Wednesday, March 28, 2012

Further Inconsistencies in the Conservative Case Against the Individual Mandate

It's important to distinguish between 1) the conservative case against the individual mandate as a violation of individual liberty and 2) the legal case against the mandate as an unconstitutional exercise of Federal power.  If there are conservatives who slam the mandate as a violation of natural rights while supporting government-mandated trans-vaginal probes (such as the Governor of Virginia). . . well, I can only say they've got a rather idiosyncratic conception of individual liberty.

Regarding the legal issue, the U.S. Constitution does indeed constrain the Federal Government in ways that it doesn't bind state governments.  The rationale for this distinction is, roughly speaking, that states formed the United States and, in addition, are closer to "the people" than the Federal Government.  But this last argument seems much less convincing today than it was in 1787.  Perhaps, it's time for another Constitutional Convention.

George Will argues that there's no precedent for forcing individuals to enter into private contracts, and, therefore, the individual mandate is a violation of "freedom of contract," which is a guiding principle in the Constitution.  Well, here's a precedent for Mr. Will: motel owners must enter into private contracts with African Americans if they have rooms available for rent.  Granted, the rationale for civil rights laws is different than the rationale for the mandate, but people are still forced to enter into contracts, and this was the issue Mr. Will originally raised.

In addition, Will is also mistaken in characterizing the mandate as a "forced contract" in the first place.  If you don't want to buy health insurance, you can pay the fine instead. And, in this context, it doesn't matter whether you call it a tax rather than a fine.

The Conservative Critique of the Individual Health Insurance Mandate

The straightforward case for the individual mandate is that uninsured individuals will eventually impose costs on others when they're treated in the emergency room (and elsewhere), and their unpaid bills are recovered via higher health insurance rates.  Lawyers criticizing this argument before the Supreme Court, as well as a few sympathetic SC Justices, claimed that this goes on all the time in markets, e.g., if some people stop buying a particular good or service, its cost and price may rise because economies of scale are lost.

This is certainly true, but the conservatives' stress on externalities, cross-subsidies, and free riding in many markets other than health care, while it may be a good argument against the uniqueness of the health care/insurance market, it could also be read as an acknowledgement of the widespread inefficiency/ineffectiveness of real-world markets in general.  Insofar as many real-world markets fall far short of the competitive ideal, one could conclude, not that the health care/insurance market shouldn't be regulated, but that many other markets should be regulated in order to reduce cost-shifting, free riding, and the other unwanted outcomes.

Tuesday, March 20, 2012

Occupy Rousseau: a Discussion at the NYC Library

Andrew Hultkrans wrote an entertaining synopsis of the Occupy Rousseau discussion at the New York City Library for Art Forum (here).  I add a few comments to Andrew’s reporting, in quotes, below.

1. “Demos senior fellow Benjamin Barber took the stage and ebulliently outlined the evening. Rousseau thought that commerce and private property were incompatible with democracy, he said, and this problem is still with us today in an America desperately clinging to its sense of exceptionalism (‘exceptional because one in four children live in poverty’).”

I think Barber is a bit off the mark here.  Large inequalities of wealth and income, and a preoccupation with private concerns at the expense of public life, are certainly incompatible with Rousseau’s vision of democracy.  But private property is essential to that vision because personal independence is essential, and, at least during Rousseau’s time, it was hard to conceive of such independence for citizens who had to rent their homes, their land, and their tools.  Although Rousseau was a communitarian in many matters, he never advocated either Platonic or Marxian-style communism.

2. “Gourevitch threw a cold bucket of water over Barber’s enthusiasm and the premise of the entire event by saying, “’I don’t know how I fit into this program; Rousseau was a conservative, not a revolutionary.’”

I’d put it this way: Rousseau was a conservative and a revolutionary.  He was conservative in his pessimism (realism?) regarding the prospects for a good society because Rousseau doubted our ability to keep the republic, and its common good, constantly before our minds.  We’re easily distracted from our public duties by personal concerns, by the possibilities for gain and status, and we’re very good at concealing our real motives from others.  Rousseau wasn’t prepared to pin all his hopes on our capacity for virtuous self-discipline; he envisioned an extensive regime of mutual surveillance.  Yet, it’s hard to read Rousseau’s “Discourse on Inequality” and not construe it as an extended argument for the overthrow of the Ancien Regime; or to read the Social Contract and not see the existing European states as falling far short of the standards that must be satisfied if men are to exchange their natural freedom for the rights and duties of citizenship.

3. Chenevière and Keohane more effectively problematized Gourevitch’s stance by reading some pretty rad-sounding quotes from Rousseau’s writings. Gourevitch was having none of it: “Rousseau thought that the ideal form of government was a democracy of the aristocracy. He would be opposed to all trends in liberal thought today: multiculturalism, feminism, political correctness . . . ” Harsh, dude.

I don’t object too strongly to Gourevitch’s claim that Rousseau believed “the ideal form of government was a democracy of the aristocracy,” but I’d put more emphasis on the democratic element and on Rousseau’s insistence that the people can pull down their rulers at any time.  Rousseau wasn’t a multiculturalist because he thought a republic could only survive if its citizens shared a common life without too many conflicting beliefs about essentials, that is, without too much diversity.  And he wasn’t a multiculturalist because (like Brian Barry three centuries hence) he believed, implicitly at least, that cultural values were subject to critical judgment.  A culture that affirms the subordination of one segment of society to another is to be criticized, not honored.

4. “A former political philosophy student and lawyer, Husain insisted without prompting that he was not a spokesperson for the Occupy movement and said he thought Rousseau was a ‘tortured realist’ when he read him in college. ‘Occupy is presenting a structural critique,’ Husain said, ‘not limited to capitalism and wealth.’”

Rousseau, too, presented a “structural critique” if, by this phrase, we mean a thoroughgoing, root-and-branch critique of the existing order.  Although I don’t recall Rousseau writing anything about racial subordination, the First and Second Discourses do not stop at the door of “capitalism and wealth,” but aim to strike at their origin in the first interactions among human beings on their way to “civilization.”

5. “Somebody raised one of Rousseau’s most famous quotes: ‘Man is born free, and everywhere he is in chains.’  For a split second, the audience basked in the lefty resonance of this statement until ol’ bucket-brigade Gourevitch interjected, ‘Rousseau was trying to show people how to make the chains legitimate.’”

Yes, but “making the chains legitimate” doesn’t mean giving the inhabitants of the existing state a reason for obeying their current rulers.  Quite the contrary, Rousseau’s Social Contract describes a model beginning, a social contract, and a system of institutions, which could, and should, call forth the willing cooperation of men who’ve exchanged their natural rights for the rights and duties of citizenship.

6. “For my money, Kean, the type of moderate Eisenhower Republican all but extinct today, delivered the quote of the evening: ‘We used to fight our own wars and pay for them—everyone was involved. We’re now doing wars by proxy. When everyone’s involved, you have less wars.’  Word.”

Kean’s point about fighting wars “by proxy” does indeed go to the heart of Rousseau’s political philosophy.  Rousseau insisted that citizens not delegate their voices to representatives, that representatives not delegate too much to administrators, and that paying taxes – the ultimate form of “citizenship by proxy” – be replaced by the corvée, a form of compulsory public service. 

7. “All with Victor Gourevitch as the anti–Flavor Flav, a hype man in reverse who quietly debunked what everyone was saying instead of egging them on with a well-timed ‘Yeeaah, Boyeee!’  The man can rock the mic—that is, when he knows where to point it.”
Let me conclude by complimenting Andrew Hultkrans’ brilliant characterization of Gourevitch as the “anti-Flavor Flav,” a role essential to the lively discussion reported above.

Thursday, March 15, 2012

Is The Austrian View Of The Great Recession Coherent?

   There seems to be something deeply inconsistent in the Austrian view of the Great Recession (and of business cycles in general).  On the one hand, Austrian criticism of the Federal Reserve’s “easy money policy” leading up to the financial crisis and The Great Recession is sublimely self-assured.  On the other hand, the Austrian School must assume that business firms (unlike Austrian economists) can’t tell when market interest rates are well below the “natural rate” if there’s to be an Austrian business cycle.  Here’s the inconsistency: if a credit bubble can only be discerned after the fact, then it’s silly to criticize the Fed for what no one could foresee; and if a credit bubble can be discerned in its early stages, then market participants will take actions, e.g., reducing credit-financed expenditures, which will burst the bubble in its early stages.  Therefore, Austrian economists should either be more circumspect in their critique of the Fed, or they should retool their model of the business cycle.
Consider Roger Garrison's account of the Great Recession, offered in response to Brad Delong's dismissive attitude toward Hayek’s theory.  Garrison writes, “A true-to-Hayek nutshell version of the Austrian theory is not difficult to produce.  The central bank is central to our understanding of the current crisis.  The Federal Reserve under the leadership of Alan Greenspan kept interest rates too low during 2003 and 2004 and then ratcheted the rates steeply upward. Time-consuming investments that were initiated while cheap credit made them artificially attractive were then made prohibitively costly to carry through.”
Garrison continues, “The Austrian theory couldn’t be more tailor-made for understanding our current situation.  Dealing with the unfortunate consequences of artificially cheap credit, a memorable passage in Mises’s Human Action (3rd ed., 1966, p. 560) alludes to an overbuilt housing market: ‘The whole entrepreneurial class is, as it were, in the position of a master builder whose task it is to erect a building out of a limited supply of building materials.  If this man overestimates the quantity of the available supply, he drafts a plan . . . [that cannot be fully executed because] the means at his disposal are not sufficient.  He oversizes the groundwork and the foundation and only discovers later in the progress of the construction that he lacks the material needed for the completion of the structure.’”
Reading this, I can’t help concluding that Mises’s “master builder” is rather dim-witted.  Why wouldn’t the Austrian Master Builder recognize that the Fed had pushed market interest rates below the “natural rate,” that the supply of artificially cheap credit couldn’t last, and that the rational course of action would therefore be to avoid undertaking too many “roundabout” projects?  If Master Builders, relying on the Austrian model to form a rational expectation of the coming collapse, were to decide to cut their investment spending, the effect of their decisions would be to bring the supply and demand for “loanable funds” into closer balance, thereby bring the credit bubble to an early end.  Thus, Garrison’s “true-to-Hayek nutshell” explanation of the Great Recession only works if either A) few businesses held the Austrian view of the credit cycle in 2003-2004, or B) the Austrian theory can only pick out artificially low interest rates after the fact, when it’s too late. 
            What’s the Austrian response to this argument?  There are two actually.  (Further elaborations can be found in the discussion (here, here, and here).  The first response was put forward by O’Driscoll and Rizzo in The Economics of Time and Ignorance and it runs as follows.  Although entrepreneurs grasp the general macroeconomics of the business cycle, they can’t predict the precise beginning and end of its boom and bust phases.  Nevertheless, the authors add, “these entrepreneurs have no reason to foreswear the temporary profits to be garnered in an inflationary episode . . . From an individual perspective, then, an entrepreneur fully informed of the Austrian theory of economic cycles will face essentially the same uncertain world he always faced. Not theoretical or abstract knowledge, but knowledge of the circumstances of time and place is the source of profits.”
            This is an ill-fitting jumble of claims.  Although O’Driscoll and Rizzo grant that entrepreneurs can make “temporary profits” during “an inflationary episode,” they don’t tell us whether these profits come by accident, or because entrepreneurs can make very rough guesses about when the “inflationary episode” will end.  Since the authors insist that possession of Austrian business cycle theory leaves entrepreneurs with no less uncertainty than they would face without this theory, it appears that the latter interpretation, i.e., that profits during inflationary episodes are a windfall, is the more consistent one.  But, if so, then shouldn’t Austrian economists be less aggressive in their criticism of the Federal Reserve?  Either it was clear that Greenspan held interest rates too low in 2003-2004, in which case rational entrepreneurs would have drawn back from the precipice before it was too late, thereby reducing the depth of the downturn, or it wasn’t clear that interest rates were too low in which case sharp criticism of Greenspan is unfair.
            What about the Austrians’ claim that “[local] knowledge of the circumstances of time and place is the source of profits,” “not theoretical or abstract knowledge”?  Let’s imagine a regional homebuilder who profits from her knowledge of local labor markets, the strength of demand for different kinds of housing, the variety of local land use regulations, and so on.  Now, even with all this local knowledge, the homebuilder must make still some assumptions about the future course of mortgage interest rates, the future availability of credit, the future price of oil  (which affects the demand for housing in different locations), and so on.  All else equal, a homebuilder who makes better-than-average forecasts of these variables will outperform one who makes worse-than-average forecasts of these variables.  Yet, it’s hard to conceive of this as “local knowledge,” and it’s just as hard to imagine that these forecasts would be constructed without any reliance on “theoretical” and “abstract knowledge,” whether it’s the Austrian theory of the business cycle or some alternative.  This brings us back to the original problem: either firms with superior forecasting ability will act in ways that defeat the Hayek-in-a-nutshell model, or these variables can’t be forecast in which case there’s no point in criticizing the Fed.
The second response to this apparent inconsistency draws upon a prisoner's dilemma defense of Austrian business cycle theory in which the dominant strategy for individual banks during the onset of a credit bubble is to continue lending even though the bankers recognize that the prevailing rate of interest is below the “natural rate.”  The argument runs as follows.  If one bank curtails its lending and other banks don’t, the prudent bank loses business and is still subject to increased liquidity risk.  If, however, the bank continues lending and other banks do likewise, the bank is subject to liquidity risk, but doesn’t lose customers to competing banks.  Hence, the dominant strategy is to continue lending no matter what other banks do.  The upshot of this argument for the rational expectations critique of Austrian Business Cycle theory is that even if banks can discern that prevailing interest rates are unsustainable, their best strategy is still to continue lending, in which case the credit bubble continues to expand. 
            Unfortunately, this argument rests on a false premise.  A bank that charges a higher interest rate and maintains a higher reserve at the beginning of a credit bubble will indeed lose market share, but the bank is not, in fact, subject to the same degree of liquidity risk as banks that continue lending at artificially low interest rates.  A conservative bank, which maintains a relatively large reserve, is simply in a better position to cope with increased defaults and withdrawals than a bank that allows its reserves to decline.  Thus, increased lending at low interest rates is not actually a dominant strategy.  Rather, banks must balance risk and expected return.  But, in this case, the prisoner’s dilemma defense of the Austrian theory collapses, and the rational expectations challenge reemerges.
            Thus, to reiterate, either Austrian Business Cycle (ABC) Theory provides a reasonably good guide to decision makers, in which case it is “expectations inconsistent” (i.e., agents acting on ABC-informed expectations would eliminate the ABC), or the theory only gives a retrospective explanation of events, in which case it’s absurd to criticize the Federal Reserve for a creating a credit bubble that can’t be recognized before the fact.