A few readers have asked me where they can find a list of my “Rules” posts.  You can find such a list here.  One further note on the “Rules” posts — I’m not exactly sure how many there will be, but if I write all of them, there will be around 50 of them.  Should I live so long, and readers still enjoy the series, maybe I would write the last one in 2011.

Here’s tonight’s rule: Attempting to control a system changes it.

Maybe tonight’s rule deserves the “Duh!” award, but it reminds me of reading THE ART OF WAR, by Sun Tzu.  Most of what Sun Tzu writes about is really basic, but it is amazing how many times generals neglect his easy advice, and bullheadedly persist in unwise courses of action.

Well, it is that way in politics and economics as well, and we don’t seem to learn from history.  Go back to the 1960s, when economists discovered there was seemingly a tradeoff between unemployment and inflation.  All they had to do to minimize unemployment was raise inflation.  So, easy; print more money, and there will be less unemployment.

It didn’t work that way.  People got used to the inflation and assumed that inflation would occur at that higher level indefinitely, and unemployment didn’t drop.  Instead, we got stagflation in the 1970s.

I would point out the same thing to those who run the Eurozone if they would listen to me.  I feel privileged to have 29% of my readership coming from outside of the US.  Most of that is in Europe, with significant amounts in Canada, Israel and the financial centers of Asia.

The Euro was never supposed to be an area where the nations would be joint-and-severally liable for each other’s debts.  Indeed, nations were supposed to restrain their borrowing so as to avoid such and occurrence.  Bailouts change behavior.  Those that are bailed out see less need to change radically.  Those that are near being bailed out do not see a reason to stop borrowing.  Those that are in no imminent trouble, but would like more latitude in borrowing see a green light to borrow more.  Upshot: bailing out Greece leads to many perverse consequences.  It lowers the probability of individual nations defaulting in the short run, while raising the risk of total system failure in the intermediate-term.  The Eurozone is not a nation; there is little sympathy across national borders such that they would send tax dollars to bail another nation out of their debt crisis.

Or, consider US Monetary policy (or, most developed nation monetary policies, they have been pretty similar): the continual effort to promote prosperity via monetary policy, contra William McChesney Martin, Jr.  Monetary policy can’t create prosperity.  It can restrain inflation.  Attempting to use monetary policy to create prosperity was the Greenspan and Bernanke era.  They lowered interest rates, and raised asset values.  That is no prosperity, though, because the assets throw off the same cash flows.  Only the discount rate has changed.  Any asset has a higher Net Present Value when the discount rate declines.  That is all that Greenspan and Bernanke ever did, to a first approximation, is lower the discount rate.  The wealth effect stimulated consumption and additional indebtedness.

Or consider US housing policy.  We have spent bundles of money trying to entice marginal buyers to buy homes.  It is as if those that don’t own homes are inferior — a threat to society.  But have all of the efforts to increase the home ownership rate worked?  The jury is out; maybe in two years we will know for sure, but to me it seems that encouraging home ownership has been a disastrous social experiment.  I’m not an environmentalist, but isn’t it greener to have dense cities with apartment dwellers?  Face it, many people can’t maintain the discipline of a mortgage payment, regardless of what incentives are offered on the front end.

Or, consider US medical policy.  There was a time when medicine was relatively inexpensive, and people avoided using the medical system.  That was prior to offering a tax deduction for employer paid medical care, and Medicare.  Once people get separated from paying the immediate cost, they are far more willing to seek expensive care.  The insurance industry itself lost money for 20 years, because it failed to see the change in behavior the would happen once people were insured.  That is why my main recommendation for healthcare is to remove the tax deduction for all.  (Maybe leave the deduction on HSAs, and things like them.  Those are first party payer systems, and people won’t spend aggressively with them.

This is a major reason why I am a skeptic about the recent health bill.  You can’t get something for nothing.  A bill that cuts costs should result in less services, unless greater freedoms are allowed, and this bill does the opposite of that.  Single-party payer systems work because they restrict access to care, something that Americans will have a hard time adjusting to.

Or, look at the Japanese economy over the last two decades.  Keynes triumphs.  Low interest rates, and a lot  of government spending on marginal projects.  Huge increase in government debt.  Is the nation better off?  Hard to tell; wait to see if they survive to 2020 without a debt crisis.

Summary

In economics, one of my firmest beliefs is that you can’t get something for nothing.  A government increasing regulation may change the behavior of an area of the economy, but will not increase overall economic well-being.

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