Unforeseen Contingencies

The HIRE Act (the latest stimulus scheme) includes capital controls and provisions requiring foreign banks to deduct 30% withholding taxes from Americans' accounts. Here are the nasty details.

It's hard to fathom what Congress thinks it is doing. H.R. 3691, which dealt with Medicare reimbursements, reauthorized provisions of the USA PATRIOT Act. This "stimulus" legislation imposes capital controls. The Schumer-Graham "immigration fix" calls for a mandatory biometric national ID. What's happening is very ugly, and very scary.

Oh come now...it couldn't be. Could it?

Author Naomi Wolf argues that we have a nascent fascism, and had better start resisting while we can. Here's a particularly interesting quote:

"Obama has done things like Hitler did. Let me be very careful here. The National Socialists rounded people up and held them without trial, signed legislation that gave torture impunity, and spied on their citizens, just as Obama has. It isn't a question of what has been done that Hitler did. It's what does every dictator do, on the left or the right, that is being done here and now. The real fight isn't left or right but between forces of democracy across the spectrum and the forces of tyranny."

And another:

"I met Muslim immigrants in Brooklyn who were swept up in 9-11 raids, held in abusive conditions, beaten, denied rights. That's how things started in Germany. Guantanamo was modeled after what Stalin developed for the Gulag. Why are we engaged in psychological denial that it's not a concentration camp? In terms of martial law, my god. Since the book came out they deployed a brigade in the U.S. and suspended the Posse Comitatus Act. There is no question that it's something to take seriously."

Again, I don't particularly care whether we call this fascism or something else -- the important point is that America is heading in a very dangerous direction. George W. Bush started us on this road, and Barack Obama is continuing the drive. But then, growing authoritarianism, combined with a rapid expansion of government control over the economy... what the heck are we supposed to call it?

Mandatory national biometric ID, that is. This Washington Post story focuses on India, but the tenth paragraph points out that this is being proposed in the United States as well.

If you think the Tea Partiers are angry now, just wait until the government demands our fingerprints.

Read more about it here and here.

My much respected and appreciated reader NV has suggested I am way over the top on this, but I don't think so. The Obama regime really is fascist, in the style of Juan Peron. And if we do not reverse course very soon we are in for an Argentina-like fate. Here's a brief explanation focusing on the health care legislation that just passed. I'll expand this in the future.

A major focus of Obama's regime is expanding the role and power of the state into peoples' personal lives. The health care reform is a particularly unfortunate example. This legislation mandates "insurance" for every individual that meets criteria laid out by the Political Class. (The quotation marks are because this isn't real insurance. It is not insurance against risk: the requirement that pre-existing conditions must be ignored means this isn't insurance, but something else.) If you do not buy the insurance, you are subject to jail time, and a fine of up to $250,000. If your insurance exceeds these criteria by more than the Political Class deems appropriate, then you will be heavily taxed on it, unless you're associated with political supporters, like UAW, in which case your insurance is exempted.

This reform does nothing to curb government or private expenses on health care. It does offer rewards to the president's political supporters, and punishes opponents. As I have already documented, it actually worsens the federal government's precarious financial position. This is very much a Peronist sort of policy.

It will also lead to increasing intrusions into our private lives. Not only will we have to document our health "insurance," but we will see increasing control of our private behavior. For example, tanning salons are now required to collect a 10% tax from patrons. There's talk of placing federal taxes on beer, soft drinks, and snacks to make them less affordable. Eventually preventive checkups and treatments will be mandatory. Wait and see what is proposed regarding privately-owned firearms as a "public health issue." After all, now that one's health is a matter of public policy, so will be one's lifestyle. You might think I'm exaggerating, but I'm simply quoting what democrat politicians have themselves said. The authority of the state is being drastically expanded "for our own good, of course."

Meanwhile, critics of this scheme are being demonized as violent racists. The claims that Sarah Palin is calling for violence are so vicious and dishonest that I hardly know what to say. The claims the Tea Party opposition is simply racist is an enormous lie, but the democrats and the mainstream media are repeating these lies as if they are obvious facts. There are proposals in Congress to re-instate the "Fairness Doctrine" in order to muzzle conservative talk radio. Here's a despicable example of the progressive-fascist Big Lie from New York Times, and an excellent rebuttal by Pat Sajak.

As for the alleged Tea Party racism against the Congressional Black Caucus, there seems to be no evidence at all for it. See this post, and this one, and this one. (Yes, I'm even citing the Rockwellites on this!)

Because the legislation imposes a variety of new taxes on corporations, the passing of the bill meant they are required by law to re-estimate their long term projected earnings. AT&T did so and took a $1 billion loss from the bill; other corporations have similar results. Therefore, the Whitehouse has publicly condemned them as "irresponsible" and democrats in Congress are calling them into hearings to threaten them.

What is happening here is extremely dangerous. We have something that looks an awful lot like a one party state, and it is being wielded to impose a government takeover of a major sector of the economy. It is being used to take control over peoples' personal lives, and to try silencing opposition. Stylistically it is different from, say, Mussolini's fascism. But in substance, it's fascism, a the supremacy of the state -- or rather of the Political Class that controls it -- allegedly on behalf of the citizens.

Similar stories can be told concerning the financial sector and the energy sector. The democrats -- it really is a one-party show at this point -- are moving to entirely reshape the role of the state. We have been moving slowly in this direction for some time, but this is a wholesale rush.
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Postscript: Here's how philosopher Tibor Machan describes Obama in the response to the question "What does the bill say about the Obama presidency?"

Tibor Machan: "That he is now an unabashed socialist, nearly exactly like Hugo Chavez. Chavez has done things in Venezuela that Barack Obama would no doubt like to do. The ascension of governmental ambition is the same – the gradual widening of state control not for purposes of efficiency but as part of a larger agenda. It is obvious, having observed Obama during his presidency, that the president's hope and change does indeed expand government's role dramatically on an ongoing basis and one would be foolish at this point to expect anything else from his presidency."

The entire interview with Machan is well worth reading.

...not the blog, but on just how difficult it is to predict the future.

In August 1989, I traveled to West Africa to visit a friend and tour several countries. When I left the U.S., I had no particular inkling that the Soviet system was likely to unravel. But while I was in a small village in the remote backcountry of Guinea, the news came across BBC that Hungary had opened its borders with the West and East Germans were escaping across it. I was rather astounded, and was trying to explain to African friends what it all might mean. Two months later the Berlin Wall fell. But even then, how many realized that within two years the USSR would be gone as well? Answer: I certainly didn't, and almost no one else did.

When the USSR finally collapsed I was in my Ph.D. program at NYU, and taking a course in Comparative Economic Systems. During a discussion of the Soviet economy, the professor, Peter Boettke, asked if I had any opinion on the future of the Soviet Union. By coincidence, only days before before I had heard Gary Kasparov speak and assure us that the USSR would be gone very shortly. I said so, thus ensuring my reputation as a forecaster. If the conditions were as Kasparov described, the end of the USSR was obviously only a month or two away. If.

The point of this reminiscence is to remind myself how impossible it is to predict economic and political events. We can make good conditional predictions, of the sort "if A then B," but the trick is knowing which conditions will hold. We're not much good at that. I just took Kasparov's word for it.

With this caveat in mind, I note that historian Niall Ferguson of Harvard has an extremely interesting and chilling essay in the March/April 2010 Foreign Affairs, in which he ponders the likelihood of an imminent Soviet-like collapse for the United States. In a nutshell, he thinks the end of American empire is very close.

I'm a little skeptical of the complexity theory he invokes, but we don't need complexity to make a good conditional prediction about why he might be right. The United States government is currently on course for the national equivalent of bankruptcy: a sovereign debt crisis. I'm convinced that the passage of the new Obamacare bill puts us further down this road. Is there any reason at all to believe that this new federal monstrosity will stay within budget and deliver what is promised? I think the answer is no, and make a partial argument here.) Perhaps gullible Obama supporters think it will, but I suspect our creditors in Beijing are a little less starry-eyed about all this. There have already been some expressions of worry from that quarter about our long term fiscal position. It's not difficult to imagine that anything that sharply worsens our deficits could lead them to reduce or abandon their continued support of our deficits. If this happens, it could trigger the sort of catastrophic effect Ferguson warns us about.

So consider that CBO estimates that the net effect of the three major health care bills that recently have been passed and signed into law is that they add $59 billion to the national debt over the next ten years. It's simply a dishonest stunt to pick two of these three pieces of legislation and find that we are reducing our deficits. It might fool Obama's true believers, but I have my doubts that the People's Bank is among them. If the debt charade continues... well, we're in the position of the man who falls off the top of the Empire State Building: "hey, I've already fallen 100 stories with no bad consequences, I guess things are OK after all."

But on the other hand, bad consequences are not assured. In my view, at least, we could still turn things around. The level of outrage against Obama and co. seems pretty high, particularly among those who still believe in individual liberty and free markets. The numbers are not in favor of Obama and Pelosi, as I document here, for example. I suspect a horrendous political fight ahead for the democrats. It's unfortunate that the republicans are largely a worthless bunch, but the ire of the Tea Partiers is very high, and they are much more in tune with reality than either party.

Go figure how all this will unfold...it's quite an unstable situation. I can only say I fully agree with Rush Limbaugh: "We need to defeat these bastards. We need to wipe them out. We need to chase them out of town....They must my friends, be hounded out of office. Every single Democrat who voted for this needs to know, safe district or not, they are going to be exposed and hassled and chased from office."

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Photo: Boris Nikolaevich in the process of chasing some bastards out of power.

Here's an interesting question: how big is the effect of the ARRA stimulus? You can't measure it by collecting data, because you have nothing to compare your data against. Would we have had less total output without it? More? The same? Did it shift the makeup of output in some way? There's no way to answer any of these questions without knowing what would have happened in the absence of stimulus -- something we cannot observe, because it didn't happen. The same issue holds for unemployment, for the time pattern of production, and other matters of interest.

The only way to get at such a question is to postulate a theory of how such spending influences economic activity. But even that isn't enough; a theory simply tells, at best, the directions of effects; it cannot identify magnitudes. Hence some sort of measurement of something related, perhaps based on numbers from micro data, is required to calibrate the model. But you cannot measure the effects of interest, you can only compare reality against against a hypothetical world in which the cause whose effects you are trying to guess did not occur. The whole exercise rests on theory. It involves what Frederic Bastiat called "that which is seen and that which is not seen." Your hope your theoretical underpinnings are relatively sound, so that you've made an educated guess rather than a WAG. But your estimate of the effects is theory laden, and won't systematically be any better than your theory.

As "we" here at Unforeseen Contingencies understand it, that's essentially the approach that is used in macroeconomics these days. And if you're going to ask such questions, there's probably no other way to get an answer. And this seems to be exactly what the CBO did.

As mentioned in the previous post, there's been a little brouhaha on the Cafe Hayek & Econbrowser blogs over the nature of the CBO results. Russ Roberts has now clarified his position, and argues that the effects of ARRA haven't been measured, might not be measurable, and the CBO has not produced estimates of these effects. It should be clear from the above that I disagree. The effects are impossible to measure, but can be estimated. The estimate will be theory laden, and in macro, there are almost as many theories as economists.

"We here at Unforeseen Contingencies have, of course, already developed our own theoretical analysis of stimulus and multipliers, which we commend to our readers who could use a brushup on the issues. For some more technical skepticism of multipliers, see Cwik, Cogan, Taylor, & Wieland.

Given all this, though, there's a sense in which this discussion isn't as important as it might seem. Can government interventions boost GDP? It's hard to imagine that there'd be no effect at all. As mentioned in the previous post (and many times elsewhere in the blog) the Austrian theory of the business cycle is built on the recognition that artificial stimulus can generate an unsustainable boom. For that matter, the Soviet economy was able to get high rates of employment. Hence even if stimulus is successful in pushing GDP back to potential, if the spending is on things that are ultimately unproductive or negative value added, it's for naught... something I managed to get Menzie Chinn essentially to concede back in February 2009. (Scroll down to find his response to my comment.)

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Photo: Empirical proof that ARRA has stimulated the economy...evidence of a boom in the "under construction" sign building industry.

Define "work."

Ludwig von Mises argued that debt financed government spending and central bank credit creation are both capable of creating an artificial boom. Hayek concurred (at least on monetary policy). This artificial boom is the source of the business cycle, in the Austrian account.

And certainly, if by "work" we mean "increase GDP and reduce unemployment," stimulus spending might well do this; it has to have some effect, doesn't it?

Well, there's a debate of sorts between Menzie Chinn of Econbrowser and Russ Roberts of Cafe Hayek over the effects of the ARRA stimulus bill (and particularly the CBO estimates thereof). Chinn has been arguing for some time that it's been effective, while Roberts is skeptical. While there are some interesting issues involved, I'll bypass those and note a couple of oddities in Roberts' argument.

1. Many who are of an Austrian bent (I guess Roberts is Austrian) seem to be adamant that government cannot boost GDP or reduce unemployment with fiscal or monetary policy. Yet this stuff is the source of the boom in the Austrian business cycle. So why is this such an important issue for these guys?

2. Roberts appears to be arguing that the CBO estimates are not estimates at all, because they are based on theoretical models. I object. I've earlier tried arguing with Chinn that these results are not empirical measures because they are based on theoretical models, including simulations and counterfactuals. But that's quite a different point. Roberts must know that all economic propositions about the effects of some event are based on comparison with the counterfactual case where the event didn't occur. Such estimates are necessarily theory laden.

Hence my comment (on both blogs and now here): "Economics necessarily involves that which is not seen as well as that which is seen, as Bastiat points out. And the cost of an action can never be realized, as Buchanan shows us. The use of a model or theory is inescapable in economics... 'what didn't we see,' 'what would have happened,' etc.

So CBO's approach is an analysis of what stimulus actually did; such analysis necessarily requires a counterfactual, based on an underlying model of what would have happened otherwise."

3. Roberts seems to accuse the CBO of partisanship. Evidence? None offered, and I couldn't find any in reading the CBO study. They used mainstream macro, and spelled out their methods fairly clearly.

I actually share Roberts' skepticism about stimulus (and mainstream macro). But I dislike poorly reasoned critiques that add nothing to our understanding. They don't teach us anything, and simply strengthen our opponents' beliefs that we've nothing of value to offer. In a time when economic analysis is getting a terrific bashing, it needs to be done more seriously and carefully than ever.

Three of them, in fact!

The Unforeseen Contingencies Fiscal Limerick Contest is pleased to announce a three-way tie for first place. "Our" judging criterion was the subjective utility generated by each entry, and by careful analysis we were left with a draw (irrefutable proof of the indifference principle, BTW!)

And the winners...

G. Stolyarov II:

A Limerick on the Federal Reserve

There once was a bank called the Fed,
Which rendered cheap credit widespread.
It blew up a bubble,
But told us, "No trouble!
Because, in the long run, we’re dead!"

Jeff Ross

(untitled)

It did not begin with a regime unlawful.
It will not end with policies awful.
Deficits and taxation are theft,
They won't stop 'til there's nothing left.
It's time to teach those bastards TANSTAAFL!


And from "Name withheld by request":

Fiscal Discipline

Hank Paulson addressed Goldman Sachs
"Your risk management has been lax.
There's no ethics or sense
In the things you've done, hence
I'm giving you money in stacks."

Winners all! But the REAL winners are the prized readers of Unforeseen Contingencies, who get to enjoy this fine and instructive poetry without charge!

Thanks to all, and congratulations to the winners!


Each winner receives a copy of This Time is Different: Eight Centuries of Financial Folly by Reinhart and Rogoff (watch the great video).

...as our select staff of judges deliberates over the entries in the Unforeseen Contingencies Fiscal Responsibility Limerick Contest. They've been hard at it for forty-eight hours now, but still no decision.

But wait, wait! What's that? A puff of white smoke from the chimney?

Have the Scrutineers reached a decision???

If you've not been following, Bruce Schneier has has some great posts related to the assassination of Mahmoud al-Mabhouh. These are worth a look, including the link to the page on how to break through an electronic door lock. The video is particular interesting, and includes countermeasures. Things every UC reader should know!

Most officials seem to think Israel's Mossad was responsible for the killing. If so, it raises some serious questions. The assassination involved theft of identities of Israeli civilians. If a government agency is stealing the identities of its own citizens and using them for covert operations, that agency is violating rights, rather than defending them. Identity theft is a real crime, and especially in these circumstances.

Lest someone suppose that this is simply an example of our usual irony at UC, keep in mind that the people whose names were used face real danger in this. Their rights have been violated. Keep in mind too that al-Mabhouh was a murderer and weapons smuggler for terrorists, and killing him was certainly called for. It did not violate anyone's rights that he was killed, including his. "We" here at Unforeseen Contingencies are of the opinion that there cannot be peace in the Middle East until Hamas is eliminated, given their vow to exterminate Jews.

Of course, the real reason why the international community is in such an uproar is the way in which al-Mabhouh was killed. Had it been with a Hellfire missile from a Predator drone, it would just have been another ho-hum news story.

Photo: the civilized way to eliminate unwanted Muslim terrorists.