Distinction without difference

I've seen a lot of commentary over the last few days about the so-called "individual mandate" in the Affordable Care Act (ACA) that discusses how the mandate is beyond the power(s) of the U.S. federal government and that the Supreme Court would be right to strike it down. Those same commentaries, however, then concede that the same federal government does have the authority to raise taxes and then use that money to provide health care, a la Social Security.

Two thoughts immediately come to mind:

1. If the commentary, as described above, is correct, why is there such an uproar about the mandate? If the federal government really does have the authority--assuming it does so via the "proper" means--to force health care on every person within its jurisdiction, wouldn't it be far less injurious to individual liberty to allow people to choose from which provider they will get their insurance and the terms of that insurance? Furthermore, wouldn't it be far more economically efficient if individuals purchased insurance for themselves, saving the cost--both monetary and bureaucratic--of the government having to hire more IRS agents to collect the money and more functionaries to manage it?


2. Isn't the real problem that the U.S. Constitution is all but worthless at this point? That is, if the mandate is such an affront to individual liberty, but the constitution allows the government to achieve the same ends via different means, what good is it as a protector of that liberty?

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.

Father(land) knows best

Here in California, a slew of new laws went into effect yesterday, and many of them seem to have to do with children. New laws add additional regulations to what children can eat (child care centers, which serve up to 1.2 million children, can provide only unflavored nonfat or low-fat milk and beverages that lack added sweeteners), where they can spend their money (people under the age of 18 cannot use ultraviolet tanning devices (even with parents' permission)), and how they can travel:

Many young car passengers, meanwhile, will have to get back in the booster seat Sunday under legislation signed in October.  

The law requires kids to be in booster seats until they are at least 8 years old or 4 feet, 9 inches or taller. Since 2002, children have had to ride in booster seats until they are 6 years old or 60 pounds.

Note the first sentence... "will have to get back into the booster seat". Yes, that's right, a 6 or 7 year old who graduated from the nanny state's previous overbearing protection, who has safely ridden with a regular seat belt for possibly a year or more, has suddenly found him/herself in grave danger. Overnight, without warning, and by state decree, the world has once again become unsafe. What was legal (and safe) yesterday is illegal (and unsafe) today. Funny how that works, isn't it?

What's even more interesting is that SB 929 was signed by the same man who, only three months earlier, vetoed SB 105, saying, "Not every human problem deserves a law." For those unaware, SB 105 would have criminalized the act of skiing or snowboarding by a minor without a helmet. Given the intellectual inconsistency between the passage of SB 929 and the veto of SB 105, one might be given to believe that companies like Bell and Giro simply missed their opportunity to "grease the palm" of government. Fortunately, companies like Graco and Britax can rest easy knowing that the state is coercing consumers via the force of law into buying their products for at least two more years.

It's amazing to me that people will cry out when forced to purchase health insurance at the end of a government gun but see no trouble with imposing the purchase of car seats in the same manner. It's for the children, though! I mean, isn't it? Maybe not. For 7 years, at least, the data have been staring everyone in the face:

The answer can be found in a trove of government data called the Fatality Analysis Reporting System (FARS), which compiles police reports on all fatal crashes in the U.S. since 1975. These data include every imaginable variable in a crash, including whether the occupants were restrained and how. 

Even a quick look at the FARS data reveals a striking result: among children 2 and older, the death rate is no lower for those traveling in any kind of car seat than for those wearing seat belts. There are many reasons, of course, that this raw data might be misleading. Perhaps kids in car seats are, on average, in worse wrecks. Or maybe their parents drive smaller cars, which might provide less protection. 

But no matter what you control for in the FARS data, the results don't change. In recent crashes and old ones, in big vehicles and small, in one-car crashes and multiple-vehicle crashes, there is no evidence that car seats do a better job than seat belts in saving the lives of children older than 2. (In certain kinds of crashes -- rear-enders, for instance -- car seats actually perform worse.)

If you're still not convinced that these laws serve no useful purpose except to enrich the companies that make the products that consumers are compelled to buy, then you need look no further than an earlier excerpt from the same article:

Perhaps the single most compelling statistic about car seats in the NHTSA manual was this one: ''They are 54 percent effective in reducing deaths for children ages 1 to 4 in passenger cars.'' 

But 54 percent effective compared with what? The answer, it turns out, is this: Compared with a child's riding completely unrestrained.

You read that right; in order to scare you into compliance, the government compares the effectiveness of child car seats, not against the effectiveness of seat belts, but against that of riding in a car completely unrestrained! The data show that car seats are no more effective than seat belts for children over 2 and in some cases can actually be worse. Why then is the government pushing car seats onto the populace for another 6 years?! Whether totalitarianism or corporatism, I'll leave for you to decide. One thing is for certain, however; it is not for your benefit.

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.

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.

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.

Empire and its imminent demise

Glenn Greenwald writes today that the U.S is a collapsing empire. As evidence, he points to a number of surveys and studies showing the rapid decline in life expectancy, infant mortality, literacy in math and science, and the "soundness" of our banks and, by extension, financial system. He wrote a column a few months back on the same topic, though the examples provided there were more direct. On the bright side, though, he points out in the current column that the U.S. is only fifth in the world in executions and continues to best all comers in incarceration rates.

In addition, a few days ago, Ron Paul said that he thinks that a collapse of the U.S. currency system is "95% likely" and that a war with Iran would only hasten its demise. This all has a very "the sky is falling!" ring to it, but look back at the bank "soundness" rankings, mentioned earlier. The U.S. ranks 108th in the world, out of 133 countries on the list. That puts it 63 places behind Greece, a country that just received a 146 billion dollar bailout from the EU.

Peter Schiff, on a related subject, writes about the massive inflationary expedition on which the Federal Reserve is about to embark. Even I wrote about this a week or so ago. Unlike me, Mr. Schiff researches and writes about this stuff for a living (and does quite well at it), so when he speaks, it's probably a good idea to listen. Aside from the normal, "gold, silver, and commodities are rising; the dollar is falling" talk, he explains why bonds are currently acting the way they are:

A confounding factor is the strong performance of US dollar-denominated bonds. When the Fed creates inflation, that erodes the value of fixed-asset investments like bonds, which can't adjust their returns to the new price level. So many commentators are pointing to the record low bond yields as evidence that inflation is not a threat. But this is a misreading of the situation.

What is overlooked is that when the Fed prints more dollars, it typically uses them to buy bonds. Traders know this, so they are stocking up on bonds at ridiculous prices just to flip them to the Fed. They don't care that, in the long run, the Fed's policies will destroy the bonds' value because in the short run, the weak dollar policy serves as a tremendous subsidy to bond sellers.

I'll leave you with this quote, attributed to George Washington, and let you draw your own conclusion(s) about where our government is headed:

The last official act of any government is to loot the treasury.

The arrival of the total state will not be televised

Yesterday, a federal judge in Michigan handed down a ruling upholding the new health care law. Here is an excerpt:

There is a rational basis to conclude that, in the aggregate, decisions to forego insurance coverage in preference to attempting to pay for health care out of pocket drive up the cost of insurance. The costs of caring for the uninsured who prove unable to pay are shifted to health care providers, to the insured population in the form of higher premiums, to governments, and to taxpayers. The decision whether to purchase insurance or to attempt to pay for health care out of pocket, is plainly economic. These decisions, viewed in the aggregate, have clear and direct impacts on health care providers, taxpayers, and the insured population who ultimately pay for the care provided to those who go without insurance. These are the economic effects addressed by Congress in enacting the Act and the minimum coverage provision.

The health care market is unlike other markets. No one can guarantee his or her health, or ensure that he or she will never participate in the health care market. Indeed, the opposite is nearly always true. [...]

The plaintiffs have not opted out of the health care services market because, as living, breathing beings, who do not oppose medical services on religious grounds, they cannot opt out of this market. [...]

The decision, in simpler terms, is this. Unless a person opposes the medical establishment on religious grounds, that person will at some point avail himself of services provided by the health care market. That person, at the time of service, may not be able to pay for the service. Therefore, that person's original refusal to participate in the market by purchasing insurance constitutes economic activity (because if he can't pay, his costs will be shifted to other participants) which the congress may regulate under the commerce clause. In even more simple terms, refusal to participate in an economic activity constitutes an economic activity that congress may regulate.

I want to address the mental gymnastics undertaken by the judge in arriving at this decision, e.g. that a person can't not get sick; that a person, once sick, can't avoid the health care market; and the fact that that person may not be able to pay means that he can be forced to buy insurance. I'm not going to, though. At least, I'm not going to any more than I just did.

Instead, I'll focus solely at the situation in which a person does get sick, does avail himself of the health care market, and can't pay for the service(s) since that is the situation on which the judge's upholding of the PPACA is based. So, what happens when an uninsured person arrives at a hospital emergency room? Under the EMTALA, that person must be treated. Nobody [explicitly] pays for this treatment, though. The federal government has mandated that hospitals treat such patients but does not reimburse them for these costs. Instead, hospitals can write this cost off as charity or bad debt on their taxes. They can also shift these costs to paying customers in the form of higher charges for service. (Note, too, that there is nothing preventing a hospital from doing both.)

So, the judge is correct that caring for uninsured patients creates additional costs for taxpayers (in the form of tax deductions taken by hospitals) and for paying participants in the health care market (in the form of increased costs for service). Here's the rub, though. The government created that additional cost in the first place by passing the EMTALA! The absurdity of trying to fix the problems created by government interference in the market by further interfering in the market should be obvious to everyone. The problem is more insidious than that, however.

The government has dropped all pretense of "legally" taking people's money via taxation. It is now explicitly assuming the ability to force people to spend money in the ways that it directs and is using its own policy as an excuse for the authority. By this logic, there is nothing that the government cannot regulate. The total state has arrived.

Unintended consequences revisited

Last week I wrote about how some people were actually going to lose their health insurance coverage as a result of the new health care law. USA Today reports today via Bloomberg that the government has reversed course and issued waivers to McDonald's and 29 other companies exempting them from the conditions imposed by the new law. Those employees will now get to keep their insurance, but they won't be afforded the "protections" of the new law. Look at it this way, though: the government actually helped these people more by doing nothing at all.

The whole debacle is a perfect example of the failure of central planning:

The most notable critique of economic planning came from Austrian economists Friedrich Hayek and Ludwig von Mises. Hayek argued that central planners could not possibly accrue the necessary information to formulate an effective plan for production because they are not exposed to the rapid changes in the particular time and place that take place in an economy, and are unfamiliar with these circumstances. Transmitting all the necessary information to planners to accumulate and form a comprehensive plan is therefore inefficient.^[13]

Centralized economic planning has also been criticized by proponents of de-centralized economic planning. For example, Leon Trotsky believed that central planners, regardless of their intellectual capacity, operated without the input and participation of the millions of people who participate in the economy and understand/respond to local conditions and changes in the economy would be unable to effectively coordinate all economic activity.^[14]

Ultimately, though, as reported in the USA Today article, it's highly unlikely that the government set out to help these people at all.

"The big political issue here is the president promised no one would lose the coverage they've got," says Robert Laszewski, chief executive officer of consulting company Health Policy and Strategy Associates. "Here we are a month before the election, and these companies represent 1 million people who would lose the coverage they've got."

Those in office need to stay in office so that the can keep "helping" the people.

Gold, subsidies, and syphilis

There were a number of news stories that caught my attention today, and I decided to just lump them all into a single post. I'm sure at least two of them will get better treatment in the future.

Gold

Gold reached another high yesterday against the the U.S. dollar. Many seem to be blaming the weak dollar and actions by the Federal Reserve. The Fed over the last few days and weeks has been hinting that it may embark on another round of quantitative easing or QE. Wikipedia has a pretty good explanation of QE, but in the most basic terms, the Fed is preparing to print more money. Lest you think that the rise in gold is a strictly U.S.-related phenomenon, take a look at this chart. Inflation and/or economic troubles/concerns seem to be widespread.

Subsidies

Yesterday, I was able to catch various pieces of Marketplace on NPR while driving through the hills. The station cleared up enough for me to catch this particular piece. The government, as part of its "stimulus package" has been giving money to private businesses to induce them to hire people. It sounds like a good plan, but here is the problem: the government is distorting the market. By providing subsidies, the government is causing businesses to hire and expand because there is no financial risk to not doing so, not because the economy can actually support that expansion.

I have a number of problems with this, but let me just leave you with this thought: If this policy is good for the economy, why not keep it going?

Syphilis

For those who didn't know (and I have to include myself in that group), the U.S. government deliberately infected Guatemalan prison inmates with syphilis back in the 1940's as part of an experiment to test the effectiveness of penicillin in the prevention of the disease. Well, yesterday, Health and Human Services Secretary Kathleen Sebelius and others issued an apology for U.S. participation in those experiments. Perhaps these people can expect an apology sometime around the turn of the next century?

This is why I like economics

When I was in school (read: college), my focus was entirely on avoiding any kind of writing class(es). Except for my first year, in which I was forced to take remedial courses until I was able to pass the "Subject A" examination, this really wasn't a problem. In fact, I took it a step further and just avoided as much as I could that wasn't related to my major, computer science. During my third or fourth year, I had to take some kind of economics course to "round out" my education. I had a friend who had been taking environmental economics courses, and so I decided to try it out, thinking that even if I had trouble, I knew exactly where to go for help.

That was my first and, unfortunately, last experience with economics in college. Perhaps "unfortunately" is the wrong word, depending on how you view economics, as taught in school. At any rate, I say "unfortunately" because I found the course very interesting, and not necessarily because of the subject matter, per se. Rather, what I found interesting was the overwhelming number of examples of unintended consequences presented during the course. For whatever reason, I just found the fact that implementing some kind of pollution reduction scheme (remember this was environmental economics) would actually lead to an increase in pollution.

[As a quick aside, a cap and trade program is the example I remember most vividly presented in the course. In the example, companies generating more pollution would buy credits from lesser polluters, thus increasing their ability to pollute. So, in the end, the heavier polluters could continue polluting (albeit, at a higher cost) while the lesser polluters would just sell their unused credits while maintaining pollution at the same levels.]

Today I ran across an article describing some unintended consequences of the so-called "Obamacare" law. The short version is that the law requires that health insurers spend 80-85% of their revenue on patient care. Stated differently, they must limit their administrative costs (e.g. salaries of employees) to 15-20% of said revenue. Sounds great, right? Money spent on health care actually goes to health care, and CEO's can't pay themselves inflated salaries. Problem solved!

Not quite. It turns out the companies like McDonald's, Home Depot and others are actually planning on getting rid of their health benefits because of this requirement. "Those bastards!", you say. Well, hold on. These companies tend to have high turnover rates (meaning that administrative costs of health care are high due to putting people on the plan and then taking them back off), and their employees tend to be young (meaning that actual health care costs are low due to the employees not actually needing and using the services). Given that, it's all but impossible for the 15-20% administrative cost cap to be met by these companies, and if they can't comply with the law, the alternative is to just not run afoul of it by not providing coverage in the first place.

So, there you have it: a policy intended to achieve a certain outcome effecting the exact opposite. While I certainly feel for those without health care coverage and those about to lose it, on an academic level, I find the whole situation very interesting.

UPDATE: Here is a story on Marketplace's website about the same thing.

UPDATE (2): And another from Consumerist. I like Consumerist for the information, but they seem to have a very anti-business attitude in their writing. For example, look at the last sentence in the linked article. The author seems to think that McDonald's owes health insurance to its employees and is evil for not providing it. Hey Phil, why not point the finger at the government policy that upset the apple cart in the first place.