Friday, April 28, 2017

Promoting Resentment and Envy

"The devil himself?"
--Mary Rafferty (The Valley of Decision)

On the back of yesterday's post, here's a classic headline courtesy of NYT:

"Trump Tax Plan Would Shift Trillions From U.S. Coffers to the Richest"

The dishonest headline implies that the rich are getting some sort of gift or transfer payment. The truth is that those 'trillions' were originally owned by the 'rich.' A tax cut essentially returns property to its rightful owners.

Headlines like the above promote pathologies of resentment and envy.

Thursday, April 27, 2017

Tax Cut Bias

And so we turn on the TV one more time
And see that everything is fine
--Flesh For Lulu

One way bias is revealed is by how a situation is framed. Take a tax cut proposal, for instance.

If you are government or a recipient/supporter of forcible redistribution of economic resources, then you are prone to view a tax cut as a cost. Fewer taxes collected reduces state power.

If you are a taxpayer or a non-recipient/opponent of forcible redistribution of economic resources, then you are prone to view a tax cut as a benefit. Fewer taxes collected increases social power.

Wednesday, April 26, 2017

Environmental Hoodwinking

"A toast...to the end of the world."
--David Levinson (Independence Day)

Prof Williams reviews various doomsday predictions served up by environmentalists over the past few decades. It goes without saying that they have been spectacularly wrong.

Williams suggests that "hoodwinking Americans is part of the environmentalist agenda." He quotes an environmentalist from the late 1980s saying that dramatic, scary statements that strike a balance between "being effective and being honest" were necessary for the movement.

A senator from Colorado added that policymakers had to "ride the global warming issue. Even if the theory of global warming is wrong...we will be doing the right thing anyway in terms of economic policy and environmental policy."

Spoken like true watermelon socialists.

Tuesday, April 25, 2017

Viewpoint Discrimination

Teach the children quietly
For some day sons and daughters
Will rise up and fight while we stand still
--Mike & the Mechanics

Judge Nap discusses Cal Berkeley's recent cancellation of a speech to be given by Ann Coulter. Coulter had been invited to speak on-campus by a Republican student organization.

Because it is a state institution, Berkeley is obligated to respect the First Amendment. It cannot discriminate against viewpoints that fall beyond the campus political orthodoxy.

"She [Coulter] has the right to speak there because she has been lawfully invited by a group that has the right to invite her. That triggers an affirmative obligation on the part of the school to make sure that the people who want to listen to her can do so."

Berkeley cannot permit opponents to drown her out (known as the 'Heckler's Veto'). They cannot permit adversaries to scare her away. The school cannot stop her from speaking because it does not like her message.

Students groups in a public university have the right to bring whom they want to speak on campus. Campus administrators are obligated to provide a forum that permits students to listen to the speaker. Universities have to "bend over backwards to allow this to happen."

If violence ensues, and it is not commanded by the speaker, then the school is responsible. If a speech causes haters of a speech to interfere with the proceedings, it is not the speaker's fault that the haters are there. It is the university's fault for allowing the haters to interfere.

Despite the school's cancellation of the event, Coulter has indicated that she will speak to the group on-campus anyway later this week.

Monday, April 24, 2017

Unearned Prosperity

I bought a toothbrush, some toothpaste
A flannel for my face
Pajamas, a hairbrush
New shoes and a case
I said to my reflection
Let's get out of this place
--Squeeze

Dan Mitchell discusses the unearned prosperity enveloping Washington DC. Unearned in that burgeoning household incomes of DC residents come not from their own production, but from forcible wealth transfer.


In some cases the wealth transfer is direct in the form of tax payments lining the pockets of Washington bureaucrats. In other cases it is indirect in the form of lucrative privileges going to cronyist principals and their lobbyist agents.

The thing about such unearned prosperity is that it is never permanent. Forcible wealth transfer lasts only until the system breaks (which can happen in various ways).

DC's gilded class should enjoy the spoils while they last.

Sunday, April 23, 2017

Never Settled

Fantasy and microchips
Shooting from the hip
--Oingo Bingo

A motto of the global warming crowd is that 'the science is settled.' As noted here, those who think scientifically know that science is never settled.

Whether due to the uncertainty associated with probabilistic analysis, blatant manipulation of data, or new discoveries that smash old paradigms, science is always on the move.

I heard it said recently that if the global warming thesis were presented in a courtroom, then the case would lose miserably on its merits. It should come as no surprise that partisans have not presented global warming 'science' to the public at large as many would not find it credible. Instead, they trot out 'experts' who merely endorse the concept in order to lend an air of legitimacy to the cause.

When science is claimed to be settled, be wary--particularly when the proposed solution is more government power and less liberty.

Saturday, April 22, 2017

Academic Victimology and Snowflake Culture

I'll be your savior, steadfast and true
I'll come to your emotional rescue
--Rolling Stones

Heather Mac Donald argues that the soft totalitarianism aimed at silencing dissenting views on college campuses is not a psychological disorder as some have diagnosed. Instead, it is merely aggression inspired by perceived threat to a dominant institutional ideology.

Steps that many institutions have been taking to preserve that ideology, such as establishment of 'safe spaces,' policies against 'microaggressions,' and diversity oaths, reinforce a culture of academic victimology where sensitive students, i.e., 'snowflakes,' see themselves as the ones being aggressed upon.

This is nonsense. Because people can generally avoid speech that they do not like by walking away or tuning it out, speech cannot be considered aggression. People have no right not to be offended. Mature human beings are capable of controlling their feelings.

On the other hand, when speech that challenges dominant institutional ideology is chased off campus thru violence or threat of violence, then that is physical aggression being employed by individuals who rationalize themselves as victims.

School administrators who enact policies aimed at preserving dominant institutional ideology through the establishment of a culture of academic victimology are partners in crime. In fact, it seems straightforward to craft a sociological model that specifies school administrators as principals who contract with snowflake students as strong-armed agents in order to preserve institutional sameness.

Friday, April 21, 2017

Buyers of Last Resort

Jump back, got to get out of here
Been too long this time
Jump back, got to get out of here
When will, when will we fall down?
--Toad the Wet Sprocket

Extending our recent thoughts, ZeroHedge cribs from a recent BofA report to observe that asset prices are being supported by central bank buying.


In Q1, central banks, primarily BOJ and ECB, bought nearly $1 trillion of assets ($3.6 trillion annualized).


Bulls (and policymakers) better hope that these buyers of last resort to keep buying.

no positions

Thursday, April 20, 2017

Income Tax Slaves

'Cause I'm the taxman
Yeah, I'm the taxman
And you're working for one but me
--The Beatles

Yes, as Judge Nap states, income taxes can be viewed as theft.


But a situation in which a perpetrator routinely takes production (income) Iin a forcible manner is more appropriately called slavery.

Wednesday, April 19, 2017

Discriminatory Shakedown

Don't ask me what I want it for
If you don't want to pay some more
--The Beatles

The deadline to file federal income taxes was yesterday. Many, however, are not subject to the annual shakedown. Studies estimate that about 44% of US households will not pay any taxes to the feds this year.


Less than one in six of non-payers earns no income. Most of the rest do but take advantage of legal tax breaks.

Of course, all is not equitable in the 56% of households that pay taxes. Those earning more than $500,000/yr, which amounts to 1-2% of all US households, pay about 45% of all federal income tax.

The tax man chooses his targets with discrimination.

Tuesday, April 18, 2017

Few Lifting Many

Nights in white satin
Never reaching the end
Letters I've written
Never meaning to send
--Moody Blues

WSJ article observes that over one third of SPX gains so far this year come from 10 large cap stocks.


The article fails to mention that stock market gains on narrowing breadth is a common characteristic of late stage bull markets.

no positions

Monday, April 17, 2017

IP Laws

With a little perserverance you can get things done
Without the blind adherence that has conquered some
--Corey Hart

One argument for intellectual property laws is that, without them, innovation would be curtailed. But doesn't this position--that patents, copyrights, etc. need legal protection--admit the opposite? That, absent legal protection, these ideas will form and/or be put to use elsewhere?

In fact, there seems a strong argument for the opposite proposition: The stronger the intellectual property regime, the lower the innovation.

Sunday, April 16, 2017

He Has Risen

Judah Ben-Hur: He gave me water, and the heart to live. What has he done to merit this?
Balthasar: He has taken the world of our sins onto himself. To this end he said he was born, in that stable, where I first saw him. For this cause, he came into this world.
Judah Ben-Hur: For this death?
Balthasar: For this beginning.
--Ben-Hur

Once again, He has given us life.


Happy Easter.

Saturday, April 15, 2017

Kids Opening Day

"The game doesn't stink, Mr Wheeler. It's a great game."
--Billy Chapel (For Love of the Game)

Couple of the pics posted this morning of the first Kids Opening Day happening at GABP.


This is how to build the game.


Well done, Reds.

Friday, April 14, 2017

It's About Leverage

"The mother of evils is speculation--leveraged debt."
--Gordon Gekko (Wall Street: Money Never Sleeps)

Many market participants are scratching their heads, wondering how stock (and bond) prices continue to levitate at what by conventional measures seem nosebleed levels. They also wonder why technical indicators of trend reversal don't seem to be working as they have in the past.

Maybe it's all about the truly historic amount of leverage in the system. Note the correlation between Fed balance sheet holdings and the SPX:


Longer term, look at the correlation between total system leverage and SPX:


Leverage is a function of credit price and risk appetite. Cheap credit prices and high risk appetite have driven stock prices higher.

Higher credit prices and risk aversion will do the opposite.

no position

Thursday, April 13, 2017

Diversity Oaths

All in all it's just another brick in the wall
All in all you're just another brick in the wall
--Pink Floyd

Prof Williams likens today's 'diversity statements' required of university professors to post WWII loyalty oaths that were eventually struck down by the Supreme Court.

While they take various forms depending on the institution, diversity statements amount to pledge of allegiances to collegiate diversity agendas. Unfortunately, such agendas to not promote diversity at all, Rather, they foster ideological and political conformity among faculty.

As these pages recently noted, such conformity limits capacity of higher ed to develop critical thinking skills among its student body.

Prof Williams suggests some ways to assess an institution's ideological diversity. Inquire about the political party balance among the faculty--particularly among liberal arts faculty. Check to see whether the school has diversity mandates for faculty. Must they take diversity oaths? Have campus speakers been disinvited or chased off campus by protesting faculty and students?

Williams quotes Lenin: "Give me four years to teach the children and the seeds I have sewn will never be uprooted."

Diversity oaths reinforce the iron cage.

Wednesday, April 12, 2017

Gold Shoots

Tomorrow looks unsure
Don't leave your destiny to chance
What are you waiting for?
--Swing Out Sister

Following up on yesterday's observations, gold is sprouting thru resistance from a cup-and-handlish pattern.


Looking for near term follow-thru. If we get it, then a quick march toward the election highs of $1300-ish.

position in gold

Tuesday, April 11, 2017

Edge of Night

Ain't nothing gonna save you
From a love's that blind
Slip to the dark side
Across that line
--John Cafferty & the Beaver Brown Band

Could be wrong, of course, but am getting the feeling that equity markets could be on the verge of a major breakdown. Indexes are settling back down on near term support with little below until election rally lift off levels.


The banks in particular seem to be teetering on the cliff's edge.


Meanwhile, Treasuries have caught a bid and are doing work at intermediate term support. A breakdown in yields here would signify flight toward risk aversion.


And gold is chewing thru upside resistance in the 1250 area.


The stage seems set for some real fireworks.

position in gold

Monday, April 10, 2017

Trade, Interdependence, and Peace

They gave you life
And in return you gave them hell
As cold as ice
I hope we live to tell the tale
--Tears for Fears

An extension of yesterday's post is that it is trade, not restriction of trade, that fosters peace and security. At first, this may seem counter intuitive. After all, when individuals specialize in production of particular goods, then they become more dependent on their trading partners for other goods that serve to maintain and improve standard of living. Doesn't this leave specialists vulnerable to their trading partners should those partners decide to cut off trade?

Generally speaking, no.

Because both sides of the trade specialize, they are not just dependent. They are interdependent. Should either side pull away from peaceful trade, then their standard of living declines. They are well motivated to maintain trading relationships in order to advance their standard of living as much as possible.

It has long been said that when goods don't cross borders, armies will.

The interdependence fostered by free trade promotes peace. Restrict trade and listen to the war drums beat.

Sunday, April 9, 2017

Essential Industries Fallacy

Well we're living here in Allentown
And they're closing all the factories down
Out in Bethlehem they're killing time
Filling out forms, standing in line
--Billy Joel

Nice example toward the bottom here of what might be called the 'essential industries fallacy.' It is often argued that certain domestic industries, such as steel, require protection from foreign competition to protect standard of living or to preserve national security.

The story goes something like this. Suppose that China seeks to drive US steel companies out of business. The Chinese government subsidizes steel production in its country, enabling Chinese steelmakers to 'dump' product in US markets much cheaper than domestic producers. Over time, US steel producers drop out of the market because they can't compete with subsidized Chinese steel. Once US steel production has been reduced to zero, China suddenly refuses to sell steel to America, leaving many industries high-and-dry with no supply of a critical input. With their large appetite for steel, American military sectors would be particularly vulnerable as, in turn, would national defense capability.

In short, because China exploits the dependence inherent to specialization and trade, this industry needs to be shielded to ensure a high degree of US self-reliance.

There are several problems with this argument. One is that China must subsidize its steel industry for some time--perhaps decades--which drains its public coffers and diverts steel from home base use. China can't build battleships, for instance, if it is subsidizing production of battleships in the US. All the while, the US enjoys an increase in standard of living from cheap steel--as well as a nice build-up in military capacity courtesy of the Chinese.

Meanwhile, US buyers of steel become aware of Chinese steel dumping and its logical endpoint. They begin to diversify their supply base. They begin placing orders with steelmakers in thirty or so other countries throughout the world who are eager to do business after being shut out of US markets by the subsidized Chinese steel.

Importing subsidized products increases standard of living--including self-defense capacity. Domestic consumers spend less for the same level of value and can plow their savings into more consumption or into productivity improvement projects. Meanwhile, the subsidizer gets comparatively weaker.

Saturday, April 8, 2017

GDP of Regulation

Come out of things unsaid
Shoot an apple off my head, and a 
Trouble that can't be named
A tiger's waiting to be tamed
--Coldplay

Study by the Mercatus Center at GMU estimates that the cost of regulation in the US amounts to about -0.8% of GDP annually. Might not sound like much, but the cumulative drag from 1980 thru 2012 adds up to about $4 trillion, or a loss of about $13,000 per capita.


That $4 trillion would have made the regulatory state the 4th largest economy in the world by 2012.

Because the study focused on the cost of lost investment for productivity/innovation purposes as resources are diverted for regulatory compliance, my sense is that the study's estimates are conservative. They may not adequately capture, for example, the effects of lower entrepreneurial entry into industries with high regulatory hurdles, or transfer of productive resources to less fruitful countries to avoid high regulatory regimes.

The actual cost of regulation could be double these estimates.

Friday, April 7, 2017

Big Mistake

You've gone too far this time
And I'm dancing on the valentine
I tell you somebody's fooling around
With my chances on the danger line
--Duran Duran

Nearly four years ago citizen Donald Trump warned President Obama that bombing Syria without congressional approval would be a big mistake.


Last night President Donald Trump committed his own Big Mistake when he authorized a missile attack of several Syrian military installations in retaliation for the Assad regime's alleged use of chemical weapons to combat in-country rebels. Collateral damage included many women and children deaths due to poison gas.

Trump thus joins many decades of predecessors in engaging in war without the approval of Congress--a blatant violation of the Constitution.

Heinous crimes against humanity frequently provoke quick, reflexive response. Unfortunately, as we should have learned by our collective reaction to the 9/11 attacks, forcible overseas responses executed in the heat of the moment frequently have consequences well beyond the obvious.

As Senator Rand Paul observes, our founding ancestors understood this. Their intent was to slow it down--i.e., provoke deliberate, thoughtful foreign policy and, when military action is needed, careful debate and authorization by Congress.

Let's hope that the president will heed the calls of Rand Paul and others (e.g., here, here) to approach Congress for proper debate over the US role in Syria. Such action would mark a leader, and set a worthy presidential precedent.

Thursday, April 6, 2017

Spying for Political Purpose

The deception with tact
Just what are you trying to say?
--The Fixx

Reiterating points made in yesterday's post, Judge Nap discusses the concepts of unmasking and leading and their criminality in the context of emerging Spygate news.

He adds that wrongful exposure of top secret material is the same crime committed by Hillary Clinton when she exposed top secret emails in non-secure venues. However, if allegations against former national security adviser Susan Rice are true, her crime is arguably worse. While Clinton appeared to have acted with gross negligence, Rice's behavior may have been intentional.

The judge argues that mass spying without cause for political purposes blows a hole in the Constitution, and is far worse than anything that the government of King George III did to the colonists.

King George's violations were deemed so heinous that the colonists declared their independence and fought a war to reclaim their rights.

What happens this time?

Wednesday, April 5, 2017

Unmasking and Leaking

It's easy to deceive
It's easy to tease
But hard to get release
--Billy Idol

As news about the extent of the US surveillance state slowly (and in the case of many mainstream media outlets reluctantly) unfolds, American citizens are getting a lesson about unmasking and leaking. As these pages have discussed, the NSA collects all digital communications made in the US and by US citizens, purportedly for purposes of national security.

If government officials can provide justification for doing so, then they can obtain transcripts of conversations collected by the NSA. However, the identity of US citizens remains hidden, or 'masked,' to protect their rights. A snippet of a conversation might look look like this:

Foreign Ambassador: Hello. How are you doing?

Citizen1: I am fine.

If government officials wish to "unmask" Citizen1, then they must submit rationale as to why it is vital that this person's identity must be revealed from a national security standpoint. If that request is granted, only government officials with top secret clearance are permitted to review unmasked transcripts, and under no circumstances are the names of people who have been unmasked to be shared, or 'leaked,' with outsiders. Doing so constitutes a felony.

The bulk of conversations collected by NSA are between everyday citizens (a.k.a. 'incidental' information collection). For example:

Citizen1: Hello. How are you doing?

Citizen2: I am fine.

Unless government officials can submit substantial rationale on grounds of national security, then they should have difficulty merely accessing the above transcript. And, if they cannot justify doing so for national security purposes, government officials are under no circumstances permitted to unmask the identities of Citizen 1 and/or Citizen2. Doing so constitutes a felony.

Subsequently leaking those unmasked names obviously constitutes a felony as well.

Tuesday, April 4, 2017

Negative Forces

"A king may move a man. A father may claim a son. But even if the men who move you be kings or men of great power, your soul is in your keeping alone. When you stand before God you cannot say, 'But I was told to do thus,' or that 'Virtue was not convenient at the time.' That will not suffice. Remember that."
--King Baldwin IV (Kingdom of Heaven)

Two negative forces work against seeking truth and doing the right thing. One stems from the axiomatic need to economize. Resources that advance standard of living are scarce. Material things are scarce, but so are intangible resources such as time an energy.

In order to get the most standard of living at the lowest cost of scarce resources, people are tempted to use aggression to satisfy their need to economize. Aggression enables people to take production from others, which allows the aggressors to economize their time and energies on other endeavors. Individuals might do the taking directly, or they might employ strong armed agents to do their bidding for them. Either way they are principals of violence and forcibly acting on others in order to get more for less.

The other force is bowing to social pressure. Because people accrue self esteem from group affiliation, they will bend their behavior to comply with group norms. Individuals are tempted to engage in activities for 'the greater good' or similar rationale. Social pressure to compromise one's morals and beliefs is often intense and difficult to sidestep.

Economizing via aggression and bowing to social pressure. Much evil in the world is driven by these negative two forces.

Monday, April 3, 2017

Play Ball

"And so it begins."
--Charlie Grimes (High Crimes)

Like every year, seemed like it would never arrive. But is has.


Spring is here.

Sunday, April 2, 2017

Opening Day 1963

"The one constant through all the years, Ray, has been baseball. America has rolled by like an army of steamrollers. It has been erased like a blackboard, rebuilt, and erased again. But baseball has marked the time. This field, this game...it's part of our past, Ray. It reminds us of all that once was good, and could be again. Ooohhh...people will come, Ray. People will most definitely come."
--Terence Mann (Field of Dreams)

Love this pic of the Reds running out onto field for Opening Day 1963. Note a smiling rookie Pete Rose heading up the dugout steps for his first major league game. Frank Robinson, Vada Pinson, Gordy Coleman, Leo Cardenas, Gene Freese, and Johnny Edwards are also visible among the starting nine that day.


My Dad was up and to the left in the pressbox covering the game. My Mom, who had season tickets behind the Reds third base dugout for many years, was very likely close by as well.

Saturday, April 1, 2017

WSJ Slant

I'd be running up that road
Be running up that hill
With no problems
--Kate Bush

When reading UCLA (now GMU) prof Tim Groseclose's fine book on media bias several years back, I was surprised that his estimated slant quotient for the Wall Street Journal pushed the publication significantly to the left side of his bias scale. Although I had never read the WSJ regularly at the time, I had always assumed that its business-oriented content would position neutrally or to the right on a scale that accurately measures degree of political bias.

Groseclose (p. 156) explains this seemingly anomalous result as consistent with long recognized differences between the Journal's editorial and news functions. He cites numerous sources that characterize the WSJ editorial department as conservative and the news department as progressive. In his study, Groseclose gathered data only from the news pages of the WSJ.

Since late last summer, I have been reading the web version of the Wall Street Journal on a daily basis as a function of school-related activities. My experience corroborate's Groseclose's findings. The two web pages that I most frequently visit, the front page lander and the logistics report, regularly feature content that is skewed left and in many cases openly hostile toward the current administration. News at the WSJ is not well balanced.

Although I am not a big consumer of opinion pages, my periodic excursions into WSJ editorial columns suggest that this function may not be as conservative as Groseclose assumes, either. Left leaning views are well represented on the Journal's editorial pages.

It should be noted that my personal experience with the WSJ is relatively recent and coincides with a presidential election that upset not only progressives, but also many in the GOP establishment. Plausibly, some of the imbalance currently displayed in news and editorial pages reflects anti-Trump hostility emanating from main line Republican partisans.

It would be interesting to apply Groseclose's slant quotient analysis in a longitudinal study of WSJ news content to learn how bias may have evolved over the past few years.

Friday, March 31, 2017

Trump and FDR

How many times can a man turn his head
And pretend that he just doesn't see
--Bob Dylan

One thing in common between Donald Trump and Franklin Roosevelt appears to be lack of guiding ideology.

As superbly recounted by John T. Flynn, FDR built his political career on saying one thing and doing another. His campaign platform in 1932 was planked in promises to reduce the size of government, balance the budget, and keep the US out of war.

Subsequently, of course, FDR did the opposite. His New Deal programs made all previous government interventions in private affairs seem small. His spending resulted in the greatest non-war federal debt levels that the country had yet experienced. His provocations sparked US involvement in a world war that made the previous Great War seem tiny.

Trump's behavior also blows with the wind. Like FDR, he is prone to quickly changing his mind. A person that Trump publicly welcomes as an ally today might be chastised as an enemy tomorrow. His positions are often inconsistent, sometimes channeling getting government out of people's lives while at other times fostering more government intrusion.

Rather than shaping his actions according to an ideological framework, Trump's actions, like FDRs, appear grounded in political expedience.

This is not to say that ideologies might not play roles in administrations where the president possesses no core principles himself. FDR populated his 'braintrust' with ideologues--many of them with communist or fascist socialist leanings. Many believe that Trump has also inserted ideologues into his administration, some of whom lean toward the fascist end of the socialist spectrum.

It came to pass that policies of FDR's administrations were shaped by the socialist beliefs of his brain trust. Those beliefs filled the ideological vacuum inside the Oval Office at the time.

If a similar vacuum is created inside the Trump White House, what ideologies might rush in to fill the void?

Thursday, March 30, 2017

Regulation and Population

All the old paintings on the tombs
They do the sand dance don't you know
If they move too quick
They're falling down like a domino
--Bangles

After President Trump signed orders that roll back Obama era environmental regs, leftist media jester Michael Moore tweeted that "Historians in the near future will mark today, March 28, 2017, as the day the extinction of human life on earth began, thanks 2 Donald Trump."

Ignoring the logical problem, if we take Moore's statement literally, of how historians would be capable of accurately marking time related to human extinction unless they somehow survive the event, let's consider a pertinent general question. What is the effect of government-imposed regulation on human population?

Mises explained it well. Prior to the industrial age, primitive production processes were highly regulated by government primarily for the benefit of the wealthy. Because the distribution of wealth was highly skewed, far more people were being born into poor conditions than into rich conditions. Productivity, or output per person, declined as the denominator grew faster than the numerator. In time, a significant fraction of the world's population lived on the edge of death.

Facing extinction, entrepreneurs began defying law and tradition by marshaling economic resources in order to produce goods for the masses ("mass production"). This was the onset of capitalism. As Mises observed, capitalism can be seen as "everyone's having the right to serve the customer better."

By definition, capitalism's growth was inextricably linked to deregulation. Markets rewarded societies that lifted restrictions on production. As restrictions on production were lifted, more was produced. As more was produced, scarcity was alleviated. As scarcity was alleviated, population growth dramatically increased throughout the world.

But don't markets foster unpleasant externalities such as pollution that hurt standard of living and require government regulation? As Rothbard observed, government regulation has not been a proven solution to pollution problems. For example, two areas of society where private property rights have generally not been permitted to broadly function, air and waterways, have been primary grounds for pollution. Since government permits the pollution of air in some regulated fashion, entrepreneurial actions have focused on technologies that enable pollution at the regulated rate, rather than on air pollution-free technologies.

The more appropriate role of government is to help people protect their property against invasion. If, for instance, air pollution from production sends unwanted substances through the air and into the lungs and onto the property of innocent victims, then it is the role of government to stop these acts of aggression. Unfortunately, as Rothbard noted, government long ago altered laws away from protection of private property and toward the permitting of aggression via pollution.

The general proposition is this. When governments impose regulations of any kind on production, then production is restricted. When production is restricted, there is less wealth available to sustain life. Standard of living declines as does population growth. As regulatory burden grows, so does scarcity. At extremely high regulatory burdens, extreme conditions of scarcity, such as famine and disease, threaten human existence.

Rolling back government-imposed environmental regulations serves to increase production. More prosperity associated with increased production moves the human race further away from extinction. Government's proper role is to protect people against harm demonstrated to be done to their personal property from production externalities of any kind. Such policy would focus entrepreneurial attention on innovations that eliminate those externalities and further increase prosperity.  

Wednesday, March 29, 2017

Consumer Confidence and Income

Chuck Scarett: How you feelin' today?
Joe Scheffer: Confident!
--Joe Somebody

Big divergence between Conference Board measures of consumer confidence and income growth. We should note that this divergence was widening even before last fall's presidential election.


Interestingly, confidence has a better correlation to stocks than income.


Over time, however, the divergence between confidence and incomes are likely to disappear. If this means that confidence aligns more with current trends in income, then this resolution would not bode well for stocks.

no positions

Tuesday, March 28, 2017

Section 702

Now did you read the news today
They say the danger's gone away
But I can still the fire's still alight
There burning into the night
--Genesis

Ron Paul reinforces observations previously made by Judge Nap that the NSA is conducting mass surveillance on all Americans. He highlights Section 702 of the FISA Act. Passed in 2008 as an amendment to the original 1978 bill, Section 702 gave the green light to the federal government to spy on all Americans through massive digital data collection programs.

As the story unfolds about 'wiretapping' of Donald Trump and his associates, Paul wishes that the president would see this as a teachable moment. As we learn that all of us are vulnerable to government abuse of power, Trump could stand up for liberty and work to take down FISA, Patriot Act, and other unconstitutional intrusions on privacy.

Section 702 is set to expire this December. Perhaps current events will open our eyes to the law's unjust nature and drive its repeal.

Monday, March 27, 2017

Teller Line

It's not in the way that you hold me
It's not in the way you say you care
--Toto

Banks putting on their brave face this am to avoid near term technical breakdown.


Mr Valentine has set the price at 90t.

No positions

Sunday, March 26, 2017

Keeping Enemies Close

One day it's fine and next it's black
So if you want me off your back
Well, come on and let me know
Should I stay or should I go?
--The Clash

Soon after Abraham Lincoln stepped into the Oval Office he immediately fired over half of the employees working under the executive branch. After a highly contested election, Lincoln wanted to reduce the chance that those partisan to someone or something else were in a position to hurt his administration.

Many wonder why Donald Trump has not done similar. Yes, he recently fired several federal attorneys appointed by his predecessor, but thousands of Obama appointees and others who are ideologically opposed to Trump remain as his employees. For an individual who achieved celebrity status by uttering the words "You're fired!" on weeknight television, one would think Trump would have been dealing out pink slips in size by now.

It is possible, of course, that Trump just hasn't gotten around to it yet. Perhaps, based on his previous experience as a manager, he thinks it prudent to better familiarize himself with the current situation before making decisions about who should stay and who should go.

His managerial experience might also be telling him that diversity in terms of political ideology will help his administration make better decisions. Trump might achieve better long term results with a varied crew.

There is also the political argument that he wants to project an image of bi-partisanship when it comes to personnel. By keeping people on his staff that others know he doesn't like, he demonstrates restraint and tolerance that might win him cooperation from various factions over time.

A further possibility is that Trump is heeding age old advice of keeping friends close but enemies closer. Keeping enemies in his administration enables Trump to accumulate knowledge about his opposition. He might better understand strengths, weaknesses, and tendencies of his foes when they are working for him.

By keeping his enemies close, Trump could use them as bait. If, for example, Trump suspects that progressives will stop at nothing to get him out of office, then perhaps he keeps partisan operatives around in hopes that progressive leadership recruits them as agents for illicit activities. Agents, say, in intelligence agencies could illegally leak classified information designed to hurt the Trump administration. If Trump is prepared, then he might catch the agents in the act, and use them to trace back to the principals of the crime.

Perhaps the unfolding story about Spygate exemplifies this approach.

Saturday, March 25, 2017

Stay the Course

"Stay with us. Stay the course!"
--Col. Harry Burwell (The Patriot)

When the Tea Party first came about, these pages posited that its partnership with the GOP establishment would be fleeting. A couple of years later, the inevitable clash between Tea Party libertarianism and mainline Republican statism found collegiality fraying.

The infighting hit epic proportions this past week when a small group of Tea Party-oriented members of the House, called the Freedom Caucus, refused to bow to pressure and support the poorly designed Trumpcare health bill. The bill was pulled from the floor on Friday when it became clear that, without Freedom Caucus buy-in, Republicans did not enough votes for passage.

Predictably, GOP bureaucrats and pundits were pointing figures at the Tea Party reps even before the bill was pulled.

For lovers of liberty, the Freedom Caucus stand is cause for celebration. Because these people refused to compromise on first principles, they kept an enormous piece of big government legislation from moving forward...at least for now.

Here's hoping that Tea Party reps continue to stay the course. Perhaps they will influence their colleagues to do what truly needs to be done at this point to move American healthcare back toward its roots in voluntary exchange: full repeal of Obamacare.

Friday, March 24, 2017

Cash Healthcare Markets

And if I should falter
Would you open your arms out to me?
--Erasure

Statists have indoctrinated Americans into believing that healthcare is not a cash business. Healthcare prices are too high and often unknowable, thereby requiring cashless transactions and claims forwarded to insurance companies to work out payments with policyholders and providers.

The pages have discussed examples of viable healthcare market alternatives, some grounded in cash payments, evolving as conventional approaches worsen. Now, as Obamacare has pushed insurance-driven markets to the brink, alternative cash-based markets continue to coalesce.

One is called direct primary care. Instead of accepting insurance for routine visits and medicines, practices composed of one or more primary care docs charge monthly membership fees that cover most of what patients need--including office visits and lower priced drugs.

The allure to patients is cost effectiveness and simplicity. Monthly fees are often about $50. There are no copay snarls with insurance companies or bickering with claims adjusters about what gets reimbursed. There are also no pre-existing condition hurdles to overcome.

Physicians are attracted to the idea of eliminating insurers as well. Less bureaucracy frees time to spend with patients. In direct primary care practices, docs can return to being their own bosses.

But wait, isn't this model fundamentally equivalent to the insurance model? After all, patients still pay a monthly fee that looks like an insurance premium for access to an array of services. The answer is no. The key difference is that the system is not based on third party payers. Consumers are buying healthcare services with their own money, but they are prepaying for them. Doctors are pricing their services to customers, but in bundles rather than one-at-a-time. If a customer appears to be overusing services, then docs have incentive to do something about it. If care pricing or quality deteriorate, then patients have incentive to do something about it.

Stated differently, direct primary care is not an 'other people's money' arrangement.

Direct primary care does not cover specialized services or catastrophic care. As such, it does not eliminate markets that insure against large, unanticipated healthcare expenses. But that is proper function of insurance. Car and home insurance policies do not cover routine maintenance. They insure against tail risk. Properly functioning health insurance markets would do the same.

The evolution (actually, the re-evolution) of cash health care markets is but one example of entrepreneurship sure to occur as Obamacare and its statist healthcare ilk inevitably falter.

Thursday, March 23, 2017

Healthcare and Other People's Money

Drawn into the stream
Of undefined illusion
Those diamond dreams
They can't disguise the truth
--Level 42

Current debate about government's role in healthcare once again took me back to my industry days, when a grandiose healthcare plan developed by a corporate quality improvement team was presented to one of our VPs. "It won't work," the VP told me.

The plan subsidized nearly all employee expenditures related to healthcare. As long as someone else was picking up the tab, he argued, buyers would not be motivated to shop for value, and our ultimate goal of curbing costs would not be realized.

This memory jogged another, more recent lesson learned. Milton Friedman posited that there are four ways to spend money. You can spend your own money on yourself. You can spend your own money on someone else. You can spend someone else's money on yourself. You can spend someone else's money on someone else.

Spending your own money on yourself is the condition that promotes the most economizing (conservation of resources) while attaining highest value (maximizing utility of the purchase). This is what the VP was seeking. Get consumers to do what they do best and costs will go down while utility is maximized.

All third party payer plans, corporate run as well as government run, operate in the bottom two quadrants. Consumers whose behavior is insured by someone else are spending someone else's money. They will care little about the price paid for healthcare services while trying to consume as much healthcare as they can. Plan administrators essentially spend other people's money on someone else. Not only do they have little incentive to economize, but they are likely to arrange services that do not provide high value for the insured. Higher costs, lower quality, and shortages are certain.

While Trumpcare in its current form may move the needle a bit away from the 'other people's money' conditions, it still subsidizes a great deal of consumer healthcare spending. Unless it is considerably revised, Trumpcare looks too much like its Obamacare predecessor that it seeks to repeal-and-replace.

Wednesday, March 22, 2017

Ideological Diversity in Higher Ed

Interviewer: What you've got is college experience. Not the practical, hard-nosed business experience we're looking for. If you'd joined our training program out of high school, you'd be qualified for this job by now.
Brantley Foster: Then why did I go to college?
Interviewer: You had fun, didn't you?
--The Secret of My Success

My niece is among many contemporary high school juniors preoccupied with looking at colleges. One factor on her want list is a diverse student body.

I hope that she also considers the ideological diversity of the institution itself.

It can be argued that a primary benefit of a college education is to learn how to think critically. Critical thinking requires exposing the mind to various points of view. Thought processes must also be developed for sifting through those various perspectives to get closer to the truth.

On the surface, universities would seem to offer an effective platform for advancing critical thought. A student body drawn from various backgrounds helps attendees learn from each other in this regard. However, it can be argued that a more important factor is the capacity of the primary engines of the instructional platform--i.e., that of the faculty and others who convey knowledge in classrooms and other learning forums--for stimulating students to expand their minds and probe issues in search of truth.

Unfortunately, this part of the higher ed learning platform has been deteriorating to the point where potential for developing critical thought process has been severely diminished and, in some institutional environments, completely eliminated. A primary cause of this breakdown has been increasingly homogeneous ideology among faculty and administrators, particularly as related to politics and its spillover into economic and social issues.

It has been known for some time that the academy is skewed politically left. One consequence of the lack of political diversity in higher ed is that it has biased hiring of instructors. In some disciplines, preference for hiring faculty with like-minded, left-leaning ideologies is so strong that capability for honestly offering alternative views in the classroom is virtually non-existent.

Another consequence of the left skew in higher ed is that has fostered cultures of intolerance on campus. Speakers who offer competing perspectives are seen as threats and chased off campus by protesting faculty and students. Those incapable of coping with heterogeneous viewpoints are granted 'safe spaces' and language controls from 'microaggressions' committed by individuals perceived as posing ideological threats.

Several prominent academics have recognized the problems that lack of ideological diversity pose for higher ed. For example, a former Stanford provost discusses 'the threat from within' presented by ideological sameness and its consequential intolerance. The president of the University of Chicago has been outspoken about how and why his institution seeks to avoid policies that stifle diversity and freedom of thought.

Rising tuitions and and cheap credit (which are not unrelated) have increased the supply of college grads and made pursuing a college degree a riskier proposition now than in the past. All the more reason why inbound students should carefully assess the ideological diversity of prospective institutions. Attending a school rich in ideological perspectives increases the likelihood of securing the critical thinking skills commensurate with a valuable college degree.

I hope my niece does so.

Tuesday, March 21, 2017

Banks and Rising Rates

I'm at the car park, the airport
The baggage carousel
The people keep on crowding
I'm wishing I was well
I said it's no occasion
It's no story I could tell
--Squeeze

There is a theory out there positing that banks like higher rates brought about by recent short term rate increases by the Fed. The primary thrust of the argument is that higher rates should improve bank margins by allowing banks to charge more for loans.

Any positive impact, however, should be transitory. As noted at the end of this piece, banks will need to increase what they pay to borrow funds from depositors as short rates move higher. Moreover, higher lending rates result in less demand for credit (ECON 101) and, by extension, less economic activity in general.


From the above chart, does it look like bank stocks have been helped or hurt by ultra easy ZIRP/NIRP central bank policies over the past decade? Those easy policies are now in the process of reversing.


Over the past few days, perhaps investors have started to grasp what higher rates actually mean longer term for this sector.

no positions

Monday, March 20, 2017

Tantrum Era

I staggered back to the underground
And the breeze blew back my hair
I remember throwin' punches around
And preachin' from my chair
--The Who

Column compares behavior of the left post Brexit/Trump to that of a tantrum-throwing child. It is hard not to. Arm flailing meltdowns that lay off blame to others is what children do before they learn how to reason and control their emotions.

Russia interfered, Trump is Hitler, they're all racists..., populist rubes shouldn't be allowed to vote, Trump is a madman who must be thrown from office. The litany of excuses continue.

Coping with their cognitive dissonance in this case has found many progressives banding together and returning to the playpen.

Sunday, March 19, 2017

Ignore It

Jake Lo: What judge is going to believe that?
Agent Westey: My judge.
--Rapid Fire

After a district judge in Hawaii once again issued a temporary restraining order on President Donald Trump's revised travel ban, I heard several opinions this week suggesting that Trump should simply ignore the TRO and implement his executive order. If Trump would defy the absurd and ridiculously worded ruling of this judge, then he would be engaging in nullification.

In the context of constitutional law, nullification means ignoring a law or ruling deemed to be unconstitutional. Nullification was frequently employed prior to the Civil War. For example, it was used by states to combat oppressive federal laws such as the Sedition Act of 1798 and the Tariff of Abominations of 1824.

Should Trump choose to ignore the judge's TRO, then his nullification would challenge the legal principle of judicial review. Judicial review is a term concocted by Chief Justice John Marshall in the case of Marbury v. Madison. Judicial review is the power of the Supreme Court and all federal courts to examine statutes and presidential behavior, and to declare them void if found to be inconsistent with the Constitution. Of course, it is debatable whether contemporary judicial review regularly contemplates the constitutionality component.

The concept of judicial review carries some intuitive appeal. Courts should be independent, anti-democratic entities that preserve the constitutional rights of individuals when legislative and executive force intrudes. Viewed in this manner, the Courts are the last line of defense for liberty.

On the other hand, notable individuals such as Thomas Jefferson saw judicial review as an intrusion on liberty. In Jefferson's view, the Supreme Court's opinion on constitutionality should carry no greater weight than the legislative or executive branches, and in fact the Constitution does not grant the Court such interpretive authority. Moreover, Jefferson questioned, did it make sense that the people of the United States would fight a bloody revolution only to put the fate of liberty in the hands of nine (five, really) tenured-for-life judges?

Tom DiLorenzo suggests that we have become such a 'lawyereaucracy' today. Find judges friendly to your point of view and have them issue decrees that institutionalize it and put down dissent. DiLorenzo suggests nullification as a way to counter lawyereaucracy.

As an example of a president defying the Court's wishes, DiLorenzo offers Andew Jackson's veto of the recharter of the Second Bank of the United States. While Jackson's veto was in response to a Congressional bill (not a court order), Chief Justice John Marshall had himself vociferously opined that the central bank was constitutional. In his veto response, Jackson (about half way down) argues that it is the duty of Congress and the Executive to decide on the constitutionality of bills that they introduce and approve, and that the opinion of judges on this matter has no more authority over the other branches than the authority that the other branches have over the Court.

Jackson, further channeling his inner Jefferson, also states, "The Congress, the Executive, and the Court must each for itself be guided by its own opinion of the Constitution. Each public officer who takes an oath to support the Constitution swears the he will support it as he understands it, and not as it is understood by others."

DiLorenzo suggests that if Donald Trump does defy the district judge's TRO then he would be acting in accordance with his presidential role model.

Saturday, March 18, 2017

Media Crowds and Madness

Not what the teacher said to do
Making dreams come true
--Oingo Bingo

Prior to the 2016 presidential election Nate Silver was a media darling of the left. A political analyst with a background in statistics, Silver's stock increased with progressives when, based on his analysis of polling data, he assigned a higher degree confidence to a Barack Obama victory over Mitt Romney in the 2012 than many other 'experts.'

The allure for many Democrats seemed to be that not only did Silver predict that their side would win, but that he did so 'scientifically.' Like most people, Democrats tend to like the idea of scientific process when it supports their view.

The value of Silver's equity recently declined after his blog's analysis of 2016 presidential polling data suggested a high degree of confidence in a Hillary Clinton victory. Progressives who leaned on that prediction like they did in 2012 were sorely disappointed. Silver's 'science' let them down.

Silver, of course, would say (and I'm sure he did) that he was forecasting a probability, not a certainty. Although his forecasts suggested, say, a 75% percent chance of a Clinton win, there was still a one in four chance that she wouldn't.

Post election, Silver has written a series of pieces, including this one, that autopsy the phenomenon of the mainstream media's gargantuan miss of the 2016 presidential election. He concludes, per the title, that "there really was a media bubble." The use of past tense 'was' is interesting, as if the 'bubble,' better known as bias or slant, was a temporary condition not in place before or since the 2016 election cycle.

Drawing from Surowiecki's Wisdom of Crowds which. incidentally, follows a volume written 150 years earlier by Charles Mackay on Extraordinary Popular Delusions and the Madness of Crowds, Silver cites Surowiecki's argument that crowds tend to make good predictions when four conditions are in place. Crowds are 'smart' when there is diversity of opinion among participants, when people's opinions are independent of those around them, when knowledge is decentralized and local, and when private judgments can be aggregated into collective decision.

Silver suggests that political journalism scores poorly on the first three conditions. American newsrooms are not diverse. Over 92% of journalists have college degrees, up from 58% in 1971. More importantly, there seems little in the way of political diversity. Voting research suggests, for example, that journalists who vote Democrat outnumber those who vote Republican by at least four to one margins. Of the 59 major newspapers that endorsed presidential candidates in 2016, only two endorsed Trump.

Silver argues that independence among political journalists is also low. They attend the same conventions and debates, and gather in the same room for discussions among themselves. This facilitates "conventional wisdom being manufactured in real time." Reporting of conventional wisdom via social media leads to information cascades that reinforce how issues are framed through millions of impressions.

Political journalism is highly centralized, with most political news manufactured in NYC and DC. National reporters fly into local areas with pre-baked narratives and seek facts that support their point of view. That local newspapers are failing and media outlets with broad reach are gaining market share reinforce centralization of opinion-making.

In terms of improvement, Silver suggests that increased decentralization and improving diversity would be difficult. I am not so sure, particularly with respect to diversity. For example, why couldn't newsrooms intentionally hire reporters in a manner to achieve greater diversity from a political ideology standpoint? Outlets could market this diversity and reveal their ideological mix--perhaps as audited by an outside source. Outlets that want to be forthright about their bias would require journalists to disclose their voting and political contributions as part of their reporting.

Silver thinks there is more short term potential in changing the independence condition. He suggests that journalists could 'recalibrate themselves' to become more skeptical of consensus opinions and open to other viewpoints. Good luck with that. However, his recommendation does bear some similarity to Groseclose's idea that journalists could hang with others who are not like themselves in order to better understand other points of view.

There is also the view, of course, that the current state of media bias is just supply following demand. Consumers of information do not want diverse, independent, decentralized media coverage. Instead they seek out viewpoints that confirm their own viewpoints and minimize negative psychic income associated with realizing that their viewpoints may be wrong.

Cognitive dissonance w.r.t. things political facilitates and reinforces media bias among both producers and consumers.

Friday, March 17, 2017

Jacksonian Trump

"And now we are free. I will see you again. But not yet...not yet."
--Juba (Gladiator)

Tom DiLorenzo discusses similarities between Andrew Jackson and Donald Trump. Since his inauguration, Trump has been connecting to Old Hickory. A few days after moving in, Trump hung a portrait of Jackson in the Oval Office. He recently visited Jackson's grave during a swing thru Tennessee. Trump likes to compare the populist movement that supported him to one that supported Jackson and infuriated the entrenched elites of Jackson's day.

Of course, even if they know nothing about Andrew Jackson, Trump's affinity for Old Hickory is enough to cause many NeverTrumpers to dislike Old Hickory.

On the other hand, some people who confess to knowing little about our seventh president might be drawn toward Jackson upon learning that today's statists, including those of the leftist history profession, tend to belittle Jackson.

Stated differently, if he was and still is regarded as an enemy of the State, then it can be surmised that Jackson was probably a pretty good president.

As recounted by Rothbard, Jacksonian populism favored free enterprise. It opposed subsidies and monopoly privileges doled out by government. It supported minimal government at federal and state levels.

Perhaps most importantly, Jacksonians were sworn enemies of central banking. They sought to separate government from the banking system, and to ditch inflationary paper money and fractional reserve banking in favor of gold/silver money and 100 percent reserves.


Jackson vetoed the recharter of the Second Bank of the United States and, in 1833, pulled all federal funds from this precursor to the Federal Reserve--thereby leading to its complete demise.

Not unexpectedly, Jackson's presidential tenure was not without warts. For example, he threatened the use of military force on states such as South Carolina who sought to nullify tariffs viewed as unfairly penalizing Southern trade. Statists, naturally, are prone to consider this as one of Jackson's few positives while in office.

Is Trump another Jackson? DiLorenzo notes some similarities. Trump has called for tax cuts, for firing thousands of government bureaucrats, and for stripping regulations from markets--all of which are consistent with the free enterprise, small government Jacksonian mentality. He has also spoken out against the Federal Reserve at times, although the extent to which he would act against the Fed is certainly questionable. Moreover, Trump seems to attract hatred from the entrenched Washington establishment to an extent similar to Jackson.

On the other hand, Trump is in favor of government sponsored infrastructure spending. Jackson opposed federal spending on such 'internal improvement' projects. Moreover, Jackson actually paid off the national debt--something no president has done since. Trump, with his grandiose spending plans, will likely avoid bringing up this fact when drawing self comparisons to Old Hickory.

DiLorenzo concludes that a good case can be made that Donald Trump is a Jacksonian. I agree that the degree of rancor that Trump has inspired among statists and Washington elites seems on par with Jackson. Trump also enjoys a populist backing that perhaps few presidents since Jackson have had. And, yes, Trump's early actions suggest he wants to shrink government bloat, regulation, and taxes.

However, Trump's stated positions on trade and on government-sponsored infrastructure spending are decidedly anti-Jacksonian. In addition, it will be interesting to see how Trump responds to crises that are certain to arise during his tenure. When the SHTF, Trump's small government Jacksonian side may take a powder.

Donald Trump as a modern day Andrew Jackson? Not yet...

positions in gold, silver

Thursday, March 16, 2017

Spygate II

"What can I say? I'm a spy."
--Harry Tasker (True Lies)

Following up on the question of whether then President Obama spied on Donald Trump during the recent presidential campaign, Judge Nap reiterates (video here) that Obama would have needed no warrant to access Trump communications. Because the NSA is tapped into all US telecommunications on a 24/7 basis, and because the NSA effectively works for the president, then the NSA would have been duty bound to provide Obama with transcripts of Trump phone calls made at any time.

In other words, raw capacity for a contemporary president, including then President Obama and now President Trump, to spy on citizens at will is certainly in place.

However, if Obama did order the NSA directly to provide such transcripts, then there would be a record of such an order. Being the smart bureaucrat that he is, Obama would have known to use a source that would leave no fingerprints of his request.

Such sources exist. For example, those knowledgeable with the situation have suggested that the British foreign surveillance service, Government Communications Headquarters (GCHQ), would have been well positioned to provide transcripts of Trump communications without a paper trail. Incredibly, NSA has given GCHQ (and other foreign intel units) full access to its computers, meaning that GCHQ has digital versions of all communications made in America, including Trump's. Plausibly, Obama could have bypassed all American intel agencies to access the information that he wanted sans his administration's fingerprints.

As such, American intelligence officials would be telling the truth that they did not know about an Obama request for intelligence because the request was made outside US channels. An added twist to this scenario is the fact that the head of GCHQ abruptly resigned three day's after Trump's inauguration, citing a desire to spend more time with his family.

Whether the spying allegations lead to discovery of the truth remains to be seen. What is completely visible, however, is a government sponsored system that tramples our natural right to privacy and, by extension, our right to be free.

Wednesday, March 15, 2017

Markets, Intervention, and Moral Hazard

If you leave, don't leave now
Please don't take my heart away
Promise me just one more night
Then we'll go our separate ways
--OMD

Nice points made here regarding the late Nobel laureate Kenneth Arrow's work on moral hazard. In a 1963 AER paper involving healthcare economics, Arrow theorized that doctors act as agents of insurance companies. Because agent behavior cannot be perfectly monitored, an agency problem is created where doctors will offer more treatments to patients. Because their behavior has been insured, patients will be likely to demand these additional services either by taking more risks or over consumption of treatments.

Insurers bear the cost of this moral hazard. Because they operate with incomplete information that prohibits them from pricing their services accurately, Arrow argued that insurers will be prone to reduce insurance coverage to 'suboptimal' levels. To rectify the situation, Arrow suggests that governments intervene using taxes or subsidies to stimulate desired forms of production. Or, of course, government itself could step in as an insurer.

However, Arrow's logic ignores the moral hazard problem from the standpoint of the entrepreneur. Previous scholars such as Frank Knight posited that it was the entrepreneur's job to deal with situations of incomplete information, particularly with respect to customer and employee (agent) behavior, in order to work out the best uses of society's scarce resources.

In the context of the health insurance problem, there is no predetermined 'optimal' level of coverage as Arrow suggests. Instead, there is a moment-to-moment best guess that constantly changes as entrepreneurs seek to satisfy customer needs under conditions of uncertainty and resource scarcity.

If government intervenes in this entrepreneurial pursuit then it is the one that creates moral hazard by socializing the costs of risky behavior. Entrepreneurial actions seek to reduce moral hazard thru innovation and thru focusing the consequences (positive or negative) of risky behavior on the people who take the risk.

Rather than being impartial referees that reduce moral hazard, governments encourage it. Markets work to reduce situations of moral hazard while intervention institutionalizes them.

Tuesday, March 14, 2017

Policy Uncertainty, VIX, and Equity Valuation

Live those dreams
Scheme those schemes
Got to hit me, hit me
Hit me with those laser beams
--Frankie Goes to Hollywood

These pages have considered Princeton economist Robert Shiller's CAPE (cyclically adjusted price to earnings) ratio as one of the better measures of overall market valuation. This Bloomberg piece includes Shiller's warning that markets according to CAPE are at nosebleed levels.


The piece also notes the divergence between measures of 'economic policy uncertainty' and the VIX--a popular measure of fear in the marketplace (labeled 'equity uncertainty' in the graph below). The VIX can also be viewed as a measure of equity market complacency.

Precisely how 'economic policy uncertainty' is not explained in the piece. One might consider it a dimension of the broader construct of regime uncertainty.


That being said, time series plots show it on the rise over the past few years (not just since Trump's election, btw) while the VIX has been creeping lower. Prior to the past few years, measures of policy uncertainty and the VIX were well correlated.

Currently the divergence between the two series is near record highs. Couple that with record high equity valuations and it is easy to conjure future bearish scenarios.

no positions