Laissez Faire: A Vacation from Overbearing Authorities

The recent economic turmoil that besieged the minds and homes of American citizens has been met with persistent, remedial efforts from the government and Federal Reserve. A freeze on floating rates and mandated extensions for those with mortgage troubles exemplifies the government's attempt to ease financial volatility as well as provide social aid. The Federal Reserve has also played a significant role in economic intervention by implementing protective policy for Wall Street institutions like Bear Stearns and steadily slashing interest points. Due to global growth and economic problems, America is witnessing a unique change in government involvement that manifests itself in a variety of markets, whether it is housing or finance. For example, the Federal Reserve's official authorization clearly states that its objective is to analyze important market data and govern monetary policy to influence healthy, economic growth. However, just recently, the Federal Reserve employed resources to rescue a private institution from bankruptcy and justified it as a necessary action to protect the economy. Additionally, there has been a rise in preemptive ordinances geared towards directly softening potential woes in the stock market. Though the ability to intervene when needed may sound appealing, it establishes a dangerous precedent. An organization that is allowed to decide whether or not their actions are justified tends to become more creative or aggressive with its policies. The non-laissez faire philosophy raises many questions and I have decided to explore the topic further by engaging other bloggers discussing relevant subjects. The first post I decided to comment on is written by a blogger named Mike Shedlock who operates Global Economic Trends. Though the writer does not supply an "about me," the extensive quality of his work establishes him as an intelligent and informed economist. In his post he discusses the Federal Reserve's recent plan to swap debt with banks and loan institutions. The second post I decided to comment on is by Tim Duy, an adjunct professor in economics at the University of Oregon who runs the blog Economist's View. Professor Duy comments generally on government regulation and reveals his personal beliefs on the subject. He does not engage in a deep investigation, but the post provides interesting grounds for discussion. I submitted my comments to each blog and posted a copy below.


"Fed Is Not King Midas" Comment (comments link located on Shedlock's page):


I want to thank you for the time and effort required to update your blog frequently. You conduct very informative entries that raise critical points and I specifically enjoyed your brief post on the Federal Reserve's debt-swap plan. Since the beginning of the year, the Federal Reserve has been under incredible pressure from financial institutions, both banks and equity firms, to assert monetary policy that will alleviate liabilities and strengthen markets. Unfortunately, it appears that the decisions of a government system entrusted to insure a stable and growing economy sans bias are influenced by the outside community. Most notably, the Federal Reserve continuously reduced interest rates throughout the last few months in response to a plummeting stock market. Though the cuts prevented further drops and even instigated several large, upward surges, it created significant risk to the long term health of America's economy. Therefore, I believe that after the first couple rate reductions, Bernanke respond solely from pressures to protect investors. However, even he realized that he was not going to be able to cut interest rates forever. This led Bernanke to address the large amount of bad debt floating around the financial realm and to devise the swap plan mentioned in your post. I think this is grounds for discussing the extent of the Federal Reserve's power and the precedent established from expanding their area of operations. In principle, if the Federal Reserve is acting ONLY in the best interest of the economy, then there would be no need for skepticism. The problem arises when Bernanke tries to do too much. First, the apparent urgency of the situation most likely "forced" him to rush out with an idea that was not in the best benefit of the economy. Second, it appears Bernanke is incapable of withdrawing and letting the market correct itself. I firmly believe that he overacted and the debt-swap was a futile effort in devising an alternative plan to aid the financial sector. Do you believe this to be true? What is your stance on the Federal Reserve's repetitive rate cuts? Do you think the economy may best be benefited by a more laissez faire approach to allow for market corrections? In your post you said that debt-swap instigates a "rise in abuse and mistrust." Obviously, those in the financial sector are happy this occurred. How much influence do you think they had in bringing about this plan?


"The Deregulation Ideology among Economists" Comment:


The concept of regulation is of paramount significance and I was very happy to stumble across this post. I agree whole heartedly that government regulation should be dramatically limited in certain markets while expanded in others, the financial sector most notably. A great example of government interference that does little to streamline efficiency is satellite radio. As I am sure you have heard, XM and SIRIUS have been laboring away to pass a merger that has been stalled, first by the government, and now by the FCC (due to monopoly of the market). You stated that "monopoly was your main worry." And I also am wary of companies that are in complete control of very important market sectors. However, I think the taboo of monopolies tends to hurt companies like XM and SIRIUS radio that are incapable of competing against each other due to high costs. Granted, I am not a forecaster, but I do not believe that a merger between these two entities would increase consumer dead-weight loss. First, by merging, the company should be capable of offering lower prices and expanding the consumer base. Second, if the company did raise prices, customers are capable of resigning from their service as it is easily substituted. Digressing slightly, static government regulation presents only a small part of current involvement in economic matters. Because your post did not mention it, I was interested in your opinion towards the government's and Federal Reserve's recent trend in economic first aid. Though not specifically regulation, it follows the discussion of separation between government control and economic developments. Considering the Federal Reserve's debt exchanges, the multiple interest rate cuts, and the direct involvement in helping a private institution from becoming bankrupt, how do you feel about the Federal Reserve's active roll in the economy lately? Do you think they have done more harm than good? As an extreme case, what would you think if the Federal Reserve temporarily suspended its monetary policy to allow for market correction?

Economic Analysis: Law and Marijuana

The primary focus of this blog is economic and financial synergy. However, in today's discourse I would like to deviate from the usual objective to remind readers that economics harbors broad applications. Though market trends and unemployment rates are important, more interesting questions are often overlooked. Given the right data, a wide variety of social phenomena can be analyzed to unveil deeper understandings of culture and common practice. For example, the author of Freakonomics, Steven D. Levitt, explores the rationality behind drug dealers living with their mothers and provides a description of a world typically misunderstood. He reveals the creative and insightful contributions that economic logic has to offer, a rare accomplishment outside the cubicles of slide-rulers and supply-demand charts.

Like the living habits of criminals, marijuana laws are not often discussed in economic terms, even though many pro-decriminalization arguments stem from cost-benefit and game theory analysis. The most prevalent example condemns the prohibition as a quantifiable drain on resources. The National Organization to Reform Marijuana Laws (NORML) provides studies that show "the societal costs of propagandizing against marijuana and marijuana law reform, funding anti-marijuana 'science', interdicting marijuana, eradicating domestically grown marijuana and industrial hemp, law enforcement, prosecuting and incarcerating marijuana smokers costs U.S. taxpayers in excess of $12 billion annually." Upon deeper investigation, a lot of these expenditures are questionable. For example, approximately 90% of marijuana related arrests are credited to personal use (refer to the left graph for the numbers of arrests). A large portion of tax payer's money is utilized to process these detentions with little to no social benefit. There are more pressing matters than the brief imprisonment of a cannabis user. Drug trafficking for example. Additionally, Jeffery A. Miron, a Harvard economist, demonstrates that tax revenues of up to $6.4 billion can be obtained if marijuana was treated like tobacco and alcohol. The opportunity cost alone begs the question: are there more efficient allocations for prohibition expenditures? Miron's report claims marijuana decriminalization would create such a significant impact on available funds that it could single handily cover the entire cost of anti-terrorist port security as well as provide the resources to secure lost soviet nukes.

Furthermore, basic economic theory implies that dead-weight loss would be eliminated. Overt operations, in contrast to black markets, streamline supply and demand, and therefore reduce prices. Consumers can either save the excess cash or spend it on alternative items. Either way, the American economy would realize a surge in its gross domestic product, not only from the addition of a billion dollar crop, but also from the reallocation of consumer funds.

However, to understand why decriminalization is truly the best the solution, one has to examine the futility of the opponent's position. Those in favor of federal marijuana laws argue that legalization would raise consumption, increase the ill effects of use, make it more accessible to adolescents, create a rise in motor vehicle accidents, send mixed singles to citizens, and influence the migration to harder drugs. In essence, the social cost of decriminalizing marijuana would manifest itself through diminished productivity, specifically in the nation's youth and the health of citizens. The flaw in this dispute arises from the already widespread use and accessibility of cannabis. I personally know several parents, one a successful lawyer, who indulge in habitual, though not daily, use. Statistics from the National Institute on Drug Abuse also indicate that approximately half of 12th graders have tried marijuana while close to 25% use it monthly (refer to right graph).

With such widespread use and accessibility, what should the government do? Conventional wisdom and simple game theory mechanics make the solution painfully obvious. In the real world, the struggle between government and those for decriminalization is a complex, dynamic game of many players. However, basic generalizations can be made that greatly simplify the analysis. First, the population of smokers and nonsmokers for decriminalization can be aggregated into one player (called player one) while the government and those against decriminalization can be aggregated into another (called player two). Members who do not fit the extremes can be discarded since they do not have a significant effect on payoffs*. Second, since marijuana users have demonstrated consistent consumption, even under the scrutiny of legal action, it is safe to assume that this trend will not be deterred by any future government action. The government, on the other hand, can either choose to legalize marijuana or continue to enforce federal marijuana law. Note that the choice of player two will determine the payoff of player one. These simplifications reduce the game into a static, one player scenario.

If the government continues to enforce marijuana law, they will obtain the "alleged**" payoff of preventing diminished productivity, zero, minus the loss of resources discussed in paragraph two. On the other hand, if the government chooses to decriminalize marijuana, the payoff would be the increase in available resources minus the small decrease in productivity. Given these two options, it is apparent that both players benefit from decriminalization.

Notes:

*It is assumed that those not falling under either extremes will not effect payoffs because they will a) not change the choice of player one and b) not effect the numerical values of player two's payoffs. Technically, they can be grouped with either player without significance.

**The term alleged is employed because the already widespread use of marijuana and its accessibility make the calculable effects of legalization uncertain. For simplification, we will assume the loss from productivity will be minuscule due to the above reasons.

Final notes: No payoff is attributed for morality. It is assumed that if cigarettes and alcohol are legal, the government's view of marijuana is similar. This is based on the definition that marijuana is not a hardcore drug.

This game is a gross oversimplification of the real situation. It provides insight as to which of the two choices benefits the government, but excludes the complication of actually implementing the decision. The most efficient way to transition from a prohibition to a decriminalized state is another discussion entirely. However, the preceding analysis should exemplify the universal practicality of economic logic and the rational approach it can provide towards social subjects.