July 4th, A time to recommit to the principles of freedom

Celebrating Freedom

This year we celebrate 233 years of freedom. We also celebrate 222 years of union. Late in 1787, in a flash of inspired genius, 55 men put aside their petty differences and forged the great balancing act we know as the United States Constitution. Get out your barbecue, head to the fireworks, but don't let July 4th pass without having pondered our founding documents.

Have you read the Declaration or the Constitution lately? Just as importantly, have you read any biographies of the founding fathers? The founding of the the longest lived constitutional republic is no small matter. I have always felt that balance is the key to most human endeavors. The Constitution of United States has it! Everywhere you turn, there is a check against those with authority. Not only are the three branches of federal government played off one another, but the entire federal government is checked by both the States and the people. (And the people are checked by the Constitution and by their chosen statesmen.)

If I were to sum up the U.S. constitution in one sentence, I'd say this:
It's all about providing freedom from abuse by those in authority.

Context for the Constitution is also important. It matters what the framers intended and it matters to understand the milieu in which their discourse took place. Thus, a study of history and of important works such as Common Sense and the Federalist Papers is also in order.

Here is an example of how context helps us understand the founding principles. While the Constitution pays homage to "We the People" it also puts a check against them. In fact, it is a great fallacy to believe our country to be a democracy. James Madison says in Federalist 10 "Democracies have ever been spectacles of turbulence and contention; have ever been found
incompatible with personal security or the rights of property; and have in general been as short in their lives as they have been violent in their deaths...A republic, by which I mean a government in which the scheme of representation takes place, opens a different prospect, and promises the cure for which we are seeking."

Another phrase in the Preamble that has lead to much abuse in federal government is the "promote the general welfare" clause. Of this Madison had this to say: "Nothing is more natural nor common than first to use a general phrase ( like common welfare) and then to explain it and qualify it by a recital of particulars." (Federalist #41) Thus, that clause means nothing on it's own! It's meaning is elaborated by the details of enumerated powers later on. Jefferson also concurred: "Congress has not unlimited powers to provide for the general welfare, but only those specifically enumerated."(1817 letter to Albert Gallatin).

Let not another Independence Day pass without recommitting ourselves to the civic duty of understanding good government. I have assembled here some essential resources.

1. The Constitution of the United States
2. The Declaration of Independence
3. The National Center for Constitutional Studies
4. The 5000 Year Leap
5. My own MP3 collection of the Federalist Papers

Happy July 4th!

Cherry Picking Your Scapegoat

This post is just a reprint of the second half of this older post:

How Two Sides can both be right about Objective Truths
Now I will show by example how opposing viewpoints about objective truth can both be right. I will take the recent financial crisis as an example. That there is a meltdown of sorts is pretty much an objective truth agreed upon by most everyone. Over the past months I've heard two claims that were made with utmost certainty:
1. Republicans, especially President Bush (And more recently President Reagan), are 100% to blame for the crisis.
2. Democrats are 100% to blame for the crisis.

My argument is based on the fact that, whether they knew it or not, each of the above claimants is implying "according to my values and priorities" in their statement. When you take into account the implied reference point, their claims can both be verified objectively

I will do so. According to this Denver Post article and this WSJ article there are about eight causes of the financial meltdown. Some of the causes had both beneficial as well as deleterious effects. In no particular order:

1. Enactment of laws that encourage home ownership (most notably, the CRA of 1977 and the 1993 expansion of it) (D)
   
2. Political pressure on Fannie and Freddie to buy/guarantee subprime loans. Followed up by lax oversight. (D)
   
3. Deregulation of banks which allowed them to get too big and have too high a debt load (R)
   
4. Overregulation of banks which give them a false sense of security. (D)
   
5. Low interest rate policy of the Fed which fueled mortage debt (D/R)
   
6. Preditory lending practices (R)
   
7. Government created credit-rating oligopoly (providing the market with misinformation) (D)
   
8. Short Sellers (R)
   

This is a gross simplification, but each of the causes above can be loosely associated with one political party or the other. To be fair, each cause can be attributed to both parties...but I'm trying to make a larger point. I've marked each cause with the associated party.

Now a bubble can only burst when it reaches a certain level. Take away any one or two of the above factors, and you might have averted the crisis entirely. So if you order the list above according to your priority, the last few items (that the other guy caused) are the entire cause of the meltdown right? This sort of cherry picking can be justified from a subjective point of view and it is very very common. But wouldn't be better if we acknowledge the valid considerations of both sides?

Obama's Tax Increase on All Americans

10,000 for a candy bar
I'll never forget my first hand experience with 5,000 percent inflation. I was living in Argentina in 1989 as a missionary. We got our living stipend at the beginning of the month. It was denominated in Australes. The money had to be spent quickly, as prices would double by the end of the month. When I arrived in 1989 a candy bar (the tasty alfajor) was 100 australes. When I left in 1991 the same alfajor cost 10,000. I'll never forget how we used 100 Austral bills as toilet paper. I still have a wad of Australes an inch thick that I kept as a souvenir.

Inflation is a major back door tax on all citizens. Everyone with a bank account or a fixed wage suffers. Governments with debt love inflation because they can pay down debt with devalued currency. The recession is causing a temporary deflationary cycle, but with things starting to turn around, everyone knows that inflation is the true threat. I noticed that gas was already back up to almost 2.50. And it isn't because of oil demand. The dollar is losing value. The Chinese are getting nervous about holding so much U.S. debt. Even prominent central bankers are worried. Here is a random quote from fund manager Harry Lange at Magellen (one of my 401k funds) "In my view, that no-holds-barred approach to spending could mean that inflation will resurface as a serious problem once the U.S. economy enters a recovery phase. " And from the fund managers of Vanguard Primecap: "There are legitimate concerns about the increased moral hazard and unintended consequences that are likely to result from the various rescue plans and stimulus bills...We are also concerned that the dramatic increase in money supply may result in inflation."

How to fund a major increase in the size of government
It is completely naive to believe that President Obama can fund all his programs by just soaking the rich. I believe he thinks it can be done, but it goes against all experience. The reality is that Obama's initiatives will be paid for by everyone. Here is how:

1. Inflation will pay for much of the debt. China will not keep buying our treasuries forever. You monetize debt by selling it to the Federal Reserve. Sure, the FED buys debt all the time to maintain a stable money supply. But now it's being pressured into it for political ends.
2. The tax increase on the "rich" will miss the target and hit smack dab on the middle class. As the 2003 Bush tax cuts proved, the upper class doesn't try as hard to hide income when taxes are relatively lower. Thus, we saw a surge in the amount that the upper 10% pays in taxes because of the Bush tax cuts. Obama will reverse that trend, and the rich will go back to either hiding income or being less productive with it. The middle class will have to shoulder the burden.
3. Cap-and-trade. Regardless of the environmental merits, carbon taxes are a tax increase on all Americans. I'd even say they are regressive. There is no such thing as a tax on a company. Only taxes on people. You can tax companies all you want, but it all lands on consumers and on shareholders. (Most Americans are shareholders of some sort, whether through a company retirement fund or a 401k plan.)
   

No matter how it turns out, the pro-Obama forces will be able to claim victory because the processes I've outlined above are all very indirect. But modern liberals have always succeeded more when they take the back door approach. Who wants to hear tough talk? Americans seem to want others to pay for their benefits, so the political class has to fool them into believing that they're getting a free ride. We'll you're not. Factor into it the opportunity costs of lost freedom and innovation, and the picture is pretty bleak.