A Libertarian Perspective on "Too Big to Fail"

As the government continues to “bailout” failing corporations such as General Motors, Chrysler, American Investment Group (AIG), and a host of other financial institutions, the “too big to fail principle” has been cited as the primary justification for these rescue packages. This is a utilitarian principle that implies that the costs of “allowing” these corporations to fail outweigh the benefits; that is, if they fail others will fail and unemployment will rise. Although most economists seem to accept this utilitarian justification, no one has offered any explanation of how these corporations got “too big to fail.” Let’s explore two alternative explanations. The free market explanation is that corporations get “big” because they offer higher quality products and/or services at a lower cost than their rivals. These natural monopolies get “big” because they defeat their competition. In the absence of competition these monopolies raise prices and earn windfall profits. But natural monopolies are usually short-lived because other corporations can see their success, copy their strategies and/or improve upon those strategies. This process of weeding out the “unfit” (inefficient) competitors and inspiring competitors that are more “fit” (efficient) is called “creative destruction.” Unfortunately, there are other ways for corporations to “destroy” their competition. The second way to “get big” is to raise the cost of competing in a market by artificially raising the cost of others entering the competition. The easiest way for “big” corporations to stifle competition from smaller, more innovative companies is by lobbying government officials to raise the cost of competing by imposing costly regulations. These artificial monopolies can maintain their stature, regardless of their actual “fitness.” In fact, most artificial monopolies are downright inept: U.S. Postal Service, Public Schools, Public Utilities, etc. Now, how did AIG (American International Group) get “too big to fail?” Did it “take-over” its competitors because it was more “fit” or because it was more adept at lobbying government? The basic problem with the “too big to fail principle," is that if a corporation is “too big to fail” in the eyes of the government, it can take risks that other smaller, risk-sensitive corporations cannot. This leads to the proliferation of large, inefficient corporations that are protected from failure. Then, these maladapted corporations proceed to takeover over smaller, more efficient corporations. In short, the “too big to fail principle” tends to undermine “creative destruction.” Libertarians argue that when governments artificially prop up obviously inefficient corporations that take irrational risks, and reward incompetent executives with bonus pay, they also drive good corporations out of business. Would you rather invest in, work for, or buy from an inefficient corporation that is “too big to fail;” or invest in, work for, or buy from an efficient corporation that will probably be driven out of business by an inefficient corporation that is “too big to fail?” If you owned a smaller, more innovative, and more efficient competitor would you rather continue to compete with a corporation that is “too big to fail,” or agree to a lucrative takeover offer? The libertarian view on the “too big to fail principle” is that it undermines “creative destruction,” and leads to endless cycles of future government bailouts. But more than that it gives rise to an enormously destructive corollary the “too small to succeed principle.”

Nadya Suleman's Octuplets: An Exercise in Moral Hazard

We libertarians rely heavily on the linkage between the concepts of “liberty” and “personal responsibility.” The underlying assumption is that our lives are the product of risk-management. Sometimes our lives are shaped by our own decisions and sometimes by others. Libertarians argue that within the bounds of legality, individuals must be allowed to reap the benefits of “good risk-taking decisions” and/or pay the costs for “bad risk-taking decisions.” But in the real world, we often rescue one another from the painful consequences of our bad decisions under the guidance of morality. Unfortunately, when we exercise beneficence under these circumstances, we encourage future risk-taking on the part of the beneficiary and other aspiring future risk-takers. Economists call this predictable incentive pattern “moral hazard.” Nadya Suleman’s Octuplets provide a valuable case study on how government programs, charitable organizations, and a doting mother can lead to an unfathonable degree of morally hazardous behavior. Because of confidentiality laws, we don’t know all of the details, but here’s what I’ve been able to gather. Nadya is a 33 year-old, unemployed single mother. Before the octuplets were born she already had six children via two separate vitro fertilization procedures. On average IVF yields live births about 30% of the time and costs about $15,000 per cycle. Most “live births” require more than one cycle. In order to increase the odds of having a “live birth,” clinics often insert multiple embryos into the uterus, which can lead to multiple pre-mature births. Premature births require the services of neonatal intensive care units (NICUs), which cost on average about $475,000 per child. Although clinics do not pay NICU costs, the American Fertility Society recommends the insertion of no more than 2-3 embryos at a time. However, desperate mothers with limited financial resources often request more than two embryos to avoid multiple IVF cycles. Inefficient clinics often insert multiple embryos to cover up their inefficiency and/or increase their published “live birth rate” Nadya’s doctor apparently inserted 6 embryos for those two initial multiple birth pregnancies, and for the cycle that yielded the octuplets (which allegedly included 2 sets of twins). So who paid for the IVF and NICU costs of the first two pregnancies, and who will pay for the octuplets? Private insurance companies rarely cover IVF treatments but are required by law to cover NICU costs. They usually limit that exposure to $1 million. Nadya is unemployed so forget about that! If uninsured, Medicaid (and a raft of other state assistance programs) usually covers most of these costs. Again, we don’t know who paid the medical costs for those first two IVF and NICU services, but we do know that she now receives Social Security Disability Payments for three of those children (one is autistic) and that she collects $480 in food stamps. We also know that Nadya also owes $50,000 in student loans. Her mother Angela has been trying to financially support Nadya and her six children. But Nadya’s home, which is owned by Angela, is currently $23,000 behind in mortgage payments and under foreclosure by the bank. The family has filed for bankruptcy. Given the uncertainties surrounding the Nadya’s ability to care for these 14 children, it is not clear if or when Child Protective Services will allow the octuplets to leave the NICU, or where they will live. “Angels in Waiting” a charitable group of nurses offered free 24 hour-a-day assistance (worth $130,000. a month) for all 14 kids, which would have avoided action by Child Protective Services. But self-reliant Nadya refused that offer. So how will she pay for all of this? Back in 1999, Nadya apparently suffered a back injury at work and has filed for permanent disability. She is also planning to take out more student loans so she can return to graduate school at Cal State Fullerton to finish her degree in counseling, while her mother continues to provide free care for her 14 children under six years old. Nadya also hopes land a lucrative T.V. offer and/or book deal. So what can a lifelong libertarian say about all of this? Absolutely nothing!

Positive and Negative Rights

In the United States there is a strong moral tradition that favors rights-based discourse over public policy. Given that this tradition is usually invoked without much philosophical clarity, let’s take a closer look. First of all, rights-based claims imply duties imposed upon others. There are no rights without corresponding duties. Failure to fulfill one’s duty constitutes a rights violation. Libertarians differentiate between two classes of right-based claims. If you claim a positive right, you are implying that another individual or community has a duty to expend time, energy, and/or resources on your behalf. For example, if you have an unqualified positive right to vote, but are unable to get to the polling place, then someone else must have a duty to pick you up at your house, bring you to the polling place, and then bring you home. Positive rights raise a number of puzzles. Suppose you are “able” to get to the polls, but are “unwilling” to expend your own time, energy, and/or resources to get to there. How might that affect the duties of others? Hence, if you invoke positive rights, you must specify how much of your own, time, effort and resources will be expended before a duty upon others is imposed. In short, there is always a grayish area between “able” and “willing.” If you live a half-mile away and are “physically able” to walk to the polling place, but are unwilling to do it, does the duty on the part of others automatically kick in? If so, then how does one decide exactly whose duty it is to drive you to the polling place, and how much of their time, effort, and/or resources are morally required to fulfill that duty. If you claim a negative right, then you are merely imposing a duty on the part of others to not interfere with your own efforts to act on your own behalf. If you have a negative right to vote, it implies a duty on the part of others to not interfere with your quest to get yourself to the polling place. Obviously, if I tried to forcefully prevent you from voting by either physically restraining you or by threatening you, then that would clearly invade your negative right to vote. That’s why poll taxes are widely regarded as rights violations. (Interestingly, no one questions whether the U.S government’s failure to declare Election Day a national holiday constitutes a voting rights violation.) Generally speaking, we are more likely to claim a positive right when we believe that we really need something than when we merely want something. Most of us are willing to accept the fact that the distribution of at least some of the good things in life are best left to the free market, while at least some things ought to made available to us through the good will of others, as a matter of duty. Americans do not have a positive right to own a Mercedes, ocean front property in Florida, or a Harvard education. But they do have a negative right to pursue those things without outside governmental interference. Finally, there is one more dimension to rights-based claims; namely, “How will that positive or negative right be monitored and enforced? If you have a positive or negative legal right, then that right is monitored and enforced by government. If you have a moral right, then compliance will be enforced by a moral community alone. Sometimes the duties that support rights are sufficiently supported by morality and sometimes legality is necessary. That’s why our most important rights are legally enforced. Libertarians argue that there are no positive rights, only negative rights.

Is There a "Positive Right" to Health Care?

The “Right to Health Care” will be one of the mantras of the forthcoming debate over health care reform. Let’s explore that mantra in light of my previous blog. Obviously, we must address several issues. Do we have a right to health care? If so, who has a duty to fulfill that right? Is the right to health care a positive or a negative right? If it is a positive right, then who has the duty to provide it, and at what cost? And, is this positive right a legal right or a moral right? There are several options. Many argue based on the Hippocratic Oath that under “certain circumstances” health care providers have a duty to provide health care to others. But what are those “certain circumstances?” Well, one might argue that the "duty to provide" kicks in when a patient “needs” medical treatment but is “unable” to afford it. However, recall that the line between “unable” and “unwilling” is murky at best. Many young healthy Americans are “able” to purchase health insurance, but are “unwilling” make the economic sacrifices necessary to pay the premiums. (Forego buying that new car or new house while still in college!) If a health care provider has a duty to provide health care, does fulfilling that duty imply providing it for free or at a discount rate? If providers of health care do not have a duty to provide health care, then what about other third parties such as relatives, friends, employers, private insurance companies, and/or government? If it is a third party, which party and how much are they obligated to pay those second party providers? My mother-in-law is a cancer survivor. Hoping to prevent the return of cancer, her physician prescribed a drug called Aromasin. The drug costs about $10. per day. Interestingly, this drug is usually (if not always) prescribed to elderly female cancer-surviving patients. The safety and effectiveness of all drugs is expressed in terms of a cost/benefit ratio. Although the drug's stated purpose is to prevent her cancer from recurring, the statistical evidence in support of this claim was impossible for to decipher and act upon. Now, if she has a positive right to this drug then who has a duty to provide it? Here are some of her options: Medicare, her co-insurance company (the private insurance that covers the Medicare gaps), my father-in-law, my wife and I, or a charitable organization? She is almost certainly “able” to pay that $10 a day, if she and my father-in-law were “willing” to cut back on other things such as: their other prescription drugs, food, clothing, shelter, or transportation. Given the obscure cost/benefit ratios presented, she decided that the benefits did not justify the costs. Fortunately, a non-governmental organization the Susan G. Komen Foundation decided to pay for it. Although, everyone is thankful for that charitable intervention, one might reasonably question the price of that drug. Given that almost all of the patients likely to “need” this drug will be about in approximately the same economic situation as my mother-in-law, one might accuse the providers of monopolistic price-gouging. But libertarians are more inclined to blame the government for those overly-generous twenty-year drug patents and prescription drug laws that protect them from competition. There is something disingenuous about arguing that someone has a positive right to health care, and that third-parties have a duty to provide that care, when the providers are do not have a duty to moderate their prices. So what’s the lesson here? Well, maybe that whole eighteenth-century moral framework based on interlocking rights and duties is not a very illuminating in the area for twenty-first century health care.

President Obama and the War in Afghanistan

President Obama inherited two ill-fated wars from President Bush. Today, he stands poised to exit Iraq “with honor” and refocus efforts on “winning” the war in Afghanistan. In both cases, Obama has stated that his decisions will be contingent upon the advice he receives from his generals. The underlying assumption here is that these wars are primarily “military events” and that these decisions require “military expertise.” Let’s explore these assumptions. First of all, military generals are loath to lose wars. The military code of honor does not condone losing, and therefore Obama should realize that his generals will not admit that the war cannot be "won" militarily, but they will request more time and more resources, especially troops. The underlying the military perspective is that war resembles a “game,” in fact the lexicon of war is rife with sports metaphors. (war strategy, war games, victory, defeat, etc.) At the root of this vision is the assumption that there are rules of war and that victory is marked by a decisive “final score.” Historically, that final score has always been tabulated based on military criteria: body counts, territorial control, etc. In the end, there is a ceremonial event where the “losers” surrender and sign a peace treaty that acknowledges the “winner.” Throughout human history military generals have always approached war from this “winner-loser” framework. However, this military interpretation is necessarily blind to the fact that war is ultimately a political event, and therefore, “winning” must relate to the realization of political goals. In my view, the wars in Iraq and Afghanistan have been waged based on the pursuit of vague, and unrealistic political goals. In fact, if you look closely at the stated goals of the Bush administration for Iraq you’ll note that they changed over time from eliminating weapons of mass destruction, to removing Saddam Hussein from power, to establishing a democracy, to restoring urban security. Now we can’t blame the military for meandering political goals. Given that the civil war between the three Iraqi religious factions has subsided (thanks to the implementation of a successful military strategy: "the surge"), the most recent political goal (urban security) appears to be within reach. Obama feels as though we can soon leave Iraq “with honor” and pursue victory "with honor" in Afghanistan. What might "victory with honor" in Afghanistan mean? Well... military victory would require a final score based on the realization of military goals, such as killing large numbers of Taliban soldiers (and their sons) and holding territory. In the end, we’d have that ceremony where a Taliban leader admits defeat and signs the proverbial peace treaty. If there is one, single, powerful leader that can sign that treaty I’m sure our politicians know where to find him. A political victory would be marked by the realization of our stated political goals for Afghanistan. What exactly are those goals? Well, again we have that notoriously vague notion of establishing a democracy in a culture that has been dominated by religious authoritarianism. The current “elected” government has been marked by corruption and ineptitude. The assumption is that all Afghanistan really needs to do is militarily defeat the Taliban and elect a new crop of honest and efficient political leaders. But democracy is not a cure-all for all of Afghanistan’s social, political, and economic woes. For centuries it has been one of the poorest nations on earth. Most of its income today is derived from the illegal drug trade and arms dealing. Education in Afghanistan is monopolized by religious leaders. Therefore, their schools do not produce doctors, lawyers, engineers, chemists, or biologists that go to work every day providing goods and services. When there is an election, voters will elect more religious leaders. Women will not go to school and they won’t vote. But they will produce more male children that will attend these religious schools and thus perpetuate the status quo. Therefore, as we move our troops into the Afghan wilderness, Americans must demand clarity in terms of both our military and political goals. What do we really hope to gain for Afghanistan (or the United States) by removing the Taliban from power? How will we know when the war is over? And, most importantly, who will sign the peace treaty? My modest view is that President Obama cannot expect our military generals to answer these questions for him.

The Imagination Recession

Although, the current Recession is very real, it is considerably more than an economic malaise. My view is that the root cause of that Economic Recession is our failure to exercise and implement our imaginations; call it the “Imaginary Recession.” Let me explain. Buyers and sellers make decisions based on quality and price. Businesses go bankrupt when they try to sell goods and services that buyers don’t buy. Over the past few years, entrepreneurs have survived in highly competitive markets, not by offering imaginative new products and services, but by recycling what has already been done. When those old ideas didn’t work, they simply borrowed money to stay afloat. Just look around at the kinds of stores that occupy strip malls. Sometimes over-priced, low quality products and services that compete in saturated markets survive (for a while) with the help of imaginative marketing campaigns, but in the long run the “chickens come home to roost.” The borrowing frenzy worked as long as financial institutions were willing and able to lend money to unimaginative entrepreneurs. The current economic recession began when those chickens showed up. Honestly, if you look objectively at most markets you’ll note a stark lack of imagination at the grass root level. How many franchised fast food restaurants can that market support? How many auto dealers, heartburn medications, gas stations, banks, coffee shops, hospitals, rock bands, sports stadiums, airports, or highways? Health care reform debate doesn’t focus on new ideas, but on whether we should copy health care systems in Canada, Great Britain, France, or Germany. Everyone is trying to “cash in” on old ideas. How long will we continue to burn oil, gas and coal before imaginative engineers come up with a whole new technology? As things stand, we have a long wait! One major reason why we still burn fossil fuels is that our public school systems do not produce imaginative scientists. In fact, I would argue that our educational system punishes creativity and rewards conformity. Why does almost every high school in the United States have a football stadium, but very few have a state-of-the-art science laboratory? Why not expend that same of time, energy, and resources promoting math and science? But in the final analysis, its government that bears most of the responsibility for stifling imagination, thwarting innovation, and upholding the status quo. It does it by stealthily imposing regulations that make it more difficult to compete in markets dominated by old ideas. That’s why it’s a lot easier for a restaurateur to open a Subway franchise than a family restaurant, easier to get a research grant to study heart surgery (or drug treatment) than for stem cell research. My jaded view is that if we expect to survive the Economic Recession we’ll have to minimize the government’s ability to protect the status quo from imagination and innovation.

Teenage Pregnancy

I read in the paper the other day that the birth rate among teens (15-19) is on the rise in 26 states. So what? Let’s start with some rather hard facts. First, Mother Nature has programmed us to reproduce, whether we like it or not. And as a species, we’re pretty good it; as evidenced by our absence on the “endangered species” list. Maybe we’re too good! Second, Mother Nature discourages procreative efforts that are both “too early” and “too late.” Biologically, “too early” might refer to prepubescent pregnancy, which is pretty much impossible apart from biotechnology (ova retrieval, IVF etc). It might also mean that “too early” might threaten the life (or health) of mother or child. “Too late,” biologically speaking, might relate to the age of the ova and possibly the sperm. We know that late procreators run a higher risk for genetic malformations, especially, Down syndrome. Human children require a certain amount of “care” in order to survive long enough to sustain the procreative cycle. Culturally speaking, procreating “too early” might mean that young couples or young single mothers that have children might not be able to “care” for the child. “Too late,” might refer to the probability that the old couple or single mother might be too old (or sick) to care for the child; or they might be so old that they may die before the child can survive his/her own. The key work here is “care.” In our current cultural environment, “care” implies more than the provision of basic food, clothing, and shelter. Today, parents are also expected to prepare their children to participate in our complex socioeconomic environment. In other words, “care” requires the provision of an education. In this regard, many “old couples” are much more financially secure than “young couples,” and therefore might be more likely to be able to afford to provide that education. Now, for a libertarian, the basic question is who is responsible for providing all of this “care” when the teenage procreative couple (or single mother) are unable to do it? Here are the possibilities: the male (or sperm donor); the female (or egg donor); the couple together; the immediate family of either the procreating male and/or female (grandparents, older brothers or sisters etc); or some third party (government or a charitable organization); or all of the above. Many (if not most) libertarians lay the onus of responsibility on the young couple, their parents, and/or other blood relatives. Unfortunately, our culture has evolved (or devolved) to the point where many families are now dysfunctional. At least some of that dysfunctionality can be blamed on perverse incentives wrought by government: welfare programs (which discourage work), public schools (which discourage learning), tax policies (which discourage marriage), minimum wage laws (which discourage low wage jobs), child labor laws (which discourage child labor and/or education), and health care policies (which discourage low wage jobs and maternal and neonatal health). So until we address the root causes of what makes teen pregnancies problematic, I really don’t know what to say!