Lagniappe

Melissa Etheridge – Tax Protestor?
Melissa Etheridge inadvertently stumbled over a good point recently. After Prop 8 passed in California, she fired off an angry blog post in which she threatened to withhold her state income taxes because the vote didn’t go her way. She backed off that threat in a later interview featured on the November 17th edition of Access Hollywood, but she did mention how bizarre it seemed that her right to marry the person of her choice had been put to majority vote. In this Ms. Etheridge and I agree. In fact, it’s almost as if she had read my last piece.

But I can’t help laughing at the irony. Melissa Etheridge is a proud “progressive” who has been outspoken in her support for the likes of Dennis Kucinich and Al Gore. So normally she’s all for putting things to a vote – like voting for new and creative ways to waste your money on some ill-conceived socialist plan. On any other issue, if you were the one who disagreed with the outcome of a vote and threatened to withhold your tax money because of a fundamental disagreement with the way in which it would be spent, I’m sure she’d be the first to condemn you for acting childishly and selfishly.

Now that she’s on the losing side, however, Ms. Etheridge is slowly coming to grips with the fact that direct democracy is a double-edged sword. Do you think this will be enough to get her to reconsider her lifelong worship of big government? Neither do I.

Pavlov’s Hog
The pigs are already lining up to the trough. City officials in Dallas are already jockeying for position to make sure that they find ways to get their grubby mitts on some of that “free money” the Feds are talking about throwing around in the next stimulus package. They’re like Pavlov’s hog - bureaucrats have become so accustomed to appropriating taxpayer dollars that now all it takes is a rumor of a stimulus package to get them salivating. But don’t worry – Dallas wouldn’t dream of tapping into the existing $700 billion bailout plan like they’re doing in Philadelphia, Phoenix and Atlanta. Dallas wants a completely new bailout plan to tap into. Soo-ee!

Buy American – Or Else!

American consumers have stated in no uncertain terms that they do not wish to support the Big Three auto manufacturers. They’ve done this by not buying cars made by Ford, GM, or Chrysler. Since the Big Three have been unable to persuade consumers to support them voluntarily in the free market, they’re now begging Congress to force the consumers to support them in the form of a taxpayer-financed below-market rate loan. The plan is stalled for the moment, but there’s little doubt that some type of bailout will eventually go through now that the federal government has decided that throwing good money after bad is the new national pastime.

Redefining Marriage

California’s Proposition 8, a constitutional amendment defining marriage as a union between a man and a woman, passed with 52% of the vote. The demographics show a clean split between the urban coastal areas that opposed the measure and the more rural interior areas that supported it, but at the end of the day the bluest of the blue states had voted to override a California Supreme Court decision that had previously recognized gay marriage in the state.

Protestors immediately took to the streets, vowing to overturn the results one way or the other. Keith Olbermann, the MSNBC reporter who wins my vote for “News Anchor Most Likely to Climb a Tower with an Automatic Weapon,” delivered an emotional editorial on the November 10th episode of “Countdown” saying,

“…to me this vote is horrible. Horrible. Because this isn't about yelling, and
this isn't about politics. This is about the human heart, and if that sounds
corny, so be it.

If you voted for this Proposition or support those who did or the sentiment they expressed, I have some questions, because, truly, I do not understand. Why does this matter to you? What is it to you? In a time of impermanence and fly-by-night relationships, these people over here want the same chance at permanence and happiness that is your option. They don't want to deny you yours. They don't want to take anything away from you. They want what you want—a chance to be a little less alone in the world.

Only now you are saying to them—no. You can't have it on these terms. Maybe something similar. If they behave. If they don't cause too much trouble. You'll even give them all the same legal rights—even as you're taking away the legal right, which they already had. A world around them, still anchored in love and
marriage, and you are saying, no, you can't marry. What if somebody passed a law
that said you couldn't marry?

I keep hearing this term "re-defining" marriage. If this country hadn't re-defined marriage, black people still couldn't marry white people. Sixteen states had laws on the books which made that illegal in 1967. 1967. The parents of the President-Elect of the United States couldn't have married in nearly one third of the states of the country their son grew up to lead. But it's worse than that. If this country had not "re-defined" marriage, some black people still couldn't marry black people.

It is one of the most overlooked and cruelest parts of our sad story of slavery.
Marriages were not legally recognized, if the people were slaves. Since slaves
were property, they could not legally be husband and wife, or mother and child.
Their marriage vows were different: not "Until Death, Do You Part," but "Until
Death or Distance, Do You Part." Marriages among slaves were not legally
recognized.

You know, just like marriages today in California are not legally recognized, if the people are gay.”

Normally I can’t stand Olbermann, but in this case I find myself agreeing with his main point. I have friends who are gay, and I certainly understand their desire to have their relationship recognized in the same way as heterosexual marriages, along with all of the legal rights and privileges that derive from that recognition.

Nevertheless, I think both sides of the gay marriage debate miss a fundamental point. The real question is not whether government should recognize gay marriage. The real question is “Why does anyone – gay or straight – have to ask government for permission to marry at all?”

When I proposed to my wife, the only two people in the world whose permission I felt I needed were my wife and her father. But for some reason, our marriage hinged on getting a license from some low-level bureaucrat in Lincoln County, Mississippi. Why? Because at some point in history, some genius decided that it would be a good idea to take a social institution that had existed since the dawn of human history and turn it over to government. Government involvement in defining marriage began in the United States in the 19th century as a way to prevent blacks from marrying whites. Although the original racist justification for a government-granted marriage privilege has long since been obliterated, the legitimacy of government involvement in the area of marriage remains unquestioned by all but a few.

Let’s imagine some lucky guy has just slipped an engagement ring on his fiancee’s finger. The happy couple then announce the news to their friends. Before their friends can congratulate them, though, they have to take a vote on whether they will allow the marriage to take place or not.

“OK guys, show of hands. Who here wants Bob and Sue to get married? OK, now how many oppose? I see. Bad news, guys. We all voted, and I’m afraid we just can’t allow this wedding to go forward. Sorry.” Would anyone allow themselves to be subjected to majority rule in that case? Of course not. But that is exactly what happened as soon as the state was granted a role in marriage. Americans imposed a public aspect over what should have been an exclusively private matter.

Proposition 8 is another illustration of the folly of turning to government to define, legitimize, or involve itself in any way with marriage. By allowing government to either recognize or restrict gay marriage, we further confirm the legitimacy of the state’s involvement in straight marriage as well.

A basic understanding of Lockean natural rights would go a long way in preventing these kinds of issues from ever becoming political battles in the first place. It would enable us to draw bright lines around those areas of life that should never be subject to majority rule. In the context of the current marriage debate, the result would be that the original definition of marriage would be restored. Marriage would once again be an exclusively personal decision between people who loved each other, sanctified by their own religious, familial, or cultural norms. The role of the state would be limited to enforcing the terms of the marriage contract, whatever they might be.

At first blush, one might expect this approach to be embraced by proponents of gay marriage, such as Keith Olbermann. But accepting the notion that many, if not most, aspects of life should remain outside the sphere of state control would undercut his big-government worldview. Somehow I doubt that his concern for the rights of gays runs so deep as to allow such a heretical thought to cross his mind.

So until Olbermann and other big-government supporters are willing to consider these fundamental questions, they’ll just have to live with the occasional disappointments that are the inevitable result of majority rule. Sometimes they’ll get their way, sometimes they won’t. The only things for certain are that the conflicts will be never-ending, and that the security of fundamental individual rights will always be subject to the whims of the electorate.

Lessons From the Campaign Trail

Election season is finally over. After months of filling out forms, attending party functions and candidate forums, and spending untold dozens of dollars, I can now sit back and reflect on some of the lessons learned in my very first political campaign.

For those of you who didn’t already know, I was the Libertarian Party candidate for State Representative for my district here in Texas. I had originally volunteered as a “paper candidate.” Basically I was the only person from my district they could find, so I threw my hat into the political ring in order to help the LP maintain its ballot access.

You see, the Republicans and Democrats in each state have set certain rules about who is and who is not allowed on the ballot – i.e., whom the voter may or may not vote for. The specifics vary, but generally speaking, the Republicans and Democrats get space on the ballot automatically, but every other party has to go through a time-consuming and wildly expensive process of obtaining signatures, verifying names and addresses, and fighting off legal challenges just so they can have their candidates listed as a choice for the voter to ignore come November. And should the voter ever pay more attention to these renegade candidates than the major parties might like, the number of signatures required to gain ballot access in the next election cycle is simply raised higher. And if for whatever reason the minor parties either don’t pull down enough votes or don’t have enough candidates to fill a certain percentage of the available races, they have to go through the whole ballot access process again.

So with that in mind, I decided to do what I could to help the LP retain its access. I submitted my name at the nominating convention, and was chosen by acclamation (and by the fact that no one else was there from my district to challenge me). After that, I was officially a candidate for State Representative. Truth be told, if I thought for a second that I could actually win, I never would have volunteered. State Representatives in Texas make $600 a month, and frankly I couldn’t have afforded the pay cut.

Nevertheless, I found myself wanting to represent the LP to the best of my ability, while staying within a budget of roughly nothing. So I participated wherever I could. I created a website, got some business cards, filled out voter questionnaires, gave phone interviews to the local press, and participated in whatever debates I happened to be invited to. At the end of it all I garnered a whopping 3% of the vote, but I have to say it was a good experience. Or at least an interesting one.

Ours was a three-way race. The incumbent is a Republican who was seeking her sixth consecutive term as State Representative (each term is two years, so she had been State Rep for this district for the past decade). The challenger was a newly minted Democrat. Prior to her conversion to liberalism (which took place immediately before the initial filing deadline), she had been a lifelong Republican. In fact, she had even been the Republican incumbent for three terms until she got knocked out of the box in a GOP primary ten years ago by the woman she was running against (the current Republican incumbent). In short, these two women have been fighting over the same job for roughly twenty years now, and the voters of my district had a choice between the current Republican incumbent or the previous Republican incumbent – or me.

I live in a district that is one of the reddest parts of this red state, so the outcome was never really in doubt. The woman with the “R” after her name won in a landslide. But the campaign wasn’t a total loss. I did manage to make a few observations along the way.

1) THE SPECIAL INTERESTS: As a candidate, you receive countless surveys from various special-interest groups. From what I can tell, these surveys all ask the same two basic questions:

a. “What’s your central plan to run everything?”
b. “Will you promise to funnel taxpayer money to our pet project?”

As I was preparing for the various candidate forums, I consolidated all of the surveys that I had received over the past few months. When I put them together, the underlying assumptions behind all the surveys became frighteningly clear. People really think that any elected official should have a complete central plan for absolutely everything under the sun.

For example, one issue on virtually every questionnaire is education, or more accurately funding for public schools. Although most use those terms synonymously, the two have very different connotations to a libertarian. Nevertheless, everyone wanted to know what Stephen Smith’s master plan for public schools was. My background is in international supply chain operations in Latin America. My faux-Democrat opponent’s background is listed variously as homemaker, consultant, and farmer. And the last time the Republican incumbent held a straight job it was in health care and pharmaceuticals. Why would anyone want to put control of their children’s education into any of our hands? Not a single one of us has any experience in education - we don’t understand the differences in educating primary, secondary, or university students. We live in North Texas – what do we know about the needs of schools in, say, Laredo? Nothing. So why would anyone want us to make these decisions? To the degree that these decisions should be decided by government at all, they should at least be handled at the lowest possible level. Unfortunately, that is flat-out not what the vast majority of voters want to hear. Everyone expects the candidate to have a central plan, and they want to hear you describe how you will be the one who finally makes central planning work. They might as well ask us to build a perpetual motion machine while they’re at it.

2) REPUBLOCRATS: I’ve discovered that there may even be less difference between the Republicans and Democrats at the state level than at the national level, believe it or not. Being a Republican in Texas these days seems to involve agreeing with the Democrats that the government should be involved in absolutely every aspect of life while spouting a lot of anti-immigration rhetoric. Democrats apparently just want to wave their magic government wand and make health insurance instantly cheaper. But beyond that, it’s just a question of presenting your grand plan to run everything out of Austin, and hope that the voters find your plan slightly less revolting than your opponent’s.

3) CAMPAIGN FINANCE: The Republican incumbent raised almost $200K and spent about $60K just to keep a job that pays her $600/month. Although I certainly defend her right to raise and spend as much money as she likes on a voluntary basis (unlike her party’s standard-bearer, John McCain), I do have to question the kind of cost-benefit analysis skills this reflects. It does go a long way to explain the state of government budgets across the country, though. (And just as an aside, last year the Republican incumbent was fined $5,300 by the Texas Ethics Committee for reporting violations – that’s almost ¾ of her total salary last year, but she still sailed into a sixth consecutive term.) Don’t worry about her, though – she’s been using campaign contributions to pay for a luxury condo in Austin for years. She’s going to be alright.

4) THE ISSUES: Democratic strategist James Carville once said, “You can’t beat something with nothing.” Mr. Carville has obviously never attended a candidates’ debate for a state office. Case in point, light rail.

I attended a forum hosted by the League of Women Voters. The question was, "Texas is one of the richest states in the country, but we rank dead last in light rail. Why is that?"

My answer: "Light rail is the most expensive and inefficient form of transportation this side of the Space Shuttle. A mile of light rail costs as much to build as a mile of 4-lane highway, but only carries 15% of the traffic. Light rail has never once delivered on its promises to reduce congestion, provide environmental benefits, or even run in the black. Politicians love light rail, because they get to throw lots of taxpayer dollars into a big government sinkhole, and they get to have their picture taken in front of a shiny new train. A much wiser investment in clean public transportation would be to add more natural gas or hybrid buses. They are just as clean as light rail, and they carry far more people. In addition, buses cost pennies on the dollar when compared to light rail, and they have the added advantages of being more flexible (because routes can easy be changed to reflect changing population dispersion), and scalable (you can add or subtract the number of buses on the road at any given time to reflect actual ridership needs). Light rail is one contest in which the winner is the one who comes in last. As State Rep, I will be much more careful in how we invest in public transportation."

Democrat’s answer: "I really like light rail. Last year, I rode the Dallas light rail to the Cowboys game, and it was really nice. So I want Texas to be number one."

At this point, I flashed back to an old Saturday Night Live skit thinking, "I can't believe I'm losing to this guy!"

5) WASTED VOTE SYNDROME: After the candidate forums, I had Republicans forming a line to tell me that I won the debate. My Democrat opponent said that I should run as a Republican so that I could win. It was kind of a back-handed compliment, but she meant it sincerely, telling me how well she thought I had done in the forum. Of course, I’m a small-government, free-market guy. There’s no room in the Republican Party for someone like me. I would not get the GOP’s nomination by espousing my free-market philosophy. Much better for me to run as the libertarian that I am, and get the chance as the Libertarian Party’s candidate to share an alternative view with the voters.

And despite the encouraging words, I’m quite sure most people who heard me voted for the Republican – even those who preferred my answers to hers. Fears of “wasting one’s vote” are very real, as well as very irrational. People like Mark Cuban apparently believe that the purpose of voting is to bet on who’s going to win, and not to take advantage of their one opportunity to express their opinion on what direction the government should take. These people think that voting for a dark-horse candidate they happen to agree with is wasting their vote, while voting for the well-known candidate they despise is not. It’s a bizarre pathology, but it’s out there nonetheless.

6) THE POLITICAL ZOO: The League of Women Voters hosted the forums, and they were really great. Very welcoming, and very excited to have participation from the Libertarian Party. After my panel had concluded, they moved on to the US Congressional race. The LP candidate was also participating in that panel, and in his introduction the LWV moderator said, “Don’t you just love it when the Libertarians attend? They are so interesting! I’ve never heard one before!” As if we were exhibits in the zoo or something, which may be a more accurate analogy than I care to admit. But she and the other members of the League were genuinely happy to have us there and they were actually quite supportive of what we had to say, which was a pleasant surprise. I had anticipated a much cooler reception, but the LWV really made the experience enjoyable.

7) A SLIVER OF HOPE: At one of the candidate forums, I got the best reaction of any candidate the entire night. When asked if I would support a statewide smoking ban I said, “No, but I might support a ban on smoking bans.” At that point, the entire room burst into laughter and cheers. A small thing, perhaps, but hope springs eternal…

And Then What?

Now that Halloween is over, the Christmas marketing season is already in full swing. I suppose that’s to be expected. After all, how many times have we heard that ours is a consumer economy? Joe Biden said so just last week during one of his cookie-cutter whistle stop speeches in some battleground state that escapes me just now. Something about sidekicks, taking money away from Exxon, and then my mind started to wander…

But this notion of a consumer-driven economy is so prevalent that it was the basic premise for President Bush’s economic stimulus checks that went out earlier this year. The stimulus package was opposed at the time by most Democrats, but now that Barack Obama understands the political advantage one obtains by promising free money, they’ve come to see the light and are now talking about a second round of stimulus checks. (Because the first round of checks did so much to improve the economy, you see). Sort of makes you wonder why the government doesn’t do this more often. I mean, if it’s such a great idea to put money in consumers’ pockets, why don’t we just get a weekly allowance from Uncle Sam?

Maybe it’s time we made the distinction between a consumer-driven economy and a consumption-driven economy. In a free market (and here is where I call upon the readers to use their powers of conceptualization), the consumer is indeed king. Businesses make money by catering to consumer demand. Those that do so in the most efficient means possible reap financial rewards. Those that do not get thrown out of business and their assets are placed in the hands of those entrepreneurs who can make better use of them. This is what Joseph Schumpeter called “creative destruction.”

However, this is not what is usually meant when the bubble-headed bleach blonde comes on at five to tell you about the stock market crash with a gleam in her eye. When the media or politicians speak of a consumer-driven economy, what they are really claiming is that ours is a consumption-driven economy. That is, they view consumption as the engine of economic prosperity. This is a very different, and very dangerous, concept.

But wait a minute, you say. Of course consumption drives the economy - if consumers don’t buy products, then businesses don’t make money, people get laid off, and it’s a downward spiral from there! Well, not exactly. The choice is not between consuming or not consuming. Human beings must consume in order to survive, so there will always be a significant level of consumption in any economy. And I’m not against consumption. Our ability to consume is what we call wealth, and I’m definitely pro-wealth. But when we talk about growing the economy, what we’re really talking about is the way in which we create more goods and services to consume. That is, what makes for sustainable consumption?

Sustainable consumption can only come from increasing our savings, not our spending. Although it may seem counter-intuitive at first, it begins to make sense once you break it down and take it step-by-step. This graph illustrates the trade-off between consumption and investment. If you’ve got $100, you can spend it all, save it all, or choose some combination of the two. Since your savings become funds available for others to invest, we treat savings and investment as synonymous. The Production Possibilities Frontier (PPF) is what those possible combinations between savings and consumption look like in graph form.

So what happens when the government prints or borrows money and sends us a nice fat check every time the stock market takes a dip? Well, if we all do what George Bush, Joe Biden, and Barack Obama suggest, we rush out to Best Buy and pick up a new plasma television. Fantastic! Best Buy reports a good quarter, and we’re all watching the election returns in vivid high-definition. Of course, as Russell Roberts once said, economics is the science of asking, “And then what?” So what happens next?

In short, nothing good. The money supply and the national debt are increased, so our current dollars will be worth less and our children will have to pay for our plasma TVs in the form of higher taxation. But are we wealthier as a result? Not really, because nothing has been added to the capital stock of the economy. That is, our capacity to produce the goods and services that make us wealthy has not increased one iota. We’ve managed to push ourselves beyond the PPF curve for a short period of time, but this is not sustainable. At some point, reality will reassert itself, and whatever minor gains the stimulus provided will prove illusory.

Now let’s imagine what would happen if we were to save our money and actually live within our means. Certainly, consumer spending would drop for a while and retailers would take a hit. And then what? The increased savings would grow the resource pool available for investment. This means that the capital stock would actually be increased as businesses use those funds to invest in new technology and new businesses. The economy’s capacity to produce goods and services would increase, pushing the PPF out to the right. More goods and services would be available to consume. This increase in the amount of goods and services available as a result of a greater productive capacity would be sustainable, since the increase in the capital stock reflects true consumer preference, and is not merely the result of a temporary monetary stimulus.

If this still seems counter-intuitive, look at it this way. When you sit down with your financial planner to discuss how to grow your wealth so that you have enough money for retirement, what advice does he give you? Does he say that in order to retire rich you need to a) control your spending and increase your savings and investments, or b) spend all your money on new cars and home theater systems?

The logic of stimulus check proposals and the consumption-driven economy lies in following Option B. The theory is that somehow we as a country can spend our way to prosperity. This is a Keynesian fantasy that many have come to accept as fact. It’s promoted by many in the media, government, and even some in the field of economics. But what would you tell your financial planner if he gave you that advice? My guess is that you would start combing the yellow pages for a new financial planner, because you would instantly recognize that you can’t get rich by spending all the money you have and then borrowing even more just to keep spending.

The Keynesian model simply confuses cause with effect. Consumption does not create wealth. Instead, our ability to consume to the degree that we do is the result of our savings and the accumulation of capital that we have amassed over the years. It is this capital accumulation that generates the incredible amount of goods and services that are available to us. Keep this in mind the next time you hear some talking head try to justify yet another plan to “inject liquidity” or “stimulate consumer spending” as a way to cure our economic ills.

As Adam Smith once said, “What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom.” If spending wildly at the expense of saving and investment doesn’t make sense for you as an individual, it doesn’t make sense for us as a country.

Note: For a much more in-depth presentation of these ideas, check out Professor Roger Garrison’s incredible presentation entitled “Hayekian Means-Ends Analysis.” Come on, you didn’t think I came up will this all by myself, did you?

Bailing Out the Bailout

Determined not to let their constituents’ overwhelming opposition stand in the way, Congress went ahead and passed the bailout bill. Evidently we are supposed to believe (once again) that those in Washington know how to spend our money better than we do. So shut up and open your wallet, citizen!

One of the many frustrating aspects of the current financial crisis is the media’s inability and the politicians’ unwillingness to identify root causes. Instead, what we get is an endless, panicked media diatribe that confuses the symptoms of the disease with the disease itself. For example, CNN/Money’s Chris Isidore wrote last week that the problem is,

“Banks and Wall Street firms, worried about both their own needs for cash and the condition of other institutions, essentially stopped loaning money to one another. That choked off the money being made available on Main Street in the form of mortgage loans, business loans, and other consumer borrowing.”

He continues on, saying “Others point out that bailout doesn’t address the root cause of the problems on Wall Street as well as the broader economy: falling house prices.”

Falling housing prices may be a problem for certain individuals and financial institutions, but they are very clearly not the root cause of the problem. As one might expect a senior writer for CNN/Money to understand, the price of any good rises and falls with supply and demand. But this increasingly common misrepresentation of the issue echoes what Bernanke and Paulson were saying during the Senate hearings. Both kept yammering on about “fire sale prices” and “hold until maturity prices.” Their claim is that the markets need government intervention to value these toxic mortgage assets at the “hold to maturity price,” rather than allowing the market to liquidate at what they consider the “fire sale price.” But this is nothing more than an attempt to perpetuate the fiction that contributed to the problem in the first place – namely, the mistaken belief that housing prices never go down. The “hold to maturity” price is just a mythical number arbitrarily assigned by the Treasury. It doesn’t matter what Secretary Paulson thinks these assets might be worth if the housing market hadn’t been so screwed up. What matters is the actual valuation of these securities in the real world – and that can only be determined by the interplay of free market forces.

Bernanke and Paulson say that they are trying to manage the market correction, but this claim is ludicrous on its face. Government intervention is never needed to value assets. It is only needed if one wishes to prevent the proper valuation of assets by assigning a politically palatable price either above or below the one defined by the market. As any Econ 101 textbook will tell you, artificially setting the price of any good higher than its market price will result in a surplus of that good. Given the fact that in most areas of the country today the problem is precisely too many houses on the market, maintaining a surplus through price manipulations seems patently absurd.

Even if the boys and girls in the Treasury Department were able to find buyers to pick up the assets at the inflated prices needed to spare irresponsible financial institutions the consequences of their own actions, at the end of the day someone else is going to be left holding the bag. The assets will still be overvalued, and someone is going to take the hit for that eventually. In a free market, the one taking the hit for miscalculating the value of an asset would be the one who bought it in the first place. The White House, the Fed, and the Treasury Department don’t like that outcome, so they’d rather force you and me to take the hit instead.

The real question here – the one that Congress, the White House, the Fed, the Treasury Department, and the media are all taking great pains to avoid asking - is, “How could so many people to get so stupid in unison?”

The conventional wisdom is that the cause of this whole thing is greed. I’m not going to claim that there weren’t any greedy people involved in this, but greed in and of itself doesn’t really explain anything. Are we to believe that people on Wall Street just now discovered greed? Is greed a brand-new vice that was just invented by the housing sector? If that were the case, then surely these crises would happen every day. In fact, we’d never be able to have a functioning economy if greed were so overpowering that the market couldn’t find ways of dealing with it. So there has to be something else in play here.

I’m sure I’ve used this analogy before, but I think it bears repeating. If you’re walking by a lake and you see a single fish floating belly-up in the water, you shrug your shoulders and move on. After all, individual fish do die from time to time. But if you’re walking by the lake and you see the entire school of fish floating belly-up, you instantly recognize that there must be something in the water – something external to the fish that caused them all to die at the same time. Because although individual fish die from time to time, fish as a species are pretty good at surviving.

The same thing applies to any business sector. Sure, from time to time individual banks make bad loans and may even go out of business as a result, but banks as a whole are pretty good at understanding their environment, forecasting, and making sound decisions. So when dozens of banks all go belly-up at the same time, there has to be something in the water.

That something is government interference in the marketplace. In the case of the mortgage and financial industry, government has had its thumb on the scale for almost a century. Interest rates have been subject to manipulation ever since the advent of the Fed in 1913, and they have been kept especially low (even by government standards) ever since the 9/11 attacks in 2001. The demon twins Fannie Mae and Freddie Mac were hatched by FDR way back in 1938, and have always enjoyed below-market interest rates that were backed by the government’s implicit guarantee – a guarantee which has now been made explicit, of course. All of this manipulation warped the incentive structure that the market had devised, and helped break down the system of checks and balances that had existed previously.

I heard another good analogy recently. Imagine that I took you to Las Vegas, and I told you that you could keep whatever you won, and that I would cover any money you lost. Don’t you think that would change your behavior in the casino a bit? You would have no incentive to be cautious, and would have every incentive to bet the house. And in the case of Freddie and Fannie, that’s just what they did – literally.

So sure, individual greed may have been a factor in all this, but the fact that Freddie and Fannie stood in the background, with their below-market rate money, willing to buy up just about any property that was offered to them with virtually no questions asked helped to enable that greed. If they hadn’t been there, then those “greedy” financial institutions and mortgage brokers would have had to review their loan portfolios in a very different light, because if they judged an applicant incorrectly, they would be stuck with more of those loans on their books, and they would have suffered the consequences directly. Freddie and Fannie, in essence, put a safety net under those firms where none would have existed in the free market.

The catch phrase in the media these days is “Capitalism on the way up, socialism on the way down.” Of course, we know that it wasn’t capitalism on the way up - it was socialism. And it’s going to be even more socialism on the way down. I think that’s one reason why libertarians need to be very careful when speaking to non-libertarians. We need to make clear that when we speak of things like “capitalism” or “the free market,” we are not referring to the economic system as it exists in the US today. We’re talking about an economic system that has never existed fully, but one to which we have been closer in the past than we are today. We need to make sure others understand that government support of business through sweetheart deals, protectionism, or subsidies is no more capitalist than government restrictions on business. Government-sponsored entities like Fannie Mae and Freddie Mac are in no way, shape, or form free-market creations.

This bailout program is a remarkably bad idea. It results from a fundamental misdiagnosis of events, and will cause further agony down the road. But the impact to the financial system is probably not going to be the worst effect of this whole thing. What is really going to be detrimental over the long term is the lesson that most people take away from this episode. The current financial crisis and the bailout plan will be held up as another example of so-called “market failure” and used as a justification for more regulation, more restrictions on the market, and bigger and bigger government. The Great Depression occurred almost eighty years ago, but even today statists refer to it as an example of how capitalism failed and FDR’s socialism saved us. It’s all nonsense, of course, but it’s great propaganda for those who wish to push a big-government ideology. This latest episode will just perpetuate the same economic myths that have plagued us for almost a century.

With Friends Like These, Who Needs Socialists?

On my way home from work this afternoon, I was flipping through the stations on the AM dial, listening to afternoon talk radio discuss the proposed bailout. The majority of callers were against the plan, but many of the allegedly conservative hosts were supporting it, if only grudgingly. For example, Michael Medved stated that although the free market is always superior to command and control economies, he nevertheless believes that the government should absolutely step in and intervene when necessary. He cited the FDIC and the savings and loan bailout of the 1980s as examples of “legitimate” interventions. Similarly, Glenn Beck posted an editorial on CNN.com earlier in which he claims that the bailout package is absolutely required, even though it’s a horrible idea.

But when it comes to sheer economic ignorance, neither Medved nor Beck can hold a candle to local Dallas-area talk show host Jon-David Wells. Wells, who is skeptical of the Paulson bailout but will no doubt get behind whatever stupid plan is inevitably enacted, spoke with a caller who pointed out the fact that these boom and bust cycles are caused by the Fed through its policy of inflationary credit expansion. Wells dismissed the caller, and claimed that anyone who suggested we should do away with the Fed was crazy. He went even further, saying that the economy would completely collapse, à la the Soviet Union! Here is a guy who thinks that the absence of a central bank would be like communism, even though one of the central planks of the communist manifesto is to create and control a central bank. Even though the Fed's raison d'être is to artificially set the price of money, just like a central Soviet economic planning board would arbitrarily set the prices of commodities. Even though Alan Greenspan agreed with Ron Paul that if you have a central bank, you don’t have a free market!

I’m amazed at the rapidity with which even those who believe themselves to be defenders of the free market over big government are jettisoning their principles in order to support this bailout. In effect, what they’re saying is, “Sure, the free market beats command and control economies every single time, but when things get tough, what we really need is socialism.” (For a truly excellent critique of the bailout plan, check out Ron Paul’s Campaign for Liberty blog).

As I have written in this column many times before, the GOP’s standard bearer, John McCain, denigrates private enterprise and the capitalist system every time he opens his mouth. But not to worry, he’s putting everything else on hold to go back to D.C. to fix the problem, and has challenged Barack Obama to do the same. Although I think McCain got the drop on Obama politically with this little stunt, I’d rather have these two nimrods debating in Mississippi rather than in Washington. They can do much less damage in Oxford.

All of this wailing and gnashing of teeth underscores once again the importance of philosophy, particularly for those on the right. It’s not good enough simply to watch the news and have opinions about the issues. You have to understand why you have those opinions, because if you don’t, you’re liable to be swayed by any passing fad, issue, or crisis.

I think that’s why the GOP is in such disarray right now. If you were to ask a self-described “conservative” if they favored small government or big government, he’d say, “Small government, of course.” But then if you asked why he favored small government, he’d be completely flummoxed. By not having a unified, coherent philosophy based on first principles, conservatives have lost sight of what is was they were supposed to be conserving, which is namely individual liberty with the Constitution as its protector.

And without that bedrock philosophical foundation, there is functionally no barrier to the growth of government. The concepts of liberty which used to animate Americans have been so completely lost that, as Don A. Rich writes, even those on Wall Street applaud as the government moves in to nationalize the financial sector. But as those of us who are familiar with the Austrian theory of the trade cycle understand, further intervention in the markets will only create greater problems down the road. Perhaps the next crisis will be severe enough to get people to stop cheering capitalism’s demise. Who knows? At that point, maybe those who consider themselves defenders of the free market will even start to act like it.

Conversations Overheard Overseas

I just wrapped up a two-week visit to Helsinki. As I was eating dinner in the hotel restaurant one night, I overheard another American businessman having a conversation with some European counterparts. (Just so you know, it wasn’t so much eavesdropping as it was not being able to drown out a very loud voice in an otherwise quiet restaurant).

The American was discussing the upcoming presidential election, and from what I gathered he was a Democrat. I gathered this from his anti-McCain comments (no argument there), but also by his utter lack of concern over the possibility and/or certainty of higher taxes under an Obama administration. After all, he already pays taxes in the US and Switzerland, so what’s the harm in spending even more? In for a penny, in for a pound, I suppose.

But he had another reason for opposing McCain. He said he didn’t want McCain to win because he didn’t want his daughter to grow up in a country where she wouldn’t be able to have an abortion. And then it got really interesting. He asked rather indignantly, “When did we start telling women what they could do with their own bodies?”

Well, let’s see. There have been laws against prostitution in most societies since at least Biblical times. Women have been told what substances they may or may not ingest ever since the dawn of the progressive era about a hundred years ago. These days cities all across the Land of the Free tell women that they can’t smoke, eat trans-fats, or enjoy goose-liver pate. And despite the recent Heller decision, Washington DC continues to tell women that they’re not allowed to defend their own bodies with a gun.

So it seems to me that “we’ve” been telling women what they may or may not do with their own bodies since at least the dawn of recorded history, and “we’re” still doing it. And in most cases both liberals and conservatives have cheered these government intrusions into the private sphere and demanded more to boot. So I find it amusing that anyone from either camp should now express shock and outrage that the government is telling women what they may or may not do with their bodies.

Not to delve too deeply into the abortion issue, but it seems bizarre that a woman’s “right to choose” should allow her to terminate her unborn child’s life, but does not extend so far as to allow her to eat a Big Mac if she happens to get hungry later. If the liberals really care about defending a woman’s right to make her own decisions about her body, then surely that takes all the other paternalistic programs that they do support right off the table.

So here’s a hint for the pro-choice crowd. If you don’t want the government dictating what a woman can do with her body, then don’t ask the government to dictate what women may do with their bodies. Just a thought...