You Say Communism, I Say the Ism That Made Me Rich:
Those of us who aren’t quite ready to abolish the state tend to be in favor of a more limited, and much more smart, set of clear rules that are based largely on transparency, cost-benefit-analysis, and fairness (i.e., so that the system can’t be gamed to favor certain large investment banks or quasi-governmental entities that lard the politial system with campaign contributions).
“A Real Regulator” (Jim Harper, Cato-at-liberty):
Sunday’s Meet the Press had a fascinating colloquy on securities regulation, revealing Washington’s immense capacity for self-deception.
David Gregory set up the story, on which CNBC’s Erin Burnett commented:
MR. GREGORY: . . . I want to stay in New York and something else that has rocked Wall Street beyond the economy, and that is Bernard Madoff. Big money man, investment man who was the darling of Wall Street for many, many years. Now it turns out he ran a giant Ponzi scheme and billions have been lost, from the small investor to, to Jewish organizations and, and philanthropies across the country. Steve Pearlstein, who writes about the economy for The Washington Post, wrote this: “With the Madoff story, it is now revealed that the masters of the universe aren’t just too clever by half—they’re not that clever at all. For years, they not only allowed themselves to be bamboozled by a con artist but also willingly and enthusiastically served as his market agent, offering friends, relatives and favorite charities the opportunity to invest with their good pal, Bernie Madoff. (So much for the idea that wealthy individuals and ‘sophisticated’ institutional investors don’t need the protection of government regulators.)” Was anybody watching?
MS. BURNETT: It, it is incredible, because there had been credible complaints brought to the SEC that said along the lines of, “This is too good to be true. You don’t get these sorts of consistent returns.”
MR. GREGORY: Mm-hmm.
MS. BURNETT: And they didn’t do anything about it. But they’re—you know, I was talking to Mort Zuckerman, the New York real estate man, earlier this week, and he had lost $30 million in one of his charities that was invested with Bernie Madoff. And he said, “I didn’t even know who the guy was. I had given my money to somebody else who actually”…
MR. GREGORY: Right.
MS. BURNETT: …”entrusted the entire $30 million to one guy, a guy I’d never heard of, and then I get a letter finding out that it’s completely gone.” So you’re talking about some very sophisticated people who were completely duped, and maybe some of them should have been doing more due diligence. Some of them were trusting that role to others…
MR. GREGORY: Right.
MS. BURNETT: …who had a fiduciary responsibility to do it. But there’s no question we need a real regulator.
“[W]e need a real regulator.”
Ms. Burnett, the SEC that failed to prevent this is a real regulator.
When regulators fail to address a problem ahead of time, when they regulate inefficiently, when they hand their rulemaking organs to the industries they are supposed to oversee, those are all the actions of real regulators. That’s what you get with real regulation.
What Burnett meant when she called for a “real” regulator, of course, was “the regulator I can imagine.” The regulators people imagine are foresighted, interested only in the public good, they’re resistant to lobbying, and they run efficient organizations. But these characteristics are simply imaginary.
Watching discussions like these, you come to realize how legislation and regulation thrive on self-deception and the appeal to ego.
Thousands of people come to Washington and stay because they believe that they can design the ideal regulatory system. They think they know how to write a law or a regulation that works for everyone, that protects consumers, that doesn’t pick winners and losers in the marketplace, that doesn’t make the glaring errors that we see month in and month out on Sunday morning political shows.
(If only voters didn’t elect the wrong guy. If only lobbyists didn’t ‘corrupt’ the system. If only, if only, if only . . . .)
Alas, we’re stuck with real regulators. They fail, and when people rely on them, the failures of regulation are magnified. (Not that Mort Zuckerman should get his money back from anyone other than Bernard Madoff. No bailout.)
Libertarians and pro-Washington people (for lack of a better term) have the same goals: honest, transparent marketplaces, productive economies, healthy and happy people. The difference is that Washingtonians strive to defeat human nature rather than harnessing it, and they build a bigger and bigger machine for doing that, sometimes calling it “real regulation.”
The Brains of TSA, by David Henderson:
Lesley Stahl did a moderately good job on “60 Minutes” this evening in her story on the Transportation Security Administration (TSA). Why good and why just moderate? Good for two reasons. First, she actually interviewed a critic who pointed out the basic fact of substitution: when you take away guns and knives, people substitute into box cutters. Etc. Second, she showed the creepy thing they’re starting to do with X-rays that essentially strip search people electronically.
Why moderate? For two reasons also. First, because after seeing the results of the X-rays, she said she expected to see something pornographic and didn’t. But what she looked at was a slender woman wearing a bra and she could see the bra. She didn’t ask the obvious question: what if the woman had been braless. Second, she didn’t challenge Kip Hawley, the head of TSA, when he said that we are at war with terrorists. A little numeracy would have helped here. The risk of dying from terrorism on airplanes is well below other low risks that we put few resources into preventing.
Here’s a quote from my book, co-authored with Charles Hooper, Making Great Decisions in Business and Life. You’ll wonder why I’m quoting it, but be patient. I wrote:
“A few years ago, I volunteered to serve hamburgers, hot dogs, and veggie burgers at a barbecue held at my daughter’s high school. When it looked as if we were running out of any of the three items, one of the cooks would put more of those items on the grill. At one point, the line got long, with about 12 people suddenly waiting for their meal. That was the symptom of the problem. The cooks quickly put more burgers on the grill. That was their solution. But I looked down and saw that I had about four each of hot dogs and veggie burgers. I realized that the cooks were implicitly assuming that everyone wanted hamburgers. But, I wondered, what if some of them were in line for hot dogs and veggie burgers? There was a simple solution that addressed the real problem: ask them. So I announced, in my booming voice, “Anyone who’s in line for hot dogs or veggie burgers please come up here.” Immediately, six people came up, cutting the apparent hamburger line in half. Interestingly, the server who had made the panicked request to the cook for more hamburgers was a high-level manager at a logistics firm. He didn’t see any easy way around the problem.”
When Charley and I tell a story of poor thinking, we almost never give the name of the person. But here I’ll make an exception. This high-level manager of a logistics firm? Well, his name is Kip Hawley and he’s now head of TSA.
However, most people do not realize that passing gas 14 to 23 times a day is normal.
From Steve Horwitz at The Austrian Economists. This was worth quoting in its entirety.
“Oh, but he’s different”:
“Oh, but he’s different”
The Austrian Economists 12/9/08 12:55 PM Steve Horwitz
So the big news today is that the governor of Illinois has been caught doing explicitly what most politicians do with more subtlety every single day: selling off their power to the highest bidder. I can’t help but note that yet another politician is indicted on corruption charges at the very same time we are handing over unprecedented power to the political class as we partially nationalize the banking system and, apparently, the Big Three auto companies.I simply do not understand how those who are in favor of giving government all of these new powers because they sincerely believe that doing so will work out the way their blackboard designs intended can keep a straight face. What kind of cognitive dissonance must it take to believe that the people YOU are handing power over to are “not like” Ted Stevens or Rod Blagojevich? How deeply must one be in denial or engage in rationalization to believe that they are “different?” How blind must one be to think that trillions of dollars in bailout money won’t go to the highest bidder (as the lobbyists line up on K Street…) in a process different only in its wink-and-a-nod courtesies than Blagojevich’s auctioning off of a Senate seat?
For me, the key insight of public choice is the same insight that underlies Austrian economics: it is the institutional framework that is the key to understanding the choices people make and the unintended outcomes they produce. As I said to a class last week: “Governments can’t act like businesses because businesses only act like businesses because they operate in the institutional environment of private property, monetary exchange, and competition.” In the same way, getting politicians to stop selling off their power isn’t a matter of ethics or psychology, rather it’s about changing the rules of the game such that they do not have as much power to sell. Unfortunately, the current bailout mania is changing those rules in utterly the wrong direction.
Look at it this way: the bailouts are already becoming just a legal form of the essentially the same behavior for which the governor has been indicted.
Why should we ever accept “Oh, but he’s different” as an answer to the claim that explicit bribery and selling off power are just a less subtle form of politics as usual?