Kelsey Harris and Amy Payne from in their column Where Your Money Goes When This Bank Gets Ahold of It note, “Recently, we talked about how your hard-earned money helps subsidize loans for people in other countries to buy from American companies. Our new info-graphic has more details on where your money is going.”
Francis Spufford. Red Plenty. Graywolf Press, 2012. 448 pages.
This column was originally part of a paper presented at the recent APEE meeting in Las Vegas.
Francis Spufford’s Red Plenty has been ably reviewed in these pages before. But it’s a book I can’t stop talking about and recommending. And when I do recommend Red Plenty to others, I’m never quite sure what to call it.
The back of the book describes it as “history . . . fiction . . . as different from what you were expecting as a glass of Soviet champagne.” The author, though, wants us to think of it as a fairy tale.
Best to call this a fairy-tale then—though it really happened, or something like it. It is storybook Russia, not real Russia; a place never quite in perfect overlap with the daylight country of the same name. It is as near to it as a wish is to reality, and as far away, too.
It occurred to me that by writing not a review of the book, but a bit of literary analysis that attends closely to Spufford’s insistence that Red Plenty is a fairy tale, I might be able to share some of the power of the book, as well as show off some of Spufford’s careful crafting of his narrative. Calling Red Plenty a fairy tale is not a way of dismissing its importance. It is a way of heightening it. And throughout the text, Spufford uses the presence and absence of fairy tales as a way of conveying the emotional and cultural toll of the Soviet dream.
Spufford has a few reasons, I suspect, for wanting readers to think of Red Plenty as a fairy tale. As he notes in his acknowledgements, “I wrote this book without being able to speak or read Russian. I have therefore been able to draw on only a fraction of the available material, and readers should be aware that what they find here reflects the limited universe of sources that happen to have been translated into English; often, translated into English during the Cold War, as part of the West’s anxious guesswork about Soviet developments.”
Soviet economic data are notoriously inaccurate, and I expect that another layer of fallibility is added when those data are translated by a nervous Cold War America. So, calling Red Plenty a fairy tale allows Spufford to explore his subject while remaining aware—and signaling to his readers—that he doesn’t have the language skills one would expect for a full academic treatment, and that the data and sources upon which he is relying are a little more like “data” and “sources.”
But throughout Spufford’s work, fairy tales appear as more than a mitigating explanation for the book’s creative amalgam of fact and fiction. Spufford’s introduction explains why they are such a preoccupation:
Tales supplied what the real country lacked, when villagers were telling them . . . the stories dreamed away reality’s defects. They made promises good enough to last for one evening of firelight; promises which the teller and the hearers knew could only be delivered in some Russian otherwhere.
And so when Spufford describes one Krushchev’s speeches, we are instantly alert to the language of fantasy and the promises of a real-life end of the scarcity.
“In our day,” Nikita Khrushchev told a crowd in the Lenin Stadium . . . “The dreams mankind cherished for ages, dreams expressed in fairytales which seemed sheer fantasy, are being translated into reality by man’s own hands.” . . . Humanity’s ancient condition of scarcity was going to end, imminently.
The Soviet fantasy is the fairy tale fantasy: the end of scarcity. And with the end of scarcity comes the end of the human need to imagine and tell stories about the end of scarcity. When the fairy tale is real, we don’t need the story anymore.
This is when Spufford’s use of fairy tales becomes most intriguing. Again and again, Spufford shows us characters looking for a fairy tale parallel in their lives, or trying to tell a story and failing. The promises of the State have replaced the fantasies of the fairy tales, and stories are dying.
Some comrades seemed to think that fine words and fine ideas were all the world would ever require, that pure enthusiasm would carry humanity forward to happiness; well excuse me, comrades, but aren’t we supposed to be materialists? Aren’t we supposed to be the ones who get along without fairy tales? . . . [People need] more money to spend, or else more of a world in which money was no longer necessary to ration out all the good things, because there were so many good things, all gushing out of the whatchamacallit, the thing like a cone spilling over with fruit. The horn of plenty.
The rapid transformation from stark realism to dreams of State-sponsored plenty to the inability to even remember the name of the magical item one wants to mock seems to me to be a perfect capsulization of the Soviet economic way of thinking. That failure of memory at the end of the passage tells us that as the State fantasy is offered, story is shoved out of the way. We see this failure again when Spufford takes us to the kind of small village gathering where folk and fairy tales would have ordinarily formed a large part of the evening’s entertainment.
“Go on, Grandad, give us a story,” someone said. “How’s your memory tonight? Got a whole one in there?”
“Well, I’ll try,” said the old man doubtfully. “In the thrice-ninth kingdom of the thrice-tenth land, there lives a poor man who had, uh, a miraculous horse. No, he bought the miraculous horse, he bought it with . . . Or was it a miraculous wife he had? Dammit, I used know all of ‘em. No, it’s gone.”
Even the epigraph to the final section of Spufford’s book—taken from the concluding lines of a Russian fairy tale—is an interrupted tale about an interrupted adventure. “The laborer awoke and saw that the princess, the flying carpet, and the magic tablecloth were gone. Only his walking boots remained.” The magical folk imagination has been almost entirely consumed by the dreams of the great Soviet state.
But the great plans fail, and the fairy tale of the Soviet state doesn’t have a happy ending. As this realization begins to dawn on the characters in Red Plenty, we see them return to more fully fleshed stories and to a better understanding of how they function. When the writer Sasha Galich—one of the first to realize the distances between the promises of the State and the lives of the citizens—comes to see his way through the fog of the propaganda he helps to create, he rediscovers the truth of fairy tales at the same moment he uncovers the lies of the State.
Drip by drip, these last years, he had understood more of what had been happening in his own time, just around the corner, just behind the scenes, just out of his sight, as if he had been a child in a fairy-tale wood who sees only green leaves and songbirds ahead, because all the monsters are standing behind him. Quiet conversations with a returned choreographer who’d survived his ten-year stretch on dancer’s strength. Confidences from . . . a secret policeman, blurred by the bottle . . . about the famous year of 1937 when the van loads came in so fast for the bullet that the drain in the floor of the basement corridor sometimes blocked, and some poor sod had to fish in it, and pull out mush and bone chips and hanks of human hair. . . . [Emphasis added.]
When reality starts to look like this, the need for fantasy comes rushing back.
It seems to me, then, particularly important that one of the last exchanges in Spufford’s book is between a young boy and his mother as they discuss a book that he is reading. The year is 1968, which means the boy will be in the prime of his adult life when the Berlin Wall comes down and the Soviet Union dissolves. He is, in other words, the future. He is, in other words, us. And he says to his mother:
I’m just getting to the end of this science-fiction book, and they’re at a kind of place that gives wishes, like a genie, only it’s alien technology, and it’s very dangerous? And there’s a silly man and a tough man, and the silly man rushes forward and he makes this kind of enormous wish for everybody in the whole world to be happy, but the alien thing squishes him instead. And I was wondering, if it’s supposed to be a kind of a—kind of a . . . sideways picture. You know. Of here.
ABOUT SARAH SKWIRESarah Skwire is a fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis.
As a follow-up to my two earlier columns on falsehoods about the free market (here and here), I wanted to cover some more falsehoods that I’ve heard again recently. I’m sure I’ll have plenty of opportunities to add to the list sometime down the road.
This one never seems to get old. I wish it would just die. In truth, I agree with it, but in a different sense than it’s usually meant.
Many people say that if the government doesn’t regulate, say, the purity of bottled water, Poland Springs would be free to poison us if they could profit from it. While standards of safety or purity in some form would undoubtedly emerge on the market without government—something like Consumer Reports or Underwriters Laboratories—it’s the last part of the accusation that actually does the heavy lifting, even in our present unfree market. Profit-seeking regulates! Outside of markets that have been criminalized or heavily regulated by government, the gains from cheating and hurting others are risky and relatively rare. Legitimate business people are ready to scoop up the dissatisfied (or sick) customers of other legitimate business people by giving them better value for the dollar, burnishing their reputations in the process. When’s the last time you went to a restaurant that had a reputation for poor quality, much less for food poisoning?
Bottom line: In the absence of government regulation, there’s still regulation in the free market. It’s called competition. And if you want more safety and better quality, take away barriers to free competition.
I’ve found that people who follow current events too often worry about “technological unemployment.” That’s because when a person innovates she replaces an old way of doing something with a new way, or she does something significantly different. In some cases the inputs she used to hire—land labor, capital, know-how—can adapt and continue to work with her. If they can’t, though, they have to find somewhere else to work. Some people can have a hard time doing this. But that doesn’t mean there aren’t other jobs in which they can be productive.
Consider this: The world population has grown in the past 200 years from about one billion people to just over seven billion. The number of jobs has also grown by billions, with most involving far less drudgery and danger than work 200 years ago. Ah, but what about living standards? Per capita real gross domestic product, in roughly that same period, skyrocketed from about $3 to about $100 per person per day.
How? With growing economic freedom, innovators created ever-more and better products, lengthening lives and making them more comfortable. It created not only more jobs but more valuable jobs in the process.
Anyway, the primary focus shouldn’t be on jobs themselves, because if you make things people value, the jobs will follow. Apple now employs 70,000 people worldwide. If you include all the other people whose labor is now more valuable because of Apple (app designers, for example), that number seems to range from a low of 350,000 people to a high of 500,000, some of whom probably worked for the companies Apple products out competed. But of course if Apple didn’t exist, those people would still be working—they’d just be making things that were less valuable and getting paid a lower wage. So while some argue for regulations to block innovation in order to protect certain (but not all) workers, to the extent they are successful the long-term result is lower standards of living for all—workers and everyone else.
What about the “unskilled”? Well, that’s a good topic for another column. Suffice to say that the Ricardian law of association demonstrates that even someone who is “worse” than everyone else at everything is still more efficient than anyone else at something.
No, they usually don’t. According to the rule of law, the law should treat everyone the same way regardless of status. Some regulations do a better job at this than others, such as speed limits on highways (unless you’re the police). But in practice, whether intended or not, all regulations benefit some at the expense of others. The Affordable Care Act (“Obamacare”) seems to have benefited the healthcare industry at the expense of ordinary people and businesses, which now have to pay higher premiums for more coverage than they want. Regulations that putatively protect consumers, such as government licensing of doctors, benefit those that practice conventional medicine and make it harder for others to enter the field. Regulations that are supposed to protect workers, such as the minimum wage, benefit skilled workers by driving up the price of hiring the unskilled. And when it’s intentional, trying to gain an advantage through legal privilege is called “rent-seeking.” As the saying goes, business owners like competition for everyone except for themselves.
This idea is as complicated as it is widespread. For instance, income inequality in the early part of the twentieth century (when, by the way, economic intervention was far less than it is today) fell sharply until World War II, but then accelerated after the mid-1970s. Inequality today has reached the level it was in 1920. It’s hard to disentangle how much of that inequality is due to intervention and how much we can attribute to the free market. Let me instead address a more fundamental issue.
Now, without giving too much personal information away, my own annual salary is over seven times the average poverty-level income in the United States this year. To some that’s pretty unequal, and I can imagine that a person making only $11,490 a year with no other source of income probably feels pretty bad-off compared to me. But consider that the annual income Bill Gates, according to this website, is about $3.7 billion. That’s $3.7 billion dollars a year! So Gates’s annual income is more than 43,500 times my own. That’s monstrously unequal by almost anyone’s standard. But it’s funny—maybe it’s just me, but I don’t feel oppressed by that fact at all. What does that mean?
I think it means that what most of us object to is not income inequality per se (although I know some people do) but poverty. So the question becomes: What is the best way to fight poverty?
Sandy Ikeda is an associate professor of economics at Purchase College, SUNY, and the author of The Dynamics of the Mixed Economy: Toward a Theory of Interventionism. He will be speaking at the FEE summer seminars “People Aren’t Pawns” and “Are Markets Just?“
Most Americans dislike the income tax, now more than a century old. The rates are too high. The provisions are unfair. The recordkeeping is onerous. The revenues are wasted.
Other than that, Mrs. Lincoln, how was the play?
But there are fans. The politicians, certainly, of both parties. What good would it do to serve in Congress if you didn’t have any money to spend? There are other sources of public money, to be sure, but none so effective at plucking the geese while minimizing the hissing. Withholding means many Americans look forward to receiving a refund even though that means they have provided an interest-free loan to the very officials conscripting people’s money for dubious purposes.
The beneficiaries of the politicians’ largesse also share in the income-tax lovefest. Uncle Sam needs money to write checks. He can borrow, but there’s a limit to investors’ credulity. Borrow too much and they might doubt Washington’s ability to repay. Moreover, robust tax collections are necessary to repay debts. So creditors, too, benefit from the income tax, even if they don’t enjoy paying on the other end.
Don’t forget about the armies of tax preparers and IRS agents who, at the end of the day, end up with much of the deadweight loss.
Then there are the fans of expensive and expansive government. Jonathan Cohn of the New Republic argued that the money collected has gone for building infrastructure, cleaning the environment, and keeping us safe from foreign threats. Alas, a lot of federal building is politically driven, conservation measures spend huge amounts inefficiently to control minimal problems, and military outlays go to defend scores of foreign societies rather than our own. In all these cases, less would be more.
More dangerous may be the social engineers. For instance, Yale economics professor Robert J. Shiller suggested using the income tax to mitigate “some of the worst consequences of income inequality.” He proposed indexing taxes to income inequality.
It’s a genuinely nutty idea: Inequality measures are sensitive to data distortion based on dates chosen, units measured, and more. Moreover, they incorporate no judgments about how the inequality arose. Were opportunities obstructed, systems manipulated, wealth extracted, people defrauded? Or did a generally free society operate naturally and deliver ever-changing income and wealth patterns? If the latter, what is the government trying to “correct”? And if the former, is the government correcting the right things?
Worse, though, is the weird presumption that seizing private wealth from mostly productive taxpayers and giving it to political operators noted for their electoral skills rather than economic judgment would somehow remedy financial disparities. There is no evidence that increasing Washington’s resources would yield greater social or economic justice, improve economic efficiency or growth, or make people wealthier or freer.
To the contrary, experience demonstrates that the majority—most people outside of those who make their living from the federal trough—are likely to end up worse off. Extensive bureaucracies soak up a lot of money before it leaves government hands. Cash gets tossed at influential interest groups, such as businesses, non-profits, contractors, and unions. Benefits for the poor are dwarfed by middle class welfare, such as Social Security and Medicare. Federal largesse gets bestowed on foreigners through misnamed foreign aid, which long meant taking money from poor people in rich countries and giving it to rich people in poor countries. America’s defense budget is another form of foreign aid, subsidizing some of the wealthiest countries on the planet.
Providing more money to expand these and other programs is supposed to close the income and wealth gaps? The social engineers just assume that the benevolent dictator model, in which angels enact direct transfers that make people healthier and happier, can actually exist.
Unfortunately, the income tax creates additional harms. By taxing work, the levy discourages work. The higher the rate, the greater the incentive to choose leisure and invest in consumption and tax shelters. Moreover, credits and deductions give legislators the opportunity to play social engineers, providing subsidies and manipulating behavior sub rosa.
The greater the resulting complexity, the more wealth is wasted in compliance activities rather than invested in productive endeavors. Indeed, the system most benefits tax professionals who profit from the system’s failings. Today the tax code and IRS rules run nearly 75,000 pages. And there never is any certainty; my Cato Institute colleague Chris Edwards noted nearly 5,000 tax changes over the last decade. Ever-confused taxpayers are a captive audience for tax preparers and litigators.
Income taxes impose a number of other burdens. There is no financial privacy, since Uncle Sam is empowered to rummage through everyone’s personal affairs. And taxpayers are expected to maintain potentially extensive records for possible inspection for years. For instance, use a home office and you’d better keep your utility bills, home repair charges, and gasoline receipts!
Moreover, as Edwards pointed out, the entire enforcement process is built around a denial of due process. From start to finish the burden of proof falls on the taxpayer, not the government. The Fifth Amendment right against self-incrimination is out the window. Fourth Amendment protections against unreasonable searches and seizures don’t apply. Sixth and Seventh Amendment guarantees of a jury trial don’t cover the U.S. Tax Court.
Contrast this with the sales tax. You pay it when you purchase something and you are done with it. You don’t have to keep personal records. You don’t have to file a return. There is no government rummaging around through your bank records for enforcement.
Even social engineering usually is at a minimum. Consumption levies typically include little variations of rates among goods, with at most occasional exemptions of “necessities” and surcharges for “luxuries.” There seldom is much attempt to manipulate rates to achieve objectives other than raising revenue. Even politicians don’t claim that they can use the sales tax to solve the “problem” of income inequality.
The first income tax in U.S. history was proposed in 1814 to fund the ill-fated War of 1812. Happily, the conflict ended before Congress could demonstrate the dire consequences even of taxation with representation. In 1861, a desperate national government turned to the income tax to fund its war to conquer the Southern states seeking to separate. Americans sacrificed both independence and liberty in that conflict.
A search for revenue to replace declining tariff collections led to another income tax in 1894, but the Supreme Court declared the levy unconstitutional. Legislators probably could have met the jurists’ objections by scaling back the tax. Instead, 15 years later Congress proposed a constitutional amendment, which was approved on February 2, 1913, during the heyday of the Progressive Era. From modest beginnings it has grown into a monster.
There is a necessary role for government, but it is far more limited than today’s Leviathan in Washington. Government must be funded, but it should be by something other than today’s income tax, which has made it far too easy for politicians to mulct the public. There are many reasons for Americans’ steady and serious loss of liberty, but the income tax ranks high among them.
ABOUT DOUG BANDOWDoug Bandow is a senior fellow at the Cato Institute and the author of a number of books on economics and politics. He writes regularly on military non-interventionism.
EDITORS NOTE: The featured photo is courtesy of FEE and Shutterstock.
In the new mini-documentary Locked Out, Sean Malone shares the stories of microentrepreneurs fighting against artificial barriers to entry.
[youtube]http://youtu.be/gvPdgXX27Gw[/youtube]
Whenever you hear someone claim the benefits of government regulation, think about sharing this post. So very often the issue is not one of public health or the public interest, but of industry cartels colluding with bureaucrats in an effort to thwart honest competition.
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Click on the image to download a free copy of Rich States, Poor States 2014 Edition.
The American Legislative Exchange Council (ALEC) has released its 2014 edition of Rich States, Poor States: State Economic Competitiveness Index. Throughout the country, states are looking for ways to energize their economies and become more competitive. Each state confronts this task with a set of policy decisions unique to their own situation, but not all state policies lead to economic prosperity.
Using years of economic data and empirical evidence from each state, the authors identify which policies can lead a state to economic prosperity. Rich States, Poor States not only identifies these policies but also makes sound research-based conclusions about which states are poised to achieve greater economic prosperity and those that are stuck on the path to a lackluster economy.
The 2014 economic outlook ranking is a forward-looking measure of how each state can expect to perform economically based on 15 policy areas that have proven, over time, to be the best determinants of economic success.
Rich States, Poor States: ALEC-Laffer State Economic Competitiveness Index is an annual economic competitiveness study authored by economist Dr. Arthur Laffer, Stephen Moore, chief economist at the Heritage Foundation, and Jonathan Williams, Director of the Tax and Fiscal Policy Task Force at the American Legislative Exchange Council.
ABOUT THE AMERICAN LEGISLATIVE EXCHANGE COUNCIL
The American Legislative Exchange Council works to advance limited government, free markets, and federalism at the state level through a nonpartisan public-private partnership of America’s state legislators, members of the private sector and the general public.
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There would be no risk if the future were known and all of one’s plans played out exactly as expected. Because of pervasive uncertainty, a variety of risks permeates all human endeavors.
It is a common human desire to want to feel secure, to want to avoid as much risk as possible and live a comfortable, protected life. But different people deal with risk in different ways. Not all people are risk-avoiders.
For example, artists take risks with each work. In his Lectures on Shakespeare, W.H. Auden draws a distinction between a minor writer and a major one. This distinction hinges on the writer’s appetite for risk-taking and his ability to break new ground. A minor writer (Auden used the example of the poet A.E. Housman) is one who finds his niche and sticks to it. “The minor writer never risks failure,” Auden states. On the other hand, the major writer, like Shakespeare, pushes himself to discover new problems and try new things. In a word, the major writer takes risks. According to Auden, “Shakespeare is always prepared to risk failure. Troilus and Cressida, Measure for Measure, and All’s Well that Ends Well don’t quite come off, whereas almost every poem of Housman does.” Yet Shakespeare risked enough so that his successes have earned him almost universal acclaim as a great writer.
The same can be said of musicians. Great jazz artists like Charlie Parker and Miles Davis pushed their art in new and different directions, taking risks when they had no assurance they would succeed. Their experimental play earned them places in the pantheon of jazz immortals.
Gamblers are other examples of people who willingly take risks. In fact, gamblers who frequent the gaming tables create risks in playing various games. Sometimes they are lucky. The tale of Charles Wells is a case in point. In 1891 Wells gained fame by “breaking the bank” at Monte Carlo three times in one year. One evening he played the wheel and left his chips on the number 5, with the odds 36 to 1. The number five came up five times in a row. He walked out with the equivalent of over one million dollars. He was written up in the newspapers and even had a song about him (“The man who broke the bank at Monte Carlo”). Ironically, Wells would die broke.
In any event, whatever happens to the artist or to the gambler happens to him alone (and perhaps his backers, should he have any). In other words, if Shakespeare wrote a clinker, Ben Jonson didn’t have to come out of pocket to support him. In a similar way, the gambler who loses his shirt has no claim against sober individuals who choose not to gamble. Conversely, Shakespeare’s fame is his alone and the gambler’s winnings are his too.
However sensible this arrangement seems, it often does not prevail in the modern world where collectivist thinking is rampant. In real life successful people indirectly support those who are unsuccessful. In some cases successful people do this voluntarily by contributing their time and money to charity. But more often, successful people support others whether they want to or not, since their pockets are regularly picked by government officials of every stripe. The government encourages the illusion of a mighty shield that will protect people from their own imprudence and misfortune rather than let them take care of themselves, which would require them to save, to plan, and to be prudent.
The existence of a forced safety net, or a support system not voluntarily funded, warps the normal incentives and changes people’s behavior, in perverse ways.
Look at the banking world. If a bank makes a series of poor decisions that lead to failure, the FDIC stands ready to make good on any losses depositors should suffer. Here we have two problems. The first is that the banker is not held accountable for his losses. And the second is that the depositor is relieved of the responsibility for where he puts his money. All he has to know is whether his bank is FDIC-insured.
This would be like giving your money to Charles Wells knowing that the house will reimburse him for any losses he suffers and that he will in turn reimburse you. Do you think that this would change Wells’s behavior? Do you think that he might take some risks that he otherwise might not take? And what if Shakespeare knew that no matter how bad any particular play was, he would get reimbursed for any losses incurred? It is common sense to acknowledge that risk influences behavior.
In more formal terms, a moral hazard is created when the adverse consequences of risk-taking are transferred to a third party and the transfer benefits the risk-taker and harms the third party. Insurance is often cited as a common example of risk transfer. However, most insurance is created in the marketplace and is priced, like all goods and services in the market, by the interplay of buyers and sellers. In other words, insurance is not persistently mispriced. The fact that the FDIC determines the price of insurance necessarily means that it will likely be higher or lower than the market price. Risk will always be too cheap or too dear. Occasionally, perhaps, the FDIC hits the market price. Then the question becomes, why not let the market run this insurance program?
Then again, deposit insurance is really not insurance at all. Just because the government calls it insurance doesn’t mean it is. No other industries have insurance like it. When Amazon or General Motors or Dell takes a loss, no one reimburses the company for it. Entrepreneurial risk is inherently uninsurable. Insurance protects against certain kinds of risks, but it doesn’t underwrite failure.
If the theory of moral hazard is correct, then risk—the possibility of loss, the element of chance—serves a useful purpose in changing behavior. Risk can keep people within certain behavioral boundaries.
Few would dare cross a busy street without at least looking to see if any cars were coming. The risk of being hit and its attendant consequences are simply too great. People modify their behavior to deal with these risks. They mitigate them, in this case, by looking both ways before crossing the street. Further, a pedestrian may choose to cross only when the light is in his favor. These are some of the ways people deal with risks of crossing a busy street. The risk of being hit forces them to think before they act.
In banking, the theory of moral hazard is no different. Benjamin Esty of the Harvard Business School conducted a valuable study on the impact of contingent liability on commercial bank risk-taking.* Esty looked at the banking world prior to deposit insurance. From the passage of the National Banking Act of 1863 until 1933 regulators imposed double liability—a form of contingent liability—on national bank shareholders. Esty explains: “Under this system, shareholders were doubly liable in that they could lose both the market value of their shares and, through assessment, an amount equal to the par value of equity to cover creditor obligations including deposits and other debts.” Most banks at the time had a par value of $100 per share. So, as a shareholder, if your bank went belly up you would lose the market value of your stock and you could be assessed another $100 per share to cover depositor and other losses. Do you think that this would change your behavior as an owner of a bank?
The states passed their own versions of contingent liability as well. Some had single liability. California had triple liability. And regulators were effective at collecting assessments. During the years 1865 through 1934, the comptroller of the currency collected 51 percent of the assessments. The fact that these assessments were creditable is shown in the behavior of the banks and their risk-taking activities. As Esty notes, from 1865 to 1933 voluntary bank liquidations accounted for over 70 percent of all bank closures. The states had similar experiences with state-chartered banks.
In an FDIC world there is no incentive for banks to close or liquidate as soon as trouble arises. And since bank shareholders have limited liability, their appetite for risk is greatly enhanced. Banks of the nineteenth century were fortress-like compared to their late twentieth-century counterparts. They had reserves of gold and silver, and by law their reserves had to cover 25 percent of deposits. Some banks, like National City, carried reserves to cover 60 percent of deposits.
This is not to recommend that contingent liability is the way to enforce bank soundness, but rather to illustrate how the risk of loss changes behavior and forces prudence in a way that FDIC insurance lacks.
Deposit insurance is only one commonly known way that governments try to collectivize and minimize risk. They have numerous other programs and guarantees that seemingly lower risk. Another example is the Small Business Administration (SBA), which provides banks with a partial guarantee of loans made to certain favored classes. If a minority-owned business, financed under an SBA loan, fails, the SBA stands in to absorb a portion of that debt. This encourages the banks to take risks that they otherwise would not take.
Removing or shifting risk by government fiat is not a panacea. Genuine risk serves a useful purpose. Forcing the shifting of risk to third parties, in essence creating moral hazard, leads to the perverse outcome that the risk one hoped to avoid is actually recreated in the form of the false promises made by the welfare state.
*“The Impact of Contingent Liability on Commercial Bank Risk Taking,” Journal of Financial Economics, February 1998, pp. 189–218.
Christopher Mayer is a commercial loan officer and freelance writer.
EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.
William Shakespeare. Merchant of Venice. Circa 1598.
Everyone knows about Shylock. Even those who have only a passing familiarity with Shakespeare know about the vicious money-lender in Shakespeare’s The Merchant of Venice. He lends Antonio (the merchant of the title) 3,000 ducats to give to his friend Bassanio, and if Antonio fails to repay the loan in time, he must give Shylock a pound of his flesh.
A lot has been written about Shylock and about his contract with Antonio. (Some of it has even been written by my brother.)
But we spend a lot less time thinking and talking about Bassanio, the friend for whom Antonio takes on the debt. Bassanio interests me because he represents what seems to be a completely different way of financial thinking. In contrast to Antonio’s fairly conservative financial approach—while he has invested heavily, he has diversified his investments into three different ships—and Shylock’s grasping, near-miserly attitude, Bassanio is a spendthrift. When we first meet him he is explaining to Antonio exactly how he has ended up broke again.
‘Tis not unknown to you, Antonio,
How much I have disabled mine estate,
By something showing a more swelling port
Than my faint means would grant continuance:
Nor do I now make moan to be abridged
From such a noble rate; but my chief care
Is to come fairly off from the great debts
Wherein my time something too prodigal
Hath left me gaged.
In other words, in the style of spendthrifts the world over, he tells Antonio that he has spent more than he has to look like a more important person than he is. Now he is in debt, and he is worried. But, he adds, he won’t be worried for long, because he has “plots and purposes/How to get clear of all the debts I owe.” Those plots will involve, however, just a little bit more investment from Antonio. After all, Bassanio argues, money management is like archery.
In my school-days, when I had lost one shaft,
I shot his fellow of the self-same flight
The self-same way with more advised watch,
To find the other forth, and by adventuring both
I oft found both . . .
This is a perfectly reasonable way to find a lost arrow, according to several archers I consulted—but it’s a fairly rotten financial plan. It amounts to “throwing good money after bad” or doubling down on a bad hand.
And what are the precise details of Bassanio’s plan? It seems that “in Belmont is a lady richly left,” and Bassanio means to wed her and her inheritance. If he can win her.
Despite Bassanio’s appalling credit history, Antonio acts on the notion that “sunk costs are sunk” (this joke is much funnier if you have read the play) and takes out the loan to help him. While this decision rapidly brings things to a peak of tension for Antonio in Venice, events go beautifully for Bassanio. He arrives in Belmont. Portia, the “lady richly left” is delighted to see him. All he must do to win her is to play a little game that her father devised before he died.
In a scene straight from a fairy tale, Bassanio is presented with three small caskets or chests—one of gold, one of silver, and one of lead. The gold casket reads, “Who chooseth me shall gain what many men desire.” The silver casket says, “Who chooseth me shall get as much as he deserves.” And the lead casket is engraved with, “Who chooseth me must give and hazard all he hath.” By the time that Bassanio is ready to choose, those of us watching or reading the play have already seen two suitors choose and fail. So we know several things. First, by the immutable law of fairy tale triplets, we know that Bassanio will choose correctly merely because he is choosing third. Second, we know that the right choice is the lead casket, because the two earlier suitors chose the gold and the silver caskets and were rejected. Lastly, we know that Bassanio’s character means that he is perfectly suited to make the right choice.
How do we know this? Well, the lead casket says, “Who chooseth me must give and hazard all he hath.” Portia’s previous suitors argued against this casket by saying it (and perhaps Portia) was too unappealing for such a risk—“You shall look fairer, ere I give or hazard” and:
Men that hazard all
Do it in hope of fair advantages:
A golden mind stoops not to shows of dross;
I’ll then nor give nor hazard aught for lead.
These previous suitors are following some very sensible real world financial principles. Bassanio, however, is following fairy tale rules. He has already proven in Venice that he is perfectly happy to take all kinds of irrational risks with his fortune and with his friend’s fortune. The possibility of a very high return on a risky investment in something that is apparently worthless is irresistible to Bassanio. Of course he will choose lead. He would choose lead even if he didn’t like Portia. He would choose lead for much smaller stakes than her endless wealth. And in a place like Belmont, where marriages are decided by casket games, he is a clear winner.
So here are the questions that I have always had about Bassanio. His financial irresponsibility, taken out of the realistic world of Venice (which is governed by scarcity and real risk) and transported to the fairy tale world of Belmont (which is governed by luxurious superfluity) is transformed into good sense. Are we meant to see him as the model for good choices in this play? Are we meant to remember that his initial stake in the casket game means that his best friend nearly dies? Are we meant to think that his choices are only good choices in a world with no scarcity? The great thing about a great play is that it can open these questions, and leave them for us to ponder through repeated readings. At the moment, I’m inclined to think that Bassanio may serve as the opposite extreme to Shylock—both of them willing to see Antonio die in order to achieve their own satisfaction and neither of them engaging in anything like a reasonable relationship with wealth.
Thanks to Adam Cowming, Kyle Trowbridge, Joe Lehman, and Sean Malone for their helpful elucidation of archery questions.
ABOUT SARAH SKWIRESarah Skwire is a fellow at Liberty Fund, Inc. She is a poet and author of the writing textbook Writing with a Thesis.
How can we minimize the gap in income inequality for America’s Haves and Have-nots? This video features Milton Friedman with a surprisingly simple solution. Watch to find out about the keystone of school choice.
[youtube]http://youtu.be/JrqAv5Z6yRo[/youtube]
To learn more about the Nobel Prize-winning economist and his views on education, visit: http://www.edchoice.org.
The current fuss over inequality has a classic feel to it. For one thing, it’s one of the oldest plays in the Progressive playbook. But it’s a well-established maneuver for governments everywhere. The idea is to appeal to the age-old feelings of envy and guilt that arise in virtually every person: Why should some have more than others? Is it fair that some people or whole countries have greater wealth and higher incomes while others struggle?
History is rife with examples of politician-induced envy in order to attempt to justify redistribution. Those who fomented the Russian revolution in the early twentieth century tempted the proletariat with the property of the affluent. Hitler enticed the populace toward envy of the Jews, many of whom were economically successful in Europe, to help construct his national socialist empire. Miquel Faria, in his book,Cuba in Revolution: Escape from a Lost Paradise, states, “As in all socialist systems, Castro uses envy, class hatred, and class warfare.” Much the same has been true of Peronist Argentina.
It pits us against each other, letting politicians leverage an instinctive reaction to gain power. It’s an effective tactic and the rhetoric of inequality remains an effective cover, which is why politicians still trot it out routinely. But the policies it perpetuates will end up impoverishing any country.
Wealth redistribution inevitably robs every person of their freedoms. Equality is never achieved; the wealth is mostly shifted to those currently in power, who administer and derive political support from redistributive programs. The masses remain impoverished, and those in power remain, for as long as they can, the supposed champions of those masses, struggling for a fair redistribution.
This process was diagnosed some time ago by Helmut Schoeck, in his 1966 book Envy: A Theory of Social Behavior. According to Schoeck, “The revolutionary movements in South American republics, Bolshevism in Russia, the resentful Populists in the United States (today the Progressives), all were supported by those circles who would clearly be the first to take a malicious delight in the levelling of society. But without exception, and sometimes in the course of a few decades, the new ruling caste has become a bourgeoisie or a plutocracy.” Inevitably, those promulgating envy as a means to levelling, in the end become the same class they earlier despised.
History has shown us that the result of trying to enact income equality is that you achieve a society where all the citizens are poor together. Ludwig von Mises, in Socialism, wrote,
Most people who demand the greatest possible equality of incomes do not realize that what they desire would only be achieved by sacrificing other aims. They imagine that the sum of incomes will remain unchanged and that all they need to do is to distribute it more equally than it is distributed in the social order based on private property…. It must be clearly understood, however, that this idea rests on a grave error. It has been shown that, in whatever way one envisages the equalization of incomes this must always and necessarily lead to a very considerable reduction of the total national income and, thus, also, of the average income. For we have then to decide whether we are in favor of an equal distribution of income at a lower average income, or inequality of incomes at a higher average income. [emphasis added]
European countries moved toward socialism and levelling in a big way during the twentieth century, partially in order to decrease income equality in monarchies in which only a few had wealth and the rest lived in poverty. But what has been the result?
According to Richard Florida, co-founder and editor at large at The Atlantic Cities, “The U.S. accounts for about a third of all high-net-worth people (60,657), and Europe is home to 54,170.” The actual numbers are not starkly different. In 2012, 24 percent, or 120 million people, of the 500 million people in the European Union were listed as at risk of poverty. In the same year, the U.S. poverty rate (out of 318 million people) was 15 percent, roughly 46.5 million people. Socialist policies that attempt to level the economic playing field are repeatedly unsuccessful. As Winston Churchill stated, “Socialism is a philosophy of failure, the creed of ignorance, and the gospel of envy,” and “The inherent virtue of Socialism is the equal sharing of miseries.”
A society that encourages envy in order to “level the playing field” for its citizens is a society that will implode from within. Oppressive government spending programs requiring high taxation and controls on individuals can lead to economic stagnation or even collapse. There is something particularly sordid about politicians who play on our envy. It is a game of power and control and it can lead people to justify using violence to take the property of others. Citizens of every country should learn to recognize whether politicians are manipulating them by playing on their envy. Only when we learn to aspire and admire those that are economically successful, and not be envious of them, will we see our economies flourish.
Terree P. Summer is an economist and author specializing in healthcare and the federal budget. She is the author of What Has Government Done to Our Health Care? published by the Cato Institute (1992).
EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.
We all know that the “sanctions” Obama has placed on a few of Putin’s pals thus far and those Obama wants the European Union to impose will have no effect whatever on Putin’s decision to annex the Crimea from Ukraine.
One of Obama’s solutions to protect Ukraine’s sovereignty includes giving it a billion dollars because Russia has raised the price of the natural gas it sells to the Ukraine. This means Putin just made a billion while reacquiring Crimea.
One way to bring Russia to its knees would be for Obama–if he could–to impose the same things he is doing in America on the Russian Federation:
These policies since 2009 have weakened the United States and, if applied to Russia, they would have the same effect. It’s bad enough what Obama has done and is doing to the U.S., but neither we nor the rest of the world would be better off with a weak Russia. Its economy is too tied into the world’s.
Putin insists that it was the West led by the U.S. that resulted in the collapse of the Soviet Union in 1991 after seventy years of communist rule, but it was Communism that brought it to its knees. The other element was a decline in the prices of oil and natural gas–still the primary source of income for the Russian Federation—that undermined its economy.
While a panoply of experts keeps talking about the prospect of Russia aggression toward its former satellite nations in Eastern Europe, the simple fact is that Putin’s reacquisition of the Crimea just added to Russia’s financial pressures. He can barely afford Crimea. All the hand-wringing about its annexation ignores the fact that it was part of Russia for hundreds of years.
Ruchir Sharma, the head of emerging markets at Morgan Stanley Investment Management, recently spelled out Russia’s economic woes in a Wall Street Journal commentary titled “Putin’s Potemkin Economy.”
“Mr. Putin’s real power base, the economy, is crumbling,” says Sharma. “Russia’s economic growth rate has plummeted from the 7% average annual pace of the last decade to 1.3% last year,” adding that “the Central Bank of the Russian Federation has been fighting to prevent a ruble collapse since the Crimean crisis began.”
Does that sound like a Russia that wants to invade its neighbors at this time?
“The result,” says Sharma, “is that the Russian state has few new sources of income outside of oil and gas, at a time when it is taking on more dependents” in Crimea. As for the rest of the Ukraine population, it’s only the younger generation that did not grow up under the oppression of the former Soviet Russia that thinks giving up its sovereignty is a good idea. Ukrainians with a memory of the pre-1991 days know better.
Europe, much of which depends on Russian gas, will be in no hurry to punish Russia beyond a few relatively meaningless sanctions. It’s all a charade.
It’s true that Europe went to war twice for far less reason than the Crimean annexation, but its present leaders have no wish to repeat that error for all the talk about international law.
What is being debated now is whether Putin will, for whatever reason, invade Ukraine. Only Putin knows that and the decision would be a bad one for him and everyone else.
As we strive to survive Obama’s war on the U.S. economy and the current havoc resulting from Obamacare, it is doubtful that even Obama has any inclination to see Russia collapse and could not reverse the Crimean situation even if he cared about it.
He doesn’t seem to care about what he’s doing to the rest of us so it’s the war at home which we have to survive.
© Alan Caruba, 2014
It isn’t enough that U.S. taxpayers have for years now been subsidizing the Pakistanis’ support for jihad terrorists. The New York Times reported on that at length back in 2008. No,that jizya is not enough. There has to be more, more, more — more money spent, more submission, more tribute. Even up to and including a fiberglass camel.
“Exclusive: U.S. Taxpayers To Spend $400,000 For A Camel Sculpture In Pakistan,” by Aram Roston for BuzzFeed, March 31 (thanks to Jerk Chicken):
The State Department is planning to spend $400,000 in taxpayer funds to buy a sculpture for the new American embassy being built in Islamabad, Pakistan, according to contracting records.
The work, by noted American artist John Baldessari, depicts a life-size white camel made of fiberglass staring in puzzlement at the eye of an oversize shiny needle — a not-so-subtle play on the New Testament phrase about the difficulty the wealthy have in entering the kingdom of heaven.
Officials explained the decision to purchase the piece of art, titled “Camel Contemplating Needle,” in a four-page document justifying a “sole source” procurement. “This artist’s product is uniquely qualified,” the document explains. “Public art which will be presented in the new embassy should reflect the values of a predominantly Islamist country,” it says. (Like the Bible, the Qur’an uses the metaphor of a camel passing through the eye of a needle.)
To emphasize Baldassari’s fame, the contracting officials pulled a section from Wikipedia. “John Anthony Baldessari (born June 17, 1931) is an American conceptual artist known for his work featuring found photography and appropriated images.”
In a statement, State Department press spokeswoman Christine Foushee said the proposed purchase comes from the department’s “Office of Art in Embassies.” In new construction projects, she said, a small part of the total funds, about 0.5%, is spent on art purchases.
Steven Beyer of Beyer Projects, the art dealer for the project, said the government reached out. “They approached us,” he said in a phone interview. “We were, of course, quite surprised.”
The $400,000 price tag “is actually a very a reduced price for this sculpture,” he said. “There is an art market that makes these prices, and this is one of the most prominent American artists.”
Another copy of “Camel Contemplating a Needle” is on display at Hall Wines in Napa Valley, Calif., and Beyer said that copy sold for far more then the State Department would pay.
He points out that while some Americans may find it frivolous for the government to pay for art, others will find it important. “It depends on what part of the public you are in,” he said. “If you go to the museum and enjoy art and are moved by it, things cost what they cost.”
To put the sculpture’s price tag into a local perspective, the average yearly income in impoverished Pakistan is about $1,250 per year, according to the Agency for International Development.
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EDITORS NOTE: The featured image is John Baldessari: Camel (Albino) Contemplating Needle (Large) courtesy of Beyer Projects.
Both the Governor’s and House Hawaii State Budget Proposals Are Not In Balance
News Release from Office of Sen Sam Slom March 25, 2014 – HONOLULU— Senator Sam Slom indicates concern that as early as 2016 Hawaii will run out of cash reserves resulting in Hawaii’s budget being unconstitutional.
Senator Slom says:
“As the Senate Minority has predicted for several years, the State has not provided incentives for an improved business climate and is thus becoming both an entitlement society and a debt based economy. It is imperative that we change the fiscal direction of the State.”
IMPORTANT FACTS YOU KNOW ABOUT THE STATE BUDGET
by Paul Harleman, M.B.A., Budget Director, Hawaii Senate Minority
Recently, the State Council on Revenues significantly reduced the revenue growth projections that are used to determine the budget spending levels for the two upcoming fiscal years. Specifically, the Council lowered the revenue growth forecast for FY 2014 from 3.3% to 0% and for FY 2015 from 7.4% to 5.5%. This downward forecast is important because it will be used by the legislature in the current budget negotiations.
At the present time, only the Governor and the House have formally introduced their respective drafts of the state operating budget. Based on the downward revenue forecast, both budget drafts that have been submitted by the Governor and the House are not in balance and are based on projected long-term deficit spending.
Constitutionally, the state could engage in annual deficit spending as long as there are enough cash reserves to absorb these deficits. However, as figure 1 illustrates, under the current budget drafts the state is projected to run out of its cash reserves as early as FY 2016, which would be unconstitutional.
Since the current long-term revenue growth projections are based on a relatively optimistic scenario of an average annual growth rate of 5%, a failure to make significant budget cuts today will lead to severe budgeting problems during the upcoming biennium, which will be in next year’s legislative session.
Figure 1. Projected General Fund Surpluses/Deficits and Ending Carry-Over Balances FY 2013-2019 (Starting with $844M Surplus in 2013):
Source: Based on the March 11th Council on Revenues General Fund Forecast. Proposed Executive Supplemental Budget vs. HB 1700,HD1 (2014). For a larger view click on the chart.
For a larger view click on the chart.
Congressman James Bridenstine (R-OK, District 1) has uncovered another Obama secret scandal. The deal that was entered into behind closed doors by President Obama with Russian President Putin. The deal is to give Russia “Free of Charge” crucial, mid-grade sensitive US military technology, used by US Special Operations Forces to get ready for combat operations.
A Republic of Korea (ROK) Soldier armed with a 5.56mm K2 assault RIFLE wears Multiple Integrated Laser Engagement System (MILES) gear during the combined Exercises Reception, Staging, Onward Movement, and Integration/Foal Eagle 2002 (RSOI/FE 02).
The National Nuclear Security Agency has been providing the Multiple Integrated Laser Engagement System (MILES) to Russia. The transfer has been facilitated by Obama appointee, Secretary of Energy Ernst Moritz. Moritz is overseeing this dangerous and potentially illegal transfer of crucial, mid-grad, sensitive US military technology to Putin. All this while Russia was invading Crimea and is poised to invade Ukraine. Moritz is continuing the transfer in the midst of Putin the mobilization of 150,000 Russian troops along the Ukrainian border.
Every American should be informed of this illegal transfer by the Obama administration. The Democrats in the Senate and House, under the leadership of Senator Reid, Rep. Pelosi and President Obama have, by their actions, been degrading the “Combat Effectiveness” the US Armed Forces. They have been caught secretly giving US Army and US Marine Corps military sensitive technology to Putin, rather than giving it to the National Guard, the US Marine Corps Reserve, and the US Army Reserve who desperately need that that type of equipment to prepare their personnel for combat operations.
The question every American should be asking is why didn’t Speaker Boehner halt the “illegal” transfer of crucial, mid-grade technology US military sensitive technology, to Russia “Free Of Charge” and allowed it to inserted in the House Fiscal Year 2014 and Fiscal 2015 budgets? Why did it require the investigation of Congressman Bridenstine to discover the traitorous and illegal transfer of US military sensitive technology to Russia “Free of Charge”?
Will the Speaker stop this transfer of sensitive US military technology to Russia?
Or will he, as he has been doing with the Benghazi investigation for 18 months, nothing? Boehner has been frustrating 186 Congressmen who keep asking the Speaker to appoint a Select House Investigative Committee on The Battle of Benghazi, so they can finally have subpoena powers that the 5 House investigations on Benghazi do not have. To cover up what happened in The Battle of Benghazi, the Obama administration has classified information on Benghazi that should never been classified and has prevented thirty-two US personnel who were on the ground during The Battle of Benghazi from testifying—-the only way to get around that is for the House to have subpoena powers which Boehner has prevented 186 Congressmen from doing for 18 month.
Twenty-six million veterans in the United States, millions of patriotic American citizens, all the members of the US Armed Forces, Republicans, Independents, Tea Party Patriots, and Blue Dog Democrats are waiting for you to “do something”.
In addition to allowing the US Military’s sensitive crucial mid-grade technology to be transferred “Free of Charge ” to Russia, Speaker Boehner has also allowed cuts to military benefits to already poorly paid enlisted military personnel, the elimination of military commissaries, reduction of the US navy below its strength at the beginning of WWI, cutting the US Army below its strength at the beginning of WWII, elimination of entire categories of US Air Force Combat aircraft and allowing President Obama to kill the cornerstone of US Naval Power–The Tomahawk & Hellfire Missile Programs
Will you, Mr. Speaker, ever “do something”? You do control the purse strings and have massive powers given you by the framers of the US Constitution.
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Kelsey Harris and Amy Payne from The Foundry write, “Regulation: It’s a mostly hidden drain on the economy—and a favorite of the Obama administration. It affects all of our lives—and wallets—yet rarely makes headlines. Why? It’s complex; it’s constant; and the sheer volume of regulations is stunning.”
Heritage experts James Gattuso and Diane Katz have just updated their one-of-a-kind report on the Obama administration’s unrelenting use of regulation to push its policy agenda. Check out our new infographic to see how this presidency compares to the previous one, and what it’s costing us.
Gattuso and Katz note, “In his January 2014 State of the Union address, President Barack Obama vowed to wield his executive powers when faced with congressional resistance to his legislative agenda, stating: ‘America does not stand still—and neither will I. So wherever and whenever I can take steps without legislation … that’s what I am going to do.’” And he is doing it daily with red tape.
