Saturday, October 30, 2010

ObamaCare: the political-economy of the entitlement

The above video from Reason.TV draws some startling parallels between the Great Depression new deal programs and the current Obama administration social engineering schemes. (1)

A question posed in the video is: do bold persistent experiments [social engineering schemes] solve problems or merely create a wall of uncertainty for firms which are ultimately made up of households? Among many other factors, a closer look at past entitlements and the newly introduced entitlement of ObamaCare are worth a closer discussion regarding "do they solve problems". In fact, New Deal type social engineering schemes have become so enormously expensive that the unfunded future liability of such programs now stands at +$1oo trillion. That is, from FDR'S Social Security, to LBJ's Great Society programs of Medicare and Medicaid, to present day ObamaCare, politicos continue to promote New Deal type programs when in fact we can not afford such programs. Do these programs make the world a better place albeit at some unaffordable price? Or it short term politico fiction?

New Deal type programs, spending, and the constituency building proposition

Frédéric Bastiat (1859):

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”(2)

Regarding a federal budget out of control aka out of control spending, mainly do to redistribution schemes known as entitlements, many media articles and talking heads are posing the question: "..then what will you cut [from federal budget]"? Then comes the redistribution scheme questions and who will take the politically unpopular position to cut entitlements. Obama's Deficit Commission, of course, didn't touch redistribution/entitlements with a ten foot pole.

The root cause regarding reform of entitlement/redistribution schemes being such a hot potato topic [politically unpopular] may well be: the entire entitlement process was purposely set up, in the beginning, and further shaped as a hot potato topic. That is to say, New Deal type entitlements become perpetual as they are purposely shaped to be political hot potatoes that burn all that dare raise the issue of reform.

If one examines the proposition that FDR pushed government spending programs and entitlements in particular as schemes purposely designed as political constituency building through dependency, and that politicians that followed in FDR's foot steps pushed the same constituency building through dependency, then the dependency element in fact did build a constituency (an army of government spending dependents).

"Dependency" becomes an accustom environment. The accustom environment has been shaped as an "entitlement". That is, participants in such redistribution schemes have been convinced they are not dependents upon the system, rather, they have been convinced they are in fact entitled to the system.

When it becomes clear that entitlement-dependency/redistribution schemes need reformed, so clear that elementary math can be used to pinpoint the problem, the problem can't be discussed or confronted because: purposely formed constituency groups, who view themselves as the entitled, will act as a constituency and vote against any erosion of their entitlement due to self interest (or greed turned upside down).

The odd thing is that redistribution of income proponents, although patting themselves on the back that they have created a hot potato that can't be touched, do not realize that the redistribution system created as constituency building through dependency, becomes over time, an economic black hole. Hence in the long run the economic black hole (can you say +$100 trillion of unfunded future entitlements?) destroys the productive capacity of the economy and the system caves in under the weight of redistribution of income via constituency building through dependency. Therefore, the aims of redistribution and any final goal perceived by proponents of redistribution, can never be achieved as the purposely created hot potato is self defeating in that it produces a system that self destructs far short of any perceived goal.

Beyond Hot Potatoes

The New Deal and current social engineering "bold experiments" are no more than central planning programs. That a central authority plans the economy. However, the New Deal and current social engineering plans are failing.

Reviewing F.A. Hayek for a moment, once a centrally planned economy fails, the argument for the continued existence of the centrally planned economy becomes “equality of income”. In the planned central economy equality of income becomes an income distribution scheme. Of course this causes further failure of the centrally planned economy as income redistribution schemes cause a twin disincentive (a disincentive for producers within the economy and the built-in disincentive for the dependent recipient class). The redistribution schemes end in disaster, which Thatcher later noted in one sentence, as you end up running out of other people’s money. (3)

Now let us apply F.A. Hayek to the current situation. Obama’s schemes of central planning spending and social engenerringh have failed. New Deal and Great Society programs are in essence bankrupt. That is, on queue, the abundance promised by proponents of central planning have not come to fruition. Hence the next step would be to argue for the continuation of central planning by beating the drum of “equality of income”. That arguments along the class warfare lines and business bashing lines will be for equality of income and equality of outcome (social justice) through redistribution schemes (or one might say through even more redistribution schemes).

Hayek predicted the stages and current entitlement plans, a eighty year legacy of government intrusion into private sector attempting to centrally plan the US economy, and the current Obama administration social engineering, has reached Hayek's stage one where a centrally planned economy has failed. Now we have arrived at a Thomas Sowell favorite expression: "Then what next?". (4)

How do Constituency Building through Entitlements and Central Planning perpetuate?

Harold Demsetz’s book From Economic Man to Economic System and in particular chapter nine The Contrast Between Firms and Political Parties, on page 135 Demsetz writes: “Dollar voters get what they want from the market place. Ballot voters get less of what they want and get more of what political internal constituencies want”. Demsetz goes onto state “Political parties that win office satisfy the wants of larger constituencies than those that do not win office”. Also keep in mind that “constituencies” is used in a general sense by Demsetz to encompass both external (ballot voters) and internal constituencies (party members). (5)

However, at some unknown but certain point the entitlements and central planning fails. When failure arises the ballot voter (external constituency) sees the hidden agenda and feels betrayed and revolts.

Applying Demsetz to the current voter revolt one might point to “…and get more of what political internal constituencies want”. That what is commonly coined as “over-reach” has a sub component where the internal constituencies are perceived as going beyond what they originally presented to their own external constituencies. Hence in the current political environment the internal constituency is perceived to have had a hidden agenda and alienated the external constituency that depended upon the presented agenda.

Going back to Demsetz statement “Dollar voters get what they want from the market place. Ballot voters get less of what they want and get more of what political internal constituencies want”, we might merge this thought with H.L. Mencken's thoughts (paraphrasing): "good" social programs, through enlightened politico speakers, on grand missionary work, lead the ballot voter (external constituencies) to believe that internal constituency agendas will benefit them. All the while the “benefit” is a mirage. -Or- as H.L. Mencken observed: “.....the worship of Jackals by Jackasses.”


The US ballot voter, the vast external constituency, is seeing first hand that the promotion and implementation of central planning and redistribution schemes by internal constituencies are failing. That central planning through redistribution schemes are more apt to be political constituency building strategies by internal constituencies rather than problem solving strategies or making the world a better place for the vast external constituency.


(1)Reason.TV, 10/28/2010,

(2)Library of Economics and Liberty,

(3)Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

(4)Applied Economics, Thomas Sowell

(5)From Economic Man to Economic System, Harold Demsetz

Monday, October 25, 2010

ObamaCare: Hayek's central authority paradox

The Paradox
Many argue that as an economy becomes larger and more complex that a central authority needs to handle the economic decisions. In other words, central planning is necessary as the large economy and complex economy appears as chaos and the apparent chaos needs “organized”.

F.A. Hayek pointed out and argued successfully that as an economy becomes larger and more complex that decentralized decision making by individuals is the route to pursue. That no central authority is capable of gathering all the knowledge necessary to run a dynamic economy. Hayek was proven correct by the dismal results of the former Soviet Unions and their central planning. Hayek pointed out that the mundane knowledge of households and firms (decentralized authority) is the correct way to handle large complex economies. (1)

That it’s a paradox that as size grows and what some view as chaos that needs organized by a central authority is exactly opposite in that decentralized authority is the route. The chaos is not chaos. Apparent chaos is an economy based on price signals and the mundane knowledge of the individual households and firms is the best and most timely knowledge base to react to the price signals.

Large Central Authority and Large Mistakes
However, what gets little press time in the above Hayek argument is the sub-topic he raises about size and mistakes. That a centralized authority would be by definition absolutely enormous. The enormous centralized authority has to make assumptions leading to plans. If the assumptions are poor or incorrect, then the mistakes are of the enormous variety affecting many. If decision making is decentralized, then large numbers of households and firms make plans also based on assumptions. At any one time good and poor plans are devised. However, in the decentralized model only small decentralized mistakes occur affecting few.

Larger and Larger Government (Government Creep)
If one takes Hayek’s centralized authority with its inability to collect complete and timely knowledge, then takes the poor plans leading to enormous mistakes proposition, then larger and larger government becomes more apt to fail due to partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes. One might point to the recent $800 billion stimulus as a plan based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes. When the enormous mistake occurs many are harmed e.g a 17.3% u6 unemployment measurement.

Running in the Background
As government enlarges as a percentage of the economy then of course the centralized decisions of government increase as well. Hence in the foreground we have a decentralized private sector functioning within an economy based on price using mundane up to the minute information to devise plans. Functioning in the background is a centralized authority (government) based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.

Centralizing Authority in the Health-Care Sector of the Economy
Health-Care is currently a decentralized mundane dynamic knowledge sector being replaced by ObamaCare which is a centralized authority based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.

It would likely be Hayek's contention that problems occurring within an economic sector, what ever those underlying reasons are regarding the perceived problems, the underlying reasons for the problems are not solved by applying centralized authority based on partial and untimely knowledge leading to poor assumptions leading to plans that lead to enormous mistakes.


(1)Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

Thursday, October 21, 2010

ObamaCare: governments fail too

Governments fail too

Many times you read articles or see news reports regarding "market failure". That some how the market has failed. What you intuitively know but is rairly reported is that "governments fail too". Both markets and governments fail basically because they are both made up of human beings that make errors. Some errors are unfortunately by design.

In a recent Kudlow Report segment Don Luskin, chief investment officer of Trend Macro made this instant- classic statement: "Government is the only enterprise in the world that when it fails, it does the exact same thing over again except bigger". (1)

Luskin is not alone. Milton Friedman also observed: "The government solution to a problem is usually as bad as the problem". (2)

Do we know of government failures?

We do in fact know governments fail. John and Jane Goodfellow have first hand experience from a simple trip to your local Department of Motor Vehicles that takes hours, to the out of body experience of trying to read and fill out you annual federal tax return. We also know government failure in a more complex proposition of unfunded future entitlements of Medicaid, Medicare, and Social Security that are now in excess of 100 trillion dollars.

Why are market failures reported yet government failures are under reported?

It boils down to the "painting" of the subject matter. What exactly is the difference between politicos through the mechanism of government creating a cheap money bubble while simultaneously promoting purchases of single family housing units by low income marginal buyers and a financial advisor promoting a novice, part-time retail stock investor, with very modest means, into making risky trades using a margin account? (3)

The point being that both are highly risky practices especially for the type/kind of participants involved. One risky practice is promoted by the government while the other risky practice is promoted by the private sector.

If the outcome for both situations end in disaster, the government promoted activity is painted as merely public policy failure experiment albeit in-your-best-interest, helping the little guy, and social justice didn't work in this particular isolated incident. The other disastrous outcome from the private sector is painted in exact opposite terms where "greed", getting over on the little guy, and the-system-is-rigged are the overarching themes of the incident as well as the incident not being isolated but portrayed wide spread within the entire economic system.

In the larger picture, cases of government promoted failure and private sector promoted failure, yield only one report: "markets fail". The "governments fail too" proposition plays second fiddle and is only pointed out by a handful of people. Hence the public at large are feed the "markets fail" concept and the "governments fail too" proposition remains widely under reported.

ObamaCare and governments fail too

F.A. Hayek wrote extensively that centralized command and control programs only worked in the hunter/gatherer stage of economic evolution. When small groups of forty or so controlled a hunting/gathering region, centralized authority might have worked. Harold Demsetz has also written extensively regarding the subject. (4) (5)

However, both Hayek and Demsetz point out that when economies evolved into millions of people, the market became based on the individual, individuals in number that are far removed from the forty or so hunter/gather stage. That millions of unique individuals, through no master centralized plan, began to base information on "price" through no particular grand design. That an economy based on price, price being reflective of scarce resources with alternative uses, allowed the unique millions of individuals, within a vast economy, to communicate, economically speaking, in the universal language of "price".

Hayek went further and postulated that the summation of mundane knowledge of individuals was greater than the knowledge of any centralized authority. In effect, no centralized authority could mimic the knowledge of millions of unique individuals with specific mundane knowledge of their unique abilities, needs, wants, and desires. Thomas Sowell has also dispelled the myth that the knowledge of a centralized authority can supplant the billions of mundane knowledge decisions made everyday by individuals with specific mundane knowledge particular to each and every price decision. (6)

History repeats itself but market failure receives a front page headline

A quote by Ronald Reagan has been widely disseminated within the United States over the past half century: "....government is not the solution to our problem, government is the problem". Actually Reagan went on in his statement to basically summarize Hayek's position of centralized authority being unable to organize an economy. You can hear those remarks in the link below:

When ObamaCare, the first major entitlement introduced since LBJ'S Great Society programs, and with Social Security, Medicaid, and Medicare all basically bankrupt, many, many individuals in US society immediately recalled Reagan's remarks. That yet another entitlement stacked atop a bundle of bankrupt entitlements smacked of "..government is the problem".

Upon review, ObamaCare is merely a centralized authority trying to mimic billions of mundane decisions by unique individuals. ObamaCare attempts to manipulate price which would simply cause individuals to receive the wrong price signals regarding the allocation of scarce resources with alternate uses. Moreover, ObamaCare is a price fixing scheme that ends, as do all price fixing schemes, with a qualitative and quantitative reduction in supply aka rationing. (7)

Oddly enough, "Governments fail too", regarding the introduction of yet another vast entitlement, was elevated, through the voices of millions, to the forefront. Millions upon millions of citizens want to investigate "government failure" before it becomes government failure. Upon further review and investigation, the failure of ObamaCare has become daily reports. That the plan is unravelling daily and possibly for the first time "governments fail" may be stopped before it happens.




(3) Getting Off Track, John B. Taylor

(4) Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

(5) From Economic Man to Economic System, Harold Demsetz

(6) Applied Economic, Thomas Sowell

(7) Basic Economics, Thomas Sowell

Friday, October 15, 2010

ObamaCare: the ultimate third party decision

The YouTube video above is a Fox Business Network interview with William Poole. (1) Poole is an economist and past chief executive of the Federal Reserve Bank of St. Louis and currently is with the Cato Institute. (2) Your focus should be from 2:35 of the interview until the end of the interview.

Poole is merely stating the empirical evidence of Medicare funding in particular, and entitlement funding in general, being completely unsustainable at any possible tax rate within a market economy. In other words, the current unfunded future entitlements of +100 trillion dollars is not possible to finance. Note that Poole is discussing current unfunded entitlements before the addition of the ObamaCare entitlement.

Poole mentions "the federal government promises" when referring to entitlements. Federal government promises likely can be stated more concisely as: past and present politicos making promises, through the mechanism of government. In other words, government is merely the mechanism to deliver promises of politicos.

Promises made by politicos through the mechanism of government are related to discussions long made by Thomas Sowell regarding the concepts of political time horizons and third party decisions. (3) (4) (5) (6) (7) Sowell points out that politicos have a short term political time horizon. Politicos match their short term political time horizon to economic policy that yields short term economic consequences. That leaves the rest of us to live with the long term cascading unintended economic consequences of such policy. Or alternatively, politico promises are based on short term economic effects that match the short term political time horizon (the next election) with the long term cascading unintended economic effects of the promise accumulating into a series of politico promises that can not possibly be financed (we have arrived at the zenith of accumulated cascading unintended economic consequences related to politico promises).

Politicos are making third party decisions for first party promise participants and first party promise tax payers. Current and future participants as well as current and future tax payers are left to pick up the pieces of the promise with the third party (politicos) paying no direct cost for purposely matching short term economic effects with their short term political time horizon (reelection). That is, the first party suffers from the third party decision, with the third party (politicos) walking away and suffering no direct cost for their third party decisions.

ObamaCare is arguably the ultimate third party decision. With current potential participants and current potential tax payers standing as the majority in opposition, the third party purposely made a minority decision and imposed that decision upon first party (you).

With entitlements in general, and medicare specifically, being unsustainable at any possible tax rate in a market economy, certain politicos went to their playbook and exercised the game plan of matching short term economic effects to a short term political time horizon. However, passing additional entitlement legislation in a known unsustainable finance environment and against the majority of the electorate, will likely turn out to be a promise too far.




(3) Economic Facts and Fallacies, Thomas Sowell

(4) Applied Economics, Thomas Sowell

(5) A Conflict of Visions, Thomas Sowell

(6) Intellectuals and Society, Thomas Sowell

(7) Basic Economics, Thomas Sowell

Saturday, October 9, 2010

ObamaCare mandate, Wickard v. Filburn, and the auto insurance argument

Wheat and the ObamaCare mandate?

U.S. District Judge George Caram Steeh ruled on 10/07/2010 that Congress has the authority, in regards to ObamaCare, to mandate that individuals carry health insurance. The decision was based in part on a 1942 court decision:

"Steeh invoked the New Deal era case of Wickard v. Filburn (1942), which substantially broadened the authority of Congress to regulate under the Commerce Clause. The high court agreed with the federal government that Roscoe Filburn’s decision to grow excess wheat for himself would affect interstate commerce, because the farmer would not be forced to buy extra wheat under a New Deal regulatory scheme designed to increase wheat prices during the Great Depression. "(1)

Expressed alternatively:

"So the Supreme Court has allowed Congress to prohibit a farmer from growing wheat for his own use and a sick woman from growing her own medical marijuana. The Court majorities have reasoned that the restrictions on intrastate activities are necessary and proper for Congress to be able to control the interstate markets in wheat or marijuana. (Wickard v. Filburn; Gonzales v. Raich)."(2)

Another observation is:

"In just a few perfunctory pages, Judge Steeh dismisses this argument on the theory that the Commerce Clause allows Congress to regulate economic decisions, and not just economic activity. Thus, the decision not to purchase health insurance is ripe for regulation. As Professor Barnett points out, "Judge Steeh offers no limiting principle to the “economic decisions” theory," and does not even acknowledge the profound implications of government regulation of all "decisions" that might in some way affect economic activity." (3)

More court challenges

The Michigan case is merely the first of a long line of court decisions to come as the ObamaCare mandate is being challenged on many fronts. Matter of fact, the Obama Administration has attempted to block courts from even considering the constitutionality of the mandate. "So far, the Obama administration is 0 for 3 in its efforts to block courts from considering the constitutional merits of the health control law." (4)

Debating the mandate and auto insurance?

Needless to say the debate over the ObamaCare mandate will resurface as the Steeh ruling is further discussed and the remaining court rulings come to fruition. Along the way you are going to hear a debate point that the ObamaCare mandate is nothing more than the same mandate as owning auto insurance. The rebuttal to this debate point will be that you have the ability to avoid owning auto insurance by merely not owning a vehicle. These debate points have already surfaced on CNBC'S The Kudlow Report on Friday 10/08/2010 as articulated by Matt Miller and Betsy McCaughey. (5) You can view the debate by going to this link:

The debate point regarding ObamaCare mandate and auto insurance

In the coming months, when you hear the debate point put forward that the ObamaCare mandate is akin to owning auto insurance, you should consider the following: that the debate point has a major flaw which is based on "obligation". The debate point makes the implicit assumption that you have an obligation to own auto insurance and hence that same "obligation" exists in the ObamaCare mandate. (6) (7)

The fatal debate flaw is the implicit assumption of obligation. In other words, the debater is hanging their debating hat on auto insurance and the ObamaCare mandate as being equivalent obligations of the buyer. That each buyer of auto insurance has the same obligation as each buyer of health insurance hence "obligation" is being presented by the debater as equivalent obligations regarding auto insurance and health insurance.

What is your obligation to own auto insurance? Your obligation is that of liability to another party, a third party obligation. What is your obligation to own health insurance? Your obligation is to yourself, a first party obligation. Hence one obligation is to a third party whereas the other obligation is to a first party (you). In other words, the debater is comparing obligations that are not equivalent. That is to say, the debater defeats himself/herself by presenting "obligation" as a focal point of the debate then making the incorrect obligation comparison which then negates their own argument.

For further information regarding the "obligation" aspect please visit these two links: