Voice For Liberty

Tag: Interventionism

  • The left flunks economics 101

    Who might you guess is better informed on issues of economics: liberals who promote government intervention in the economy, or conservatives and libertarians who oppose that?

    A recent study found some surprising — or maybe not surprising — results. The study is titled Economic Enlightenment in Relation to College-going, Ideology, and Other Variables: A Zogby Survey of Americans. At this link you can read an abstract of the study and the entire document, too.

    An article by one of the authors that appeared in the Wall Street Journal is Are You Smarter Than a Fifth Grader? Self-identified liberals and Democrats do badly on questions of basic economics.

    In the study, researchers asked a series of questions designed to “gauge economic enlightenment.” Conclusions included these: First, and surprisingly, “for people inclined to take such a survey, basic economic enlightenment is not correlated with going to college.”

    Perhaps more importantly, who scored best: conservatives or liberals? Here’s the rundown:

    Adults self-identifying “very conservative” and “libertarian” perform the best, followed closely by “conservative.” Trailing far behind are “moderate,” then with another step down to “liberal,” and a final step to “progressive,” who, on average, get wrong 5.26 questions out of eight.”

    The authors say “we should acknowledge that none of the eight questions challenge typical conservative or libertarian policy positions.”

    The authors also note:

    At least since the days of Frédéric Bastiat, many have said that people of the left often trail behind in incorporating basic economic insight into their aesthetics, morals, and politics. We put much stock in Hayek’s theory that the social-democratic ethos is an atavistic reassertion of the ethos and mentality of the primordial paleolithic band, a mentality resistant to ideas of spontaneous order and disjointed knowledge. Our findings support such a claim, all the caveats notwithstanding. Several of the questions would seem to be fairly neutral with respect to partisan politics, particularly the questions on licensing, the standard of living, monopoly, and free trade. None of those questions challenge policies that are particularly leftwing or rationalized on the basis of equity. Yet even on such neutral questions the “progressives” and “liberals” do much worse than the “conservatives” and “libertarians.”

    Author Daniel B. Klein concludes in the Wall Street Journal piece: “Adam Smith described political economy as ‘a branch of the science of a statesman or legislator.’ Governmental power joined with wrongheadedness is something terrible, but all too common. Realizing that many of our leaders and their constituents are economically unenlightened sheds light on the troubles that surround us.”

  • Downtown Wichita planning events scheduled

    Last October the City of Wichita selected the Boston firm Goody Clancy to develop a plan for the revitalization of downtown Wichita. Now the draft master plan is ready, and will be presented to Wichitans on Monday June 14.

    The Wichita Downtown Development Corporation wrote in a message: “The Downtown Master Plan Team has been researching, analyzing the market, listening to the community and incorporating public feedback since November. Goody Clancy will present strategies for achieving the vision, identifying resources and the type of activity and development for Downtown Wichita. Following the presentation there will be a question and answer session with the planning team. People may RSVP for the meeting at info@downtownwichita.org or to (316) 264-6005.”

    The event will be on Monday, June 14, at the Scottish Rite Temple at 332 E. 1st Street (northwest corner First and Topeka). The event starts at 5:30 pm with a reception and light refreshments. The actual presentation is from 6:00 pm to 8:00 pm.

    The WDDC also announced three planning workshops to be held on Wednesday June 16. The schedule for these are

    8:00 am to 9:30 am: Enabling Downtown Development
    3:30 am to 5:00 pm: Creating Transportation Choices
    5:30 am to 7:00 pm: Creating Unique Places

    These events will be held in the Bank of America Theatre at 100 North Broadway, basement level.

    The WDDC says: “Following the public meetings on June 14th and 16th, the Downtown Wichita Development Corporation, Visioneering Wichita and the City of Wichita will make presentations to groups throughout the regional community for additional public input. The Downtown Master Plan Team will incorporate the feedback gathered at the June and July presentations. The final plan will be presented in September. To request a presentation, please contact Nancy Moore at 316-264-6005. ”

  • Wichita Bowllagio hearing produces only delay

    Yesterday’s meeting of the Wichita City Council featured a lengthy public hearing for a proposed west-side entertainment development known as Bowllagio. Bowllagio is planned to have a bowling and entertainment center, a boutique hotel, and a restaurant owned by a celebrity television chef.

    The developers of this project propose to make use of $13 million in STAR bond financing. STAR bonds are issued for the immediate benefit of the developers, with the sales tax collected in the district used to pay off the bonds. The project also proposes to be a Community Improvement District, which allows an additional two cents per dollar to be collected in sales tax, again for the benefit of the district.

    The Kansas STAR bond process calls for several steps: First, a local governing body, like the City of Wichita, must approve the concept and set boundaries for the project. This is what yesterday’s agenda item called for. If approved by the council, the Kansas Secretary of Commerce would examine the project to see if it meets statutory criteria. If the Secretary approves the project, the city is then required to prepare a project plan and hold another public hearing concerning whether to adopt the project plan. The project plan must be passed by a two-thirds supermajority of the council.

    One of the elements of the project plan, according to the 2010 Kansas Legislator Briefing Book, is a “marketing study conducted to examine the impact of the special bond project on similar businesses in the projected market area.” The effect of Bowllagio on existing Wichita-area businesses was a major source of concern for both council members and citizens speaking at the public hearing.

    Speaking during the public hearing, Ray Baty, who is manager of a Wichita bowling center, said Bowllagio is not a new concept, but rather one that would compete with existing programs already in Wichita. The C.A.T.S. system, a training system promoted by Bowllagio developers, is actually a portable system, Baty said.

    He contended that introduction of Bowllagio to the market will not grow the market for bowling, but will further divide the existing market, resulting in a loss of revenue and profit for existing bowling centers. He said that bowling centers lose six percent of their customers each year, a trend that he said is national.

    Frank DeSocio, owner of several bowling centers in Wichita, told the council that the bowling training promoted by Bowllagio developers already happens in Wichita at the present. He mentioned five full-time bowling teachers and coaches already working in Wichita bowling centers.

    He added that Wichita does very well in obtaining and hosting tournaments, mentioning 17 PBA live televised tournaments that took place in Wichita, 10 regional events, a BPA womens’ open, six intercollegiate championships that were televised live, and numerous Kansas state high school championships.

    “Everything the Maxwell Group [developer of Bowllagio] claims they want to do is already being done in Wichita by the current bowling centers,” qualifying that he’s speaking only of the bowling side of the Bowllagio proposal, not the restaurants.

    In my remarks to the council, I mentioned that Wichita has had examples of restaurants or other establishments being announced — sometimes by the mayor in his annual state of the city address — but then the development failed to materialize. I expressed concern that we might commit to a large amount of STAR bond financing based on big plans that never advance beyond some small initial stage.

    Susan Estes told the council that “this is an extremely profound day” for the City of Wichita. She asked will the city help one business owner over another business owner in the same industry? She said that Bowllagio has some unique aspects, but it is a bowling alley. Its other entertainment features are also available in Wichita. We are using tax money to compete against existing businesses, she said.

    In response to a question by a homeowner in the project area, the mayor, indicating he believed he speaks for the council, said the council would not support using eminent domain to remove the homeowner from his home.

    During discussion by council members, a subject of controversy was whether approving project boundaries and forwarding the application to the Secretary of Commerce constitutes an endorsement of the project by the City of Wichita. Some council members wanted to pass an ordinance that would establish the boundaries of the district, and then have the Secretary decide whether the project meets the statutory requirements for a STAR bond project. Wichita economic development director Allen Bell mentioned that the council’s endorsement of the project might be a factor the Secretary would consider in determining whether to approve the project.

    A question from Council Member Lavonta Williams elicited Bell’s further opinion that the Secretary is “looking for a signal from the council” regarding its support for the project. Lack of local support, he added, would be taken in a “negative way.” Council Member Paul Gray agreed with this assessment.

    Vice Mayor Jeff Longwell disagreed, saying that all the Secretary needs is a geographic boundary for the proposed project. He contended that the process starts with setting the boundaries, and that other questions are difficult or impossible to answer without doing this. There are too many unknowns, he added, to give this project a formal endorsement at this time.

    Longwell also mentioned a report that showed that the south-central region of Kansas, which includes Wichita, receives fewer state economic development funds, relative to population, than the northeast Kansas region. He said we needed to “equal the playing field.”

    Longwell said he didn’t want to put together a package that would harm existing businesses, saying he wouldn’t vote for the project if an independent study showed that result would happen.

    Council Member Jim Skelton asked about the property taxes the development would pay. Bell replied that the property taxes should increase by a large amount, as the land is vacant now and is planned to receive $95 million of development. He said that while STAR bonds and Community Improvement District financing is proposed for this development, the plan does not include property tax abatements, industrial revenue bonds, tax increment financing, or any other diversion of property taxes.

    Council Member Janet Miller asked if the Kansas STAR bond statutes prohibited adding these other types of incentives to the project. The answer, according to Bell, is that these programs could be added on to this development, as has been done in some Kansas STAR bond districts.

    Later Miller referred to the “lack of information to make an education decision about the project.” She wondered why the developers would not spend “one-tenth of one percent of their $50 million dollar investment” ($50,000) to produce the studies that would give the council the information it needs to decide whether to send the project to the Secretary of Commerce with its support.

    When City Manager Bob Layton suggested a delay to gather more information from the developers, council members readily agreed. Layton said that city staff will visit with the developers, looking for an approach that will make council members comfortable with proceeding, addressing some of the information needs expressed today.

    Due to scheduling, Layton said that this matter would need to appear on next week’s agenda, or there would be a one month delay before it could be considered at a council meeting.

    The council voted unanimously to defer the item for one week, and to keep open the public hearing.

    Analysis

    An important issue to many council members is the potential harmful affect of Bowllagio on existing businesses, particularly bowling centers. Miller’s suggestion that the developers spend the money to have an independent assessment of this performed is entirely sensible.

    But I don’t think a study of that scope can be performed in one week. As it is now, the city will probably rely on information provided by the developers. It must be recognized that they have a $13 million incentive to produce information favorable to their cause. In his remarks, Gray recognized that proof that Bowllagio will not harm existing businesses will not come from “somebody advocating for the project.” It would require a third-party, independent analysis, he said.

    As of now, it is difficult to see how information that will satisfy council members can be produced by next week’s meeting.

    In my opinion, the local bowling center operators are justifiably concerned that a subsidized competitor will harm their business. They were able to show that many of the purportedly unique aspects of the Bowllagio concept are already available in Wichita, and have been for some time.

    Further, it’s not only direct competitors such as bowling centers that we need to be concerned for. Since the development is proposed to include a Mexican restaurant, what will its impact be on existing Mexican restaurants? And not only restaurants offering that cuisine, but all other restaurants?

    In a broader sense, a subsidized business competes with all other businesses in the market for employees and other goods and services that all business firms purchase.

    Longwell’s contention that we can still “kill” the project at a later date if reports come back showing negative impact on local businesses is, in my opinion, an empty promise. If the Kansas Secretary of Commerce approves this project, it would be very difficult for the council to vote against Wichita receiving $13 million in state tax dollars, especially in light of Longwell’s argument that the Wichita area doesn’t receive nearly enough of this economic development money.

    While council members such as Schlapp say they’re in favor of free markets, she and the other council members nearly always vote in favor of intervention in markets. The fact that the city council members have so many questions about the proposal tells us that this plan is, in fact, a form of centralized planning by government.

    As I remarked to the council, developments such as this are portrayed as a success story, in that someone has confidence in Wichita because they’re investing here. But I wonder why these people won’t invest in Wichita unless they receive millions in payments or tax forgiveness from the city, county, school board, and/or state.

    Aren’t the real heroes in Wichita the people — many of them small business owners — who invest in Wichita without the benefit of TIF districts, tax abatements, STAR bonds, or other forms of subsidy or incentive?

    These people, besides facing subsidized competition, additionally have to pay the taxes that make the subsidies to others possible.

    Regarding the mayor’s statement that eminent domain will not be supported for this project: Kansas law does not prohibit the use of eminent domain to acquire property in a STAR bond district (K.S.A. 12-17,172).

    If the city wants to assure property owners that their property will not be subject to seizure by eminent domain, the city can add language to that effect in the ordinance. With four city council positions — including the mayorship — up for election next spring, it’s possible that a future city council might not be opposed to the use of eminent domain. This change could take place during the time Bowllagio developers are acquiring property. An ordinance would help prevent this from happening.

    Similarly, if it is not the intent of the developers to seek additional forms of subsidy such as tax increment financing or property tax abatements, appropriate language could be added to the authorizing ordinance.

  • Wichita economic development to be topic of meeting

    This Monday (May 17), economic development tools and incentives in Wichita will be discussed at a meeting sponsored by the Kansas chapter of Americans for Prosperity.

    Susan Estes, AFP Field Director and John Todd, AFP Volunteer Coordinator will lead the meeting, whose topic is “Local government economic development incentive tools with particular emphasis on the proposed Bowllagio STAR bonds project.”

    The meeting is from 7:00 pm to 8:30 pm on Monday, May 17. The location is the Alford Branch Wichita Public Library (private meeting room), at 3447 S. Meridian.

    For more information, contact John Todd at john@johntodd.net or 316-312-7335, or Susan Estes, AFP Field Director at sestes@afphq.org or 316-681-4415

  • Response to economic crisis to be subject of Wichita lecture

    Tomorrow night at Friends University Dr. Brian Domitrovic of Sam Houston State University will deliver a lecture titled “Economic Crisis: Have We Learned from History?” Domitrovic is the author of the book Econoclasts: The Rebels Who Sparked the Supply-Side Revolution and Restored American Prosperity.

    In an email message Professor Domitrovic gave a preview of his lecture: “I’ll discuss the history of policy responses to economic crisis over the last century. The unbroken record of that history is that when the crisis was met with stable money from the Fed and income tax cuts, the crisis was dispatched; and that when solutions other than this supply-side policy mix were applied, the crisis festered until the proper cure came. I’ll devote special attention to the 1919-21 and 1961 crises, before reserving words for the stagflation era and the supply-side solution that ended it. The lessons for today should jump off the page.”

    Domitrovic’s website is Econoclasts.

    This free lecture and following reception is Tuesday April 20, from 7:00 pm to 9:00 pm, in rooms 101-102 of the Marriage & Family Therapy facility on the Friends campus. It’s building number 10 on this map, just north of Kellogg Drive on Hiram Street.

    This event, which is part of the Law, Liberty & the Market lecture series, is underwritten by the Fred C. and Mary R. Koch Foundation in Wichita.

  • Cash for clunkers clunked

    Did the “Cash for Clunkers” program work as advertised? It all depends on the meaning of the word “work,” I suppose.

    If the definition of success means moving more cars off of dealer lots than what probably would have happened anyway, that’s good. But when looking at the marginal activity — and I believe this is the correct way of looking at things — the cost of moving the additional cars is astonishingly high.

    An Edmunds.com article calculates the cost per car for the clunkers program in a different way than the government does, and finds this:

    Nearly 690,000 vehicles were sold during the Cash for Clunkers program, officially known as the Car Allowance Rebate System (CARS), but Edmunds.com analysts indicate that only 125,000 of the sales were incremental. The rest of the sales would have happened anyway. Analysts divided three billion dollars by 125,000 vehicles to arrive at the average $24,000 per vehicle sold. The average transaction price in August was $26,915 minus an average cash rebate of $1,667.

    Not surprisingly, the Obama administration attacked the authors of this article.

    This is just the latest evidence that the clunkers program didn’t really increase the wealth of our country. Writing at the Foundation for Economic Education, Bruce Yandle doubts the glowing assessment of effectiveness of the program:

    The doubt arises for at least three reasons. First, the program was supported politically primarily for its much touted environmental benefits. Carbon emissions would be reduced. But the reduction costs are at least ten times higher than alternate ways of removing carbon. Second, there is Bastiat’s parable of the broken window to consider. And third, there is a serious matter of eroding social norms for conserving wealth. A crushed clunker with a frozen engine is lost capital. … The cost per ton of carbon reduced could reach $500 under a set of normal values for critical variables. The cost estimate was $237 per ton under best case conditions. The much celebrated Waxman-Markey cap-and-trade carbon-emission control legislation estimates the cost of reducing a ton of carbon to be $28 when done across U.S. industries. Yes, we are getting carbon-emission reductions by way of clunker reduction, but we are paying a pretty penny for it. … Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation. As Tony Liller, vice president for Goodwill, put it: “They’re crushing these cars, and they’re perfectly good. These are cars the poor need to buy.”

    It’s very difficult for the government to intervene in the economy and produce a net positive result. Even if it could, the harmful effects of taking one person’s money and giving it to another so they can get a discount on a new car far outweigh the small economic benefit that might be realized.

  • ‘Political capitalism’ explained in Wichita

    In Wichita this Monday, Robert L. Bradley, Jr. explained the state of capitalism in America today, using his experience working in a high-level position at the failed energy conglomerate Enron as a backdrop.

    Bradley asked: What happened to business prudence? What has happened to capitalism? The answer is that what we have today is not free market capitalism. Rather, it’s a very different type of capitalism: political capitalism.

    A common question today is has capitalism failed? Problems are automatically blamed on greed, self-interest, and profit maximization — in other words capitalism.

    Historically, robber barons have been condemned as examples of capitalism out of control. But many “robber barons” such as Rockefeller made money through voluntary transactions with their customers, Some, however, lived off special government favor such as tariffs. That’s political capitalism.

    Then during the Great Depression capitalism was blamed again. At that time, however, the Federal Reserve Bank was already in control, and this era saw the rise of other forms of government interventionism.

    Today our problems are commonly blamed on self-interest and capitalism rather than government.

    What is real capitalism vs. American-style political capitalism — the mixed economy where government intervenes heavily in business and the economy?

    Enron is still the premier example of political capitalism. But not many knew the full extent of Enron’s activities, or they though it was okay: “Enron was everyone’s favorite company.”

    But the company that everyone thought was the best turned out to be the worst.

    Bradley said the moral of Enron is deeper. There was a systemic failure surrounding Enron. All the gatekeepers — regulators, auditors, legal counsel, the business press, credit rating agencies, business professors — all failed at the same time.

    Many critics said that Enron refutes all that is good about free markets. Bradley quoted one business ethics professor: “The Enron value set was an extreme laissez faire ideology of absolutely free unregulated markets.”

    Bradley disagrees with this assessment, however. Enron was all about Ken Lay, “a master political capitalist.” Lay was a PhD. economist with a lot of Washington experience. His business model for Enron was regulatory change. If Enron could direct the change, it could gain the “first mover” advantage.

    Bradlet quoted a definition of political capitalism as “The utilization of political outlets to obtain conditions of stability, predictability, and security to allow corporations to make reasonable profits over the long run.”

    Socialists, he said, believe that when there is private property, its owners will be in bed with politicians in order to gain special favors.

    Enron’s profit centers had to do with regulatory change. Enron was the first major United States company to proclaim that the climate was in crisis and that government intervention was needed to reduce greenhouse gases.

    But it was a self-interested position. Enron rescued the domestic wind power industry by purchasing a company in that industry, and getting a mandate from the Texas legislature for renewable power mandate.

    Today, the Obama energy plan has a lot to do with Enron’s public policy thrust.

    Enron also gamed regulatory systems. By manipulating accounting rules, Enron could show accounting profits where there were no true economic profits.

    In the tax department, Enron used boutique accounting and legal firms to find niches in the tax code that could be exploited.

    The lesson is that these regulations may not be providing investors useful information and protection, although there may be an illusion created. A corporate report from the 1930s of just three pages gave investors more useful information, and held the firm more accountable, than did Enron’s last corporate report of 56 pages. The lesson, Bradley said, is “simple rules for a complex world.”

    So how did someone like Ken Lay get to the top of the business world? How did he fool everyone and bring down all the gatekeepers with him? Bradley said the government side of the mixed economy was the factor that created an environment that could be exploited.

    The lesson is that the rise and fall of Enron discredits the mixed economy and political capitalism.

    A question was asked: What should we do? Bradley said we should support public policies that are market-oriented, instead of supporting government intervention. But given the mixed economy, we need to watch out for artificial incentives.

    Afterwards, I asked Bradley about government intervention at a local level, such as in Wichita. Specifically, what about TIF districts and tax abatements? Are these examples of political capitalism? Bradley said yes, these are. A side effect is that a tax abatement does leave money in the private sector instead of the government public sector. But a special favor means an artificial stimulus that encourages malinvestment.

    I asked if we need more regulation to protect us, or is our current regulatory regime sufficient? Bradley mentioned that in the Bernie Madoff scandal, the defrauded investors are as mad, or more mad at the Securities and Exchange Commission, that they are at Madoff himself. Many figured that the SEC, with its thousands of regulators, had done their homework for them, and that Madoff’s company was safe. This represents a major unintended consequence of regulation.

    Much more information about this topic can be found at Bradley’s website Political Capitalism. His recent book is Capitalism at Work: Business, Government and Energy.

  • City council members on downtown Wichita revitalization

    At the meeting of the Wichita City Council last week, several city council members gave their reasons for supporting the planning for the revitalization of downtown Wichita. It’s worthwhile to take a look at two members and their remarks.

    Council member Janet Miller spoke first. (Click on Wichita downtown planning proposal: Janet Miller for video.)

    “We’ve given the free market a chance in downtown,” Miller said. There’s a few things we can disagree with in this statement. First, the market downtown is not very “free.” There are TIF districts overlaying much of downtown, for example. These TIF districts are an example of government interventionism in the extreme, something quite different from free markets.

    Besides this, Miller frames the decision incorrectly. To her, downtown redevelopment is something that must happen, and since people haven’t responded to this decree very well, that’s a failure of the market. But the correct decision point is when people and business decide to be downtown or somewhere else. That’s where we see free markets in action and the decisions people make. Because they make decisions other than what Miller wants them to make, that doesn’t mean that free markets have failed. Instead, people have simply made a decision other than what she believes is the correct decision.

    She also said this: “Without incentives, the free market just doesn’t work.” To which I say: “Where there are incentives, markets are not free.” That’s government interventionism. It’s axiomatic.

    Then, there’s this quote from Miller: “Just like the human body cannot succeed with rot at its core, neither can a city be healthy with rot at its core.” Variations on this nostrum are constantly repeated by government-subsidized downtown revitalization supporters. This analogy is meaningless. I’ve asked the city to supply evidence of this — something more authoritative than the mayor’s vision and dreams — and so far none has been supplied.

    Regarding public and private investment in downtown Wichita: A document published earlier this year showed that public and private investment in downtown Wichita over the past decade is nearly even, or about a one to one ratio. Now Miller says: “I’ve heard the city manager talk about moving us toward a return more in the neighborhood of 15 to one, private contribution to public.”

    So has something new been discovered in the last ten years that allows public-private partnerships to reap such fabulous rewards? It doesn’t seem likely.

    Furthermore, if it is possible to achieve such impressive results from public investment, why is this our goal only now? Shouldn’t we have had this goal earlier? Is this an example of the incompetence of previous city councils, of which Mayor Brewer has been a member for many years?

    Council member Lavonta Williams, in her remarks, said that we must have a plan, comparing the planning of downtown revitalization to planning her classes when she was a schoolteacher. (Click on Wichita downtown planning proposal: Lavonta Williams for video.)

    “Without a plan, there is chaos,” she said, noting that some people think that the things we’ve done downtown may be chaotic. “Hopefully this bond will bring us all together. … Downtown is everybody’s community, but it’s not going to be if you don’t have everybody buying in to what’s going on.”

    She urged citizens to attend meetings so that their comments are validated.

    William’s analogy — downtown planning and running her classroom — is not meaningful. There’s simply no comparison between the two. One is a highly structured situation, while the other is a problem of immense complexity with very little structure. My post Planning downtown Wichita revitalization: an impossible task? summarizes some of the characteristics that make planning such a difficult task. Deluding ourselves that the task is as simple as Williams posits is a sure path to failure.

    Then, I have some news for Williams: not everyone is going to buy in to these plans and the huge public subsidies that will accompany them. We’re not all going to come together on this. As council member Miller recognized in her remarks: “There’s a great variety of opinions on this subject.”

  • John A. Allison: The current problem, and what to do

    Last Thursday, John A. Allison visited Wichita to address the annual economic outlook conference produced by the Center for Economic Development and Business Research (CEDBR) at Wichita State University.

    Allison is chairman and former CEO of BB&T Corporation, the nation’s 10th largest financial-holding company. Its headquarters are in Winston-Salem, North Carolina. His talk first diagnosed the cause of the crisis. You can read my coverage of it at Causes of global finance crisis explained in Wichita

    Having described the cause, Allison told what we need to do to fix the mess we’re in, and to avoid future crises like the present.

    One problem is the credit rating agencies and the functional oligopoly granted them by the government. These agencies — Standard & Poor’s, Moody’s, and Fitch — provide ratings for bonds. (These are the “AAA” and other ratings that many people are familiar with.) The oligopoly comes the fact that many institutional investors may purchase only those securities that have been rated by one of these firms.

    These rating firms made many mistakes, and not just small mistakes. These companies did a poor job of analyzing the risk of these securities. That lead to insurance firms, most notably AIG, becoming deeply in trouble. The justification for saving or bailing out AIG is that there was a systems risk. AIG’s relationships with other parties such as the investment bank Goldman Sachs lead many to believe that the fall of AIG would lead to the fall of these other institutions.

    Allison said that if you’re former Treasury Secretary Henry Paulson, who was once chairman and CEO of Goldman Sachs, it’s easy to believe that if Goldman Sachs goes out of business, the world goes out of business. Allison asked: “Is that a systems risk or is that crony capitalism?”

    There was an irrational belief in mathematical models. There is the “tail problem,” which comes from models usually assuming a normal mathematical distribution (the familiar bell-shaped curve). The events out in the tails are usually discounted, as they are rare. But Allison said “For anyone who has built a house in a hundred year flood plain, I’ll give you the bad news: we’re going to have a flood.” Given enough time, these rare events become a certainty.

    Market corrections, Allison said, are healthy phenomenon. These events drive companies that are misallocating capital out of business, and the world is better for it.

    One of the little-known things is that part of the reason for the Troubled Assets Relief Program (TARP) was to bail out General Electric. GE had done a lot of risky long-term financing using commercial paper, and this lead to trouble.

    All the major banks participated in TARP, as there was huge regulatory pressure. There were four very large banks that were on the verge of failure. But the government didn’t want it to look like it was bailing out just those banks, so it forced all large banks to participate, even though many were healthy.

    In his career, Allison said. Citigroup has failed three times, and each time they emerged bigger and worse. That, he said, will also be the result of the current bail out.

    The five banks that are judged, as is Citigroup, as “too large to fail” will have advantages like lower cost of capital, and they’ll be able to engage in risky activities without the risk of going out of business if investments fail.

    Allison said the government should have let these banks fail. Alternatively, they should be broken up, so that none are in the “too large to fail” category.

    Going forward

    “We ought to cut government spending, not increase it,” Allison recommended. The belief that wasteful government spending on the wrong things can increase our standard of living is irrational. It’s based on the belief of the economist John Maynard Keynes. He recommended that we pay people to dig holes in the ground, and then pay them to fill the holes. Will that raise our standard of living?

    In the long term price instability is a major problem, as it leads to economic miscalculation.

    The biggest issue, Allison said, is the continued attack on capitalism. Related is the attack on the wealthy, in terms of both taxation and ethics. Most very productive people become wealthy. If we attack these people, they become more conservative and less willing to take risk.

    The government needs to privatize Freddie Mac and Fannie Mae and let banks make mortgages the way the had for many years before the government became involved in the business.

    We also need a market-based monetary standard, probably based on gold. “You can’t just print gold,” Allison said. If we can’t do this, we need to do as Milton Friedman advocated, which is to grow the money supply at a slow and predictable rate, probably about 3% per year.

    There should also be less FDIC insurance, so that the shareholders of a bank bear risk, rather than the government.

    Free trade is also needed, even though many conservatives oppose this. One of the reasons for the Great Depression was trade tariffs. Other countries responded to ours, and there was less trade.

    Allison said that the most important problem we have is philosophical. Where does free medical care come from, for example? He said that the idea of rights on which the United States was built is that people have right to what they produce themselves, but not what others produce.

    Free medical care and affordable housing are a perversion of this concepts of rights. The right to free medical care, he said, is the right to enslave a doctor to provide the care, or to enslave someone else to pay the doctor. That’s the opposite of the American system of rights.

    Under such a system, no one has the right to their own life.

    He also addressed the difference between short-term and long-term thinking. Some things that work in the short-term are destructive in the long-term, such as the pick-a-payment mortgages.

    The “free lunch mentality” leads to a lack of personal responsibility, and that is the death of democracy. The “tyranny of the majority” — where a majority can vote a free lunch for themselves, eventually the providers quit.

    The cure is the opposite. Life, liberty, and the pursuit of happiness demand personal responsibility. Each person has a moral right to their own life.

    “The United States is the only country founded on the concept that people should act in their rational long-term self interest, properly understood.” He said that you shouldn’t take advantage of other people, as it doesn’t work. You also shouldn’t self-sacrifice, as you have the right to your own life.

    Where do we go now?

    We are probably in the beginning of an economic recovery. Allison feels the most likely scenario is a period of stagflation — slow growth, high inflation, and higher unemployment than we should have — similar to the 1970s. This would not be a great time, but not a horrible time, he said.

    He is more concerned about the long term. The liabilities in the social security and Medicare systems, our huge operating deficits, a dysfunctional foreign policy, and a failed K through 12 educational system lead to the certainty that in 25 years, the United States will be broke.

    What we need to do, he said, is the opposite of what we’re doing. We need to return to individual rights, the incentives that free markets provide, and less regulation.

    The “American sense of life,” Allison said, means that we are a very individualistic nation and not collectivist.

    Business makes the world a better place to live by providing quality products and services. A primary difference between the United States and Africa is that we have better businesses.

    Allison mentioned two pillars that make the human mind productive. The first is Freedom and liberty. He drew a parallel between academic freedom and economic freedom. Those who believe in academic freedom, however, often want to restrict economic and business freedom.

    The second pillar is knowledge that comes from education, in the broadest context. We need an environment that encourages competition, discipline, and creativity in our educational system.

    Allison encouraged the audience to seek happiness through a “life well-lived.” Self-esteem is developed by doing your job the best you possibly can, he said. Depending on government for security is the European way, but not the American way.