A Problem with the Social Contract

A lot of political philosophy rests on the idea that people come together under a social contract whereby they give up some of their freedom in order to form a government that looks after the common welfare. Libertarians and economists often hold the belief that people ought to have freedom of contract. That is, we shouldn't limit what terms people want to have in their own contracts because if they agree to it it we should presume it is for their own good.

One problem with applying this idea to the social contract is that a typical individual has very little say concerning the terms of the society in which he lives. We may be presented with a contract that requires the sacrifice of a lot of liberty without granting much in the way of benefits. Since living apart from society is such a difficult proposition, it is probably in the best interest of most people to consent to living under even the most dismal contract.

Compare our situation to that of a person who is set upon by an armed robber. If the thief offers you your life in exchange for all of your money, you should probably consent even though most people wouldn't really call it a beneficial agreement. The problem is that you don't have very much bargaining power.

Because the society we live in is so complex, the number of terms in our social contract is immense. Even if we don't like some of the terms, we generally have to consent to the whole because we have very little bargaining power. If a simple majority can continuously add terms to the contract we can eventually come to a point where the terms added due to lobbying from one interest group or another add up to a whole that takes a very significant portion of our freedom.

The fact is that whenever we add terms to the contract we limit everyone's freedom. If I consent to a new restriction in order to achieve some benefit, it isn't only my freedom that suffers. Freedom is stripped from all and benefits are distributed to a few.

For this reason I think it is prudent to have stricter standards for when we add things to the social contract. That is, we should hesitate before we raise taxes, criminalize behavior, or enforce civil regulations. What should our standard be?

I recently read a very interesting blog post that talked about how market failure should not be a sufficient condition for government intervention. Modern economic research has put a lot of effort into deciding when a free market will result an efficient outcome. Many people take this research and declare that whenever the market result is inefficient the government should step in. There are two problems with this: First, the existence of market failure by itself does not imply government success. In some cases we might be faced with problems that are inherently inefficient given the current state of society. Second, all government intervention comes at the cost of reduced freedom. Even if government intervention does increase efficiency, this benefit must be weighed against the loss of liberty.

As an example, consider the case of the market for narcotics. Let's suppose assume that the market is inefficient. Left to themselves, people will consume too many drugs because they are addictive and much of the harm is external (that is, consumption can harm people other than the user). But it should be obvious by now that the government is not doing a very good job of limiting either the supply or the demand for drugs. Plus, government intervention results in the growth of criminal gangs and the violence associated with them. It also results in a significant loss of liberty. This loss of liberty is reflected in two ways. Those who would use drugs responsibly are prevented from making that choice, and a lot of people are in prison for using or distributing them despite the law.

As a result of drug laws and countless other terms in our contract, the US has the highest incarceration rates in the world. (We have 5% of the world's population and 25% of the prisoners). We do have lower tax rates than most other countries, but not really by that much. (See this graph comparing our rates to other industrialized nations).

The fact is that even a "free" democratic society can become oppressive if the majority gradually keeps adding to the burden that individuals must live with. When we see a problem we can't do anything about by ourselves, government action is often the first thing that comes to mind. When a natural disaster hits, people hold the government responsible. When society faces an obesity "epidemic," people turn to the government.

Consider an interesting piece of research about soccer goalies. The best strategy for a goalkeeper to block a penalty kick is to remain in the center until they see where the ball is going. But most goalies commit to one side of the other because shots placed far enough to one side are impossible to block unless they pre-commit. The reason they commit is that they are more afraid of looking passive than jumping the wrong way.

People seem to be that way with regard to government as well. When there is doubt about the best way to approach a problem, law-makers and executives prefer to err on the side of doing something counterproductive. We don't trust each other to resolve our own problems as individuals, and we don't trust the market to work things out. So we get government involved without honestly answering the question of whether doing so is worth the cost.

Keeping all this in mind, I would like to develop a new standard for giving government new responsibilities, or adding new terms to the social contract. The standard should satisfy three principles:

1. There must be a problem that cannot be efficiently resolved by individuals interacting in a free market.
2. There must be compelling evidence that government can achieve a more efficient result.
3. The efficiency benefits must be weighed against the loss of liberty.

Basically, the default should be no government intervention unless we are sure we need it, that it is going to work, and that the benefits are great enough to justify restricting everyone's liberty. The third part is particularly difficult to quantify. How can we compare economic benefits to loss of liberty? Or, as many progressives argue, what if the proposed efficiency of government redistribution provides more "positive liberty" (i.e., economic opportunity) for the poor than it takes from the rich? These are questions for another day.

8: The Mormon Proposition

A few weeks ago I heard an interview on NPR with the producer of a new documentary entitled 8: The Mormon Proposition. The producer is a gay ex-Mormon, and his documentary criticizes the church’s role in passing the California constitutional amendment restricting marriage to a union between a man and a woman. However, he was adamant about his attempts to make a fair portrayal of the church and its involvement.

This afternoon Mercedes and I were downtown and decided to stop at the Tower Theater in Sugarhouse to see the movie. Regretfully, I must say that I was disappointed. The documentary was made in a way that will only widen the gap between those who believe in the doctrines of the church and those who accept the legitimacy of homosexual relationships. Although the material probably doesn’t include any outright untruths, members have a right to be disturbed by the movie’s portrayal of the church:

• It casts the church’s attempt to organize support for the proposition as a kind of dark conspiracy.
• It presents speculative aspects of church theology as if they were settled matters of doctrine.
• It shows intolerant and offensive anti-gay supporters of the proposition in a context that might lead some viewers to associate that attitude with the church.
• It talks about decades old instances of attempts to cure BYU students of homosexuality with shock therapy without giving the proper context (psychiatric treatments which were commonplace in the 60’s now seem barbaric).
• It repeatedly quotes people like state Senator Buttars who are well known for making insensitive remarks, and dismiss the church’s insistence that he is does not speak for the whole church.

In other words, the documentary is not a dispassionate investigation of the subject matter. To be honest I can kind of see where it is coming from. One telling moment comes when a gay man recalls the moment when he learned that the proposition had passed. He felt as if he had been done a great indignity, as if society had declared him to be a second class citizen. The film feels as if it were made by someone who felt a similar despair. It feels like the work of one who has been shamed and cast out and wants to return the favor. I would have preferred something a little more rational and a little less inflammatory, but that is not the state of the gay marriage debate in our society.

At this point I should explain my own position on the gay marriage issue. Basically, I think that both sides of the debate are trying to enforce their own moral views through the law, whereas I hold that the government should strive to remain neutral on issues of personal morality. (The government should, however, attempt reinforce civic virtue, which I define as the set of norms necessary to ensure that people don’t hurt each other and that they do bear their share of the burden of government.)

Marriage is an ancient institution centered around the need for raising children, since there are still biological obstacles to gay procreation I don’t really accept the argument that marriage is a right equally applicable to both gay and straight couples. I also don’t agree that government should withhold any rights on the basis that granting them will legitimize homosexuality and therefore undermine the family. Committed gay unions are a new and developing institution in our society. Those who feel that they need socially recognized institutions to achieve self-actualization should be free to try and develop their legitimacy. But they should not pretend that the existing concept of marriage can be seamlessly applied to their personal romance.

The reason people are worried that granting rights to gay couples will legitimize a practice they see as immoral is that both sides of the argument accept the premise that the government ought to reinforce their own views. If government wasn’t so paternalistic and moralistic in the first place, we wouldn’t have to worry about whether an attempt at neutrality would be perceived as a tacit approval of one side or the other. As it stands, it is impossible to find common ground because both sides see every shift in government involvement as an attack on (or affirmation of) their personal beliefs.

I understand if people want to facilitate the raising of children because I think modern societies undervalue child rearing. But government should not determine what is and what is not a legitimate relationship. That should be left to individuals and religious communities. People should not need a license from the state in order to marry, and the state should not subsidize couples that aren’t raising children. If we all expected the state to remain neutral on issues of personal morality, caustic debates such as the one over gay marriage would not be necessary.

Abortion Litigation Account

I have been a big proponent of using donations to fund government activities that are currently supported by tax dollars. Recently it was pointed out to me that the Utah legislature has actually tried this, with the Abortion Litigation Account. The account was first created in 1991 to give people a chance to contribute to legal battles Utah expected over its abortion laws. Once I started looking I was able to find mention of the account in the national news. (See this article in the NYT).

Several thousand dollars were donated to the fund but I am not sure whatever happened to it. Then last year the legislature reopened the account, and this year they passed another bill modifying it (HB 114).

The account hasn't been widely advertised. It isn't even on the internet and these days if something isn't on the internet it can barely be said to exist. But I finally tracked it down by calling the state Finance Division, who directed me to the Treasurer's office. There I learned that the account currently has about $1,300 in it and that I can donate by sending a check to their office with instructions about where to deposit it. I also learned that there are a number of other accounts the state has set up that accept private donations. They include a Quarter's for Christmas account, and one to help immobile seniors.

Clearly $1,300 won't go very far in funding a complex legal battle, and the discussion I had left me with the impression that it was quite unusual for the treasury to receive checks from private individuals.

Although I was happy to hear that the legislature has at least considered using private donations to fund such a controversial legal battle, the account falls far short of the potential I envision. The first problem is that the fund is obscure. There ought to be a dedicated website that lists all such funds and makes it easy for people to donate. The second problem is that the state will go ahead and defend the controversial laws with or without donations. So private citizens have no real motive to give any money, or spend any time fund raising.

The Patrick Henry Caucus and Immigration

A few days ago I had the chance to attend a picnic hosted by the Patrick Henry Caucus (PHC). The goal of the PHC, according to its website, is "to restore and uphold the sovereignty and rights of the individual States as guaranteed by the tenth amendment of the United States Constitution, which states, 'The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.'" They sponsored a number of bills during the last legislative session, including a bill giving the state the power to use eminent domain to seize federal land, a bill ostensibly opting Utah out of ObamaCare, and a bill limiting federal control over guns manufactured and used exclusively in this state.

Although I think some of the sponsored bills were flawed, I wholeheartedly agree with the basic purpose of the PHC. That is why I was a bit surprised to hear at the picnic that one of the main goals of the caucus during the next legislative session will be to pass an immigration law similar to what has been passed in Arizona. This came straight from the mouths of Rep. Carl Wimmer and Rep. Chris Herrod, two of the most active members of the PHC.

The discussion prompted me to do some thinking on the subject and I would like to share two of my conclusions:

• The Patrick Henry Caucus should not focus on immigration because it is not an area where the federal government has usurped power that ought to belong to states or individuals.

• It is important to strengthen enforcement of immigration law, but it is more important to reform immigration law.

First, immigration is a federal issue. Article I, section 8 of the constitution states that "Congress shall have power to...establish an uniform Rule of Naturalization..." It seems odd that a group dedicated to restoring constitutional limits to the federal government should choose to focus on an issue where the constitution clearly grants authority to congress.

My guess as to why they are doing it is simply that the people who make up the PHC are not solely interested in upholding the constitution. They have other interests in common and immigration happens to be one of them. They also probably think that immigration is an issue that resonates with a lot of people in the state so addressing it will encourage more people to support them. I think it distracts them from their primary purpose. If they want to focus on immigration in their capacity as legislators that is fine, but don't distract the PHC from its main objectives.

Second, it will do us more good to reform immigration law than it will to spend more money enforcing the current laws. At the picnic, Rep. Herrod made two basic points that justify the need to enforce immigration law:

• Allowing illegal immigration results in unfair treatment of those who want to come to the US legally from across the world, and benefits immigrants primarily from Hispanic countries.

• Illegal immigration is particularly harmful to people who have to compete for jobs with unskilled laborers.

Both arguments are misguided. Rep. Herrod's first point is in response to those who argue that we should turn a blind eye to illegal immigration because we should have compassion. He argues that rather than show compassion for the one specific group of people who tend to make up most of the illegal immigrants we should show compassion for all of the others who are in line to come here legally. He says that while only 8% of the worlds population are Hispanic, they make up over 80% of the illegal immigrants. I haven't verified these numbers but I will grant that they are correct. But so what?

Compare his argument to the justification for affirmative action. Hispanics, and Mexicans in particular, have an advantage over other potential immigrants in coming illegally because we share a long remote border with Mexico. Since it is easier for these immigrants to get here, they are more likely to make it here illegally than those from Indonesia or the Ukraine. This is similar to the situation in the University of California school system. People of Asian origin seem to have a natural advantage over other applicants when it comes to grades and test scores. In 1996, California voters banned the use of affirmative action in admissions with the result that more Asians (and fewer whites, blacks and Hispanics) were accepted to University of California schools. A similar thing happened when Ivy league schools stopped limiting the number of Jews admitted. So does compassion for blacks mean we should limit the number of Asians in college?

In the case of university admissions, limiting the number of applicants from one group actually does help others get into school but that doesn't mean we should do it. Immigration quotas have the same drawbacks as race-based admissions, but keeping Mexicans out doesn't even help Ukrainians or Africans and it has nothing to do with reversing a history of discrimination. There are natural reasons why more Hispanics want to come to the US, and immigration quotas are designed to put a thumb on the scale in order to produce a more "desirable" mix of immigrants. But there is no reason to think that compassion for one group of "undesirable" immigrants should compel us to more strictly enforce limitations on another.

A related point made by Mr. Herrod is that if too many immigrants come from one place it will undermine the American "melting pot." They won't learn English and they will be able to import their culture without assimilating. I agree that people should learn English before becoming full citizens because I think it is necessary to fully engage in the political process. But justifying the enforcement of quotas in order to create a "more diverse" (read: less Hispanic) mix of immigrants seems too much like cultural engineering. What it means to be American should not be restricted to cultural norms from originating in Northern Europe. America is a nation based on freedom, individual rights, opportunity and hard work. There is no basis for arguing that Hispanic immigrants lack these core values.

Another reason to be skeptical of the "melting pot" argument is that we have no reason to believe that we can actually keep Hispanic immigrants out. The level of immigration is driven more by economic factors than by the effort we put into enforcing our quotas. But enforcing quotas almost certainly makes it difficult for those who come outside the system to assimilate.

The next point that I would like to address is that we owe it to native-born workers to enforce limits on immigration because they are the ones harmed by the influx of unskilled labor. It is popular these days to show empathy for "blue-collar", "main street" America, but it is wrong to place the blame for economic hardship on immigrants (legal or illegal). The fact is that immigrants aren't a drag on the economy, they don't take our jobs, they don't reduce our wages, and they don't cause higher crime rates. Rather, they complement the native work force, increase demand, and create new economic development. The problem (as discussed in the article I just linked to) is that the increased opportunities are spread out across the whole economy and are difficult for the average person to see.

The advantages of immigration are similar to those of free trade. They result in lower prices and a more specialized, productive workforce. Increase demand results in the creation of more jobs, and (as I mentioned in my last post) the unemployment rate has much more to do with the rate of creation of new jobs than it does with the rate of job loss. Trying to prevent job loss results in an inefficient economy propped up by government restrictions and subsidies. Encouraging natural job growth results in a dynamic economy. But since the pain associated with a lost job occupies a bigger place in our collective consciousness, we tend to hold on to some backwards ideas about how to improve economic conditions.

To sum it all up, there is no reason to believe that our current system of quotas is either moral or economically efficient. Allowing market forces and individual ambition to determine who comes to live and work in the United States would show more compassion and more economic wisdom than spending more resources to enforce the current restrictions in the name of upholding the rule of law. Of course we all agree that the rule of law is important, but the fact is that the current system does more harm than good. Our system of quotas hurts the economy, it makes life extremely difficult both for those who wait in line to get here legally and for those who come outside the law, it is difficult to justify morally, and the difficulty in enforcing it actually undermines respect for the law in general.

Therefore, we should eliminate the quotas and create a system where anyone who can find productive work is permitted to live here legally as a temporary worker (along with their family). Any resident who wants to devote the time and effort to learning English and the basics of the American civil system should be allowed the opportunity to become a citizen. Let this be the land of opportunity.

Cut Jobs or Lower Wages?

During the recent recession, many businesses and government entities have had to cut back spending in order to balance their budgets. This often leads to the difficult decision of whether to cut jobs or lower wages. So which one is better?

In my recent post on foreign currency exchange I stated that difficulty in reducing wages leads to more painful times during an economic downturn. This implies that 1) the economy would be better off if we could lower wages during a recession, but that 2) doing so isn't easy. Why?

Let's start with the first question. Why would reducing wages be better than cutting jobs? Because if everyone is cutting jobs, then those who get fired will have a difficult time finding work elsewhere and many will end up unemployed. People who are unemployed aren't very productive, and they don't buy as much stuff. This reduces demand for consumer goods and puts further strain on the economy. People whose wages are reduced will buy less stuff, too, but the change in their spending habits won't be nearly as severe as with those who lose their job altogether.

So why is it difficult to lower wages? There are several reasons. One reason is that if employers try to make across the board cuts their best employees might leave. If you cut wages you also might hurt morale in the workplace. If jobs are cut the people who suffer no longer work there. If wages are cut the pain is not hidden. Employees can't really be sure if the employer is cutting wages because of reduced demand or just to make bigger profits and they might assume the worst. Finally, many people are locked into contracts or have unions that protect their pay and benefits. So it is often easier for employers to get rid of employees who don't have an extended contract or union representation than to try and tinker with the terms of those who do. All these factors and more lead to the phenomenon economists call "sticky wages." The inefficient response to labor demand is one of the major causes of high unemployment. (Check out these figures comparing jobs and wages in during the current recession)

Another reason that high wages leads to unemployment is that it makes it more difficult to create new jobs during a recession. If you keep all your old employees at their old wages, you can't lower your average production costs much by hiring new people. The marginal cost of producing even more than you did during the boom might be lower if you can hire new people at reduced wages but most companies aren't looking to increase capacity. Research suggests that the slowdown in hiring, not an increase in layoffs, is the real reason unemployment goes up during a recession. But both are related to sticky wages.

In a recession as painful as the one we are in now, employers probably have an easier time cutting wages than usual. Since so many people have been laid off, most people will probably understand that the alternative is losing their job. And it is unlikely that the most qualified employees will quit because of the cut when they will have a hard time finding a job anywhere else. (Here is an article from the WSJ talking about how some employers are starting to cut wages, and how for many the cuts actually bring a sense of relief) Still, cutting wages is the exception not the rule.

Still, during a recession it is better for the economy if governments and businesses would reduce wages rather than cut jobs. Governments will often find it difficult to do either since government workers are more heavily unionized. Consider the recent article in the NYT about how NYC must fire many of their best teachers because collective bargaining agreements protect the most senior employees. Yet another reason to be skeptical of unions.

Who Should Pay for the BP Oil Spill?

The recent oil spill in the Gulf of Mexico is turning out to be a monumental disaster with no end in sight. BP (formerly British Petroleum) has promised to pay for the cost of cleanup and all other "legitimate claims", but as you may know, federal law limits their liability to $75 million. I want to talk a little bit about why this is, and what we can do to improve the situation.

The United States has an emergency fund to deal with oil spills appropriately called the Oil Spill Liability Trust Fund. According to an agreement reached after the Exxon Valdez incident, an excise tax of $0.08 per barrel is collected from producers and importers of oil to cover the costs of a disaster like this. The existence of this prepaid tax was supposed to justify the $75 million liability limit. Currently there is between $1.5 billion and $2 billion in the fund. For comparison, recall that Exxon spent about $2 billion in cleanup costs after the Valdez spill and another $2 billion on claims from fisherman and others hurt by the spill.

The fund and the liability limit are part of the Oil Spill Act of 1990. The idea was not a bad one in theory. If we charge a tax upfront we can have resources ready to respond quickly to a disaster, but we need some post-spill liability to avoid the moral hazard of companies taking unnecessary risks because they know the government will cover the costs of a disaster.

Unfortunately it appears as if the solution was woefully inadequate. 20 years after the passage of the bill, the fund is still only half as much as the cost of the Exxon Valdez spill. And its not like there haven't been any smaller spills in the meantime. One of the purposes of the act was to insure that under capitalized companies wouldn't cause a disaster and then go bankrupt leaving us with the bill. But now the fund designed to prevent that from happening could easily go bankrupt after a single incident. Plus, the $75 million dollar liability limit is laughable when compared to the real costs of an oil spill of this magnitude. At the rate we're going, total costs of the BP spill could exceed $10 billion.

Keep in mind that over the last four years, BP has made over $80 billion in profit. So even a $10 billion spill wont sink the company. But one thing is certain: $75 million in liability isn't enough to make a big oil company adopt a conservative approach to offshore drilling. Recent reports have indicated that several days before the explosion they decided to save some cash by installing a less expensive cement casing in the well. This may or may not have contributed to the explosion, but it certainly tells us something of how worried they are about $75 million in liability.

The funny thing is that despite legal limits to its liability, BP will probably end up paying much more than $75 million. Exxon paid its billions in an even murkier legal situation because it was worried about massive backlash from customers and congress. BP has spent millions on a campaign to rebrand itself as an environmentally friendly company (check out their website, for example) and they are well aware that some in congress have already proposed retroactively changing the liability limit to $10 billion.

The bottom line is that after the Exxon Valdez incident we came up with a neat plan to this kind of disaster and it didn't work. BP didn't operate safely enough, and the question of who should pay is still just as murky. So what is my solution? Private insurance.

As our experience with the Oil Spill Liability Trust Fund (and numerous other government insurance funds) shows, the government is not very good at pricing risks. So we should simply require that people who produce or import oil buy insurance on the private market. The insurance they get should have a liability limit of at least $10 billion. Companies that operate safely should be able to work out reasonable premiums in a competitive insurance market. Because insurance with such high limits can get pretty expensive, they will have to work pretty hard to show insurance companies that they aren't taking any unnecessary risks.

We should also be prepared to accept that the cost of this insurance will be reflected in gas prices. The fact is that we all profit from cheap gas and so in a sense we should all be responsible for part of the costs of using oil to fuel our economy.

Would an oil spill of this magnitude cause a huge shock to the insurance industry? Not likely. Consider the fact that insurance companies paid out over $40 billion after the Sep. 11 attacks. Hurricane Katrina caused $50 billion in damage. In fact, over the last 30 years the US has had an average of one natural disaster every 3 months that resulted in more than $1 billion in damages.

The insurance industry can cover oil spills. They can also monitor oil companies to make sure they are operating safely. The decision after the Exxon Valdez incident to rely on excise taxes and liability limits has only compounded the current disaster. Let's not make the same mistake again.