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Monthly Archives: July 2013

LEGALIZED THEFT,  Report to The US Congress

By Professor Steve Hanke, (3/5/2002)

_______________________________

 U.S. House of Representatives

Committee on Financial Services Subcommittee on International Monetary Policy and Trade – 5 March 2002

Steve H. Hanke

Professor of Applied Economics The Johns Hopkins University

Baltimore, Maryland 21218    and

President  Toronto Trust Argentina  Buenos Aires, Argentina  (410) 516-7183

hanke@jhu.edu

Mr. Chairman, thank you for this opportunity to express my views on the causes of and cures for Argentina’s current political-economic crisis. I first became seriously interested in economic reform in Argentina shortly after meeting Argentina’s newly-elected President, Carlos Menem, in 1989. At that time, I concluded that, while stability might not be everything, everything was nothing without stability. To achieve stability, a cure for Argentina’s endemic inflation and unstable money was required. In consultation with some members of Argentina’s Congress, I developed a blueprint for monetary stability during 1990 with a fellow economist, Kurt Schuler. In 1991, our proposal for an orthodox currency board (Banco Central o Caja de Conversión? Buenos Aires: Fundación República) was published. In 1994, I became President of Toronto Trust Argentina (TTA), a balanced mutual fund which can invest in stocks and bonds. TTA has had a good record. Indeed, in 1996, Micropal ranked TTA as the best-performing emerging market mutual fund in the world. In 2000, S&P/Micropal ranked TTA third out of the 169 funds monitored in Latin America for the 1997-2000 period. During 1995-96, I was an advisor to the Minister of Economy, Domingo Cavallo. In 1999, shortly after president Carlos Menem suggested dollarization for Argentina, Kurt Schuler and I wrote a paper explaining how to achieve that goal, step by step. I presented the paper to president Menem in February (“A Dollarization Blueprint for Argentina, ”Friedberg’s Commodity and Currency Comments Experts’ Report, Toronto: Friedberg Commodity Management, Inc., February 1, 1999, available at http://www.cato.org/pubs/wtpapers/dollar.pdf). In December 2001, I updated the case for dollarization in two papers, gave talks about dollarization in Argentina and presented my new proposal to Carlos Menem on December 6, 2001 (“Argentine Endgame: Couple Dollarization with Free Banking,” Foreign Policy Briefing No. 67, Washington D.C.: Cato Institute, December 4, 2001http://www.cato.org/pubs/fpbriefs/fpb-067es.html and “How to Dollarize in Argentina Now,” with Kurt Schuler, December 20, 2001, updated January 2, 2002, http://www.cato.org/pubs/papers/schuler-hanke011231.pdf).

All this is simply intended to inform you that I have been interested and involved in Argentine affairs for over a decade, and also to indicate what the nature of that involvement has been.

What Went Wrong in Argentina?

Anyone attempting to make sense out of Argentina’s fall from grace to economic and political chaos faces a real challenge. Most of the commentary has been, at best, confused and confusing.

The road to good health began on April 1, 1991, when Carlos Menem’s government installed what was known locally as a “convertibility system” to rid Argentina of hyperinflation and give the country a confidence shock. Under the Convertibility Law, the peso and the U.S. dollar both circulated legally at a 1-to-1 exchange rate. The owner of a peso had a property right in a dollar and could freely exercise that right by converting a peso into a dollar. That redemption pledge was credible because the central bank was required by law to hold foreign reserves to fully cover its peso liabilities.

With the passage of the Law of Public Emergency and Reform of the Exchange Rate Regime on January 6, 2002, near-dictatorial powers were conferred upon President Eduardo Duhalde and the convertibility system was swept into the dustbin. The peso was floated and is currently worth less than half of its former value.

The confusing commentary about Argentina centers on its rather unusual monetary regime, which although popular with the Argentine public, was not well understood by most economists, many currency speculators, or the International Monetary Fund.

Because the convertibility system was not well understood, it has been blamed for a number of Argentina’s ills that either had little to do with convertibility or simply did not exist. The convertibility system was the linchpin for a decade of stable prices and a solid export and economic growth performance. The price level at the end of 2001 was about where it was in 1994. Exports grew each full year of the convertibility system, with the exception of 1999. And the real GDP growth rate during the decade of convertibility was greater than any other decade since World War II.

Argentina’s monetary system from April 1, 1991 to January 6, 2002 was known locally as convertibility. It was an unusual name for an unusual system. The convertibility system was not an orthodox currency board. Rather, it was a currency board-like system: a mixture of currency board and central banking features. In writings dating back to 1991, I proposed that Argentina establish an orthodox currency board and criticized convertibility as an unstable, mixed system.

Was Argentina’s monetary system an orthodox currency board?

The three defining features of an orthodox currency board are:

a fixed exchange rate with its anchor currency,

unrestricted convertibility into and out of the anchor currency at the fixed rate, and

net reserves of 100 percent or slightly more of the board’s monetary liabilities, held in foreign assets only.

Together, these three features imply that an orthodox currency board is a narrowly focused, rule-bound institution. In particular, an orthodox currency board lacks the power to conduct sterilized intervention, does not lend to the government, does not regulate commercial banks, and does not act as an official or unofficial lender of last resort.

The convertibility system lacked one or more of the defining features of an orthodox currency board throughout its lifetime. Last year, when the convertibility system began encountering severe problems, the government fiddled with the exchange rate and restricted convertibility. Throughout the lifetime of the convertibility system, the Banco Central de la República Argentina (BCRA)—note that it was never officially renamed a currency board—held extensive domestic assets in addition to its foreign assets. The BCRA was initially allowed to hold true foreign reserves of as little as 66-2/3 percent of its monetary liabilities. It was allowed to hold the difference between its true foreign reserves and 100 percent in the form of Argentine government bonds denominated in foreign currency, valued at market prices. Later, the minimum ratio was raised to 90 percent, although the BCRA was allowed to breach that floor temporarily, which it did on a number of occasions, most recently from July 25 to September 7, 2001 and from December 12, 2001 until the convertibility system ended on January 6, 2002.

The BCRA was never subject to any maximum ratio of foreign reserves. In contrast, if an orthodox currency board holds reserves beyond 100 percent of its monetary liabilities, the purpose is to merely provide a small cushion to prevent reserves from falling below 100 percent. Many currency boards have held supplementary reserves of 5 or 10 percent to guard against losses, but they have not used their supplementary reserves to conduct discretionary monetary policy and have remitted to their owners all surpluses beyond what was necessary to maintain the core and supplementary reserves. Over the course of 2001, the BCRA had a ratio of true foreign reserves to monetary liabilities that varied from a high of 193 percent on February 23 to a low of 82 percent at year-end. The BCRA gained foreign reserves through the IMF loan of September 7. It lost foreign reserves by lending to commercial banks and indirectly supporting the market for government bonds, since government bonds were used as collateral for many loans.

The holding of domestic assets and the varying of the ratio of foreign reserves to monetary liabilities meant that the BCRA engaged extensively in a discretionary policy of sterilized intervention, which an orthodox currency board does not do. The problem with sterilized intervention is that it forces a monetary authority to attempt to hit simultaneously two possibly incompatible targets—an exchange-rate target and a money-supply target. The convertibility system thus eventually encountered the problem common to all pegged exchange rates: which target to hit when the two came into conflict. Argentina chose the money-supply target, which involved giving up the exchange-rate target.

Under the convertibility system the BCRA also retained the power to regulate banks, such as by setting reserve ratios. It was unofficially a lender of last resort, though it retained a constructive ambiguity about its role that reduced moral hazard risk.

As evidence of the BCRA’s hyperactivity, one has to only look at theBulletin of Monetary and Fiscal Affairs published quarterly by the BCRA. Each issue since April 1991 contained a long list of measures taken by the BCRA. If the BCRA had been operating as an orthodox currency board, these pages would have been blank.

In a 1993 book, Russian Currency and Finance, which I co-authored with Lars Jonung and Kurt Schuler, we predicted that Argentina’s monetary system would eventually behave more like a typical central bank than an orthodox currency board. After a longer delay than we ever expected, we were proved correct. Moral: An unorthodox, currency board-like system is an internally contradictory mixture of currency board and central banking elements. An orthodox currency board system is internally consistent and therefore does not encounter the same problems.

The original convertibility system began to crack in April 2001, when Domingo Cavallo, who had been recently appointed minister of the economy, sent a bill to Argentina’s Congress to change the peso’s anchor from the dollar to a 50-50 basket of the dollar and the euro. As economy minister in 1991, when the convertibility system was established, Cavallo had considered but rejected a similar idea. Also in April, Pedro Pou, the independent-minded president of the central bank who preferred dollarization to devaluation, was ousted on a pretext in favor of the more pliable Roque Maccarone.

Was the original convertibility system in effect until January 6?

By June the original convertibility system was definitively finished. Congress approved changing the exchange rate link if and when the euro ever appreciated to one per dollar. More importantly, Cavallo announced a preferential exchange rate for exports—a dual exchange rate. This was contrary both to the intent of the original convertibility system and of an orthodox currency board. Cavallo’s measures showed that the government was quite willing to tamper with the convertibility system. In previous episodes when confidence in the peso declined, the government had responded, sometimes after an agonizing delay, by reaffirming the link to the dollar and the commitment to a single exchange rate. By removing the cornerstones of the convertibility system, Cavallo left the edifice shaky.

By meddling with the convertibility system, Cavallo tightened monetary conditions. Indeed, peso interest rates shot up and remained at punishingly high levels until peso interest rate caps were imposed in December 2001.

In December 2001 the government imposed a freeze on bank deposits. It was the last straw. Angry Argentines remembered how high inflation during similar freezes in 1982 (engineered by Cavallo) and 1989 had robbed them of the real value of their savings. Cavallo and president Fernando de la Rúa resigned in the face of widespread protests.

There was another way out: official dollarization, which would have eliminated questions about confidence in the peso by eliminating the peso itself. Unfortunately, a lack of resolve by the Argentine government and a lack of support from the U.S. government prevented this economically beneficial, but politically somewhat difficult, option from being implemented either when president Menem first proposed it in 1999 or subsequently. Instead, Argentina temporized and eventually suffered both a currency crisis and a political crisis.

Many people assert that the crux of the Argentine crisis was an overvalued peso. Supposedly, the peso’s link to the strong US dollar made the peso overvalued, rendering Argentina uncompetitive, causing the economy to slump, and forcing the government to default.

Moral: When a currency board-like system faces a crisis caused by lack of confidence in the currency, a “hard” exit, for example via dollarization, is preferable to the “soft” exits of devaluation or floating.

Was the peso overvalued?

Does the story withstand examination? A classic sign of uncompetitiveness caused by an overvalued currency is declining exports. But Argentina’s exports increased every full year of the convertibility system except 1999, when Brazil, its largest trading partner, suffered a currency crisis. Exports during the first 11 months of 2001 were 3.2% ahead of the same period in 2000. Considering that estimated real growth in world trade was only 0.9% last year, Argentina’s export performance was relatively strong. Indeed, the export sector has been one of the few bright spots in the Argentine economy. If the rest of the economy had been growing as fast as the export sector during the last two years, Argentina would not be in a recession.

In an attempt to bolster claims that the peso was highly overvalued under the convertibility system, some observers asserted, on the basis of taxi rides from the airport or other casual impressions, that prices were high in Buenos Aires, and that high prices were evidence the peso was significantly overvalued against the dollar. A recent Union Bank of Switzerland survey of prices in 58 of the world’s largest cities found that for a basket of 111 goods and services, weighted by typical consumer habits—including three categories of house rent—Buenos Aires ranked 22nd, about midway between the most expensive city, Tokyo, and the least expensive, Bombay. The survey also found those taxi rides that were allegedly so expensive cost about 8% less than in Rio de Janeiro.

There are other indicators that contradict the overvaluation story. For example, the Economist magazine’s Big Mac Index, which compares the price of McDonald’s hamburgers around the world, indicates that the peso, before its devaluation, was 2% undervalued. In 1999 the index had indicated that the peso was 3% overvalued and in 2000 it had indicated no overvaluation. Even so, from May 15, 1999 through February 2, 2002, the Economist contained twenty-six articles claiming that the economy was being dragged down by an overvalued peso. And although the Big Mac index, as well as more sophisticated estimates of equilibrium exchange rates, should be treated with great skepticism, a recent careful study of the matter using data from 1993 to 1999 indicates that the peso was always within 6% of its so-called fundamental equilibrium real exchange rate (Kalin Hristov, “FEER and Currency Boards: Evidence from the 90’s,” unpublished manuscript, Bulgarian National Bank, presented at the Centre for Central Banking Studies (Bank of England) Conference on Exchange Rates, November 26, 2001, p. 25).

Moral: Look carefully at the evidence before claiming that a currency is overvalued. For better or worse, devaluation is now a fact. The big question going forward is: Will it revive the economy? Let’s go through the arithmetic. The short-run price elasticity for Argentine exports is about -0.1. So, to stimulate exports by 1%, the real value of the peso (adjusted for inflation) would have to depreciate by 10%. Exports in Argentina only accounted for 9% of GDP last year. Consequently, if the current devaluation of 50% (the floating peso is trading at about two to the dollar) doesn’t pass through to any domestic inflation—in short, if the nominal devaluation is a real devaluation—exports will increase by about 5%. Under this optimistic scenario, the current level of devaluation would add less than a half percent to GDP—a GDP that, thanks to the new exchange-rate regime, has collapsed. And even though estimates of price elasticity cannot be treated with very high confidence, the short-run price elasticity for exports would have to be about ten times as great as its estimated value to offset the 5% officially-projected contraction in GDP this year. If you use private-sector forecasts of the Argentina’s contraction in GDP for 2002 (which are much more pessimistic and realistic than the official estimate), the elasticity would have to be even greater.

Will the devaluation restart the economy?

Moral: When considering a regime shift, use the back of an envelope and make a few calculations. The Convertibility Law gave a peso holder the right to convert a peso into a US dollar. That redemption pledge was made credible because the central bank was required by law to hold foreign reserves to fully cover its peso liabilities. It was this redemption pledge that made the convertibility set up unique and distinguished it from the typical fiat money system.

Why was Argentina’s devaluation unique?

With the repeal of the Convertibility Law, the redemption pledge was thrown to the wind and the peso holders’ claims on foreign reserves held at the central bank were revoked. Argentina’s devaluation, then, represented more—much more—than a garden-variety devaluation. It was a great bank robbery. Foreign reserves equal to 17.8 billion dollarsthat were the property of peso holders were confiscated by the government.

That was just the beginning. In addition to taking the foreign reserves from people who held pesos, the government of Eduardo Duhalde has passed other laws and issued regulations to pesofy the economy. These have annulled property rights and ignored the rule of law. The Congress acquiesced in the government’s actions by approving the Law of Public Emergency and Reform of the Exchange Rate Regime on January 6, 2002. The law transfers extraordinary powers to the President and allows him to, in effect, rule by decree for two years (when his term is scheduled to end).

Argentina’s economy went into recession in September 1998 in the aftermath of the Asian and Russian currency crises, which resulted in a general decline in flows of investment to emerging market economies. The Brazilian currency crisis of 1999 dealt the economy another blow. Signs of recovery appeared in late 1999 and early 2000, but the incoming de la Rúa government choked the recovery by enacting large tax increases that took effect at the start of 2000. The government (and the IMF, which lent support to the government’s program) thought the tax increases were necessary to reduce the budget deficit. Instead, tax collections fell. When Domingo Cavallo became minister of the economy in March 2001, he pushed through a financial transaction tax, which was increased in August to its current rate of 0.6 percent on bank debits and credits. Although the tax rate may appear low, it is not.

Moral: In a country that fails to adhere to the rule of law, the domestic currency should be replaced with a foreign currency produced in a country that embraces the rule of law.

So, then, what caused Argentina’s crisis?

The tax increases added to the already heavy tax burden Argentines bear if they are part of the legal economy. Tax evasion is high in Argentina because the tax savings from going into the underground economy are huge. The value-added tax is 21 percent; social security and medical care taxes are 31.9 percent; and the top income tax rate of 35 percent starts at 102,300 pesos—currently less than 50,000 dollars. Compare these with US state sales taxes of 0-9 percent (there is no federal tax); Social Security and Medicare taxes of 15.3 percent; and a top federal tax rate of 38.6 percent starting at about 300,000 dollars (plus state taxes of 0-11 percent). Unlike Argentina, the United States does not tax bank credits and debits at all.

The distortions created by Argentina’s sky-high tax rates show up in the labor markets. For example, the tax wedge between gross labor costs and net wages is 42%, comparable to the largest wedges in Europe and almost double that of the U.S. It is not surprising, therefore, that the unemployment rate is relatively high and the underground economy is so vibrant.

It is also not surprising that tax revenue fell as higher tax rates aggravated the recession. Falling tax revenue made the government’s debt more precarious. Particularly after Domingo Cavallo’s changes to the convertibility system, concern about the consequences of a debt default spilled over into the currency market. Forward rates reflected an expected devaluation of the peso, and interest rates in pesos shot up to 40-60 percent. Concern about the consequences of a default also spilled over into the banking system, reflected by withdrawals of deposits and interest rates in dollars of 20-30 percent. (Most bank deposits and loans were, in fact, in dollars rather than pesos.) People feared that the government would not let the default remain compartmentalized as a problem of government finance, but would make it spill over into the rest of the economy.

Again, dollarization would have helped contain the problem, by depriving the government of a national currency as a tool for devaluation and inflation. Dollarization would not have guaranteed success—no monetary system can—but it would have improved the chances for success. It still would help today. Moral: During a recession, avoid raising tax rates and don’t “tighten” monetary conditions by meddling with monetary institutions.

The IMF’s Role in Argentina’s Crisis

During the boom years, 1990-94, when Argentina’s per capita GDP measured in dollars grew by 72.8%, the IMF played a minor role in Argentina’s economic affairs. Argentina implemented the convertibility system without the IMF’s aid or advice. Following the Mexican devaluation of December 1994, Argentina suffered a crisis of investor confidence, which it overcame by enacting policies that included a reaffirmation of its commitment to an exchange rate of 1 peso per dollar. The IMF lent Argentina funds to support these policies, and ever since has been heavily involved in Argentina. Unfortunately, the IMF threw cold water on President Menem’s dollarization proposal in early 1999. As a result, Argentina was forced to forego a much-needed positive confidence shock. When Fernando de la Rúa became president in December 1999, things went from bad to worse. His administration’s new economic plan, approved by the IMF, was supposed to lower interest rates and produce a boom by raising taxes, which was meant to reduce the government’s deficit. Its timing was awful. World interest rates in December 1999 were on the rise, so Argentina’s rates also roseand the economy slumped further into recession. Argentina was headed for a crisis of confidence, one that would plunge the economy into a deeper recession and cause debt-servicing problems. The rest is history, almost.

From there the de la Rúa administration would commit a steady stream of policy errors that would undermine the successful reforms of the early 1990s: stable money and sound banking. And during this period, the IMF stood by silently and at the same time extended more credit to Argentina.

Then, during the early days of the Duhalde government, the IMF again threw cold water on the dollarization idea. When asked about dollarization for Argentina during a press briefing on January 11, Anne Krueger, first deputy managing director of the IMF, said: “Well, my understanding at the moment is that [dollarization] is technically unfeasible. So I don’t think the authorities are thinking about it; I don’t think we are thinking about it.”

Dr. Krueger’s statement implies that the BCRA did not have enough foreign reserves to liquidate its peso monetary liabilities and dollarize the economy. According to the BCRA’s balance sheet of January 10, this was not the case, however. The BCRA’s peso monetary liabilities were 17.92 billion pesos and “pure” foreign reserves in US dollars were $14.75 billion. In addition, the BCRA had 14.96 billion pesos of domestic assets valued at market prices that could be sold to acquire U.S. dollars. Consequently, at the time Dr. Krueger made her statement, it would have been feasible for Argentina to dollarize at an exchange rate of 1 peso to 1 U.S. dollar, the rate in force under the Convertibility Law.

This, of course, leads to a number of questions. Was Dr. Krueger misinformed? Or does the IMF know something that the rest of us don’t know? In short, does the BCRA have an “Enron problem”? Either way, the IMF does not look good.

The IMF didn’t look good in Indonesia, either. When I was operating as President Suharto’s advisor in early 1998, I had recommended a currency board for Indonesia, something Suharto agreed to. The IMF went very public with an anti-currency board campaign. Part of the IMF’s attack centered on the claim that I had supposedly recommended a rupiah-dollar exchange rate of 5,000, and at that rate, the IMF concluded that the Bank of Indonesia didn’t have adequate reserves to set up a currency board.

The problem with this IMF story is that it was entirely fabricated. I did not specify a rupiah-dollar exchange rate of 5,000. Indeed, I made that clear at the time (“Voice of Suharto’s Guru,” International Herald Tribune, March 20, 1998) and have done so in many articles since.

That hasn’t stopped the IMF from rewriting monetary history in an attempt to cover up its blunders. For example, the IMF issued a 139-page working paper about Indonesia in May 2001. It was authored by Charles Enoch, Barbara Baldwin, Oliver Frécaut and Arto Kovanen, and titled, “Indonesia: Anatomy of a Banking Crisis: Two Years of Living Dangerously, 1997-99.” The authors include a largely fictive three-page account of the currency board episode. The authors assert, among other things, that I counseled President Suharto to set the rupiah-dollar exchange rate at 5,000. Not surprisingly, this account, which includes 115 footnotes, fails to document that assertion. Lies are impossible to document.

What Should the U.S. Role Be In Argentina?

The Duhalde government’s measures, especially those connected with the exchange rate and the banking system, have drawn praise from many observers as steps in the right direction. The observers are wrong. They neglect that the government’s program amounts to destruction of the rule of law, to the imperfect extent that it existed in Argentina. The government has changed the terms of some contracts between private parties, suspended the validity of other contracts, and seized wealth from some members of the public to redistribute to other members or to itself.

The Duhalde government has so disrupted rights to private property that they hardly exist any more. The government’s measures are disastrous for Argentina’s future. Without a reversal of most of the measures, Argentina will remain for years to come what it has been for more than half a century: a once-rich country that has stagnated while other countries, once poorer, surged ahead of it. If private property has no stability, there will be no reason for Argentines or foreigners to invest much in Argentina.

Observers who have praised the government’s measures have also somehow failed to notice that a depreciating peso, which is the only kind Argentina is likely to get, is massively unpopular. Since central banking was established in Argentina in 1935, the peso has depreciated against the dollar by a factor of approximately 6,000,000,000,000. In the Argentine context, a floating exchange rate has always meant a depreciating rate. The convertibility system, though imperfect, was the cornerstone of Argentina’s economic growth in the 1990s. Now that the cornerstone has been removed, much of the structure has already crumbled.

At a hearing of this subcommittee on February 6, 2002, John Taylor, the Under Secretary of the Treasury for International Affairs, remarked that he thought Argentina should have dollarized rather than frozen bank deposits on December 1. To me, it is astonishing that he did not communicate this view to Argentina’s government, since it would have carried considerable weight. Although the United States is not responsible for Argentina’s economic problems, it is in our national interest for the Treasury Department to offer advice that would promote economic growth and political stability in Argentina. The result of the Treasury’s hesitant attitude about recommending dollarization has been that Argentina is now asking the IMF and other international financial institutions for billions of dollars in new loans. Since the United States is the largest provider of funds to those organizations, if they lend to Argentina at their customary below-market rates, U.S. taxpayers will in effect be paying for the Treasury’s hesitation. This leads me to my two recommendations for U.S. policy towards Argentina.

First, recommend dollarization. As a purely technical matter,dollarization is always feasible at some exchange rate, and as Ecuador’s experience of dollarization in 2000 indicates, it is feasible even when established in the midst of political and economic chaos. The question in Argentina’s case is what exchange rate is appropriate now and, if dollarization is not adopted soon, how to determine the exchange rate that would be appropriate should a future government decide to dollarize. Dollarization remains desirable because the prospects are poor for making the peso into a stable currency that people will want to use without coercion. People trust the dollar; they do not trust the peso.

It may no longer be possible to return to an exchange rate of 1 peso per dollar, but Argentina can do what Ecuador did when it dollarized in 2000: establish a uniform exchange rate for converting local currency into dollars and apply it to all assets and liabilities denominated in local currency. This rate should not be determined mechanically, by simply looking at what exchange rate would be necessary to make the central bank’s dollar assets cover its peso monetary liabilities. The confidence that dollarization would inspire might enable dollarization to occur at an exchange rate considerably more favorable for the Argentine public than a mechanical calculation indicates.

Interest rates in pesos are far above rates in dollars because of expectations of substantial inflation. They can be adjusted as they were in Ecuador by establishing procedures for reducing nominal interest rates downward to reflect lower expectations of inflation.

My second recommendation is that the Treasury respect laws that Congress has passed, which establish the wise principle that Americans as taxpayers should not support a government that robs Americans as investors. A number of provisions of Title 22 of the U.S. Code state that the President shall deny foreign aid to governments that seize the property of or nullify contracts with U.S. citizens or corporations. These provisions also state that the President shall instruct U.S. executive directors at international financial institutions to vote against loans (except humanitarian aid loans) for such governments unless the governments have, within a specified period, provided compensation for the property taken or submitted claims for compensation to arbitration in accord with international law. The relevant provisions of Title 22 include sections 283r; section 284j; section 2370, subsection (e); and section 2370a, subsections (a) and (b).

In my view, the actions Argentina has taken should clearly trigger U.S. opposition to loans by international financial institutions to which the United States belongs. In testimony to the Joint Economic Committee on February 14, 2002, Dr. Taylor indicated that Argentina’s actions have not triggered the provisions of Title 22 because Argentina has treated all foreign investors equally. That is not the standard the provisions refer to, however; rather, the provisions are supposed to be triggered by specified violations of property rights that affect Americans whether or not other foreign investors have suffered similar violations. Mr. Chairman and members of this committee, whether the administration will enforce the laws Congress has passed depends mainly on you and your fellow legislators. If American as taxpayers end up supporting a government that has robbed them as investors in Argentina, it will send a terrible signal. Secure private property rights are an essential ingredient of our prosperity and that of every other wealthy country. To turn a blind eye to the massive violations of property rights in Argentina would not only harm U.S. investors, it would reinforce longstanding tendencies that have made Argentina a problem-prone country for most of its history. Therefore I urge you to ensure that the laws are upheld and that the United States vote against aid for Argentina from the IMF and other institutions until Argentina reverses its seizures of property or provides compensation for them.

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FREDERIC BASTIAS & JUAN BAUTISTA ALBERDI, Founding Fathers of INDIVIDUAL LIBERTIES.

Introductory comment by Gaston Saint Martin (gsaintmartin@hotmail.com )

ALBERDI Juan Bautista -2

When J.B. ALBERDI was born in the North of Argentina, F. BASTIAS already was 9 years old in France. –  I really don’t care if their ideas were as “metastasis” (one originated from the other) or as a “multi-centric cancers“, but as those leader thinkers didn’t have I-Pads, Cellphones, Laptops interconnected by Internet, wire connected phones neither code Morse Telegraph, I guess their individual ideas were mainly originated as reaction to their time problems!. –  Neither of them were born to academic, university, wealthy families, but rather  middle class poor rural neighborhoods. I am amazed by the similarities of their IDEAS!… –   More than 1.6  century  later those ideas are as fresh and powerful as 160 years ago!   –  I know: You  may argue: “…What you say is true… but you didn’t mention

Frédéric Bastiat

Frédéric Bastiat (Photo credit: Wikipedia)

Bastias and Alberdi live in France at the same time…” – …  You are right about that! … BUT… When Juan Bautista Alberdi Included his article 29 in the draft of Argentine Constitution, he was only 42 years old and was not appointed as Plenipotentiary Argentine Diplomat to present the New Argentine Sovereign Nation to the world yet! It was years ahead before he established his headquarters  in Paris, to present modern Argentina to Europe and to the world!

To amaze you as much as I am,  with the similarity between Bastia’s thinking (Legalized Pounder, to Alberdi’s  (Infamous Traitors to The Patria, art 29” to actual “Legalized TheftSTEVE HANKE-1Professor Steve Hanke’s report to US Congress, please read: Article 29 of the Argentine Constitution, I have translated to English for you:

Art.29. Argentine National Constitution-1853:Congress can not grant to the National Executive, nor the Provincial Legislatures, to Provincial Governors, extraordinary powers or the sum of public power, neither prerogatives nor special privileges in order to put the life, honor or wealth of argentines to the mercy of government, neither any person whatsoever. Acts of this nature imply absolute nullity, are utterly useless, and condemn to those who formulate, consent or endorse it, the responsibility and PUNISHMENT OF INFAMOUS TRAITORS TO THE PATRIA (Homeland).

– http://dotsub.com/view/6474921d-8943-443b-9128-de62aa3b3e54

–FREDERIC BASTIAT – LEGAL PLUNDER- ( or Legalized Theft or Robo Legalizado)

https://en.wikipedia.org/wiki/Frédéric_Bastiat

French Economist 1801-500 – ‪‪Frédéric Bastiat – From Wikipedia, the free encyclopedia

Frédéric Bastiat

  Classical liberalism

Born 30 June 1801Bayonne, France
Died 24 December 1850 (aged 49)Rome, Papal States
Nationality French
Influences Richard Cobden, Adam Smith, John Locke
Influenced Arthur Latham Perry, Gustave de Molinari, Ludwig von Mises, Henry Hazlitt, Ron Paul, Thomas Sowell

Claude Frédéric Bastiat (French: [klod fʁedeʁik bastja]; 30 June 1801[1] – 24 December 1850) was a French classical liberal theorist, political economist, and member of the French assembly. He was notable for developing the important economic concept of opportunity cost, and for penning the influential Parable of the Broken Window. His ideas have gone on to provide a foundational basis for Libertarian and the Austrian schools of thought.[1][2]

Biography[edit]

Bastiat was born in Bayonne, Aquitaine, a port town in the south of France on the Bay of Biscay, on 30 June 1801. His father, Pierre Bastiat, was a prominent businessman in the town. His mother died in 1808 when Frédéric was seven years old.[3] His father moved inland to the town of Mugron with Frédéric following soon after. The Bastiat estate in Mugron had been acquired during the French Revolution and had previously belonged to the Marquis of Poyanne. Pierre Bastiat died in 1810, leaving Frédéric an orphan. He was taken in by his paternal grandfather and his maiden aunt, Justine Bastiat.[3] He attended a school in Bayonne, but his aunt thought poorly of it and so enrolled him in Saint-Sever. At 17, he left school at Sorèze to work for his uncle in his family’s export business. It was the same firm where his father had been a partner. Economist Thomas DiLorenzo suggests that this experience was crucial to Bastiat’s later work since it allowed young Frédéric to acquire first-hand knowledge of how regulation can affect markets.[2] Sheldon Richman notes that “he came of age during the Napoleonic wars, with their extensive government intervention in economic affairs.

Bastiat began to develop an intellectual interest. He no longer wished to work with his uncle and dreamed of going to Paris for formal studies. This dream never came true as his grandfather was in poor health and wished to go to the Mugron estate. Bastiat accompanied him and took care of him. The next year, when Bastiat was 24, his grandfather died, leaving the young man the family estate, thereby providing him with the means to further his theoretical inquiries.[3] Bastiat developed intellectual interests in several areas including “philosophy, history, politics, religion, travel, poetry, political economy and biography.”[2] “After the middle-class Revolution of 1830, Bastiat became politically active and was elected justice of the peace of Mugron in 1831 and to the Council General (county-level assembly) of Landes in 1832. He was elected to the national legislative assembly after the French Revolution of 1848.”[1]

His public career as an economist began only in 1844 when his first article was published in the Journal des economistes in October of that year. It was cut short by his untimely death in 1850. Bastiat had contracted tuberculosis, probably during his tours throughout France to promote his ideas, and that illness eventually prevented him from making further speeches (particularly at the legislative assembly to which he was elected in 1848 and 1849) and took his life. In the fall of 1850, he was sent to Italy by his doctors. He first traveled Pisa, then on to Rome. On 24 December 1850, Bastiat called those with him to approach his bed. He murmured twice the words “the truth” then passed away.[3]

Works

Bastiat was the author of many works on economics and political economy, generally characterized by their clear organization, forceful argumentation, and acerbic wit. Economist Murray Rothbard wrote that “Bastiat was indeed a lucid and superb writer, whose brilliant and witty essays and fables to this day are remarkable and devastating demolitions of protectionism and of all forms of government subsidy and control. He was a truly scintillating advocate of an unrestricted free market.”[1] On the other hand, Bastiat himself declared that subsidy should be available, but limited: “under extraordinary circumstances, for urgent cases, the State should set aside some resources to assist certain unfortunate people, to help them adjust to changing conditions.”[5] Among his better known works is Economic Sophisms,[6] which contains many strongly worded attacks on statist policies. Bastiat wrote the work while living in England to advise the shapers of the French Republic on pitfalls to avoid.

Economic Sophisms and the “Candlemakers’ Petition”[edit]

Contained within Economic Sophisms is the satirical parable known as the “Candlemakers’ petition” in which candlemakers and tallow producers lobby the Chamber of Deputies of the French July Monarchy (1830–1848) to block out the Sun to prevent its unfair competition with their products.[7] Also included in the Sophisms is a facetious petition to the king asking for a law forbidding the usage of everyone’s right hand, based on a presumption by some of his contemporaries that more difficulty means more work and more work means more wealth.[8]

The Law (1850)

Bastiat’s most famous work, however, is The Law, originally published as a pamphlet in 1850. It defines, through development,[clarification needed] a just system of laws and then demonstrates how such law facilitates a free society.

In The Law, he wrote that everyone has a right to protect “his person, his liberty, and his property”. The State should be only a “substitution of a common force for individual forces” to defend this right. “Justice” (defense of one’s life, liberty, property) has precise limits, but if government power extends further, into philanthropic endeavors, government becomes so limitless that it can grow endlessly. The resulting statism is “based on this triple hypothesis: the total inertness of mankind, the omnipotence of the law, and the infallibility of the legislator.” The public then becomes socially-engineered by the legislator and must bend to the legislators’ will “like the clay to the potter”:

“I do not dispute their right to invent social combinations, to advertise them, to advocate them, and to try them upon themselves, at their own expense and risk. But I do dispute their right to impose these plans upon us by law – by force – and to compel us to pay for them with our taxes”.

Bastiat posits that the law becomes perverted when it punishes one’s right to self-defense (of his life, liberty, and property) in favor of another’s right to “legalized plunder,” which he defines as: “if the law takes from some persons what belongs to them, and gives it to other persons to whom it does not belong. See if the law benefits one citizen at the expense of another by doing what the citizen himself cannot do without committing a crime.”[9] [e.g. see also redistribution (economics)]

“What is Seen and What is Unseen”

Also, in his 1850 essay “Ce qu’on voit et ce qu’on ne voit pas” (“What is Seen and What is Unseen”),[10] through The Parable of the broken window he introduces the concept of opportunity cost in all but name; this term was not coined until over 50 years after his death in 1914 by Friedrich von Wieser.

Debate with Proudhon

He also famously engaged in a debate, between 1849 and 1850, with Pierre-Joseph Proudhon about the legitimacy of interest.[11] As Robert Leroux argued, Bastiat had the conviction that Proudhon’s doctrine “was the complete antithesis of any serious approach”.[12] Proudhon famously lost his temper and declared to Bastiat: “Your intelligence sleeps, or rather it has never been awake…You are a man for whom logic does not exist…You do not hear anything, you do not understand anything…Your are without philosophy, without science, without humanity…Your ability to reason, like your ability to pay attention and make comparisons is zero…Scientifically, Mr. Bastiat, you are a dead man.”

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Bastiat asserted that the sole purpose of government is to protect the right of an individual to life, liberty, and property, and why it is dangerous and morally wrong for government to interfere with an individual’s other personal matters. From this, Bastiat concluded that the law cannot defend life, liberty, and property if it promotes “legal [or legalized] plunder,” which he defined as using government force and laws to take something from one individual and give it to others (as opposed to a transfer of property via mutually-agreed contracts, without using fraud nor violent threats against the other party, which Bastiat considered a legitimate transfer of property).

In The Law, Bastiat explains that, if the privileged classes or socialists use the government for “legalized plunder,” this will encourage the other socio-economic class to also use “legal plunder,” and that the correct response to both the socialists and the corporatists is to cease all “legal plunder.” Bastiat also explains in The Law why his position is that the law cannot defend life, liberty, and property if it promotes socialist policies. When used to obtain “legalized plunder” for any group, he says, the law is perverted and turned against the only things (life, liberty, and property) it is supposed to defend.

Bastiat was also a strong supporter of free trade. He “was inspired by and routinely corresponded with Richard Cobden and the English Anti-Corn Law League and worked with free-trade associations in France.

Because of his stress on the role of consumer demand in initiating economic progress (a form of demand-side economics), Bastiat has been described by Mark Thornton, Thomas DiLorenzo,[2] and other economists as a forerunner of the Austrian School. In his Economic Harmonies, Bastiat states that,

We cannot doubt that self-interest is the mainspring of human nature. It must be clearly understood that this word is used here to designate a universal, incontestable fact, resulting from the nature of man, and not an adverse judgment, as would be the word selfishness.

Thornton posits that Bastiat, through taking this position on the motivations of human action, demonstrates a pronounced “Austrian flavor.

Frédéric Bastiat

One of Bastiat’s most important contributions to the field of economics was his admonition to the effect that good economic decisions can be made only by taking into account the “full picture.” That is, economic truths should be arrived at by observing not only the immediate consequences – that is, benefits or liabilities – of an economic decision, but also by examining the long-term second and third consequences. Additionally, one must examine the decision’s effect not only on a single group of people (say candlemakers) or a single industry (say candlemaking), but on all people and all industries in the society as a whole. As Bastiat famously put it, an economist must take into account both “What is Seen and What is Not Seen.” Bastiat’s “rule” was later expounded and developed by Henry Hazlitt in his work Economics in One Lesson, in which Hazlitt borrowed Bastiat’s trenchant “Broken Window Fallacy” and went on to demonstrate how it applies to a wide variety of economic falsehoods.

Negative railroad

A famous section of Economic Sophisms concerns the way that tariffs are inherently counterproductive. Bastiat posits a theoretical railway between Spain and France that is built in order to reduce the costs of trade between the two countries. This is achieved, of course, by making goods move to and from the two nations faster and more easily. Bastiat demonstrates that this situation benefits both countries’ consumers because it reduces the cost of shipping goods, and therefore reduces the price at market for those goods.

However, each country’s producers begin to criticize their governments because the other country’s producers can now provide certain goods to the domestic market at reduced price. Domestic producers of these goods are afraid of being outcompeted by the newly viable industry from the other country. So, these domestic producers demand that tariffs be enacted to artificially raise the cost of the foreign goods back to their pre-railroad levels, so that they can continue to compete.

Bastiat raises two significant points here:

1. Even if the producers in a society are benefited by these tariffs (which, Bastiat claims, they are not), the consumers in that society are clearly hurt by the tariffs, as they are now unable to secure the goods they want at the low price at which they should be able to secure them.

2. The tariffs completely negate any gains made by the railroad and therefore make it essentially pointless.

To further demonstrate his points, Bastiat suggests that, rather than enacting tariffs, the government should simply destroy the railroad anywhere that foreign goods can outcompete local goods. Since this would be just about everywhere, he goes on to suggest that this government should simply build a broken or “negative” railroad right from the start, and not waste time with tariffs and rail building.

Bastiat’s tomb

Bastiat’s tomb in San Luigi dei Francesi

Bastiat died in Rome and is buried at San Luigi dei Francesi in the center of that city. He declared on his deathbed that his friend Gustave de Molinari (publisher of Bastiat’s 1850 book The Law) was his spiritual heir.

Bastiat in English translation[edit]

The following titles were originally published by the Foundation for Economic Education in Irvington-on-Hudson, NY, and are made available online by The Library of Economics and Liberty.

A collection of Bastiat’s major works is available from the Ludwig von Mises Institute:

  • 2007. The Bastiat Collection, Volume 1[16] and Volume 2[17] Ludwig von Mises Institute.
  • The Man and the Statesman, The Correspondence and Articles on Politics (2009) Jacques de Guenin, General Editor; Introduction by Jacques de Guenin and Jean-Claude Paul Dejean; Dennis O’Keeffe, Translation Editor; David M. Hart, Academic Editor. Liberty Fund. Book overview

See also:

Libertarianism portal

Additional reading[edit]

References

1. ^ a b c d e Thornton, Mark (2011-04-11) Why Bastiat Is Still Great, Mises Institute

2. ^ a b c d DiLorenzo, Thomas. “Frédéric Bastiat (1801–1850): Between the French and Marginalist Revolutions.” Mises.org.

3. ^ a b c d Roche III, George Charles (1971). Frédéric Bastiat: A Man Alone. New Rochelle, New York: Arlington House. ISBN 0-87000-116-7.

4. ^ Richman, Sheldon. “Frédéric Bastiat: An Annotated Bibliography.” The Library of Economics and Liberty. 2000.

5. ^ Justice and fraternity, in Journal des Économistes, 15 June 1848, pg. 313

6. ^ Bastiat, Frédéric. “Economic Sophisms”. Retrieved 2008-12-12.

7. ^ Bastiat, Frédéric. “Candlemakers’ petition”. Retrieved 2008-12-12.

8. ^ “Bastiat: Economic Sophisms, Series 2, Chapter 16”. Library of Economics and Liberty. Retrieved 2013-03-03.

9. ^ The Law, at bastiat.org

  1. ^ Bastiat: Selected Essays, Chapter 1, What Is Seen and What Is Not Seen | Library of Economics and Liberty
  2. ^ “Bastiat-Proudhon Debate on Interest”. Praxeology.net. Retrieved 2008-12-02.
  3. ^ Leroux, Robert. “Political Economy and Liberalism: The Economic Contribution of Frédéric Bastiat” Routledge, 2011, p. 118.
  4. ^ Roche, Charles George. “Frederic Bastiat: A Man Alone”. Arlington House, 1971, p. 153.
  5. ^ a b Bastiat, Frédéric. The Law. Ludwig von Mises Institute, 2007.
  6. ^ Thornton, Mark. “Frédéric Bastiat as an Austrian Economist.” Mises.org.
  7. ^ Mises.org
  8. ^ Mises.org

Derecho a La Intimidad

Constitucion Argentina 1853 (Art 19)

University of Louisville / Children’s Hospital and G.H 

Childrens

Compartir > > > >     http://wp.me/p2jyCr-co 

I was an just graduated Argentine MD in pediatric training at Children’s Hospital and General Hospital of University of Louisville, (UOL) Kentucky in the late sixties. As come to The US  planning to go back to Argentina‘s Patagonia to practice there when my training was complete; I chose that University because it was one of the oldest and smallest Municipal Universities in The Union. –  UOL was academically excellent, but even more important to me: “It was small enough to avoid human, personal disconnection with patients“. – To take care of both –(across the street)- hospitals, our Pediatric Department needed 25 to 30 MD residents, but that year we were only 8; so I was lucky!… I have plenty of work and no time to fool around! – Because my ESL (English as Second Language) was limited, my first post was at the newborn and premature nursery. My Pediatric Professor a mentor (Dr. Water Hughs) call me to his office one day; to discuss a baby case I was discharged the previous day.  The new born baby was born to a syphilitic mother. We treat the mother and the baby. As the baby blood diagnostic test for syphilis was positive my discharge diagnosis was “Lues Congenital”. My discharge diagnosis was read by a clerk at the file room while processing that chart. The clerk called his supervisor. The supervisor called my Chief, and he called me to tell me: “Gaston your diagnosis and treatment of this baby has been excellent. The baby’s blood test for lues are positive, so in a way that diagnosis may be right… BUT if you stamp that diagnosis to his records; this baby is going to be a civil dead for the rest of his life. He won’t be able to get any job, insurances … On the other hand… the treatment has been so good that he is not really sick…” – We change that diagnosis and routinely followed the baby as a normal out patient; and I learn precisely what I expect to learn in my medical training “Medicine is about human been, individual persons, NO just “cases, tests, X-rays, either stats”. I was right to Choose UOL!  –  It was not just my Chief who save that baby! It was a plain alert clerk, part of a teamwork  of an excellent small University! –As an actual contrast: What is going on today with those same principles? “The Right to OUR PRIVACY!” – To day: a simple buccal mucosal swab can make public, thousand times more PRIVATE information than 1 cc of blood drained from a baby, 40 years ago!. It can predict (for example) serious incapacitating genetic diseases 30 or more years before the disease became symptomatic! Are we going to “LEGALLY KILL all that people? And do that just to let corporation make more money?  – Is this a modern more efficient technique for INFANTICIDIOS? – Please read the CATO note about “BALANCING” and DNA SWABSINFANTICIDIO del REY HERODES

“Balancing” and DNA Swabs

Posted: 05 Jun 2013 05:22 AM PDT

Julian Sanchez

My colleagues IlyaJimRoger, and Walter have said most of what needs to be said about the Supreme Court’s recent decision in the DNA sampling case Maryland v. King. So let me just hover for a moment on a point Roger makes.  Everyone seems to agree that Justice Kennedy’s majority opinion strains the bounds of language by arguing that the state purpose of “identification” served by DNA sampling arrestees includes establishing a “context” for understanding “who the person really is,” including their “past conduct.” By the same logic, we might justify searching the homes of every drunk driver for evidence of unrelated crimes, since this too would give us a sense of “who they really are,” and whether they have reason to jump bail lest other crimes be discovered. The real argument, disingenuously shoehorned into this rubric of “identification,” is that this is indeed a warrantless search for ordinary investigative purposes, but that once a person has already been legitimately detained, the marginal intrusion involved in a cheek swab is trivial—and the benefit to society of enabling serious crimes to be solved so great—that an exception to the normal Fourth Amendment rules is justifiable.  This is, as Roger suggests, a closer call.

Let’s go further and make the argument that Justice Kennedy, determined to cast this as a matter of “identification,” didn’t bother with.  He could, after all, have cited to the Supreme Court’s major dog-sniff cases, Place and Caballes, in support of the following argument:

Animation of the structure of a section of DNA...

Animation of the structure of a section of DNA. The bases lie horizontally between the two spiraling strands. (Photo credit: Wikipedia)

The limited DNA profile actually entered into the CODIS database is only useful for matching, not for revealing other sensitive facts about medical conditions or genetic predispositions.  In essence, then, this is a search that only reveals whether one is the unidentified perpetrator of a crime—which, like possession of contraband, is a fact in which a person has no “reasonable expectation of privacy.”  So one might argue.

The first point to make is that the narrow “if you have nothing to hide, you have nothing to fear” argument doesn’t really work.  A murder investigation will naturally involve collection of foreign DNA samples on the victim, which may well belong to persons that had nothing to do with the crime. Thus a search of an innocent arrested persons DNA could easily reveal the existence of, say, an unrelated but secret sexual relationship with the victim, or merely the presence of the searched person at the scene of a crime they had no involvement in. So this is not really a search with no realistic risk of exposing innocent but legitimately private information.

The larger point, though, is that the provisions of the Bill of Rights were meant to avoid precisely this kind of granular case-by-case “balancing” process, to the extent possible. An analogy to the First Amendment may be helpful here. Let’s concede: It is totally plausible that prohibiting Nazis from marching through a community of Holocaust survivors, or the grotesque Westboro Baptist Church from picketing military funerals with signs that read “Thank God for Dead Soldiers” and “God Hates Fags,” would suppress particular instances of speech with no real social value and spare decent people anguish they do not deserve. In a vacuum, probably neither instance of speech would survive a “balancing test.”  But the courts correctly protected both nevertheless, because the First Amendment articulates a meta-balancing judgment that we do not want the government engaged in this kind of specific case-by-case balancing analysis of which speech is valuable enough to be protected. The Framers of the Constitution had already done a balancing test about when it is better not to engage in balancing tests.

So it is, I would argue, with the Fourth Amendment. In the short term, it is easy enough to say that a few cheek swabs are a trivial marginal intrusion, even if they sometimes expose innocent private information, compared with the social benefit of catching murderers and rapists. But especially as DNA testing technology evolves, what are the consequences of establishing a massive repository of genetic information about the one-third of Americans who will be arrested by the age of 23—especially if that database disproportionately encompasses poor minorities, many of whom are never convicted of any crime? (Those who ARE convicted, as Justice Scalia’s dissent in King observed, get sampled anyway—so the policy in  question here only really makes a difference to the innocent.)  How do you “balance” the crimes solved at the margin when samples are taken from people arrested though ultimately acquitted against the creation of an architecture of genetic information-gathering, which may in itself encourage pretextual arrests for trivial offenses to circumvent the need for search warrants for genetic material, whose long-term uses are impossible to foresee? The general attitude of the courts, after all, is that once information or evidence has been legitimately acquired by police, there is no Fourth Amendment barrier to further analysis of that evidence, even if unrelated to the purpose for whcih it was acquired. (There are, I think, good theoretical reasons to regard this as a mistake, but that’s how things presently stand.)

In this case, then, the Court has invoked the idea of “identification” to obscure what is fundamentally an application of a “balancing test” to a warrantless investigative technique. But the Court is balancing benefits it can see reasonably clearly with costs it cannot.  Perhaps, even in the long run, the benefits will outweigh the costs. But the point of the Fourth Amendment is to provide a basis for limiting governmental information gathering that, to the extent possible, avoids saddling the Court with the responsibility for engaging in this sort of utilitarian calculus. It cannot be avoided entirely, of course—that much is implicit in the inclusion of the normative term “unreasonable” in the text of the Fourth Amendment—but it should not be the ordinary grounds for deciding which particular searches are permissible. Sometimes, as Hayek understood, we stick to simple rules, not because they are truly optimal, but because we are not clever or prescient enough to develop more nuanced rules that do better.

JUNE 28, 2013 1:41PM

Yesterday, the U.S. Department of Education released the latest results from theLong Term Trends portion of the National Assessment of Educational Progress. The NAEP LTT was specifically designed to track changes in student performance over time, even when there aren’t any. The chart below depicts the average performance of U.S. 17-year-olds across subjects, relative to the scores of the students who took these tests 40 years ago.

AMERICAN TRENTS PUBLIC SCHOOLING

There have been some slight improvements in the scores of younger children, but they don’t last. By the time students are preparing to enter higher education or the workforce, they are no better prepared academically than they were two generations ago–despite the fact that we have spent three times as much on their K-12 education as we did educating the class of 1970.

What explains this stagnation?

Officials suggest the results for 17-year-old students reflect fewer low-performing students dropping out. For instance, Hispanic students had a 32 percent dropout rate in 1990 and that number fell to 15 percent in 2010, said Peggy Carr, an associate commissioner with the National Center for Education Statistics.”These students are generally scoring at the lower end of the distribution but it’s a good thing that they’re staying in schools,” Carr said.

There are several problems with this explanation. First, Carr seems to be referring to the NCES’s “status” dropout rate that counts a GED as high school completion (see Figure 2, page 21, here). But a student who takes the GED is not in school, would therefore presumably not participate in the NAEP test, and could therefore not drag down the NAEP average. Moreover research by Nobel laureate economist James Heckman (among others) has demonstrated that:

(a) the true high school graduation rate is substantially lower than the official [“status”] rate issued by the National Center for Educational Statistics; (b) it has been declining over the past 40 years; (c) majority/minority graduation rate differentials are substantial and have not converged over the past 35 years; (d) the decline in high school graduation rates occurs among native populations and is not solely a consequence of increasing proportions of immigrants and minorities in American society;

Second, if the overall average only languished because more low-scoring minority students are now taking the test, as the NCES implies, we would expect to see the scores of minority students falling and the scores of white students rising over the 20-year period in question. That is not the case. Scores for white, black, and Hispanic students are all flat between 1990 and today.

The evidence thus seems to contradict the NCES’s explanation for the four-decade stagnation in achievement among 17-year-olds. Here is a more plausible one: Improvement is hard. Systematic progress only occurs when producers have the freedoms and incentives to innovate and excel. Our public-school monopolies do not provide those freedoms and incentives, and so they stagnate while their costs inexorably rise.