Saudi Arabia Pressures Russia

Low-prices-of-OilOne remarkable aspect in the recent fall in global oil prices is that Saudi Arabia has not cut production to prop them up. Much of the speculation about why the Saudis have sat by passively and allowed the oil price decline has been that they are trying to undermine higher-cost producers in the US and Canada. A decline in oil prices will make some of that production uneconomical.

While American producers will see their profits fall as oil prices decline, American consumers benefit from lower gas prices. Meanwhile, the oil price decline will hit Russia much harder than the US.

After the Russian intervention in Ukraine, both the US and EU announced economic sanctions against Russia. Those sanctions have had a minimal effect on the Russian economy, whereas the decline in oil prices poses a much larger threat. The Russian economy has been slow to advance in the decades since the Cold War, and has become increasingly dependent on natural resource exports for financial support. The decline in oil prices will hurt.

Among various economic threats thrown back and forth as a result of Russia’s intervention in Ukraine, Russia has threatened to cut off energy exports to Ukraine and the EU, and the economic impact of lower oil prices makes Russia more dependent on that revenue, and so less likely to actually follow through and cut off its exports.

I’d be hard-pressed to claim that pressuring Russia is the reason the Saudis have stood by and allowed global oil prices to fall. They may well have in mind undercutting high-cost American producers, as news analysts have suggested, and lower oil prices also puts pressure on Iran, which may help stabilize the Middle East.

Whatever their motives (and they may be many), it is easy to see that the decline in global oil prices, facilitated by the passive Saudi response, hurts Russia far more than the economic sanctions imposed by the US and EU.

Lesson from the Election: People Want Less Government

6353268_SThe lesson I draw from the Republican victories in the 2014 election is that people want less government. Since 2009 the number of Democratic Senators fell from 58 to 45, the number of democratic House members fell from 256 to 192, and the number of Democratic governors fell from 28 to 18. I’m not the first to observe that these big Democratic losses are directly related to the unpopularity of President Obama’s big government agenda.

But wait... didn’t he come in with a mandate? Both the House and Senate went Democratic in 2006, prior to Obama’s election, and he ran as a big government candidate, more or less. Actually, I’d say less. He ran on a platform of “hope and change,” an anti-Bush campaign. He was running against what he called “the eight failed Bush-McCain years,” rather than running on his own platform. Yes, he talked about health care reform, but mostly, he campaigned against Bush (who. at that point, wasn’t running for anything).

It appears that Bush’s waning popularity in his second term was also a sign of opposition to big government. Bush initiated two wars and a major Medicare expansion, turned a budget surplus when he took office into a substantial deficit when he left, and completely eroded any notion of fiscal conservatism. In 2000 he appeared to be a principled supporter of limited government. By 2006, when the Congress turned Democratic, he appeared to be a big-spending foreign interventionist.

Remember a few limited government promises Obama did make on the campaign trail: end the wars in Iraq and Afghanistan, and close the prison in Guantanamo. Those promises sounded good to American voters, but six years later, they haven’t materialized.

There is more here than just the idea that presidents grow unpopular after six years in office. Both Bush and Obama generated voter backlash because of their big government policies. The problem is that for both Republicans and Democrats, the people who run for office are people who believe the government can solve our problems. If people really do want to curb the power and influence of government, the best thing they can do is vote for divided government and hope for gridlock. That’s what voters did.

The Power of Ideas

11316360-standardToday marks the twenty-fifth anniversary of the most thrilling event of my lifetime: when oppressed individuals came together and laid claim to their birthright of liberty.

Also known as “The fall of the Berlin Wall.”

It wasn’t supposed to have happened this way. “Everyone” knew the Soviet Union was the strongman. The intellectuals dismissed historian Robert Conquest’s portrayal of a corrupt and tyrannous system, and Paul Craig Robert’s prescient exposure of the myth of central planning. Communism was the darling of the western cultural elites.

And yet the change came from no political “messiah,” no elections, no liberating army.

It was simply the full flowering on an idea: individuals latching onto the idea “We are free,” and rejecting the message “You are slaves.” They withheld their consent to be ruled. Their rulers blinked, and utterly collapsed—morally bankrupt.

While those brave souls celebrating at the Berlin Wall may not have appreciated fully the idea that each of us is born with inalienable rights to life, liberty, and property, they embraced the idea enough to peacefully topple the modern era’s most powerful tyrant.

Ought not we as heirs of the Declaration of Independence find it so much easier to claim our birthright and turn back incursions on our liberties?

The State and its claims are just ideas. Liberty is the better one.

Spread the good news, be a shining example of how one lives in community with free and equal people, seize every opportunity of standing and speaking against claims against our liberty. Let’s live purposefully, topple every “Berlin Wall” erected against freedom, and unleash the full flowering of human potential in peaceful, prosperous, and free societies everywhere.

Gordon Tullock and the Transitional Gains Trap

41LaBkV7NCL._SY344_BO1,204,203,200_Gordon Tullock, who died on Monday at the age of 92, was along with his longtime colleague James Buchanan, the founder of the modern field of public choice, which during the past fifty years has become a well-established subfield of economics and of political science and has also had an influence on other disciplines. Tullock himself is most closely associated with the idea of rent seeking, which would have caused less confusion and been more precise if it had been called privilege seeking.

One of his most important contributions, which he expounded in a 1975 article in the Bell Journal of Economics, pertained to what he called the transitional gains trap. This idea helps us to understand, among other things, why government privileges have such durability long after the original rationale for their creation has become irrelevant.

Consider, for example, an agricultural subsidy such as the production controls authorized for lemon producers during the 1930s. This privilege allows the lemon producers to operate, without fear of the antitrust laws, a marketing cartel for their product. This cartel, called a marketing board, restrains the quantity of lemons placed on the market each year and thereby ensures that the product’s price will be higher than it otherwise would be. When this privilege was created, it had the effect of making the land operated by existing lemon producers (i.e., members of the cartel) more valuable. This increase in land value reflects what economists call the capitalization of rents: because the future stream of income expected from growing lemons on the land has been raised, farmers are willing to pay more to acquire the land. Indeed, they will pay so much more that anyone who acquires the land after the cartel has been created will gain no special benefit—no extraordinary rate of profit—from its ownership. Future owners must, so to speak, pay fully for the cartel profits associated with ownership of the land and its employment in growing lemons. All of the true profit from cartel’s creation is captured by those who owned the land at the time the cartel was created.

Now, the Great Depression, which had an especially harmful effect on most farmers, ended long ago, yet many such agricultural subsidies remain in legal effect. Why? Because elimination of the privileges at this point would be harmful to all the existing land owners by causing them substantial capital losses on the value of their land. Any farmer who acquired possession of the land after the privilege had gone into effect gained no profit from lemon production, yet all such farmers would sustain large losses from its elimination. Hence, existing producers are willing to carry out whatever political actions are necessary to bribe legislators to keep the program going (thereby illustrating another of Tullock’s ideas, the deadweight loss associated with rent seeking).

The transitional gains trap is a powerful and (by the general public) little understood idea. For its formal introduction and development in the economics profession, we are indebted to Gordon Tullock.

I got to know Gordon about thirty years ago. I spent time with him on many occasions over the years and worked with him in various editorial and professional capacities. He was an extraordinary person in many ways, and he made contributions of great and lasting value to our understanding of economic and political life. May he rest in peace.

Third Parties Control 83 Percent of Prescription Drug Spending, Up from 52 Percent in 1993

Adam J. Fein of Drug Channels has written a short article describing the evolution of payment for prescription drugs. In just twenty years, patients’ share of payments dropped from almost half of the spending to just 17 percent. Even worse, Fein forecasts, the share will drop to 12 percent by 2023.

Of course, if you look at the first graphic in his article, you see that most of the third-party-payer growth is from government spending, while private insurance shrinks as a share. By 2023, 45 percent of prescription drug spending will be controlled by government.


Does anyone really think that the government will continue to hold back from fixing prices as its share of spending becomes increasingly dominant? This is a time bomb for the pharmaceutical industry.

Even worse, most people who use prescription drugs are capable of paying for them directly: We live in an era of paying $4 for a month’s supply of commonly used medicines. And yet, the truly sick — cancer patients and the like — are stuck with out-of-pocket bills for many thousands of dollars.

This is pretty much the opposite of what health insurance should look like.

Gordon Tullock, R.I.P.

10444565_10153334911167796_5877500791548779174_nMy friend and former colleague Gordon Tullock passed away on Election Day eve at the age of 92.

Gordon was one of the great polymaths of the past more than half-century. Known best as the co-author (with Nobel laureate James M. Buchanan) of The Calculus of Consent: Logical Foundations of Constitutional Democracy (1962), Gordon invented the concept of what became known as “rent seeking” in a paper published in 1967 (the term actually was coined by Anne Krueger in 1974), contributed extensively to the literature of the law (owing to the high error rates of judges and juries in common law regimes, he favored continental civil law processes), and wrote much about the economic behavior of non-human societies (e.g., “The Coal Tit is a Careful Shopper” is one of my favorites). In The Social Dilemma, Gordon explored the benefits and costs of revolutions and coups d’état; he also brought his fertile mind to bear on autocratic regimes, which he observed correctly are much more prevalent in human history than democracies.

Many of us thought that Gordon should have shared Buchanan’s Nobel Prize and, until very recently, held out faint hope that a Nobel would be awarded to him for launching a vast literature extending his rent seeking logic, perhaps jointly with Anne Krueger. Alas, that was not to be.

In addition to co-authoring The Calculus, to which Gordon contributed some of the first applications of game theory to problems of collective decision making, he single-handedly launched the academic journal now known as Public Choice, was present at the creation of the Public Choice Society, and as journal editor fostered the careers of many young scholars by publishing their work. (It is for that reason that the journal’s publisher, Springer, funds the honorarium paid to the winner of the annual Gordon Tullock Prize for the selection by the journal’s current editorial team of the best paper published by a younger scholar in Public Choice.)

Gordon was famous for insulting his friends good-naturedly and not interacting much with people he didn’t particularly like. I count myself as one of Gordon’s friends because not long after I succeeded the late William C. Mitchell as book review editor of Public Choice, he remarked that I hadn’t been doing as bad of a job in that post as he had expected me to do.

Gordon was proud to say that he took only one undergraduate course in economics (taught by Hebert Simon) and that because he had not fulfilled all of his degree requirements prior to being accepted into (and later graduating from) law school, he didn’t even have a college diploma.

It is somewhat ironic that Gordon passed away on the day before Election Day 2014. He was famous for telling anyone who listened that he never voted. He practiced what he preached: voting is irrational, as public choice reasoning explains.

If you have failed unaccountably to become familiar with Gordon Tullock’s incredibly creative contributions to the literatures of public choice and beyond, a good place to start is the 11-volume Selected Works of Gordon Tullock, edited by the late Charles K. Rowley and published by Liberty Fund.

Gordon Tullock (1922-2014)

10444565_10153334911167796_5877500791548779174_nGordon Tullock, one of the founders of the sub-discipline of public choice, passed away November 3, at the age of 92. Public choice uses the methods of economics to analyze political decision-making, and Tullock’s book, co-authored with James Buchanan, The Calculus of Consent, was a pioneering work in public choice. It is the best-known work written by either Buchanan or Tullock, and many people thought that when Buchanan won the 1986 Nobel Prize in economics for his work in public choice, that prize should have been shared with Tullock.

Tullock’s contributions go well beyond his co-authored book. He wrote the first article on rent-seeking, he extended public choice analysis beyond the examination of democratic governments to look at other arrangements ranging from autocracy to anarchy, he was co-founder of the Public Choice Society, and founding editor of the journal Public Choice.

While other scholars worked in the area of public choice around the same time as Buchanan and Tullock (and even before), it was Buchanan and Tullock who turned occasional writing in the area into a movement, partly by starting the Public Choice Society, and partly by establishing the journal.

I recall Tullock explaining the importance of the journal as an outlet for scholarly writing in public choice. The mainstream journals in economics and political science did not view public choice as a part of their disciplines, and as a result, scholars working in the area often had a difficult time publishing their articles. Tullock’s idea was that if they could not get them published in those journals, having a journal that specialized in public choice would give them the opportunity to have their work published somewhere, and so would give scholars an incentive to work in the area. The journal Tullock founded is now very highly regarded by both economists and political scientists.

Tullock remained academically active, and was a regular attendee of the Public Choice Society annual meetings, until the past few years when his declining health curtailed his ability to travel.

Tullock’s impact on economics and political science was immense, and with his passing the world has lost a brilliant scholar.

Has Colorado Gone to Pot?

marijuana-plant-yes-or-noLast week I had the chance to spend a few days in Denver while giving a talk as part of the Exploring Economic Freedom Lecture Series at the Metropolitan State University of Denver (you can find a link to the video of my lecture on police militarization here).

After landing at the airport I received several text messages from family and friends asking if I was “walking through smoke clouds,” enjoying the “mile HIGH city,” or “stepped off the plane with a contact high.” These messages, all referring to Colorado’s legalization of marijuana this past January, reflect a broader idea about impact of drug legalization. Indeed, legalized marijuana is gaining traction throughout the U.S. In yesterday’s election, voters in Oregon, Alaska, and Washington, D.C. voted to legalize recreational marijuana in various ways.

Opponents of drug legalization often argue that the legalization of drugs would lead to rampant drug use, increases in crime, and higher rates of overdose. In 2012, Douglas County Sheriff David Weaver stated if Colorado legalized marijuana,

I believe there will be many harmful consequences. Expect more crime, more kids using marijuana and pot for sale everywhere. I think our entire state will pay the price.

A large body of literature, however, counters these claims, illustrating why drug legalization is likely to decrease crime, decrease overdose deaths, and decrease the use of hard drugs like heroin and other opiates.

Colorado provides a unique opportunity for a natural case study. Here is a state in which recreational marijuana was (for all intents and purposes) illegal one day and legal the next. So, since legalizing marijuana, has Colorado gone to pot?

Based on personal observation, I saw a few marijuana dispensaries in downtown Denver, but they weren’t at all pervasive. I failed to observe any roving gangs of potheads blasting Bob Marley music, eating entire bags of potato chips, or discussing their vast collection of Cheech and Chong sequels. The city looks like a healthy economic hub with lots of restaurants, shops, and other commerce.

But what do the statistics look like?

First, Colorado’s pot sales have hit a new high (pardon the pun). In September, recreational marijuana sales exceeded those of medical marijuana. This implies that customers who previously bought products on the black market are now going through legal venues, buying products from legitimate vendors. While sales are much higher, it does not appear that the use of marijuana among teens has increased.

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Second, crime rates have fallen. According to government sources the murder rate in Denver fell 42.1% in the first six months of legalization (this is compared to the same period the year before). Major crimes against property have fallen 11.5% and violent crime is down about 2%.

Third, the state of Colorado is making and saving money. As opposed to spending more resources to combat crimes involving marijuana, the Colorado Center on Law and Policy estimated the state would save between $12 million and $40 million as a result of legalization. As of June, the state collected some $4.7 million just in sales tax on marijuana. As of mid-July, the state boasted $25.3 million in taxes on pot. This number is expected to reach $60 to $70 million by the end of the fiscal year.

Opponents of broad drug legalization claim that such policies would mean increased crime, more drug addicts, a drain on state budgets, and more overdose deaths. The question of “how many addicts” and “how many deaths” is empirical. We can’t know beforehand how many addicts would exist in a world of legalized marijuana (or other drugs for that matter) or how many overdoses would occur every year. However, there is very good reason to believe that legalizing drugs would actually lower the likelihood of overdose. Such theories have seen empirical validation in a variety of studies, including recent research published by the Journal of the American Medical Association. The researchers found that overdose deaths in states with some form of legalized marijuana saw a 25% reduction in overdose deaths from other drugs.

What is the appropriate drug policy? It is important when analyzing programs to look at the facts. Does policy X achieve goals Y and Z? It may be the case that legalization works to combat issues like overdose and crime better than does outright prohibition. Without a doubt, current drug policies have largely failed to achieve their goals. When the DEA started its operations in 1973, they employed about 2,700 personnel with a budget of $74.9 million. By 2011, the DEA employed 10,000 people and maintained an annual budget of over $2 billion. Despite these efforts, overdose deaths, drug-related crime, and addiction rates have increased over the past 40 years.

It is clear that states are starting to consider the costs and benefits of other policies related to drugs. It’s high time the country as a whole does the same.


Administration Continues to Stonewall on Obamacare Exchange Enrollment

information-freedom-200x200Back in May, the U.S. Department of Health and Humans Services (HHS) suddenly stopped issuing monthly reports on enrollment in Obamacare’s health-insurance exchanges. The administration had used these reports to ramp up the cheer-leading for Obamacare’s “successful” recruitment of 8.1 million people by the end of the first open-enrollment period on March 31 (or, actually, sometime in mid-April due to omnipresent technical glitches).

In a report subsequently issued for another purpose, HHS (perhaps unwittingly) disclosed that only 2.3 million people were enrolled in private insurance via an Obamacare exchange. The other 8 million of the 10.3 million now considered enrolled are in the category of charity care called Medicaid.

On Halloween, HHS issued a report that looks exactly like the reports that it published through May 1. So, one might reasonably expect that if the administration could produce a report on May 1 that announced enrollment as of March 31, then the next report that it issued on October 31 could announce the numbers enrolled as of September 30.

No such luck.

The Halloween report covers sign-ups through June 30. Further, unlike the previous reports, it does not disclose data that HHS uniquely possesses—actual enrollment numbers reported by the Obamacare exchanges. Instead, it simply recycles surveys of estimates of the decrease in the number of uninsured Americans produced by Gallup-Healthways and non-HHS government agencies.

To be clear: Neither private polling firms nor other government agencies possesses the enrollment figures reported from the Obamacare exchanges. Only HHS has those data. And yet HHS continues to bury those data.

Such stonewalling can only serve to jeopardize claims about Obamacare’s “success”.

* * *

For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

The Malvinas versus Argentina

map-falkland-islandsI hope someone has the cheek to send Argentine President Cristina Kirchner a copy of the Statistical Yearbook 2014 published by the Falkland Islands Government—preferably without giving too many hints of their identity, if they want to avoid serious trouble. Regardless of what one thinks about the sovereignty issue, few documents in recent memory are more humiliating for Buenos Aires.

In 1982, of course, Argentina and the United Kingdom went to war over the Malvinas (Falkland Islands), an archipelago in the South Atlantic held by the Brits since the 19th century and to which Argentina has a long-standing claim. At the time, there was little more than sheep farming. Now the islands’ three thousand Kelpers boast a per capita GDP of $122,000, not far behind that of Luxemburg, the richest country. If we take oil and gas exploration out of the equation, its per capita GDP equals that of Japan. What a contrast with Argentina, now in a recession, whose per capita GDP is just over $11,000 (about $18,000 in purchasing power parity terms).

Lo and behold, the Malvinas’ success has come about thanks to private enterprise, property rights and commerce, while Argentina’s failure has resulted from the severe dose of statism inflicted by Kirchner. The government of the Malvinas represents only 12 percent of the value “added” to the islands’ economy (if one must accept the fact that the government can add value to an economy); private enterprise in everything from commercial fishing to organic agriculture, transportation and retail services, and hydrocarbon exploration has done the rest. This, in a territory where after the war the Falkland Islands Company sold the sheep farms it controlled to the government!

In Argentina, by contrast, the Kirchner government has gone from absorbing 27 percent of the wealth produced by its citizens every year to 46 percent. It has engaged in a frenzy of nationalizations, including the private pensions that constituted the basis of the nation’s savings, and overtaxed the most productive segments of the economy. The only private wealth that has grown in terms comparable to those of the Malvinas is that of President Kirchner herself—by a factor of ten.

While private enterprise has been active in hydrocarbon exploration in the Malvinas, in Argentina the authorities nationalized YPF, the main oil and gas producer (an affiliate of Spain’s Repsol) in 2012. Through price controls, they ruined the industry, which has suffered from undercapitalization and production deficits. Buenos Aires even tried to prevent oil exploration in the Malvinas by making it a criminal offense for energy companies to drill near the islands. While oil majors such as British Petroleum and Chevron kept away, others disregarded the threats. Which is why Premier Oil, Falkland Oil & Gas, Edison, Noble, Borders & Southern and others have been trying to get their hands on the oil believed to be lying under the sea bed surrounding the Malvinas. Some has been found, and Premier Oil is the closest to production.

If Argentina is ever to persuade the Malvinas folks that they will be better off becoming Argentineans, it will need to start by looking at what those tiny islands have done for themselves.

A word of caution. The problem with wealth creation is that even the government that makes it possible by removing obstacles will eventually be tempted to get its hands on it. The Falkland Islands Government is already talking about a 26 percent corporate tax on future oil production. It sounds as if the Kirchner spirit may be spreading across the South Atlantic...