China Needs Dollars!

I will be interested in seeing how the trade negotations with China work out. If they’re successful they will place China in the odd position of needing both more and fewer dollars, as this post at Bloomberg makes clear:

China’s trade surplus with the U.S. expanded 10.5% (in yuan terms) in the first four months from the same period in 2018 – but for all the wrong reasons, as imports slumped by more than exports. Additional Trump administration tariffs would significantly curtail the trade balance, putting enormous strain on China to cope with U.S. dollar debts that need to be rolled over within the next 18 months.

Large swathes of the Chinese economy remain stagnant. Rapid growth in new total social financing and stalwart industries such as steel and real estate have ensured the headlines remain relatively upbeat. But trade is falling and consumer demand is weakening, with products from automobiles to appliances struggling. Official nominal GDP growth was 2.6 percentage points lower in the first quarter compared with a year earlier; unofficial data show even greater declines.

As long as Beijing refuses to make the yuan a freely traded currency, it will need to generate dollars. Beijing may not want to make a deal with Trump under these circumstances; it may have little choice.

Over the past nine years China’s foreign debt has increased four-fold and that debt is denominated in dollars. Yes, China’s GDP has increased, buoyed on the wings of debt, mostly corporate and local government debt. I’m genuinely not sure how it will all play out.

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The Foundations of American Liberty

Many people today are not familiar with the name of Orestes Brownson. Brownson was a respected American political thinker of the generation that followed Jefferson and Adams. His views on American democracy are compatible with and complementary to those of the more familiar Alexis deTocqueville. You might find this article at the Library of Law and Liberty on him interesting, in particular this passage, an indictment of our modern politics:

The main opponent of Brownson and the authors, however, is the theory of radical individualism, the human person understood too abstractly, merely as the individual with rights. It appears to be the congenital American bête noire. Brownson’s critique of Jeffersonian “Lockeanism” is remarkably relevant, as our authors show, and illumines today’s aggressive individualism, whether in economic life, in culture, or in law. In fact, later conservative arguments that dealt with the progressivism that emerged after Brownson, to the effect that radical individualism leads to collectivism, an increase in state power, and the marginalizing of intermediate institutions, receive fresh impetus from Brownson’s critique of the theory and practice of the autonomous individual. One especially acute irony was that Progressivism itself indicted “individualism” or “rugged individualism.”

The last point leads us beyond Brownsonian personalism to social and political and constitutional matters. The authors treat them all, some more than others; they do so, however, out of a recognition or apprehension that Lockean individualism is ascendant today and increasingly so. Several years ago Lawler coined a memorable phrase in this regard: it’s imperative to keep Locke in the locked box. The radically individualist view of man must not be allowed to become our authoritative public dogma. If it does, American liberty will be gravely impoverished and, predictably, tyrannical in its implementation.

Read the whole thing.

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God Said “No”

By all means read this column from John Kass in the Chicago Tribune. It’s about a story that made the news here of a newborn baby found on a garbage can and it’s very touching.

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The Devil Is In the Details

In his latest Washington Post column Robert Samuelson worries about what none of the proponents of “Medicare for All” seem concerned about—the details:

The popular appeal of a single-payer system to solve the nation’s health-care problems is no secret. Everyone would have insurance, recognizing — as Sen. Bernie Sanders (I-Vt.) continually tells us — that health care is “a right, not a privilege.” Our medical expenses would be paid by some central agency, eliminating the wasteful overhead of today’s insurance companies that drives up costs and premiums.

Presto, problem solved.

Oh, were it that easy.

and ends up at the conclusion I arrived at 25 years ago when Bill Clinton’s attempt to reform the health care system fell on its face:

It’s very hard to control costs when all health spending is considered a “right.” But the alternatives to single payer all suffer from some political or moral defect. The real point is that our choices are all bad in some way. Our unenviable task is to discover which is the least bad.

The key problem is that in order to control costs you’ve got to be able to deny care. In a country as diverse as ours that’s deeply problematic from a political standpoint. Whenever any member of any racial, ethnic, or religious minority is denied care, he or she will inevitably believe it’s because of his or her race, ethnicity, or religion. Faced with this identical problem 35 years ago the insurance companies decided not to control costs.

There is no national consensus for cost control and not enough respect for authority to simply accept whatever the powers-that-be declare.

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Make It Impossible

I disagree with Facebook heavy Chris Hughes’s prescription for the company in an op-ed at the New York Times:

Mark is a good, kind person. But I’m angry that his focus on growth led him to sacrifice security and civility for clicks. I’m disappointed in myself and the early Facebook team for not thinking more about how the News Feed algorithm could change our culture, influence elections and empower nationalist leaders. And I’m worried that Mark has surrounded himself with a team that reinforces his beliefs instead of challenging them.

The government must hold Mark accountable. For too long, lawmakers have marveled at Facebook’s explosive growth and overlooked their responsibility to ensure that Americans are protected and markets are competitive. Any day now, the Federal Trade Commission is expected to impose a $5 billion fine on the company, but that is not enough; nor is Facebook’s offer to appoint some kind of privacy czar. After Mark’s congressional testimony last year, there should have been calls for him to truly reckon with his mistakes. Instead the legislators who questioned him were derided as too old and out of touch to understand how tech works. That’s the impression Mark wanted Americans to have, because it means little will change.

We are a nation with a tradition of reining in monopolies, no matter how well intentioned the leaders of these companies may be. Mark’s power is unprecedented and un-American.

It is time to break up Facebook.

I disagree. There is no handy way to break Facebook up that actually reduces its power. For practical purposes it is impossible to divide it geographically, the solution arrived at for Standard Oil and Ma Bell.

It’s time to make its business model illegal by greatly strengthening individual privacy rights. That’s the direction in which the Europeans have been going and they’re right.

However, the situation does highlight the inability of our judiciary and legislature to deal with today’s megacorporations. Eight figure fines are pin money for them. They need to think at least one order of magnitude larger. That’s a tall order for people whose last contact with math was high school trig and that was a half century ago.

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The Price

Well, here’s another prediction of mine that’s coming along just as I predicted. From the Washington Post:

Mariam Rastanawi fled Homs, Syria, in 2012, hoping to escape a protracted civil war amid fears that remaining in her native country would amount to a death sentence. Seeking refuge in the United States, a country she saw as sympathetic to her plight, she and her husband waited years in exile without a permanent home.

In March, they were shocked to learn that they were being admitted to the United States as refugees, and their spring arrival in Indianapolis was akin to winning the lottery. The country used to allow thousands of Syrians to immigrate, but the flow of Syrian refugees is at an almost complete stop.

“We are so happy, thank God,” Rastanawi said through a translator. “We didn’t think it would be this long.”

Under the Trump administration, the number of refugees allowed into the United States has fallen to its lowest level since the resettlement program began in 1980. And few groups have been as affected as Syrians, who have been fleeing a brutal civil war that has left hundreds of thousands of people dead since it began in 2011.

Actual refugees are paying the price for the chaos wrought by the economic migrants posing as refugees at our southern border and our inability to come to terms politically with what is an actual problem there.

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What Do I Think of the Claim of Executive Privilege?

I think that the legislative, executive, and judicial branches are coequal branches of government. The legislative branch does not have an unconditional right to executive branch work product and the Supreme Court has never found that it has. The Speaker of the House has oversight authority over the president only in her mind.

The House has the power of impeachment. And it has the power of the purse. If they demur from using either, they’re out of ammo.

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Land of the “Free”

Yesterday at USA Today Robert Robb had an op-ed attempting to educate those drawn to “democratic socialism” about the pitfalls:

If young Americans survey the world and come to the conclusion that the answer is more government and greater control by politicians, so be it. They are the ones who will reap the consequences of that misjudgment.

Besides, it’s not as though my generation, the baby boomers, have been good stewards of our patrimony. The march of millennials toward European-style social democracy will be inhibited by the massive government debt and insolvent public pension programs we will be bequeathing them. Baby boomers aren’t really in a position to be tut-tutting other generations, irrespective of how old we become.

But if young Americans want the United States to become more like Europe, they can get there over time. Young Americans wanting to make that march are unlikely to take the advice of a long-in-the-tooth libertarian conservative. But here it goes anyway.

There is one mistake that would be much more serious than the others and potentially fatal to the entire enterprise. While the term “democratic socialism” is in vogue, that’s not really what’s in prospect. If the term socialism is to retain any useful meaning, it refers to government ownership of strategic commercial enterprises. “Democratic” socialism is distinguished from communism in that the body politic gets to choose who mismanages the enterprises.

Europe abandoned socialism decades ago. The countries there have various iterations of democratic capitalism that can loosely be denoted as “social democracy.”

There are two aspects of social democracy as practiced in Europe that distinguish it from the form of democratic capitalism prevailing in the United States.

The first is a much more extensive social welfare state. Health care is almost universally treated as a public good in Europe, the responsibility of government to provide in one way or another. There are generally broader safety net programs for the poor and even the middle class.

The second is greater regulation of capital and especially labor markets. Pursuing that is the potentially fatal mistake.

There is perhaps no clearer lesson from history than that markets produce greater material well-being for a society, including for the poor. And markets work best when there is free movement of capital and labor.

and succeeds in a pratfall. To understand why let’s turn to Heritage House’s (Heritage House’s!) ranking of countries according to the Index of Economic Freedom:

Ranking  Country
Hong Kong
Singapore
New Zealand
Switzerland
Australia
Ireland
United Kingdom
Canada
UAE
10  Taiwan
11  Iceland
12  United States
13  Netherlands
14  Denmark
15  Estonia

Sweden and Finland are just a tick below that at 19 and 20, Germany a little below that at 24. Ignore the top two. They’re authoritarian city-states—there’s nothing for us to learn from them. Switzerland eschews “foreign entanglements”. It doesn’t belong to the EU and avoided joining the UN until 2002. Women didn’t get the vote there until 1976. It’s a very small consensus-based country. Ignore UAE—it’s a tiny, authoritarian petrostate.

The rest of those countries are just as economically free as we are with enormously more substantial social safety nets. There is clearly something different about the U. S. What is it?

Every single one of those countries that comingle social democracy and economic freedom is materially an ethnic state. We have never been an ethnic state and never will be. Clearly, it makes a difference. The issues are political and social. In the U. S. “looking out for #1” is the order of the day and for many that means people who look like them.

What we look like is a multi-ethnic, multi-confessional state like Russia. I think that freedom is a more practical aspiration for the United States and that in the United States aspiring to social democracy will inevitably lead to less freedom which in turn will lead to less social democracy.

What about France? Heritage House no longer rates France as “mostly free”, it’s also stepping away from its welfare state, and there are people rioting in the streets every weekend. That’s our future unless we choose an achievable goal.

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Shaking the Foundations

It is very nearly a truism that the United States is not a democracy but a republic. Indeed, the Founding Fathers had what amounted to a horror of democracy, as Madison wrote in Federalist 10:

AMONG the numerous advantages promised by a wellconstructed Union, none deserves to be more accurately developed than its tendency to break and control the violence of faction. The friend of popular governments never finds himself so much alarmed for their character and fate, as when he contemplates their propensity to this dangerous vice. He will not fail, therefore, to set a due value on any plan which, without violating the principles to which he is attached, provides a proper cure for it. The instability, injustice, and confusion introduced into the public councils, have, in truth, been the mortal diseases under which popular governments have everywhere perished; as they continue to be the favorite and fruitful topics from which the adversaries to liberty derive their most specious declamations. The valuable improvements made by the American constitutions on the popular models, both ancient and modern, cannot certainly be too much admired; but it would be an unwarrantable partiality, to contend that they have as effectually obviated the danger on this side, as was wished and expected. Complaints are everywhere heard from our most considerate and virtuous citizens, equally the friends of public and private faith, and of public and personal liberty, that our governments are too unstable, that the public good is disregarded in the conflicts of rival parties, and that measures are too often decided, not according to the rules of justice and the rights of the minor party, but by the superior force of an interested and overbearing majority. However anxiously we may wish that these complaints had no foundation, the evidence, of known facts will not permit us to deny that they are in some degree true. It will be found, indeed, on a candid review of our situation, that some of the distresses under which we labor have been erroneously charged on the operation of our governments; but it will be found, at the same time, that other causes will not alone account for many of our heaviest misfortunes; and, particularly, for that prevailing and increasing distrust of public engagements, and alarm for private rights, which are echoed from one end of the continent to the other. These must be chiefly, if not wholly, effects of the unsteadiness and injustice with which a factious spirit has tainted our public administrations.

By a faction, I understand a number of citizens, whether amounting to a majority or a minority of the whole, who are united and actuated by some common impulse of passion, or of interest, adversed to the rights of other citizens, or to the permanent and aggregate interests of the community.

There are two methods of curing the mischiefs of faction: the one, by removing its causes; the other, by controlling its effects.

There are again two methods of removing the causes of faction: the one, by destroying the liberty which is essential to its existence; the other, by giving to every citizen the same opinions, the same passions, and the same interests.

It could never be more truly said than of the first remedy, that it was worse than the disease. Liberty is to faction what air is to fire, an aliment without which it instantly expires. But it could not be less folly to abolish liberty, which is essential to political life, because it nourishes faction, than it would be to wish the annihilation of air, which is essential to animal life, because it imparts to fire its destructive agency.

The second expedient is as impracticable as the first would be unwise. As long as the reason of man continues fallible, and he is at liberty to exercise it, different opinions will be formed. As long as the connection subsists between his reason and his self-love, his opinions and his passions will have a reciprocal influence on each other; and the former will be objects to which the latter will attach themselves. The diversity in the faculties of men, from which the rights of property originate, is not less an insuperable obstacle to a uniformity of interests. The protection of these faculties is the first object of government. From the protection of different and unequal faculties of acquiring property, the possession of different degrees and kinds of property immediately results; and from the influence of these on the sentiments and views of the respective proprietors, ensues a division of the society into different interests and parties.

The latent causes of faction are thus sown in the nature of man; and we see them everywhere brought into different degrees of activity, according to the different circumstances of civil society. A zeal for different opinions concerning religion, concerning government, and many other points, as well of speculation as of practice; an attachment to different leaders ambitiously contending for pre-eminence and power; or to persons of other descriptions whose fortunes have been interesting to the human passions, have, in turn, divided mankind into parties, inflamed them with mutual animosity, and rendered them much more disposed to vex and oppress each other than to co-operate for their common good. So strong is this propensity of mankind to fall into mutual animosities, that where no substantial occasion presents itself, the most frivolous and fanciful distinctions have been sufficient to kindle their unfriendly passions and excite their most violent conflicts. But the most common and durable source of factions has been the various and unequal distribution of property. Those who hold and those who are without property have ever formed distinct interests in society. Those who are creditors, and those who are debtors, fall under a like discrimination. A landed interest, a manufacturing interest, a mercantile interest, a moneyed interest, with many lesser interests, grow up of necessity in civilized nations, and divide them into different classes, actuated by different sentiments and views. The regulation of these various and interfering interests forms the principal task of modern legislation, and involves the spirit of party and faction in the necessary and ordinary operations of the government.

He goes on to defend the system of checks and balances established by the new Constitution in what is probably the most famous passage from Federalist.

The protections against “faction” under our system are numerous and they include not only the system of checks and balances but representative government itself, the division of the legislature into two houses, the appointment of the members of the Senate by the state governments, and the electoral college.

I don’t think most people understand what a “republic” is. It is a form of government in which the will of majority is not the most important thing. The rules have primacy. Legitimacy is not conveyed by popularity with 50%+1 of the voters but by agreeing on the rules and following them.

There is at least an argument to be made for majority rule. In the absence of a system of rules there is none at all to be made for minority rule unless that is according to the rules in which case it’s all that is important.

For the last two years Democrats have been arguing that

  1. The rules aren’t fair and
  2. Trump cheated.

Over two years no evidence has emerged of the latter which leaves them with the former. However, under our system, if you are unable to change the rules because of the rules themselves, there are two honorable, decent courses of action.

The first is to leave—to flee. The second is to take up arms against what is to you an intolerable and unjust order. Not only is calling the legitimacy of the system itself neither honorable nor decent it is shortsighted. It is worse than a crime—it is a mistake, sawing off the limb of the tree you’re sitting on.

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The Seen and the Unseen

There’s a reason that pharmaceutical costs are complained about so bitterly by Americans. It’s not fairness. It’s because drug prices are what seniors are most exposed to out-of-pocket and seniors complain. I find it extremely discouraging that I should need to point out basic economic facts to Megan McArdle but there you have it. In her latest Washington Post column she defends high drug prices:

You could cut the budget and maybe still eke out a living. But when you’re making a new investment, the question isn’t “How can I make my income match my expenses?” but “Is this the best use of my time and money?”

Most of us want to do more than eke out a living. If government squeezes the profit out of a business, we’re not going to go into that business; we’ll do something else.

That’s how pharmaceutical firms think about research and development: not as something they must do, which they will support by economizing elsewhere, but as something they would like to do if the investment pays better than doing something else, such as executing stock buybacks. It’s also how people buying biotech stocks, or lending money to pharmaceutical firms, think about their activities. And so, if the returns on those investments are squeezed, fewer investments will be made.

That, like every other assertion in her column, is unsupported by the facts. Research at pharmaceutical companies does not increase with revenues or profits. It rises with inflation. That is evident from reading the companies’ annual reports. That means it is treated like overhead, “something they must do”.

There is also no demonstrable relationship between the rate of spending on research and the rate at which new drugs or treatments are developed. Maybe there was a century ago but it is simply no longer the case.

Finally, overspending on drugs is exactly the same as throwing a rock through a bakery window. You may see the new drugs that are developed due to the excess spending but there are thousands of things that might have happened that did not and will not happen and you do not see. Children that will not be educated. Bridges that will not be repaired. Research in energy or materials or any of a million other things that might have saved millions of lives or made them better that will never happen. You see what did happen but you don’t see what didn’t.

That was observed nearly 150 years ago by Frédéric Bastiat and recapped later in Economics in One Lesson. Ms. McArdle might try reading it.

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