In support of (legalizing) insider trading

In today’s Wall Street Journal Don Boudreaux argues that insider trading should be decriminalized.

Reminds of what Milton Friedman had to say on the issue:

You want more insider trading, not less. You want to give the people most likely to have knowledge about deficiencies of the company an incentive to make the public aware of that.

TABOR

Gerald Prante of the Tax Foundation has an interesting take on what TABOR means for the foundations of the American political system.

TABOR, for those unfamiliar with the term, refers to Colorado’s Taxpayer Bill of Rights provision that imposes exogenous limits on the amount state and local government spending can grow in a state. Similar provisions are being proposed in those two states. But is it necessary?

If government always acted in the best interest of society, TABOR would never be needed. Therefore, the supposed need for TABOR is derived from a lack of trust of the representative democratic system. TABOR is kind of like the Bill of Rights in the U.S. Constitution: the Founding Fathers imposed restrictions on Congress (representatives of the people) from passing laws that restrict speech, establish religion, etc. If the Founding Fathers thought that Congress would always do what’s in society’s best interest, we wouldn’t have needed a 1st Amendment that starts with the phrase “Congress shall make no law…” The Bill of Rights is inherently anti-democratic.

Maybe as a first-best solution (in a world of a purely benevolent government), the First Amendment isn’t the best policy. But it’s probably a second-best solution given that Congress isn’t to be trusted when it comes to actively regulating speech, religion, etc.

And that’s the ultimate question with TABOR. If government was purely benevolent, the first-best solution would be some optimal tax-spending mix. But if government is pre-disposed to get larger and larger (when left to its own devices) and be at a size that is far above optimal, a TABOR has the potential to improve societal well-being. It’s likely not to lead to a perfect outcome, but it shouldn’t be compared to what a perfect, purely benevolent government would do. It should be compared to what an imperfect government is actually doing (and likely to do in the future).

That being said, for TABOR to be successful at improving social well-being, it must be the case that there is a significant amount of waste in the state’s spending. If politicians aren’t interested in maximizing social well-being (which is the necessary condition for TABOR in the first place), then who is to say that the spending cuts they make in response to TABOR are going to be right ones?

If the politicians decide to cut funding for some wasteful project as a result of TABOR, then society wins. Resources that were being wasted are now being put to better use (via lower taxes). But if those politicians, in response to TABOR, cut spending that actually has a high marginal social value (higher than the total marginal cost from taxation), social well-being could be made worse off as a result of TABOR. (Just saying that because government spending / GDP fell that such a policy change is good is nonsense. It depends on what type of spending was cut.)

In summary, TABOR would undoubtedly improve social well-being if politicians cut the least valuable government service in response to TABOR’s enactment. But given that TABOR is necessary because we can’t trust the politicians in the first place to do what is right for society, what is the probability that they are going to cut spending in response to TABOR that has a value to society less than the taxes that TABOR would be cutting? That’s the second-best question for both TABOR opponents and TABOR supporters that is most important, yet rarely asked.

The main point here is one that is rarely brought up but extremely important. All government spending is not created equal. Some government spending is absolutely necessary (i.e. police, fire protection, and military spending), some is beneficial but not critical (education spending), and some is no better than putting money into a pile and burning it (subsidies for failing industries). Unfortunately, it seems that the more useless – or even harmful – the type of spending, the more effective a tool it is for politicians to buy votes from various groups (rather than representing the interests of the individual).

This brings us to the issue of TABOR as an “anti-democratic” measure – which it absolutely is, as is the Bill of Rights. But this anti-democratic nature is by no means a negative. Democracy, by its very nature, is anti-freedom. Democracy is rule by the majority, and if history has taught us anything, it is that a majority will frequently find cause to violate the rights of the minority. Freedom can only mean one thing: individual liberty. The concept of  “collective rights” is an absurdity. No group of people, no matter the number, can possess rights. Only individuals possess rights. And when we are dealing with questions of government spending and taxes, we are dealing with one of the most sacred category of rights: property rights. Any legislative body that has any control over its citizens property (i.e., any legislative body that levies taxes) must be subject to severe anti-democratic measures.

Cass Sunstein: Regulatory Czar

Our new unelected, unconfirmed, unaccountable, and unconstitutional Regulatory Czar is Cass Sunstein, a law professor and longtime adviser to Barack Obama. In 1999 Sunstein co-authored an article entitled “Why We Should Celebrate Paying Taxes”. To call the article “appalling” is an understatement. It begins by, basically, crediting government with all of civilization’s progress.

“It’s our money, and we want to keep it!”

“Why should the IRS take our money, when the government wastes it and we want to spend it on ourselves!”

These are piercing sentiments, especially on April 15. But are they defensible? In what sense is the money in our pockets and bank accounts fully “ours”? Did we earn it by our own autonomous efforts? Could we have inherited it without the assistance of probate courts? Do we save it without support from bank regulators? Could we spend it (say, on the installment plan) if there were no public officials to coordinate the efforts and pool the resources of the community in which we live?

Do not get up tomorrow and drape your house in black! For tax day is not a day of national mourning. Without taxes there would be no liberty.

Without taxes there would be no property. Without taxes, few of us would have any assets worth defending.

Cass Sunstein is crediting government with creating wealth, implying that property rights emanate from government. I believe it’s self-evidently logical to equate “taxes” with “government” when reading Sunstein’s article. Government is not responsible for individual innovators and entrepreneurs. If these men of the mind did not put their faculties to use and create wealth, there would be nothing for the tax collectors to collect. As for the emanation of property rights; I’ve stated before my firm belief that they are a natural by-product of man’s right to his life.

There should be no question that man’s life is his and his alone. If we accept this basic premise, we see also that he has an inalienable right to his property. If, by his time (i.e. his life), he has produced property (this would also apply to maintaining property, such as land) he has the right to that property. When man works, he is, in effect, trading his time (a portion of his life) for whatever it is that he is producing. Because he had a right to his time/life, he has a right to whatever thing he traded it for.

As for Sunstein’s claim that government coordinators are necessary to effectively allocate resources – it’s barely worth responding to. The record of history is indisputable that (with the exception of certain non-rivalrous, non-excludable goods and services) the invisible hand of the free market (i.e. individuals acting in their own selfish interests) is far superior to any centrally-planned effort.

But perhaps I’ve jumped the gun. Cass Sunstein offers some examples of the validity of his ideas:

Indeed, property owners are more deeply “dependent” on government than food-stamp recipients. The man who purchases several news organizations owes more to legislative, adjudicative and administrative action than the woman who sleeps under one newspaper at a time.

While it is true that the property owner may be subject to more legislative, adjudicative, and administrative action than the homeless woman, he is hardly “dependent” on government. To the contrary, government is a roadblock in his path of fulfilling his potential as a human being. Government protects property rights because that is a more efficient system than each individual protecting his own property.

Even if we lived in a perfect world, there would still be some need for a government to protect against the possibility of looters attempting to attack the rights of human beings. Perhaps in Cass Sunstein’s perfect world, businessmen are extremely dependent on the government – or to put it more accurately: in Cass Sunstein’s perfect world, the individual is dependent on the collective. I, for one, would call this type of world a hell on earth (those unfortunate soul’s who lived in Soviet Russia under Joseph Stalin would likely agree with me). Some might say that I’m reading too much into Sunstein’s comments. Sadly, this is not so. Sunstein goes on to say:

This is all a truism, in a way. But it has yet to become a commonplace. Its implications are seldom thought through. Most importantly, the dependency of individual freedoms on collective contributions has not sufficiently penetrated the American debate over our basic rights and the proper limits of the state.

Unfortunately for Sunstein and his depraved philosophy, observable reality does not support his premises. There is no such thing as “collective contributions” because there is no such thing as a “collective” among mankind. Man exists as an individual. Any contributions come from an individual mind. This, to me, is self-evident. Spiritual notions about a “collective” aside, can any one name one invention, discovery, work of art, or idea that has come from a “collective” mind? No. Individuals may collaborate and work together, but they are merely using their individual faculties in concert – each specific action, idea, contribution comes from an individual mind. Individual freedoms depend on absolutely nothing. Individual rights are possessed by every human being as an inherent and inalienable quality that is an integral part of his or her nature.

Sunstein continues on in his ignorance and rejection of basic human dignity:

Unlike fees, levied on those who directly enjoy a service, taxes are levied on the community as a whole, regardless of who enjoys the benefits of the public services funded thereby. Most rights are funded by taxes, not by fees. This is why the overused distinction between “negative” and “positive” rights makes little sense. Rights to private property, freedom of speech, immunity from police abuse, contractual liberty, free exercise of religion–just as much as rights to Social Security, Medicare and food stamps–are taxpayer-funded and government-managed social services designed to improve collective and individual well-being.

For all rights–call them negative, call them positive–have that effect. There is no liberty without dependency. That is why we should celebrate tax day. As Oliver Wendell Holmes, the great Supreme Court justice, liked to say, taxes are “the price we pay for civilization.”

There is much in these statements that could be attacked – but every above blasphemy against the individual rests on two statements found in the preceding paragraphs. The first is the notion of “collective well-being”, and the second is the sentence “There is no liberty without dependency.”

What, exactly, does “collective well-being” mean? It could mean whatever allocation of resources is best for every individual member of society. The first problem with this view is that it is highly unlikely that, in a society of millions, one given scheme for allocating resources is optimal for every member. The second problem is that this would require (if we reject a free-market system as Sunstein clearly has) that some central body dictate the uses of every individual’s property. Not only is this abhorrent to anyone who values his freedom, history has shown time and time again that it leads to ruin.

The second possible meaning of “collective well-being” is even more grotesque than the first. This meaning holds that the “collective well-being” is the best allocation of resources for the majority of people – in other words, the greatest good for the greatest number. But if we practice this philosophy, if even one member of society is harmed for the sake of the rest, we have turned the slighted minority into sacrificial animals. If we hold down one to raise up another, we have, as Ayn Rand said, become a society of cannibals.

As for “no liberty without dependency”, this is just false. It is true that in a free market system, individuals depend on one another – but only when they have chosen to. The type of collectivization that Sunstein would like to see take place in America would force dependency on American citizens. For centuries, mankind operated in societies based on dependency. From the earliest human tribes, to ancient Egypt, to feudal Europe, to Soviet Russia: everyone who lived under these systems was dependent, but none were free. Not until the United States of America, where the individual was held to be sacred above all else on earth, was freedom truly understood and practiced (albeit to a limited extent at first, but still to a far greater extent than had previously been known).

Cass Sunstein’s ideals are antithetical to the ideals of the Founding Fathers. They should be abhorrent to all Americans, and his very presence in the White House should be viewed as an abomination to our country, and as a blasphemy against the sanctity of individual rights.

The Power of the Poor

On October 8, PBS will braodcast The Power of the Poor, a new documentary featuring Hernando de Soto, among my favorite economists. The documentary was produced by the same team that brought us Milton Friedman’s classic documentary series Free to Choose. Below is a preview of what to expect:

The Power of the Poor will demonstrate “how free markets, individual freedom and especially the right to property can transform the poor into the most powerful resource in the world. At its heart is the potential triumph of capitalism as a system.”

Click here to read my previous post on the ideas of Hernando do Soto.

A 50,000-Foot View of Government’s Role in Health Care

Economist Gerald Prante of the Tax Foundation takes a sky-high look at health care reform:

There are many areas of society where the outcome of the free market does not maximize social well-being. In other words, markets do fail. So in these areas, there is the potential for government to improve social well-being. This leads us to two questions: (1) In what areas is the free market failing to maximize social well-being? and then (2) Are the expected benefits of a given government policy designed to combat the market failure greater than the expected costs?

This is the framework with which we should be analyzing all government policies, including the proposed policies in the area of health care.

Obviously, a purely free market in health care would not maximize social well-being relative to a utopian situation in which a purely benevolent government with adequate information corrected the market failures. The problem though is that government policymakers are likely not going to propose the best policy solution on top of the fact that government administration is not costless. So we are always faced with questions of second bests on health care policy (like almost all government policies).

Just because somebody says a free market in health care doesn’t produce as good an outcome as the free market in say potato chips due to the various market failures in health care (e.g. moral hazards, adverse selection, lack of competition in health care, distributional concerns, public health, etc.) doesn’t mean that government doing “something” in response is automatically going to make society better off. That “something” must be better than the imperfect free market alternative, or else we need to head back to the drawing board.

There is another side to this, however. Even IF (and this is a big “if”) the government could produce a better outcome than the free market, there is still a great possibility that such government action would be incompatible with individual rights. Most government intervention in the economy violates individual property rights by distributing income from those who earned it to those who did not.

The Invisible Economy

Jeremy Main of Fortune Magazine writes,

The underground economy, also called the informal, invisible, or black economy, is regarded around the world as a refuge of drug traffickers, smugglers, and tax evaders. Now a new view is taking hold: At least in the Third World, the underground economy is mainly good, not bad. It embodies the entrepreneurial energy of ordinary people striving in admirable ways to break out of poverty. It comprises thousands of craftsmen, storekeepers, truck and bus drivers, and food vendors whose operations would be perfectly legal in the U.S. but whose governments force them to ply their trades illegally. The underground economy is part of the solution, not the problem. If this entrepreneurial spirit were legalized and nurtured rather than fettered and suppressed, goes the argument, a burst of competitive energy would be released. Living standards, which have been dropping in much of the Third World, would start rising. International trade would increase, and developing countries could service their huge and debilitating external debts more easily.

Using data from the World Bank’s 2002 World Development Report, Peruvian Economist Hernando de Soto calculates that,

The total value of real estate held but not legally owned by the poor of the developing world is at least $9.3 trillion.

He estimates that the total amount of land informally or illegally held is 85% of total urban land holdings and 53% of total rural land holdings. By assigning a fair market value to all this informally held land, the grand total comes to $9.3 trillion-more than the total value of all the companies listed on the New York, Tokyo and London stock exchanges.

De Soto also points out that,

In Argentina, according to Marcos Victorica of the Institute of Contemporary Studies, an economic research organization, the unreported, informal economy last year produced $50.4 billion, vs. the official GNP of some $70 billion.

In Kenya the lethal minibuses called matatus that cruise around Nairobi are the most colorful expression of the unofficial economy, which the ministry of planning says contributes about 35% to the country’s GNP.

He explains,

Extra legal businesses are taxed by the lack of good property law and continually having to hide their operations from the authorities. Because they are not incorporated, extralegal entrepreneurs cannot lure investors by selling shares; they cannot get low interest formal credit because they do not even have legal addresses. They cannot reduce risks by declaring limited liability or obtaining insurance coverage. In fact, the only ‘insurance’ available to them is that provided by their neighbors and the protection that local bullies or mafia are willing to sell them. Moreover, because extralegal entrepreneurs live in constant fear of government detection and extortion from corrupt officials, they are forced to split and compartmentalize their production facilities between many locations, thereby rarely achieving important economies of scale. With one eye always on the lookout for police, underground entrepreneurs cannot openly advertise to build up their clientèle or make less costly bulk deliveries to customers.

Ultimately, De Soto concludes,

Most people do not resort to the extralegal sector because it is a tax haven but because existing law, however elegantly written, does not address their needs or aspirations. In Peru, where my team designed the program for bringing small extralegal entrepreneurs into the legal system, some 276,000 of those entrepreneurs recorded their businesses voluntarily in new registry offices we set up to accommodate them – with no promise of tax reductions. Their underground businesses had paid no taxes at all. Four years later, tax revenue from formerly extralegal businesses totaled US$1.2 billion.

Informal Economy as percentage of GNP (follow link for complete data):

For more on the invisible economy, Capitalism’s struggle in the developing world, and property rights, I would highly recommend reading Hernando do Soto’s The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else.

Economic Freedom and the Average Size of the Informal Economy

Principles, Not Laws

David McIntosh of the Wall Street Journal urges Senators to “Vote No on Sotomayor”. McIntosh gives some excellent examples of Judge Sotomayor’s lack of respect for property rights, the Second Amendment, and racial equality. Many conservative or libertarian-leaning individuals will state that a judge’s priority should be to uphold the Constitution – I would argue that this criteria slightly misses the mark. The Constitution – and laws, in general – are meaningless, in and of themselves. Let us not forget that the Constitution used to consider blacks to be only 3/5 of a person. The focus of a judge’s (or any public official’s) attention should instead be the principles on which the Constitution was based. Granted, these principles have not always been consistently practiced in our nation, but that is a result of inconsistency in the application of those principles. The moral and philosophical foundation of our Constitution is granite. That foundation is the idea that every human being is an end unto himself, that society is subordinate to the individual, the the “common good” does not exist – only the sum of the good of individuals. When the Constitution is viewed in this way – with full knowledge of the underlying principles – it is clear that it is one of, if not the, greatest documents in human history.

So, when it comes to the Second Amendment, property rights, racial equality, and the unborn – it is not the Constitution, per se, that our public officials should be concerned with, but the principles of individual liberty. I would like to briefly look at the ramifications of these principles for the issues listed above.

The Second Amendment should be, without question, held inviolate. In the natural state of man, every individual has the right to defend himself, those he values, and his property. This right emanates automatically from man’s right to his own life. As this right to self-defense exists as a part of man’s nature and thus predates government or society, government has no right to abridge this freedom (unless it has been abused in order to harm others). One of the most insidious violators of humanity throughout history has been government. Because government possesses firearms, I see no rational objection to firearms being included in man’s right to self-defense.

Man’s survival is not granted to him by nature. In order to survive, man must produce. In order to produce he must be allowed to own property. The right to property emanates from man’s right to his own life. Again, this right is inherent in man’s nature, thus predating government and rendering government morally impotent in any attempts to violate it.

The problem with discussing “racial equality” is that the term is not uniformly employed. Obviously, the law should be objective and impartial. But it should be remembered that, as F. A. Hayek said: “There is all the difference in the world between treating people equally and attempting to make them equal.” Too often, programs aimed at social inequalities violate the rights of individuals. Quotas, for instance, may seem to provide much-needed help to minorities who have, in the past, been oppressed. But they violate the rights of non-protected classes of citizens who, in this day and age, have not contributed to those past crimes against certain minority groups.

“The Unborn”, there’s a forbidding topic. I am, for the record, pro-life. Though I do not wish to discuss those views on this site I will offer my assurances that they are not, in any way, based on my religion – I am a firm believer of the separation of morality and the state. However, I will say that both sides of the aisle frequently miss the mark on the abortion debate. The pro-choice side frequently argues from the point of women’s rights, while the pro-life side frequently argues from the point of religion. Both of these approaches are inconsistent with a proper view of government and individual rights. IF abortion is the termination of a human life (i.e. a person achieves human status before birth), then the rights of the mother have no place in the discussion as she has no right to end another life. IF abortion is not the termination of a human life (i.e. a person does not achieve human status before birth) then the religious arguments carry no weight as you cannot legislate on the basis of subjective morality. So the issue is, as always, a question of individual rights.

I believe that all of our current political and economic problems can be traced to one root: a lack of understanding of and respect for individual rights. We must, as a nation, rediscover objective morality and, as our Founding Fathers did, hold the individual sacred above all else.

The Jerusalem housing discrepancy

Al Bawaba reports:

The United States has demanded that Israel suspend a planned housing project in east Jerusalem following a complaint by Palestinian President Mahmoud Abbas, senior Israeli officials said Sunday. This is the latest in disagreements between the US and Israel over settlements.

The Israeli officials confirmed that Israeli ambassador to the US, Michael Oren, was summoned to the US State Department and told that the housing project developed by American millionaire Irving Moskowitz, a longtime supporter of Israeli settlements, should be canceled.

According to Israeli Army Radio, the US demanded that Israel revoke approval for the project.

Abbas reportedly told the Americans that the construction of Jewish housing in east Jerusalem would shift the demographic balance of east Jerusalem.

Abbas’ argument seems reasonable, though the issue of property rights–whether to sell or purchase– is muddied by the the region’s political situation. At any rate, I find it important to point out that Arabs are permitted to purchase homes in both east and west Jerusalem, the Arab and Jewish sides. That being the case it seems inconsistent to prevent Israel’s Jewish residence from exercising the same rights. It is highly unlikely for Israel to prevent Jewish home purchases in east Jerusalem while permitting Arab home purchases in west Jerusalem, especially with a Likud-led coalition government under Netanyahu.