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?