Bruce Schneier <3's TSA

Yesterday, Bruce Schneier wrote a blog post about abolishing the Department of Homeland Security. It was based, in large part, on a CATO report calling for the same citing that

DHS has too many subdivisions in too many disparate fields to operate effectively. Agencies with responsibilities for counterfeiting investigations, border security, disaster preparedness, federal law enforcement training, biological warfare defense, and computer incident response find themselves under the same cabinet official. This arrangement has not enhanced the government's competence. Americans are not safer because the head of DHS is simultaneously responsible for airport security and governmental efforts to counter potential flu epidemics.

Schneier agrees, citing his own writing from 2003:

Our nation may actually be less secure if the Department of Homeland Security eventually takes over the responsibilities of existing agencies. [...] Security is the responsibility of everyone in government. We won't defeat terrorism by finding a single thing that works all the time. We'll defeat terrorism when every little thing works in its own way, and together provides an immune system for our society. Unless the DHS distributes security responsibility even as it centralizes coordination, it won't improve our nation's security.

But Schneier takes issue with CATO's suggestion, later in the above linked report, that the TSA should abolished. Instead, he believes

abolishing the TSA isn't a good idea. Airport security should be rolled back to pre-9/11 levels, but someone is going to have to be in charge of it. Putting the airlines in charge of it doesn't make sense; their incentives are going to be passenger service rather than security. Some government agency either has to hire the screeners and staff the checkpoints, or make and enforce rules for contractor-staffed checkpoints to follow.

It would be very easy, at this point, to attack Schneier on the basis that the TSA is a colossal failure. However, that TSA is not a failure of epic proportions is not what he is arguing. In fact, Schneier himself is the progenitor of the idea that exactly "two things have made flying safer: the reinforcement of cockpit doors, and the fact that passengers know now to resist hijackers". Furthermore, just this week, he penned an article calling the TSA irrelevant. So, let's look at exactly what he did say: that airline security should return to pre-9/11 levels with the government being in charge of it, either directly (government-hired goons staffing the checkpoints) or indirectly (private contractors acting under government regulation). If we hearken back to the pre-9/11 days, we find that his statement is redundant. Prior to 9/11, the government via the FAA was in charge of airline security, and what Schneier is suggesting is exactly how we arrived -- ignoring the reason(s) for the attacks themselves -- at 9/11 in the first place.

Before addressing Schneier's claim that putting the airlines in charge of airport security doesn't make sense, let's start with why his own solution doesn't make sense. First, there is the empirical evidence. As I just pointed out, 9/11 happened on the government's watch. While I agree that airline security should be rolled back to pre-9/11 levels, putting/leaving the government in charge of it is ludicrous, and the reason for that is that the government's interests do not align with that of the traveling public. Ostensibly, both care about flight safety. But in reality, as Schneier himself points out relentlessly, the TSA fails to provide this on any level. Just last month, a Vanity Fair writer explained how Schneier helped him circumvent TSA security to meet Schneier at the gate when his flight arrived. Then there's my own personal experience: after leaving the screening area (without being screened), the TSA demanded that I return because they feared that I may have an explosive device on my person. Why would they usher me back to the most crowed area of the airport if they feared that I had explosives? In reality, the government's interest(s) lie in an ever increasing role in security. This provides, not an actual increase in security, but an ever increasing ability to funnel money to favored contractors and further ratchet up the police state apparatus for the same reason.

The other reason that having the government in charge of airline security doesn't make sense is the same reason that letting the airlines manage their own security does: the profit and loss test. The basic idea is that when a business produces a product that consumers want at a cost that is less than what consumers are willing to pay, then the business profits. If any of these conditions are not met, the business suffers a loss. If the business does not change, then it goes out of business, government intervention notwithstanding.

Let's apply this test to the government's handling of airline security. It is producing a product that consumers want, namely, security. It is producing it at a cost of approximately $8.8 billion per year according to the federal government's 2011 budget. But this is where the profit and loss test ends for the TSA or any government entity. The profit and loss test requires that consumers of a product voluntarily pay or not pay for it. The government is funded via compulsory taxation. Therefore, the government need not concern itself with whether or not it is producing a product that people want or, more importantly, in a way that they want. That the government acts in exactly this way is borne out by reality. The TSA's budget during its first full year of funding in 2003 was $4.8 billion. It's current budget, only 8 years on, is a near 100% increase from that initial budget. This comes despite repeated TSA bungles including sleeping on the job, physically harassing passengers, allowing criminal activity to bypass security, stealing from passengers... the list goes on and on. If the TSA was a private corporation, consumers would have put it out of business almost 10 years ago. Instead, its costs are higher than ever and rising with no end in sight. In fact, the TSA's only measurable goal is total security, something that requires an absolute police state. Despite the desire on the part of the traveling public for total security, I'd wager that none would actually want to pay for it in terms of money or liberty required to implement said police state.

Now we can return to Schneier's claim that putting airline security in the hands of the airlines makes no sense. He believes this because he thinks that the airlines' focus will be on passenger service instead of security. Somebody didn't think through his rationale, completely. Tsk, tsk. Security is part and parcel of the service provided by the airlines. No passenger is going to be concerned about a glass of soda and a bag of peanuts or that he didn't get a blanket and a fluffy pillow if his plane is commandeered or blown up by a terrorist. Not only that, but the loss of a plane costs an airline hugely. There is of course the capital loss of the plane and the fuel, but more than that, if the airline wants to stay in business it's not only going to have to beef up its security, but it is going to have to figure out how to prove to passengers that it had changed its ways so that they'd be willing to fly again. We see then, that the airlines' interests, unlike the government's, align perfectly with the traveling public. In addition, airlines carry insurance for their operations. This means that airlines want their operations to be safe and secure because they don't want their premiums to rise in the event of an accident, and the airlines' insurance companies have every incentive to pressure the airlines to keep their operations safe and secure lest the insurance company have to pay out a multi-million, possibly billion, dollar claim.

"We can't trust the airlines", I hear you scream. "They're greedy capitalists!" Indeed they are, and that's exactly why the system would work. The airlines, unlike the government, cannot just take consumers' money to fund their operations. They must induce consumers to voluntarily give money to them. Thus, the airlines are subject to the profit and loss test described earlier. If the airlines provide too little security, passengers won't be willing to fly. The airlines will have saved some money by skimping on security, but the lack of income will ultimately result in losses. If they provide too much security, either the costs will drive ticket prices to a level that consumers are unwilling to pay, or consumers will find alternate means of travel because they find the security required by the airlines too onerous. In either event, the airlines will again find themselves losing money. In order to make money, the airlines will have to provide enough security to satisfy their passengers' desire for safety and their insurance companies' risk tolerance while not imposing so much security that passengers seek other airlines or other modes of travel entirely to avoid the costs and hassles.

Astonishingly, a self-correcting and self-policing system like this hasn't taken hold. Part of the reason for this is human nature. Humans have demonstrated a surprising inability to correlate events with the likelihood of their occurrence. For example, very few people are concerned about choking to death on their own vomit. However, it turns out that one is 9 times more likely to die by this method than via an act of terrorism. This is a topic that Bruce Schneier has also written about repeatedly. Because of this, people always demand ever more security in the event of some kind of accident or attack. Normally, the costs of these demands would temper them somewhat, but this doesn't happen because of government involvement. This is the other reason that a free market system has not taken hold: the government provides moral hazard. The airlines prefer that the government be involved because by using government provided security and/or standards, responsibility for security failures falls on the government, not the airlines. When something tragic occurs, the airlines can point to the government as the failure. Insurance companies are likewise not terribly worried about having to pay airline claims because the government has proven willing to bail them out. Even consumers are unwitting accomplices in this system because the costs of security have been separated from the cost of a ticket. Instead, these costs are (or would normally be) imposed as taxes, but even if one went looking for them, they would be difficult to find as the government has taken to inflating the currency in order to finance its operations. The increased costs of security are found in the rising prices of everyday items like milk, rent, electricity, and gasoline.

The government's involvement in airline security is not only an abject failure but an impediment to allowing a free(d) market to discover what the people really want when it comes to airline security. Bruce Schneier is a smart guy, and he's one of the TSA's harshest critics. He's written extensively about security and the trade-offs made in its name; he's no stranger to economics, especially when it comes to security. In light of this, I can only conclude from his desire to keep the government involved in airline security that he secretly loves the TSA.

Where's the beef (with capitalism)?

Over at Arm Your Mind for Liberty, a recent article takes issue with capitalism. I read this article with great interest because (I assume) it grew out of a discussion between myself and the author as well as some others regarding capitalism. When I read it, though, I couldn't find that the "beef" is really with capitalism at all. Before going too much further, we should probably start with a (common) definition of capitalism, but I'm not going to attempt to define capitalism in great detail. It seems that if you ask ten different people, you'll get ten different answers about what capitalism means to them as the linked article states:

‘Capitalism’ is a funny word. It means so many different things to so many different people, that it’s become entirely useless as a basis for any kind of rational or constructive communication. [...] Some will mention wage labor, others exploitation and yet others will talk of free trade. But I think the defining feature is the ability to accumulate lots and lots and lots of stuff (capital).

Fair enough. The ability to accumulate lots (and lots and lots) of stuff, or capital, is most assuredly a characteristic of capitalism and, as we will see, the article's main problem with it, so let's focus our attention there. Before we do so, the original article takes a slight detour:

And then, most importantly, [a characteristic of capitalism is] to have a third party protect your ability to control that stuff even when you’re not using it. That third party, of course, is the state (the government). [...] Without this ability to accumulate and have your title to said stuff protected at little to no cost to yourself, things like wage labor, exploitation and managed trade could not happen. These all depend on the power imbalances that stem from the state protecting capitalists’ control of their property.

Whoa, wait just a minute! Now, we're not talking about capitalism any more. We're talking about a state-directed ("managed trade") and state-enforced ("stuff protected at little or no cost to yourself", presumably via taxation on the whole population and "power imbalances" in the form of state-chartered police and enforcement mechanisms) economic system, our current system, what many call crony-capitalism. So, we can already see that the author's problem is not with capitalism, per se, but with crony-capitalism and the state enforcement of it. The author continues by stating that he doesn't "think capitalism would survive without the state".

But we're not talking about capitalism any more. We're talking about the state. The author offers no evidence or theories as to why capitalism cannot or will not exist without a state other than to say, "I don’t think a non-aggressive organization will go to the same lengths as the state to protect property". This is demonstrably false, however:

Just think for a moment about the following:

• Who is responsible for protecting you at most major shopping centers? Ever see a private mall cop? I bet you have.
• How about casinos? Almost all casinos have private armed security.
• What about at the dance club? Ever see a bouncer throw out a belligerent drunk?
• What about at the university? You’d be hard pressed to tell the difference between a public safety officer and a cop. Many universities have private police forces.
• How about warehouses, ports and apartment complexes? It is not uncommon to have private security guards protecting all of those. My apartment complex has its own security.
• Airports used to be entirely protected by private security – and guess what? No one was complaining about being molested. Further, after 9/11, it was the airlines who made real improvements to security by putting in steel cockpit doors and arming the pilots.
• Banks? - Almost all bank cash transfers are dealt with by way of private armored car, and many banks have private armed security as well.

Now I've been drawn into a digression about capitalism on a larger scale. Let's return to the accumulation of stuff in the original article and look at an example provided by the author describing his issue with it: "if someone fences off 1,000 acres of land but consistently uses only 2, I don’t consider that legitimate". This situation draws its basis from the Lockean idea of homesteading, that one becomes an owner of land by "mixing" his labor with it. I'm not going to argue whether fencing 1,000 acres constitutes a mixing of labor. A debate on such a matter is not likely easily resolved.

Instead, what if we arrived at this situation differently, voluntarily? Let's assume two people and call them A and B. Each of them own 501 acres (via legal means, homesteading or otherwise) and farm the entirety of their respective plots. A and B both consume only what they need to survive and sell the rest of their produce into the marketplace. A saves the proceeds from his sales under his mattress while B spends his money on vacations and house keepers and other consumable goods and services. (One has to wonder, at this point, if B has a claim to A's money since storage under A's mattress is not "productive" use in B's mind.) At some point, bad weather conditions befall A and B. A, having saved his money, is able to buy what he needs from the marketplace, but B has nothing. Seeing B's plight, A offers to use some of the rest of his savings to buy 499 acres of B's land. B, needing to feed himself and his family, reluctantly agrees. Now A owns 1,000 acres, and B owns 2. We've arrived at the evil capitalist situation described by the author in the original article, but we've arrived by completely legal and voluntary means.

Let's assume that A, having just bought the land and exhausting much of his savings, does not have the capacity to expand his farming operations into his newly acquired 499 acres. When the weather improves, does B have a legal right to reacquire the land, via homesteading? What if B had kept the land but sold his farming equipment to A to pay for his food? Now that B is incapable of farming his land (and has no reasonable prospects for doing so since he has no farming equipment and no savings with which to buy any), can A also freely acquire B's land under the homesteading principle?

The author of the original article seems to think so: "If someone needed land and had a solid intention to use it to sustain his life, I would support that person in any attempt to homestead a reasonable parcel out of the 1,000 acres". B, in our example, has every "intention to use [the land] to sustain his life" as well as others'. The author goes so far as to suggest that force is an appropriate means to affect this outcome:

In a stateless society, people would be freer to rise up against people who attempt to control more property than they actually use. Acting in concert, great numbers of people could, in the worst case, purchase arms, form a defense force and fight capitalists on a more level playing field. Squatters, worker-owned cooperatives and similar direct actors would take control of more of the capitalists’ property. In the process, their power would be eaten away.

In fact, A has saved B's life as well as his family's, and in return B should have the right to use violent force to take back from A what was voluntarily given/traded (by B himself!) to A? What the author is suggesting is either a clear violation of the non-aggression principle or will require a state, with a legal monopoly on the use of violence, to forcibly give A's land to B.

The only other argument in favor of what the original author is suggesting hinges on the word "reasonable". Perhaps 1,000 acres is an "unreasonable" amount. Much like the hypothetical debate about homesteading to which I alluded earlier, a common definition of what is "reasonable" is not easily resolved. As an example, here are a bunch of pro-gun people on a pro-gun forum disagreeing about what "reasonable" gun laws would look like. At any rate, the example I gave above works with any sized parcel of land. In fact it becomes even more difficult to reason out on a smaller scale. Consider if A and B each owned two acres and A bought 1 acre from B. A is in a much better position to farm an additional 1 acre than he is an additional 499. What if A incrementally continues the process, voluntarily acquiring parcels from C, D, E, etc. in a similar manner? When does the amount of land that A owns become "unreasonable"? Does the situation change if A rents the land back to B, C, D, E, etc.? Who makes that decision and who enforces it? What authority does this entity have when A can show that his property was acquired legally? None, according to the author of the original article: "If a person prospers legitimately, I have no basis to challenge any accumulation of wealth." Wait, what? Does B have a claim to A's legitimate accumulation of wealth (in the form land) or not?

In short, capitalism, true capitalism, is not an economic system that is imposed on anyone. It is an economic system that arises from, or rather is the result of, voluntary interactions in a truly free society. In fact, the economic system proposed in the original article is not only incoherent but, in the author's own words, requires violent enforcement. I suggest that the author's "beef" is not with capitalism but with a free and voluntary society.

Climate change denial != science-averse

I just watched this clip from last night's Daily Show:



Another segment of this show was devoted to poking fun at various pundits' criticism of science and scientists. Putting this interview in the context of that previous segment sheds a little more light on Mr. Stewart's apparent confusion about the "resistance" to science. The reason is apparently that climate change deniers are all crazy, liars, or idiots or possibly all of the above.

Let me suggest another alternative: people don't want more government intervention. Assuming for a second that climate change is real and further that it is man-made (thus implying that it is man-reversible), then the logical next step is government intervention to combat this scourge. This likely entails more regulations on emissions which means increased costs for fuel and cars, government subsidies to "green" businesses which means gambling tax dollars on politically connected businesses, and limitations on production of goods considered to be non-"green" or produced via non-"green" methods which means violation of property rights.

My point is that climate change "deniers" are not necessarily science averse. Their reticence to accept it may be based more on a desire to prevent greater government intervention or simply on the idea that climate change better be really "for-damn-sure" before government guns are used to forcefully reorganize society around its implications.

Is the state a criminal conspiracy?

Murray Rothbard famously called the state "a bandit gang writ large", or as it is more commonly rephrased, "a gang of thieves writ large". I have to admit that the first time I read this I was quite taken aback. I think I was first exposed to this idea early on after becoming a libertarian, and I wrote it off, in large part, to fiery rhetoric intended to get readers' attentions. Fortunately, it didn't scare me off, and as I read more and more, I came to understand the logic behind the assertion. As it usually goes for me, I have trouble seeing the forest for the trees right away.

This assertion -- government as a criminal gang -- often accompanies, or occurs during, a discussion of taxes. In fact, I had a discussion with someone just this past weekend during which I said that taxes were theft because I had never consented to them. Invariably, this leads (as it did in this case) into discussion about helping the poor, benefits of services paid for by tax revenue, and "civic duty" and what it means to be a "good citizen". The argument goes: taxes are fine and good as long as we put them to "good" use; to be against taxes is to be against the good that taxes provide. Don't get me wrong. I believe in helping the poor; I drive my car on roads; and I'm all for peaceful cooperation and being a productive member of society. I simply differ from the bulk of the population on how these ends should be achieved.

Since I'm likely in agreement with most about what can be achieved with the proper use of tax revenue (assuming the "proper" use could really be known), let's back up a bit and look at taxes themselves. A tax is simply a financial charge imposed by a state (or functionally equivalent "legal" entity), the payment of which is enforced under penalty of law. This is a somewhat euphemistic definition, though. A tax "is not a voluntary payment or donation, but an enforced contribution, exacted pursuant to legislative authority" according to Black's Law Dictionary. With that definition in mind, we begin to see now the shape of the criminal gang metaphor. The state imposes a financial charge on its subjects and enforces the payment of said charge with force. In less civilized societies, failure to pay may be immediately met with the state's armed enforcers stopping by to collect the charges. In more civilized societies, one might first be given a trial in a state-run court, after which failure to pay will be met by the state's armed enforcers. The result is always the same, though. Taxes are ultimately, always collected by force be it through property confiscation or (the threat of) incarceration. (A discussion of the equality of the threat and actual use of force is omitted.)

When a criminal gang takes money by force, it is theft. When the state does it, it is taxation. The difference is curious, to say the least. Looking back at Black's definition of taxation, note that taxes are "exacted pursuant to legislative authority". So, despite all outward appearances, taking money from someone against their will is not always a crime; the legality of the act depends on who is doing the taking. The state is empowered by "legislative authority" while the "criminal" gang has no such authority. So, let's step further back and examine from where the state derives this authority.

Imagine, for a second, a person living alone on an island. For all intents and purposes, this person owns the island and everything on it, if for no other reason than there is no one else contending for ownership. Now let's add a second person into the mix. There are myriad ways for the two to decide how to divide up the land and coexist, but they all begin with the question of the proper ownership of each person's body. The simplest, most common sense solution to this question is that each person is the exclusive owner of his or her body. After all, it doesn't make sense for each person to own the other's body but not his or her own. Nor does it make any sense for the two to own both bodies jointly. These latter solutions would only produce conflict as the two would never be able to agree on how best to use their bodies. Indeed, the only viable solution is for each person to be the exclusive owner of his or her own body.

If we accept this premise, then it follows that the initiation of force/violence against another (without this other's consent) is never justified as it constitutes a violation of the person's ownership of his or her body and sole discretion as to how that body should be used. It further follows that if a person does not have the authority to initiate violence against another, he or she cannot contract this authority out to a third party, namely, the state. That is, one cannot grant power or authority to another that one does not have in the first place. Thus, we arrive at the conclusion that the initiation of force/violence by the state is never justified, and since all state actions are predicated on the use of force, we must further conclude that all state actions are without proper authority, at a minimum, with respect to those who do not consent to violence against them.

By now, it should be clear that there is little difference between the actions of a "criminal gang" and the state in terms of their authority to commit those actions. The only place where the two may differ is in the fact that, occasionally, the state may use its ill-gotten gains to help the public in the form of welfare, roads, etc. But the state is no Robin Hood. It steals from the rich, the middle class, and the poor, alike. Not only that, but it pays its bureaucrats first and then uses what's left to pay for these services. So, even when the state does good, the taxpayers are forced to overpay for these services since they can be provided by and found in the private sector -- often the state ends up contracting with private sector businesses -- with less bureaucracy and the added benefit of market competition to keep prices down. We must also note that money left, after paying bureaucrats, is further reduced by the state's spending on warfare and all that that entails. Taxpayers really aren't getting a good bang, no pun intended, for their buck.

All of this talk about how the state spends money, though, is simply a giant misdirection intended to confuse the issue. After all, we don't tolerate crime when the proceeds are used for ostensibly "good" purposes. Nor would we tolerate it if the criminal offered to give us a partial say -- a vote if you will -- in how he or she might use the proceeds. The criminal act must be addressed first and foremost, and this should be no different when it applies to the state. When there are different rules for the state and for the subject/citizen, what we have is most definitely not the rule of law.

The state is indeed criminal in its actions; the next step is to establish conspiracy. Strictly speaking, a conspiracy is "an agreement by two or more persons to commit a crime, fraud,or other wrongful act". Under this definition, a conviction of the state is all but certain. This isn't exactly what I have in mind, when I say conspiracy, however. Conspiracy, in reference to the state, implies to me some larger goal: not only to keep power but to further and further enhance and centralize it. It also implies that the state is always working toward this goal as an end unto itself. Now, I won't argue that this isn't what happens, in practice; however, I have a hard time believing that the state, at all levels, is always and everywhere conspiring toward this end for one simple reason. Again, Murray Rothbard:

[I]n a profound sense, no social system, whether anarchist or statist, can work at all unless most people are "good" in the sense that they are not all hell-bent upon assaulting and robbing their neighbors. If everyone were so disposed, no amount of protection, whether state or private, could succeed in staving off chaos.

If Mr. Rothbard is correct, which I believe him to be, that most people are "good", then we must conclude that either a significant number of people working for the state are "good" or that by some sort of social malfunction the state exclusively employs the "bad" people in society. There is certainly a good argument to be made for the latter possibility, but I'm a believer in the former.

If I am correct in that belief, then there only remains the question of why the state continues to exist. I believe there are two, related reasons: 1.) people do not understand the nature of the state, and 2.) people believe that they are not responsible for the actions of the state. I've addressed the former in this post; I'll try to address the latter in the next.

That triple-A credit rating

Despite a debt deal, the US federal government still faces a downgrade of its credit rating. In my opinion, rating the creditworthiness of a government is all political theater. However, during the course of discussion, I've noticed a curious argument being made with regard to the possible downgrade:

Behind all too many of market moves in government debt of late has been a report from one of the major credit ratings agencies. S&P is the biggest and arguably the most influential, fast followed by Moody's Investor Service and then their smaller rival, Fitch Ratings. In national capitals, they are alternately vilified by politicians or held out as just arbiters for denouncing government profligacy. 

Yet there is an overwhelming irony in their new-found prominence. These are the same firms that many blame as prime instigators of the 2007-2008 credit crisis for freely giving out top ratings to ultimately worthless structured mortgage products, allowing the credit bubble to form. Now they sit in judgment of the countries that had to ruin their public balance sheets to prevent financial collapse by saving the banks shattered by those bad instruments once blessed by the agencies. 

"The ratings agencies failed the world economy in spades in the past," said Lord Peter Levene, chairman of the Lloyd's of London insurance market and a former senior adviser to the British finance ministry. 

"Their track record has not exactly been stellar."

The argument seems to be that because the ratings agencies all "missed" the financial collapse in rating junk financial instruments as AAA, then their credibility in this matter is nil. I don't follow this line of reasoning for a couple of reasons:

1. The main issue that people seem to have with the credit rating agencies is that they waited too long to warn the investing public about the looming financial catastrophe that struck in 2007-2008 and issue downgrades. Shouldn't those people now be applauding these same agencies for trying to correct their failures by getting out ahead of possible new problems?
   
2. If credit rating agencies tend to overrate financial instruments, an assumption that seems to underlie the argument, then shouldn't people take it very seriously when an agency actually does issue a downgrade?

You can't have it both ways. You can't simultaneously decry the agencies for missing the financial collapse in 2007-2008 and then point at that incompetence as a criticism for downgrading a financial instrument that everyone agrees is in trouble.

Gresham's law, extended by force

A few weeks ago, a man by the name of Bernard von NotHaus was in the news. If you Google the phrase "unique form of terrorism", you can read all about him. In short, he minted coins in a variety of metals and offered to "exchange" them for Federal Reserve Notes -- those pieces of paper you carry around in your wallet, usually referred to as "money". (His original site is here, but Wikipedia is probably the best place to start if you want to know more.) In 2007, the government arrested Mr. von NotHaus and charged him with a number of crimes amounting to "counterfeiting". He wasn't actually minting pennies, nickels, etc.; he was simply minting coins in denominations similar to U.S. currency that the government claims bears too close of a resemblance to official U.S curency. The government accused him of trying to "replace" the official currency of the U.S. He was eventually convicted of these "crimes", with the government going so far as to declare him a terrorist, and his case is now on appeal.

This whole episode seemed to me to be an interesting application of Gresham's law. Gresham's law is the idea that "bad" money chases out "good" money. What that means is that if there are both "bad" and "good" money in an economy, the good money will eventually disappear from that economy. Since anything could be money (as Lew Rockwell points out: shoes, shells, flash drives, or books) and people can assign whatever value they want to that money, how do we define good vs. bad? That's where the government comes in. Instead of the people assigning value to their money, the government has assumed that role (and the authority to occupy that role). Thus, Gresham's law is more accurately stated as (looking again to Wikipedia): bad money drives out good if their exchange rate is set by law.

Let me give you a personal example of how this is so. Just last week, I was cleaning up one of the bedrooms in my home when I came upon a container full of coins. They weren't particularly special in any way; it was just the type of accumulation that occurs when you come home at the end of the night and toss the change in your pocket into a jar. Thinking I might come across some rare coins -- I was hoping for some old pre-1964 silver coins -- I decided to sort through them. I happened to know that pennies used to be made of copper and nickels, of all things, of nickel and copper. A quick Internet search turned up the fact that pennies were made out of copper up until 1982 and that nickels are still made out of copper and nickel. It also revealed that copper pennies are currently worth approximately 3 cents each and nickels about 6 cents. These coins are worth more as metal than the value given to them on their face. You can probably guess what happened next. I put all of the nickels and pre-1982 pennies into a separate pile. The rest are slated to go off to the local Coinstar machine.

Let me give you another, more obvious example. Let's say the government issues two one ounce coins, one in silver and one in gold, and stamps $50 on their respective faces so that each can be exchanged for $50 in goods. Would you spend the silver coin or the gold coin? Hopefully, you answered, "silver". At current spot prices, an ounce of silver is worth just under $40 while an ounce of gold is a bit over $1,400. When a monetary unit's face value exceeds its intrinsic value, as the silver does in the example, it is "bad" money. It will be spent, i.e. stay in circulation, as the spender believes he/she is getting a "deal" since the seller is forced by law to value the unit greater than the worth that would otherwise be assigned to it by the "market". Gold, whose intrinsic value exceeds its face value in the example, would leave circulation as people would hoard it and/or try to sell it for its intrinsic worth (i.e. they could obtain it for $50 but sell it for almost 30 times as much). This would likely remain true so long as the gold's intrinsic worth exceeds the face value, no matter how slight that excess might be. Even if gold was intrinsically worth less than its face value but still more than the silver, you would still find the silver to be in much greater circulation than the gold for the reasons explained previously.

So, what does all of this have to do with Mr. von NotHaus's situation? Let's first (try to) understand exactly what it was he was doing. To the best of my understanding, a silver Liberty Dollar one-ounce coin would be minted with some denomination on it, let's say $10. It would be produced so long as the intrinsic value of the silver in the coin remained under $10 as denominated in official U.S. currency and sold/exchanged for $10 in official U.S. currency. When the intrinsic value of the coin exceeded $10 (in U.S. currency, due to inflation of the U.S. dollar), Mr. von NotHaus would mint one-ounce silver coins with $20 stamped on their faces (and sell them for the $20 in U.S. currency). He would also exchange existing $10 coins for $20 coins. Based on the previous paragraph and definition(s), Mr. von NotHaus was actually creating his own form of "bad" money, with one important difference. There was a limit to how bad his money would get.

Let me explain this with another example. Let's say that you have a $10 bill (official U.S. currency) and a $10 Liberty Dollar which, for the sake of argument, is accepted at the stores at which you shop. Let's further assume that the food you'll eat today costs $10. Now, let's say that you stick both the coin and the bill under your mattress and wait some amount of time, during which the dollar inflates due to the Federal Reserve's money printing processes. You dig your coin and your bill out from under the mattress and go to the store only to find that the $10 worth of food you want to buy now costs $20. The $10 bill will only buy you half of what you want. On the other hand, Mr. von NotHaus will exchange your $10 Liberty Dollar coin for a $20 version, and you can buy all of your food.

As I mentioned before, Mr. von NotHaus's Liberty Dollar is still "bad" money since its face value would always exceed its intrinsic worth. However, at the point at which it becomes "good" money, the holder would actually be able to exchange it for more "bad" money, i.e. when a $10 piece's intrinsic worth becomes worth, say, $12, it could be exchanged for a $20 piece, a much better option than selling the coin for $12. In this way, while "bad" by our earlier definition, this money is a "better" option than the official U.S. currency which always loses value over time.

If the Liberty Dollar was "better", wouldn't it have eventually been naturally forced out by the market via Gresham's law? It's hard to say; that's (unfortunately) the way markets are. Markets are made up of individual actors, or people. People may have seen the Liberty Dollar as a better preserver of their wealth since it could be exchanged for greater denominations as the U.S. dollar fell in value. Had that been the case, the Liberty Dollar may have taken off. And this would not necessarily have been a violation of Gresham's law. It turns out that "good" and "bad" money (under Gresham's law) can only be compared when their values are both fixed by (the same) law. While von NotHaus may be creating "bad" money in an absolute sense, it would likely have been viewed as "better" than the current U.S. currency. Since the exchange rates of both monetary units are not set/fixed by (the same) law, it may have been possible for the "better/good" money to chase out the "bad".

Thus, the U.S. government extended Gresham's law by force. If another monetary system -- one not controlled by the federal government -- took off, the federal government's ability to print money to pay off its debt and fund its operations would have been severely limited, if not outright destroyed. I'm not sure exactly how to sum up the idea that challenges to a government-created fiat money system will be put down with force in a neat "law" like Gresham's, but if you have any ideas, feel free to share them in the comments.

***

Lew Rockwell wrote about this particular issue and had a few choice quotes:

A nation that is confident about its money’s future would not fear currency competition. A nation with a dying money uses every possible means to crush the competition.

and

[...] when the dollar became all paper, there has been a sense that its viability needs the backing of federal guns in order to thrive. This attitude is inconsistent with freedom. The right of private coinage is an essential part of free enterprise. Currency competition, especially in a digital age, is something that every country needs.

***

Bill Rounds also wrote about this issue. I think he makes a good case that Mr. von NotHaus drew the ire of the federal government, not necessarily by competing with the government, but by making his coins look a little too similar to real U.S. currency. He points out:

There are all kinds of alternate currencies in circulation in the US. Ithaca Hours, Potomacs, gift certificates, and Chuck E. Cheese tokens can all be used to barter and transact instead of legal tender coins and bills.

None of those coins have been or are being forced out of existence by the federal government. Arguably, they aren't trying to compete with the government, either, though.

It's not clear to me, from what I've read, that Mr. von NotHaus intended to defraud people or imply that his coins were legal tender or official U.S. currency. From what I can tell, he was simply trying to give them the same value as U.S. currency to make them easy to understand and trade. In the end, I have to agree with Lew Rockwell when he points out that the U.S. Constitution nowhere prohibits private coinage and even points out that it was commonplace during the settling of the West. Mr. Rounds even acknowledges that the law is, at best, nonsensical:

[...] the state of monetary law is almost nonsensical. Court opinions, federal statutes and the Constitution are logically inconsistent with one another.

***

Finally, I hope that the example I gave of a $10 Liberty Dollar round being exchangeable for a $20 round as the U.S. dollar depreciates drives home the idea of the inflation tax. By depreciating the dollar, the government is essentially stealing money from people who hold cash. This is why our economy is driven by consumption instead of saving. If your dollar is worth less tomorrow than today, then it makes sense to spend it instead of saving it.

Democrats flee Wisconsin

The Democrats have fled the Wisconsin capital to avoid an upcoming vote to deny collective bargaining rights to government workers. I think the Democrats are right but probably for a different reason. The first amendment (supposedly) protects free speech and the right of the people to peaceably assemble. A union is, at its core, a group of people exercising those rights. The fourteenth amendment applies the first to the states -- really, the Supreme Court applied the first to the states, but that's another discussion -- so in my mind, an attempt by the government to bar unions is unconstitutional (keep in mind that I'm no lawyer).

In the particular case of Wisconsin, and really governments in general right now, government incomes are falling (unemployment) and expenses are rising (healthcare, welfare, etc.). Like a business, they need to cut costs, raise revenues, or declare bankruptcy. The latter two are politically untenable, which leaves cost cutting. Hence, the governor wants to cut workers' salaries and benefits. The union is simply trying to prevent that. I'll let you draw your own conclusion about whether or not the union is in the right.

I'm willing to give the Democrats the benefit of the doubt and assume that part of their reasoning in leaving the state was defending constitutionally protected freedoms, as I described above, but I believe much of it to be predicated on the pro-worker position(s) of the Democratic party and the idea that the government workers in question deserve "fair" compensation. The idea of "fair" compensation is murky, at best, when dealing with governments, though. There's a tendency to compare government salaries to private sector salaries and assume that they should be similar (at least) in the cases where the job functions are the same. If government salaries are too low as compared to those in the private sector, government can raise taxes to raise its workers' salaries. This would likely have a negative effect on private sector workers, though, as they would see less "take-home" pay, and employers may even begin to pay less as well. As private sector salaries decreased, government could lower its workers' salaries and, in turn, taxes. In theory, this would reach equilibrium at some point, and we could all claim that "the market works". (Also, keep in mind that I'm no economist.)

In reality, this would probably never actually happen because the union would fight tooth and nail to prevent the government from lowering its workers' salaries, much like what is happening now. The other problem is that it's not the market at work. In a truly free market, people would determine the workers' salaries indirectly by voluntarily paying for the product produced by the workers. The government isn't subject to market forces, though, because its revenues come in the form of taxes. People, in general, don't pay their taxes because they want a product that the government produces; they pay them because the alternative is prison.

I don't mean to sound anti-union; I'm not against them, per se. Like anything else, they can be good, and they can be bad. For interested readers, Henry Hazlitt gives a much fuller and better treatment of the subject.

"Saving" capitalism

[I wrote the following in response to a friend who posted this article on his Facebook page. I apologize for the lack of annotated links in this post.]

The article starts by blaming Bush for a declining market. That's not really fair. Obama is doing exactly what Bush was doing when he left office (stimulus/bailouts). That is, if Bush had been President for two more years, the economy would likely be in the exact same place it is today. 9/11, coupled with the bursting tech bubble, is what originally sank the economy. Greenspan then held interest rates down, and the Dow Jones was back up to around 14,000 in late 2007. (How's that for one-sided reporting on the author's part... only pointing to the Dow at 8,500 on Bush's last day.) Greenspan's plan backfired, though. The low interest rates created a bubble in the housing market leading to all kinds of crazy gimmicks on the banks' parts. These fell apart in late 2007, and the market tanked again.

In response, the government began bailing out banks, the auto industry, anyone who could get get their hands into the proverbial cookie jar. Bush and Obama both did it, and it was a bad idea both times. Neither of them "saved" capitalism. The problem is that neither of them (or anyone in the government) has the backbone to let capitalism do its job. Capitalism means failure for those who can't compete and for those who do it fraudulently. The bailed out auto companies fall into the first category; the banks and insurance companies subsidizing their schemes fall into the second. Of course GM and Chrysler are making cars again! The government gave them the money to do it, and the government did it because it was politically better to try to save jobs (or at least that was the thinking at the time). Nothing about that investment other than the perceived political upside was a good thing at the time. To argue now that the fact that the government made (or possibly will make) money means the investment was a good one is to argue that the ends justify the means. That is the last argument anyone should apply to the state in any of its dealings.

The problem with the economy now is that Bernanke is making the same mistake(s) that Greenspan made. He's holding interest rates down at zero. (Remember the housing bubble? Why does no one see that Bernanke's cure is actually more of the poison?) Bernanke's got huge problem, though. The low interest rates aren't working. Banks are hoarding the cash because they still have more toxic assets on their books. What's his solution? He's turned on the printing presses and is using the new money to buy U.S. Treasuries in the hopes of bringing down long term interest rates. He claims he can do this because inflation is tame. That's because banks are hording the cash he's printing. Gold is continuing to rise in price, though; the market knows what is going on. Look also at other commodities like cotton, oil, etc. They're fairly stable now, but that's because producers hedge their bets by buying futures. Come Spring/Summer of next year, prices of those items are going to skyrocket (the same effect could probably be achieved by banks finally beginning to lend again all at once), and Bernanke won't be able to stop it. He can't raise interest rates like Volcker did, because unemployment is already high. (Volcker had the luxury of being able to drive unemployment up with interest rates so he could tame inflation.) The other alternative is that China stops buying up U.S. Treasuries (it's already making noises about doing that very thing) or the entire market just loses faith in the entire system (i.e. the government's ability or intention to repay its debt). When, not if, one of those things happens, the economy is going to collapse, not just tank. Think hyperinflation like in Chile in the 70's.

Yes, it would have been bad if the government had not intervened in the economy, but the government's "saving" of capitalism makes each attempt by the market to flush out the bad stuff even worse than the previous one because it (the government) won't actually let the bad stuff be flushed out. The government isn't saving capitalism. It is destroying it by making everyone think that what we have is capitalism.

[Here are some other witticisms that I sprinkled later on in the thread.]

In response to a comment that Democrats lost the midterms because Obama/they failed to get the message out:

Getting the message out is not leadership. It's politics. And we don't need either.

And in response to a comment that Americans "got it right" in this most recent election:

Americans never get it right in any election. The government keeps getting elected.

Follow the money, part 1

I mentioned to my dad recently that money is the best way to determine what people really believe; he kind of chuckled at the notion. I made the same point again the other day when I posted a link to a story about Carl Paladino renting space to Planned Parenthood in spite of his anti-abortion political platform. The same could also be said of Al Gore's recently purchased ocean view property in Monticello, CA. If he believes the oceans are going to rise due to global warming, why would he live on the coast? Then again, maybe "believe" is the wrong word. Perhaps money is better at determining priorities. Maybe Al Gore really does believe that the oceans are going to rise, but it's probably a ways off and he'd really like to live by the beach until then. Maybe Mr. Paladino really does believe that abortion is murder, but he likes profit just a little bit more.

The concept certainly isn't new. Consider the phrases "put your money where your mouth is", "talk is cheap", "actions speak louder than words", etc. Note that the first two idioms make a direct reference to money. The latter refers to "actions" which take time to implement, and time is often equated with money. That's a kind of a stretch, though, so I'll generalize that people will make an "investment" in the things that they care about. Investment does not even necessarily have to refer to time or money. Rather investment, in this context, simply means the use of something valuable to further, reach, or effect an end.

My point in all of this is this: A person will invest in things relative to the importance of those things to him. As I've said, this investment doesn't necessarily have to be money, but money is easily quantifiable and is almost, if not completely, universally regarded as valuable. So, here are some examples (in addition to those above) of money showing what is really important to people:

• It's a generally accepted fact that Christians, on average, tithe 2-3% of their income rather than the commanded 10%. (The slightly bigger house, fast food, cable TV, etc. are arguably more important than the 10% "donation".) [By the way, please don't flame me. I fall into this group, and I know it's wrong.]
• Walmart is still in business (and profiting) despite its wide regard as a pariah among businesses by its employees and customers. (Low prices and employment are a bigger concern than Walmart's business practices and the "plight" of its workers.)
• Consumers have rejected the compostable Sun Chips bag because of its aesthetics despite the wide outcry for "green" products. (The loudness of the bag is a bigger factor than "saving the planet" via reducing waste.)

It is absolutely not my intention to "call anybody out" as a hypocrite for saying one thing and doing another (i.e. if you fall into one of the aforementioned groups). My point is simply that investment (usually money) is perhaps the best way to determine what is truly important to people.

City gets up on its high horse

This morning I caught a story about a proposed jewelery/pawn shop trying to open in downtown Oceanside.

A plan to open an upscale pawn shop in the heart of downtown Oceanside ran into a wall of opposition from a citizens advisory group Wednesday whose members said a pawn shop wasn't what they had in mind for revitalizing the area.

[...]

The committee voted 5-0 to advise the City Council to reject a proposal to open a pawn shop in a vacant store at 205 N. Coast Highway.

This seemed like kind of a bummer to me. The last time my wife and I were in the downtown Oceanside area, we tried to go into a pawn shop. We thought it would be fun to look around. (The place was closed on the day that we were there, unfortunately.) And this place looks like it would be more of a jewelery than pawn shop, anyway.

The pawn shop ---- Coast Jewelry & More ---- would deal in "mostly high-end jewelry pieces and watches," said Jason Lambert, who would manage the store. "We want to fit in, and we want to make everyone happy."

Over time, the focus of the store would likely shift away from offering loans on pawned items to a more conventional retail operation, Lambert said, although he said it would continue offering collateral loans.

The advisory group sees it differently, though.

But committee members said a downtown pawn shop would harken back to a past the city is trying to leave behind, when downtown had a reputation for sleazy bars, strip joints and tattoo parlors.

"It's the wrong location, downtown, as we're trying to bring in more residential and tourists," said committee member Carolyn Krammer. "We don't want our tourists to be subject to people trying to pawn merchandise."

Is the committee afraid that people are going to begin trying to sell their wares to tourists right on the street (as if that weren't already possible)? Or do they just detest the "kind of people" who would patronize a pawn shop for a loan? One thing is clear; the group isn't actually interested in "redevelopment" or increased tax revenue.

[...] the owner of the proposed store, David Mueller, would remodel what has been a vacant space for more than four years and has been "kind of an area for people to hang out and maybe do things we're not crazy about."

Former Oceanside newspaper publisher Tom Missett, who presented the pawn shop plan to the committee, said Mueller would invest about $2 million on the pawn shop.

The committee would prefer that the building (already owned by Mr. Mueller!) remain vacant. His $2 million investment isn't the "kind of money" they want. But the insanity doesn't end with the committee.

Oceanside police also oppose the plan, fearing a new pawn shop would lead to more crime downtown and mean more work for a department already stretched thin, said Lt. Valencia Saadat.

According to police statistics, seven arrests have been made so far this year related to stolen property taken in by pawn shops and $21,000 in stolen property has been recovered.

Maybe I'm reading this wrong, but it seems to me that stolen goods were recovered and the offenders arrested and taken off the streets because of pawn shops. Those crimes likely would have never been solved if those goods had simply been sold on the street. The police don't want the extra work (doing what they're paid to do!), though. They don't want it even though the shop manager is willing to jump through all sorts of hoops to make their jobs easier in order to get his store opened.

Besides installing security cameras throughout the store, Lambert said anyone pawning items would have to show identification, sign a slip saying the property belonged to them and have photographs taken of themselves and whatever they're pawning. He said the photographs and other information would be made available to police daily.

Apparently the insanity isn't limited to the city. Sign a slip saying the property isn't stolen? If he thinks that is going to work, then why submit information to the police on a daily basis? Why not just go all the way and take finger prints and a DNA swab? It's too bad. I wouldn't sell anything to a shop that treats its customers like common criminals in this way.

And finally, we have the government serving its own interest.

Bartlett said he'd be fine with the business if it was a jewelry store, but the very use of the term pawn shop is troubling.

"That's semantics but it bothers me," said Bartlett, who lives downtown."I will be strung up if my neighbors are told we are going to have a pawn shop in downtown."

We certainly wouldn't want Mr. Bartlett to lose his position of power, looking down on honest people and crushing their entrepreneurial spirit because he doesn't like the type of business they would open or the clientele it might draw. That empty building will be a much better symbol of his ability to direct the redevelopment of the downtown area.

Fire protection and the free market

Earlier this week, fire fighters in Obion County, Tennessee let a man's house burn to the ground because he hadn't paid his annual $75 fee to the nearby city of South Fulton for fire protection. Here is the short version:

In rural Obion County, homeowners must pay $75 annually for fire protection services from the nearby city of South Fulton. If they don't pay the fee and their home catches fire, tough luck -- even if firefighters are positioned just outside the home with hoses at the ready.

Gene Cranick found this out the hard way.

When Cranick's house caught fire last week, and he couldn't contain the blaze with garden hoses, he called 911. During the emergency call, he offered to pay all expenses related to the Fire Department's defense of his home, but the South Fulton firefighters refused to do anything

They did, however, come out when Cranick's neighbor -- who'd already paid the fee -- called 911 because he worried that the fire might spread to his property. Once they arrived, members of the South Fulton department stood by and watched Cranick's home burn; they sprang into action only when the fire reached the neighbor's property.

I was planning on writing about this, but smarter people have already done the heavy lifting:

I don’t get this debate at all. It is not even a real debate. The fire-protection services were government services. The fee in question was a government-mandated fee. The county lines in which the fee was applicable is a government-drawn line that is completely arbitrary. The policy of not putting out the fire was a government policy enforced by the mayor. As he said, in the words of a good bureaucrat, “Anybody that’s not in the city of South Fulton, it’s a service we offer, either they accept it or they don’t.”

So why is the market being criticized here? This was not a real market. Instead, this is precisely what we would expect from government. In a real market, there is no way that a free-enterprise fire service would have refused to provide the homeowner service. They would be in business to provide that service. The fire would have been put out and he would have been charged for the service. It is as simple as that.

Consumers go 'brown'

USA Today notes that Frito-Lay is sending their compostable Sun Chips bags back to the design team for some re-tooling. This story is illustrative of a couple of things. First, consumers, despite what popular sentiment would have us believe, actually have the power in the marketplace. And, second, consumers are concerned more with the aesthetics of the products they buy than with being 'green'. I think this second point is especially important because it is a perfect example of the power of the market to determine what people really care about. While everyone is out proclaiming the need to protect the environment, they're unwilling, in this particular case at least, to put their money where their mouths are.

For those unfamiliar with the new bags, check this out.