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Well, Back to Smoking: FDA Bans 99 Percent of E-Cigarettes by Guy Bentley

May 7, 2016/in Commentary, Healthcare, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

The Food and Drug Administration (FDA) published long-awaited rules Thursday that could ban 99 percent of e-cigarette products and wreck industry innovation for years to come.

Passed in 2009, the Tobacco Control Act says all e-cigarette products released after February 15, 2007, (predicate date) will have to go through the Pre-Market Tobacco Applications process (PMTA). FDA officials claim they cannot change the predicate date.

The PMTA is ruinously expensive and can cost millions of dollars per product and by the FDA’s own admission will take more than 1,700 hours for an applicant to complete.

Since almost all vapor products on the market were released after February 2007, hardly any will avoid a PMTA and almost no businesses, with the exception of big tobacco companies, will be able to bear the regulatory burden.

“The agency’s economic analysis of the rule predicts that the cost of such approvals will be so high that approximately 99 percent of products on the market will not even be put through the application process,” says the American Vaping Association (AVA).

The rules usher in a new era of federal regulation, with sales of vapor products to those under the age of 18 banned nationwide. Most states had already passed laws banning e-cigarette sales to minors.

“This final rule is a foundational step that enables the FDA to regulate products young people were using at alarming rates, like e-cigarettes, cigars and hookah tobacco, that had gone largely unregulated,” Mitch Zeller, director of the FDA’s Center for Tobacco Products, said in a press release. The FDA will now set industry standards for manufacturing and labeling. The rules will take effect in 90 days.

But there is still hope for the industry yet after a House Appropriations committee passed an amendment April 19, which would alter the predicate date. The amendment is not yet law and will have to pass through the House of Representatives.

If the amendment fails however and the FDA regulations stand, the industry will have two years to comply with the PMTA.

“Despite an overabundance of distorted and misleading information propagated by some in the public health community, the science is clear – responsibly manufactured vapor products are not only a safer alternative to traditional combustible products, but also provide smokers with a viable path to reducing their tobacco consumption and quitting altogether,” said Tony Abboud, the Vapor Technology Association’s National Legislative Director.

“Today’s action by the FDA will do nothing to improve our nations’ public health objectives. To the contrary, today’s action will yank responsibly manufactured vapor products from the hands of adult smokers and replace them with the tobacco cigarettes they had been trying to give up.”

The VTA argue the FDA’s rules will kill almost a decade of innovation in the e-cigarette space and put thousands of small and mid-size businesses out of businesses to the benefit of major tobacco companies.

“If, in the name of public health, federal regulations inhibit much-needed innovation in the e-cigarette market, public health would actually suffer, as fewer adult smokers would be likely to switch from smoking,” said the National Center for Public Policy Research’s director of Risk Analysis, Jeff Stier.

“One only needs to look at the rapid innovation coming from the vaping industry to see how devastating this rule will be,” Jared Meyer, Fellow at the Manhattan Institute, told The Daily Caller News Foundation in an emailed statement.

“While large tobacco companies will likely be able to absorb these costs, countless small manufacturers will be put out of business – leading to a less dynamic market. Without continued innovation, it will be harder from cigarette smokers to kick their deadly habit by taking up a much less harmful form of nicotine consumption,” Meyer added.

According to Wells Fargo, e-cigarette sales amounted to $3.5 billion in 2015. The case for wide-spread e-cigarette use was given a boost April 27 after the Royal College of Physicians published a 200-page report supporting the products as a smoking cessation method.

Reprinted with permission from the Daily Caller News Foundation.

Guy Bentley

Guy Bentley is a reporter for the Daily Caller.

Does Democracy Lead to Socialism? by B.K. Marcus

March 5, 2016/in Commentary, Economy, Elections, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

Presidential candidate Bernie Sanders has brought “democratic socialism” out of the shadows of fringe ideologies and into the spotlight of mainstream American politics. Nevertheless, many find Sanders’s self-description perplexing. Is socialism seriously still in play? Didn’t the horrors of the 20th century finally bury that ideological monstrosity?

No, that’s communism you’re thinking of. To quote the Democratic Socialists of America (DSA),

Socialists have been among the harshest critics of authoritarian Communist states. Just because their bureaucratic elites called them “socialist” did not make it so; they also called their regimes “democratic.”

If the communists weren’t really socialists, then what the heck does socialism mean?

The basic definition of socialism, democratic or otherwise, is collective ownership of the means of production. The DSA website says, “We believe that the workers and consumers who are affected by economic institutions should own and control them.”

But the DSA keeps the emphasis on democracy:

Democratic socialists believe that both the economy and society should be run democratically — to meet public needs, not to make profits for a few. To achieve a more just society, many structures of our government and economy must be radically transformed through greater economic and social democracy so that ordinary Americans can participate in the many decisions that affect our lives.

Socialism, then, as the democratic socialists understand the term, is just the logical consequence of the democratic ideal:

Democracy and socialism go hand in hand. All over the world, wherever the idea of democracy has taken root, the vision ofsocialism has taken root as well.

On this point, at least, many in America’s free-market tradition would agree.

Anti-democratic Anti-socialists

Ludwig von Mises may have been the most radical classical liberal in 20th-century Europe, but when he came to the United States, Mises found himself at odds with American libertarians who felt that his liberalism didn’t go far enough.

Some of these disagreements would strike most of us as highly abstract, such as the question of whether or not the philosophy of freedom is based in natural law or utilitarianism. But at least one practical point of contention was the issue of majoritarian democracy. Mises had defended both capitalism and democracy in his book Liberalism. American libertarians such as R.C. Hoiles and Frank Chodorov shared Mises’s appreciation of the free market but were far less sanguine about majority rule. The harshest language came from Discovery of Freedom author Rose Wilder Lane:

As an American I am of course fundamentally opposed to democracy and to anyone advocating or defending democracy, which in theory and practice is the basis of socialism.

It is precisely democracy which is destroying the American political structure, American law, and the American economy, as Madison said it would, and as Macauley prophesied that it would do in fact in the 20th century. (Letter from Lane to Mises, July 5, 1947; quoted in Mises: The Last Knight of Liberalism)

Why would Lane argue that democracy is “the basis of socialism”?

Majority Fools

Voting turns out to be a particularly bad way to make economic decisions. Mancur Olson’s book The Logic of Collective Action wouldn’t appear for another 18 years, but some version of his thesis was probably already familiar to Lane and her radical allies. Olson argues that majority rule separates the benefits and the costs of decision-making.

Elections aren’t just a poll of everyone’s opinion; they are organized campaigns by different groups fighting for their interests. A voter doesn’t go into the booth having studied the controversy in question. He or she brings to the polls an impression of an issue based on how different organized groups have presented their cause during massive advocacy campaigns prior to Election Day. Every such campaign is a case of a special-interest minority trying to persuade a voting majority.

And it’s not a level playing field, to borrow one of the political left’s favorite metaphors. Olson explains how the incentive for group action decreases as the size of a group increases, meaning that bigger groups are less able to act in their common interest than smaller ones. Small groups can gain concentrated benefitswhile the rest of us face diffuse costs.

The textbook example is sugar tariffs (“or what amounts to the same thing in the form of quota restrictions against imports of sugar,” as former Freeman editor Paul Poirot put it). Why is Coke sweetened with corn syrup in the United States and with sugar everywhere else in the world? Because sugar is cheaper everywhere else, while the US government keeps sugar artificially expensive for Americans. The protections responsible are a huge benefit to a small group of domestic sugar producers (and, as it turns out, also to corn growers) and a burden on the rest of us.

Ignore the corn-syrup issue for a moment and pretend that Coke is still made with sugar. Let’s imagine that government price supports make each can of Coke, say, 5¢ more than it otherwise would be. That difference adds up, but at the moment you’re buying the can of soda, it’s an irritation, not a hardship. Even if you bother to figure out how much extra money you have to spend on sweet drinks each year, the figure probably won’t be enough to stir you to petition the legislature to repeal the sugar lobby’s protections. In fact, the loss isn’t even enough to prompt you to learn the cause of the higher price.

That’s what economists mean when they talk about diffuse costs. (And the Coke drinker’s very reasonable cluelessness about the cause of his lost nickel is what economists call “rational ignorance.” See “Too Dumb for Democracy?” Freeman, Spring 2015.)

On the other hand, the sugar producers will make billions from lobbying and campaigning to explain why their favorite barriers are good for the economy.

Take this example and multiply it by all the special interests seeking government favors. Even if you do understand what’s going on, even if you know how this hurts the economy and consumers and yourself, it’s not like there’s ever one plebiscite, a big thumbs-up or thumbs-down for free trade in sugar. Every issue is addressed separately, and every issue faces the same logic of collective action we see in the case of the sugar. (And as with the case of sugar, where the corn industry has its own interests in promoting higher sugar prices, many issues have multiple special-interest groups with their own reasons for supporting socially harmful policies.)

Now replace agribusiness in this example with teachers unions or the AARP or anyone else who benefits from a government program, even if that program hurts the rest of us.

The democratic system is rigged from the outset to favor ever more interference from ever-bigger government. From this perspective, Rose Wilder Lane doesn’t seem quite so polemical for equating democracy and socialism.

Democratic Socialists for Crony Capitalism

But is big government the same thing as socialism? The DSA denies it. They insist that they prefer local and decentralized socialism wherever possible. How long an elected socialist would keep his hands off the bludgeon of central power is a reasonable question, and a chilling one, as is the question of how long asocialist democracy would honor the civil liberties that the DSA claims to support.

But even if we reject the DSA’s claims as either naive or fraudulent, there is still a compelling reason to reject the equation of big government and socialism.

Government doesn’t grow to serve the poor or the proletariat. Democracy spawns special interests, and special-interest campaigns require deep pockets. None come deeper than the pockets of established business interests.

Real-world capitalists, despite the rhetoric of the socialists, rarely support capitalism — at least not in the sense of free trade and free markets. What they too often support is government protection and largess for themselves and their cronies, and if that means having to share some of the spoils with organized labor, or green energy, or the welfare industry, that’s not a problem. Corporate welfare flows left and right with equal ease.

“Democratic socialists,” according to the DSA, “do not want to create an all-powerful government bureaucracy. But we do not want big corporate bureaucracies to control our society either.”

If that’s true, then democratic socialists should aim to reduce both the size of government and the scope of democratic decisions. Unfortunately, they’re headed in the opposite direction — and trying to drag the rest of us with them.

B.K. Marcus

B.K. Marcus is editor of the Freeman.

Obama’s Econ Advisers: Occupational Licensing Is a Disaster by Mikayla Novak

September 2, 2015/in Budget and Finance, Economy, Policy, Religion/by Foundation for Economic Education (FEE)

Libertarians received a rare pleasant surprise when President Obamaʼs Council of Economic Advisers issued a report highly critical of occupational licensing.

The report cited numerous problems arising from this increasingly burdensome regulatory practice, which requires ordinary Americans to obtain expensive licenses and permits to perform ordinary jobs.

It is a belated recognition by the administration that government has long been acting against the best interests of workers and consumers.

And it might give us something of a warm inner glow to consider, as the Wall Street Journal recently did, that reforming occupational licensing could catalyze important economic reforms that transcend traditional political and ideological divides.

And reform is vital: each and every day, occupational licensing destroys the ability of individuals to freely and peacefully pursue their own livelihoods.

Licensing hurts workers

Occupational licensing locks countless of people out of dignified and meaningful job opportunities.

The CEA report indicates that more than a quarter of all workers in the United States need a government license or permit to legally work. Two-thirds of the increase in licensing since the 1960s is attributable to an increase in the number of professions being licensed, not to growth within traditionally licensed professions like law or medicine.

The data show that licensed workers earn on average 28 percent more than unlicensed workers. Only some of this observed premium is accounted for by the differences in education, training and experience between the two groups. The rest comes from reducing supply, locking competitors out of the market and extracting higher prices from consumers.

What makes professional licensing so invidious is that it serves as a barrier to entry in the labor market, simply because it takes so much time and money to obtain a license to work.

For young people, immigrants, and low-income individuals, it can be extremely difficult to stump up the cash and find the time — sometimes hundreds or even thousands of hours — to get licensed. The fees to maintain a license can also be exorbitant.

Compounding the problem is that licensing requirements are spreading into more industries, such as construction, food catering, and hairdressing — occupations where it used to be easy to start a career.

Today, there is arguably no more lethal poison for labor market freedom and upward mobility than occupational licensing.

Licensing hurts consumers

Defenders of occupational licensing say that workers need to be licensed because without it consumers would be harmed by poor service.

In the absence of licensing, children will be taught improperly at school, patients won’t get adequate health care in hospital, home owners will not get their leaky sinks fixed, and somebody could fall victim to an improper haircut.

But, in the name of promoting quality, licensing regulations perversely raise costs and reduce choices for consumers.

The CEA concludes that, by imposing entry barriers against potential competitors who could undercut the prices of incumbent suppliers, licensing raises prices for consumers by between 3 and 16 percent.

Moreover, the effect of licensing on product quality is unclear. The report notes that the empirical literature doesn’t demonstrate an increase in quality from licensure.

By restricting supply, licensing dulls the incentive for incumbents to provide the best quality products because the threat of new entrants competing with better offerings is diminished.

Perversely, the inflated prices offered by licensed providers may force some consumers to seek unlicensed providers, or to use less effective substitutes, or to do jobs themselves — in some cases increasing the risk of accidents.

In a blow to the notion of efficient government bureaucracy, the CEA indicates that government licensing boards routinely fail in monitoring licensed providers, contributing to the lack of improvement in quality.

Ending the war on livelihood freedom

To restore a climate friendly to economic liberty, people must feel they have a direct, personal stake in what Deidre McCloskey calls “market-tested betterment” — that is to say, in capitalism.

There is no better way to achieve this than to allow individuals to build their own livelihoods, finding decent jobs serving customers with the goods and services they want, at prices they mutually agree on.

The argument for economic liberty is also grounded in the moral imperative of respecting the freedom of other people to lead their own lives as they see fit, including their right to choose their own livelihood.

Proponents of occupational licensing can always serve up a parade of hypothetical horribles about things that could go wrong if people didn’t need the state’s permission to work, but nothing has been more harmful to workers and consumers than occupational licensing.

Mikayla Novak

Mikayla Novak is a senior researcher for the Institute of Public Affairs, an Australian free market think tank, and holds a doctorate in economics. She specializes in public finance, economic history, and the history of classical liberal thought.

New York’s Taxi Cartel Is Collapsing — Now They Want a Bailout! by Jeffrey A. Tucker

September 2, 2015/in Economy, Labor & Unions, Policy, Politics, Regulation/by Foundation for Economic Education (FEE)

An age-old rap against free markets is that they give rise to monopolies that use their power to exploit consumers, crush upstarts, and stifle innovation. It was this perception that led to “trust busting” a century ago, and continues to drive the monopoly-hunting policy at the Federal Trade Commission and the Justice Department.

But if you look around at the real world, you find something different. The actually existing monopolies that do these bad things are created not by markets but by government policy. Think of sectors like education, mail, courts, money, or municipal taxis, and you find a reality that is the opposite of the caricature: public policy creates monopolies while markets bust them.

For generations, economists and some political figures have been trying to bring competition to these sectors, but with limited success. The case of taxis makes the point. There is no way to justify the policies that keep these cartels protected. And yet they persist — or, at least, they have persisted until very recently.

In New York, we are seeing a collapse as inexorable as the fall of the Soviet Union itself. The app economy introduced competition in a surreptitious way. It invited people to sign up to drive people here and there and get paid for it. No more standing in lines on corners or being forced to split fares. You can stay in the coffee shop until you are notified that your car is there.

In less than one year, we’ve seen the astonishing effects. Not only has the price of taxi medallions fallen dramatically from a peak of $1 million, it’s not even clear that there is a market remaining at all for these permits. There hasn’t been a single medallion sale in four months. They are on the verge of becoming scrap metal or collector’s items destined for eBay.

What economists, politicians, lobbyists, writers, and agitators failed to accomplished for many decades, a clever innovation has achieved in just a few years of pushing. No one on the planet could have predicted this collapse just five years ago. Now it is a living fact.

Reason TV does a fantastic job and covering what’s going on with taxis in New York. Now if this model can be applied to all other government-created monopolies, we might see genuine progress toward a truly competitive economy. After all, it turns out that the free market is the best anti-monopoly weapon ever developed.

Jeffrey A. Tucker

Jeffrey Tucker is Director of Digital Development at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World. Follow on Twitter and Like on Facebook.

Video Game Developers Face the Final Boss: The FDA by Aaron Tao

September 2, 2015/in Commentary, Culture War, Healthcare, Policy, Politics, Religion, Science/by Foundation for Economic Education (FEE)

As I drove to work the other day, I heard a very interesting segment on NPR that featured a startup designing video games to improve cognitive skills and relieve symptoms associated with a myriad of mental health conditions.

One game, Project Evo, has shown good preliminary results in training players to ignore distractions and stay focused on the task at hand:

“We’ve been through eight or nine completed clinical trials, in all cognitive disorders: ADHD, autism, depression,” says Matt Omernick, executive creative director at Akili, the Northern California startup that’s developing the game.

Omernick worked at Lucas Arts for years, making Star Wars games, where players attack their enemies with light sabers. Now, he’s working on Project Evo. It’s a total switch in mission, from dreaming up best-sellers for the commercial market to designing games to treat mental health conditions.

“The qualities of a good video game, things that hook you, what makes the brain — snap — engage and go, could be a perfect vessel for actually delivering medicine,” he says.

In fact, the creators believe their game will be so effective it might one day reduce or replace the drugs kids take for ADHD.

This all sounds very promising.

In recent years, many observers (myself included) have expressed deep concerns that we are living in the “medication generation,” as defined by the rapidly increasing numbers of young people (which seems to have extended to toddlers and infants!) taking psychotropic drugs.

As experts and laypersons continue to debate the long-term effects of these substances, the news of intrepid entrepreneurs creating non-pharmaceutical alternatives to treat mental health problems is definitely a welcome development.

But a formidable final boss stands in the way:

[B]efore they can deliver their game to players, they first have to go through the Food and Drug Administration — the FDA.

The NPR story goes on to detail on how navigating the FDA’s bureaucratic labyrinth is akin to the long-grinding campaign required to clear the final dungeon from any Legend of Zelda game. Pharmaceutical companies are intimately familiar with the FDA’s slow and expensive approval process for new drugs, and for this reason, it should come as no surprise that Silicon Valley companies do their best to avoid government regulation. One venture capitalist goes so far as to say, “If it says ‘FDA approval needed’ in the business plan, I myself scream in fear and run away.”

Dynamic, nimble startups are much more in tune with market conditions than the ever-growing regulatory behemoth that is defined by procedure, conformity, and irresponsibility. As a result, conflict between these two worlds is inevitable:

Most startups can bring a new video game to market in six months. Going through the FDA approval process for medical devices could take three or four years — and cost millions of dollars.

In the tech world, where app updates and software patches are part of every company’s daily routine just to keep up with consumer habits, technology can become outdated in the blink of an eye. Regulatory hold on a product can spell a death sentence for any startup seeking to stay ahead of its fierce market competition.

Akili is the latest victim to get caught in the tendrils of the administrative state, and worst of all, in the FDA, which distinguished political economist Robert Higgs has described as “one of the most powerful of federal regulatory agencies, if not the most powerful.” The agency’s awesome authority extends to over twenty-five percent of all consumer goods in the United States and thus “routinely makes decisions that seal the fates of millions.”

Despite its perceived image as the nation’s benevolent guardian of health and well-being, the FDA’s actual track record is anything but, and its failures have been extensively documented in a vast economic literature.

The “knowledge problem” has foiled the whims of central planners and social engineers in every setting, and the FDA is not immune. By taking a one-sized-fits-all approach in enacting regulatory policy, it fails to take into account the individual preferences, social circumstances, and physiological attributes of the people that compose a diverse society.

For example, people vary widely in their responses to drugs, depending on variables that range from dosage to genetic makeup. In a field as complex as human health, an institution forcing its way on a population is bound to cause problems (for a particularly egregious example, see what happened with the field of nutrition).

The thalidomide tragedy of the 1960s is usually cited as to why we need a centralized, regulatory agency staffed by altruistic public servants to keep the market from being flooded by toxins, snake oils, and other harmful substances. However, this needs to be weighed against the costs of keeping beneficial products withheld.

For example, the FDA’s delay of beta blockers, which were widely available in Europe to reduce heart attacks, was estimated to have cost tens of thousands of lives. Despite this infamous episode and other repeated failures, the agency cannot overcome the institutional incentives it faces as a government bureaucracy. These factors strongly skew its officials towards avoiding risk and getting blamed for visible harm. Here’s how the late Milton Friedman summarized the dilemma with his usual wit and eloquence:

Put yourself in the position of a FDA bureaucrat considering whether to approve a new, proposed drug. There are two kinds of mistakes you can make from the point of view of the public interest. You can make the mistake of approving a drug that turns out to have very harmful side effects. That’s one mistake. That will harm the public. Or you can make the mistake of not approving a drug that would have very beneficial effects. That’s also harmful to the public.

If you’re such a bureaucrat, what’s going to be the effect on you of those two mistakes? If you make a mistake and approve a product that has harmful side effects, you are a devil incarnate. Your misdeed will be spread on the front page of every newspaper. Your name will be mud. You will get the blame. If you fail to approve a drug that might save lives, the people who would object to that are mostly going to be dead. You’re not going to hear from them.

Critics of America’s dysfunctional healthcare system have pointed out the significant role of third-party spending in driving up prices, and how federal and state regulations have created perverse incentives and suppressed the functioning of normal market forces.

In regard to government restrictions on the supply of medical goods, the FDA deserves special blame for driving up the costs of drugs, slowing innovation, and denying treatment to the terminally ill while demonstrating no competency in product safety.

Going back to the NPR story, a Pfizer representative was quoted in saying that “game designers should go through the same FDA tests and trials as drug manufacturers.”

Those familiar with the well-known phenomenon of regulatory capture and the basics of public choice theory should not be surprised by this attitude. Existing industries, with their legions of lobbyists, come to dominate the regulatory apparatus and learn to manipulate the system to their advantage, at the expense of new entrants.

Akili and other startups hoping to challenge the status quo would have to run past the gauntlet set up by the “complex leviathan of interdependent cartels” that makes up the American healthcare system. I can only wish them the best, and hope Schumpeterian creative destruction eventually sweeps the whole field of medicine.

Abolishing the FDA and eliminating its too-often abused power to withhold innovative medical treatments from patients and providers would be one step toward genuine healthcare reform.

A version of this post first appeared at The Beacon.

Aaron Tao

Aaron Tao is the Marketing Coordinator and Assistant Editor of The Beacon at the Independent Institute. Follow him on Twitter here.

On Privatizing Marriage: No, Matrimony Is Not Irreducibly Public by Max Borders

August 25, 2015/in Culture War, Must Read, Policy, Politics, Religion/by Foundation for Economic Education (FEE)

Marriage is society’s primary institutional arrangement that defines parenthood. – Jennifer Roback Morse

The idea of marriage privatization is picking up steam. And it makes strange bedfellows.

There are old-school gay activists suspicious that state marriage is a way for politicians to socially engineer the family through the tax code. There are religious conservatives who are upset that a state institution seems to violate their sacred values. Don’t forget the libertarians for whom “privatize it” is more a reflex than a product of reflection.

But they all agree: it would be a good idea to get the government out of the marriage business. Principle, it turns out, is pragmatic.

First, let’s disentangle two meanings for one word that easily get confused. When we say “marriage,” we might be referring to:

A. a commitment a couple enters into as a rite or acknowledgment within a religious institution or community group (private); or

B. a legal relationship that two people enter into, which the state currently licenses (public).

Now, the questions that follow are: Does the government need to be involved inA? The near-universal answer in the United States is no. But does the government need to be as involved as it is in B? Here’s where the debate gets going.

I think the government can and should get out of B, and everyone will be better for it. This is what I mean by marriage privatization.

Some argue that marriage is “irreducibly public.” For Jennifer Roback Morse, it has to do with the fate of children and families. For Shikha Dalmia, it has to do with the specter of increased government involvement, a reinflamed culture war, and a curious concern about religious institutions creating their own marriage laws.

First, let’s consider the issue of children. According to Unmarried.org:

39.7 percent of all births are to unmarried women (Centers for Disease Control, 2007).
Nearly 40 percent of heterosexual, unmarried American households include children (Child Protective Services, 2007).
41 percent of first births by unmarried women are to cohabiting partners (Larry Bumpass and Hsien-Hen Lu, 2000).

Does the law leave provisions for the children of the unmarried? Of course. So while state marriage might add some special sauce to your tax bill or to your benefits package, family court and family codes aren’t likely to go anywhere, whatever we do with marriage. This is not a sociological argument about whether children have statistically better life prospects when they are brought up by two married parents. Nor is it a question about gender, sexuality, and parental roles. It’s simply a response to the idea that marriage is “irreducibly public” due to having children. It is not. (I’ll pass over the problem for this argument that some married couples never have children.)

Dalmia is also concerned that “true privatization would require more than just getting the government out of the marriage licensing and registration business. It would mean giving communities the authority to write their own marriage rules and enforce them on couples.”

It’s true. Couples, as a part of free religious association, might have to accept some definition of marriage as a condition of membership in a religious community. But, writes Dalmia, “This would mean letting Mormon marriages be governed by the Church of the Latter Day Saints codebook, Muslims by Koranic sharia, Hassids by the Old Testament, and gays by their own church or non-religious equivalent.” And all of this is could be true up to a point.

But Dalmia overstates the case. Presumably, no religious organization would be able to set up codes that run counter to the civil laws in some jurisdiction. So if it were part of the Koranic sharia code to beat your wife for failure to wear the hijab at Costco, that rule would run afoul of criminal laws against spousal abuse. Mormon codes might sanction polygamy, but the state might have other ideas. So again, it’s not clear what sort of magical protection state marriage conjures.

What about Dalmia’s concern that in the absence of state marriage, “every aspect of a couple’s relationship would have to be contractually worked out from scratch in advance”? Never mind that some people would see being able to work out the details of a contract governing their lives as a good thing (for one, it might prevent ugly divorce proceedings). There is no reason to think that all the functions normal, unmarried couples with children and property have in terms of recourse to “default” law would not still be available. Not only would simple legal templates for private marriage emerge, but states could establish default civil unions in the absence of couples pursuing private alternatives.

There is no reason to think that all the functions normal, unmarried couples with children and property have in terms of recourse to “default” law would not still be available.

Indeed, if people did not like some default option — as they might not now — there would be better incentives for couples to anticipate the eventualities of marital life. People would have to settle questions involving cohabitation, property, and children just as they do for retirement and for death. Millions of gay couples had to do this prior to the Supreme Court’s ruling on marriage equality. Millions of unmarried couples do it today. The difference is that there would be a set of private marriage choices in a layer atop the default, just as people may opt for private arbitration in lieu of government courts.

In the debates leading up to marriage equality, an immanently sensible proposal had been that even if you don’t like the idea of hammering out a detailed contract with your spouse-to-be, simply changing the name of the entire statutory regime to “civil unions” would have gone a long way toward putting the whole gay-marriage debate to bed. The conservatives would have been able to say that, in terms of their sacred traditions and cultural community (as in A), “marriage” is between one man and one woman. Gay couples would have to find a church or institution that would marry them under A. But everybody would have some equal legal provision under the law to get all the benefits that accrue to people under B. You’d just have to call it a “civil union.”

And that’s fine as far as it goes.

But I like full privatization because “marriage” is currently a crazy quilt of special privileges and goodies that everybody wants access to — unmarried people be damned. But marriage should confer neither special favors nor goodies from the state. We can quibble about who is to be at the bedside of a dying loved one. Beyond that, marriage (under definition B) is mostly about equal access to government-granted privileges.

Not only does the idea that marriage is irreducibly public represent a failure of imagination with respect to robust common law, it also resembles arguments made against privatization in other areas, such as currency, education, and health care. Just because we can’t always envision it doesn’t make it impossible.

Max Borders

Max Borders is the editor of the Freeman and director of content for FEE. He is also co-founder of the event experience Voice & Exit and author of Superwealth: Why we should stop worrying about the gap between rich and poor.

Democracy Can’t Really Be Democratic by Ilya Somin

August 18, 2015/in Commentary, Politics/by Foundation for Economic Education (FEE)

Recent debates over the meaning of “one person, one vote” and the lessons of ancient Greek democracy for the modern world highlight an important truth about democracy: it can’t be democratic all the way down.

Lincoln famously said that democracy is “government of the people, by the people, for the people.”

But before “the people” can govern anything, someone has to decide who counts as a member of the people, what powers they have, and what rules they will vote under. And that someone usually turns out to be a small group of elites.

Just as the world can’t be held up by “turtles all the way down,” so a political system can’t be democratic all the way down.

The Elitism at the Heart of Democracy

The ongoing litigation over the meaning of “one person, one vote” illustrates these points well.

Before the voters can decide anything at the polls, someone has to decide which voters will get how many representatives, and under what electoral rules. And that someone will turn out to be some combination of the Supreme Court and state legislators, depending on how tightly the Court chooses to restrict the discretion of the latter.

State legislators are democratically elected, of course, which means the voters will have some influence over their decisions. But in this instance, the legislators are determining the very rules under which they will stand for election in the first place, which gives them ability to constrain the electorate, as well as vice versa.

Ironically, the meaning of a principle that many people regard as a core element of American democracy is going to be decided by a relatively small elite.

Ancient Athens also exemplified the elitism underpinning democracy. While the Athenian citizen assembly had very broad powers over public policy, the right to vote in that assembly was narrowly circumscribed in ways that excluded the bulk of the population of the city.

And, at least in the first instance, the decision to exclude these people was not made democratically. Once the system was established, of course, the male citizens who had the right to vote were far from eager to extend the franchise to women, slaves, or the city’s large population of “metics” (resident non-citizens).

Committed democrats might say that such elitism can be avoided. Perhaps the rules of democracy can also be determined by a democratic process. The people themselves can decide the rules of the political game. For example, the US Constitution — which establishes the basic rules of the American political system — was ratified by conventions elected by popular vote.

But this solution simply pushes the problem one step back.

Before “the people” can decide the rules of the game, someone has to decide the rules under which that decision itself will be made (including the rules determining who qualifies as a member of the people).

In the case of the Constitution, while the people did indeed elect representatives to the ratifying conventions, it was a small elite at the Philadelphia convention that drafted the Constitution, decided that it would come into force if nine of the then-thirteen states ratified it, and chose to ignore the provision of the Articles of Confederation that required unanimous consent by all thirteen states before any amendments come into force.

Had the Philadelphia Convention followed its original mandate (which was merely to propose revisions to the Articles) or respected the unanimity rule, American political history might have turned out differently.

The point is not that the Founding Fathers were necessarily wrong to make decisions they did. It is that the decision-making process they followed was not — and could not have been — democratic all the way down.

Before a democratic process can even begin to function, some nondemocratic process has to make the rules. And those rules will have a major impact on the choices available to “the people” once they finally begin to have a say.

Why it Matters

Does it matter that democracy can’t be democratic all the way down?

The answer depends in large part on your reasons for valuing democracy in the first place. Even if its basic rules are the product of a small elite, democracy might still be superior to other political systems for a host of possible reasons.

If your support for democracy is premised on purely consequentialist grounds (e.g. — that democracy maximizes social welfare), you might not care much about how the democratic process got set up in the first place.

But the elitism at the heart of democracy does impact a number of common arguments for giving broad power to voters and elected officials.

One of the standard rationales for the idea that we have a duty to obey democratically enacted laws is that, thanks to the right to vote, we have consented to them. But we haven’t had a meaningful opportunity to consent to the rules under which the vote occurred in the first place. Many of those rules were established influential elites, in often centuries before any of today’s voters were even born.

In the 2016 election, those of us who can vote will get to decide whether the Democrats or the Republicans will control the presidency and Congress. But we won’t get to decide many of the rules under which that vote takes place, or whether the president and Congress should have so much power in the first place.

For these reasons, among others, voting does not entail any genuine consent to the policies enacted by the winners. This calls into question consent-based justifications for a duty to obey democratically enacted laws, and even consent-based justifications for the legitimacy of the entire apparatus of democratic government.

Another standard rationale for democracy is that it gives everyone (or at least all citizens eligible to vote) an equal voice. But that equality is severely limited if the most important rules of the system were actually set by a small elite, often before “the people” were even defined, much less allowed to decide anything.

Elite determination of the rules of the democratic game might also affect purely consequentialist rationales for democracy. While consequentialists may not care about the origins of the rules for their own sake, they might have good reason to worry that the elites who make the rules will skew them in their own favor.

There are many historical examples of such shenanigans. To take just one example, the elites who drafted the US Constitution included the notorious Three-Fifths Clause, which gave extra representation in Congress to slaveowners by enabling them to count slaves as part of the population base determining the number of representatives a state had (without, of course, giving the slaves any say in the selection of those representatives).

The inevitability of elite control over at least some phases of the decision-making process makes this sort of problem difficult to avoid.

Democracy’s inability to be fully democratic doesn’t do much to strengthen the case for dictatorship or oligarchy. After all, these systems are generally even more coercive and inegalitarian, as well as more prone to a range of other pathologies.

But the superiority of democracy over these rival systems should not blind us to its own significant weaknesses, or to the case for imposing tight limits on the scope of democratic government.

The elitism at the heart of democracy is far from the only factor we should take into account in evaluating political systems. But it is an important issue to keep in mind. At the very least, it should make us more skeptical of claims that some policy is wise or just because it represents the democratically enacted “will of the people.”

Ilya Somin

Ilya Somin is Professor of Law at George Mason University School of Law. He blogs at the Volokh Conspiracy.

EDITORS NOTE: This post first appeared at the Volokh Conspiracy.

Can We Afford ‘Affordable Care’? by D.W. MacKenzie

August 12, 2015/in Culture War, Economy, Healthcare, Policy, Religion/by Foundation for Economic Education (FEE)

Does the Supreme Court decision upholding health insurance subsidies prove that Obamacare is here to stay?

With its legality settled, the longevity of the healthcare program is supposed to be politically inevitable. The millions of voters who receive subsidies from the Affordable Care Act will not tolerate the loss of this money. Insurance companies will no doubt also lobby to prevent any loss of ACA subsidies, as stockholders and employees are major beneficiaries of this program.

Political factors may well preserve the ACA in the short run. But the Court’s ruling came on the heels of a gloomy report from the Congressional Budget Office that may prove to be more decisive for the law than all of Chief Justice Roberts’ legal gymnastics.

The CBO forecasts anemic economic growth and rising public debt for decades to come. Projected revenues and projected spending indicate a growing imbalance in federal finances, driven by long-term unfunded liabilities in old entitlement programs — mainly Social Security and Medicare.

The Affordable Care Act was supposed to control health insurance costs — hence the name. Unfortunately, things are not working out that way, and insurance companies are pressing for significant rate increases.

Consumers might hope that government officials would resist pressure for rate increases, but such actions are unlikely: Stock prices for major health insurers rose sharply after the Supreme Court ruled in favor of the Obama administration. Clearly, investors expect the ACA to benefit health insurers. And in Oregon, state regulators actually raised premiums higher than insurers requested, just to keep companies in the market. Rising premiums will likely drive more subsidies, worsening the looming debt and entitlement crisis.

Politicians have ignored these issues for decades because they seemed like “long-term” problems, and political pressures from elections and lobbying force them to be shortsighted. The short-term financial situation is being shored up by the willingness of investors to buy federal debt at low rates.

The trouble is that the long term isn’t as far off as it used to be. The CBO indicates that the fiscal situation in the federal government worsened significantly over the past few years, even as the deficit was declining. Further deterioration in federal finances is expected over the next decade. How much longer will private investors continue to finance this soaring debt?

A large part of the problem with rising debt is that financing it requires steady economic growth, but large public debts can crush growth. Federal debt is a millstone on the economy, the burden of which could at some point lead to national bankruptcy. The ACA, with its enormous subsidies and regulatory compliance costs, will simply pile on an already unaffordable mass of federal spending programs.

The bottom line is that Supreme Court maintained the ACA subsidies legally,but the American people will not be able to maintain them financially.

The passage and continued defense of the Affordable Care Act is an example of the rank irrationality of public budgeting. The outcome of our political and legislative processes over the past few decades has been to create a myriad of wasteful and financially unsustainable federal programs. Meanwhile, the analytical office the legislative branch of government has been quietly raising the alarm about to the direction and sustainability of government finances. It would seem that delirium is winning out over reason.

There is, of course, nothing truly inevitable about the growth of federal spending. Federal spending developed into its present irrational state because many people pressed for this growth.

But spending can and will be curtailed. Citizens can push for real spending cuts through the electoral process. Otherwise, investors in financial markets will at some point put a sharp and sudden stop to government excesses.

D.W. MacKenzie

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

How Economic Control Threatens Political Liberty, Free Speech and the Rule of Law by Jon Guze

August 8, 2015/in Economy, Policy, Politics, Regulation, Taxes/by Foundation for Economic Education (FEE)

John Cochrane (aka “The Grumpy Economist”) has posted a long meditation entitled “Rule of Law and the Regulatory State,” in which he makes a very important point:

The United States’ regulatory bureaucracy has vast power. Regulators can ruin your life, and your business, very quickly, and you have very little recourse. That this power is damaging the economy is a commonplace complaint. Less recognized, but perhaps even more important, the burgeoning regulatory state poses a new threat to our political freedom.

What banker dares to speak out against the Fed, or trader against the SEC? What hospital or health insurer dares to speak out against HHS or Obamacare? What business needing environmental approval for a project dares to speak out against the EPA? What drug company dares to challenge the FDA?

Our problems are not just national. What real estate developer needing zoning approval dares to speak out against the local zoning board?

Readers who doubt that this is an urgent problem should read the whole thing, which includes numerous chilling descriptions of regulatory abuse, but here I want to focus on an issue he raises in passing: how best to refer to this urgent problem?

Cochrane says he hasn’t found “a really good word to describe this emerging threat of large discretionary regulation, used as tool of political control.” He considers “socialism,” “regulatory capture,” and “cronyism,” but he rejects all three. Regarding the last two, he notes:

We’re headed for an economic system in which many industries have a handful of large, cartelized businesses — think 6 big banks, 5 big health insurance companies, 4 big energy companies, and so on.

Sure, they are protected from competition. But the price of protection is that the businesses support the regulator and administration politically, and does their bidding. If the government wants them to hire, or build [a] factory in unprofitable place, they do it.

The benefit of cooperation is a good living and a quiet life. The cost of stepping out of line is personal and business ruin, meted out frequently. That’s neither capture nor cronyism.

The fact is, we’ve seen this system of political economy before — most notably in Mussolini’s Italy and in Hitler’s Germany — and there’s a commonly used term for it. It’s fascism. Maybe Cochrane thinks that term is too emotionally charged. However, I’d have thought a bit of emotional charge was warranted. As Cochrane says:

The power of the regulatory state…lacks many of the checks and balances that give us some “rule of law” in the legal system. …

The clear danger we face is the use of regulation for political control. Each industry gets carved up into a few compliant oligopolies. And the threat of severe penalties, with little of the standard rule-of-law recourse, keeps people and businesses in line and supporting the political organization or party that controls the agencies. …

A return to economic growth depends on reforming the regulatory state. But… preservation of our political freedom depends on it even more.

Read the rest here.

This post first appeared at the John Locke Foundation.

EDITORS NOTE: See Steve Horwitz’s “Why the Candidates Keep Giving Us Reasons to Use the “F” Word“; Jeff Tucker’s “Trumpism: The Ideology“; and Jason Kuznicki’s “The Banality of Donald Trump.”

Jon Guze

New York Orders Fast-Food Workers Replaced With Robots, Kiosks, Mobile Apps by Daniel Bier

July 24, 2015/in Culture War, Economy, Must Read, Policy, Politics/by Foundation for Economic Education (FEE)

Well, they didn’t quite put it that way — the New York Times‘ headline read “New York panel recommends $15 minimum wage for fast-food workers” — but it amounts to the same thing.

A panel appointed by Gov. Andrew M. Cuomo recommended on Wednesday that the minimum wage be raised for employees of fast food chain restaurants throughout the state to $15 an hour over the next few years. Wages would be raised faster in New York City than in the rest of the state to account for the higher cost of living there.

The panel’s recommendations, which are expected to be put into effect by an order of the state’s acting commissioner of labor, represent a major triumph for the advocates who have rallied burger flippers and fry cooks to demand pay that covers their basic needs.

They argued that taxpayers were subsidizing the workforces of some multinational corporations, like McDonald’s, that were not paying enough to keep their workers from relying on food stamps and other welfare benefits.

The $15 wage would represent a raise of more than 70 percent for workers earning the state’s current minimum wage of $8.75 an hour. Advocates for low wage workers said they believed the mandate would quickly spur raises for employees in other industries across the state, and a jubilant Mr. Cuomo predicted that other states would follow his lead.

In other news, I ordered my lunch yesterday on my computer and picked it up from Panera Bread without ever talking to a person. Last night, I picked up a couple groceries and paid through the self-checkout lane. This morning, I ordered a latte on my Starbucks app, and it was waiting for me when I walked into the store. I’m thinking of going to a burger joint later, where I’ll tap out my order on a kiosk.

Of course, it’s not fair to blame the minimum wage exclusively for the increasingly widespread automation of service jobs. Ordering kiosks and mobile apps are becoming more popular as the technology becomes better, cheaper, and more popular. That will probably happen no matter what the price of labor is.

But the fact that the cost of not using technology — that is, an employee — is about to cost 70% more will give the entire New York fast-food industry a great big shove away from labor and towards machines. And since chain restaurants don’t just operate in New York, the investment in automation will spill into stores everywhere.

Who wins from this?

Unions and more experienced workers, at least in the short-run. Labor unions’ entire purpose is to push up wages for their members, which makes them more expensive and less attractive compared to non-union workers.

But if unions — like, say, the Service Employees International Union — can make all workers more expensive, it makes union labor look relatively better by comparison. They won’t have to compete against cheaper labor anymore (which is to say, less-skilled workers won’t be allowed to compete by underbidding them).

Why arbitrarily single out “fast food” for the hike?

First, it makes the fight politically easier because the unions only have to defeat one industry lobby, instead of every business that uses unskilled labor. Second, the SEIU, in particular, represents a lot of food workers and has for years been pushing to unionize the big fast-food chains.

Who loses?

First, businesses, especially those operating on thin margins. They’ll be staring at a 70% increase in labor costs, already typically one of the biggest expenses for restaurants.

Less experienced workers — especially unskilled immigrants and young people starting out in the job market — will also lose. Businesses will try to offset some of higher cost of labor by cutting hours or jobs, delaying or cancelling expansions, replacing labor with capital where they can, and replacing less skilled with more skilled workers where they can’t.

They’ll also try to raise prices to cover costs, so consumers lose, too — especially those who eat fast-food more often, have tighter budgets, and have food as a bigger share of their budgets: i.e., low and lower-middle income families.

The net effect this will be less employment, less production, and less consumption. The economy and especially less-advantaged people will be worse off for it.

Miscellaneous arguments:

CEO pay: The Times awkwardly shoehorns in the fact that McDonald’s chief executive made $7.5 million last year, presumably trying to suggest that he’s the reason its other 420,000 employees are paid so little. In case you’re wondering, redistributing his salary comes out to 5 cents per employee per day. And then McDonald’s has no CEO. Hurray?
Corporate Subsidy: The Times also uncritically repeats the incoherent claim that taxpayers are somehow “subsidizing” these “multinational corporations” because they don’t pay “enough to keep their workers from relying on food stamps and other welfare benefits.” This makes no sense at all.
No Big Deal: The economists who claim that raising the minimum wage won’t hurt employment that much always couch it with the caveat that the increase be “small” or “moderate.” By no stretch of the imagination is hiking the wage floor to $15 “moderate.” In New York, it’s a 70% increase; in states with the federal minimum of $7.25, it’s 107% increase.

Antony Davies has charted the relationship between the minimum wage as a share of the average wage and the unemployment rates for different workers over time.

There’s no connection between the minimum wage and unemployment for the college-educated, but for those with high school or less, there’s a strong positive correlation:

Notice that the chart axis stops at 45% of the average hourly wage: in more than three decades, the minimum wage has never gone higher. Today, according to BLS data, a $15 minimum wage would be 60% of the average hourly wage — the highest relative minimum wage ever. We are literally going into uncharted territory.

Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Martin O’Malley Got $147,000 in Speaking Fees from a Company He Gave Lucrative Government Contracts by David Boaz

July 22, 2015/in Elections, Must Read, Politics/by Foundation for Economic Education (FEE)

Martin O’Malley, the former governor of Maryland and Democratic presidential candidate, is no Bill and Hillary Clinton, who have made more than $100 million from speeches, much of it from companies and governments who just might like to have a friend in the White House or the State Department.

But consider these paragraphs deep in a Washington Post story about O’Malley’s financial disclosure form:

While O’Malley commanded far smaller fees than the former secretary of state – and gave only a handful of speeches – he also seemed to benefit from government and political connections forged during his time in public service.

Among his most lucrative speeches was a $50,000 appearance at a conference in Baltimore sponsored by Center Maryland, an organization whose leaders include a former O’Malley communications director, the finance director of his presidential campaign and the director of a super PAC formed to support O’Malley’s presidential bid.

O’Malley also lists $147,812 for a series of speeches to Environmental Systems Research Institute, a company that makes mapping software that O’Malley heavily employed as governor as part of an initiative to use data and technology to guide policy decisions.

I scratch your back, you scratch mine. That’s the sort of insider dealing that sends voters fleeing to such unlikely candidates as Donald Trump and Bernie Sanders.

These sorts of lucrative “public service” arrangements are nothing new in Maryland (or elsewhere). In The Libertarian Mind, I retell the story of how Gov. Parris Glendening and his aides scammed the state pension system and hired one another’s relatives.

In some countries, governors still get suitcases full of cash. Speaking fees are much more modern.

This post first appeared at Cato.org.

David Boaz

David Boaz is executive vice president of the Cato Institute. He is the editor of The Libertarian Reader, editor of The Cato Handbook for Policymakers, and author of The Politics of Freedom.

“Green Banks” Will Drown in the Red by Jonathan Bydlak

July 22, 2015/in Budget and Finance, Environment, Politics, Taxes/by Foundation for Economic Education (FEE)

Why does federal spending matter? There are many reasons, but perhaps the most fundamental is that free markets allocate resources better than governments because markets rely on price instead of politics. Many industries show this observation to be true, but the emerging field of “green banks” offers perhaps one of the clearest recent examples.

A green bank is a “public or quasi-public financing institution that provides low-cost, long-term financing support to clean, low-carbon projects by leveraging public funds…to attract private investment.” Right now, only a handful of green banks are scattered across Connecticut, California, New York, Rhode Island, and Hawaii.

Free marketers rightly doubt whether public funds should be used to finance private startups. But regardless of where one stands in that debate, the states’ struggles serve as a valuable testing ground for future investments.

The State of Connecticut operates under a fairly significant budget deficit. California has been calculating its budgets without taking unfunded pension liabilities into account, and it’s gambling with its ability to service its debt. New York continues to live beyond its means. Rhode Island’s newest budget does little to rehabilitate its deficit spending addiction, and, despite having a balanced budget clause in its state constitution, Hawaii has a pattern of operating at a deficit.

In fact, a state solvency report released by the Mercatus Center has each of these five states ranked in the bottom third of the country, with their solvency described as either “low” or “poor.”

This all raises the question of whether these governments are able to find sound investment opportunities in the first place. Rhode Island couldn’t even identify a bad investment when baseball legend Curt Schilling wanted $75 million to make video games about something other than baseball!

Recently, though, there have been calls to extend the struggling green banking system to the federal level. Mark Muro and Reed Hundt at the Brookings Institute argued in favor of federal action in support of green banks. Somewhat paradoxically, they assert that demand for green banking institutions and the types of companies they finance is so strong that the existing state-based green banks cannot muster enough capital to meet demand.

Wherever there is potential for profit and a sound business plan, lending institutions are likely to be found, willing to relinquish a little capital for a consistent and reasonable rate of return. So where are the private lenders and other investment firms who have taken notice and are competing for the opportunity to provide loans to such highly sought-after companies and products?

Even assuming that there is demand for green banking services, recent experience shows that a federally-subsidized system would likely lead to inefficiency, favor trading, and failure. For instance, the Department of Energy Loan Program is designed to facilitate and aid clean energy startup companies. Its portfolio exceeds $30 billion, but following a series of bad investments like Solyndra, Inc., new loan guarantees have been few and far between. The program has already lost over $700 million.

Even the rosiest measurements do not show particularly exciting returns from this system. The Department of Energy itself estimates that over the lifetime of the loans it’s guaranteed, there exists the potential to see $5 billion in profit. However, those estimates also depend on the peculiar accounting methods the DoE itself employs.

This problem is apparent in other government sectors. For instance, determining how much profit the federal government makes off of student loans depends on who is asked. Some say none, while others say it’s in the billions. Gauging the economic impact or solvency of government programs is notoriously difficult, and different methods can yield what look like very different results. Add to that the consistently uncertain nature of the energy market, and profits are hardly guaranteed.

Examples abound of wasteful federal spending, and the growing green technology and renewable energy industry is no exception. The DoE Loan Program has already faced issues that go well beyond Solyndra: Abound Solar, a Colorado-based solar panel manufacturer, was given a $400 million DoE loan guarantee, only to later file for bankruptcy, potentially costing taxpayers $60 million. The Ivanpah Solar Electric Generating System, a 175,000 unit heliostat array in California, received a $1.6 billion federal loan and, because it failed to produce the amount of power estimated, was forced to later request more than$500 million in federal grants from the Treasury Department. A recent Taxpayers Protection Alliance study showed that risky investments in heavily subsidized solar energy could even lead to a bubble similar to the disastrous 2008 housing bubble.

Those who want to expand the government’s role in green banking likely want to see more clean and renewable energy reach the consumer market, and a lot of people probably applaud that goal — but the real question is whether the proposed means can reliably achieve that end. A wise manager with a solid business plan can find investors who will willingly take a chance. Considering the struggles of several states, trusting the federal government to build an even bigger system would exponentially increase that risk.

In contrast, the market offers opportunity to entrepreneurs in the green technology and renewable energy industries. For instance, GreatPoint Energy, a company specializing in clean coal, successfully went the route that other companies do: Design a product or service, find investors, and compete in the marketplace.

SolarCity, a California-based and publicly traded corporation of over 2,500 employees, entered the industry before many government loan programs were established. Thanks to a sound business model and subsequent horizontal and vertical expansion, it has become a leader in the industry. SolarCity’s success, however, cannot be touted by the Department of Energy’s Loan Program, which declined to invest in the company, leading SolarCity to try — and succeed — in finding private investment.

If GreatPoint or SolarCity had failed, only those who willingly participated in the startup would suffer the consequences. The issue with green banking — and indeed government “investments” more generally — is that taxpayers are not party to the negotiations but are the ones ultimately on the hook for failures.

In absolute terms, these billions of dollars are a lot of money. But in the grand scheme of government spending, the amount of money invested in green banks and renewable energy production is relatively small. If Social Security is the Atlantic Ocean, and wasteful defense appropriations are the Mediterranean, then green energy investments fall somewhere in the range of the Y-40 pool: easily measurable but certainly not insignificant.

Your odds of drowning may be smaller in the pool than the ocean, but that doesn’t make the drowning itself any more pleasant. The federal government is already under water; adding new liabilities on the hope that politicians can guess the future of energy is merely a step towards the deep end, not the ladder out.

Jonathan Bydlak

Jonathan Bydlak is the founder and president of the Institute to Reduce Spending and the Coalition to Reduce Spending.

The Politics of Nostalgia: Why Does the Left Want to Take Us Backwards? by Steven Horwitz

July 22, 2015/in Commentary, Culture War, Policy, Regulation/by Foundation for Economic Education (FEE)

One of the more curious developments in the last couple of years has been left-wing nostalgia for the economy of the 1950s.

Don’t political progressives usually portray themselves as being on “the right side of history” — representing, as the term suggests, the march of “progress”?

Not when it comes to the economy.

Paul Krugman has written a number of columns over the last decade about how much better things were in the middle of the 20th century. More recently, we have presidential candidate Hillary Clinton making a major economic policy statement in which she longs for a time like the 1950s when workers had the structure of the corporate world and unions through which to lobby and negotiate for pay and benefits, rather than the so-called “gig” economy of so many modern freelance employees, such as Uber drivers. “This on-demand or so-called gig economy is creating exciting opportunities and unleashing innovation,” Clinton said, “but it’s also raising hard questions about workplace protection and what a good job will look like in the future.”

To protect Americans from the uncertain future, Clinton promised she would “crack down on bosses that exploit employees by misclassifying them as contractors or even steal their wages.”

In an economy where technology has enabled people to have a great deal more flexibility with their workdays and independence with their work choices, it’s now the “progressives” who are complaining about the economic organizations that have been agents of more efficient resource use, expanded choice for workers, and cheaper goods for consumers.

In short, the progressives are complaining about what would otherwise be called progress.

And let’s not let the conservatives off the hook here either, as they demonstrate their own nostalgia for an economy of the past, with cheers for Donald Trump’s anti-immigrant and anti-trade tirades and for his general love of dirigiste policies. Immigration and trade have also expanded the range of work available, lifted millions out of poverty through better-paying jobs in the United States, and enriched the rest of us through more affordable goods and services.

What’s particularly amusing about both sides, but especially the progressives, is how wrong they are about life for the average American being better back in the 1950s, including how much more secure they were. In a terrific paper for the Cato Institute, Brink Lindsey effectively demolished Krugman’s nostalgia with some actual data about the economy of the 1950s. He pointed out that the increase in income inequality since then noted by so many progressives is largely overstated, and that the economy they are nostalgic for is one that restricted competition in a variety of ways, mostly to the benefit of the politically influential. Limits on immigration and trade, in particular, prevented the 1950s economy from achieving the reductions in cost and increase in variety that we associate with our economy today.

Does anyone really want to go back to the stagnant, conformist, more poverty-stricken world of the 1950s?

It is more than a little ironic that modern progressives are nostalgic for the very economy that GOP front-runner Donald Trump would appear to want to create.

As I argued in a recent paper, when we look at the cost of living in terms of the work hours required to purchase basic household items, most goods and services are far cheaper today than in the 1950s. The equivalents of those items today are also of higher quality: think about the typical household TV or refrigerator in 1955 versus 2015. These substantial decreases in cost have had another effect. They have made these goods increasingly accessible to the poorest of Americans. American households below the poverty line are far more likely to have a whole variety of items in their homes than did poor families in the 1950s. In fact, they are more likely to have those things in their houses than was a middle-class American family in the 1970s.

When you also consider the number of goods that weren’t even available in the 1970s or 1950s, from technology like computers and smartphones, to innovative medicines and medical procedures, to various forms of entertainment, to a whole number of inventions that have made us safer, healthier, and longer-lived, it’s difficult to argue that things were better “back then.”

The effect of all of this change driven by increased competition is that our world is one in which the middle class and poor are better off, and the gap between poor and rich as measured by what they consume has narrowed substantially. Does anyone really want to go back to the stagnant, conformist, more poverty-stricken world of the 1950s?

Politicians do. And here’s one reason why: back then, it was easier to influence and control people’s economic lives. Progressives with a desire to shape their ideal economy aren’t happy with the world of freelancers, Uber, and independent contractors.

The economy of the 1950s and 1970s had organizational focal points where politicians could exercise leverage and thereby influence the lives of large numbers of citizens.

I’m thinking here of the auto companies in the 1950s, the oil companies in the 1970s, and any number of industries where large firms were created by restrictions on domestic and foreign competition, which were easy points of contact for politicians with a desire to control, and which had corporate leaders who were happy to reap the benefits of corporatism.

In a world of Uber, Airbnb, and all the rest, there are no central points of leverage. Facebook produces no content, Uber owns no cars, Alibaba owns no inventory. More important: Uber has no employees, only contractors. If you are Clinton or Trump, or even Krugman, there’s nowhere to go to exercise your power or to drum up support from workers in one place. There’s nothing to grab hold of. There are just people trading peacefully with each other, enriching everyone in the process.

The real irony, once again, is that what this decentralized economy has produced is more freedom and more flexibility for more workers. The same progressives who railed against the conformism of the 1950s a decade later are now nostalgic for what their predecessors rejected and are rejecting exactly the “do your own thing” ethos their 1960s heroes fought for.

The “gig” economy works for people who want options and who want flexible hours so they can pursue a calling the rest of the day. Or perhaps they want to spend a few hours a week driving an Uber because Obamacare caused their employers to cut their hours at their other job.

Whatever the reason, this economy offers the freedom and flexibility for workers, and the benefits for consumers, that represent the progress progressives should love. That progressives (and conservatives) with power are fighting against it tells you that they are much more concerned with power than with progress.

Nostalgia is a dangerous basis for making policy, whether left or right.

Steven Horwitz

Steven Horwitz is the Charles A. Dana Professor of Economics at St. Lawrence University and the author of Microfoundations and Macroeconomics: An Austrian Perspective, now in paperback.

Marriage and the (Forgotten) Middle Class Welfare State by Daniel Bier

July 14, 2015/in Culture War, Economy, Policy, Regulation, Taxes/by Foundation for Economic Education (FEE)

Jason Kuznicki, in his wonderful post on marriage and the state, included this baffling chart of how the marriage penalty/bonus affects couples jointly filing tax returns:

Kuznicki points out that the penalty/bonus part is just an inevitable artifact of the progressive income tax system. The math just works out that way.

But, my friend Sean J. Rosenthal points out, the chart also shows Director’s Law: “Public expenditures are made for the primary benefit of the middle classes, and financed with taxes which are borne in considerable part by the poor and the rich.”

George Stigler, channeling the work of the great Chicago economist Aaron Director, coined the term in a 1970 article in the Journal of Law and Economics.

The logic of Director’s Law is:

Government has coercive power, which allows it to engage in acts (above all, the taking of resources) which could not be performed by voluntary agreement of the members of a society.

Any portion of the society which can secure control of the state’s machinery will employ the machinery to improve its own position.

Under a set of conditions… this dominant group will be the middle income classes.

Stigler went on to describe the Public Choice calculus for a wealthy modern democracy. In a society like ours, with our electoral institutions, the interests of the middle class will always have the biggest sway on public policy, since most people fall in the middle of the income distribution, rather than at bottom or the top.

Politicians will (and must) try to gratify the middle’s desires and shift the costs somewhere else — i.e., the rich and the poor and future generations, since they have relatively less influence on public policy. (Though this general rule is not to say that there aren’t also policies that primarily benefit the poor or the wealthy.)

This explains a lot of features of public policy that don’t fit with the normal “welfare is all about the poor” or “the rich run everything” paradigms.

For instance, Obamacare’s insurance scheme is basically all a big subsidy for older, relatively wealthier middle class people at the expensive of younger, poorer people. The other half of Obamacare, the Medicaid expansion, increases eligibility for Medicaid up to 400% of the poverty line — that safety net is catching some pretty middling fish at this point.

Medicare and Social Security, the marriage penalty/bonus distribution, college student loans, tax write-offs for mortgage payments and employer-sponsored health insurance, small business favoritism, and a host of other policies are essentially giveaways to the middle class, at the expense of the rich and poor.

Nonetheless, we should expect politicians to continue harping on the plight of the middle class, stroking voters’ fears and concerns about the “shrinking middle,” promising to “rebuild the middle class,” pass “tax cuts for the middle class,” save “Main Street,” and on, and on.

And who could ever be against helping middle class? Nobody. And that’s how we end up being content with a marriage policy that punishes poor (and rich) working couples, even while pundits bemoan the state of marriage.

Update #1: As with many later developments in economics, Frederic Bastiat anticipated Public Choice by more than a hundred years. In his Selected Essays on Political Economy, recently republished by FEE, he wrote,

When, under the pretext of fraternity, the legal code imposes mutual sacrifices on the citizens, human nature is not thereby abrogated. Everyone will then direct his efforts toward contributing little to, and taking much from, the common fund of sacrifices.

Now, is it the most unfortunate who gain in this struggle? Certainly not, but rather the most influential and calculating.

Update #2: I see that Director’s Law was first mentioned in the Freeman, before Stigler published on it in JLE, in John Chamberlain’s coverage of the 1969 Mont Pelerin Society meeting in Venezuela.

Daniel Bier

Daniel Bier is the editor of Anything Peaceful. He writes on issues relating to science, civil liberties, and economic freedom.

Europe Needs Regime Change in Greece: They Won’t Get It by Stephen Davies

July 14, 2015/in Economy, Policy, Politics/by Foundation for Economic Education (FEE)

It seems the saga of negotiations between the Greek Government and its creditors has arrived at a denouement but almost certainly not a final conclusion, and we may expect this show to return to the stage at some point, probably in the near future. The reason for this is the real nature of the ultimate problem facing both parties, something of which the creditors are still unaware.

The negotiations over the last few months have been marked by a remarkable degree of acrimony. Most of the other eurozone governments have become increasingly (and publicly) exasperated with the Greeks, and the expressions of hostility towards the Greek government from members of national parliaments have grown ever more outspoken.

Some of the reasons for this are well known — above all, the lack of a true European demos: there simply is not the kind of solidarity or shared interest in Europe that one finds in, for example, the United States.

However, there is another reason for the acrimony that has not received much attention. The creditors misunderstand what it is they are asking the Greek government and society to do. This lack of understanding is why any deal made now is likely to prove a disappointment.

The impression given by media reports is that this is all about debt, specifically the debts run up by the Greek state before 2009. Certainly there is a problem, but it is one that is soluble and does not require the kind of fraught negotiations we have seen.

The difficulty is that the fiscal state of Greece before the first bailout in 2010, and the underlying state of the Greek economy, are symptoms of a much more serious underlying problem. This is one not of debt but of competitiveness.

Quite simply the Greek economy is not productive enough to support the levels of income and public spending that it now has, without significant capital inflows from outside Greece. Before 2008 these came in the form of private loans, since then by government bailouts (even if much of this has been recycled back to private creditors).

Greek firms and labour are simply not competitive with their counterparts elsewhere in Europe, above all in Germany. Being in the euro means that they cannot adopt the traditional way of regaining at least some competitiveness by devaluing their currency. Instead, they have to deflate internally, and the attempt to do this has devastated economic life in Greece.

This is all well known. It is the reason why the creditors are demanding that, in return for a third bailout, the Greek government introduce a series of reforms to public spending, the tax system, and the machinery of the Greek state, particularly it’s tax collecting apparatus. Successive Greek government have either refused to do this or promised to do it and then failed. This is why the rest of the eurozone is becoming ever more exasperated. It here however that the misunderstanding comes in to play.

What the creditors think they are asking for is a major shift in public policy. They recognise that the shift they are asking for is radical, and many also realise that what would be involved would be a shift in the general ideological basis of Greek politics, towards a more market liberal direction. However, they are actually, without realising it, asking for something much more fundamental and drastic.

One question that should be asked is why Greece got into a position that was so much worse than that of other “peripheral” economies. Also, why has the performance of the Greek economy been so much worse than that of other countries that have had bailouts and austerity, such as Spain, Portugal, and Ireland? The answer lies in the fundamental nature of the Greek state and the political economy of Greece.

Greek political culture is dominated by practices and institutions that certainly exist elsewhere in Europe but are not as dominant. The state has a narrow tax base, with powerful interests such as the Orthodox Church effectively exempt. The revenue collection apparatus is completely ineffective so that tax evasion is endemic at every level of income.

This means that simply raising or extending VAT for instance is not enough because so many transactions are off the books. At the same time, the Greek state provides generous pensions and other benefits, which it cannot fund.

The political system appears to be a modern democracy but is in fact a much older model. The key institution is clientelism, in which political actors give out rewards to their clients in the shape of handouts and sinecures in the very large public sector. This is done much more directly than with the kind of interest group politics that we find in most democratic countries, and it is central to the whole way that politics works.

The extent of patronage means that the Greek government (whoever they are) does not have a modern, Weberian, bureaucracy to call on. Instead, most of the people in the public service owe their positions to networks of patronage and these command their loyalty.

The economy is highly regulated in ways that entrench settled interests and inhibit innovation. In particular, a very wide range of occupations are subject to rules that make it very difficult for new entrants into those sectors. Because of the inefficiency and the existence of a plethora of rules that are irksome but ultimately unenforceable, corruption is endemic and widespread throughout Greek society.

This system cannot maintain anything like the standard of living to which most Greeks aspire and as such it means that, via membership of the euro, we have seen the development of an economy that depends upon inward transfers — to a much greater degree than is the case in countries such as Spain and Ireland.

Given all this, it becomes clear that what the creditors are asking for is much more than a shift in policy, no matter how sharp and dramatic. Policy shifts of that kind are part of the normal or regular political process that take place infrequently, but still regularly, in most polities. The shift brought about by Margaret Thatcher’s election in 1979 is an example.

What is needed in Greece, and what the creditors are asking for without realising it, is something more fundamental, a change in the very nature of the political system and in the entire nature of politics and government, rather than a change of policy within a system. This is a regime change in the original and correct use of that term.

The point of course is that changes of this kind are extremely difficult and only happen extremely rarely. Sometimes it requires a revolution, as in France; on other occasions, it takes place in the context of a fundamental crisis such as defeat in a major war. Very rarely it can happen when there is a near consensus in a society over what to do, as in Japan in the 1870s.

The current Greek government is almost certainly aware of this, but, apart from ideological objections to part of the list of reforms, they are quite simply unable, rather than unwilling, to do what is asked because a change in the political order is simply very, very hard.

So the creditors are likely to be disappointed and will then become even more enraged. Moreover, being in the euro makes any attempt at systemic change in Greece even more difficult than it would be already, because if removes a range of policy options that could alleviate some of the transition costs.

As most economists of all persuasions now think, the best option is a managed Greek exit from the euro. If this does not happen (as seems likely) then this farce is a production that will run for some time.

Stephen Davies

Stephen Davies is a program officer at the Institute for Humane Studies and the education director at the Institute for Economics Affairs in London.