If You Walk Awy, I Will Follow

Roger Lowenstein has some arresting advice for people who are underwater in their mortgages - walk away:

White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

Precisely. Government officials have been urging people, Lowenstein recounts, to "do the right thing" and pay if they can afford to. In fact, underwater borrowers are parties to contracts that state the penalties for nonpayment, and if those penalties exceed the cost of continuing to make mortgage payments, not only do borrowers have the right to walk away, they arguably should walk away. By doing so, they are conveying the message that lenders overestimated what houses would be worth, and made loans to people who shouldn't have gotten them. Borrowers who walk away will pay costs, as they should, in the form of worse credit ratings. How much worse is up to lenders, who will have to decide if a walkaway is a bad credit risk. The sooner the information about the wisdom of past lending practices gets into the price system, the better.

Lowenstein notes that a Bush Administration official dismissed walkways as "speculators," which is true. All market traders -- people deciding whether or not to go to college, whether or not to take a particular job, whether to lend to someone to buy a house, whether to walk away from a loan to buy a house -- are speculating. They are using the information they have and the prices they face to make the best decision they can, thus injecting that information into the price. Given the pejorative meaning it has taken on, "speculation" is not even economically meaningful, and financial reporters should probably refrain from using it.
It is true also that a walkaway commits a negative externality by lowering property values on his street. But a person who moves into a neighborhood and makes a bid on a house also commits a positive externality, and in any event many of these externalities are properly internalized because a single person has built the subdivision to begin with. So that is not much of an argument either.

I suspect that most of the economic argument against walking away boils down to macroeconomics -- the fear that an epidemic of walkaways will cause the housing market to once again spiral down, delaying macroeconomic recovery. But this macroeconomic idea -- the idea that "the economy" is a single organism -- is bunk. What we ought to be concerned about is whether the microeconomics are right -- whether the price system is incorporating all the information it needs to to function properly. Given the contracts that were written, and the rules of the game for breaking them, underwater borrowers would be doing society a service by giving up homes that do not serve their interests.

What Is the Real Lesson of the Cleveland Clinic?

President Obama was at the Cleveland Clinic today, and planned to say that it should be a lesson for the rest of us on how to run the health-care "system." He apparently admires, in particular, the way the clinic has decoupled medical decisions from financial incentives. In his news conference last night, he indicated he wanted to eliminate the problem where the doctor chooses a tonsillectomy instead of a cheaper alternative course of treatment because "I make a lot more money if I take this kid's tonsils out."

Leaving aside the casual way the political leader insults the integrity of a huge proportion of his constituents, presumably in the belief that it is only they who block his grand plans, the Cleveland Clinic indeed merits thought. It is a lesson alright, but not in the way the president thinks. The primary lesson of the Cleveland Clinic is rather that it is there . According to the Wikipedia entry, the clinic was founded by four physicians as a group, back when that was an unusual practice, in an attempt to provide better patient care. Since then, it has evolved into a massive facility that treats patients from all over the world. Like the Mayo Clinic, the Texas Medical Center, and other facilities, it is a crown jewel of American medicine.

And it is a product, lest we forget, of the American medical system we keep hearing such bad things about. It is an economic/medical life form of sorts, that has evolved in response to the environment, both on the cost side and the demand side, it faces. It is not something a central planner could have concocted. Indeed, the centrally planned version of the Cleveland clinic would presumably look like the big state-owned hospitals in single-payer countries, with their crowded conditions, long waiting periods, and ghastly hygiene.

When the allocation of scarce health-care resources is a matter for politics, cost containment looms extremely large. In theory, democratic competition is supposed to lead to the best health care system, in the same way that competition among restaurants leads to the best ones staying in business and the worst ones closing. In fact, political competition privileges those who speak loudly and those who lobby effectively. Given that the pressure groups seeking to stake claims to public funds are hardly confined to health care but include individuals from every arena of social activity, those claims always exceed the resources available, so that cost-cutting becomes an overpowering concern. The market system requires self-interested producers to incorporate cost into their decision-making, but also the value they are providing to patients. There is little evidence that this is true in politics. Indeed, it is more than discouraging to read about the extent to which cost control has dominated the discussion of why we need more government control over health-care decisions. In general, costs go up when more resources are claimed, and for them to come down usually requires that the service be provided. Only the arrogant politician supposes that there is some giant pot of "waste" waiting for him to discover it and fund more for less, confident, in the teeth of all the evidence, that such efficiency is the hallmark of every other type of government activity.

In a properly functioning market, the aforementioned interplay among health providers and health consumers leads, as it does in every other economic endeavor, to experimentation, and that experimentation culminates in institutions like the Cleveland Clinic. Health-care providers try, and if necessary abandon, new medicines and new surgical techniques, and more importantly they try, and if necessary abandon, new forms of social organization. They operate clinics that require payment in cash; they try group practices based on incredible degrees of specialization (the orthopedics group that has the hand specialist, the knee specialist, etc.), or they select comprehensive clinics that contain under the same roof every specialty imaginable. Those experiments that succeed stay; those that fail go. The things that don't work are purged quickly, although it is for precisely that reason that we do not observe them, and therefore cannot tally them as a success of the market system, even though they are. In a centrally planned system, in contrast, those experiments that might succeed are never born, and those that fail lobby to stay forever. This is the biggest tragedy of the looming massacre of our already wounded health system; the Cleveland Clinics of the future that we will never hear of.

The Crossroads

I was interviewed by our local paper last week, along with some other economists, about how to fix our budget mess. It was one of those usual things where they try to get the left and right points of view. I regret, upon reading that the unemployment rate in Michigan is a positively Spain-like 15.2%, that what I said sort of accepted the status quo, only substantially downsized – change Medicaid from a guaranteed-pay program to an individual insurance subsidy most importantly.

I should’ve aimed higher, because the welfare state has hit the wall. I have previously argued that social-welfare expenditures are going up all over the Western world, and that they are going to crowd out most other government functions:

But the rising burden of state pensions and health care in aging populations is going to result not just in rapidly growing tax burdens, but in a sharp narrowing of the political playing field. Options for spending money that would have been eminently debatable in the flush decades of yore are simply going to be fiscally impossible because of rapidly growing entitlement spending. This spending is going to crowd out not just private-sector economic activity but opportunities for public spending of all kind.

It has happened faster than I predicted. Below is a chart from BizzyBlog, via The Belmont Club:



This is a catastrophic decline in both individual and corporate income-tax revenues. Despite this, the Congress and President have already had the big stimulus party, much of which, it turns out, is being spent propping up state budgets rather than "shovel-ready" activities, with these budgets themselves exploding first and foremost due to expenditures on health, along with state pensions and education. In other words, future taxpayers are being shanghaied into paying for our current health care. Given that the projected deficit for next year, at about 12.5% of GDP, is higher than any country for which the World Bank has data for 2005 (the highest figure for that year was the Maldives at 12.1%), we now have the economic profile of a Third World basket-case country. And this is before the Congress has gotten around to destroying the health-care system.

The welfare state generates at least two lamentable dynamics. In the first, chronicled with characteristic skill by Charles Murray, the welfare state turns our minds away from the seeking of greatness and a life well-lived, and inward toward the emptiness of consumption. No one wants to take a big risk of scientific exploration if it cuts into the vacation time, and no one wants to go to Mars if it puts the state pension fund at risk.

The second dynamic is more directly economic. In it, once the welfare state hatches, benefits go ever higher. The electorate, having a very short time horizon, cares about gimme gimme now, and when the bill comes due it’s someone else’s problem. The resultant increased tax load drives business and high achievers out of the state – factories close, young people leave, etc. This is where states like Michigan have been for some time. Then, the people left tend to be poorer and unemployed, and require more expenditures under the existing entitlements scheme. This initially prompts the legislators to rummage through the state couch hoping a few billion dollars magically fall out. They legalize slot machines, they contemplate legalizing marijuana. None of this is done on the merits; all of it is done because of the need to feed the insatiable maw of the welfare state. (I predict that legalizing prostitution and illegal immigrants will ultimately be contemplated because of the desperate need for taxes.) Eventually, in Margaret Thatcher’s pithy phrase, the socialists run out of other people’s money, leaving only collapse or dramatic reform as futures.

That crossroads appears to have arrived. I wish I had told that newspaper reporter that my state should try something radical. It should brand itself as the one state in the Union that is serious about rewarding achievement. It should pull out of Medicaid, end all government spending not devoted to providing true public goods and significant externality control, and should then (because it now can) end the individual and corporate income taxes, repeal all protectionism for labor cartels, and sharply curtail anything that makes it difficult to open or expand business. It should then watch what happens. We must now choose a road, and the one we take will make all the difference.

National Healthcare and the Battle of the Sexes

Here is Canada's National Post newspaper on a classic central-planning problem, and associated social conflict, involving the Canadian health-care system:

The growing ranks of female physicians in Canada will slash medical productivity by the equivalent of at least 1,600 doctors within a decade, concludes a provocative new analysis of data indicating that female MDs work fewer hours on average than their male colleagues.

The paper comes just a year after a blue-chip list of medical educators publicly condemned what they called the scapegoating of women for Canada's severe doctor shortage.

The fundamental problem, as I have often noted, in public expectations about health care is that there is no such thing as "universal health care," if by that people assume that they can have any health care they want, anytime they want it. Health care is costly to produce. The resources needed to do so have alternative uses, and so health care must be rationed by some criteria or another.

A "doctor shortage" is unfortunately a term too imprecise to be helpful. According to the article, "The long surgical wait times and lack of family physicians that plague the Canadian health care system are largely blamed on the paucity of doctors.”

But what is the right number of doctors, the number of doctors that ends the "paucity"? The article attempts to answer this question by comparing the number of physicians in Canada to the number in other OECD countries, but Canada is not a copy of other countries. Like every other country, it is a collection of many different individuals. Its individual citizens have different opportunities, different health profiles, different lifestyles, different attitudes toward health. Information about how much each person needs health care is dispersed to each individual; no government agency can possess it all.

We may intelligently speak of an economic shortage, in the sense that, at the prevailing cost of doctors' services to the patient, more people want doctors’ services than there are doctors willing to provide them. (Even this definition is imprecise, but it is close enough.) Canada has this problem in that, according to the article, waiting times are extremely long for both surgery and for services by family physicians.

And somewhat remarkably, the rising presence of female doctors among all Canadian doctors is said to be responsible for this. Women are about a third of Canadian doctors now, but since they're a majority of medical-school students there, they will soon be a much greater share. And since, according to research, women doctors work on average fewer hours than male doctors (because of more claims on their time due to their child-care responsibilities), it only stands to reason that the presence of more female physicians in the workforce will lead to longer wait times. Right?

Alas, this group-based zero-sum thinking is inevitable when genetic groups -- the sexes, races, religions, etc. -- look to the state to referee their disputes. In fact, even if it is true that women on average have more competing claims on their time, so that they devote fewer hours in a week to medical care than male doctors do on average, there are many female doctors for whom this is not true, and many male doctors who also have a high opportunity cost of time. This is the classic example of a problem that a free market solves through its capability to make use of highly decentralized information -- in this case, each physician’s private knowledge about the opportunity cost of his or her own time.

If there are currently more claims on physicians' time than there is time available to be claimed, then the solution to that problem is to raise the compensation for physicians' time. But that is the sort of problem state health-care systems can seldom solve, because they are interested in getting the cost of the entire system down (assuming heroically that they are not interested merely in maximizing politicians’ political success functions by soliciting transfers from special interest groups). What the government should be interested in is encouraging physicians who have sufficient amounts of time, relative to the alternatives, to devote that time to patient care. By allowing the market to set the wage, all such physicians by definition do so. There is no "shortage," although health care is rationed by money instead of by time. But on the other hand, there is no aggregate conflict between male doctors and female doctors. No one blames female doctors are putting in too few hours. Instead, there are only individual doctors, either male or female (it makes no difference), each of whom decides how much time to devote to taking care of patients, and how much time to devote to child care, golfing, or whatever the next best alternate use of his or her time is.

The kind of thinking on display in the article is a result of the belief that good social outcomes only require that the government crunch the right equations. But the Canadian physician shortage is not a function of the aggregate sex composition of Canadian doctors (30 years ago this would have seemed obvious), but the result of the fact that, given what the government has decreed they be paid, too few people are willing to work.

Life under Collectivism

Dennis Prager has a column on how collectivism (or, in his word, “socialism”) destroys greatness, not of a people but of each person:

The state sucks out creativity and dynamism just as much as secularism does. Why do anything for yourself when the state will do it for you? Why take care of others when the state will do it for you? Why have ambition when the state is there to ensure that few or no individuals are rewarded more than others? America has been the center of energy and creativity in almost every area of life because it has remained far more religious than any other industrialized Western democracy and because it has rejected the welfare state social model.

This is a theme that has been bouncing around in recent years. In a speech I like, Charles Murray describes the attitude of Europeans raised in the welfare state thusly:

What’s happening? Call it the Europe syndrome. Last April I had occasion to speak in Zurich, where I made some of these same points. After the speech, a few of the twenty-something members of the audience approached and said plainly that the phrase “a life well-lived” did not have meaning for them. They were having a great time with their current sex partner and new BMW and the vacation home in Majorca, and saw no voids in their lives that needed filling.

It was fascinating to hear it said to my face, but not surprising. It conformed to both journalistic and scholarly accounts of a spreading European mentality. Let me emphasize “spreading.” I’m not talking about all Europeans, by any means. That mentality goes something like this: Human beings are a collection of chemicals that activate and, after a period of time, deactivate. The purpose of life is to while away the intervening time as pleasantly as possible.

If that’s the purpose of life, then work is not a vocation, but something that interferes with the higher good of leisure. If that’s the purpose of life, why have a child, when children are so much trouble—and, after all, what good are they, really? If that’s the purpose of life, why spend it worrying about neighbors? If that’s the purpose of life, what could possibly be the attraction of a religion that says otherwise?

The same self-absorption in whiling away life as pleasantly as possible explains why Europe has become a continent that no longer celebrates greatness. When life is a matter of whiling away the time, the concept of greatness is irritating and threatening. What explains Europe’s military impotence? I am surely simplifying, but this has to be part of it: If the purpose of life is to while away the time as pleasantly as possible, what can be worth dying for?

Collectivism is dispiriting for at least three reasons. First, life is in a collectivist society irretrievably zero-sum. The reason the poor don’t have enough is because the rich have too much. The reason Chrysler workers are in danger of losing their jobs is because bondholders are asking for too much. The European model, or the German labor model (with unions getting a seat on the board of directors in many large companies) or the stakeholder model (where a corporation is run through consensus among “stakeholders”) it's all about forcing people to consensus, even when agreement may not be the best solution from the point of view of society as a whole. (It is often from irreconcilable differences within the established order that the greatest ideas spring.)

Imagine collectivism as the government bringing all the groups it deems as worthy of having a say in how society, a publicly owned or publicly chartered firm, the health-care system, or whatnot should be run into a single closed room. The government wants consensus to be reached in an atmosphere of amicability, and so the room is nicely furnished -- it is in the White House, even. It is assumed that what will happen is that all of the groups will bring angry disagreements to the table, but sitting around a table will force them to resolve them.

But of course staying in the room isn't, and shouldn't be, the only option. It should be possible to leave the room and start your own business, or to stay out of it entirely -- to elect to have the government leave you alone in your choices of schooling, e.g. But collectivism says that the leader picks the guests, and whatever solution the guests come up with is binding on everyone. (This framework ignores the very real problems that seats at the table may be acquired through bribing the leader, or that the meeting in the room may be camouflage for the leader brutally imposing his own proposed solution on everyone, or even doing so in pursuit of his mere political success. But my example is collectivism taken on its own terms.)

And so collectivist societies are those in which the existing set of interest groups congeals, never to change. And all social disagreement is to be resolved through zero-sum conflict within the room, instead of through the dynamism made possible when free men are allowed to exit it, or to barge into it on the merit of their own achievements. Collectivism is the same old pressure groups doing less and less producing and more and more arguing, meaning that what your enemy is getting becomes the most important datum in evaluating social change. (Anyone who was ever worked in an environment with collective bargaining knows this to be true.)

Second, as Prager and Murray note, the collectivist society is one in which individual greatness no longer matters. Fairness in the distribution of the fruits of toil, and not the permanence and magnitude of those fruits, is the only interesting question. We do not dare to be great, because life is only about momentary pleasure and fairness. Why go to Mars, or take the risk on that revolution in human transportation, or on a potential cure for cancer, when our six weeks of vacation are coming up, or when we’re 55 and it's time to put that dreary job behind us? Perhaps the most important effect of the spread of globalization to the vast seas of humanity in India and China is the inculcation of the belief that individual achievement and greatness matter, that individual glory is to be had in solving human problems. These concerns will be nowhere to be found in our collectivist conference room.

Third, collectivist life is simply less interesting. The economist Edmund Phelps had a piece a few years back in the Wall Street Journal, which included these remarks:

I would, however, stress a benefit of dynamism that I believe to be far more important. Instituting a high level of dynamism, so that the economy is fired by the new ideas of entrepreneurs, serves to transform the workplace--in the firms developing an innovation and also in the firms dealing with the innovations. The challenges that arise in developing a new idea and in gaining its acceptance in the marketplace provide the workforce with high levels of mental stimulation, problem-solving, employee-engagement and, thus, personal growth.

If the meeting in the conference room is being chaired by the president of France, and the people in it are all the CEOs of France's leading national champions, that is not a meeting I want to be in. More particularly, those are not companies I want to work for. The collectivist expresses grand enthusiasm about solving problems, but the problems he is interested in solving are so small in the grand scheme of things -- extending 2009-quality health care to more people, managing the status quo of slow decline, saving today's jobs for a few of today's workers. Work that is truly worthy of human ingenuity -- figuring out why the existing way of doing things is so unsatisfactory, trying to persuade people that your solution is the best one in a manner that forces you to really have a stake in the outcome, creating new technologies and trying to find out if they are worth to society what you think they are, these are problems that people in dynamic societies have to solve all the time, often by quitting their current employment and boldly embarking on their own. Collectivism saps that spirit, which has consequences not just for individual greatness but for human happiness as well. Perhaps large numbers of people agitating for more time away from work, even as they simultaneously agitate for complete protection from dismissal from it, is the sign that the decline of collectivism has permanently taken hold. That moment appears to have long since arrived in Europe, and is now knocking at the door here.

When Lawyers Make Cars

The Wall Street Journal (subscription required) has an article describing how secured creditors in the Chrysler bankruptcy gave up their place at the head of the line for claims on Chrysler assets. At one point, an anonymous Obama flunky (the remark appears to have Rahm Emanuel all over it) notes:

"You don't need banks and bondholders to make cars," said one administration official.

Hundreds of car companies, based in dozens of countries and dozens of cultures, some of them the world's largest and most successful companies, somehow have in over a century of making and selling cars all managed not to figure this out. But our lawyer president, our lawyer vice president, our lawyer presidential chief of staff, and the other highly credentialed fellows not willing to speak on the record have finally got it all figured out. Thank goodness.

The New Chaos

Major depressions used to be common in the United States. We had them in 1837, 1857-8, 1873-8, 1897, and, most famously, 1929-1939. (As an aside, until 1929, the general attitude was to do nothing. It was not taken for granted that the president had a magic button in his office that he could push to end any economic problems that came along. Somehow, the economy always righted itself, and we continued to move forward.) But with one exception, we until recently had gone almost 70 years without one. The exception, the economic dysfunction of the late 1970s and early 1980s, was idiosyncratic because it was in a sense intentional, the result of having to wage extraordinarily contractionary monetary policy to fight the inflation caused by the misbegotten expansionary monetary policy during the oil-shock period.

But in 1994 on these events have been commonplace around the world. India in 1991, Mexico in 1994, East Asia in 1997, Brazil and Russia in 1998, Turkey in 2000, Argentina in 2001, the Arab Gulf states in 2006. And now, most of the planet.

It seems to me that the fact to be explained is not just why we are having this crash, but why we went so long without one, particularly in the advanced economies of the West. Financial crashes, I think, are usually the follow-up to financial bubbles. And those bubbles occur when major positive disruption to production possibilities brings overall opportunity, but great ignorance about how the opportunity is best to be exploited. The frequent depressions in the US through 1929 were caused by an economy dramatically remaking itself from predominantly agrarian to predominately industrial, the replacement of small farms with large factories. This was a revolutionary process that was not well understood at the time, so mistakes were frequent. When the mistakes reached critical mass, they had to be cleared out, and that was the function of the crashes.

In this view, the disappearance of major bubbles and crashes after 1929 was not due to government learning how to manage the business cycle better but to the much slower pace of economic transformation. Western economies matured, and so chances for speculative bubbles to build up essentially disappeared.

So what would explain the chaos of recent years? We are once again in a time of truly radical transformation. Part of it is technological -- the mainstreaming of the Internet in the late 1990s led to a huge number of highly speculative commercial ventures, all of which are plausible at the time but with the passage of time and the learning of knowledge about what consumers want proving that some of them were mistaken. This, I think, is the explanation for the Internet bubble during that period.

But the truly big story is the emergence of literally billions of people into the global economic system. They bring with them their energy, their dreams, and their ideas. Clearly, in the aggregate, the removal of these people in places like India, China, and Brazil from the imposed stagnation of state-dominated economies is a tremendous step forward for humanity. But how will the merging of all these people into the modern world change our possibilities? This has yet to be decided, and entrepreneurs have to decide it one gamble at a time. Even the current financial crisis is in part due to the introduction of new financial instruments, which are not currently well-understood. This is not unprecedented. The introduction of common stock led to the South Sea bubble, the introduction by John Law of paper currency into France did much the same there, and even the famous Dutch tulip bubble was driven in part by the introduction of tradeable futures contracts. All of these tools are still in use centuries later, and so too will be securitized mortgages, credit default swaps, and the other financial exotica that are blamed for the current mess. Being novel, they were often used irresponsibly, but it takes a while to learn the limits of any new invention.

More broadly, this introduction of people, the generators of ideas that change what is possible, into the global system is the phenomenon; the technological changes are only the epiphenomenon. And the scale of this great merging has brought with it a new instability -- the end of the artificial stability caused by the relative stasis in the number of people participating in the global system owing to the popularity of socialism. For centuries most of the heavy lifting with respect to advancing the human condition has been done by a relatively small number of countries -- the UK first, then continental Europe, the US, Canada and Australia, then Japan and the other early East Asian Tigers. Now, huge numbers of people in countries all over the world are getting into the game, and they will bring disruption with them. This will bring tremendous benefits, but it will be a bumpy ride. The current financial turmoil will not be the last.

Ignorant About All The Wrong Things

President Obama said something revealing the other day:

On the other hand, what you're now seeing is profit and earning ratios are starting to get to the point where buying stocks is a potentially good deal if you've got a long-term perspective on it. I think that consumer confidence -- as they see the American Recovery and Reinvestment Act taking root, businesses are starting to see opportunities for investment and potential hiring, we are going to start creating jobs again.

"Profit and earning ratios" is not a term that comes up much among financially literate people. (Google it, and you find that President Obama's statement is the only thing that comes up.) Profits are earnings, and so that ratio would always be one. Or perhaps he meant profit ratios and earnings ratios, but in that case the two would always be identical, so he is being redundant.

He was probably trying but failing to repeat something he once heard someone say on CNBC or something, which is "price to earnings ratio," the price of a stock divided by its profits. This is a financially meaningful term, and people in the know often say that the historical range for it is between 17 and 20; anything above 20 is a priori overpriced, anything below 17 is presumably a good buy.

Who cares? When George W. Bush was running for president in 2000, a reporter tripped him up by asking him the name of the president of Pakistan, which he did not know. Now, this was clearly an egocentric exercise by the reporter, but it was fair game. Mr. Bush was bidding to lead the most powerful nation in the world, and that he be aware of the names, let alone the philosophies and personalities, of the leaders of the rest of them was not an unfair thing for the American people to expect.

So people could in fairness increase their personal probability that Mr. Bush was a man who didn't know much about the world. We are now in a position to increase the probability that the 47-year old community organizer we elected as president, a man who has never run anything other than presidential campaign and legislative staff organizations, who has never created a single private-sector job, is clueless about how the economy operates. He is, one might suppose, the sort of person who thinks that big declines in the stock market on his watch have no useful information to impart to him, and that wealth is a thing that magically falls from the sky for politicians to cut up and distribute to the grateful masses.

President Obama is a highly intelligent man; you don't get into and excel at Harvard Law if you're the village idiot. But being smart is no guarantee of anything. (See Theodore Dalrymple's recent piece, among many others, for the reasons why.) Being smart is not the same thing as being wise, and our new president appears to have no wisdom at all about finance, economics, and incentives. Right now, that is an underwhelming endorsement at best.

How to Get Out of This Mess Cheaply

Recently I have taken to telling friends that the most efficient way to get us out of the economic mess would be to spend several million dollars and use it to send all of the high government officials - in the White House, the Fed, the Congress, the Treasury, wherever they are lurking - on vacation for 18 months in some tropical paradise. There they could try doing something radical - namely, nothing - for a little while, and in the mean time buyers and sellers could sort out the mess, liquidating some businesses and rewarding others. Recognizing that these folks are used to living high off the taxpayer hog, we wouldn't want to stint on accommodation, food, etc. But really, it couldn't cost much more than $50 million, and it would be well worth that just to avoid all the sanctimony and ignorance to which we are about to be subjected, let alone all the horribly expensive mistakes now in the proces of being made.

But it turns out Iowahawk imagines an even cheaper option.

Should the U.S. Be Making Cars in 2525?

The U.S. is about to name a "car czar," someone to supervise automotive restructuring as a condition of accepting government loans. The automakers are supposed to submit plans next week to satisfy congressional overseers. Barney Frank, Nancy Pelosi, etc., in other words, are to preside over the reorganization of major American businesses. It is too easy to point out that these are the same people who gave use the housing mess. (Mark Steyn once mocked 1970s Britain as a place where "the government made your car." It is not so funny now.)

So instead, here is a good starting question. Should the U.S. still be making cars in the tear of Zager & Evans, 2525?

If your answer is "No," how do you answer if I replace "in 2525" with "next year," "in 5 years," "in 20 years," "in 50 years" or some other value? The only honest answer to every question is "I don't know," with the probability at some level close to one if we substitute "next week," and declining toward zero beyond that.

This means that there is some year that the U.S. should stop making cars, and that no one knows what it is. And so to decide this question we have a procedure. If companies can produce cars in the U.S. and sell them at prices that exceed the opportunity cost of the resources needed to make them, the answer is "keep going," and otherwise the the answer is "stop." This procedure is generally known as "the market."

It is possible of course to substitute an alternative procedure, in which elected representatives vote, in response to political pressure exerted by various factions, via votes, campaign donations, blackmail, or whatever tools they choose to employ, on providing money extracted from taxpayers either now or later (the latter, of course, don't vote) to car companies until, one day, they stop providing it. Note that it is no answer to say that the companies, like Chrysler in the 1980s, will use the money to become profitable once again. Ultimately, one day, the time at which Americans ought to no longer make cars will come.

Which procedure produces better results? Which procedure has us ceasing to make cars at closest to the right time? We trust the market procedure to answer when the question is, "When should a hair salon close?", "When should Americans stop manufacturing horse-drawn carriages?", etc. What is the difference here? Scale, surely. The automotive industry employs huge numbers of people. But why does scale make any different with respect to the ultimate question - should American resources be tied up in this end, or reallocated somewhere else? No one knows the answer to this question, but there is substantial reason to think the market process will do a better job than the political process. Indeed, the result generated by the political process, so far, is that American companies will be asked to preserve existing collective-bargaining agreements as much as possible, despite their immense cost. They will be expected to meet very expensive emission requirements. And they will be expected to sell the results at a price American consumers will pay. This approach does not inspire confidence.

Alas, the politicians get to write the laws, and the workers, consumers, bondholders, shareholders and the competitors to U.S. car companies, whether they make cars or not, must merely obey them. And therein lies all the difference. Not in what should happen, but in what will happen.

The Road to Economic Hell

Our new Secretary of the Treasury, this morning:

"It is essential for every American to understand that the battle for economic recovery must be fought on two fronts," Geithner said in a speech in Treasury's ornate Cash Room where he unveiled the administration's new plan.


"We have to both jump-start job creation and private investment and we must get credit flowing again to businesses and families," he said.

I'll forgive him his "battle" metaphor, even though the rhetoric of war has been used in every catastrophic expansion of collectivism and the state in the last 100 years. I am more immediately struck by the use of the phrases "jump start" and (albeit as a clumsy mixed metaphor) "flowing again."

"Jump start" is what we do to dead car batteries. Someone unfamiliar with how a car works might view the turning of a non-functioning car into a functioning one merely through the application of those yellow cables as some sort of otherworldly miracle. The application of electric charges makes the car every bit as good as it was the night before, before we forgetfully left the lights on.

Alas, the economy is not a dead battery, nor indeed a single entity of any kind. To be sure, people are pessimistic, and for good reason, but the problem is not one of restoring their psychological health. The problem is not with "the economy." The problem is with a billion individual bad economic decisions, each of which must be resolved by buyers and sellers in its own way. Investors, as I have noted before, have to map out the financial landscape to find out where the problems are, and how deep they are, in an environment in which the Congress and President of the United States are just firing off every gun in the arsenal wildly, no matter the consequences in higher taxes for future Americans, in hopes that some bullet hits the target. Financial uncertainty plus vastly increased political uncertainty is not what one wants for an investment environment.

Our economic troubles boil down to a lot of resource-misallocation mistakes that have accumulated over time. The politicization of the housing and financial markets, a tremendous globalization-driven boom that created huge amounts of wealth but also allowed a lot of in-hindsight fiascos to accumulate, and the postponement of the day of reckoning through a futile Fed-led 24/7 running of the printing presses in the last few years has created an aggregate mess. But while the mess is macro, the solution is micro. The mistakes have to be weeded out. Once upon a time, in the era of great social transformation brought about by industrialization, booms and depressions were common. The government didn't imagine that it could do anything about them, and they were usually (although not always) short affairs.

But it is clearer every day that our politicians see themselves as messiahs. They are convinced, despite the utter lack of any historical evidence, not just that they but that only they can solve the problem. Thus, expect a lot of random political noise - bail out this but not that, no wait, spend another $500 billion, no wait, nationalize the banks, no wait, buy American - to make things a lot more uncertain, and therefore a lot worse.

Should American High Technology Be Less Successful?

Because soon it may be. The LA TImes talks of how Google, having bet big through campaign donations to Barack Obama, is now set to reap its rewards. (Special interests carving up the citizenry - the "change we seek.")

In 2006 I wrote the following about Google's decision to open up a lobbying office in DC:

But that they see the benefits of lobbying as justifying the costs is disturbing, another sign that information technology is every day becoming more like cars, oil, and every other industry where the returns to pressuring the government are large. And that can have no good effects on the progress of the information revolution.

Well, the entanglement of the state with the car industry (and of course the financial industry) has become far more profound than even I imagined when I wrote this. Not good news for those - say, car customers, shareholders and employees of companies, people in the future with no say in the matter but now stuck with much higher tax bills and higher costs for goods and services because of the permanently increased reach of the state - without so much heft in DC. Thinking of how such industries as passenger rail and automobiles have performed as innovators during their era of extensive entanglement with Washington, it is a little disturbing to read the following from the Times account:

Google says the main reason it has improved its standing in Washington is that Obama's tech priorities mirror its own. He has endorsed network neutrality. His technology agenda also calls for expanding broadband Internet access to rural areas and appointing the first government-wide chief technology officer ([Google CEO Eric] Schmidt has been mentioned for the position but reiterated this week he was not interested).

"This administration is more focused on science and technology," Schmidt said in an interview. "That's positive for all of technology, and particularly Google."

Does anyone feel that the American technology sector, during the era that Washington, the Microsoft antitrust case aside, has more or less left it alone has performed poorly? Has it failed to innovate, failed to make people's lives better? Is more government focus on high technology likely to make high technology more or less effective for the American people relative to how effective it was before? This is the question to ask right now, because if we wait until the government gets really "focused on science and technology" it will be too late.

Where Does the Tuition Money Go?

George Leef of the John William Pope Center for Higher Education Policy discusses Charles Murray’s recent book, which I reviewed here. Mr. Leef ends with a sentence that raises an interesting question - where does all the bloated expenditure on higher education end up?

For decades, America’s higher education establishment has been riding high. It succeeded in persuading most of the populace that more education—that is, formal education—was an unalloyed benefit for both the individual and the nation. That may have been true decades ago, but it no longer is. Instead of trying to preserve the notion that college is good for almost everyone, the education establishment should face the reality that many young Americans would be better off if they didn’t go to college right after high school.

Economists refer to the return going to an asset’s owner because of the asset’s permanent scarcity as a rent. The term derives from rent to land, which was seen to be the most meaningfully finite resource in the days of Smith and Ricardo, but can apply to any asset whose lack of good substitutes, including from competition from new entry, generates high returns for its owner. This can accrue to the owner of an unusually good voice, an unusually attractive face, the ability to write unusually elegant economic models, the ability to obtain special government privileges (whence the term “rent-seeking”), and so on.

Higher education ought to generate substantial rents. State universities are heavily subsidized, so that the cost to the student is considerably less than the expenditure on resources made by the school. This should generate ample opportunity for faculty/administration chiseling. Private and, to a lesser extent, state universities are able to price-discriminate by calibrating financial aid. After demanding, and getting, a slew of financial information from potential students, schools calculate their willingness to pay, and give them financial aid for the rest, which is just a convoluted way of charging each student a different price. By doing this, the school extracts most of the gains from trade between school and student. Competition through entry is possible, and does exist through University of Phoenix-type arrangements, but heavily subsidized first movers are difficult to compete against.

But if universities generate such tremendous rents, where do they go? Administrators are arguably very well-paid relative to the opportunity cost of their time. (If an English professor becomes a university president, what is his next-best alternative?) Some professors, especially science and engineering stars at research universities, and professors in business colleges (who tend to have better private-sector alternatives) are paid pretty well, but many, especially in the humanities are not (as they would be the first to tell you).

I think that much of the rent is taken not as money, but as leisure and vanity indulgence. The faculty member who retires (often at a relatively young age), having brought the same crumpled lecture notes into class for 20 years, is legendary. Few middle managers in the private sector could get away with such a lack of dedication to continuing education. Many faculty take a huge chunk of the year off – summer and Christmas season in particular. Compared to private-sector managers, they have a large amount of time available even during the workweek, often not having to be on campus unless they are teaching. Faculty and administrators alike are tremendously creative in creating fads (“critical thinking,” “civic engagement,” “assessment,” etc.) to justify conferences, which are often held in nice hotels in pleasant cities and for which the university often picks up the tab. The tenure system itself contributes to this leisure rent, by making it almost impossible to dismiss faculty for anything other than gross misconduct outside the classroom. It is an artifact of earlier times, but is retained by the sort of uncompetitive system Messrs. Leef and Murray describe. (I say this as someone with tenure myself.) Faculty are not under threat for being fired for what they say, which is the nominal justification for tenure. If anything, tenure serves to strengthen the ideological cartel of the existing faculty, another form of noncompetitive rent – the ability to propagandize students with little competition.

Administrators too have ways to vent the rents, most famously through the indulgence of the edifice complex, the construction of probably unnecessary buildings with the current administration’s names suitably immortalized in stone. Other methods undoubtedly exist. These methods, in combination with the grossly inefficient way in which faculty structure their work schedules, raise the cost of education, in ways a supermarket could not get away with.

College work ain’t digging ditches. It is rather nice work if you can get it, which is why the competition for faculty positions, particularly in the humanities, is so high despite the low pay. (If sociology professors are underpaid, why do hundreds of people often apply for a single opening at a decent university?) The rents from the tremendous inefficiency of the higher-education market are often not taken as cash, but that does not make them small.

American Housing and the Great Crash

The global financial crisis happened because the US, by failing to oversee lending markets, recklessly let a housing bubble develop. When it popped the whole world, having bought into the bubble through securitized mortgages, fell too. Right?

Think again. Oh, it's true that the US housing market developed a bubble. As I have noted here , that is because of the politicization of housing loans by the federal government, which made lenders' job difficult. But it is also true, as I've argued here, that the crash is more likely a function of the global boom that unfolded, depending on one's preferred starting point, in 1982, 1991 or 1998. This boom was profound, changing hundreds of millions of lives, but ended the way such booms always do, with a backlog of mistaken ventures in need of cleaning out. At worst, the U.S. housing bubble was nothing more than the needle that popped the bubble that particular day.

Can this be? Below is a chart that links two numbers. On the vertical axis is the percentage fall in stock markets around the world in 2008. On the horizontal is the country's rating for clean governance by Transparency International, an anti-corruption group.

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Note the close relationship between lack of transparency (i.e., more corruption) and the size of the fall. Indeed, the correlation between the two quantities for the 28 countries I arbitrarily chose (because market data were easily available) is 0.69, which in social science is very large.

So what does it mean? In any society economic actors make mistakes relative to what they know after the fact. In societies with a lot of corruption (which masks information, because each government bribe is by construction hidden from the investing public) or with miserable accounting or other problems with financial information the number of such mistakes over any interval is larger. Thus, this crash is a major cleaning out of a large pile of accumulated mistakes, not an outburst of irrationality or the residue of some strangely unprecedented spasm of greed. The correlation would undoubtedly be even more impressive if it used the quality of financial reporting and information instead of overall government transparency, but is very informative as it is.

For more evidence that this is a rational resolution of a rational bubble (driven by the emergence of many countries with great potential but unknown strengths and low information conductivity into the global system), note that China suffered one of the biggest market declines despite the fact that foreigners are not allowed to trade in its stock markets to any significant extent. How can that be if the crash is simply contamination from U.S. housing? Pakistan too has suffered a dramatic fall, despite the lack of importance, I suspect, of U.S. housing securities on the Karachi exchange. The U.S. and the U.K., in contrast, despite being the epicenter of the housing bubble, had (relatively) modest declines.

What is going on is, as I have said before, an information problem, not a liquidity problem. Only by discovering the information many want but few have - information about which ventures undertaken during the great bubble are sustainable, and which were errors; about where, in other words, the remaining unexploded economic bombs lie - can order be restored.

But why let the data get in the way of a good political fable?

The Mortgage Bubble - Just the Facts

The Independent Institute has a new report (pdf) about the history of the mortgage bubble, and its subsequent collapse. It makes the same arguments, and uses of the same data (and much more) I used here. But the history of the political interference in the mortgage market that revved up in the early 1990s is far superior. Essential reading for anyone who wants to understand the mortgage mess as a failure of government, pure and simple.

Do Macroeconomists Know Anything?

When I was in graduate school getting a Ph.D. in economics, I had the hardest time passing my macroeconomics comprehensive exam. I found much of the material counterintuitive, and the mathematics more difficult than in microeconomics or the field exams that I took.

Well, now I have my revenge. Macroeconomists, and those in policy circles they have trained, aren’t coming off looking too good right now. Here is Marketwatch on the Fed running out of interest-rate ammunition in its attempt to get the U.S. economy moving again:

Rates are already very low and are not playing much part in the credit crunch that is strangling the economy.

Investors should know that the Fed still has plenty of ways to stimulate the economy, even with rates near or at zero, economists said.

The bottom line on Fed policy is supply of money. The Fed typically targets the price of money, but, with the price so low, it will focus on increasing the quantity of money through its balance sheet.

Vince Reinhart, a former senior Fed staffer who is now at the American Enterprise Institute, said the Fed will make a promise in its policy statement "to use the balance sheet to help foster economic recovery and better-functioning markets."

Macroeconomics is premised on the idea that there is this single entity called “the economy,” and “the economy” can be treated the way a diseased organ is. But “the economy” is really the coordination of the conflicting desires of 300 million people (or, nowadays, six billion people). At any moment, changes will leave some people worse off, some better off. Even now, recent economic changes are operating in favor of some people. Lower oil prices are making truck drivers better off, lower home prices are making homes more affordable, etc.

If the collective sum of everyone’s changed circumstances is on balance negative at any moment, we can defensibly talk about the abstraction called a “recession” or “depression.” It is no fallacy of composition to say the economy right now is on balance terrible. But it is such a fallacy to suppose that the remedy lies in treating the entire “economy.” Undergraduate textbooks still speak of how “spending” and “the economy” respond to particular actions by the government, in the same way a doctor can say how a bacterial infection will respond to an antibiotic. But the economy is not an organ; it is not even a body, in which all the parts generally work together to advance the prospects of reproductive success. Instead, it is a network of people both competing and cooperating as they try to advance their interests, based on the rules of the game. The macroeconomic measures of trouble we are observing are really the sum of millions of microeconomic mistakes (in conjunction with a smaller number of successes). Those mistakes have to be liquidated, no matter how painful it is.

There is a reason that interest rates have failed to do the trick, and that is that what we face is not a liquidity problem but an information problem. People are not yet certain how many financial bombs remain unexploded, and the only way out is to let them blow up so we can learn what we need to learn as fast as possible. There is no magic tool in the Fed’s workshop – not interest rates, not the “balance sheet,” not anything else – that will do what rate cuts have failed to do. Nor can any crude stimulus package coming out of Washington, which operates on the mistaken premise that some mistakenly conjured aggregate abstraction called “spending” is too low. (Large cuts in taxes would be somewhat more effective, not, as even a now-and-then smart economist like Paul Krugman argues, because spending will go up, but because politicized decisions about resource use will be replaced – in fact, more than replaced, because of greater incentives to take risks – by market ones.) Washington can however easily make things worse by constantly rewriting the rules of the game – voiding debts if the borrowers have enough political strength, bailing out this guy but not that, announcing a big spending program and leaving it to the future to figure out how to pay for it – etc. Political uncertainty multiplies market uncertainty. The unpredictable effects of both Congressional and Fed responses to current circumstances are making things worse.

All macroeconomic problems are fundamentally microeconomic problems, and the continued defiance of this fact by our ruling classes is costing us a fortune.

The Medicare Miracle That Isn't

Many advocates of single-payer health-care make the argument that the U.S. government should simply extend Medicate to all citizens. The elderly are overwhelmingly satisfied with Medicare, the argument goes, and so it is a simple matter to preserve all that is best with the U.S. health-care system - a free choice of a doctor with whom a patient can have a long-term relationship - while fixing what is worst - its unaffordability. I confess I do not know where the evidence that the elderly are satisfied with Medicare comes from. I suspect it is mostly argument by anecdote. When my mother turned 65 she was delighted with it, although whether she got the same quality of care she could've had had she (and we) been responsible for all her health care, as we were for her food, housing, and other essentials, is impossible to say.

But I have always had my doubts about how satisfactory Medicare really is, and know an offhand remark in The Portland (Ore.) Tribune has brought those doubts some support. Below are the money quotes:

Those waits already are long for many Portland patients, especially those with Medicare or Medicaid health insurance. Those providers don’t reimburse physicians at as high a rate as most private insurers.

About 45 percent of all Oregon physicians won’t even take new Medicare patients, according to McMullan. With a glut of patients and a lack of internists, McMullan says, they have begun rejecting the patients whose insurance won’t reimburse them as well.

As I suspected. With Medicaid this has long been known, but time-based (as opposed to money price-based) rationing may be endemic to Medicare as well. The article notes that it is happening too with some fully insured primary-care physicians (PCPs), although I suspect not nearly as much.

It is not correct to say there is a "shortage" of PCPs, as the article suggests there is, because that shortage has to be connected to some notion of willingness to pay, willingness to offer, prices and alternatives, and never is in such claims. But time-based rationing is almost certainly far more common among Medicare and Medicaid patients than among those paying cash or fully picking up the tab for their own health insurance (where it is probably zero), and than among patients with conventional employer-based health insurance.

In principle there is no objection to having more and more doctors be specialists, and fewer and fewer willing to be PCPs. Increasing specialization has been a hallmark of medicine, as with every other line of work, for centuries. There is probably nothing magical about PCPs per se, except that employers and insurers, in an effort to keep moral-hazard costs down, insist on interposing them as gatekeepers. That of course is a function of the fact that in the U.S. we treat health insurance as an opportunity to get others to pay for our routine health care, rather than as conventional (e.g., auto-liability or homeowners') insurance against low-probability, high-consequence acts. I think the more serious issue is time-based rationing of health-care treatment generally. And that, I fear, may be coming soon to a country near you.

The Old Continent in the New World

In one of my classes I have long given a lecture on how the US and Europe are so different with regard to economic policy, and how this has generally redounded to the benefit of the U.S.

It was one of my favorite lectures, but I may now have to scrap it, and throw into the digital trash all of the data and wonderful anecdotes I have collected over the years. One of the most striking things about this electoral turn of events is how much more like Europe we could soon become. According to India’s Economic Times, Jose Manuel Barroso, Europe’s chief bureaucrat, could hardly repress his satisfaction as he said he looked forwarding to crafting with President Obama a “new deal for a new world.” Among the items he looks forward to reworking is “financial reform,” by which is meant attempts to bring the global flow of funds under the control of the state.

It is possible, although the odds are in my view less than 50/50, that the next two years will see the introduction of a European-style single-payer health system. In that regard, the worst election news in my judgment did not come from the presidential race, but from Arizona, where a proposition asserting that Americans do not lose their freedom to contract with private parties even when the contract in question involves health care appears to have gone down to a very narrow defeat. Not even half the Arizona population, in other words, agrees that a resident of that state and a medical provider have the right to strike an agreement in their mutual interest. Further European-style privileging, East India company-style, of labor unions as monopoly bargaining agents, with all of the corruption, intimidation, economic stagnation and the annihilation of individual creativity unions bring, is also on the agenda. The Constitution makes radical change difficult, so the worst excesses may be trimmed, but an agenda that would be familiar to Clement Attlee may at least be on the table.

This battle will be lost. Not necessarily the political battle, but the battle with economic reality. It may well be that the result of the election is to make America much more like Europe, the opposite of what people (including me) were predicting until very recently. But the world has other ideas. Countries full of hard-charging, creative, innovative people all over the world (whose talents have thus far benefited America tremendously, but need not continue to do so) are not interested in the welfare state or the rights of unions or other alleged “stakeholders.” They are interested in achieving great things on their own, in escaping from the smothering hand of collectivism rather than embracing it. As an Indian official recently memorably said, “We find the Europeans fighting for a 35-hour week, and we in India are fighting for a 35-hour day.“ For the Americans too, the battle will be futile, but only at tremendous cost to the American standard of living and national interest.

How Not to Solve the Global Financial Crisis

Next month there will be a summit involving something called the G20 on the global financial crisis, says Pres. Bush, according to The Chicago Tribune:

"This summit will be the first in a series of meetings aimed at addressing this crisis. The summit will bring together leaders of the G20 nations -- countries that represent both the developed and the developing world. And the summit will also include the heads of the International Monetary Fund, the World Bank, and the Financial Stability Forum, as well as the Secretary General of the United Nations.

"During this summit, we will discuss the causes of the problems in our financial systems, review the progress being made to address the current crisis, and begin developing principles of reform for regulatory bodies and institutions related to our financial sectors. While the specific solutions pursued by every country may not be the same, agreeing on a common set of principles will be an essential step towards preventing similar crises in the future.

The idea that a bunch of heads of state, joined by a bunch of bureaucratic micromanagers of the sort who tend to populate the World Bank, the UN and particularly the IMF, can hold a meeting in the de facto capital of the world, Washington, and fix what ails the world economically is misplaced. We got into this mess because of years of accumulated mistakes that inevitably arise during a a great boom, which must be cleaned out. In this case the problem is worse because of the extra noise in housing markets introduced by Washington’s social engineering, which, combined with the global securitization of mortgages, has allowed everyone else to first enjoy our bubble and now imbibe our bitter medicine.

The only way out is the same approach that Andrew Mellon, President Hoover’s Treasury Secretary, was said (by Hoover) to have recommended: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." Once the mistakes are out of the system, growth resumes. The mistakes have piled up because of combined dramatic growth-driven economic uncertainty and political uncertainty. Recent evidence – stock markets continuing to decline around the world despite one Keynesian/FDR remedy (stimulus, bank bailouts) after another – suggests that we cannot use macroeconomic management to get us out of this mess. There is nothing that a bunch of leaders can do from on high to fix a problem that is fundamentally, like all economic phenomena, an individual one – this individual decision now seen to be a mistake, that one not, that one over there a wonderful opportunity yet to be exploited.

What the summit does represent is risk – political risk in particular. This is because politicians and bureaucrats will want to do what they like to do - enhance their control, try to be seen as doing something right now instead of telling their constituents that it will be necessary to wait a bit. The combination of a lame-duck U.S. President, a more micromanagingly interventionist Administration and Congress in the wings, and Asian nations looking to reengineer global economic management for their own political interest while European nations look to increase state control for philosophical ones, is an explosive one. A quarter century of economic progress is at risk. If we take the 1930s way – control, management, administration, regulation – and forget Mr. Mellon’s advice, the results will be the same.

Living in a Union Age

Claire Berlinski, whose previous book I reviewed as part of a larger group of Euro-doom tomes here, has a striking piece in City Journal about how the Democratic Party proposes to do in the U.S. the sorts of things that caused so much damage in 1970s Britain, until Margaret Thatcher, facing a country teetering on the edge of ruin, undid them:

When Thatcher was elected in 1979, Britain had just endured a winter of discontent—a season of strikes and trade union agitation so severe that the nation stood effectively paralyzed. Food supplies were interrupted, whole industries choked, and exports fell. “We don’t want to increase our trade with you,” said the Soviet trade minister to his British counterpart. “You’re always on strike.” Rubbish piled up on the streets that winter; at one point, so did human corpses. This was what had become of a nation that was once the world’s greatest trading power.


For obvious reasons, Thatcher put reform of the trade union law at the top of her agenda. Among the key provisions of Britain’s 1980 Employment Act was a change in the way government would recognize unions. At the time, workers voted to join unions—or not—in public, by voice vote. Dissenters suffered harassment and physical intimidation. Henceforth, Thatcher decided, new union membership agreements would require approval by means of a secret ballot in order to protect rank-and-file workers from bullying by union organizers.

(The article is presumably a part of the promotion by Ms Berlinski of her new book about Mrs. Thatcher.)

The so-called Employee Free Choice Act would require that unions be recognized as a bargaining agent when a majority of employees publicly declare for one. Under current law, a majority must vote in secret for the union as their collective-bargaining agent.

Any privileging of collective bargaining in the law - requiring, for example, that employers even recognize a union if they do not wish to - is a violation of individual rights. It is also a disaster for productivity, turning the workplace into a place of zero-sum struggle (with customers conspicuously excluded from the conversation) instead of an effort of mutual cooperation for mutual gain. In a unionized workplace, fingers are pointed, pay is detached from productivity, and productivity consequently falls, with consequences for the rest of the society (which gets no say, although arguably it should, in whether a union is recognized).

But the issue of the moment here is what this means for people who do not wish to join unions. I know from personal experience (at a university I have worked at) that unions react badly to dissenters, and there are bad consequences to refusing their very untoward advances. When workers generally speaking are identified in public as union opponents, bad things may happen to them. Is it too much to suppose, therefore, that threats or fear of backlash might motivate them to vote for a union that they otherwise dislike? This is why political elections employ secret ballots in open societies, and public ballots in totalitarian ones.

There is nothing particular about labor unions in this regard. Any group so privileged in the law behaves the same way. (The ABA and the Recording Industry Association of America use their legal monopoly privileges to behave with equal thuggishness towards paralegals and copyright violators, respectively.) This is why equality before the law - allowing each individual to pursue his interests under the same rules as other individuals - is so important. But these are increasingly collectivist times. And Americans may soon be about to learn what it took the British a decade of pain to realize. That it is happening here, in the land Mrs. Thatcher admired so much for its devotion to the ideal of individual equality, is all the more unfortunate.

Union membership in the U.S., outside of the public sector (which is not subject to the realities of the private one), has been in decline for decades. Economically and philosophically this has been wonderful for the people of the United States of America. But it may be coming to an end.