Winners and losers

Depending on who you talk to, you’ll get a different list of priorities, but essentially, we all believe that the government’s essential function is to mitigate public risk. Some people want the government to focus on mitigating the risk of global instability, foreign wars, and terrorists. They might agree that a strong internal defense is necessary and that the government should help mitigate the risk of criminality, insurrection, fraud and force. Others want the government to mitigate economic risk; they want the government to stabilize financial markets and to subsidize and regulate economic transactions.

All this risk management comes at a cost. Generally speaking, the higher the risk, the greater the potential reward, the lower the risk, the lower the reward. Mitigating risk means reducing potential profits: trading wealth for security. It doesn’t matter if we’re reducing the risk of terrorist attacks, the risk that we might lose money on investments, the risk that we might get sick, or the risk that we might get mugged. No matter what security we buy, we have to pay for it.

In small doses, that makes sense. We trade a little wealth (or we give up higher rates of growth) for a little security. After all, massive returns in the market aren’t worth much if buildings are exploding around you, if you’re shot in a drug raid, or if you bet on the wrong stocks and your portfolio goes south.  I don’t have a theoretical problem with trading some wealth for some security, but I also don’t want to trade too much. Security doesn’t matter much if I have no wealth. After all, what point security but to protect what I hold dear?

The problem with mitigating risk is that the only way to do it is to spread risk around. You can’t eliminate risk, you can only “level” it off. Let’s say I wanted to reduce the risk of gambling in a casino. I could rig the games to produce a more “equitable” result; fewer losers and fewer winners. Or, I could simply tax the winners and give some of their winnings to the losers. Functionally, the means are different, but they achieve the same outcome. Rigging–or regulating–the casino games is exactly the same as increasing taxes. The increased regulation acts as a damper on winnings, in just the same way that increased taxation does. I can only reduce the risk by reducing the potential reward.

This is true of all risks. I can only lower the risk of financial insolvency for some investors by reducing (either through regulation or taxation) the potential return on investment for everyone. I can only lower the risk of terrorism or foreign attack by reducing the scope of international trade and domestic freedoms (trading security for the potential return on free, open trade).

It’s also true that we can’t effectively mitigate all risk. We have to pick and choose where we want to focus our efforts–and we have to pick and choose whose risk to dampen, whose security to protect, whose assets to rescue. This puts us in the position of deciding who we’re going to let “win,” who we’re going to let “lose,” how big we’ll let the winnings get, and how much we’re willing to lose.

Well, we don’t decide–we let the government decide for us.

When we let the government mitigate our risk, we let the government pick winners and losers.

In any government program, rule, regulation, or tax, there’s a winner and a loser.The stimulus bill picked a lot of winners; in many cases, the winners were explicitly identified. The losers are less visible, but no less real. The taxpayers who will bear the burden of the additional debt are some of the losers, but so too are the firms whose businesses were not sufficiently politically capitalized to merit inclusion. Amtrak gets additional money to continue operating and the taxpayers take a hit. But so do bus companies, the airlines, and anyone who else who competes with Amtrak. The same is true of the bailouts, only more strikingly so. Bear Sterns was bailed out, Lehman Brothers was not.

Winners and losers.

In the course of mitigating risk from domestic criminality, anarchy, fraud, theft, and force, the government generally has a centuries of accumulated legal guidelines to ensure that the selection of winners is made according to well-established procedures and rigorous due-process; we have the courts, rules of jurisprudence, stare decisis, and the common law.

It’s when we get into the mitigating the risk of foreign threats and domestic economic malaise that the criteria for determining who gets to win and who gets to lose becomes… more subjective. Deciding to give Amtrak millions of dollars in operating subsidies, or to assume part of the USPS pension obligations, to bail out AIG, or to tax the bonuses that AIG gave out, to cover this medical procedure and deny that medical procedure, or to decide that mortgage interests should be tax-deductible while rental payments should not be… those are all political decisions.

That’s crucially important. When the government picks these winners and punishes these losers, the reasons are invariably political. Whom to bail out and whom to tax are not decisions made by judging objective criteria–they couldn’t be, because there is no criteria around which to create a decision making framework. These are purely political decisions, made for purely political reasons.

When we ask why Lehman Brothers was ignored, or why some financial windfalls are subject to a 90% tax and others aren’t, why some contracts are honored and others aren’t, why the Treasury addresses some issues and not others, the only answer is because those are the results that are politically expedient or advantageous to the party in power.

It’s not even really appropriate to speak of justice when we talk about these kinds of political decisions, because there’s no sense in which these decisions can be evaluated by any standard relevant to a coherent notion of justice. Justice, when we speak of justice in the courts or justice in law, is a the result of a codified, coherent, and complex process that we have developed and refined over the course of the last three thousand years.

When we speak about the result of a political decision, however, we’re not talking about the result of a process, just the simple manifestation of political will. Is it “right” that the AIG bonuses are subject to a 90% tax? There’s no way to evaluate that tax as “right” unless we define it as right to begin with. In other words, we can’t adjudicate political decisions or subject them to due process, they simply are what they are: the manifestation of political will.

It’s tempting to believe that the politicians exercising these powers are somehow nobler than the rest of us, or that they’re somehow immune to confirmation bias, temptation, and petty grievance, but it’s not true. In fact, it’s emphatically not true. Politicians respond in general to incentives and temptations in the same way that everyone does: they act to maximize their own long term gain. (The formal study of political interest is known as public choice economics.) Politicians will reward those people who are in the best position to reward politicians. Politicians will punish those people who are least likely to benefit them: the “aristocracy of pull.”

We’ve seen the selection of winners and losers on a grand and sweeping scale in the last few months and all of those decisions have been purely political decisions designed made for purely political reasons. This has all been in the cause of mitigating the risk of collapsing financial markets.

But we can’t mitigate that risk without cost, and whatever we choose to do about the risk, the end result will be the same:  we’ll take from some people (the losers) and we’ll give that money to some other people (the winners). The current administration is picking those winners and losers with alarming speed, very little deliberation, and absolutely no due process.

I’m left wishing that we could subject political appropriations to a process as rigorous and as tested as the court system, but we can’t. Such process as exists for deciding political issues is limited to the procedural rules in Congress and the process of elections. To analogize further with the court system, it’s as if we tossed out the common law, stare decisis, the rules of evidence, the adversarial system, and the judge. We’re left with only jury selection and procedure: hardly a reliable system.

The only way to subject questions of political expropriation to an objective process is to take those decisions out of the legislature. Until and unless we can agree to place further limits on the government’s power to extract and expropriate wealth, until we decide that the arbitrary results of influence peddling and political arm-twisting should be disdained rather than ennobled, we’ll continue to see more of the same.

Isn’t that a risk we shouild mitigate?

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Afraid to be free

Hat tip to .

An excellent article by Nobel Prize winning economist James M. Buchanan: “Afraid to be free: Dependency as desideratum” from the July 2005 issue of Public Choice

If we loosely describe socialism in terms of the range and scope of collectivized controls over individual liberty of actions, then “socialism” will survive and be extended. This result will emerge not because collectivization is judged to be more efficient, in some meaningful economic sense, or even because collectivization more adequately meets agreed upon criteria for distributive justice, but rather because only under the aegis of collective control, under “the state”, can individuals escape, evade and even deny personal responsibilities. In short, persons are afraid to be free. As subsequent discussion will suggest, socialism, as a coherent ideology, has lost most of its appeal. But in a broader and more comprehensive historical perspective, during the course of two centuries, the state has replaced God as the father-mother of last resort, and persons will demand that this protectorate role be satisfied and amplified.

As the title for this paper indicates, and as I have noted earlier, this ultimate motivation for maintenance and extension of control over the activities of persons through collective institutions will, in my assessment, be more important in shaping the patterns of development during the first half of the new century than any of the other, and more familiar, sources discussed in the previous section. Almost subconsciously, those scientists-scholars-academicians who have tried to look at the “big picture” have assumed that, other things being equal, persons want to be at liberty to make their own choices, to be free from coercion by others, including indirect coercion through means of persuasion. They have failed to emphasize sufficiently, and to examine the implications of, the fact that liberty carries with it responsibility. And it seems evident that many persons do not want to shoulder the final responsibility for their own actions. Many persons are, indeed, afraid to be free.

James M. Buchanan is widely credited, along with co-author Gordon Tullock, of founding the public choice school of economics.

RIAA Update

CNET reports that the Washington Post may have been stretching the point a bit when it characterized the RIAA as attempting to criminalize the simple act of copying music to a PC.

Apparently, the RIAA doesn’t take issue with the defendant for copying music onto his computer, but for copying music into a shared folder on his computer — that folder being shared over a peer-to-peer network. Marc Fisher, the author of the Post article stands by his characterization of the suit, quoting Jennifer Pariser (Sony BMG’s chief of litigation) as testifying that “when an individual makes a copy of a song for himself, I suppose we can say he stole a song.”

I don’t think this changes my interpretation of the RIAA’s desire to protect the revenue they get from online distribution. Over time, the RIAA members will see revenues from CD sales decline and revenues from online downloads increase. Piracy and online music sharing, regardless of the source of the bits, will always be the RIAA’s enemy number one.

However, I do think it will become increasingly difficult for the RIAA to use the location of files on a customer’s computer as a measure of malfeasance. The problem, for the RIAA, is the peer network itself. My guess is that eventually we’ll see the RIAA press for legislation curtailing peer-to-peer distributed networks over the internet, probably in conjunction with legislation allowing network carriers to prioritize network traffic (and block peer-to-peer network traffic). That means that the RIAA will be at odds with “net neutrality” and will find itself aligned with major carriers (telcos and cable companies).

As I’ve said before, the future will be decided by Congress — and it will be decided in ways favorable to the long-term vested interests: telcos and the RIAA. Again, I want to make clear that this is not a partisan point. Neither party will be any better in this regard. The fact that regulations serve to further the interests of large corporations is a fact of regulation, not party politics. It’s a phenomenon called “regulatory capture” and it’s an integral part of public choice economics.