Spontaneous Order behind Bars

State of Incarceration

by James E. Miller

A case study from David Skarbek of Duke University that analyzes how the Mexican Mafia developed its own form of governance within the Los Angeles county prison system recently appeared in the American Political Science Review. The following is a portion of the study's abstract:

How can people who lack access to effective government institutions establish property rights and facilitate exchange? The illegal narcotics trade in Los Angeles has flourished despite its inability to rely on state-based formal institutions of governance. An alternative system of governance has emerged from an unexpected source — behind bars. The Mexican Mafia prison gang can extort drug dealers on the street because they wield substantial control over inmates in the county jail system and because drug dealers anticipate future incarceration. The gang's ability to extract resources creates incentives for them to provide governance institutions that mitigate market failures among Hispanic drug-dealing street gangs, including enforcing deals, protecting property rights, and adjudicating disputes.

The formation of "spontaneous order" often comes as a surprise to those who see the state as the end-all to civilization. Spontaneous order was defined by Friedrich Hayek as

A spontaneous order is a system which has developed not through the central direction or patronage of one or a few individuals but through the unintended consequences of the decisions of myriad individuals each pursuing their own interests through voluntary exchange, cooperation, and trial and error.

Through the past 50 years, the Mexican Mafia has developed its own system of property rights, protection, and order within the Los Angeles prison system. This phenomenon began in 1956 as incarcerated Hispanics joined together for the sake of protection. Since the government, which initially locked up the inmates, failed to enforce adequate property rights, an internal system of government emerged as a response. From this establishment of basic protections arose a governing arrangement to both extract wealth over a given geographical area and provide law and order. The Mexican Mafia has essentially created a state within the confines of the United States and the state of California.

Like many states, some have risen to positions of more influence despite the egalitarian model of members having "only one official rank … one vote, and no one can give another member an order." No state would be complete without taxes and the Mexican Mafia doesn't disappoint. By utilizing a form of extortion by taxing profits from drug dealers with the threat of violence upon incarceration, the Mexican Mafia plays the role of enforcer even behind bars. This tax typically runs in the range of 10–30 percent of revenues. In exchange for tax revenues comes protection from fellow inmates if one is unlucky enough to be locked up. In order for the Mexican Mafia to maximize tax revenue from drug sales, this practice strives to mitigate actual violence.

A system of dispute arbitration has also developed to ensure peace. Skarbek points to an example in February of 1994 where representatives of the Mexican Mafia and the representatives of two street gangs known as 18th Street Gang and MS-13 met to resolve animosity stemming from one gang member killing another. After arbitration, peace was reached and a gang war averted for the sake of maintaining cash flow from drug dealing. This process was repeated to settle future conflicts. Drive-by shootings are even regulated by the Mexican Mafia as unauthorized shootings are punishable by death on incarceration.

Though it is based on the threat of coercion, the system of governance by which the Mexican Mafia engages in is quite entrepreneurial. In Man, Economy, and State, Murray Rothbard describes the actions of an entrepreneur in this way:

In his quest for profits he saw that certain factors were underpriced vis-à-vis their potential value products. By recognizing the discrepancy and doing something about it, he shifted factors of production (obviously nonspecific factors) from other productive processes to this one.

The Mexican Mafia engages in such a process by vetting each target's potential for incarceration. Those who have a good chance of being arrested and subsequently locked up are pressured into paying taxes. The same goes to those whose friends or family have a high probability of being jailed. Say what you will about this type of extortion, but the entrepreneurial spirit pops up in even the most unlikely of places.

So what should Austro-libertarians, who recognize the importance of property rights but are wary of coercion, take away from this phenomenon of emergent order? After all, the Mexican Mafia has established a semimonopoly of violence and coercion over a geographical area, meaning it has become its own state even within the jurisdiction of the United States and California government.

First, the demand for basic protection and property rights amidst the failure of public authorities provided the incentive and profit motive for inmates to form the Mexican Mafia and its practice of taxation. Had adequate protection been offered, such an underground system of law and order might not have emerged.

This takes us to the next point: the Mexican Mafia's taxation and protective model was indeed the result of spontaneous order. As Hayek outlined, the original members of the Mexican Mafia established this system to better their own interests.

Where Hayek's insight doesn't apply is the use of coercion by the Mexican Mafia. While emerging order as the result of purposeful action is something to be celebrated when it results in peaceful, voluntary cooperation, the violent tactics employed by the Mexican Mafia are a sight to abhor. As the nonaggression axiom — the foundation for Austro-libertarianism — shows, unjustified aggression toward one's property is morally reprehensible.

And this leads to the final point. The Mexican Mafia's system of governance can be attributed to the state's prohibition of narcotics. If the state regarded property rights as sacrosanct, there would be no laws against drugs and therefore far fewer people in prison. Without the threat of incarceration and subsequent assault, the Mexican Mafia would lose much of its ability to tax.

Like the system of private law and property that developed during the settlement of the American West, the Mexican Mafia's creation of governance is demonstrative of man's ability to develop protective services among the failures of existing governments. In the case of the "not-so-wild" American West, property protection and order were developed to ease the living conditions of settlers in the absence of any governmental structure. In the Mexican Mafia's case, protection and arbitration were not only responses to a lapse of government enforcement but also mechanisms for violent exploitation. The two instances, though similar as emerging orders, yielded two different outcomes: one that decreased the amount of violence through volunteerism and one that utilized state-like force to maintain control.

Though it's a shame the Mexican Mafia's system of law and order devolved into coercion, Skarbek's case study is an important tool to analyze an instance of spontaneous order, as mankind, possessing infinite desire, continues to transform and adapt to changing circumstances.

Now if only our elected leaders appeared as the tattoo-laden thugs whose behavior they inspire, perhaps the public would be more reluctant to endorse their wielding of coercive power and authority. After all, skin-deep appearances are the only thing separating our friend pictured above from those who legislate in the confines of Congress, state capital buildings, or city hall.

Dire predictions for USA and Europe

Must View Video on the Coming Inflation

By R. Wenzel

GoldMoney founder James Turk interviews Adam Fergusson, a historian who has studied in detail the hyperinflation of the Wiemar Republic, in the video clip below. Fergusson discusses the parallels and differences between the Weimar inflation and the situation in the US and Europe today.

Given that we appear to be headed for very strong inflation in the United State, I try to learn from those who have experienced hyper-inflation, or studied it, so that I can gain some clues and get an edge should such a hyper-inflation hit. That is what this clip is about, Fergusson discussing the Wiemar inflation and telling us who the winners were, who were the losers and why. I consider this video must viewing.

Quotes of the day

Happy Birthday P.J. O'Rourke

By Mark Perry

It's P.J. O'Rourke's 64th birthday today, here are some quotes:

1. Giving money and power to government is like giving whiskey and car keys to teenage boys. 2. If you think health care is expensive now, just wait till you see what it costs when it’s free. 3. The Democrats are the party that says government will make you smarter, taller, richer, and remove the crabgrass on your lawn. The Republicans are the party that says government doesn't work and then they get elected and prove it. 4. The mystery of government is not how Washington works but how to make it stop. 5. The Clinton administration launched an attack on people in Texas because those people were religious nuts with guns. Hell, this country was founded by religious nuts with guns. Who does Bill Clinton think stepped ashore on Plymouth Rock? 6. Social Security is a government program with a constituency made up of the old, the near old and those who hope or fear to grow old. After 215 years of trying, we have finally discovered a special interest that includes 100 percent of the population. Now we can vote ourselves rich. 7. When buying and selling are controlled by legislation, the first things to be bought and sold are legislators. 8. No drug, not even alcohol, causes the fundamental ills of society. If we're looking for the source of our troubles, we shouldn't test people for drugs, we should test them for stupidity, ignorance, greed and love of power. 9. If government were a product, selling it would be illegal. 10. Feeling good about government is like looking on the bright side of any catastrophe. When you quit looking on the bright side, the catastrophe is still there. 11. America wasn't founded so that we could all be better. America was founded so we could all be anything we damned well pleased. 12. Bureaucrats want bigger bureaus. Special interests are interested in whatever's special to them. These two groups bring great pressure to bear upon politicians who have another agenda yet: to cater to the temporary whims and fads of the public and the press. 13. People who are wise, good, smart, skillful, or hardworking don't need politics, they have jobs. 14. If we're going to improve the environment, the first thing we should do is duck the government. The second thing we should do is quit being moral. Screw the rights of nature. Nature will have rights as soon as it gets duties. The minute we see birds, trees, bugs, and squirrels picking up litter, giving money to charity, and keeping an eye on our kids at the park, we'll let them vote. 15. The U.S. Constitution is less than a quarter the length of the owner's manual for a 1998 Toyota Camry, and yet it has managed to keep 300 million of the world's most unruly, passionate and energetic people safe, prosperous and free. 16. When you look at the Republicans you see the scum off the top of business. When you look at the Democrats you see the scum off the top of politics. Personally, I prefer business. A businessman will steal from you directly instead of getting the IRS to do it for him. And when Republicans ruin the environment, destroy the supply of affordable housing, and wreck the industrial infrastructure, at least they make a buck off it. The Democrats just do these things for fun.

Warriors for truth, justice, and the American way of debt

Deficit-Reduction Fever

 

President Obama launches the war on tchotchkes.

By Mark Steyn

Have you been following this so-called Supercommittee? They’re the new superhero group of Superfriends from the Supercongress who are going to save America from plummeting over the cliff and into the multi-trillion-dollar abyss. There’s Spender Woman (Patty Murray), Incumbent Boy (Max Baucus), Kept Man (John Kerry), and many other warriors for truth, justice, and the American way of debt. The Supercommittee is supposed to report back by the day before Thanksgiving on how to carve out $1.2 trillion dollars of deficit reduction and thereby save the republic.

I had cynically assumed that the Superfriends would address America’s imminent debt catastrophe with some radical reform — such as, say, slowing the increase in spending by raising the age for lowering the age of Medicare eligibility from 47 to 49 by the year 2137, after which triumph we could all go back to sleep until total societal collapse.

But I underestimated the genius of the Superfriends’ Supercommittee. It turns out that a committee created to reduce the deficit is instead going to increase it. As The Hill reported:

Democrats on the supercommittee have proposed that the savings from the end of the wars in Iraq and Afghanistan be used to pay for a new stimulus package, according to a summary of the $2.3 trillion plan obtained by The Hill.

Do you follow that? Let the Congressional Budget Office explain it to you:

The budget savings from ending the wars are estimated to total around $1 trillion over a decade, according to an estimate in July from the Congressional Budget Office.

Let us note in passing that, according to the official CBO estimates, a whole decade’s worth of war in both Iraq and Afghanistan adds up to little more than Obama’s 2009 stimulus bill. But, aside from that, in what sense are these “savings”? The Iraq War is ended — or, at any rate, “ended,” at least as far as U.S. participation in it is concerned. How then can congressional accountants claim to be able to measure “savings” in 2021 from a war that ended a decade earlier? And why stop there? Why not estimate around $2 trillion in savings by 2031? After all, that would free up even more money for a bigger stimulus package, wouldn’t it? And it wouldn’t cost us anything because it would all be “savings.”

Come to think of it, didn’t the Second World War end in 1945? Could we have the CBO score the estimated two-thirds of a century of “budget savings” we’ve saved since ending that war? We could use the money to fund free master’s degrees in Complacency and Self-Esteem Studies for everyone, and that would totally stimulate the economy. The Spanish–American War ended 103 years ago, so imagine how much cash has already piled up! Like they say at Publishers Clearing House, you may already have won!

Meanwhile, back at the Oval Office, the president is asking for your votes for the 2011 SAVE Award. To demonstrate his commitment to fiscal discipline, he set up a competition whereby federal employees can propose ways to cut government waste. A panel of experts (John Kerry, Paula Abdul, etc.) then weigh the merits, and the four finalists go up on the White House website to be voted on by members of the public: It’s like Dancing with the Czars. Last year, Marjorie Cook of Michigan, a food inspector with the Department of Agriculture, noted that every year USDA inspectors ship 125,000 food samples to its analysis labs by “next day” express delivery, and that a day or two later the labs ship the empty containers back to the inspectors using the very same “next day” service. Marjorie suggested that, as the containers are empty, they can’t be all that urgent, and should be mailed back at regular old ground delivery rates.

But this reform was way too radical, so it didn’t win. And happily, even as we speak, mail couriers are rushing empty containers back and forth across the USDA-inspected fruited plain at your expense. This year’s SAVE Award nominees include Faith Stanfield of Toledo, a “General Technical Expert” with the Social Security Administration. As someone who’s technically expert in a very general sense, she sees the big picture. It’s on the front of the SSA’s glossy magazine. Did you know Social Security has its own glossy magazine? It’s called Oasis and it’s sent out to 88,000 SSA employees plus about a thousand government retirees. It’s like Vogue or Vanity Fair, but without the perfume and fashion ads, because who needs Givenchy and Yves St. Laurent to fund your mag when you’ve got the U.S. taxpayer? It’s the magazine that says you’re cool, you’re now, you’re living the SSA-bureaucrat lifestyle. But Faith thinks they should scrap the glossy pages and only publish it online.

Ooh, I dunno. Sounds a bit extreme to me. Could result in hundreds of Social Security lifestyle editors being laid off and reduced to living on Social Security.

Anyway, the winner of the SAVE Award gets to meet with the president to discuss his or her proposal. The proposal then gets submitted to a committee for further discussion on whether to set up a committee to discuss discussing it further. But, unlike the Superfriends’ Supercommittee, the lunch expenses are cheaper.

What with the proposal to use the nearly two centuries of budget savings from the end of the War of 1812 to fund the construction of high-speed monorails and the plan to turn the Social Security Administration’s in-house glossy into an in-house virtual-glossy, it’s no surprise that the president himself has got the deficit-reduction fever. On Wednesday, he signed an executive order “Promoting Efficient Spending” — and ending government waste. Just like that! According to Section Seven:

Agencies should limit the purchase of promotional items (e.g., plaques, clothing, and commemorative items), in particular where they are not cost-effective.

Sounds like someone’s seen one amusing Janet Napolitano bobblehead too many at the DHS holiday party. About to stick in one of those giant commemorative plaques on the side of the road saying “These next three miles of single-lane scarified pavement brought to you by the American Recovery & Reinvestment Act”? Don’t even think about it.

Fresh from launching the war on tchotchkes, the administration then proposed a 15-cent tax on Christmas trees in order to fund a federal promotional campaign to promote the sale of Christmas trees. Possibly Commerce Department research showed that there’s a dramatic fall-off in the sale of “holiday trees” round about December 26 every year, and Obama figured a little stimulus surely couldn’t hurt. He was forced to rescind the proposal, presumably after an ACLU chum pointed out that settling the Bureau of Christmas Tree Promotion lawsuit would wipe out all the budget savings from the French and Indian Wars.

Meanwhile, as these ruthless austerity measures start to bite, the government of the United States continues to spend one-fifth of a billion dollars it doesn’t have every hour, every day, every week, including Thanksgiving, Christmas, and Ramadan.

And remember, folks, Rick Perry is the dummy because he wants to abolish so many government departments, he can’t keep track of them all. Keep it simple, Rick. Just stick to a campaign pledge to set up a supercommittee to report back on the possibility of using savings from mailing back empty specimen beakers by three-day ground service to fund Medicare. Then people will take you seriously.

Wishful thinking

Is Europe on the Verge of a Depression, or a Great Inflation?

The news from Europe, particularly from within the euro zone, seems all bad.

By SIMON JOHNSON

Interest rates on Italian government debt continue to rise. Attempts to put together a “rescue package” at the pan-European level repeatedly fall behind events. And the lack of leadership from Germany and France is palpable – where is the vision or the clarity of thought we would have had from Charles de Gaulle or Konrad Adenauer?

In addition, the pessimists argue, because the troubled countries are locked into the euro, no good options are available. Gentle or even dramatic depreciation of the exchange rate for Greece or Portugal or Italy is not in the cards. As a result, it is hard to lower real wages so as to restore competitiveness and boost trade. This means that the debt burdens for these countries are likely to seem insurmountable for a long time. Hence default and global financial chaos seem likely.

According to the September 2011 edition of the Fiscal Monitor of the International Monetary Fund, 44.4 percent of Italian general government debt is held by nonresidents, i.e., presumably foreigners (see Statistical Table 9), on Page 72). The equivalent number for Greece is 57.4 percent, while for Portugal it is 60.5 percent.

And if you want to get really negative and think the problems could spread from Italy to France, keep in mind that 62.5 percent of French government debt is held by nonresidents. If Europe has a serious meltdown of sovereign debt values, there is no way that the problems will be confined just to that continent.

All of this is a serious possibility – and the lack of understanding at top European levels is deeply worrisome. No one has listened to the warnings of the last three years. Almost all the time since the collapse of Lehman Brothers has been wasted, in the sense that nothing was done to put government finances on a more sustainable footing.

But perhaps the pendulum of sentiment has swung too far, for one simple and perhaps not very comfortable reason.

There is no way to have just a little debt restructuring for Italy. If Italian debt involves serious credit risk – an end to the view that government debt has “no credit risk” and is a “risk-free asset,” with zero probability of default – then all sovereign debt in Europe will need to be repriced downward.

Will Germany will remain a safe haven? Even that is far from clear. According to the I.M.F., gross government debt in Germany will be 82.6 percent of gross domestic product at the end of this year (Statistical Table 7 of the Fiscal Monitor, on Page 70; the net government debt number for 2011, in Statistical Table 8, on Page 71,is 57.2 percent). Reports of German fiscal prudence have been greatly exaggerated.

German policy makers and the German public will not do well in the event of a major sovereign-credit disaster. Credit would tighten across the board. German exports would plummet. The famed German social safety net would come under great pressure.

There is an alternative to a decade of difficult austerity. The Germans could agree to allow the European Central Bank to provide “liquidity” support across the board to the troubled governments.

Many things are wrong with this policy – and it is exactly the kind of moral hazard-reinforcing measure that brought us to the current overindebted moment. None of us should be happy that Europe – and the world – has reached this point.

Among others, the bankers who bet big on moral hazard – i.e., massive government-backed bailouts – are about to win again. Perhaps the Europeans will be tougher on executives, boards and shareholders than the Obama administration was in early 2009, but most likely all the truly rich and powerful will do very well.

But if the German choice is global calamity or, effectively, the printing of money, which will they choose?

The European Central Bank has established a great deal of credibility with regard to keeping inflation at or close to 2 percent. It could probably offer a great deal of additional support – through creating money – without immediately causing inflation. And if the bank is providing a complete backstop to Italian government debt, the panic phase would be over.

None of this is a lasting solution, of course. Europe needs a proper fiscal center – much as the United States needed in 1787 and got under Alexander Hamilton’s policies from 1789. When he became Treasury secretary, the United States was in default and the credit system was almost completely broken. Some centralized tax revenue and control over fiscal deficits are needed.

Silvio Berlusconi stood in the way of all this. Other European leaders would not trust him to tighten Italian fiscal policy. But if he is really gone from power – and we should believe that only when we see it – there is now time and space for Italy to stabilize and, with the right help, find its way back to growth.

Of course, if the European Central Bank provides unconditional financial support to Italian, or other, politicians who refuse to bring their deficits under control, we are heading for another Great Inflation.

In the mean time in South America ...

Quiet Success in South America

The underappreciated economic achievements of Uruguay and Paraguay.

By JAIME DAREMBLUM

With a combined population of only 10 million, and a combined GDP roughly equivalent to that of Ecuador, Uruguay and Paraguay don’t get much attention from foreign journalists or policymakers. Yet the two South American countries, though dwarfed in size and influence by their two massive neighbors (Brazil and Argentina), have quietly been growing at very fast rates, improving their economic stability, and boosting their credit ratings.

A year ago, Financial Times correspondent Jude Webber dubbed them “Latin America’s impressive little guys,” noting that both were “punching above their weight.” Uruguay is by far the richer and more developed nation. Its economy expanded by 8.5 percent last year, and it received 29 percent more foreign direct investment (FDI) in 2010 than in 2009, with total FDI surging to $1.6 billion. In January, a joint Chilean-Finnish venture announced that it would be constructing a $1.9 billion pulp mill in Uruguay, the single biggest private investment project in the country’s history. Unemployment has fallen to historic lows, and Uruguay is also experiencing a real-estate boom.

“Uruguay is likely to be viewed as one of the best-run countries in Latin America,” investment strategist Jim Barrineau toldReuters this past summer. “What debt it does have is not very actively traded because the fundamentals are so good that most managers buy and hold.” Within the last year, each of the Big Three credit-rating agencies — Moody’s, Fitch, andStandard & Poor’s — upgraded Uruguay’s status. “Uruguay’s external and fiscal vulnerabilities have reduced owing to improvements in its external and fiscal solvency ratios, strengthened external liquidity as well as better currency composition and maturity structure of government debt,” Fitch declared in July. “High GDP per capita income, strong social indicators, and a solid institutional framework underpin Uruguay’s creditworthiness.” As Bloomberg News recentlyreported, investors believe that Uruguay “is heading toward its first investment-grade rating since 2002.”

The Uruguayan economy depends heavily on exports — which grew by nearly 24 percent between 2009 and 2010 — particularly beef, grain, and soybean exports. Back in May, the U.S. agribusiness giant Archer Daniels Midland announcedthat it was building a new facility in the South American country: a massive grain export terminal with a storage capacity of 180,000 tons and an initial loading capacity of 2.8 million tons. Uruguay may also become one of the Western Hemisphere’s biggest gas exporters: The U.S. Energy Information Administration has projected that it is sitting on 20,580 billion cubic feet of natural-gas reserves.

Yet booming commodity exports explain only part of Uruguay’s economic success. Its chief advantages are strong economic fundamentals, political stability, a relatively large middle class, and a relatively good education system. The 2011Wall Street Journal/Heritage Foundation Index of Economic Freedom gives Uruguay the third-highest score in Latin America and the Caribbean. For that matter, Uruguay boasts the top ranking in the first-ever Latin Education Indexproduced by the Latin Business Chronicle, and it is also the highest-ranked Latin American country in the 2011 Legatum Prosperity Index.

Whereas Uruguay is a middle-class nation that ranks 48th out of 187 countries and territories in the 2011 United Nations Human Development Index, Paraguay is a much poorer nation that ranks 107th. Last year, however, it posted the second-fastest economic growth rate in the entire world (15 percent), behind only oil-rich Qatar, thanks to a record soybean crop. According to the World Bank, Paraguayan exports increased by 43 percent between 2009 and 2010, with soybean exports jumping by a remarkable 102 percent and meat exports growing by 59 percent. But as with Uruguay, farm exports aren’t the sole explanation of its recent economic achievements: The International Monetary Fund has determined that Paraguay’s 2010 growth “was driven by a broad-based economic expansion and not only by the historically large agricultural sector boom.” Standard & Poor’s upgraded its credit status a few months ago, following the completion of a key bilateral energy deal with Brazil. (It received a rating boost from Moody’s in late 2010.) The U.S. Agency for International Development affirms that Paraguay “has improved the management of the economy, reduced the domestic debt, strengthened the customs service, and improved the tax system.”

To be sure, the country still suffers from rampant corruption, fragile public institutions, and severe social inequalities, and its southern border region near Argentina and Brazil (part of the the so-called Triple Frontier) is a lawless, Wild West–type area that serves as a magnet for terrorists and other criminal organizations. As the WikiLeaks cables showed, Washington is worried that Islamic militants and Iranian agents are operating in Paraguay. Meanwhile, on the economic front, there are concerns that both Paraguay and Uruguay are overheating. Policymakers will have to address rising inflation before it becomes a serious problem.

Here is perhaps the most interesting aspect of the story: For their entire modern history, Uruguay and Paraguay were ruled by either non-leftist democratic governments or right-wing military dictatorships, yet their recent economic success has come under social democrats. Uruguay has had a social-democratic president since 2005, and Paraguay has had one since 2008. These leaders — Tabaré Vázquez and José Mujica in Uruguay, and Fernando Lugo in Paraguay — have demonstrated that there is more than one brand of leftist in Latin America. Presidents Vázquez, Mujica, and Lugo have all governed in a moderate, pragmatic manner, without any of the radicalism we have seen in Venezuela. They provide firm evidence that, as I have written elsewhere (here and here, for example), Hugo Chávez is losing the ideological war in the Western Hemisphere.

Outside, looking in

How a Financial Pro Lost His House

By CARL RICHARDS

ONE night a few years ago, when the value of our home had collapsed, our debt was out of control and my financial planning business was shaky, I went to take out the trash.

There was this enormous window that looked right in on the kitchen table, and through it I could see my wife, Cori, and our four children eating dinner. It was dark outside, so they couldn’t see me, and I just stood there looking at them.

After a while, I pulled up a bucket and I sat on it, just watching my children eat. I found myself wishing that I could get back there, connected to the simple ordinary stuff of my family’s life. And as I sat and watched, filled with longing and guilt, two questions kept arising:

How did I get here?

And how am I going to get out of this?

There are many stories these days of people who lost their financial bearings during the housing boom and the crisis that followed, but my story is a bit different from most.

I’m a financial adviser. I get paid to help people make smart financial choices, and I speak and write about personal finance issues for this publication and others. My first book comes out in January, “The Behavior Gap: Simple Ways to Stop Doing Dumb Things With Money” (Portfolio, a Penguin imprint).

The thing that few people know, though, is that I learned a lot of this from experience. I made a bunch of mistakes, the very same ones that I now go around warning people to avoid.

So this is the story of how I lost my home, the profound ethical questions that arose along the way, and what my wife and I learned from the mistakes that led us to that point. It made me better at what I do, but it wasn’t much fun getting there.

Like most financial stories, this one is personal. It starts with me getting into the financial services industry more or less by accident. I answered an ad in 1995 that I thought was for a job related to “security” (as in security guard) but was in fact related to “securities.” That’s how little I knew about the stock market. A few months later I found myself working a phone at a Fidelity Investments call center.

Things went well, and by 1999 I was a Merrill Lynch financial adviser and a certified financial planner. By then, we also owned a house in Salt Lake City. We’d bought it two years earlier, with a $25,000 down payment.

A few years later, an opportunity arose to form a partnership with a successful Merrill adviser in Las Vegas. The place was on our top 10 list of never-move-to cities because we had always associated it with the Strip. But Cori and I were looking for an opportunity to have an experience somewhere else, and we met some great people when we visited the city. I took the job, and we moved down there.

That was May 2003. Housing prices were already crazy, so we rented. But our neighborhood had zero character and lots of cookie-cutter houses. Within a few weeks, we were looking for a place to buy.

I felt we could afford around $350,000. We called a real estate agent named Mitch, who had signs on all the bus stops: Talk to Mitch! He picked us up in a gold Jaguar, and suddenly we were looking at houses that listed at $500,000 or more.

It felt a little crazy to be shopping for houses that cost half a million dollars, but my income was growing rapidly. Everywhere I looked, people were being rewarded for buying as much house as they could possibly afford, and then some. There was this excitement in the air, almost like static. I started to think that if I didn’t buy a house right then, I would never be able to afford one.

At moments during our house hunt, I felt in my gut that something wasn’t right. We’d go to open houses for $400,000 homes and see lines of couples in their late 20s — younger than we were — waiting to get inside. I kept wondering where all the money was coming from. How did all these people make so much?

But prices just kept rising, and when people kept buying, that made it seem safer. I knew from my work as a financial adviser that following the crowd could be costly. But like everyone else, I felt safer in a crowd.

Bulldoze the current system and start over

The Public-Union Albatross

 What it means when 90% of an agency's workers retire with  disability benefits.

By P. Howard

The indictment of seven Long Island Rail Road workers for disability fraud last week cast a spotlight on a troubled government agency. Until recently, over 90% of LIRR workers retired with a disability—even those who worked desk jobs—adding about $36,000 to their annual pensions. The cost to New York taxpayers over the past decade was $300 million.

As one investigator put it, fraud of this kind "became a culture of sorts among the LIRR workers, who took to gathering in doctor's waiting rooms bragging to each [other] about their disabilities while simultaneously talking about their golf game." How could almost every employee think fraud was the right thing to do?

The LIRR disability epidemic is hardly unique—82% of senior California state troopers are "disabled" in their last year before retirement. Pension abuses are so common—for example, "spiking" pensions with excess overtime in the last year of employment—that they're taken for granted.

Governors in Wisconsin and Ohio this year have led well-publicized showdowns with public unions. Union leaders argue they are "decimat[ing] the collective bargaining rights of public employees." What are these so-called "rights"? The dispute has focused on rich benefit packages that are drowning public budgets. Far more important is the lack of productivity.

"I've never seen anyone terminated for incompetence," observed a long-time human relations official in New York City. In Cincinnati, police personnel records must be expunged every few years—making periodic misconduct essentially unaccountable. Over the past decade, Los Angeles succeeded in firing five teachers (out of 33,000), at a cost of $3.5 million.

Collective-bargaining rights have made government virtually unmanageable. Promotions, reassignments and layoffs are dictated by rigid rules, without any opportunity for managerial judgment. In 2010, shortly after receiving an award as best first-year teacher in Wisconsin, Megan Sampson had to be let go under "last in, first out" provisions of the union contract.

Even what task someone should do on a given day is subject to detailed rules. Last year, when a virus disabled two computers in a shared federal office in Washington, D.C., the IT technician fixed one but said he was unable to fix the other because it wasn't listed on his form.

Making things work better is an affront to union prerogatives. The refuse-collection union in Toledo sued when the city proposed consolidating garbage collection with the surrounding county. (Toledo ended up making a cash settlement.) In Wisconsin, when budget cuts eliminated funding to mow the grass along the roads, the union sued to stop the county executive from giving the job to inmates.

No decision is too small for union micromanagement. Under the New York City union contract, when new equipment is installed the city must reopen collective bargaining "for the sole purpose of negotiating with the union on the practical impact, if any, such equipment has on the affected employees." Trying to get ideas from public employees can be illegal. A deputy mayor of New York City was "warned not to talk with employees in order to get suggestions" because it might violate the "direct dealing law."

How inefficient is this system? Ten percent? Thirty percent? Pause on the math here. Over 20 million people work for federal, state and local government, or one in seven workers in America. Their salaries and benefits total roughly $1.5 trillion of taxpayer funds each year (about 10% of GDP). They spend another $2 trillion. If government could be run more efficiently by 30%, that would result in annual savings worth $1 trillion.

What's amazing is that anything gets done in government. This is a tribute to countless public employees who render public service, against all odds, by their personal pride and willpower, despite having to wrestle daily choices through a slimy bureaucracy.

One huge hurdle stands in the way of making government manageable: public unions. The head of the American Federation of State, County and Municipal Employees recently bragged that the union had contributed $90 million in the 2010 off-year election alone. Where did the unions get all that money? The power is imbedded in an artificial legal construct—a "collective-bargaining right" that deducts union dues from all public employees, whether or not they want to belong to the union.

Some states, such as Indiana, have succeeded in eliminating this requirement. I would go further: America should ban political contributions by public unions, by constitutional amendment if necessary. Government is supposed to serve the public, not public employees.

America must bulldoze the current system and start over. Only then can we balance budgets and restore competence, dignity and purpose to public service.

A modern day tragedy

Hip, Hip, Hooray, It's Rhodesia Independence Day!

 

Ian Smith lived to see all his worst predictions come true.

By H. W. CROCKER, III 

On 11 November 1965, Ian Smith, prime minister of the British colony of Rhodesia, signed his country's unilateral declaration of independence, giving birth to a new nation that would, rather heroically, seek to maintain its way of life for the next fifteen years. That way of life was not -- as critics will be quick to allege -- based on racism, but on freedom, the freedom that was vouchsafed Rhodesia by the British Empire. It was the freedom that was lost by Rhodesia's transformation into Robert Mugabe's Zimbabwe. It's a transformation from which even we, as American, have something to learn.

The Rhodesians, in fact, based their declaration of independence on our own, though they charmingly reaffirmed their allegiance to the queen. Thinking themselves "more British than the British," they announced their independence on Remembrance Day, marking the end of World War I (what we mark as Veterans' Day), to remind Britain that when she fought at great cost to defend freedom, the rule of law, and the rights of small nations, Rhodesia had been at her side. In the Second World War, indeed, Ian Smith himself had flown Hawker Hurricanes and Spitfires for the RAF. A flight accident had smashed up his face (which required extensive plastic surgery) and left him with numerous serious injuries that took months to heal. He returned to duty, was shot down over Italy, and eventually made his escape back to Allied lines.

More than that, though, the Rhodesians had done what is the measure of a man -- they had gone into the wilderness and been able to re-create their civilization. While they had a reputation as outdoorsy, beer-swilling hearties, the great Rhodesian writer (and liberal) Peter Godwin and Ian Hancock estimated in their classic study of Rhodesia, 'Rhodesians Never Die,' "that probably no other transplanted English-speakers had done more -- with similar resources -- to reproduce and practice the parent culture."

It is a question worth asking ourselves: how many of us could hack our way into the jungle and re-create the United States? The more culturally pessimistic, or multiculturally inclined, might even wonder whether that would be a good thing anyway.

The Rhodesians had no doubts -- or few. They were so confident in their civilization that they were willing to endure international ostracism. They were so certain they were on the right side of history, and certain of their martial valor, that they volunteered to send troops to Vietnam (an offer that the embarrassed Lyndon Johnson administration declined to accept). They were so certain that they stood athwart tyranny, that they sacrificed their sons and fortified their farms in an African bush war that thrilled the armchair adventurers among the readers of Soldier of Fortune magazine, which sold "Be A Man Among Men, Rhodesian Army" t-shirts, based on a Rhodesian recruiting poster.  

Smith believed that one-man, one-vote in Africa meant free elections once. He was loath to submit his country to the chaos, socialism, violence, and dictatorship that he was certain would follow elections based on a universal franchise (which, as he pointed out, had difficulties that Western critics were not likely to consider: for instance, how to accurately register voters when most rural-born black Africans had no birth certificates). Smith was careful to gain the support of the country's tribal chiefs, he stated that his goal was evolution not revolution on the way to expanding the franchise (which was tied to income and property qualifications), and he affirmed that he would not risk Rhodesia's multi-party elections, free press, independent judiciary, and free economy with a mass electorate that might be inclined to do away with them.

In the end, of course, the British brokered a deal. Lord Carrington and almost all the other delegates to the so-called Lancaster House Agreement of 1979 were convinced that Robert Mugabe, regarded as the most radical of the Communist-backed insurgents, would be defeated in the elections arranged for 1980. Ian Smith thought otherwise. He was certain Mugabe would win because he belonged to the Shona tribe, which represented eighty percent of Rhodesia's population, and because Mugabe would be the most effective at voter intimidation. Smith was proved right, as he usually was -- though he got no credit for it.

Smith lived to see all his worst predictions come true; had he been able to read his obituaries he would have seen that liberal opinion blamed him for it. Smith's solace in his declining years was the popularity he had among black Zimbabweans who saw him as a symbol of unbreakable resistance to Mugabe. If you want to see the Rhodesia Smith defended, you can watch a video or two on YouTube and see black soldiers (most of the Rhodesian army was black) marching on parade past mostly white civilians, including an official dressed like an 18th-century town crier; you can see the sons of productive farmers and businessmen, who made Rhodesia an economic success, shouldering rifles to defend their homes and their liberties.

And if you want to see the tribute that vice pays to virtue -- or that Zimbabwe pays to Rhodesia and the British Empire -- just note how Zimbabwe's judges still wear white wigs, how Mugabe's henchmen make a show of owning farms (taken from white farmers who once produced plenty, and whose fields now lie barren while Zimbabweans starve), and how Mugabe still goes thorough the formality of having elections (as long as his goons ensure that he wins). Zimbabweans think of British institutions as having legitimacy, even if they are deployed as part of Robert Mugabe's charades. 

So what can America learn from gallant Rhodesia? For one thing, we can learn to judge nations by the values they uphold, not the electoral processes they observe. We can see why Western "colonialism" was oftentimes better than the alternative. And most of all, perhaps, we might learn not to take our own liberties for granted. In every generation, they are only a demagogue away from being taken from us.