Friday, September 26, 2008

Zakaria: Cheerleader of Regulation

Tibor R. Machan

Over a decade ago I read an essay in The New Republic on the topic of business ethics written by the then Harvard graduate student Fareed Zakaria. It was insightful and lacked the standard ingredient of mainstream discussions of the ethical dimensions of business, namely, business bashing. Quite the contrary. It was refreshingly free of cant.

I sent a note to Zakaria asking him if he may be a champion of the free market and his response indicated that my suspicion was right. Since then I have sent him emails now and then and have on occasion received replies. He has since then written several books and one of these, The Future of Freedom, was especially poignant in distinguishing between liberal and illiberal democracies throughout history and around the globe in our time. Genuine supporters of the free society have always insisted that while democracy as such may have the virtue of inclusivity, it can be just as tyrannical as more direct command systems unless restrained by a well crafted constitution.

When a couple of months ago Zakaria became host of CNN's public affairs program "GPS" (which stands for "Global Public Square")--not long after giving up hosting Foreign Exchange with Fareed Zakaria for PBS, another good program focused on foreign affairs--I was hopeful that finally someone has emerged in mainstream media who will not join the cheerleaders of contemporary mercantilism, of the ubiquitous government intervention in the market place. And for a while this hope seems to have been fulfilled. Zakaria didn't immediately join with the rest of the statists on the tube, even if he wasn't quite the Harvard (JFK School) educated version of John Stossell.

Alas, then came the current financial debacle which, of course, was precipitated by the federal government which had been ordering various institutions under its command to lend money at very cheap rates, to go easy on folks who couldn't or wouldn't cover their debts, especially in the housing market (where over the last five decades, at least, a policy of populism has prevailed, with low interest rates and little collateral for many borrowers and with incentives such as mortgage interest deductions). This is when I would have liked and indeed expected to see a courageous journalist speak up about how it is the perversion, corruption of the free market that has produced the mess. Sadly, it wasn't to be.

After I returned from a lecture tour in Europe this last summer, I started checking out Zakaria's new CNN program and gradually learned that the host has joined with the rest of the government-loving commentators, such as The New York Times columnist Paul Krugman, claiming that what is needed to deal with the problem is, you guessed it, more government intervention. In his column for the September 29 issue of Newsweek, the international edition of which he himself edits, Zakaria intoned as follows:

"As of this writing, we don't know the details of the plan that is being crafted by Henry Paulson [US Secretary of the Treasury] and Ben Bernanke [head of the Federal Reserve] to restore confidence in the U.S. financial markets. It is impossible to know that it will work. But the administration and the Federal Reserve were right to intervene in a large and systemic manner. Modern capitalism depends on credit, and credit depends on confidence. By the middle of last week, fear was pervasive and no one was ready to lend money to anyone for any purpose. [This is plain wrong--I have personal knowledge that proves it!] It turned out that only government intervention could change this psychological paralysis. The lesson of the almost 100 (smaller) financial crises of the past three decades is that only government intervention can stabilize the system when it chokes."

Of course, the system choked because of government intervention, because of the easy money policies of the past several decades, because of the politically motivated efforts of the likes of Bill Clinton to gain favor with the electorate by doling out almost entirely unsecured loans to every Tom, Dick, and Harry who came asking for something he could not afford. That is not a market phenomenon but one typical of the mixed economy's welfare state. Free markets did not produce the current crisis and it will do no good, in the long run, to continue with government interference which is always subject to the pressures identified in public choice theory, namely, politicians and bureaucrats engaging in self-dealing and being mostly ignorant as to what is needed to sustain and, when necessary, restore confidence in bona fide markets.

Maybe the pressure from colleagues and other cheerleaders of government meddling in people's lives was too much for Zakaria to resist. Or maybe he has just signed up to championing a bad set of economic ideas for some other reason. In any case, he has now joined the group whose complicity in promoting the political economy of the mixed economy brought about the mess we are in now.

Thursday, September 25, 2008

Bush’s Confusion

Tibor R. Machan

It is generous to call it that. More likely President George W. Bush was prevaricating, not confused, when he stated, looking straight out at the audience listening to is speech about the current financial disaster, “The market is not functioning properly.” That’s because he—or his advisors—must know that the American economy is not a genuine market at all but a politically manipulated arena of criminal interference with people’s economic decisions.

Take the plain and easily demonstrated fact that during Bill Clinton’s years in the White House the two government-supported lending corporations, Fanny and Freddy May, were forced by his administration to lend money to people are unbelievably low rates. This was done so as to encourage home ownership among low income citizens, ones who ordinarily could not afford home loans. But government interfered and made it easy for such people to obtain money without adequate collateral, without solid jobs, without a ghost of a chance of actually paying their loans back.

Of course this is just one of the reasons for the current crisis but what is clear beyond any reasonable doubt that no such system as a market was functioning at all. Markets are destroyed as markets when the government interferes in such a fashion, taking out the normal instrument of risk which leads people to tend to act rationally, prudently.

So is President Bush so economically ignorant as to fail to understand even this much about the recent history of the housing market? Does he not know that when you provide people with artificially low mortgage interest rates and with ridiculously easy terms, they will then most likely cut deals they should never even go near? If you force a merchant to part with his or her product or service at prices that are way below what the free market would command that merchant is going to go broke and the customers are going to be utterly mislead about the requirements for doing sound business.

The American economy has for decades been subjected to such irrational public policies that seriously distort the market process and many economists predicted that exactly that would happen nearly a decade ago. These economists, who do understand the nature of a properly functioning market, aren’t shocked, shocked with the current economic state of affairs. But when they aired their warnings in all kinds of forums, they weren’t listened to because it was deemed politically incorrect to oppose easy housing and other loans to people who had no business getting them. Yes, they were too poor to handle those loans and when government nonetheless forced financial institutions to make them, they were paving the way toward today’s financial collapses.

Why Mr. Bush would join all those dishonest “economists” who advocated the government’s easy money policies with the claim that it was “the market” that is “not functioning properly” is a mystery to me, especially after he announced, in that same speech, that he favors the free market and is reluctant to interfere with it. But then President Bush clearly appears to have only pretended to be a friend of freedom, what with his enormous budget deficits which coerce members of future generations into near bankruptcy even before they are born.

Thomas Friedman, The New York Times columnist who recently wrote The World Is Flat: A Brief History of the Twenty-First Century, about globalization, said a few days ago that until the very end of one’s journey falling from a skyscraper one will feel like one is able to fly. So over the last few decades, as housing prices kept climbing and every Tom, Dick, and Harry has become a home owner, never mind the ability to afford a home, millions of people were like the bloke who was deluded that he could fly until he met his demise by crashing to the ground. But instead of learning from this, Congress and those cheering it on are committed to fooling us into thinking that one can really get away forever with financial imprudence.

Tuesday, September 23, 2008

The Regulation Trap

Tibor R. Machan

Mercantilism, socialism, and fascism have pretty much been discredited as economic systems by Adam Smith, Ludwig von Mises, F. A. Hayek, and actual economic history. One could have learned from the lessons that government economic regulation was no less refuted as a way to deal with economic problems but, alas, the fantasy of useful, helpful and just state coercion keeps bouncing back. The resilience of such faith in the state rests on nothing but wishful thinking and the myth of the power of public service.

For starters, the very same reasons that incline people to distrust market processes should lead them to distrust government regulations. This that people can often misbehave when they have a chance to do so unless some virtuous and wise overseers make sure they do not. Government regulators are among these people and since they have no one overseeing them, the likelihood that they will misbehave is considerable. Given the power government regulators have over those they regulate, and given how power tends to corrupt, government regulators are far more likely to misbehave than are the people they are supposed to regulate. We might put this as follows: Government regulators are in far greater need of government regulation than are free market agents whom they believe they must regulate!

Then there is the regulators’ necessarily limited knowledge, indeed ignorance, regarding what those whom they regulate need to do. Because of such ignorance, combined with the imperative to do something, anything, to prove their worth to the electorate, malpractice is more the rule than the exception for government regulators.

There is more. Who is to regulate the regulators, given that they are far more powerful than the rest of us? Profit may tempt market agents to misbehave but the regulator’s political power nearly guarantees that the he or she will do so.

All of this plus some matters better left to longer discussions ought to silence those who keep insisting that what must happen in a market economy is for there to be more government regulation. There is just now good reason to think that in general government regulation is going to help avoid the occasional malpractice in a free market place. And, indeed, nearly all the problems with markets come not from the misconduct of market agents--who, of course, do make mistakes and do now and then act badly--but from the interference of ignorant, powerful, self-deceived government regulators urged on by even more mendacious politicians and their cheerleaders in the general culture.

Most of this is pretty much implicit in the theory of public choice for the development of which Professor James Buchanan received the Nobel Prize back in 1986. This theory argues, fairly straightforwardly, that people who presume to regulate the rest of us from their seats of government power are no less motivated by their own agenda than are all those in the market place. Except that there are inherent restraints on those in the market--any fraud or theft or violation of property rights is actionably illegal--whereas government regulatory misconduct is nearly untouchable by the law! (It has the protection of sovereign immunity, the idea that what governments do is immune to prosecution because it amounts to something we all do to ourselves via the democratic process!)

Ever since the end of the 18th century people eager to use government to get what they want without having to peacefully ask for it have championed government regulations. Innumerable agencies at the federal, state, county and municipal levels of government were established to interfere with free market processes. This is especially so with financial markets, beginning with the socialization of money itself!

Now that some of the adverse consequences of all this are coming home to roost, the politicians and their academic cheerleaders insist that the solution is, yes you guessed it, even more government regulation. So a few years hence we will be facing the same troubles and then, too, it will be the free market--the alleged ubiquity of laissez-faire in our society, will once again be blamed! But this isn’t that surprising: people in power never hold power wielding responsible for any problems they create. No. It is always the lack of even greater power that is to blame!
Are Air Fares Too High?

Tibor R. Machan

In genuinely free markets prices reflect the overall intersection between supply and demand, so there are no prices that are too high or too low. Such notions express personal expectations and nothing objectively true. An exorbitant price is one someone finds beyond his budget, a good deal something well within it.

In particular, if airfares were truly exorbitantly high, planes would be flying with few passengers just as few people drive Bentleys or Maseratis, both of which cost a bundle while are also widely desired. In contrast, planes are mostly filled to the brim.

As someone who flies nearly every week, all over the globe, only by purchasing tickets way before the scheduled trip do I manage to get decent seats. The flights are I take, most often between some point on the West Coast and someplace East or the Midwest, are completely booked. Indeed, I recall when back in the 60s this wasn’t true and planes flew half full, mostly. Nowadays they are full and upgrading is nearly impossible. Airlines have restricted upgrades to passengers who purchase fairly high price tickets in the first place--supersavers don’t seem to qualify.

Despite the high demand for their services, executives such as Glenn Tilton of United Airlines are urging the public to implore Congress “to take immediate action to solve our nation’s fuel crisis.” (Hemisphere Magazine, September 15-30, 2008, p. 13). He claims that “Record-high fuel prices are having a devastating impact on our economy, and the airline industry is taking drastic steps to remain competitive, including cutting flights and services, increasing fees, grounding inefficient airplanes, and laying off employees.” Yet, each but one of the six United flights I took the other week was full. American Airlines, US Airways, Southwestern, all of which I have flown recently, are no different. And on one United flight the pilot explained that the reason why we had to wait an hour and a half on the tarmac is that New York’s La Guardia Airport “is too small by 30% to handle all its flights.” So not only airlines but airports seem to regularly overbook!)

By all reasonable accounts, if airports cannot handle all their scheduled flights, especially on days the weather is perfect everywhere, they should not be trying to accommodate them and ticket prices must be too low. (Prices, in a free market, are supposed to serve to ration goods and services! When shortages develop, prices need to rise to send potential customers to some other means of transport!)

It is of course wrong for the Chairman and CEO of United Airlines to urge passengers to try to get the government to manage fuel prices. Government’s task isn’t to order the prices of goods and services but to preserve the conditions for us all to carry on peacefully as we go about our various businesses. True, this idea of how markets must function isn’t much in vogue these days when too many market agents try to get their politicians to do deals for them instead of making deals themselves. Nearly all major businesses have abandoned and betrayed the ideal of free market capitalism, both in the U. S. A. and abroad. Getting government to bail out firms that overextended themselves is now routine and politicians are only too eager to accommodate, though not without putting all kinds of conditions on their loans which then keep the firms beholden to them. And, of course, all of this is for the sake of the public interest, never for their own survival at the expense of taxpayers! No, you will never hear them admitting to wanting to rip off Peter so as to rescue Paul. Instead they are simply being public spirited. Yeah.

I am almost certain that Mr. Tilton’s advisers have told him to plead public spiritedness as he implores his customers to lobby for help from the government. (While decent selfishness has a very bad reputation, phony altruism is a favorite mantra in both business and politics!)

Just remember, most people fly because they can afford to do so! Although the absolute figures of the cost of flying look big, the portion of income it takes up is not more than it used to be before, probably less (which is why planes are so full).

Everything costs more these days in nominal terms--milk, gasoline, flights, grapes, cars, etc. But compared to what people earn now, prices aren’t rising a lot.

Monday, September 22, 2008

It's Always Freedom's Fault

Tibor R. Machan

In the middle of the financial scares I went to a little college in New Hampshire to debate whether politics ought to be about moral virtue of individual liberty. I took the position that even if one means to promote moral virtue, one must do so by first securing the right to liberty for all. It is not moral virtue if men and women aren't free to choose their conduct. Regimenting adult human beings to act properly, ethically, just doesn't cut it as a way to promote human morality.

My opponent argued that politics should be about promoting morality and that the individual8ism implicit in my position is dangerous--he even claimed that Hitler's Nazi politics arose because of too much individualism! While he was advocating a conservative program, in fact, as I understood him, his objections to the libertarian alternative were no different from the Left's communitarianism which also blames everything on individual liberty and claims that individualism is actually atomism, the idea that people are self-sufficient and are able to thrive without society.

The debate was conducted at a pretty academic, abstract level although sometimes we made reference to current events to illustrate some of our points. What was rather remarkable for me is just how eagerly my conservative opponent found fault with the classical liberal viewpoint because of its embrace of individual liberty as the prime public good. As I returned to earth from the debate and resumed listening and reading about the current problems on Wall Street and what politicians say and want to do about it, I noticed that mainstream figures in both parties also targeted liberty as the culprit, claiming that recent erratic and halfway deregulations of the financial markets--supposedly a perfect example of championing fully free markets--is responsible for it all. None of the mainstream commentators took any notice of the fact, pointed out in a recent comment by Professor Donald Boudreaux of George Mason University, that it was free market economists who warned about the policies that ushered in the current problems. Indeed, as these economists noted, the policies of the fed and other governmental--and governmental sustained outfits like Freddy and Fanny--can be clearly identified as precipitating the credit crises.

More generally, despite the fact that the likes of New York Times columnist Paul Krugman, a Princeton University economists, keep repeating that some mythical market fundamentalism that's running rampant across the country and the world, is causing all the trouble, free market economists from such institutions as the University of Chicago, George Mason University, the Austrian School and the Cato Institute have been warning that government meddling in the market place will have dire consequences. The most general lesson, as I see it, is that governments are forever giving special breaks to people everywhere who are only too eager to take on risks that then they need to cover but can count on government to do so. This is often a hidden agenda but when one removes all the mambo jumbo from the legislation and regulations, it is really the bottom line: You can do whatever you like and not reckon with the consequences because Uncle Sam will bail you out every time.

And this is then labeled market fundamentalism? Go figure. But the people who environ themselves as ruling the rest of us do not stop with their efforts to besmirch freedom, including, especially, free markets since only by discrediting this most productive, most just institution do they have a chance to turn enough citizens against it and gain the control they so desperately seek. I can only express the strong hope that they will not succeed. And maybe pointing this out often enough will stop them. (By the way, anyone who wishes to read some really solid economic analyses about the current situation and the history that has produced it should check out Even thought the mainstream media ignores this very valuable source, perhaps they will not succeed at suppressing its content by focusing mostly on surface matters instead of the substance.)