John Locke’s 1690 “Two treatises on government” enumerated humanity’s fundamental rights as life, liberty and property, a formulation which was picked up by the First Continental Congress of 1774. Thomas Jefferson, no expert on economics and heavily influenced by dodgy French philosophers, changed it in the Declaration of Independence to “Life, Liberty and the Pursuit of Happiness.” We are still suffering for his economic illiteracy.
Locke’s “life, liberty and property” set the task for government of establishing ground rules by which the economic game was played, without giving it the right to engineer favored outcomes. Jefferson’s formulation changed the game; the pursuit of happiness, let alone happiness itself, is an outcome not a ground rule, and ever since that time the U.S. government has felt itself entitled to put its thumb on the scales and engineer the outcomes the political class desires. The high tariffs of the nineteenth century, various expansionary wars against Mexico and the Native Americans, which were begun without any great provocation but ended in adding huge territories to the United States, the New Deal, which attempted to rescue the U.S. economy from depression by government fiat and the huge subsidies to agriculture and scientific research were all attempts to secure desired outcomes without any great regard as to the economic or political principles by which such outcomes are attained.
To return to the 21st Century, there have been a number of instances in recent years in which Jefferson’s conception of government’s proper activities has triumphed at the expense of Locke’s and of good policy. The most egregious is the collapse of the Doha Round of trade talks, and their supposed replacement by a spaghetti of bilateral trade agreements.
Doha and the World Trade Organization were a quintessential attempt to govern by means of process; the organization for promoting free trade was set up, a series of meetings was arranged at which liberalizing proposals were made by one party or another, and the hope was that some kind of agreement could be reached before the President’s “fast track authority” expired in June 2007 and treaties became subject to renegotiation by a recalcitrant Congress. Each round of talks had some stated objectives, of areas that it was hoped would be liberalized by the round, but only the process was predetermined. Under the General Agreement on Tariffs and Trade from 1948 and the WTO from 1994, tariffs throughout the world have been lowered dramatically, resulting in a revival of world trade to its pre-1914 levels and since 1980 a surge in world economic growth that has missed only the heavily protectionist continents of Africa and Latin America.
The alternative policy now to be pursued by the United States, bilateral trade agreements, is far more results-oriented. Countries with which trade agreements are to be negotiated are chosen on foreign policy grounds, not economic grounds, and the contents of such trade agreements are determined by a political balance between the wish to favor a particular country and the strength of the lobbies resisting imports of that country’s products.
Thus the U.S.-Australia Free Trade Agreement retains quantitative quotas on Australian beef exports to the United States. The U.S. –Central America free trade agreement retains tight restrictions on sugar imports to the United States, with a quota for Central America that replaces only 1.2% of U.S. sugar production in the first year and a heavy tariff remaining on above-quota imports.
Not only does this spaghetti of agreements impose major costs on businesses doing business in several countries (particularly as it is matched by an equivalent spaghetti of bilateral agreements with other major economies) but it also does little to free up trade, mostly diverting trade from low cost producers to higher cost producers with which the United States has an important political relationship. The process of negotiating FTAs is free-form; the results are politically predetermined.
There are a number of reasons why all-out free trade, with no tariff or non-tariff barriers of any kind, is probably not desirable – for one thing, it’s not clear that a 10% tariff is any more economically distorting than a 10% sales tax or income tax, and government has to be financed somehow. Furthermore, in modern conditions, it’s not clear that David Ricardo’s Doctrine of Comparative Advantage remains valid when the Indian software writers to whom you outsource your standardized coding can learn from their work and take over the rest of your business which you’d kept at home. Nevertheless, when there are no worldwide pressures for freer trade, it’s clear from 1930s experience that subsidies, non-tariff barriers and special politically-motivated deals multiply, to the great detriment of world prosperity as a whole. The Doha trade negotiations, the process, were thus far more valuable than any outcome of freer trade that might eventually have emerged from them.
The U.S. government’s budget process is also highly results-oriented, more so than in other countries. In the United Kingdom, for example, the Budget is presented annually in a formal statement, debated over a 2-3 month period, and signed into law, the overall spending totals being monitored closely by the Chancellor of the Exchequer, representing a government with a secure Parliamentary majority. Budgets differ from government to government and century to century – from time to time, as under Tony Blair and Gordon Brown since 1997, a government is elected with a mandate to increase spending on public services — but the budget process, little changed since the 1820s, allows the Executive to maintain overall control of the outcome.
In the United States, the Executive does not control Congress. Instead each House committee traditionally prepared budgets for spending in its area, with the Executive having very little input into the process. From 1921, coherent budgets were prepared by the Executive, and from 1974 a House Budget Committee has attempted to sort out the process, but there has always been a very high level of local “pork-barrel” spending compared to other countries. The overall budget process is merely a servant of the result, which is to fund the spending that powerful Congressmen want, without regard to the consequences. If the President and Congress are of opposite parties, or if Congress itself alternates between the two parties, the natural antagonisms of party warfare provide a check on waste. However when, as in the 1960s and today, one party controls all three branches of government and has done so for a considerable period, there are essentially no controls and spending escalates more rapidly than anybody really wants.
A rigid British-style process, in which the Executive proposed a Budget, Congress voted on a total level of spending (which the President might or might not veto) and individual items were then forced to fit within that total, would put the process first and except when there was a manifest public demand for profligacy, would automatically keep spending under control.
A third example of results being valued over process in the U.S. political system was the Kelo vs. New London Supreme Court decision last year, which allowed state and local governments to seize private properties if local economic development goals would benefit by doing so. Since the desired development in New London was a shopping center, the decision represented par excellence a preference for a Jeffersonian pursuit of happiness through shopping over the Lockean property rights of the homeowners concerned.
Finally, there’s the Enron bankruptcy, and the prosecutions that have resulted from it. When bankruptcy occurred, the political system wanted to make an example of the Enron executives who had been so foolish, and the auditors who had assisted them. The result was a series of trials in which genuine fraud (by Andrew Fastow) received only a moderate punishment while the auditors, Arthur Andersen, were driven out of business, peripheral figures, such as Jamie Olis of Dynegy, were given prison sentences far in excess of what was reasonable for their errors and the top two figures, Kenneth Lay and Jeff Skilling, were convicted not for fraud, nor for bankruptcy, but for attempting to sound optimistic to the market as the company crashed around them.
As a result, the risks of top corporate management have hugely increased, because if things go wrong you can spend the rest of your life in jail. Of course, your stock options may make you as rich as Croesus if they don’t go wrong, so you may still take the job. However shareholders suffer, because they have to overpay management, the system as a whole suffers, being made more risky for all the participants and business ethics suffer, since if failure lands you in a lengthy prison sentence you might as well ensure success by outright robbery. Once again the desired result, a spectacular conviction of the public figures responsible for a large bankruptcy, was allowed to take precedence over the process, a system that punishes only genuine fraudsters, with sentences approximately proportional to their guilt.
There are many other equivalent examples – in foreign policy, for instance, it is by no means clear that U.S. or Israeli interests have benefited by choosing the “result” of crushing Hezbollah over the “process” of respecting the borders of the independent non-hostile state of Lebanon.
The overall principle is clear. By trying to pursue directly political goals which are thought to produce “happiness” among the electorate, the government destroys the processes by which property rights are preserved, tariffs are imposed at a low and consistent level, without favoritism between countries and industries, public money is spent wisely and thriftily and businessmen are encouraged to take honest business risks and avoid fraud.
The economic costs of this are immense but mostly hidden. Trade barriers are likely to drift up in the next few years, invisibly sapping world economic growth. A federal budget that is $296 billion in deficit at the top of an economic boom is bound to cause trouble in the next recession. The “Las Vegas” anything-goes approach to business management will produce numerous unexpected collapses once interest rates rise to normal levels. Property rights that are vulnerable to outsiders with political influence will produce only individual, hidden losses but may cause a loss of confidence in the system that is infinitely more damaging than the losses themselves.
Gee, thanks, TJ. “Happiness” isn’t all it’s cracked up to be.
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(The Bear’s Lair is a weekly column that is intended to appear each Monday, an appropriately gloomy day of the week. Its rationale is that the proportion of “sell” recommendations put out by Wall Street houses remains far below that of “buy” recommendations. Accordingly, investors have an excess of positive information and very little negative information. The column thus takes the ursine view of life and the market, in the hope that it may be usefully different from what investors see elsewhere.)