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Posts Tagged ‘Mitchell’s Law’

A reader wants to know if I think the American people are becoming more statist over time.

I’m conflicted. More and more people get lured into some form of government dependency every year, and this suggests Americans eventually will adopt a  European-style moocher mentality.

This worries me.

On the other hand, I periodically see polls suggesting that the American people have very libertarian views on key issues.

These are encouraging numbers. And here’s another bit of good news. A recent poll by Fox News found that a plurality of Americans would not give up personal freedoms to reduce the threat of terrorism. What’s especially remarkable is that this poll took place immediately following the bombing of the Boston Marathon by the welfare-sponging Tsarnaev brothers.

Terrorism Freedom Tradeoff

Interestingly, I had a conversation with a left-leaning friend who said this poll showed that Americans were a bunch of “paranoid nuts” because this poll showed that they viewed their government with suspicion.

But perhaps people are simply rational. I had an intern look up data on the probability of getting killed by a terrorist. He found an article from Reason that reported.

…a rough calculation suggests that in the last five years, your chances of being killed by a terrorist are about one in 20 million. This compares annual risk of dying in a car accident of 1 in 19,000; drowning in a bathtub at 1 in 800,000; dying in a building fire at 1 in 99,000; or being struck by lightning at 1 in 5,500,000.

In other words, the odds of being killed by a terrorist are very low. And with the risk so low, why give up liberty? Particularly when it’s highly unlikely that sacrificing more of your freedom will actually reduce the already-low threat of terrorism.

This reminds me of the money laundering issue. Just a few decades ago, there was no such thing as anti-money laundering laws. Then politicians decided we need these laws to reduce crime.

These laws, we were told, would give law enforcement more tools to catch bad guys and also reduce the incentive to commit crimes since it would be harder for criminals to enjoy their ill-gotten gains.

That sounds good, but the evidence shows that these laws have become very expensive and intrusive, yet they’ve had no measurable impact on crime rates.

So how did politicians respond? In a stereotypical display of Mitchell’s Law, they decided to make anti-money laundering laws more onerous, imposing ever-higher costs in hopes of having some sort of positive impact.

This is bad for banks, bad for the poor, and bad for the economy.

So when I see polls showing the American people are skeptical about surrendering freedom to the government, I don’t think they are being “paranoid.” I think they’re being very rational.

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Notwithstanding the title of this post, perhaps nobody deserves blame.

Sometimes, a good or service rises in price solely as a result of changes in supply and demand. And if the price of something climbs because of market forces, then it’s merely a reflection of unfettered exchanges between buyers and sellers.

But politicians and bureaucrats often distort market forces with subsidies. And even though consumers ostensibly benefit when government helps to pay for something, intervention can have very costly consequences.

I’ve already shared an amazing chart and a very powerful video to help explain how government subsidies in health care have created a third-party payer problem that has resulted in rapidly rising prices and considerable inefficiency in that sector.

Well, the good intentions of government also are causing problems for higher education.

Here’s a superb video from Learn Liberty, explaining why college expenses are skyrocketing.

The first part of the video shows that a college degree has become more valuable, so it’s understandable that the relative price of higher education has risen.

But then, beginning at about 1:55, the video discusses the role of subsidies. Echoing points I’ve made in the past, the professor explains how subsidies have simply generated higher prices. In other words, colleges have captured all the benefits, not students.

Business Week recently published a story that provides some glaring example of how universities have wasted all the additional money. Here are some remarkable excerpts.

“I have no idea what these people do,” says the biomedical engineering professor. Purdue has a $313,000-a-year acting provost and six vice and associate vice provosts, including a $198,000-a-year chief diversity officer. Among its 16 deans and 11 vice presidents are a $253,000 marketing officer and a $433,000 business school chief. The average full professor at the public university in West Lafayette, Ind., makes $125,000. The number of Purdue administrators has jumped 54 percent in the past decade—almost eight times the growth rate of tenured and tenure-track faculty. “We’re here to deliver a high-quality education at as low a price as possible,” says Robinson. “Why is it that we can’t find any money for more faculty, but there seems to be an almost unlimited budget for administrators?” …Purdue is typical: At universities nationwide, employment of administrators jumped 60 percent from 1993 to 2009, 10 times the growth rate for tenured faculty. “Administrative bloat is clearly contributing to the overall cost of higher education,” says Jay Greene, an education professor at the University of Arkansas. In a 2010 study, Greene found that from 1993 to 2007, spending on administration rose almost twice as fast as funding for research and teaching at 198 leading U.S. universities. …Trustees at the University of Connecticut are reviewing administrative salaries at the school’s main campus in Storrs, following a controversy over the compensation of the school’s former police chief, who received $256,000 annually—more than New York City’s police commissioner. …Mitch Daniels, a fiscal hawk who will become [Purdue's] president when his term expires in January…says he wants to take a look at administrative costs that he suspects are “marbled” throughout the university—beginning with his office. In anticipation of his arrival in January, and without his knowledge, the school renovated the president’s 4,000-square-foot suite. The cost was $355,000, enough to send 15 Indiana residents to Purdue for a year.

Wow. Reminds me of this post about politically correct featherbedding at the University of California at San Diego. I can see why college administrators like this system. But it’s definitely bad news for students who get stuck on a treadmill of higher tuition and more debt.

P.S. At 2:18, the video has a discussion of how subsidies lead to higher costs, which then leads to more demands for additional subsidies. Hmmm…bad government policy leads to more bad government policy. Seems like there’s a term for that phenomenon.

P.P.S. I highly recommend the Learn Liberty videos. Here’s one on protectionism, one on the legality of Obamacare, and here’s another about how excessive federal spending is America’s real fiscal problem.

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Even though I’m a dull and straight-laced guy, that doesn’t mean I want the government to pester, harass, and persecute people for engaging in victimless crimes that I find distasteful.

Especially when interventionism and prohibition doesn’t work. To be blunt, the War on Drugs has been a costly failure (much like the War on Poverty).

Fortunately, it appears that more and more people are coming to the same conclusion – and many of them aren’t libertarians. For instance, I recently cited Mona Charen’s wise comments about the issue.

Even more remarkable are the statements from one of America’s leading evangelicals, Pat Robertson.

Here’s the key sections from an Associated Press report.

Religious broadcaster Pat Robertson says marijuana should be legalized and treated like alcohol because the government’s war on drugs has failed. The outspoken evangelical Christian and host of “The 700 Club” on the Virginia Beach-based Christian Broadcasting Network he founded said the war on drugs is costing taxpayers billions of dollars. He said people should not be sent to prison for marijuana possession. The 81-year-old first became a self-proclaimed “hero of the hippie culture” in 2010 when he called for ending mandatory prison sentences for marijuana possession convictions. “I just think it’s shocking how many of these young people wind up in prison and they get turned into hardcore criminals because they had a possession of a very small amount of a controlled substance,” Robertson said on his show March 1. “The whole thing is crazy. We’ve said, ‘Well, we’re conservatives, we’re tough on crime.’ That’s baloney.” …Robertson said he “absolutely” supports ballot measures in Colorado and Washington state that would allow people older than 21 to possess a small amount of marijuana and allow for commercial pot sales. Both measures, if passed by voters, would place the states at odds with federal law, which bans marijuana use of all kinds. While he supports the measures, Robertson said he would not campaign for them and was “not encouraging people to use narcotics in any way, shape or form.” “I’m not a crusader,” he said. “I’ve never used marijuana and I don’t intend to, but it’s just one of those things that I think: this war on drugs just hasn’t succeeded.”

Wow, not only for legalization, but “absolutely” supports ballot initiatives in Colorado and Washington. Kudos to Rev. Robertson for recognizing the human cost of the Drug War. As the old saying goes, not everything immoral should be illegal.

Here’s five minutes from Gov. Gary Johnson on the issue.

Very well stated. Legalization is common-sense conservatism. Too bad Gary Johnson didn’t get more attention early in the GOP race.

The Drug War doesn’t work, and it is the ultimate example of Mitchell’s Law since it has spawned bad policies such as asset forfeiture and anti-money laundering rules.

Time to “just say no” to big government.

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When Ronald Reagan said that big government undermined the economy, some people dismissed his comments because of his philosophical belief in liberty.

And when I discuss my work on the economic impact of government spending, I often get the same reaction.

This is why it’s important that a growing number of establishment outfits are slowly but surely coming around to the same point of view.

This is remarkable. It’s beginning to look like the entire world has figured out that there’s an inverse relationship between big government and economic performance.

That’s an exaggeration, of course. There are still holdouts pushing for more statism in Pyongyang, Paris, Havana, and parts of Washington, DC.

But maybe they’ll be convinced by new research from the World Bank, which just produced a major report on the outlook for Europe. In chapter 7, the authors explain some of the ways that big government can undermine prosperity.

There are good reasons to suspect that big government is bad for growth. Taxation is perhaps the most obvious (Bergh and Henrekson 2010). Governments have to tax the private sector in order to spend, but taxes distort the allocation of resources in the economy. Producers and consumers change their behavior to reduce their tax payments. Hence certain activities that would have taken place without taxes, do not. Workers may work fewer hours, moderate their career plans, or show less interest in acquiring new skills. Enterprises may scale down production, reduce investments, or turn down opportunities to innovate. …Over time, big governments can also create sclerotic bureaucracies that crowd out private sector employment and lead to a dependency on public transfers and public wages. The larger the group of people reliant on public wages or benefits, the stronger the political demand for public programs and the higher the excess burden of taxes. Slowing the economy, such a trend could increase the share of the population relying on government transfers, leading to a vicious cycle (Alesina and Wacziarg 1998). Large public administrations can also give rise to organized interest groups keener on exploiting their powers for their own benefit rather than facilitating a prosperous private sector (Olson 1982).

In other words, government spending undermines growth, and the damage is magnified by poorly designed tax policies.

The authors then put forth a theoretical hypothesis.

…economic models argue that the excess burden of tax increases disproportionately with the tax rate—in fact, roughly proportional to its tax rate squared (Auerbach 1985). Likewise, the scope for self-interested bureaucracies becomes larger as the government channels more resources. At the same time, the core functions of government, such as enforcing property rights, rule of law and economic openness, can be accomplished by small governments. All this suggests that as government gets bigger, it becomes more likely that the negative impact of government might dominate its positive impact. Ultimately, this issue has to be settled empirically. So what do the data say?

These are important insights, showing that class-warfare tax increases are especially destructive and that government spending undermines growth unless the public sector is limited to core functions.

Then the authors report their results.

Figure 7.9 groups annual observations in four categories according to the share of government spending in GDP during that year. Both samples show a negative relationship between government size and growth, though the reduction in growth as government becomes bigger is far more pronounced in Europe, particularly when government size exceeds 40 percent of GDP. …we provide new econometric evidence on the impact of government size on growth using a panel of advanced and emerging economies since 1995. As estimates can be biased due to problems of omitted variables, endogeneity, or measurement errors, it is necessary to rely on a broad range of estimators. …They suggest that a 10 percentage point increase in initial government spending as a share of GDP in Europe is associated with a reduction in annual real per capita GDP growth of around 0.6–0.9 percentage points a year (table A7.2). The estimates are roughly in line with those from panel regressions on advanced economies in the EU15 and OECD countries for periods from 1960 or 1970 to 1995 or 2005 (Bergh and Henrekson 2010 and 2011).

These results aren’t good news for Europe, but they also are a warning sign for the United States. The burden of government spending has jumped by about 8-percentage points of GDP since Bill Clinton left office, so this could be the explanation for why growth in America is so sluggish.

Last but not least, they report that social welfare spending does the most damage.

Governments are big in Europe mainly due to high social transfers, and big governments are a drag on growth. The question is whether this is because of high social transfers? The answer seems to be that it is. The regression results for Europe, using the same approach as outlined earlier, show a consistently negative effect of social transfers on growth, even though the coefficients vary in size and significance (table A7.4). The result is confirmed through BACE regressions. High social transfers might well be the negative link from government size to growth in Europe.

The last point in this passage needs to be emphasized. It is redistribution spending that does the greatest damage. In other words, it’s almost as if Obama (and his counterparts in places such as France and Greece) are trying to do the greatest possible damage to the economy.

In reality, of course, these politicians are simply trying to buy votes. But they need to understand that this shallow behavior imposes very high costs in terms of foregone growth.

To elaborate, this video discusses the Rahn Curve, which augments the data in the World Bank study.

As I argue in the video, even though most of the research shows that economic growth is maximized when government spending is about 20 percent of GDP, I think the real answer is that prosperity is maximized when the public sector consumes less than 10 percent of GDP.

But since government in the United States is now consuming more than 40 percent of GDP (about as much as Spain!), the first priority is to figure out some way of moving back in the right direction by restraining government so it grows slower than the private sector.

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Europe is in the midst of a fiscal crisis caused by too much government spending, yet many of the continent’s politicians want the European Central Bank to purchase the dodgy debt of reckless welfare states such as Spain, Italy, Greece, and Portugal in order to prop up these big government policies.

So it’s especially noteworthy that economists at the European Central Bank have just produced a study showing that government spending is unambiguously harmful to economic performance. Here is a brief description of the key findings.

…we analyse a wide set of 108 countries composed of both developed and emerging and developing countries, using a long time span running from 1970-2008, and employing different proxies for government size… Our results show a significant negative effect of the size of government on growth. …Interestingly, government consumption is consistently detrimental to output growth irrespective of the country sample considered (OECD, emerging and developing countries).

There are two very interesting takeaways from this new research. First, the evidence shows that the problem is government spending, and that problem exists regardless of whether the budget is financed by taxes or borrowing. Unfortunately, too many supposedly conservative policy makers fail to grasp this key distinction and mistakenly focus on the symptom (deficits) rather than the underlying disease (big government).

The second key takeaway is that Europe’s corrupt political elite is engaging in a classic case of Mitchell’s Law, which is when one bad government policy is used to justify another bad government policy. In this case, they undermined prosperity by recklessly increasing the burden of government spending, and they’re now using the resulting fiscal crisis as an excuse to promote inflationary monetary policy by the European Central Bank.

The ECB study, by contrast, shows that the only good answer is to reduce the burden of the public sector. Moreover, the research also has a discussion of the growth-maximizing size of government.

… economic progress is limited when government is zero percent of the economy (absence of rule of law, property rights, etc.), but also when it is closer to 100 percent (the law of diminishing returns operates in addition to, e.g., increased taxation required to finance the government’s growing burden – which has adverse effects on human economic behaviour, namely on consumption decisions).

This may sound familiar, because it’s a description of the Rahn Curve, which is sort of the spending version of the Laffer Curve. This video explains.

The key lesson in the video is that government is far too big in the United States and other industrialized nations, which is precisely what the scholars found in the European Central Bank study.

Another interesting finding in the study is that the quality and structure of government matters.

Growth in government size has negative effects on economic growth, but the negative effects are three times as great in non-democratic systems as in democratic systems. …the negative effect of government size on GDP per capita is stronger at lower levels of institutional quality, and ii) the positive effect of institutional quality on GDP per capita is stronger at smaller levels of government size.

The simple way of thinking about these results is that government spending doesn’t do as much damage in a nation such as Sweden as it does in a failed state such as Mexico.

Last but not least, the ECB study analyzes various budget process reforms. There’s a bit of jargon in this excerpt, but it basically shows that spending limits (presumably policies similar to Senator Corker’s CAP Act or Congressman Brady’s MAP Act) are far better than balanced budget rules.

…we use three indices constructed by the European Commission (overall rule index, expenditure rule index, and budget balance and debt rule index). …The former incorporates each index individually whereas the latter includes interacted terms between fiscal rules and government size proxies. Particularly under the total government expenditure and government spending specifications…we find statistically significant positive coefficients on the overall rule index and the expenditure rule index, meaning that having these fiscal numerical rules improves GDP growth for these set of EU countries.

This research is important because it shows that rules focusing on deficits and debt (such as requirements to balance the budget) are not as effective because politicians can use them as an excuse to raise taxes.

At the risk of citing myself again, the number one message from this new ECB research is that lawmakers – at the very least – need to follow Mitchell’s Golden Rule and make sure government spending grows slower than the private sector. Fortunately, that can happen, as shown in this video.

But my Golden Rule is just a minimum requirement. If politicians really want to do the right thing, they should copy the Baltic nations and implement genuine spending cuts rather than just reductions in the rate of growth in the burden of government.

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A couple of weeks ago, I proposed a “Golden Rule of Fiscal Policy” that was probably a bit too wordy.

Good fiscal policy exists when the private sector grows faster than the public sector, while fiscal ruin is inevitable if government spending grows faster than the productive part of the economy.

In some recent speeches, I’ve been experimenting with how to discuss this concept, and I’ve decided to be more concise.

I’ve also decided to be self-aggrandizing and call this Mitchell’s Golden Rule.

In some sense, this Golden Rule is a way of trying to help people understand why it is important to limit the growth of federal spending. And based on my recent speeches, it appears that linking government growth and private sector growth is very helpful.

Especially when I point out that the fiscal crises in nations such as Greece are the result of the opposite approach – letting the public sector grow faster than the productive sector of the economy.

Another advantage of the Golden Rule is that it doesn’t matter whether a nation has a budget deficit or a budget surplus. As I’ve explained on several occasions, the fiscal problem in most nations is that government is too big. Deficits and debt are just a symptom of that problem.

Following the Golden Rule doesn’t prohibit tax increases, but it certainly means they will be far less likely. Simply stated, tax revenues tend to track economic performance. So if the private sector is growing faster than the government, that means tax revenues will be growing faster than government spending. So why raise tax rates?

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P.S. Regular readers know that I’ve already tried to create a legacy with the not-so-famous Mitchell’s Law, which points out that politicians often propose to expand government to ostensibly solve the messes created by previous expansions of government.

But there’s nothing new about Mitchell’s Law. Great economists such as Mises wrote about how one misguided government intervention often becomes the excuse for another foolish government intervention. I simply coined a phrase in hopes of helping to popularize the notion that one government mistake is often a precursor for another government mistake.

I’m not aware, however, of anybody that has stated that the key to good fiscal policy is restraining government spending so it grows slower than the private sector. Hence, my narcissistic decision to label this concept Mitchell’s Golden Rule.

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Over the years, Obama has said some really disturbing things.

In my video on class warfare, I noted that Obama in 2008 said he wanted to raise the capital gains tax even if the government lost revenue.

It was necessary to punish success, he said, to promote “fairness.”

This was an utterly malevolent statement. It meant Obama is so consumed by the politics of hate and envy that he is willing to destroy private sector output even if it doesn’t result in more money for the political class.

Now there is a new statement that may be just as bad. In a recent interview on new fees from banks, the President said, “you don’t have some inherent right just to, you know, get a certain amount of profit, if your customers are being mistreated.”

This statement is reprehensible because banks are only raising fees because of new regulations in the Dodd-Frank bailout bill. In other words, this is a classic example of “Mitchell’s Law,” which is my narcissistic way of describing how politicians mess up an economy with one bad policy and then use the inevitable damage as an excuse for imposing additional bad policy.

But there is an even deeper problem with Obama’s statement. He is saying that consenting adults in the private sector do not have a right to engage in voluntary exchange if some clown in Washington arbitrarily thinks that one side of the transaction is being “mistreated.”

At the risk of engaging in uncivil rhetoric, but the President can go jump in a lake. Under the U.S. Constitution, I do have an “inherent right” to engage in commerce. As Walter Williams has eloquently explained, it is the federal government that does not have the right to do things that are not listed in the enumerated powers section of the Constitution.

Last but not least, I’m not making a partisan attack on Obama. On my occasions, I have strongly condemned Bush for stating that, “We have a responsibility that when somebody hurts, government has got to move.”

Where the you-know-what did Bush get the right to declare that “we” have a responsibility? Why the you-know-what did he think that compassion is defined by spending other people’s money.

Heck, what Bush said is probably even more morally bankrupt than what Obama said.

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The governments of Spain, Italy, Belgium and (of course) France recently imposed 15-day bans on “short selling,” which means they are prohibiting people from making investments that would be profitable if certain stocks fall in value.

According to the politicians, the bans are being imposed to protect financial markets from “speculators” who cause “panics” by “betting” in favor of bad news.

But this type of regulatory intervention doesn’t seem very effective, at least if the U.S. and U.K. experiences are any guide. Here’s an excerpt from a Bloomberg report.

British financial stocks dropped 41 percent in the four months after regulators imposed a ban on short selling following the collapse of Lehman Brothers Holdings Inc. in September 2008. The benchmark FTSE 100 index fell 15 percent in the period. When the Securities and Exchange Commission prohibited short-sales for three weeks in September 2008 a Bloomberg Index tracking the 880 U.S. stocks affected fell 26 percent, outpacing the Standard & Poor’s 500 Index’s 22 percent decline. …“In contrast to the regulators’ hopes, the overall evidence indicates that short-selling bans at best left stock prices unaffected and at worst may have contributed to their decline,” said Alessandro Beber, a professor at Cass Business School in London who’s studied short-sales bans in 30 countries. …“EU policy makers don’t seem to understand the law of unintended consequences,” Jim Chanos, the short seller known for predicting Enron Corp.’s collapse, said by e-mail. “The vast majority of short-selling financial shares is by other financial institutions, hedging their counterparty risks, not speculators. The interbank lending market froze up completely in October to December 2008 — after the short-selling bans.”

Beber’s research (cited in the excerpt above) has been confirmed by other scholars. Simply stated, if investors realize that something is over-valued, it is going to fall in price. Governments can hinder and delay that process, thus increasing volatility and uncertainty, but they can’t stop it.

But here’s a very big reason why these laws are stupid (at least from my amateur perspective*). Most rational people presumably would agree that the housing and financial bubbles of the last decade were a bad thing. But most of us know it was a bad thing because we have 20-20 hindsight.

But what if there were lots of people back in 2005, 2006, and 2007 who recognized a bad thing as it was happening? And what if they had the ability to deflate the bubble (or at least slow its increase) by making investments that assumed housing and finance were heading for a fall?

We could have saved ourselves a lot of economic misery if that was the case. Heck, short sellers probably did save us from a lot of additional economic agony by stopping the bubbles from getting even bigger.

In other words, short sellers are the good guys. To some extent, they put a damper on “irrational exuberance” and therefore reduce the subsequent economic damage.

But don’t believe me. Here are some sage words from Cliff Asness.

…what goes through the minds of the politicians and bureaucrats and what do they say to themselves? Perhaps it’s the following: “What this crisis absolutely requires is that a really futile and stupid gesture be done on somebody’s part and we’re just the guys to do it.” It was funny when Bluto said it in “Animal House.” …So, they decide to outlaw shorting in a giant number of stocks… Never mind that the short sellers were in many cases the heroes who uncovered much of the ugliness in the financial system that needed uncovering. The government’s actions here will unambiguously hurt our capital markets and economy long-term. …At the risk of restating the obvious, short-sellers play a vital role in any free market. In a world where everyone can only hold long positions, managers have less incentive to work hard, improve stale business models or keep their companies competitive and efficient (sound anything like government bureaucracy?). Short-sellers keep companies, managers and markets honest, and without them the disciplining mechanism is much weaker.

By the way, Asness made those comments back in 2008, and his analysis was confirmed by subsequent events.

Andrew Lilico, meanwhile, is equally astute in his analysis.

Short-sellers make money by identifying situations in which the world is worse than the Market thinks. They expose cases where managements or governments are disorganised or lying or have themselves been deceived. Given the events of the past few years, it would seem very foolish to try to deter people from properly analysing companies or governments to see whether they might actually be less robust than they claim. Surely we want more such analysis, not less! …short-selling (and other forms of speculation) are extremely valuable. They improve market efficiency…and they expose errors made by the management of companies and by governments, early, when those companies and governments might still have a chance to rectify things. Banning short-selling is a classic case of shooting the messenger because one does not like the truth he tells.

The bans on short selling are classic examples of Mitchell’s Law. Politicians do stupid things such as bad monetary policy and corrupt housing subsidies. Those misguided policies cause bubbles that eventually pop. But rather than learn that bad policies are foolish, they use the economic damage as an excuse to implement additional forms of intervention such as short-selling bans. The only constant is that the political class gains more power and control.

* Caveat: I’m only commenting on public policy, not how you should invest your money. I’m only a policy wonk. I know less about financial markets than Barack Obama knows about economics

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Okay, perhaps the title of the post is not quite as memorable as Charlton Heston’s famous line from Planet of the Apes, but it certainly captures my sentiments after reading an article in Slate that calls for the elimination of the $100 bill. The author, Timothy Noah, says that large bills are only for “criminals and sociopaths.” Here’s the crux of his argument.

…why does the U.S. continue to print C-notes…? Technological change has reduced much further the plausible need of any law-abiding American to carry a C-note in his wallet or to stash a pile of C-notes in his mattress.

Noah’s argument is unconvincing for several reasons. First, he is underestimating the degree to which “law-abiding” Americans use “Benjamins.”  And with higher inflation almost certainly around the corner, one can safely expect that $100 bills will become even more common in the future. Second, his entire argument rests on the statist assumption that government should restrict honest people because this will somehow make life more difficult for criminals. Yet he debunks his own anti-money laundering argument by noting that the government already has stopped printing larger bills, such as the $500 note. Has that stopped the drug trade? Hello? Anyone? Bueller?

Like much of what government does, the campaign against money laundering is a costly exercise with very few tangible benefits. This video examines the cost-benefit issues.

I actually think the moral arguments against anti-money laundering laws are even more powerful. As Americans, we should have a presumption of innocence in our daily lives. What business is it of government whether we want to carry $20 bills or $100 bills? And think about the implications of these laws. What if the government said we need to ban cars, or put government-monitored homing devices in all vehicles, because bank robbers occasionally use automobiles as getaway vehicles? In this case, there is a theoretical benefit to the policy, just like there is a somewhat plausible case for anti-money laundering laws, but presumably we would reject such a policy as too intrusive.

Anti-money laundering laws are a classic case of Mitchell’s Law, which is the notion that bad policy begets more bad policy (this insight has been around forever, but I’m quite envious of Art Laffer for the Laffer Curve, so I’m trying to give myself a small measure of notoriety by being the lead proponent of the concept). The government passes drug laws that create huge profits for criminals. But rather than fight criminals (or, as libertarians would argue, get rid of victimless crimes), the government imposes policies that make life more difficult and costly for everyone else.

But regardless of what people think about drug laws, let’s at least use common sense and tell the crowd in Washington that it’s our choice whether we use $100 bills.

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I don’t want to give anyone indigestion, but The Hill is reporting that GOPers on Capitol Hill want to require insurance companies to cover pre-existing conditions, which is one of the key provisions of Obamacare.

Speaking to more than 100 students at American University, Cantor said, “What you will see us do is to push for repeal of the healthcare bill, and at the same time, contemporaneously, submit our replacement bill, that has in it the provisions [barring discrimination due to pre-existing conditions and offering young people affordable care options].” Cantor stressed that while he supports full repeal of the current law, Republicans share some of the same goals as Democrats, although they propose different ways of achieving them. “We too don’t want to accept any insurance company’s denial of someone and coverage for that person because he or she may have pre-existing condition,” Cantor said, addressing a young woman in the audience who noted that she had a pre-existing health condition.

This story initially was seen as a sign that House Republicans were planning to keep certain provisions of Obamacare, but Cantor’s office claims he was misquoted and the story now includes a correction indicating that “House Republicans are pursuing a full repeal of healthcare reform while addressing issues in the law, such as pre-existing conditions.”

It doesn’t matter to me, though, whether Republicans violate free markets and ignore the laws of economics by keeping an Obamacare provision or by doing the same thing in a different way with a brand new provision. The bottom line is that private insurance markets will be seriously damaged if the government imposes a mandate requiring companies to provide policies (with no price adjustment) that cover pre-existing conditions.

Such an approach leads to a couple of problems. First, such a mandate will create a bad incentive structure since consumers will be tempted to wait until they’re sick before purchasing insurance. Second, regardless of when they obtain insurance, the mandate would result in higher premiums for everybody else, contributing to what is sometimes referred to as adverse selection, which occurs when relatively healthy people decide to leave the system because government rules push up prices by forcing them to subsidize other consumers. Insurance companies are then left with consumers that are more expensive to cover, which leads to even higher rates, which leads even more consumers to opt out of insurance (which is why this process sometimes is referred to as the health insurance death spiral).

Ironically, the Democrats supposedly solved this problem in Obamacare by imposing the insurance mandate, which helps explain why the big companies were supportive of the legislation.

So what’s the answer? I’ve been around the political system long enough that I actually can sympathize with GOPers who don’t want to appear heartless when dealing with tough issues such as pre-existing conditions, but they better figure out an approach that doesn’t lead to an especially destructive version of “Mitchell’s Law,” which is when one bad government policy (such as a mandate to cover pre-existing conditions) leads to even worse government policy (a health insurance mandate or a single-payer system).

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For those who favor truth in labeling, the housing meltdown and related financial crisis and economic downturn should be brightly stamped with the phrase, “Made in Washington.” Here are two good pieces of evidence. First, this paper from the American Enterprise Institute is one of the best big-picture analyses on the issue. It identifies how “affordable lending” policies are at the heart of the problem. Here’s an excerpt from the abstract.

Government policies forced a systematic industry-wide loosening of underwriting standards in an effort to promote affordable housing. This paper documents how policies over a period of decades were responsible for causing a material increase in homeowner leverage through the use of low or no down payments, increased debt ratios, no loan amortization, low credit scores and other weakened underwriting standards associated with NTMs. These policies were legislated by Congress, promoted by HUD and other regulators responsible for their enforcement, and broadly adopted by Fannie Mae and Freddie Mac (the GSEs) and the much of the rest mortgage finance industry by the early 2000s. Federal policies also promoted the growth of overleveraged loan funding institutions, led by the GSEs, along with highly leveraged private mortgage backed securities and structured finance transactions. HUD’s policy of continually and disproportionately increasing the GSEs’ goals for low- and very-low income borrowers led to further loosening of lending standards causing most industry participants to reach further down the demand curve and originate even more NTMs. As prices rose at a faster pace, an affordability gap developed, leading to further increases in leverage and home prices. Once the price boom slowed, loan defaults on NTMs quickly increased leading to a freeze-up of the private MBS market. A broad collapse of home prices followed.

Then, to show a good example of Mitchell’s Law, which is how bad government policy leads to more government policy, here’s a story about the fiasco surrounding President Obama’s mortgage subsidy program. The government is so bloody incompetent, it can’t even give away money effectively.

Nearly half of the 1.3 million homeowners who enrolled in the Obama administration’s flagship mortgage-relief program have fallen out. The program is intended to help those at risk of foreclosure by lowering their monthly mortgage payments. Friday’s report from the Treasury Department suggests the $75 billion government effort is failing to slow the tide of foreclosures in the United States, economists say. More than 2.3 million homes have been repossessed by lenders since the recession began in December 2007, according to foreclosure listing service RealtyTrac Inc. Economists expect the number of foreclosures to grow well into next year. “The government program as currently structured is petering out. It is taking in fewer homeowners, more are dropping out and fewer people are ending up in permanent modifications,” said Mark Zandi, chief economist at Moody’s Analytics. …Many borrowers have complained that the government program is a bureaucratic nightmare. They say banks often lose their documents and then claim borrowers did not send back the necessary paperwork. The banking industry said borrowers weren’t sending back their paperwork. They also have accused the Obama administration of initially pressuring them to sign up borrowers without insisting first on proof of their income. When banks later moved to collect the information, many troubled homeowners were disqualified or dropped out. Obama officials dispute that they pressured banks. They have defended the program, saying lenders are making more significant cuts to borrowers’ monthly payments than before the program was launched. And some of the largest mortgage companies in the program have offered alternative programs to those who fell out.

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David Ignatius has a thoroughly boring and utterly predictable establishment left-wing column in the Washington post, but it is a perfect illustration of my maxim that “Bad government policy begets bad government policy.” In this case, Ignatius wants to expand gun control in the United States in response to the foolhardy drug war in Mexico. Neither effort will succeed, at least if either society wants even a smidgen of individual liberty, but statists never seen to worry about such niceties. If one of their policies leads to a mess, that’s just an excuse for more bad policy.

Mexico is reeling from a drug-cartel insurgency that is armed mainly with weapons acquired in the United States… Naming a new ATF chief to lead the fight against illegal weapons would be a small symbolic step. But it would signal to Mexicans and Arizonans alike that the administration is mobilizing to deal with these problems — and is willing to take some political heat in the process. …”The absence of a chief has hamstrung ATF’s ability to aggressively target gun trafficking rings or corrupt firearms dealers and has demoralized its agents,” Paul Helmke, president of the Brady Campaign to Prevent Gun Violence, wrote in a June 10 letter to Obama. …The prevailing political wisdom in America, to which the Obama administration evidently subscribes, is that it’s folly to challenge the gun lobby. When Mexico’s President Felipe Calderón addressed a joint session of Congress in May, he all but pleaded with lawmakers to help stop the flow of assault weapons. His call to action produced little more than a shrug of the shoulders in Washington.

By the way, several of you have been ribbing me for calling this phenomenon Mitchell’s Law when great economists like Mises have written about this pattern. But I’m not saying that I invented the concept. I’m just trying to popularize it, much as I gave the name “Rahn Curve” to the theory about a growth-maximizing level of government. In effect, I’m trying to mimic Art Laffer. Art will freely tell anyone he meets that the concept behind the Laffer Curve existed for centuries. But he turned in into a curve and brought it to the attention of the world.

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I’ve decided my one legacy to the world is the phrase, “Bad government policy begets more bad government policy.” This term, which I am modestly calling Mitchell’s Law, describes what happens when government intervention (Fannie and Freddie, for example, or Medicare and Medicaid) causes problems in a particular market (a housing bubble or a third-party payer crisis), which leads the politicians to impose more misguided intervention (bailouts or Obamacare).

Here’s a good example from Germany. The politicians created government-run healthcare. Overweight people are putting a larger burden on the system, imposing costs on taxpayers. The logical response is to shift to a market-based system where people are in charge of their own healthcare costs. Not surprisingly, that option isn’t being considered. Instead, politicians are using the situation as an excuse to consider even more taxes.

Marco Wanderwitz, a conservative member of parliament for the German state of Saxony, said it is unfair and unsustainable for the taxpayer to carry the entire cost of treating obesity-related illnesses in the public health system. “I think that it would be sensible if those who deliberately lead unhealthy lives would be held financially accountable for that,” Wanderwitz said, according to Reuters. Germany, famed for its beer, pork and chocolates, is one of the fattest countries in Europe. Twenty-one percent of German adults were obese in 2007, and the German newspaper Bild estimates that the cost of treating obesity-related illnesses is about 17 billion euro, or $21.7 billion, a year. …Health economist Jurgen Wasem called for Germany to tackle the problem of fattening snacks in order to raise money and reduce obesity. “One should, as with tobacco, tax the purchase of unhealthy consumer goods at a higher rate and partly maintain the health system,” Wasem said, according to Germany’s English-language newspaper The Local. “That applies to alcohol, chocolate or risky sporting equipment such as hang-gliders.” Others are suggesting even more extreme measures. The German teachers association recently called for school kids to be weighed each day, The Daily Telegraph said. The fat kids could then be reported to social services, who could send them to health clinics.

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