This past Wednesday morning, Representatives John Dingell (D, Michigan) and Kevin Brady (R, Texas)  sat down for an interview with CNBC’s Becky Quick, Carl Quintanilla and John Harwood.   Discussing healthcare legislation, bipartisanship and the law-making process in general, some unintentional revelations of our completely dysfunctional Congress were laid bare and proved stunning.

A few minutes into the discussion, Becky Quick questioned whether or not a “public plan” was needed to achieve the goal of “lowering the cost curve”.   Here is Dingell’s response:

“Well, I think a public plan is an absolute necessity, and the reason is, that we have found, that the current pattern of state regulation does not work.  There’s no way, whatever, that we can control the costs and the behavior of the insurance companies.  And so we’ve got to substitute for that, competition.   And the only way we can get that competition that will work is by seeing to it that we do have a public plan.“

Nevermind that many Republicans believe that it is exactly all the state and federal regulation prohibiting competition that is a big contributor to our dramatic health care cost inflation.   What was truly remarkable was that even with the admission of a non-working public policy, there has been no call from these same people to repeal it.   Rather, a massive new program must be put in place which will correct for the failings of the first one, which will be left in place.

Dingell was also proud of the Congressional Budget Office’s estimate that through the inclusion of a public option there would be “an increase the number of persons receiving employer based health insurance by about 2 million people”.   Using his number of 46 million uninsured, that’s a little over 4%.   Enough said.

But it got better.   Minutes later, following a discussion of whether or not there was bipartisan cooperation, Rep. Dingell, elected to the House in 1955, initiated the following exchange:

Rep. Dingell: “One of the problems that exists, and this is a very real one, is that we are engaged now in the public [his emphasis] drafting of legislation.  This leads to all manner of unfortunate misunderstandings as to what it is that we are doing.”

Becky Quick:   “But you say doing this in ‘public’.  That means doing it under the light of day where people can actually see what’s happening?”

Dingell:  “Uh, you’re just seeing the unfortunate consequences of public drafting of legislation and it makes a fine mess because people don’t understand the complexities of this.”

Quick:  “So it should done behind closed doors…?”

Dingell:  “Bismark observed, ‘If you like sausage, or legislation, don’t watch either one made.'”

Carl Quintanilla:  “Right, right. We’re watching it get done this time.”

Quick: “I don’t know, I’ve always thought that the openness is something that’s a good thing though, the more people that are involved, the better.”

Rep. Brady: “It is.”

Quintanilla:  “That’s assuming that people really understand and have time to pay attention to the detail, right?”

Quick: “I guess it depends on whether you trust what’s happening behind closed doors or not though.”

Brady:  “I’ll tell you… We held over 51 Town Hall meetings, the people who came to our Town Hall meetings were knowledgeable, they’d read the bill, they knew health care issues. Their problem is too much of this has been done behind closed doors.   They want it to be open.  They want their ideas heard.  And it’s not.”

At an earlier point in the interview, John Harwood turned to Rep. Brady and said “Are you really going to stand in the way of the Congressman realizing his dream”?    Brady calmly ticked off a number of initiatives that Republicans would do instead.   But the point is that this isn’t about Dingell’s dream.   It’s about doing what will produce the best result, according to the people affected, in the most fiscally responsible manner, which just might include having the government doing a whole lot less than what’s been done thus far.

It would seem that the truth about the nasty rotten sausage that pass for many of our laws, and the factory conditions where they’re produced, are exactly what is getting people worked up and causing them to look more closely over the process.    Dingell’s obviously not happy with that (and we can probably count on him never signing on to H.R. 554, requiring that all non-emergency legislation and conference reports receive 72 hours of Internet exposure prior to debate).   When people see something disgusting,  a common reaction is to recoil and try to ensure that they don’t see it again.  Better yet, they act to find the cause of the disgust and fix it.

It’s safe to say that we’d all be better off by ramping down the production lines at the sausage factory that is the US Congress.

From his soapbox at the NY Times, Paul Krugman delivers a lengthy and entertaining history of the views of “saltwater” and “freshwater” economists, and laments how neither side really saw our recent financial debacles coming.  Most troubling for this writer, he describes how Keynesiansim, rightly or wrongly interpreted but in either case a theory custom-made for big government, seems to be falling back into favor, although (encouraging to this writer), he surmises that the fields surrounding behavioral economics may hold better promise.

But nowhere in the article is the school of thought that did largely see this financial tsunami coming, but whose repeated warnings were largely ignored — the entire school of Austrian economics.   It’s too bad, because we have a lot to learn from Ludwig von Mises, Frederick Hayek and others.

Krugman describes the gigantic mind struggle of the Keynesian and Monetarist camps, as he says “clad in impressive-looking mathematics”, each trying to out-gun each other with explanations of which levers in the economy the government should be pulling and pushing on to smooth out the business cycle.  Meanwhile, the Austrians make the compelling case that it is exactly the government, mostly now via the Federal Reserve’s attempts at controlling the price of money, that causes the business cycle in the first place. There are doctoral-level tombs that get into this in great detail, such as von Mises’ “Human Action”. For an entirely more accessible version, complete with its application to recent events, check out Thomas Wood’s recent bestseller, “Meltdown”.   Acknowledging the Austrian’s perspective on things would have changed the article considerably.

Years ago I spent time developing software in the fixed income departments of several major investment banks.   Occasionally, the trading floor would explode in a sudden commotion like of a bunch of panicked extras in some cheesy disaster movie, with bond traders and salespeople yelling and screaming frantically.   The Fed had unexpectedly cut the discount rate! (or had taken some equally earthquake-like action).    Like seismologists, many players in the market would try to anticipate when these events would occur, but with some regularity, “big ones” would hit with little notice.   If you happened to be positioned incorrectly, property damage (to a trader’s book) could be severe.

Since blogs are such a great place for thought experiments, why not ponder the repercussions of not having a Federal Reserve at all, as Jim Rogers, Thomas Woods and others have at one time or another?    Imagine that those bond traders, salespeople and their managers were collectively the bottom line of our interest rate structures, and that were was no big Federal daddy to run home to for whatever reason.   My guess is that they’d be at least a little (if not a lot) more careful with what price they put on capital, and the manner in which it was transacted.

Which brings me to another great omission in Professor Krugman’s article, that being the role of failure.   Continuing the same thought experiment, if every bank knew it was NOT too big to fail, that there was no backstop for their potential mismanagement and recklessness, that would necessarily introduce an additional heap of caution into their lending practices.    When your trading counterparty is deemed “too big to fail”, it sets off an entire chain of relaxation in information gathering.   The mutual knowledge of needs and equally shared costs and benefits between trading partners that is required by free trade is rendered increasingly phony and precarious.  Would some borrowers, who under the recent overly-lax regimes got loans (what the Austrians might refer to as “malinvestments”), no longer get them?   Absolutely.     But we now see that perhaps that would have been a good thing, and there is no reason to extrapolate into a scenario where lending stops entirely.    Would some customers fear doing business with a bank that could fail?   Absolutely.   Therefore, a bank would have every reason to conduct themselves in a way that would assure their customers that they could not.   This could even spawn a market for private banking insurance, the price of which would be determined by the insurance companies’ assessment of the likelihood of failure.

In 2005, WalMart scared many potential competitors and special interest groups by drafting plans to enter the banking industry.   Suffice it to say, they eventually withdrew their plans.   The point is, in a truly free market, driven by the profit motive, firms will always arise to meet the unmet wants of potential customers.    At the same time, excess profits will always be kept in check by enabling and encouraging complete competition.  “Excess profits” simply open the doors for a hungrier competitor to steal customers through better pricing.

At the height of the recent banking crisis, nearly one year ago, there were cries of bank lending potentially shutting down completely.   But just because some lenders might be having trouble does not mean the need for borrowing permanently disappears.     Might the extra cross-industry diversification of a “WalMart in the banking business” have influenced “banking” for the better at the margin?   Would the Citibanks and Bank of Americas of the world have been forced to tweak their business models for the better?    We’ll never know.

In 2002, McCain/Feingold was passed with the noble-sounding goal of limiting the influence of  money on our legislative and election processes.  Less than two years later, the statute survived a challenge at the Supreme Court level, to the complete shock of anyone with a traditional definition of “free speech”.   In addition,  there is plenty of evidence that it was political speech, and in particular, the right to speak out against the policies and members of the government that The Framers sought to protect.  And in today’s day and age, “speaking out” can take many forms, including television, print, radio and the Internet.  Money, sometimes a lot of money, is required to participate in these mediums (although the Internet is changing this game entirely).   To now have strict limits on such expenditures, has the unintended (or perhaps entirely intended) consequence of limiting the amount and/or effectiveness of a single individual or organization’s ability to “speak out” and most troubling, to challenge our elected officials and their policies.

Why people would want to speak out?  In the same First Amendment, it states (in part) that “Congress shall make no law…abridging …the right… to petition the Government for a redress of grievances”  — in other words, to communicate to the government one’s thoughts or desires on how the government should or should not act.  Today, this activity is often referred to as lobbying.  As the number of issues that the government gets involved with grows, the incentive or requirement to lobby the government, to “speak out” in one way or another in an effort to affect the outcome, increases as well.

Originally, the number of issues that the government got involved with was very small, because the Constitution dictated as such.  So to petition the government, possibly spending money to do so, about an issue that the government was not going to address because it was legally bound not to would be an irrational act.  Then around the time of FDR, through a variety of new interpretations of the Constitution, suddenly many more issues were fair game for petitioning, that is, lobbying.  That trend has only accelerated to the present day.

So lobbying, therefore, is more important than ever before, and for entirely understandable reasons.  Politicians listen to the lobbying, because they feel they are in a position to do something about it, with “it” nowadays being just about anything.   With the stakes so high, the contributions to politicians’ campaigns soar proportionally.

Which brings us back to McCain/Feingold and the limiting of expenditures.  If there is greater-than-ever-before incentive to lobby, and yet the mechanisms to undertake that lobby are restricted, there is tension in the system.   Like excess pressure in any system, the pressure will seek to relieve itself any way it can, and again, government can not successfully figure out those ways in advance.   The collective will of the people is simply too complex.  Therefore, efforts to regulate or manage this pressure will certainly fail, which renders efforts to do so a waste of resources, and worse, a needless stimulation of civil discord.   With McCain/Feingold, Congress attacked the symptom and not the disease.

What would work instead?   Going back to root cause of the problem, namely, that government is now entangled with every aspect of our lives, in ways far more numerous than The Framers sought.   If we instead seek to strictly limit the role of government, we will necessarily limit the need to lobby.   The money spent doing so will drop as an uninteresting byproduct.

Elections do indeed have consequences.   The consequences of the latest U.S. Presidential election are taking the form of a titanic debate boiling down to liberty versus socialism.

Amidst this debate, there are calls for “bipartisanship”.   But why would the winner of the election, with a self-proclaimed mandate for “change” want to reach out to the other side?   On many of the issues, the Democrats simply have a different worldview than the Republicans.   Given that the Democrats won the election, and enjoy large voting majorities in the House and Senate, who needs the Republicans?  What point would it serve for the winners of an election to water down their legislative goals with the policies and perspectives of the other side — the policies and perspectives that they don’t agree with?   If they believe in their policies, and have the votes to get them done, they should just do so.

But perhaps they don’t really believe.

Perhaps by making token outreaches, and token modifications, they can give the impression of consideration and compromise, and provide political cover for themselves when things don’t work out as planned.  This, I suggest, is the likely purpose of bipartisanship.   It is rational for political purposes, but remains irrational for purposes of sound public policy.

Sound economic principles don’t need to be watered down and compromised upon with those that are less sound.   The Republicans ought to have thoroughly learned this lesson, and should greet any calls for bipartisanship by the other side with complete skepticism, and should likewise stop their own calls for bipartisanship, as they make no sense.   They had their chance and blew it big time.   The best they can do now is provide thorough and credible alternatives via a well-executed marketing war.   The American people will sort out the damage.   With protests mounting as the truth comes out about the Democrats’ plans for government, they’ve already begun to do so.