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A Simple Lesson of Policy Diversity from “The Black Swan” Author: ...(Thomas Sowell mentioned) ^ | November 24, 2012 | Daniel J. Mitchell

Posted on 11/24/2012 12:58:56 PM PST by Kaslin

Several months ago, I wrote a rather wonky post explaining that the western world became rich in large part because of jurisdictional competition. Citing historians, philosophers, economists, and other great thinkers, I explained that the rivalry made possible by decentralization and diversity played a big role in both economic and political liberalization.

In other words, it’s not just a matter of tax competition and tax havens (though you know how I feel about those topics).

Now I want to provide another argument in favor of the jurisdictional differences that are encouraged by national sovereignty. Simply stated, it’s the idea of diversification. Reduce risk by making sure one or two mistakes won’t cause a catastrophe.

This isn’t my insight. The author of The Black Swan understands that this simple principle of financial investment also applies to government. He recently explained his thinking in a short interview with Foreign Policy. The magazine began with a few sentences of introduction.

Nassim Nicholas Taleb has made a career of going against the grain, and he has been successful enough that the title of his book The Black Swan is a catchphrase for global unpredictability far beyond its Wall Street origins. …His newest project is helping governments get smarter about risks.

The rest of the article is Taleb in his own words. Here are some of my favorite passages, beginning with some praise for Switzerland’s genuine federalism and strong criticism of the EU bureaucracy in Brussels.

The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It’s not even a city-state environment; it’s a municipal state. Most decisions are made at the local level, which allows for distributed errors that don’t adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe — Switzerland. It’s not united! It doesn’t have a Brussels! It doesn’t need one.

But it’s important to understand why he likes Switzerland and dislikes the European Union: Small is beautiful. More specifically, decentralized decision making means less systemic risk.

We need smaller, more decentralized government. On paper, it might appear much more efficient to be large — to have economies of scale. But in reality, it’s much more efficient to be small. …an elephant can break a leg very easily, whereas you can toss a mouse out of a window and it’ll be fine. Size makes you fragile.

Taleb elaborates on this theme, echoing many of the thinkers I cited in my wonky September post.

The European Union is a horrible, stupid project. The idea that unification would create an economy that could compete with China and be more like the United States is pure garbage. What ruined China, throughout history, is the top-down state. What made Europe great was the diversity: political and economic. Having the same currency, the euro, was a terrible idea. It encouraged everyone to borrow to the hilt.

Because it’s a short article, he doesn’t cite many specific examples, so let me elaborate. One of the reasons for the financial crisis is that the world’s financial regulators thought it would be a good idea if everybody agreed to abide the same rules for weighing risks. This resulted in the Basel rules that tilted the playing field in favor of mortgage-backed securities, thus helping to create and pump up the housing bubble. And we know how that turned out.

But that’s just part of the story. The regulatory cartel also decided to provide a one-size-fits-all endorsement of government debt. Now we’re in the middle of a sovereign debt crisis, so we see how that’s turning out.

Unfortunately, governments seem drawn to harmonization like moths to a flame. To make matters worse, the corporate community often has the same instinct. Their motive often is somewhat benign. They like the idea of one rulebook rather than having to comply with different policies in every nations.

But mistakes made for benign reasons can be just as bad as mistakes made for malignant reasons.

P.S. Last but not least, it’s worth noting that Taleb is not a big fan of democracy.

I have a negative approach to democracy. I think it should be primarily a mechanism by which people can remove a bad leader

I don’t know if this is because he recognizes the danger of untrammeled majoritarianism, much like Thomas Sowell, George Will, and Walter Williams. But if you want more information on why 51 percent of the people shouldn’t be allowed to oppress 49 percent of the people, here’s a very good video.

TOPICS: Business/Economy; Culture/Society; Editorial; Foreign Affairs
The entire title is: A Simple Lesson of Policy Diversity from “The Black Swan” Author: Don’t Put All Your Financial Eggs in One Regulatory Basket
1 posted on 11/24/2012 12:59:03 PM PST by Kaslin
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To: jazusamo

This might interest you

2 posted on 11/24/2012 1:00:20 PM PST by Kaslin ( One Big Ass Mistake America (Make that Two))
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To: Kaslin

I think I can agree with this.

3 posted on 11/24/2012 1:12:36 PM PST by GeronL (
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To: Kaslin
Interestingly there is one state where the governor is using his rather significant constitutional powers to force at least some significant parts of the public administration down to the local level and support distributed decision making in education. Of all places it is Louisiana. Bobby Jindal has used the recurring state deficit problem to defund significant parts of the state public health apparatus and leave the consequences to some degree in parish hands. The state mental hospital in New Orleans has been slowly dismantled and then done away with. Residual services were shirted to the large Southeast State Hospital in Mandeville. This year citing lack of funds that hospital was closed. The political leadership of the very well off St Tammany parish, where this hospital is, threw a tantrum. Jindal’s response was to offer parts of the hospital to the parish to operate with the proviso that the parish would handle everything and pay the costs. That is what happened . A mental health contractor from Florida was found and the parish will pay the freight. The large state charity hospital in Baton Rouge appropriately named Earl K. Long Hospital Center had a physical plant over 50 years old. The politicos of course wanted to have a grandiose new physical plant. Jindal through his appointees on the governing board instead elected to contract out EKL to Our Lady of the Lake. Next step is to start whittling away on those services the state will pay. As long as there is a deficit this can be employed as a tactic to cut the public health footprint of the Swamp State.

Public schools have been getting the same treatment using expansion of charter schools to districts that consistently score low. Jindal also has gotten the legislature to support a grant plan that provides a hefty payment for charter school fees for students with a decent academic record. Slowly the public schools are becoming just the dumping grounds for the dregs and students who want to learn in a violence and drug free environment are getting the chance. Also the centralized top down public school administration model is being crumbled by the distributed decision model of the charter schools.

Jindal has also clearly stated the Swamp State will not in any way take part in setting up the Obamacare state insurance exchange. It will be a totally fed operation.

The effects of Jindal’s decisions have delivered significant body blows to two of the biggest sources of Rat Party strength in Louisiana, the school employees and teachers organizations and the state civil service empire. The budget deficit in 2013 will be in the neighborhood of $1B and that provides a good opportunity to deliver some blows to Louisiana's ridiculously bloated (so called) higher education structure.

Of course all the usual suspects are screaming the usual bloody murder, the polisucks, the Rats, the Lamestreams most loudly represented by New Orleans rapidly sinking flagship publication, the Times-Picayune, plus all the usual high minded whiners and socialist hand-wringers. Bobby J just keeps a low profile and keeps on pushing responsibility downward for government. The big problem is that he doesn't have any real successor lined up when he has to leave office at the end of his term. Swamp State politics are more personality driven than almost any other state. Much of the GOP in the state are just a bunch of time serving pigs slopping at the public trough so it will be hard to continue the act but not impossible.

4 posted on 11/24/2012 1:34:59 PM PST by robowombat
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To: Kaslin

Here is an article that speaks about the same issue

5 posted on 11/24/2012 1:48:32 PM PST by Fzob (In matters of style, swim with the current; in matters of principle, stand like a rock. Jefferson)
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To: Kaslin

The video is stupid. It confuses democracy (rule by a majority of the people) with a civil society/republic of limited government. The two are by no means necessarily synonymous.

There is no reason at all the people cannot vote to hand over oppressive power to their rulers, as we are in the process of watching happen in Egypt and elsewhere in the Arab world.

It can happen even more easily when a majority uses its thoroughly democratic power to oppress a minority, as in the Jim Crow South.

6 posted on 11/24/2012 2:37:03 PM PST by Sherman Logan
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To: Fzob

Thank you for the article and link. Fascinating stuff!

7 posted on 11/24/2012 2:57:39 PM PST by Standing Wolf
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To: Kaslin
The most stable country in the history of mankind, and probably the most boring, by the way, is Switzerland. It's not even a city-state environment; it's a municipal state. Most decisions are made at the local level, which allows for distributed errors that don't adversely affect the wider system. Meanwhile, people want a united Europe, more alignment, and look at the problems. The solution is right in the middle of Europe -- Switzerland. It's not united! It doesn't have a Brussels! It doesn't need one.

And we have 50 states that can do the same, but majority of USA citizens and the Federal Gov't want to eliminate state's rights and pull all the power (and risk) to the center.

8 posted on 11/24/2012 4:00:00 PM PST by PGR88
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To: Kaslin

9 posted on 11/24/2012 5:05:21 PM PST by Travis McGee (
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To: Kaslin

I thought this was going to be about the movie where Natalie Portman ate Mila’ s Kunis. ;)

10 posted on 11/24/2012 5:39:45 PM PST by allmendream (Tea Party did not send GOP to D.C. to negotiate the terms of our surrender to socialism)
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To: Kaslin
Absolutely. Competition is good for ideas and systems as well as goods and services.
Just because you're big and powerful does not mean you're always right.
Look at out government, performing social experiments on 300 million people, to a large extent without their consent, and with their own money.
Money means nothing when you're too big, governments routinely think they have an unlimited supply, especially when they can print it, but it does run out.
If you have a one world government, where can you flee to when it goes sour? And I say WHEN not IF.
I notice whenever there is a difference in rules and economics between two regions, businesses spring up along the borderline taking advantage of it.
I the whole world is exactly the same, that won't happen. What's the point of traveling and tourism then?
Watch old buildings? Why, pictures are on the web.
Besides, the pyramids will be gone soon.

11 posted on 11/24/2012 8:10:04 PM PST by BitWielder1 (Corporate Profits are better than Government Waste)
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To: BitWielder1


12 posted on 11/24/2012 10:28:49 PM PST by publius911 (Formerly Publius 6961, formerly jennsdad)
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To: Kaslin
Thanks for the ping, Kas.

Dr. Sowell’s column referenced in this piece “Back to the Future?” is an excellent piece and should be read by all who haven't already done so.

13 posted on 11/25/2012 1:18:49 PM PST by jazusamo ("Intellect is not wisdom" -- Thomas Sowell)
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