Friday, November 26, 2010

Debt, Moral Hazard, Praxeology

There is a common thread through most of Professor Krugman’s essays; Selective Moral Hazard.

He believes in the concept of moral hazard, but apparently only for bankers. I agree with the conclusion of today’s essay, I just wish he were more consistent in his application. Were we to take into consideration moral hazard when implementing economic/public policies affecting individuals we would bring personal responsibility and praxeology back into our economics.

As a good Keynesian Leftist (excuse the redundancy), Professor Krugman believes government should take responsibility for solving the current financial mess. And in applying moral hazard to this situation it would be logical to ask government to solve a problem for which they are primarily responsible. But that would be like asking a committed AND currently intoxicated alcoholic to run an AA meeting. It’s a mockery.

Our financial system is built on a scheme that has been gradually implemented over the last 100 years. We’ve made the transition from the gold standard to a complete fiat monetary system in several stages, culminating in Nixon’s closing of the gold window in 1971. At that point all international currencies were floating, each against all the others, and countries could no longer exchange American dollars for gold. But money has been created by debt for many, many years because that’s what a fractional banking system does, it creates money through debt. But 100 years ago, at least SOME of the money was back by gold. Now, none of it is. We are currently on a debt standard. Practically all money is created by debt and backed by the economic strength of the issuing country or in the case of the Euro, countries; Hence the problem.

We are reaching the limits of the “debt standard”. Eastern philosophy embraces Yin and Yang and the ebb and flow of change. Everything changes and nothing lasts forever. This debt standard will come to an end. With what shall we replace it? Anything we do will be painful. We could start all over with new debt but it will start us back on the same road. We know where it ends. Perhaps we should take another look at gold. It too will be painful and to implement a classic gold standard would require going back to a true laisser-faire economic system. But doing that would also apply moral hazard equally to all participants in the economy; bankers as well, with bad decisions resulting in bankruptcy. What could be more fair that that?

Thursday, November 18, 2010

Socialism, Alaska Style

What's the first thing that comes to you mind when you think of Alaskans? For me, it's rugged individualism. I've always seen Alaska as the state where its citizens preserve, at least to some degree, the ideal of frontier life. The people there are unique and embody the core ideals of America; tough, self-reliant individuals who make a living in a demanding and somewhat hostile environment.

The state has consistently been represented by Republicans; currently its Governor and Lt. Governor are Republicans, of the 3 person Congressional delegation, two are Republicans and the state legislature is Republican 55 to 45 %. The recently Senatorial election where Lisa Murkowski was re-elected as a write-in over the Tea Party selected Joe Miller should on its surface be somewhat surprising. But I think this election underscores my contention that most Americans are comfortable with a large federal government.

Alaska, I learned depends on the largess of the Federal Government for about 1/3 of its GDP. A significant portion of that is probably the oil profits that are distributed to all the citizens the amount of which was increased by a previous governor, Sarah Palin.

Lisa Murkowski who pretty much inherited her Senate seat when her father died was a protege of Ted Stephens who was famous for his ability to bring home the pork. She instinctively knew that Alaskans didn't want that to end. Joe Miller, whose nomination was endorsed by the Tea Party movement, would have been obligated to not use earmarks and other schemes to raid the federal treasury. So Ms. Murkowski embarked on a write-in campaign and became the first federally elected official to win by write-in since Strom Thurmond in 1954.

This election is just more anecdotal evidence that Americans, even Republicans, are comfortable with the concept of looting ones fellow citizens.

Sunday, November 7, 2010

Nancy Pelosi, Minority Leader

Nancy Pelosi has decided to run for Minority Leader and the polticial literati is shocked. They all expected her to resign her seat and go back to San Francisco to play with her grandchildren. Really?? This is a woman who craves power and enjoys the trappings of power. She's an idealogue who wants to impose her policy proscriptions on the masses but make no mistake this is also about Nancy Pelosi, her ego and desire to remain relevant.

C-SPAN this morning is taking calls on the question, "should there be a change of leadership in both parties". It's amazing how much agreement there is on Ms. Pelosi; the Democrats and Republican callers generally agree she should become "Minority Leader". It's been a while since I've seen this level of agreement by Republicans and Democrats.

The Hypocrisy of the Tea Party (and Republicans)

I saw an interesting statistic recently. A poll on the popularity of Social Security and Medicare revealed that 73 or so percent of the American people support these programs. That’s not very surprising. What is surprising is 62% of self identified Tea Party supporters also are in favor of these programs. Keep in mind that both of these programs were initiated by Democrats, Social Security by F.D.R. and Medicare by Lyndon Johnson. These programs are straight-forward wealth transfer entitlement programs designed to pay benefits to one group with the taxes extracted from another group. The very same type of socialistic programs the Tea Party rails against.

The Tea Party movement is primarily a response to the alarming levels of debt that have accumulated in the Bush 43 and Obama administrations, most of which was caused by the recent economic/financial crisis. But I don’t see the Tea Party as our salvation. True, they’ve awakened many to the problem, but the fact of the matter is they, like many of us, are also part of the problem.

Thirty-two percent of the current Federal Budget goes to Social Security and Medicare. Only 38.6% of the 2011 $3.554T budget is discretionary and almost half of that is defense spending, probably the most constitutional of all spending and the spending that supports what all politicians agree is the “primary” role of government, protection of its citizens. So, from where are the cuts to come??

Most Republicans who are sympathetic to the Tea Party movement like Marsha Blackburn of Tennessee equivocate and only promise an “adult conversation” about solutions while Tea Party politicians like Michele Bachmann are actually discussing cuts in Medicare and Social Security by “weaning” those that don’t need it from the system, this is known in policy circles as “means testing”. It’ll be interesting to see how long she supports such policies when her constituents get wind of this…assuming her constituency tracks the same as those in the above poll.

The Tea Party movement should give freedom loving Americans hope. It shows that liberty still has a pulse. But my point is it’s a weak pulse. To rail against socialism but support SOCIAL security and Medicare when it benefits oneself is hypocritical in the extreme and reveals a perverse understanding of freedom and its corollary, personal responsibility.