Twenty-First Century Political Economy

The only way to remove the corruption from politics is to decrease the amount of the economy that is owned and operated by the government -- agriculture, education, retirement savings, health care, mortgage lending, etc. When any such industrial sector is socialized, the smartest investment in that industry will usually be to invest in lobbying for a (bigger) piece of the government-controlled pie. Campaign finance reform proposals simply dull some the knives for cutting the pie (thus in effect sharpening others, like those wielded by celebrities and the media). As long as the pie is there, people will be doing whatever they can to gouge out big(ger) pieces of it for themselves and those they favor.

It's only lately seeping into the political world, but there actually has been unprecedented theoretical/scientific progress in the discipline of political economy in the latter decades of the 20th century. Thinkers have blathered about politics since before Aristotle without making any fundamental progress, but starting in the late 1950s academic economists have finally laid a sound theoretical foundation for analyzing the proper scope of government. Nobel Prizes have even been awarded for it. The theory is about how the analysis of market failure leads to a taxonomy of four kinds of goods: private, public, common, and club.

There is a joke that some people would do anything for the environment except take a science course. I add: some people would do anything for social progress except take an economics course. The standard liberal prescription is to create a centralized, non-scalable, byzantine mountain of regulations that tries to orchestrate hundreds of millions of people making tens of billions of decisions, and to constantly try to hand-tune the mountain to react to unintended consequences and to decide what groups/technologies/industries/etc. will be winners or losers. This will always be inferior to a decentralized, dynamic, scalable market-based approach that uses the pricing system to aggregate information and communicate incentives. The role of the government should just be to deter and punish force and fraud, and to correct market failure.

It's an open question whether democracy can work after majorities discover they can vote themselves money taken from other people. The theory of government failure is called Public Choice Theory, and while it too was only created in the last half-century, it has not yet given us any firm guidance on how to design institutions to prevent government failure. The findings so far from Public Choice Theory are very depressing. They demonstrate that voters have systematic incentives to deceive/delude themselves and to let politicians assist in the process. The best answer we have so far is to diffuse and decentralize government power as much as practical, so that jurisdictions compete with each other and people can vote with their feet if necessary.

A Bailout Hair Of The Moral Hazard Dog That Bit You

[This is the director's cut of today's joint press release from 18 California Libertarian candidates for Congress.]

The current mortgage crisis is the direct and predictable result of the government protecting borrowers and lenders from their own unwise choices. Only one party in America — the Libertarian Party — is willing to say who caused this crisis and to consistently follow the principle of holding such people responsible for their own choices.

This all happened before in the Savings and Loan crisis of the 1980s, when the government increased the level of deposits it insures from $40K to $100K, and the "Keating 5" senators (including John McCain) were interfering in the fraud investigation of an insolvent S&L whose chairman later ended up in jail for five years. When the resulting real estate bubble burst, the government used $160B of taxpayer money to bail out the borrowers and lenders who had made bad decisions.

When government socializes losses, the resulting incentive for excess risk-taking is called "moral hazard". After the precedent of the 1989 bailout of the S&L industry, the government fed a new real estate bubble with several more kinds of moral hazard. There had always been an implicit government guarantee behind the alleged "independence" of Fannie Mae and Freddie Mac, allowing them to sell mortgage-backed securities at prices beyond their underlying risk. In 1992, Congress passed a law requiring Fannie Mae and Freddie Mac to devote part of their lending to support affordable housing. In 1994, Congress gave advocacy groups the power to interfere with mergers among lenders who the groups think aren't lending enough to low-income borrowers. In 1995, the Clinton Administration created rules under the Community Reinvestment Act to further encourage such lending, including letting advocacy groups market such loans and then bill lenders for any marketing costs. In 1999, Fannie Mae created yet another program to encourage banks to extend home mortgages to individuals whose credit was generally not good enough to qualify for conventional loans. The New York Times quoted an economist's reaction: "This is another thrift industry growing up around us. If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry." The tech bubble burst in 2001 and the Federal Reserve responded with even easier credit than it had been providing before. Artificially low interest rates fed the bubble in real estate prices, and encouraged the perception that the Fed would protect such asset prices with its interest rate policies. However, the Fed could only delay the day of reckoning, and in so doing made it worse.

Now the Republicans and Democrats have intervened again in the credit markets, by using $700B of taxpayer money to bail out Wall Street firms holding non-performing mortgages. This is a recipe for continuing the cycle of bailouts. If the S&L bailout cost $160B 20 years ago, and the current bailout costs $700B, then what will the next bailout cost?

The Libertarian Party says it's time to stop the insanity. Economic expansion is currently sluggish, but America is nowhere near the 45% contraction and 24% unemployment of the Great Depression. Talk of a general economic "crisis" is fear-mongering designed to justify more looting from current and future American taxpayers. If, as bailout advocates claim, there is potential for the government to profit from buying non-performing mortgages, then let private investors (including bailout advocates!) pursue these opportunities with their own money instead of with your tax dollars.

We already have a mechanism to sort out the assets and liabilities of a troubled company — it's called bankruptcy. Bankruptcy doesn't mean that assets get torched or employees get blacklisted from all future employment. Bankruptcy just means that assets and employees are taken away from those who failed to manage them wisely, and made available for more productive employment.

We already have a mechanism to punish those who deceived borrowers or lenders — it's called prosecution for fraud. The Libertarian Party's presidential nominee Bob Barr, a former federal prosecutor, has called for vigorous prosecution of anybody who practiced deceptive lending or who deliberately overvalued mortgage-backed securities. He says we need to clean up the marketplace, not cover up financial crimes with a deluge of taxpayer money.

Most importantly, we already have a mechanism to punish the politicians who worked so hard to help create this mess — it’s called an election. This November, don’t bail out the incumbents who are using your tax dollars to bail out their irresponsible friends on Wall Street. Instead, vote for the only party in America that believes people should be free to make their own choices in their personal and economic lives — and should bear the responsibility for those choices. Vote Libertarian, and send the message that Washington should be in nobody’s pocket.