Mary Katherine Ham performs the math and demonstrates that total confiscation of all the assets of the rich would not, in fact, solve the federal entitlement spending problem.

This week, Michael Moore offered a simple and elegant solution to our debt problem.

Calling the assets of wealthy Americans a “national resource,” he suggested our problems would all be solved if we could just have access to all that money.

“What’s happened is that we’ve allowed the vast majority of that cash to be concentrated in the hands of just a few people, and they’re not circulating that cash. They’re sitting on the money,” Moore said. “That’s not theirs, that’s a national resource, that’s ours. We all have this… we all benefit from this or we all suffer as a result of not having it.”

“America’s not broke,” he told a cheering crowd of pro-union protesters in Wisconsin. …

The United States of America has about 400 billionaires. Moore calls them “400 little Mubaraks.” About half of those have less than $2 billion each, and those with a net worth in the double-digit billions is an exclusive club of about 30.

Still, as Moore says, “there’s a ton of cash out there.”

The grand total of the combined net worth of every single one of America’s billionaires is roughly $1.3 trillion. It does indeed sound like a “ton of cash” until one considers that the 2011 deficit alone is $1.6 trillion. So, if the government were to simply confiscate the entire net worth of all of America’s billionaires, we’d still be $300 billion short of making up this year’s deficit.

That’s before we even get to dealing with the long-term debt of $14 trillion, which if you’re keeping score at home, is between 10 to 14 times the entire net worth of all of the country’s billionaires, combined. That includes the all-powerful Koch brothers ($40 billion between them), the all-powerful George Soros ($14.5 billion), all the Walton family (of the Wal-Mart fortune), Steve Jobs, Oprah (at a paltry $2.7 billion), the Google Founders, Michael Bloomberg, and the Mars family (of the candy bar empire).

Contrary to the left’s favorite talking point, our economic problems do not have anything to do with inequality. The problem is actually the reverse: government is taking away from its rightful owners (and redistributing) so large a portion of this country’s economy that investment, enterprise, opportunity, and economic confidence have been depressed.

The real solution is for government to restrain its appetite and stand aside in order to allow the economy to function and to grow, increasing the general prosperity, lowering costs of goods and services, and making everybody better off.

Curt from Flopping Aces forwarded a lengthy posting by MataHarley which raises the question of whether the near financial collapse of 2008 was deliberately engineered, and whether a further stage of the same anti-American offensive remains to be completed.

MH summarizes and discusses the hypotheses advanced in a highly provocative paper on Economic Warfare written in 2009 by Kevin D. Freeman via the DOD contracting system for the Department of Defense Irregular Warfare Support Program (IWSP).

It is undeniable that if the collapse of the financial system was deliberately engineered by calculated attacks aimed at perceived vulnerabilities, those attacks were tremendously successful and resulted in enormous economic losses.

The hypothesis discussed in this paper suggests the very real possibility that financial terrorism may have cost the global economy as much as $50 trillion, roughly 1000 times greater than Bernie Madoff’s fund and equal to nearly four years of American productive output.

[A]n estimated $50 trillion of global wealth virtually vanished. At least $15 trillion of that loss was experienced by Americans, as measured by the combined declines in the value of stocks, bonds, real estate, and other assets.

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The Freeman paper visualizes a three-stage assault on the US economy, and the American position of military, political, and economic leadership, only two parts of which are so far completed.

The hypothesis under consideration is that a three-phased attack is underway with two of those phases completed to date.

The first phase was a speculative run-up in oil prices that generated as much as $2 trillion of excess wealth for oil-producing nations, filling the coffers of Sovereign Wealth Funds, especially those that follow Shariah Compliant Finance. This phase appears to have begun in 2007 and lasted through June 2008.

The rapid run-up in oil prices made the value of OPEC oil in the ground roughly$137 trillion (based on $125/barrel oil) virtually equal to the value of all other world financial assets, including every share of stock, every bond, every private
company, all government and corporate debt, and the entire world‘s bank deposits. That means that the proven OPEC reserves were valued at almost three times the total market capitalization of every company on the planet traded in all 27 global stock markets.

The second phase appears to have begun in 2008 with a series of bear raids targeting U.S. financial services firms that appeared to be systemically significant.

An initial bear raid against Bear Stearns was successful in forcing the firm to near bankruptcy. It was acquired by JP Morgan Chase and the systemic risk was averted briefly. Similar bear raids were conducted against various other firms during the summer, each ending in an acquisition. The attacks continued until the outright failure of Lehman Brothers in mid-September. This created a system-wide crisis, caused the collapse of the credit markets, and nearly collapsed the global financial system. The bear raids were perpetrated by naked short selling and manipulation of credit default swaps, both of which were virtually unregulated. The short selling was actually enhanced by recent regulatory changes including rescission of the uptick
rule and loopholes such as ―the Madoff exemption.

While substantial, unusual trading activity can be identified, the source of the bear raids has not been traceable to date due to serious transparency gaps for hedge funds, trading pools, sponsored access, and sovereign wealth funds. What can be demonstrated, however, is that two relatively small broker dealers emerged virtually overnight to trade ―trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value.

The risk of a Phase Three has quickly emerged, suggesting a potential direct economic attack on the U.S. Treasury and U.S. dollar.

Such an event has already been discussed by finance ministers in major emerging market nations such as China and Russia as well as Iran and the Arab states. A focused effort to collapse the dollar by dumping Treasury bonds has grave implications including the possibility of a downgrading of U.S. debt forcing rapidly rising interest rates and a collapse of the American economy. In short, a bear raid against the U.S.financial system remains possible and may even be likely. Phase Two may have concluded with the brief market rebound that was supported by an emerging regulatory response calling for greater transparency across the board.

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Freeman observes: “[W]e remain left with the critical unanswered questions of who and how?”

One important clue must be the bizarre and confusing story of the seizure of $134.5 billion of apparently counterfeit US Treasury bearer bonds being smuggled across the border from Italy into Switzerland in June of 2009 by two Japanese nationals.

St. Louis Adjusted Monetary Base (BASE)

Freeman says that incident “may be as significant as the Japanese radio intercepts were before December 1941.” A hundred and thirty four billion dollars worth of counterfeit treasury bonds here and a hundred and thirty four billion dollars worth of counterfeit treasury bonds there adds up to a lot of money very quickly. The Obama Administration’s expansion of the US Monetary Base already threatens major inflation and jeopardizes the role of the dollar as reserve currency, additional counterfeit-based inflation could easily constitute a tipping-point factor changing our worst fears into reality.

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Freeman refers to, and quotes points made in, an anonymous, non-publicly-available 65-page paper titled Red Flags of Market Manipulation Causing a Collapse of the U.S. Economy, distributed to law enforcement agencies, members of Congress, and regulators.

This report discusses extensive research that shows significant red flags‘ of danger to the world‘s economy from what appears to be market manipulation in the global financial markets, which includes trading in common stocks, options,futures, commodities, currencies, oil, and bonds.

Two companies…are at the heart of this trading and they consistently work in concert. These firms became, virtually overnight, the largest traders in the U.S. financial markets. These companies provide a one-stop-shop for trade execution, back office clearing and bookkeeping that cater to hedge funds and small broker dealers. To give perspective, the amount of trading executed by these two firms in October 2008 exceeded the trading of securities firms Goldman Sachs, JP Morgan and Merrill Lynch combined in the NASDAQ market participant reports.

Key points

1) The firms have traded trillions of dollars worth of U.S. blue chip companies. They are the number one traders in all financial companies that collapsed or are now financially supported by the U.S. government. Trading by the firms has grown exponentially while the markets have lost trillions of dollars in value.

2) These firms appear to own few or no shares of blue chip companies they are number one traders in. There is no doubt that the magnitude of their trading impacted the marketplace. Since the direction of the market place has been in a severe downward trend, the impact from the firms has been and remains, negative to the marketplace.

Some other starling findings in the report, based almost exclusively on reviewing basic trading data, include:

The two previously small broker dealers mentioned in the report are market makers for every major financial services firm under attack.

These firms have a combined 76 different symbols under which they act as market maker (by contrast a major firm such as Citigroup has just 6).

Both firms offer sponsored access.

Both firms offer access to dark pools.

From June through September 2008, the two firms appeared to concentrate on Lehman Brothers, trading 1.04 billion shares while the stock price collapsed from $33.83 to $0.21 on 15 September. This pattern seemed to repeat in every other major financial stock.

The report estimates that the two firms completed as many as 641,000 trades per hour in October 2008 (based on market participation statistics and average trade size from the last available data).

Total trading volume by month in the financial sector listed for these two firms grew from approximately 350,000 shares (less than 1% of all market participant trading) in September 2006 to approximately 600,000 shares in the sector (about 6% of all market participant trading) in September 2007, to over 8 billion shares in the sector (about 19% of all market participant trading) by September 2008. That‘s an increase of 2.4 million percent in two years.

While both firms have been around for several decades, their rapid growth began in 2006 for one and 2007 for the other.

Both firms seem to specialize in the same stocks at the same time, appearing to work in concert.

Combined, the two firms traded 203 billion shares, mostly concentrated in major financial services companies. This compares to a total of 427 billion shares outstanding of all issues on the New York Stock Exchange.

The report estimates trading of at least $5 trillion over the 25-month period ending in November 2008.

The trading appears to represent new money to the marketplace by new participants.

From July 2008 through September 2008, the two firms ―traded more shares of Fannie and Freddie than were issued even as the share prices were collapsing.

The firms were also the largest traders of the UltraShort funds as well as the financial spider (symbol ―XLF) during the reporting period.

The firms also became the largest traders of energy stocks.

The two firms did not and do not hold major equity positions on their books.

The names of these two firms have been purposely withheld in this report because trading data alone is insufficient to consider any accusations against them. But, this trading data is specifically the type of red flag that should prompt further investigation. In addition, even in the event that trades were entered with the purpose of manipulating markets,there is no evidence to suggest that either of the brokerage firms discussed had any knowledge of, or in any way participated in any wrongdoing. They simply could have been conduits through which orders were placed as the laws and regulatory authorities currently allow. Nevertheless, this trading activity does lead to numerous questions:

Who had the capital to effect $5 trillion worth of trades in such a short period?

Who are the clients behind the trades? Are they foreign or domestic?

Why would two long-standing but relatively minor broker dealers be selected for such massive trading rather than the major firms? Did they have more permissive rules for sponsored access?

Why was trading concentrated in the financial firms that failed (Lehman, AIG, Bear Stearns, Fannie, Freddie) or were under threat of failing (Citigroup, Bank of America, Merrill Lynch, and Wachovia)?

There is obviously no definitive evidence here that the Financial Collapse of 2008 was the result of a deliberate strategic plan to bring down the US economy carried out by hostile foreign agencies, but many of the details noted, particularly the scale of bear raids on major US financial institutions, certainly do provoke suspicion. The US Government is hardly about to share what it knows, so the rest of us can only file all this away for future reference, and keep an eye out for further related coverage.

And Henry Blodget has produced a graphic illustration to illustrate his contention.

[H]ere’s the one chart you need to see to understand why the US is screwed.

This is the “income statement” of the United States in 2010. “Revenue” is on the left. “Expenses” are on the right.

Note a few things…

First, “Revenue” is tiny relative to “Expenses.”

Second, most of the expense is entitlement programs, not defense, education, or any of the other line items that most budget crusaders normally howl about.

Third, as horrifying as these charts are, they don’t even show the trends of these two pies: The “expense” pie is growing like gangbusters, driven by the explosive growth of the entitlement programs that no one in government even has the balls to talk about. “Revenue” is barely growing at all.

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I’d put it another way.

I’d say that Liberalism and the post-New Deal American Welfare State is screwed.

The accident of the chickens finally coming home to roost from decades-old federal housing policies during the waning weeks of an increasingly unpopular Republican Administration delivered both elected branches of government into the hands of left-wing democrats eager to expand the empire of statism.

Those kinds of democrats do not understand economics and are not prudent and responsible managers. Their response to the economic crisis was to apply traditional liberal pump-priming excuses to enact a massive Stimulus package and to nationalize some automakers and bail out more banks, while driving full steam ahead on creating another new cyclopean entitlement system.

The result is a kind of show-and-tell demonstration, in front of God and everybody, making it perfectly clear to everyone whose intellect is not paralyzed by ideology that what conservatives had been saying all along is perfectly true. Social Security is a Ponzi scheme, and was always destined to fail one fine day when demographics failed to cooperate. That there are limits to the percentage of the national economy which can be taxed and redistributed without drastic costs in growth and prosperity. That there are limits to how much government you can have, how much government can do, how many departments and programs you can create, and how many bureaucrats you can hire.

The music has stopped. The era of the expansion of socialism, regulation, and federal authority is over. We have run out of money. National bankruptcy is within sight. The end of government’s capacity to pay for the entitlement system existing prior to Obamacare is at hand. Obamacare is a dream and a delusion which we could never afford. Our domestic experiment in social welfarism has failed.

The American people are gradually awakening from a troubled sleep. A political avalanche is building which is going to sweep Barack Obama, Harry Reid, and Nancy Pelosi, liberalism and the America left, and the whole New Deal/Great Society philosophy from the national political landscape onto the rubbish heap of history.

Andy Kessler argues that the gods of economics have turned their faces against mere sloppers, sponges, slimers, and thieves, i.e., persons working in support and service and professional capacities. The number of available openings for them will dwindle and their bargaining power is doomed to decline. The future, and the lion’s share of income, will belong to the creators.

With a heavy regulatory burden, payroll taxes and health-care costs, employing people is very expensive. In January, the Golden Gate Bridge announced that it will have zero toll takers next year: They’ve been replaced by wireless FastTrak payments and license-plate snapshots.

Technology is eating jobs—and not just toll takers.

Tellers, phone operators, stock brokers, stock traders: These jobs are nearly extinct. Since 2007, the New York Stock Exchange has eliminated 1,000 jobs. And when was the last time you spoke to a travel agent? Nearly all of them have been displaced by technology and the Web. Librarians can’t find 36,000 results in 0.14 seconds, as Google can. And a snappily dressed postal worker can’t instantly deliver a 140-character tweet from a plane at 36,000 feet.

So which jobs will be destroyed next? Figure that out and you’ll solve the puzzle of where new jobs will appear.

Read the whole thing.

Daniel J. Mitchell posted the above chart from Heritage and offered the following observation.

This is a remarkable image, but let’s start with some disclaimers. There are lots of factors that impact economic performance, and many of them are outside the control of politicians. Moreover, it is impossible to know what would have happened in the past two years or in the early 1980s if Obama or Reagan had chosen different policies.

But even with these caveats, it is difficult to look at this chart and not conclude that Obama’s big government policies are much less successful than Reagan’s small government policies.

Hans Rosling

Mortimer B. Zuckerman identifies the real significance of the enormously expanded Obama-era deficit. It is not only capable of putting a dent in Americans’ consuming lifestyles. It promises to change permanently American capabilities and America’s role in the world. Some of us believe the permanent transformation of the United States into another militarily impotent welfare state would fulfill both the domestic and foreign policy goals of the radical left’s agenda.

The majority of Western governments are running fiscal deficits of 10 percent or more relative to GDP, but it is increasingly clear that there will be no quick fixes, that big government and fiscal deficits will not bring us back to the status quo ante. Indeed, the tidal wave of red ink has meant that the leverage-led or debt-led growth model is dead.

Developed countries will be forced to deal with their debt on every level, from the personal to the corporate to the sovereign. Being able to borrow may have made people feel richer, but having to repay the debt is certainly making them feel poorer, particularly since the unfunded liabilities that many governments face from aging populations will have to be paid for by a shrinking band of workers. (Ecoutez, mes amis!)

Demography is destiny. As a result, there is a burgeoning consensus that we are witnessing an inevitable rise of the East and a decline of the West.

The prognosis for America is especially discouraging. We have relied too heavily on surplus savings from abroad on top of running massive current account deficits. Until recent times, we ran deficits of this order only when we were engaged in a titanic war; otherwise we sought to achieve budget balances over a complete business cycle. But now we are running annual deficits of $1.4 trillion, about 10 percent of the total economy. We have compounded the deficits we accumulated over the last decade, so they now reach 61 percent of GDP. Only once before has the ratio of federal debt to GDP come in above 60 percent. That was after World War II. And our federal debt ratio today doesn’t even take into account Social Security and Medicare. Total liabilities and unfunded promises for Medicare and Social Security were about $62 trillion at the end of the last fiscal year, tripling from the year 2000, according to the calculations of former Comptroller General David Walker. Sixty-two trillion dollars is $200,000 per person and $500,000-plus for the average household. As Walker put it, the problem with these trust funds is “you can’t trust them [and] they’re not funded.” Therefore, he asserts, we ought to count them as a liability, which would bring the debt-to-GDP ratio to 91 percent.

The present model of global growth had served excess Western consumption with inexpensive products from the East. The result is plain to see: The West has excessive debt, while China has excessive capacity and inadequate consumption, as well as high levels of savings and our debt.

The deficits we face are a dagger pointing at the heart of the American economy. They threaten that the United States will evolve into another aging welfare state, where fiscal expenditures shift from defense to social welfare, and America’s power in the world will shrink. It has clearly happened in Western Europe, which can no longer defend itself but relies on the United States.

Robert J. Samuelson warns that the United States has a very good chance of duplicating the Japanese experience. Like Japan, the US has an aging population and consequently a shrinking domestic market, problems producing affordable exports, and a tax and regulatory regime not encouraging to new start-ups.

It’s hard to remember now that in the 1980s Japan had the world’s most-admired economy. It would, people widely believed, achieve the highest living standards and pioneer the niftiest technologies. Nowadays, all we hear are warnings not to repeat Japan’s mistakes that resulted in a “lost decade” of economic growth. Japan’s cardinal sins, we’re told, were skimping on economic “stimulus” and permitting paralyzing “deflation” (falling prices). People postponed buying because they expected prices to go lower. That’s the conventional wisdom – and it’s wrong.

Just the opposite is true: Japan’s economic eclipse shows the limited power of economic stimulus and the exaggerated threat of modest deflation. There is no substitute for vigorous private-sector job creation and investment, and that’s been missing in Japan. This is a lesson we should heed.

Japan’s economic problems, like ours, originated in huge asset “bubbles.” From 1985 to 1989, Japan’s stock market tripled. Land prices in major cities tripled by 1991. The crash was brutal. By year-end 1992, stocks had dropped 57 percent from 1989. Land prices fell in 1992 and proceeded steadily downward; they are now at early 1980s’ levels. Wealth shrank. Banks – having lent on the collateral of inflated land values – weakened. Some became insolvent. The economy sputtered. It grew about 1.5 percent annually in the 1990s, down from 4.4 percent in the 1980s.

Despite massive stimulus, rapid growth hasn’t resumed two decades later.

from Rico via Theo.

Arnold Kling examines the feasibility of maintaining current US level of entitlement spending for seniors and arrives at highly pessimistic conclusions.

Most Americans would be happier if the outlook for the budget could be taken care of without having to make major changes to entitlement programs. Certainly, politicians would have it easier if this were the case.

Unfortunately, arithmetic and prudence imply a need to tackle entitlements. What this paper has shown is that various alternative solutions to the budget problem are largely myths. Social Security is not protected by its trust fund. The trust fund contains no real assets. It is simply an accounting device that indicates the promises that have been made to current workers to provide benefits to them in retirement. There is no way to avoid having Social Security absorb a large share of
the budget during the years when the Baby Boomers are collecting benefits.

Raising taxes on high earners (those in the top 1 percent of the income distribution) is not a reliable way to deal with the budget deficit. Increasing the effective tax rate requires much more than just raising marginal rates because individuals have the opportunity to shift income into forms that are taxed at lower rates. Structural reforms to the tax system could reduce the ability of high earners to shelter income, but only with adverse effects on capital accumulation, entrepreneurship, and risktaking. In any case, even doubling the effective tax rate on high earners would not make the budget problem disappear.

Health care spending is rising as a share of GDP. This is true all over the world, reflecting the high income elasticity of the demand for health care. As people get wealthier, they are willing to spend more to remain healthier. Certainly, greater efficiency in health care management and delivery is both desirable and possible. However, the potential for pure efficiency gains is limited, and it will not solve the problem of ever-increasing Medicare spending. The only way to address Medicare specifically and health care spending more generally is to change the way that Americans make choices about the utilization of medical services. This will require either a stronger move toward government rationing or a shift toward more consumer sharing of the costs and responsibility for decisions about which procedures to undertake and which procedures to forgo.

Broad-based tax increases, bringing rates in line with those seen in Europe, will only solve the budget problem if there is minimal response of labor supply. However, there is notable evidence that higher taxes produce significant long-run reductions in hours spent engaging in market work, with households substituting home production for taxable labor. Higher tax rates could result in a large loss in consumer well-being with little or no increase in government revenues.

Finally, it is true that we faced a higher ratio of debt to GDP at the end of the Second World War. However, our current position does not resemble that of 1945, when we could look forward to sharp declines in government spending and large primary surpluses. Instead, the outlook over the next two decades is for increased spending and ever-widening primary deficits. Certainly, if productivity growth greatly exceeds the 1.6 percent per year embedded in current projections, the prospects for the budget would be brighter. However, it is most prudent to align our promised entitlement benefits to realistic projections, not to optimistic hopes.

Today, the American people must face up to significant structural changes in entitlement programs that reduce promised benefits. We have exhausted the alternatives.

Peter J. Wallison, at AEI, debunks the Baily-Eliott thesis, which attempts to deflect the responsibility for the housing market bubble from government social policies by dispersing shares of the responsibility to financial institutions for failing to manage risk, to insufficient regulatory oversight, to reckless and naive consumers, and even to the actions and inactions of “many outside the United States.”

Exculpating social engineering policies emplaced by the Clinton Administration was vital for the defense of the Progressive political agenda, and it was the Baily-Elliott interpretation of events that led to passage of the Dodd-Franks Act.

Last November, two highly respected Brookings Institution scholars, Martin Neil Baily and Douglas J. Elliott, published a paper entitled “Telling the Narrative of the Financial Crisis: Not Just a Housing Bubble.”

Baily and Elliott make a strong case for explaining the financial crisis as the result of a general decline in risk aversion because of the effect of the great moderation—the period from 1982 to 2007 when it seemed that we understood the causes of financial crises and had found a way to avoid or mitigate them. The evidence for a general weakening in risk aversion coming out of this period is plausible. But the Baily-Elliott narrative assumes that the 1997–2007 housing bubble was also caused by this factor, and that seems implausible. The extraordinary lengths to which the government went to force private-sector lending that would not otherwise have occurred—through affordable-housing requirements for Fannie and Freddie as well as demands on FHA and on the banks under CRA—shows that the housing bubble that ended in 2007 was not a natural occurrence or the result of mere risk aversion. If it had been, there would have been no need for these government programs.

The housing bubble that finally burst in 2007 was driven by a U.S. government social policy that was intended to increase homeownership in the United States and was thus not subject to the usual limits on the length and size of asset bubbles. As such, it was far larger and lasted far longer than any other bubble in modern times, and, when it deflated, the vast number of poor-quality mortgages it contained defaulted at unprecedented rates. This drove down U.S. housing values and caused the weakening of financial institutions around the world that we know as the financial crisis.

Market participants were certainly taking risks as the bubble grew, and it may well be, as Baily and Elliott posit, that this private risk taking was greater than in the past. But the facts show that the bubble was inflated by a government social policy that created a vast number of subprime and Alt-A mortgages that would not otherwise have existed. And the risks associated with this policy—which could produce losses of more than $400 billion at Fannie and Freddie alone—were being taken by only one unwitting group: the taxpayers.

Read the whole thing.

Hat tip to Scott Drum.

Matthew Ridley, in the Saturday Wall Street Journal Review section, offers a summary of a new and valuable article on the biases fueling endless government expansion and bad policy.

Slavisa Tasic, of the University of Kiev, wrote a paper recently for the Istituto Bruno Leoni in Italy about [the psychology and neuroscience of government]. He argues that market participants are not the only ones who make mistakes, yet he notes drily that “in the mainstream economic literature there is a near complete absence of concern that regulatory design might suffer from lack of competence.” Public servants are human, too.

Mr. Tasic identifies five mistakes that government regulators often make: action bias, motivated reasoning, the focusing illusion, the affect heuristic and illusions of competence.

In the last case, psychologists have shown that we systematically overestimate how much we understand about the causes and mechanisms of things we half understand. The Swedish health economist Hans Rosling once gave students a list of five pairs of countries and asked which nation in each pair had the higher infant-mortality rate. The students got 1.8 right out of 5. Mr. Rosling noted that if he gave the test to chimpanzees they would get 2.5 right. So his students’ problem was not ignorance, but that they knew with confidence things that were false.

The issue of action bias is better known in England as the “dangerous dogs act,” after a previous government, confronted with a couple of cases in which dogs injured or killed people, felt the need to bring in a major piece of clumsy and bureaucratic legislation that worked poorly. Undoubtedly the rash of legislation following the current financial crisis will include some equivalents of dangerous dogs acts. It takes unusual courage for a regulator to stand up and say “something must not be done,” lest “something” makes the problem worse.

Motivated reasoning means that we tend to believe what it is convenient for us to believe. If you run an organization called, say, the Asteroid Retargeting Group for Humanity (ARGH) and you are worried about potential cuts to your budget, we should not be surprised to find you overreacting to every space rock that passes by. Regulators rarely argue for deregulation.

The focusing illusion partly stems from the fact that people tend to see the benefits of a policy but not the hidden costs. As French theorist Frédéric Bastiat argued, it’s a fallacy to think that breaking a window creates work, because while the glazier’s gain of work is visible, the tailor’s loss of work caused by the window-owner’s loss of money—and consequent decision to delay purchase of a coat—is not. Recent history is full of government interventions with this characteristic.

“Affect heuristic'” is a fancy name for a pretty obvious concept, namely that we discount the drawbacks of things we are emotionally in favor of. For example, the Deepwater Horizon oil spill certainly killed about 1,300 birds, maybe a few more. Wind turbines in America kill between 75,000 and 275,000 birds every year, generally of rarer species, such as eagles. Yet wind companies receive neither the enforcement, nor the opprobrium, that oil companies do.

If lawmakers are to understand how laws get applied in the real world, they need to know and understand the habits of mind of their officials.