Browsing the blog archives for December, 2010.

(Alleged) Problems with Capitalism


Rarely does a day pass when I don’t hear multiple complaints blaming capitalism for maladies ranging from war and hunger to mass inequality and social injustice. Many of these tirades come from otherwise nice and informed people, but they just don’t seem to understand economic realities. I am always searching for simple ways to explain concepts like capitalism, so I thought I would try to create categorize for all of these complaints. As it turns out, all of them seem to fall into one of three groups.

The first group consists of problems instigated by government interference with capitalism. Complaints in this category often come from well-educated analysts who either have not thought through a particular problem or refuse to do so. The housing market collapse is a great example. Blame the greedy bankers all you want, but without an intricate government-established infrastructure including the Fed, Fannie & Freddy, and a healthy dose of social engineering (e.g., the Community Reinvestment Act), the downturn simply would not have happened.

The second group consists of problems associated with ethics, not capitalism. Enron is a classic example. Our founders understood humanity’s proclivity for power so well that they devised a system of checks and balances designed to keep maximum power in the hands of individuals. They also recognized the responsibility of government to establish and maintain a sound legal infrastructure so that victims can recover damages from wrongdoers. When an executive commits a crime, the problem is not one of capitalism, but of human nature. Pick up any newspaper and you’ll read about fraud and deceit in all walks of life, including business, education, and government. Besides, the marketplace does a better job than government when it comes to rooting out scoundrels. Corporations must deliver value to survive, but Washington has access to the printing press. This is why Enron has been dissolved but Washington continues to drive us deeper into debt.

The third group is comprised of problems that have nothing to do with capitalism. Wal-Mart, for example, is often denigrated for not providing comprehensive medical coverage to all of its workers. Wal-Mart is just greedy, we are told, and greed is synonymous with capitalism. However, firms have no moral obligation to pay for health insurance simply because they hire workers. It’s nice to do and helps many companies attract and retain good workers, but it’s not required. Ironically, today’s confused expectations of company-supplied medical insurance can be traced to government intervention. During World War II, wage and price controls prohibited companies from raising salaries to attract and retain the best workers, so companies added and expanded health insurance instead. Add tax breaks and rising payroll and income tax rates, and you have a system that discourages individuals from buying their own insurance. Much of the inefficiency in this system can be attributed to the fact that consumers rarely pay directly for their own healthcare, which is why many providers seem to be working more for the insurance companies than for their patients. All of this, of course, has nothing to do with Wal-Mart or greedy capitalists.

Perhaps this three-category explanation can help in your next debate with your socialist coworker or the neighbor who just watches too much network news and doesn’t stop to analyze what he hears. At any rate, our challenge is to educate others about how markets function. As Reagan put it, “the trouble with our liberal friends is not that they are ignorant, but that they know so much that isn’t so.”


Constructing a Better Argument


I received one of those “I really like your blog but…” emails the other day. This one followed the typical pattern. The sender claims to be a conservative but takes issue with one or more of my “extreme positions.” He then makes an emotional case for a moderate/liberal viewpoint, wishes me well, and challenges me to be less divisive and less libertarian in the future. Sometimes these guys might actually think they’re real conservatives, but I’m sure most know better.

This time the issue was healthcare, and the sender argued that any real conservative would favor universal coverage. Of course, the essence of conservatism is individual rights and responsibility, which flies in the face of almost anything universal. There might be some exceptions to the rule, but you have to make a strong case. He didn’t. I’ll skip the rest of the details, as this is not the point of the blog. In the spirit of the season, I thought I’d offer my liberal friends some a few basic pointers on formulating their arguments. These work for conservatives and part-libertarians like me as well.

1. Know the facts. For example, you shouldn’t argue for tax “cuts” for low wage earners when Americans in this bracket are not net tax contributors in the first place. You’re better off taking an honest approach and arguing for more wealth redistribution.

2. Avoid emotional stories. The world is full of suffering people, but we shouldn’t develop public policy to alleviate every perceived need, and doing so is usually irrational anyway. For example, arguing for amnesty because you want to help 40 million illegals currently in the U.S. ignores hundreds of millions of impoverished individuals in other countries who would come here legally if they could. Are you suggesting that we open the door for them as well? Who’s going to pay the bill? Emotion is not a bad thing; it’s just not the basis of a sound argument.

3. Identify all of the consequences of your proposal, even the unintended ones. For example, history tells us that extending unemployment benefits actually increases the unemployment rate because recipients have less incentive to pursue and accept a marginal job offer. You might argue that extending benefits is the right thing to do, but you can’t argue that doing so will create jobs and/or growing the economy.

Think about these suggestions and you’ll understand why I’m a conservative. If you know your facts and think rationally about problems, you’ll end up favoring individual liberty every time. Even when you’re tempted to favor a government solution, stopping to consider the unintended consequences of a new or expanded entitlement should bring you to your senses. 

Merry Christmas!


Healthcare reality


A federal judge ruled today that Congress lacks the authority to require Americans to purchase health care. This is a serious blow to the scheme that opened the door to universal coverage in the United States. Here’s why.

According to Obamacare, everyone has a right to coverage without regard to individual risk or lifestyle considerations, and insurance companies cannot align their premiums with risk. The result is easily predictable—a large number of Americans demanding policies at rates far below their projected medical expenditures. Mandatory coverage is necessary to make up this shortfall because it would grow the number of healthy Americans who must pay the freight. Put another way, a larger percentage of premiums from the healthy must be confiscated to cover the expanded losses generated by the unhealthy, and a mandatory coverage requirement prevents low risk Americans from avoiding the scam. Without their contributions, the levels of rationing and wealth transfer required to finance the system would balloon out of control.

Don’t misunderstand me. I am not bashing Americans with high medical bills and I am certainly not suggesting that health insurance is a bad concept. The problem here is that Obama’s notion of insurance violates the fundamental requirements for an insurance market to work properly. Buyers and sellers MUST be permitted to enter into agreements voluntarily. Companies should have the right to refuse coverage to individuals who are projected losses, and they must be permitted to charge premiums that reflect the risks they incur. Likewise, individuals must be able to refuse coverage if they don’t want it. Obamacare rejects these principles and instead seeks to redistribute wealth through the market. This is why Obamacare looks more like social security than health insurance. It’s all about wealth redistribution.

The entire notion of Obamacare assumes that Americans have a right to quality healthcare without paying the full price. Just eliminate or reform the bad guys—insurance companies, doctors, hospitals, and big pharma—and a small co-pay should be enough to keep the system running. Nothing could be further from the truth.

If this ruling survives an appeal, it could bring Obamacare to a halt. The timing couldn’t be better for the incoming Republican Congress, which should immediately move to dismantle the scheme and propose rational market-based reforms.


The great tax compromise


For once I agree with most of the liberal Democrats in Washington. The compromise on the Bush tax cuts is a bad idea. Here’s why: 

  1. We lost the language battle. The two-year extension suggests that Washington is giving Americans some kind of temporary reprieve. Why not insist that the tax cuts be made permanent? Obama can run on raising them in 2012 if he likes. Of course, he would prefer to talk about “expiring tax cuts” when reelection time comes.
  2. We lost the emotion battle. According to the deal, unemployment benefits will extend through Christmas 2011, a time of year when Republicans will hesitate to cut them off, lest they be portrayed as Scrooge at a time when the 2012 election cycle starts to heat up. Basic economics and common sense tell us that unemployed workers are less likely to pursue and accept new jobs—perhaps are less than desirable wages—when they are being paid not to work. A 6-month extension would have given the new Congress an opportunity to address the issue in mid-2011.
  3. We lost the deficit battle. We are told that the compromise balloons the deficit because the tax cuts won’t be “paid for” by spending cuts. This is debatable because tax cuts spur economic growth (i.e., the Laffer Curve), thereby increasing revenues. Whether the increase is revenue would balance out the lower tax rate remains to be seen. Nonetheless, we should have accepted the liberal argument and cut spending accordingly. The deficit is a primarily a spending problem, not a tax problem. Whenever the left argues against deficits, we should accept their premise and immediately propose spending cuts.
  4. We lost the political battle. Simply stated, we could have gotten more in the bargain. Obama does NOT want to enter 2011 with tax increases for the middle class, and letting the Bush tax cuts expire would have done just that. Had Republicans stood firm, he would have probably negotiated a better deal. If not, the new Congress could have a bill making the cuts permanent on his desk to sign by February, forcing Obama to stake a position on the issue. The current compromise deprives the new Congress of that opportunity.

If you believe the media reports, Obama might not have enough Democrat support to get the compromise through Congress. They could do us a huge favor by rejecting it. Doing so would position them as hard-line leftists and allow the Republicans to defer the issue to the new Congress.

I recognize that compromise is necessary in Washington, and you never get everything you want. Nonetheless, it is time for our politicians to stand on the strength of a strong conservative shift in the country. Don’t kid yourself—many of the Republican voters in November may not like the Democrats, but they will return to left in 2012 if Republicans don’t push for a noticeable reduction in the size of government. The Republicans are holding a lot of good cards now, but they better not blow it.