Flirtin' With Resistance

I'm outta money, outta hope, it looks like self-destruction
Well how much more can we take with all of this corruption?
--Molly Hatchet

While off their intraday highs, ten year treasury yields are flirting with recent highs at ~2.7%.

Stochastics are not twisty overbought, meaning that there may be energy-in-reserve to mount a significant challenge to resistance here.

An important battleground here...

no positions

Income Inequality by Force

"Hey, Cyn, guess where I am?"
--Tess McGill (Working Girl)

Spot on observation that although President Obama calls growing income inequality 'morally wrong,' income disparity has grown more on his watch than in other recent administration. These pages have frequently discussed the effects of government policy, and this administration's efforts in particular, on the distribution of income and wealth (examples here, here, here, here).

Income inequality itself is not morally wrong. In fact, it is an essential feature of a thriving market economy, as it empowers consumers to motivate producers to better meet marketplace needs. Those producers who do so are compensated well; those who do not do so are paid less.

Although it gets less attention, an even more important feature of a market economy is income mobility, defined as the extent to which people can move (up or down) in income. In unhampered markets, people who better serve the needs of the market move to higher income brackets; those who do not do so drop to lower levels.

Distributions of income and wealth therefore have natural shapes and variances to them, reflecting voluntary cooperation among people seeking to improve their circumstances.

The problem occurs when force is applied to unnaturally alter the distributions. When people use force on their own to alter income or wealth distributions, it is called robbery, fraud, slavery, etc.

When people employ government agents to forcefully alter income or wealth patterns, the associated policies go by many names: welfare, war, fiscal policy, monetary policy, et al. Some of these policies force the distribution tighter while others serve to widen it.

Currently, the policies enacted by the Obama administration are, on the net, serving to force the distribution wider.

If this president is serious about reducing income inequality then he should not apply even more force to the system in hopes of reducing the spread between rich and poor.

The correct response is to remove force from the system.

Feds vs Fourth Amendment

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

Consistent with discussion on these pages, Jacob Hornberger observes that broad federal government surveillance schemes are clearly unconstitutional per the Fourth Amendment. Any search or seizure must be specific by place and person. There is no justification for ongoing or 'blanket' programs.

Government officials claim that these programs are necessary in order to keep us safe. But, as JH notes, there are no exceptions written into the Fourth Amendment that nullify the law in the name of national security.

The framers knew exactly what they were doing when they wrote this amendment. They understood that the federal government would inevitably attract people who would like to do the things prohibited by the Fourth Amendment.

People like those currently in office.

The Fourth Amendment prohibits federal officials from indiscriminately searching homes, businesses, and personal effects. In the event of a crime, the feds cannot go door to door in search of evidence. They also cannot search everyone's things in order to prevent a crime.

If federal officials want to search a person or a person's possessions, then they must get a warrant authorized by a judge. In order to get a warrant, law enforcement officials must swear out an affidavit specifying precisely the evidence that is being sought. They must also produce evidence of 'probable cause.' If officials fail to do either of those things, then it is the judge's responsibility to deny the search warrant application.

People seeking to enact/enforce NSA spying, the Patriot Act, and related programs are precisely the type of people that the framers were seeking to restrain.

Rewriting GDP History

Welcome to the Grand Illusion
Come on in and see what's happening
--Styx

Need more economic activity if you're in government? Then just change the numbers. This week the Bureau of Economic Analysis will revise historic GDP numbers upward.

The BEA will do so by capitalizing intangibles such as spending on research and development. Until this week, R&D has been viewed as an expense--a cost of creating the output that GDP is supposed to measure.

Under the new and improved GDP metric, such costs will now be considered 'investments' and added to GDP. Some other intangible added to GDP include the value of movie originals, long lasting TV programs, books, and sound recordings. Not the sales of these things, mind you, but their assessed and changing value of balance sheet assets.

These changes are estimated to add about 3% to historical GDP since 1929.

In a rare moment of bureaucratic candor, a BEA spokesman observed that the agency is "essentially rewriting economic history."

Practically speaking, this provides government with one more mechanism for fudging the numbers. All officials have to do label all federal spending program as an R&D investments, and then watch GDP soar.

After the historical data are changed, perhaps we'll learn that there was no Great Depression after all.

Fundamental Lesson for Politicians

Doug Carlin: What if you had to tell someone the most important thing in the world, but you knew they'd never believe you?
Claire Kuchever: I'd try. 
--Deja Vu

Sheldon Richmond directs this missive toward President Obama, but his message is one that all politicians must learn. Richmond presents reasoning, grounded in fundamental axioms, as to why government intervention restrains prosperity. The thought process goes like this.

We live in a world of scarcity, where our wants and needs always outstrip means to achieve them.

We therefore economize in order to achieve as many desirable ends as possible.

Economizing means that scarce resources such as materials, labor, and time must be allocated toward one purpose at the expense of another. It also means that we seek the most benefit from the least cost.

Each of us chooses among competing ends by assessing the tradeoffs (a.k.a. opportunity costs), because we do not want to inadvertently give up something we prefer in exchange for something we value less.

When free of government interference, markets help us accomplish the economizing process to a remarkable degree thanks to the pricing system, which helps coordinate production and distribution in a manner that allocates resources to meet needs at the top of our lists.

Government intervention throws this process out of whack. Government forcibly takes resources from people and reallocates those resources in manners other than those desired by people engaging in voluntary exchange.

Moreover, the incentive system for government projects almost guarantees that the resources taken by force will fail miserably. While private sector producers are motivated by profit--which can be realized only if customer needs are met well and in an efficient manner, government bureaucrats face no such motive. Instead, politicians are motivated by the prospect of receiving votes, which leads them to allocate resources for the benefit of special interest groups that promise support at the polls.

Unhampered markets assure that bad trade-offs are avoided or are correctly quickly. No corresponding process exists in hampered markets. Resources are allocated by prospects of political favor. Misallocations, and the likelihood that they will persist, are nearly certain.

Because top consumer needs are no longer being addressed by the market, when government takes resources from some for the benefit of, prosperity declines.

Profiling and Self Defense

The shadows are on the darker side
Behind those doors, it's a wilder ride
You can make or break, you can win or lose
That's a chance you take when the heat's on you
And the heat is on
--Glenn Frey

Nice discussion of profiling by Professor Williams. Profiling is a method of economizing information costs by using readily visible characteristics as a proxy for more difficult to observe characteristics. It is not unlike reductionist statistical operations that seek to obtain high predictive value from a few variables thought to be predictors.

Humans constantly profile other humans. When conversing with friends we study facial expressions and body positioning to gauge their responses to our points of view. Dating services study characteristics of members to infer good matches. Colleges use standardized tests of applicants to predict future scholastic performance.

If people did not engage in profiling, then they would need to spend more time and other resources collecting information about people before drawing conclusions. Because people seek the most benefit from the least cost, profiling is an attractive way to economize scarce resources.

However, since profiling generates predictions or conclusions under conditions of uncertainty (in this case, imperfect information), it is subject to error. Two categories of error are possible. A type 1 error (a.k.a. false positive) occurs when profiling leads to the conclusion that a relationship exists when it really doesn't. A type 2 error (a.k.a. false negative) occurs when profiling leads to the conclusion that no relationship exists when it really does.

To exemplify, let's employ a context where the use of profiling attracts considerable attention: predicting criminal behavior. A friend and I sit down to eat at a casual restaurant. Customarily, I like to sit with my back to a wall so that I have a good view of things. I proceed to scan the room for anything unusual. An unshaven younger man dressed in a long coat stands over by the bar. He appears to be alone and does not converse with others at the bar. He looks down at his watch and then looks out the front door. He does this a few times.

Perhaps he's just waiting for someone. Or perhaps he is preparing to engage in criminal activity. Robbery, shooting, bombing...

I am engaging in profiling. I am observing a limited number characteristics and behaviors of this man in the context of the surrounding situation and using my observations as the basis for forecasting criminal conduct.

If the man's wife subsequently walks in and they proceed to a table, or if the man finishes his drink and walks out the door never to return, then my forecast would be likely be wrong and I may allocate no further attention to this man. If so, I will have (thankfully) committed a type 2 error--I proposed a possible relationship that did not turn out to be true.

While scanning the room I also notice three mid-aged women sitting at a table across the way. They are dressed casually and chatting among themselves. They appear to be enjoying each other's company over dinner. Because I notice nothing suspicious, I give this group no further thought as to potential criminal behavior.

If, subsequently, one of the women suddenly stands up, pulls out a machine pistol, and screams that everyone here is going to die for jihad, then I will have (unfortunately) committed a type 1 error. I saw no possible relationship between these people and criminal activity when in fact there was one.

Note that in these two cases, the cost of the type 2 error was small while the cost of a type 1 error was large. This is typically the case, and implies that it is often worthwhile to profile in order to identify potentially dangerous situations.

As long as I do not invade the pursuits of others to do so (if I did so I would be an aggressor rather than a defender), profiling can be an effective means for economizing valuable resources, such as time, that assist in effective self-defense against aggression.

Freedom and Safety are Not Equals

"People should not be afraid of their governments. Governments should be afraid of their people."
--V (V For Vendetta)

Cogent thought process by Judge Nap on the false choice between safety and freedom. The argument goes like this.

Man was born free.

His right to freedom is inalienable, meaning that it cannot be legitimately taken away by another worldly entity.

Man created government to help protect his freedom.

Government properly does so by helping individuals protect against aggression by others.

Those who conflate safety and freedom, claiming that liberty and safety must be balanced against each other, are philosophically, historically, and constitutionally wrong. Liberty is the default position, the natural state.

Safety, on the other hand, is a good--a good that we have instructed government to obtain.

Liberty and safety are therefore not in balance because one created the other.

Every conceivable conflict between the free choices of individuals and their instructions to government to safeguard liberty must favor the free choices of individuals because freedom is inalienable. I cannot authorize government to take away your freedom and you cannot authorize government to take away mine. A majority of all but one cannot authorize government to take freedom from that one minority individual.

As such, it is the free choice of individuals to resolve the conflict between freedom and safety. It is not one that government can rightly make.

If anyone truly believes that, by silencing him or monitoring him or taxing him, government keeps him safe, and that those are the least restrictive means by which to do so, then that person is free to surrender his speech, privacy, and wealth.

The rest of us have the right to retain ours and provide for our own safety.

The reason that we have consented to limited government in the United States is to preserve the freedom to pursue happiness wherever that might lead for each individual.

That freedom cannot exist if we are subservient to government in the name of safety.

Bernanke's Fail-Well Tour

Everybody stop
Hey, what's that sound?
Everybody look what's going down
--Buffalo Springfield

Ron Paul reflects on Fed head Ben Bernanke's recent Humphrey Hawkins comments and the consequences of Fed policy. He observes, as we have many times on these pages, that the Fed's policies are lining the pockets a privileged few.

"The Fed thinks that you should lose two percent on the value of your dollar this year," he says. He also notes that if price changes were measured more accurately that the destruction in purchasing power would be even more apparent.

Where does that loss of purchasing power go? Into the pockets of bankers and to the owners of financial assets.

This is the biggest wealth transfer in the history of the world and Bernanke is trying to deceive his way to the finish line (a.k.a. retirement).

You can do as he hopes and look the other way, or you do what you can to stop being robbed.

Search Costs

Reverend Clayton: You wanna quit, Ethan?
Ethan Edwards: That'll be the day.
--The Searchers

Search costs are costs incurred by buyers ahead of a purchasing decision. They largely involve identifying and assessing various alternatives related to a prospective purchase. What sellers and products do I have to choose from? What are the product features that are important to me and how do the various choices stack up? How much do the various alternatives cost? Where can I buy this product? What are the risks associated with each alternative?

Although they may be paid in monetary terms, search costs are often paid in the form of time and attention required to scope out the purchasing choices. Search costs are 'up front' costs, meaning that they are paid in advance and largely independent of the actual purchase.

The search process itself can be viewed as a risk reduction strategy. The more buyers engage in search, the lower the risk that the subsequent purchase will be a dissatisfying one.

Parenthetically, producers and sellers also face up front costs. Often referred to as 'set-up' or 'order' costs, these are the costs of getting ready for production or for selling. Equipment changeovers, finding appropriate suppliers, filling out purchase requisitions, blueprinting, fixturing, and employee training are some of the up front costs that producers might encounter.

Because people are economizers, seeking the most personal benefit from the least personal cost, buyers are naturally interested in ways to reduce search cost. Because sellers know this, advertising and other media that push product information toward consumers have been developed to lower the search burden. Advertisers are not engaging in benevolent activity for doing so, of course. They hope that they will gain an edge by providing information about their products to consumers.

The internet has also been a major search cost reducer for buyers. And arguably quite an empowering one, as consumers have much more information from various sources at their fingertips.

Buyers doing their 'due diligence ahead of purchases is an important feature of unhampered markets. When buyers carefully engage in search, subsequent purchases provide high fidelity signals to sellers about what buyers perceive as value--i.e., benefits vs cost, reward vs risk. Sellers respond to positive signals (purchases) by doing more of the same. Sellers respond to negative signals (no purchases) by doing less of the same and more of something different (improvement and innovation).

Scarce resources are therefore well economized and goods are rationed according to the needs signaled by consumer purchases.

Hampered markets often prompt consumers to engage in less search than they otherwise would. Buyers search less ahead of purchases because they view interventionary forces as substitutes for search, thereby reducing the risk that purchases will be dissatisfactory. Doing so appeals to buyers' economizing nature.

The examples are legion. If buyers are concerned about the safety of food and there is a government agency that purports to oversee food safety among producers, then buyers will be apt to engage in less search to make sure that food is appropriately safe. If government subsidizes health care purchases, then consumers will be less apt to look for low cost alternatives. If government promises to reimburse all account holders in the event of bank failure, then prospective depositors will engage in less due diligence to study the balance sheets of banks as long as a 'government insured' sign hangs in the window.

Purchase behavior in hampered markets sends a distorted signal to producers about what buyers truly value--because they have not completely 'done their homework' ahead of purchases. Moreover, hampered markets create conditions of moral hazard where buyers take on more risk (by searching less) because they perceive their purchases as insured by the government.

If the interventions are severe enough, then subsequent purchasing signals sent to producers are likely to drive a significant misallocation of resources in the production and distribution systems.

Moreover, buyers, by cutting their search processes short, are likely to take on more risk than government has the capacity to mitigate.

Mainstream Republicans

They're seeing through the promises
And all the lies they dare to tell
Is it heaven or hell?
They know very well
--Journey

Based on a recent editorial claiming that Rand Paul could never be a mainstream Republican, Jacob Hornberger wonders why Paul would want to. As these pages have observed many times, there is little difference between mainstream Republicans and Democrats.

Aside from perhaps subsidies to NPR, mainstream Republicans have signed off on the entire Welfare State package. Social Security, Medicare, Medicaid, federal education programs, unemployment benefits, foreign aid, et al. Mainstream Republicans have embraced it all.

All the while, mainstream Republicans claim to be for "freedom and free enterprise." This is an empty rhetoric of deception, denial, and delusion.

In addition to enthusiastically backing the Welfare State, mainstream Republicans were the architects of the Warfare State. Starting with its 'founder' Lincoln, mainstream Republicans have favored the use of military force to accomplish its agenda. The results over the past 150 years include tens of millions dead and $trillions in wasted resources to support empire and special interest building--usually legitimized under the ruse of "national security."

Paul demonstrates that political philosophy is inaccurately viewed as a one dimensional left-right spectrum. It is better viewed in two dimensions--as a landscape. RP's positioning is far from mainstream Republicans.

The alternative position on the political landscape that Rand Paul reflects is becoming increasingly visible to many voters, particularly young ones.

This frightens mainstream Republicans to no end.