Posts Tagged ‘government regulations’

Social Security: Welfare or Earned?

March 28, 2011

In 2010 President Obama’s Deficit Commission (ODC) announced some findings regarding, among other areas, Social Security. The result of all this political brain power are proposals to raise the full retirement age (again), raise the income subject to taxation (again), raise the minimum benefit amount (again), add (more) means testing, lower the cost of living adjustment (by changing how it is calculated) and enact a variety of bureaucratic administrative changes. Their combined efforts amount to little more than rough tweaking and kicking the SSA can down the road another 50 years. So they say. Given the obvious failure of the 1983 Greenspan Social Security Commission whose “solutions” didn’t even last 30 years it is highly unlikely that the ODC proposals will make it that far if they even see the legal light of day.

Missing from the political discussions of Social Security (SSA) is any description of the of actual program versus the rhetoric used to describe the program. Rhetoric from opponents of SSA claim individuals could obtain higher retirement benefits if they invested their own social security taxes and that SSA bankrupts the young to support the old. Rhetoric from supporters of SSA claim it is good social policy with descriptions ranging from insurance against senior poverty to wholly earned benefits. Neither side provides even a basic understanding of the actual SSA program. Instead they are content with tossing rhetorical fire bombs left and right.

To examine today’s SSA program in operation it is useful to determine how initial benefits payments related to the SSA taxes paid in to the system over a theoretical working career. If taxes paid amounted to less than benefits received then the recipient would be receiving some portion of welfare in their SSA benefits. If taxes paid were more than the benefits received then those individuals would, in effect, be subsidizing the benefits of the welfare group. One could certainly consider that subsidy as an ongoing “tax” paid by those, usually higher income, workers.

Chart #1 depicts the initial maximum SSA benefit provided in the year of retirement versus the level of benefit provided by the assumed SSA Earned Annuity. The earned annuity is a fixed payment lasting for 22 years and is dependent on the amount of SSA taxes paid. The higher the tax paid the higher the initial annuity. Thus the annuity beginning in 2007 is much higher than the annuity in 1987. And so were the SSA taxes. The initial SSA benefit assumes the maximum benefit payout in the year of retirement. While there was a flattening of this curve from 2002-2004 it otherwise is rising each year.

The key point in this chart is the difference between the two curves. From 1987 through about 1998 the maximum SSA benefit was far above the assumed earned annuity. The difference represents a welfare payment to the benefit recipient. In later years, starting about 2000 the earned annuity rose above the initial maximum SSA benefit. The difference this time represents earned income that is taxed away.

SSA Benefits vs Earned Annuity

Initial Maximum Benefit at Year of Retirement

Using data from the SSA website I created a spreadsheet that links maximum tax payments with maximum SSA benefits over the period 1937 through 2010. For its own reasons the SSA website assumes a 40 year working career. Thus someone retiring at the end of 1976 who worked the full 40 years and who paid in the maximum amount of taxation each year would have paid a total of $6,962 in SSA taxes. Their employer would have paid the same amount. Upon retirement at the end of 1976 this worker would be eligible to receive an SSA benefit of $3,427 per year. In just under two years this worker would have received back every dime they paid in SSA taxes. And this assumes the worker retires with reduced benefits at age 62.

That same worker retiring at 65 would receive $4,368 per year if a man and $4,546 per year if a woman. [There is a period from 1962 through 1977 when women aged 65 received a larger maximum SSA payment than men. It was 1962 through 1974 for women aged 62.] A woman retiring at 65 in 1976 would receive her entire SSA contributions back in just under 1 ½ years. A man would receive his back in just over 1 ½ years. But each would continue to receive those payments, along with inflation adjustments for the rest of their lives. Was that benefit earned or is it welfare?

Reasonable arguments regarding the earned versus welfare aspect of SSA benefits can be made on three grounds: (1) employer contributions are not included; (2) prospective earnings on the SSA contributions are not included; and, as always, (3) the situation is different now. Fair enough.

Employer Contributions: as a small business owner and employer, if I was not required to pay SSA taxes based on employee wages that money would not accrue to my employees. This is after all a tax on my status as an employer. If I had partners or utilized sub-contractors no SSA tax would be charged. Certainly some of that tax might find its way to the employees for competitive reasons but it is highly unlikely that all of it would accrue to them. More importantly that tax is no more the employee’s money than the income tax, property tax, unemployment tax or worker’s compensation tax. However, there is a substantial argument regarding the employer portion of SSA taxes. That money provides a revenue stream to the government be used for the other benefits (disability, spouse, etc.) currently provided by SSA.

Earnings on Contributions: this argument could turn either way depending on the investment return being assumed. It may or may not be sufficient to cover a retirees SSA benefits. There is a myth that individuals could have earned a far better return on their SSA tax than is implied by the benefits paid. Maybe, but not very likely. Consider that as long term retirement savings it is not reasonable to assume that individuals would be able to invest their SSA taxes in the stock market (or any other market). No rational person wants the government to do so and politics argues against letting individuals do so on their own behalf. If individual investors or markets temporarily failed it could result in a massive taxpayer cost for outright welfare support during retirement. (Politics would require a bailout whether I agree or not.) That would be a prime example of public risk versus private gain albeit on an individual basis. There is another alterative the Retirement Certificate of Deposit (RCD).

In order to estimate the earnings power of SSA taxes I assumed that individual employee SSA taxes earn the higher of 6% or the 10 year treasury bond rate and that all earnings be tax free. Accumulated contributions would be compounded annually and the rate would adjust annually depending on the then current 10 year treasury bond rate. Note that since 1968, 30 years had a 10 year treasury bond rate above 6%. This may seem rather conservative but then again, a conservative investment policy for retirement funds is wholly reasonable. As a example of how this might work we could assume all SSA taxes are held in a bank retirement certificate of deposit or RCD on behalf of each individual worker. Each year the bank accrues the current taxes and then pays the higher of 6% or the 10 year treasury bond interest rate on the total sum which is compounded annually. Note that a 6%, tax free, guaranteed rate of return provides good value compared to the 10% average historical stock market returns. Yes, government would be required to subsidize the interest rate as necessary to ensure the minimum 6% rate of return. Where might that money come from? From the employer portion of the SSA tax.

On this basis our worker who retired in 1976 after 40 years work, paying SSA tax at the maximum rate and receiving the aforementioned return on those taxes would accumulate a total of $14,439 of which $6,962 was actual taxes. At the maximum SSA benefit level of $3427 per year at age 62 the payback takes just under 4 ¼ years. At $5069 for women age 65 the payback takes just over 3 years 2 months. But the payments continue, with partial inflation adjustments for the rest of their lives. Since SSA uses a life expectancy of 22 years that means roughly 18-19 years of welfare payments for the 1976 retiree.

It’s Different Now: yes, actually it is different now but not all that much. It was earlier noted that the employer portion of SSA taxes is unlikely to accrue to the individual employee. Either because the employer would retain all or a portion of them or the government would utilize that revenue stream for other purposes. And, in all likelihood that’s exactly what would happen. So only the individual portion of SSA tax could be invested in a bank RCD on behalf of each individual while the employer portion of the tax would be retained by the government. It would be used for such purposes as: (a) subsidize the 6% retirement earnings as necessary; (b) provide for the disabled; (c) provide for non-working spouses or other individuals; and (d) pay existing retirees their benefits. Note that items (b), (c) and (d) are existing SSA programs. Good arguments can be made to shift all or some of those existing programs to general welfare as a more appropriate funding source but that’s another issue.

It is reasonable then to only look at the individual portion of SSA taxes versus benefits to determine how much welfare – if any – exists in the program today. An individual retiring at the end of 2009 (the first of the baby boomers) after working 40 years and who paid the maximum amount of SSA taxes would have paid in $115,800. If we assume the 6% RCD earnings scheme noted above the taxes plus earnings would amount to a combined total of $333,826. Continuing the 6% earnings scheme through retirement and assuming a life expectancy of 22 years that amount provides an annual annuity of $27,723. But only for 22 years. And no inflation adjustment either.

However, an individual with that work history who retires at age 62 at the end of 2009 would today be awarded an SSA benefit of only $21,228 per year. Thus today’s baby boomer retiree would be forgoing earned benefits of $6,495 per year (reduced by any future inflation adjustment). However, if that worker were married their spousal benefits would be $10,614 or $4,119 in net unearned – welfare – benefits. Of course that would be reduced by the work history and SSA taxes of the spouse.

Chart #2 is similar to Chart #1 except that it shows the SSA benefits as of the beginning of 2011 instead of the initial maximum at retirement. While the earned annuity curve has not changed the series of cost of living adjustments (COLA) has raised the SSA benefit level well above the annuity curve until the year 2004. Retirees from 2004 to the present who paid the maximum SSA tax and who could receive the earned annuity amount are actually receiving less from SSA than they would from the assumed annuity. More recent retirees are receiving considerably less. Again, this represents a tax on high earning retirees.

SSA Benefits vs Earned Annuity

Maximum SSA Benefits as of 2011 vs Earned Annuity

If instead this boomer retires at the end of 2009 at age 65 their SSA benefit would be $26,064 or $1,659 below their “earned” amount. Of course spousal benefits would raise the total accordingly well above the “earned” amount depending on the spouse’s work history. The significant point is that while SSA Welfare isn’t as substantial for boomers as it is for WWII’ers even today’s boomer retirees could receive major welfare payments (if married) in the guise of SSA benefits. Single retirees however, end up subsidizing others. So, yes it is different today but only in degree.

Millennials: How will it be tomorrow for today’s millennials? Well, the bottom line is that since 1999 high earners (if single) began receiving less in SSA benefits than they would by investing and annuitizing their own tax payments. This trend will only be exacerbated as full retirement age is increased, as income levels are raised and as the tax rate inevitably increases. The trend then is for the upper earner millennial to become more and more a subsidizer of  lower income earners. At some point in the future even the addition of spousal benefits may not shift a high earner into a welfare recipient. This can only be considered as a stealth tax on high earning millennials above the federal income tax and hidden from view by bureaucratic dictate.

What is important to take away from this exercise is that whatever the rhetoric, social security was clearly designed in the form of a massive Ponzi scheme that required an ever larger number of workers to support current retirees. When that quickly became impractical the tax rates and income levels were raised in lieu of additional workers. Indeed, were it not for those who die before receiving benefits or who die early after receiving benefits (thus cheating their families out of their tax payments) the SSA program would have long since imploded. Adding fiscal injury to monetary insult one Congress after another purchased votes by raising benefits, expanding eligibility, and adding inflation protections. Again the total cost as well as tax rates and income levels rose dramatically. From an original 1% tax on the first $3000 of wages in 1937 (over $45,000 in current dollars) the cost has risen twelve fold to a 6.2% tax on $106,800 (and rising) of wages. The worst of both worlds.

Regrettably as the 1983 Greenspan Social Security Commission did so does the Obama Deficit Commission. Both simply tweak the system and kick the SSA can down the road. There is no discussion of the inherent structural flaw of the SSA program. By continuing the dishonest assumption that SSA benefits are somehow fully “earned” workers (and non-workers) continue to expect to receive those benefits. Yet even today a high earner with a non-working spouse continues to receive unearned benefits especially as they live beyond the actuarial life span. A more honest explanation of the structural flaws in the program would provide a firm basis to propose more realistic and responsible long term solutions that might provide some financial security for individuals and their families without robbing their neighbors or their children. It’s time to trust the people with the truth.

My proposal is to vest individual SSA tax payments in an RCD investment vehicle with a minimum return and taxpayer guarantee. This provides a wealth creation mechanism for the working class and ensures that future Congresses cannot borrow and spend that money and that Wall Street will never get their hands on those funds. At the same time the employer portion can provide benefits for the non-working spouse, the disabled and those who exceed their actuarial life span as well as the minimum investment subsidy. However, some SSA programs such as disability should be transferred to general welfare.


Social Security: The 6% Solution *

March 27, 2011

* Or, How to Transform SSA into an Individual Retirement Plan

Late in 2010 President Obama’s Deficit Commission disgorged their budget recommendations. The complex and difficult work under the combined wisdom of these earnest, well regarded, leaders has resulted in a series of entitlement proposals that are significant for their disregard for physical laborers, all young people and every responsible individual. Not to have seized this opportunity to revamp a failed program is a feckless and cowardly insult to hard working, responsible individuals and is most egregious to young people. Choosing to raise the taxation level, institute means testing and bump out the full retirement age could not be a bigger insult to America’s responsible citizens. No, this is just another instance of kicking the entitlement can down the road just as did the 1983 Greenspan Commission on Social Security. It too failed to correct the long term entitlement program and so will these proposals.

Raising the taxation level will, under the current SSA benefit scheme merely result in larger benefits to the upper income retirees down the road. It only temporarily solves the current benefit issue and does so by creating a worse predicament in future years. Means testing seems viable but it ignores the current SSA rules that link tax payments to benefits. Further, to change the program after the fact, when upper income individuals have already paid in their full tax payments only to find their benefits arbitrarily reduced upon retirement is dishonest at best. It will achieve full disrepute not by means testing directly but by instead instituting an increased tax rate on upper income SSA benefits. The left hand will take what the right hand gives. And the always favorite scheme of bureaucratic desk warmers to bump out the retirement age, is so rife with discriminatory application one wonders how it can pass the ADA (American’s with Disability Act). Anyone who physically labors will pay a steep price in lost benefits and lost jobs as they approach their later years. Who will hire a 60 year old laborer?

I propose a “6% Solution” to the current Social Security Ponzi scheme. My proposal gives individuals control over their retirement funds and retirement age. It also provides a wealth creation scheme that protects their families in the event of early death or disability. It specifically avoids giving monies to Wall Street or to the government. It utilizes existing government guarantees to protect the individual accounts along with a new scheme to provide a minimum return on their retirement funds. At the same time it provides a secondary revenue stream to government to provide funds for current retirees, those who are disabled and to provide for the minimum return on the retirement accounts. That secondary revenue stream is simply the employer’s portion of the current social security tax.

My proposal will result in the “Individualization of Social Security”. This is not privatization with its Wall Street connotations. Individualization uses the existing banking system with its FDIC guarantees and is premised on typical bank Certificates of Deposit. In essence an individual’s monthly social security tax payments would be deposited in a Retirement Certificate of Deposit (RCD) in a bank of their choosing. This RCD would, to the bank, be the same as any other CD. The bank would use those funds to make loans to individuals and businesses. The RCD would receive the current FDIC protection ($250,000 at present). However, the RCD may not be cashed or used as collateral. It is strictly intended to provide retirement benefits.

The new minimum return scheme is to ensure that every individual is able to earn a minimum 6% return on their RCD. This is necessary because of the Federal Reserve’s repeated and ongoing action to maintain interest rates at levels that provide little or no interest income. The basic idea is that the bank will pay the RCD interest at the higher of 6% or the current 10 year treasury note rate. The government will guarantee the bank the difference between 6% and the current 10 year treasury note. This difference is currently about 3.35% owing to the Federal Reserve’s monetary policies. The money to provide this subsidy is obtained from the secondary revenue stream. Of course if the Federal Reserve would raise interest rates to more normal levels the subsidy would all but disappear.

There would need to be a transition of course for those who have been in the workforce for some time but who are still distant from retirement age. Such a transition could be accomplished by a transfer of the existing Treasury notes or notes in the social security trust fund to each individual according to their own individual work history. Each bank can redeem those treasury notes/notes for capital from the Federal Reserve. In this way the individual retirement CD accounts, the RCD’s, can be funded.

This not a perfect scheme and likely has serious flaws. However, it is an attempt to put each working individual in charge of their retirement. At the same time it removes government from direct responsibility while leaving government (e.g., taxpayers) liable to protect and guarantee the retirement accounts. By limiting the accounts to an RCD as opposed to stocks or bonds the taxpayer guarantee is likely to have limited exposure. There are three principal benefits to this scheme.

  1. charge each individual worker with responsibility for their own retirement by giving them direct ownership of their retirement account.
  2. remove the workers retirement funds from government control thus eliminating the resulting spending of those funds by the government and limiting government control over individuals retirement choices.
  3. ensure workers retirement funds are isolated from Wall Street and in exchange provide guaranteed minimum returns and security of the accounts.

Government Etiology (post #2 of 3)

February 14, 2010

The blog, The Conspiracy to Keep You Poor and Stupid by Donald Luskin, published a post titled, “A Marriage on the Rocks” written by Steven Hales. Mr. Hales and I have corresponded on this issue and he has given me permission to post our correspondence along with my comments. I have titled these posts as “Government Etiology” (the initial correspondence) followed by the “Government Regulation” post which combines my comments with Steven’s “A Marriage on the Rocks” article. 

In this initial correspondence Mr. Hale crafts a very cogent explanation of the rationale for the development of government and by extension, regulation. I offer my comments as to how the origination of our government differs from its current manifestation.

Government Etiology

Steven Hales:    If the main purpose of government is to provide a framework for the free exchange of goods, services and ideas, to provide for protection of property rights as well as protect the citizenry then you would say that government has already gone too far.  But what has driven it to this metaphorical cliff?  I would say that it is increasing complexity in our relations with each other (here I am referring to all relations from individuals to companies to government).  This necessitates a more nuanced or complex response from our government, something that is sorely lacking in our current administration and in the last administration because the nature of the increasing complexity is not well understood.  

RedSt8r:               First, I disagree with the premise that “increasing complexity in our relations with each other” drives the government regulatory bureaucracy. It is the other way around. Government complexity drives our relations. Regulators craft rules for our “free exchange of goods, services and ideas” and each year they add to those rules. I believe that is because once a set of rules are crafted what else would the regulators do? As carpenters hammer and saw, regulators craft rules and re-craft rules and craft rules for crafting rules.

Second, government is fundamentally incapable of “a nuanced or complex response” because they are incapable of crafting a rule to encompass nuance. No rule no response. 

Steven Hales:    To look at complexity let’s take a look at the business cycle and how government responds and has responded.  Since the business cycle exists and is subject to some unknown periodicity we have developed several responses to smooth out the ill effects of this cycle.  One of these tools is unemployment insurance.  Workers and employers contribute to an unemployment insurance fund which is then disbursed to those workers who lose their jobs and are searching for new ones.  Now this fund is used even when the business cycle is in a positive phase but its real benefit is to support aggregate demand in a general economic downturn.

RedSt8r:               Okay so far. 

 Steven Hales:   But you would say this is hardly a complexity more a mundane feature of economic activity present since antiquity.  But our current recessions are usually global in nature and have triggers that can arise in the most curious of places.  When, in 2007, the pricing of certain real estate financial instruments was not possible the mortgage market froze.  This was the beginning of the recession and its cause had barely been recognized.  Who would think that the relatively small sub-prime market would trigger a financial collapse?  This took place in an environment of lax regulation and direct government mandate of increased home ownership.  The problem wasn’t too much regulation but too little.  Government had deviated from its primary purposes.  Restoring regulation to its proper role is what we are now trying to accomplish.

RedSt8r:               It is an arguable proposition whether it was too little or too much regulation. One should differentiate between regulations (rules) and regulators (government officials charged with enforcing regulations). We have plenty of regulations but the enforcement was lacking. Many of us attribute that lack of enforcement to other government officials such as legislators and the Fed who actively proscribed the necessary enforcement. Government has indeed deviated from its primary purpose but that has been the case for at least two decades. Restoring regulations is incorrect. It should be restoring regulatory enforcement of regulations. Any restoration of regulatory enforcement will be met with fierce resistance from the regulated. 

Steven Hales:    The other problem is that the government had transferred market risk onto itself (implicitly through the GSEs) in the midst of an economic boom and ironically became the catalyst for the boom.  Risk transference is something the government should only undertake in an economic downturn.  The FED being the lender of last resort, deficit spending to spur private business activity are all tools of risk transfer when the private economy is risk averse.

RedSt8r:               Au contraire. Government should never be in the position of holding or receiving market risk. Government stepping in to contain the economic problems while simultaneously allowing market participants to fail and fail big is quite different from preventing private failure in the first instance.

Fed lending – quantitative easing or QE – is exactly the wrong prescription at almost any time. The Fed can create low interest rates to ease the cost of borrowing but this is vastly different from the Fed doing the lending directly. Transfer of risk to the government has paradoxically increased the risk to the taxpayer and created massive moral hazard to boot. The Fed should only be the “lender of last resort” when it steps in to prop up the banking system by providing costly liquidity and taking quality assets as security. This time around the Fed has provided cheap liquidity and taken the lowest quality assets. Even worse the Fed has stepped outside the normal bank arena to provide this liquidity and QE to all manner of financial purveyors. 

Steven Hales:    Today, this process of risk transference has exceeded its usefulness because it is becoming increasingly difficult to unwind this risk taking by government and in the process government has accelerated the claims on future output by engaging in unwise and ill planned investments.  Here I am referring to the Bush and Obama stimulus bills.  Ex-Tarp these bills were pure deficit spending totaling some $1.5 trillion.  The debt service of this spending is itself financed and the problem increases through compounding.  This process will claim an increasing share of federal revenues.

RedSt8r:               While not accepting the validity of government risk transfer I concur that the deficit spending has not cured anything but has made a bad situation seriously worse. 

Steven Hales:    Because the nature of the recession was little understood in its increasing complexity and the government response has likely compounded the problem and extended the length of the recession but lessened its depth, it is unlikely that government will now respond correctly and it is left to the private economy to grow our way out of the mess.  But economic growth will have to be extraordinary to be effective.

RedSt8r:               Here I disagree that the “nature of the recession was little understood”. But I agree that the private economy must “grow our way out of the mess”. After all it is the private sector that supports and feeds the public sector not the other way around.

My disagreement regarding the understanding of the nature of the recession is conditioned on the response of the government. Unfortunately I believe their response was crafted not to contain the situation but to support the financial entities with which government was most familiar with and most comfortable with. Yes, this is a conspiracy theory of sorts. But look at their response. Bailing out the favored financial institutions (but not all) was done ad hoc as the first response. There was and still is no public recognition that the issue was always solvency and not liquidity. But to accept solvency as the issue puts the favored financial institutions in a position of bankruptcy and our regulators will not do this. 

Steven Hales:    How might we persuade government to now get out of the way and focus on its proper role?  First we must recognize that the size of government today is not just a result of ideological driven takings but really a response to uncertainty. And that uncertainty derives from complexity of relations.  We are part of a global economy where whole towns can be devastated overnight; where financial capital flows to where returns are greatest.  National currencies are buffeted about by global trade; where the gains from trade are blurred by protectionist rhetoric; where political movements can arise from an on-air rant; where recessions can be caused by falsely enabling the poorest of the aspirational. 

RedSt8r:               We cannot persuade government to get out of the way. We can only force them. I vehemently disagree with the idea that government complexity is a benign outcome of supposed complex activity. Government complexity is a conscious design intent to ensure its survival and growth. None of the listed examples – towns devastated overnight, currency movement, capital flows, etc. – are new. All have been present for decades. On-air rants are the technological equivalent of pamphleteers and rabble rousers. Again, not new. 

Steven Hales:    Government must not be moved to over-regulate or to improperly reduce uncertainty it must move carefully and deliberately it must cease the destructive rhetoric directed at our best and brightest.  It must not be swayed by interest groups that little understand what they promote.  It must embrace the possible, the productive, the most prudent use of its revenues.  It must respond to complexity not by old responses of ossified regulation or mandates on behavior.  It must above all be smart.  It must understand that innovation cannot be directed or taxed into existence that it arises where there are incentives.  For it will only be through innovation and technology that many of the problems we see today will be solved.  If we could promote an innovation focused government we would have a government that increased incentives not for pet projects or social goals but pure innovation that reduces the work required to get something done.  But this only arises when government first protects property rights, fosters an environment of free exchange and protects it citizens.  Is this too much to ask?

RedSt8r:               Government will continue to craft rules and regulators will continue to enforce the rules. It cannot be “smart” as you suggest for the simple reason that today government is akin to any physical organism. It will grow (tax, regulate) to survive and thrive. Government has no interest in innovation only its own survival and gain. Asking government to simplify itself is like asking a human to eat less. Might be helpful, beneficial even, but not going to happen. Force is required. Not necessarily physical force. It could be force by ballot or by quiet revolution. But force it must be.

Government Regulation (post #1 of 3)

February 14, 2010

The following post appeared on the blog: The Conspiracy to Keep You Poor and Stupid  by Donald Luskin

This was a guest post by Steven Hales: entitled, “A Marriage on the Rocks”. I have corresponded with Mr. Hales regarding this post and my comments are from that correspondence. Please note that the preceding post (Government Etiology) and comments are the prelude to this article. Steven’s article is a humorous look at the rationale for the development of government. 

My title is:  Government Regulation

Steven Hales:           “A Marriage on the Rocks”

Steven Hales:    Thanks for the response.  Let me address the first of several issues.  In a humorous manner, I hope.  What came first the relation or the law?  I posit that the relation came first or there would be no need for the law.  Disagreements and conflict form the basis of much of our legal code so it was the relation or the behavior that had to come first not the law.   If we can agree on that point we can agree that government arose from relations and as those relations grew more complex more conflicts arose and the law responded and grew more complex.  They are part of a symbiotic evolutionary process. 

RedSt8r:               I appreciate the humor. Obviously the chicken came first. In a more serious vein early government was the codification of the rules of kings albeit with great leavenings of common sense. What is called, “Common Law”. So far so good, I agree with you the relation came first. It is in the last part of the paragraph where I challenge the order. There is no rational conflict or relation that requires government to regulate smoking, ingestion of trans fats or any of a hundred thousand (hundred million?) little regulations strewn throughout government.

I posit that when government achieves a critical mass, which I suggest happened in the 1930’s in the US, it then becomes a self-sufficient organism that does not exist to adjudicate private relations but to ensure its own survival, growth and reproduction. There is the illusion of regulating private relations but it is a chimera to hide the survival mechanism of the governmental organism. 

Steven Hales:    I view all inventions as technology, ala Brian Arthur and other “new institutionalist” economists.  Government and the law are inventions and by definition are technologies.  They have all the elements of a technology.  They are assembled from other technologies and something new is created.  The last great evolution of government came in the 18th Century.  It was assembled from a variety of other ideas or technologies.  Liberty and Equality, Self Government, Representative Democracy and our greatest innovation, the separation of powers.  At about the same time as our evolutionary experiment began another great invention was born, Capitalism.  It was born out of the Industrialization of production and together our experiment in governing and capitalism became intertwined into a single system of production and governance. 

RedSt8r:               There’s nothing to argue here. However, I do believe the two experiments were actually one. That capitalism required limited government as presented by our well designed Representative Democracy and the reverse was equally true. A viable Representative Democracy required a privatized economic system, capitalism, to ensure its survival. Neither would succeed on its own. Often today, we seek to inculcate private economic rights as a prelude to democratic political rights. 

Steven Hales:    Shortly after the union of these great technologies a third invention was born, the corporation.  Not only did the organizing principles of the corporation extend to the production of goods but also to the government.  Our government began to look like a corporation with all the attendant complexities.  Like all transformative technologies it reached into every part of life.  This marriage of government and capitalism under a corporate governance structure is often in conflict and like all marriages each spouse, at times, wants a divorce.  Bad things are said but the marriage endures and grows stronger.  We see the current estranged spouse in the White House regularly throwing tantrums and hurling dishes in the direction of capitalism now symbolized by the corporation and its financiers, the evil bankers.  But this is just so much theater and the marriage will endure, it has to, each depends on the other.

RedSt8r:               Given that Thomas Jefferson was opposed to corporations I’m not so sure this was a unique technology to the US. And, given that a “Corporation” is truly a beast created by the law it may not fully fit your definition of “invention” or “technology”. But we can ignore all that. Yep, we got corporations and government seems to be organized like one. But then that organizational form was not original nor unique just useful. Is it not similar to a King and his council?

You may not have intended this meaning but the comment, “it reached into every part of life.” is exactly my point that government has long since ceased to be a partner and is now a master, a self-sufficient organism dominating our lives. 

Steven Hales:    Currently, our government is trying to get capitalism to do the dishes and take out the trash and like most stay at home spouses feels generally unappreciated.  It has also taken to comparing itself favorably to capitalism’s last spouse and is saying how good it is compared to that bitch and how messy she left the house and what a shamble the finances are, she was a spendthrift, blah, blah, blah.  It gets so bad that you have to tune her out.  What’s worse is that her sisters chime in from time to time to berate capitalism and give him a good talking to.  But like all dutiful spouses capitalism takes it and continues to support them.  

RedSt8r:               Yes, well put. Good humor here. I am a 37 year husband. 

Steven Hales:    My point here is not just humorous but informative when looking at the growth of government and the increasing complexity of our economic relations, they are intertwined and spring from a common heritage.   There is a dynamic tension between them but each needs the other to survive and thrive.

RedSt8r:               I regret my repetition but I don’t see government as intertwined with the private economy any longer.  It may have been at one time and indeed, surely was. Government was originally designed (in the US) to buttress and support the private economy and hence private relations. It no longer is the support but the controlling master abusing the power of law to effectively blackmail various (and shifting) sectors of the private economy to gain the financial support to continue its growth and ensure its survival. 

Steven Hales:    I’ll address some of your other points later.  But I want to know, what is your understanding of how the Federal Reserve operates?  Some of your comments indicate a misunderstanding, like the role of “lender of last resort.”  I am not being pedantic but I want our discussions to be in agreement on the facts.

RedSt8r:               What? You mean I can’t have my own facts? Grumble, grumble. What fun is that?

RedSt8r:               I understand the Fed as the institution responsible for the monetary policy of the US. It adjusts the money supply and by issuing or purchasing securities from its member banks. The two interest rates it controls, Fed Funds rate (rate paid on inter-bank lending) and the Discount rate (rate at which the Fed loans to member banks.) There are two other primary issues (I peeked at Wikipedia):  regulating financial institutions and protecting the financial system.

The phrase “lender of last resort” is of course colloquial but I understand it as meaning the Fed will print money (used to be literal paper money but today its electronic) and “loan” it to a member bank that is in need of liquidity. The Discount rate applies and if the bank is in trouble the Fed may require high quality assets as collateral. All of this is to minimize the moral hazard of the lending.

What the phrase does not mean is that the Fed will lend to investment banks, hedge funds, private equity, pension funds, industrial companies, and other non-bank financial institutions such as insurance companies. Ahem, not that they ever would mind you.