I’ve alluded to the regulatory house of cards before, specifically with regard to net neutrality. The basic idea is one of unintended consequences: starting from a state of freedom, the government sees a problem real or imagined and tries to fix it by fiat. Of course, this perverts incentives and makes for new problems, which is then fixed by further fiat. Thus, regulation begets more regulation, and we end up with an ad hoc patchwork of rules – a delicate house of cards that is surprisingly hard to deconstruct without tearing the whole thing down.

To repeat the story from the net neutrality piece, it was obvious by Gorbachev’s ascent to power that the Soviet Union’s centrally planned economy had no room for growth. It was facing stagnation and decline into the indefinite future. To revitalize the economy, one of the first things Gorbachev did was ease capital controls. Unfortunately for him, that was one of the bottom cards: capital was immediately whisked out of the country, and the Soviet Union forthwith collapsed.

This is one of the most dire pathologies of government control: it’s extremely hard to move back towards freedom. One cannot “just do it”; it has to be done right. One of the reasons privatization has such a bad name is because in Russia and Argentina, state industries were not really “privatized”, but sold to government cronies (or drinking buddies in Gorbachev’s case). Regulatory patchworks have to be dismantled, if not totally, then with extreme care lest we end up with a lopsided and immediately perverse set of incentives that lead to even worse outcomes.

It goes without saying of course that this is not to be used as an argument against dismantling government control; only that it must be done with care…

Or so you’d think. American conservatives use this logic all the time for exactly that purpose: keep our regulations, we’re used to them.

Immigration is the most obvious example. The most common argument against illegal immigration used by conservatives is that we don’t want them using our government services and leeching off our tax dollars. But wait, aren’t conservatives supposed to be against government services? What better way is there to demonstrate the untenability of the welfare state than to show its insolvency in the face of increased payouts; to show that it is not an extensible system? In fact, I propose that no welfare program will go away until it is on the brink of crisis.

So rather than tackling the root of the issue, conservatives focus on a symptom and propose their own patch (border control) to fix the brokenness of the patches we already have (the welfare state). We’ve got a generous welfare state? Of course the indigent poor want to come here. Duh. But that doesn’t mean the indigents are the root of the problem. Our government determines in the short run the kind of immigrants we attract, and in the long run, what kind of economic actors we ourselves are (In Sweden for example it is common to take a year off after school and live off the generous unemployment benefits – not because of difficulty in finding a job, but because there’s no reason to until the benefits stop). Conservatives in America, far from advocating caution in dismantling as their name might suggest, are actually adding new cards.

This is the fundamental flaw that denies Conservatism the prestige of being a real and consistent ideology. Rather than an ideology, Conservatism (and Liberalism too; but I’ll get to that in a future post) is more of an aesthetic. The house of cards argument is so inconsistent that I suspect it’s not even what the conservatives who make it really believe. More likely it’s a mask for a visceral xenophobia, which is (consciously or unconsciously) suppressed because they know (probably unconsciously) that cosmopolitanism is at the moment more culturally in vogue that parochialism.

Of course, xenophobia doesn’t go away, even if it is culturally suppressed and hidden behind (not so) clever arguments. And some conservatives (the incorrigible, the imperceptive, or those surrounded only by other conservatives) venture into outright xenophobia anyway. The “protect our culture” argument is hardly on the fringes of the movement (as if American culture ever lived up to their ideals, and as if culture could be static anyway). Neither is the subtly racist and/or classist crime argument (which statistically just doesn’t hold water).

So if you’re going to pretend that the house of cards argument against immigration is the real reason for opposition, then Conservatives just need a dose of logic to realize the virtue of free immigration. Otherwise, if you just want to force your cultural preferences on people with the same apparatus that liberals use to force their economic preferences on people, then at least be honest about it. And if you can’t take the marginalization that a stance like that will inevitably afford as the old guard dies off, then just keep quiet on the issue.

Two and a half years ago I wrote a relatively unsophisticated analysis of China’s economic outlook. China’s fundamental position has changed little in that time, but they have come closer to their day of reckoning. This post is intended as a deeper analysis.

China is on everyone’s minds now, not only because they send us cheap imports, but because Americans are increasingly dissatisfied with this arrangement. The crux of the issue is China’s currency policy, which most of the world believes is set “too low” – effectively making China’s exports cheaper than they would otherwise be in terms of other currencies. The US is not the only one upset either, for the sake of its trade balance – India and other developing nations in the area worry that China is forcibly diverting production from their own borders to China, not out of an increased productivity, but because the currency policy makes it cheaper.

There is much talk of an “imbalance” and “rebalancing the world economy”. But the term “imbalance” applied to economic reality implies an objective balance different from the current situation. What justifies the assumption that reality is not by definition balanced? It is not merely the trade deficit that makes us “out of balance” – it is the undervalued Chinese Yuan; the intervention of the Chinese government in currency markets. The term “undervalued” in turn implies an objective value different from the current value, which itself requires a demonstration that consumers would be better satisfied by another arrangement: in this case it requires a demonstration that the pattern of comparative advantage is distorted by undervaluation.

This is not exactly a trivial task, but most economists agree that the pattern is distorted, though they disagree as to the degree. This distortion, though it costs the Chinese government, ultimately brings production to China and hurts other countries competing for that production. In a free market, China would be severely constrained currencywise: flooding the market with Yuan to buy foreign reserves must either cost the government Yuan, or instigate inflation – or both – depending on whether the government spends tax revenue or prints Yuan to fund itself. The latter is just starting to become a worry. The former is what the US means by an implicit subsidy on exports: the government spends money to make its exports more competitive across the board, though in a less direct fashion than a traditional subsidy.

Export subsidies are of course illegal for the most part under WTO law. And because China’s peg acts essentially like an implicit subsidy, the US is considering pressing the WTO for retaliatory trade sanctions commensurate with the Yuan’s undervaluation.

What are China’s options then? it cannot alienate itself from the world market by antagonizing all its export markets, or they will impose retaliatory barriers as they are already threatening. And it certainly cannot revalue to the extent that the US wants, or its exports will suffer. Of course, some argue that since most of China’s exports were once imports, that any rise in the Yuan’s value will simply allow them to import more for export, with a negligible overall change in the trade balance. But the allure of China for investors is not cheap materials; these can be had elsewhere. It’s cheap labor; labor made cheap by the low exchange rate. When it becomes more expensive to produce and assemble there, investors will find another intermediary.

Ultimately, China’s chickens must soon come home to roost. If China doesn’t revalue, trade sanctions will be imposed against it, making its labor advantage useless. If China revalues, all the malinvestment within its borders will suddenly become manifest, sending it into major recession. Either way, its stellar growth record sustained by ever increasing malinvestment through currency manipulation must soon come to an end.

$787 billion worth of fiscal stimulus to get the economy back on track, and the best volley Conservatives can lobby is that it didn’t work. With the Obama administration’s widely off-the-mark estimates as to the unemployment rate with or without the stimulus (the actual job losses exceeded the estimates without the stimulus), the debate now centers around whether the stimulus did any good or if we’d have experienced even worse job losses without it.

If only the worst thing that could be said about the stimulus bill was that it did nothing: its pernicious effects are far worse than any politicians or pundits seem to realize. Both sides of this debate entirely miss the point. The failure of the stimulus bill is not that it didn’t create or save jobs – It may or may not have in the short term, but this fact is irrelevant – it is that we are setting ourselves up for a worse crash in the future.

Why do recessions happen? It is not a random occurrence that occasionally besets Capitalist economies: it is the result of malinvestment realized too late. Because the capital which has been invested in can only be sold at a net loss or converted to more valuable capital at great cost, once people realize they’ve been investing in the wrong things, they have to take a hit.

Individual malinvestments are extremely common in the market – imagine the businessman whose business ventures fail time and time again. Anyone who loses money on the stock market has made a malinvestment – and the market is generally resilient to this sort of isolated malinvestment. So what causes so many people to malinvest in tandem such that we get a recession?

Price distortions.

Now the perniciousness of the stimulus bill starts to become evident. The goal of the stimulus bill is to stimulate “aggregate demand” so that we can return to “full employment”. These terms obscure the nature of the situation. The reason we are not at “full employment” is because we have invested in capital which cannot be converted into things people actually want to buy. Returning to full employment is meaningless if we are not producing things people want – think of the giant paperclips produced by Soviet manufacturers in order to meet an arbitrary weight quota. These workers were employed, but their productivity was useless.

This is what the stimulus is doing for us. It’s postponing the problem – the problem that people have invested in worthless things – and propping up their value as if a worthless investment is just as good as a good investment. There is no such thing as homogenous aggregate demand: there is demand for cars, and there is demand for computers, but these are totally separate things. But after all, GDP is a number which doesn’t care what is produced. It doesn’t matter to the employment rate how the workers are employed. Keynesian economic metrics obscure the health of the economy just as its terms obscure the nature of our problem.

The Stimulus bill essentially implements a command economy by open market operations. Our government decides what to spend money on, and so prices shift accordingly depending on what they spend it on. The bigger the stimulus, the more we start to see the same economic problems of command economies arise in our own backyard. $7 87 billion can effect a lot of shifting – distortions which will ultimately come back to bite us with a deeper recession until we let the market adjust and get rid of these bad investments.

“Every time the citizens have voted on marriage, they have always sided with natural marriage,” said Mathew Staver, founder of Liberty Counsel, a Florida-based Christian legal group.
Gay leaders blame TV ads, Obama for loss in Maine

So Christians fight for what’s “natural” to be codified into our legal system?

Let us for the sake of argument grant that homosexuality is unnatural in some meaningful way. Guess what else is unnatural? Monogamy. Certainly the proportion of animals in the animal kingdom practicing monogamy is lower than that which practices homosexuality: Neither is unheard of, but both are comparatively rare. And if one can make an appeal to naturalness without reference to animals, then what constitutes naturality? Humanity stripped of its culture? No doubt homosexuality would be uncommon, but monogamy would no doubt be as well: the scenario changes nothing.

Arguments from naturalness must necessarily take homosexuality and monogamy as a package deal. Yet who among the social conservatives would advocate a repeal on polygamy bans on the basis of naturalness? Indeed, polygamy is usually further down the slippery slope than homosexuality in their conception, right before toaster marriage.

The error in reasoning that leads Christians to advocate a position which necessitates polygamy is readily apparent to anyone even marginally familiar with Christian doctrine, which apparently does not include the Liberty Counsel quoted above. Quite simply, “Natural” does not equal “Good”. “Natural” is almost always used negatively in the Bible. Throughout Romans 8, the natural man is contrasted with the spiritual man, and the natural man isn’t the good one. Indeed, sanctification at all – the necessary fruit of salvation – is completely unnatural, that is, against our nature. It is the result of an outside force, God, acting upon us, overcoming our natural tendencies – tendencies which would be to our ultimate destruction.

The Natural Marriage argument is nothing but a red herring, and coming from a legal group which calls itself Christian is at the same time a bastardization of Christian doctrine and a mockery of the American political process. It presumes a gospel which saves us to naturalness rather than godliness, and subverts the separation of church and state which exists for exactly this reason: that moral legislation (as distinct from just laws) is ineffective at best and counterproductive at worst.

The following is loosely transcribed from a speech I gave at George Mason University

In the late 1980s and early 1990s, the Soviet Union was in trouble. It had been on a protracted economic slide for many years, and showed no sign of lifting. Mikhael Gorbachev, leader at the time, fancied himself a reformer, and went on a spree of deregulation and privatization. But coming from such a regulated environment, the sweeps of deregulation were not – and could not be – total. People were free to do things they were not before, but the perverse incentives still existed. The house of regulatory cards collapsed: capital fled the country in a firesale, and with it went all potential for the future of the Soviet Union.

Now we’ll come back to that story later, and talk about Net Neutrality. Net Neutrality is an unpopular issue among Libertarians, most of whom are against all regulation at all times. Though it would indeed be ideal to have a completely deregulated market, this is not what we have, and we must be careful how we get there.

Let me start off with a brief explanation of what net neutrality is. It is in no respects a price cap. It is what we have now and have always had, though it has yet to be codified into law. Imagine, if you will, a line with you on one end, and Google searches, Youtube videos, and Rush Limbaugh podcasts on the other. Between us on my end is my service provider AT&T, and on their end, their respective servers, each of whom we pay respectively for access to each other. The key stipulation of net neutrality is that AT&T must treat all traffic I want the same. Whether I want to listen to Rush Limbaugh podcasts or send my friends Rick Astley videos, AT&T may not filter or give preferential treatment to data coming from one server over another.

Without net neutrality however, AT&T suddenly gets the right to charge me for access and to charge Google for getting their data to me. Content providers and websites get double charged. What this means is the death of free on the internet. Those increased charges aren’t going to be absorbed by Google; they’re going to be passed to the consumer. No more free Gmail, Youtube, Twitter, Facebook; and what of small blogs like this one? The single most important reason the internet has taken off so quickly as a tool of commerce and communication has been the low barriers to entry. If we take that away, we essentially kill the internet. Without the ability to pay double, we’ll be relegated to the lowest tier of access. People will get slow, if any, access to the material of all but the well-endowed, and that’s a best-case scenario. Countries like Iran and China use a nonneutral internet to outright filter political speech.

Now that Net Neutrality has been established as an unequivocally good thing from a consequentialist standpoint I ask further, what right does a service provider have to decide what constitutes a good or bad use of the bandwidth I’m paying for? I believe in consumer sovereignty in the marketplace. Consumer sovereignty is exercised through market competition as consumers flock to those who best meet their demands. Unfortunately the government has given regional monopolies to telecoms all over the United States – Verizon in the Northeast, AT&T and the former Baby Bells in a lot of other places, for example – stifling the potential exercise of consumer sovereignty.

This is where we get back to the Soviet Union. Total deregulation would be a good thing, but fiddling around at the margins is not necessarily so: it can even be disastrous. Am I saying that net neutrality legislation is ideal, or even good? Not in the least. What I am saying is that it is ultimately harmful to our infrastructure and to consumers if we allow a nonneutral internet before intra-regional competition can be firmly established nationwide. Deregulation is good, but in states of transition, we must take care to deconstruct our house of cards in such a manner that it does not first collapse upon us.