The Tragedy of NATO: Economic Problems Embedded in Collective Security Agreements

The economic phenomenon known as the “Tragedy of the Commons” instructs us that commonly held resources that are insufficiently protected will be plundered to extinction. The phenomenon was recognized in the early nineteenth century to explain why the commons in England quickly came to be denuded by sheep. All sheepherders had an equal right to graze sheep on the commons. There often was no agreement as to how many sheep each could graze, so it was sheer rational self-interest for each to graze as many sheep on the common ground as possible. In short order the commons came to be overgrazed. What later came to be called “the tragedy of the commons” was a simple and imminently understandable explanation.

 

Is security an economic resource?

 

One can easily accept that grassland is an economic resource that must be protected, but what about security and, if security is held collectively, can collective security agreements also be vulnerable to the tragedy of the commons? Security is a service that usually requires economic resources. We secure our personal possessions when we take precautions such as padlocking our bicycles, locking our car doors and the house, buying monitored security systems, purchasing heavy safes, and the like. These are all economic goods to secure our personal property. But what about protecting our physical selves? It is on a somewhat different plane but the purpose is the same. We may carry concealed weapons, take personal self-defense courses, or hire personal body guards. All these things require the expenditure of time and money to acquire economic goods to make us more secure. On a more subtle level, we modify our behavior to avoid giving offense to complete strangers about whom we know nothing. We especially do not deliberately seek confrontations over minor things like the last parking spot in the lot. Similarly we avoid dangerous parts of town or parts of town that are dangerous at night or on special occasions. For example, my wife and I were in downtown Chicago in the late 1990’s when the Chicago Bulls professional basketball team was winning the NBA championship. We were not fans and gave little thought to the fact that there might be what we shall call “excessive celebrations” after the final victory. As we strolled downtown Chicago after dinner we were advised by a Chicago policeman to leave, because the “excessive celebrations” often became excuses for certain people to behave criminally. Rather than assert our right to window shop whenever and wherever we darned-well pleased and discretion being the better part of valor, we went home. This aspect of security–i.e., avoiding unnecessary confrontation– is often overlooked.

 

Collective security brings in economic problems

 

Ah, but would we have reacted the same way had we been in a group? Perhaps we would have felt more secure to window shop by assuming that others in the group would protect us. Our behavior would have changed to become a bit more willing to take risk due to an implicit assumption of collective security. This willingness to take more risk because others may bear some or even all of the cost is known as moral hazard.

 

So we see that providing our own personal security of our physical bodies and our possessions requires that we expend resources that perhaps we would rather employ elsewhere. We pay for these ourselves and we modify our behavior to avoid the necessity of employing them with uncertain result and to minimize the cost.

 

But all this changes under collective security agreements.

 

Moral hazard and socialism cause a tragedy of the commons in collective security

 

Under a collective security agreement, all who join are obligated to provide security to all others in the alliance. Each member must expend resources to provide such security, which naturally means sacrificing the satisfaction of other preferences.

 

However, since all contribute to the security pot, all know that their individual sacrifice may be claimed by others. Therefore, there will be a reluctance to spend resources on security that may be used by others, while encouraging, at least to some extent, claims upon security that one would not have made in the absence of the security agreement.

 

The latter phenomenon, the increased willingness to call upon alliance members, is moral hazard at work and the former phenomenon, the reluctance to expend resources that may be claimed by others, is a well-known consequence of socialism.

 

Mises explained that socialism discourages production while it increases demand. Why produce only to be forced to share with others when one can demand to share in the production of others without regard to having previously produced something of value to those same others? Eventually all altruism vanishes in a sea of cynicism and nothing is produced for anyone to share. The result is a tragedy of the commons fed by moral hazard and socialism.

 

The tragedy of NATO

 

Today we see the above destructive economic forces at work in NATO expansion. When the Soviet Union disintegrated in 1990, the reason for NATO’s existence vanished. But rather than declare NATO to have been a success in deterring war in Europe, possibly disbanding the alliance and building a new Concert of Europe that would include Russia, NATO bureaucrats set about to expand the alliance to the east. Whereas the Concert of Europe after the Napoleonic Wars had quickly embraced France as an important member, NATO expanded to isolate Russia by absorbing its former satellite nations.

 

The last NATO expansion prior to the disintegration of the Soviet Union had occurred in 1982 when Spain joined the alliance. At that point in time NATO was composed of sixteen nations. Starting in 1999 twelve countries have joined NATO, ten of them former members of the Warsaw Pact. The other two, Slovenia and Croatia, were previously part of Yugoslavia, officially a non-aligned nation, but a communist dictatorship all the same. With the possible exception of Poland, none of these new members contribute much to the alliance’s military capability, meaning that the older members are shouldering their security burden. Naturally expanding NATO to the east has resulted in isolating and antagonizing Russia, who feels its security threatened. So, NATO has succumbed to the socialist phenomenon by adding new members who demand security without much of an obligation and to the moral hazard phenomenon by adding new members whose territories could be used to house American nuclear weapons, a situation that may yet provoke a major world crisis with Russia, which is precisely what NATO was formed to avoid.

 

Ukraine and Finland as examples of moral hazard and socialist demands

 

Both Ukraine and Finland are lobbying NATO for membership. President Poroshenko of Ukraine is lobbying for membership in both the European Union and NATO. The fact that Russia already has taken the Crimea following anti-Russian riots apparently means nothing as long as Ukraine believes that mighty NATO will intervene on its behalf. If NATO did admit Ukraine, one wonders if Ukraine would invoke the collective security clause and demand that NATO go to war with Russia. Finland is already a member of the EU and now is openly lobbying for NATO membership. In a recent interview with der Spiegel, Finnish president Alexander Stubb was dismissive of Russia’s stated concerns about Finland joining NATO. His interview has to be read to be believed. Both presidents’ behavior illustrate the moral hazard nature of collective security agreements. And neither country would contribute anything to the security of current NATO members. On the contrary, Ukrainian and/or Finnish membership would cause an escalation in tensions in Europe and take us right back to the Cold War…or worse! Neither country considers the possibility that NATO might not honor its military commitment. It is one thing for NATO bureaucrats to admit new members. It is another thing for current members to expend blood and treasure, especially when the possibility of nuclear war is wafting through the air. Does anyone remember the Cuban Missile Crisis?

 

In conclusion, due to the inherent problems with collective security alliances–tragedy of the commons fed by socialism and moral hazard–nations should enter into them with great caution. George Washington’s farewell address has never sounded more prescient: Beware foreign entanglements.

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Fractional Reserve Banking, the Euro, and the Benefits of a New German Deutsche Mark

In this thirty minute interview on Power Trading Radio I discuss fractional reserve banking, the euro, and the beneficial effect of a reinstated German deutsche mark.

Interview with Patrick Barron on Power Trading Radio

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Befuddled Keynesians attack German responsibility

Re: Germany’s Insistence on Austerity Meets With Revolt in the Eurozone

These two article in the New York Times from Wednesday of this week illustrate the confusion and increasing stridency of Keynesian school economists. All the Eurozone countries except Germany are heavily in debt with no real prospect for reducing their annual budget deficits. Only Germany has a balanced budget. This is what Keynesians falsely label as “austerity”. It is no such thing. It is merely being responsible. The I.M.F. and other nations of the Eurozone want Germany to spend more as the cure to other nations’ debt problems. Their sole rational is the typical Keynesian dogma that it is spending that drives an economy forward. The I.M.F.’s chief economist, Olivier Blanchard, states that large scale infrastructure projects funded by debt, if properly undertaken, are beneficial and will bring quick growth benefits. How German infrastructure projects will cure Greece’s bloated welfare state bureaucracy is beyond me. It is well past time for the other nations of the Eurozone to stop criticizing Germany and start emulating her. Patrick Barron
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An opportunity to educate the public is squandered

From today’s Open Europe news summary:

Hans-Werner Sinn: Some countries should be allowed to temporarily leave the euro
Open Europe yesterday hosted the launch of Professor Hans-Werner Sinn’s new book, ‘The euro trap: on bursting bubbles, budgets and beliefs’. At the beginning of his presentation, Professor Sinn described Open Europe as “one of the most important platforms for the public discourse on the continent.” He argued that “there is no real solution” to the Eurozone’s problems, therefore “we need to choose among evils”. Professor Sinn suggested three steps: forgive part of the debt of the Eurozone’s peripheral countries; let some countries leave the single currency temporarily to regain competitiveness while giving them the chance to re-join later; impose stricter budget constraints on central banks.
Andrew Sentance CBE, senior economic adviser at PwC and a former external member of the Bank of England’s Monetary Policy Committee, said that “real depreciation” of the euro would be a “more hopeful” solution than a break-up. He added, “There are too many hidden barriers to trade in services in Europe. Removing them would be a very pro-growth measure.” A video summary of the event will be available on the Open Europe website shortly.
I fear that Professor Sinn squandered an opportunity to educate the public. The true problem with the euro is that it is a fiat currency managed by a central bank that is under constant political pressure to print money as the solution to all ills. Mr. Sentance’s comments confirm this view. But a nation cannot become more competitive by depreciating its currency. An honest currency reveals problems that need to be solved, such as onerous labor laws, restrictive business regulations, high taxes, and lack of adequate defense of property rights. The solution to Europe’s economic problems is to reverse its century old retreat from free market capitalism, most importantly its retreat from sound money. Patrick Barron
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A way to look at Fed mismanagement of the dollar

Here’s an interesting little calculation of how many dollars the Fed would have to charge for an ounce of its gold reserve in order to cover all of M1. (M1 is the narrowest definition of money, which includes cash and bank checking accounts.)

  • In 1960 the Fed owned 506 million ounces of gold and M1 stood at $140 billion. So the Fed could “cover” its gold reserves at $277 per ounce.
  • In August 2014 the Fed owned 261 million ounces of gold, slightly more than half of what it owned in 1960, and M1 stood at $2,856 billion. So today the Fed would have to charge just under $11,000 per ounce in order to buy back all of M1 and not run out of gold.
Even the comparatively low cost of covering M1 in 1960 does not mean that the Fed had been an honest bank up until that time. At the 1944 Bretton Woods Conference the Fed promised to maintain a dollar price of gold at only $35 per ounce. The International Monetary Fund (IMF) was created to ensure that the Fed did not print money unless its gold reserves increased. Needless to say, the Fed did print money and the IMF did nothing. Patrick Barron
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German Understatement

From today’s Open Europe news summary:

Germany hits out at ECB plans to buy asset backed securities
ECB plans to purchase Asset Backed Securities (ABS) have taken a lot of criticism in Germany, with Bundesbank President Jens Weidmann warning that the ECB could get stuck with “low-quality loan securitizations” at inflated prices. Former ECB chief economist Jürgen Stark termed the programme “an act of desperation”. Separately, Welt reports that other members of the ECB Governing Council have raised concerns over the plan with Bank of France’s Governor Christian Noyer reportedly voting against ECB President Mario Draghi’s plans to use external firms to purchase ABS due to the ECB’s lack of experience in the market.
Of course the ECB will get stuck with low-quality loans purchased at inflated prices! Economic logic makes this a certainty. If the institutions selling such loans could get as high a price in the open market as the ECB will offer, they would sell them now. This program is nothing more than a back door bailout to politically connected, privileged, special interest groups. It is corruption on a grand scale. Of course the ECB has a good role model–the US Federal Reserve Bank. Patrick Barron
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Is the US making the same mistakes as Zimbabwe?

I have started reading a new book about the collapse of the Zimbabwean dollar–When Money Destroys Nations, by Philip Haslam and Russell Lamberti. One of the main causes of the hyperinflation was the decision of the Zimbabwean government to give army veterans of its recent wars a big bonus. The promise was too much for the Zimbabwean economy to manage, so the government printed money…and lots of it. Why is this relevant? Well, look at America. We have been fighting wars around the world for twenty-five years and recently promised universal healthcare to all citizens. The baby boom generation is retiring and will draw unfunded Social Security and Medicare benefits in ever larger amounts. There is  no way that these promises can be funded by the American economy. We will print money, too, just like the Zimbabweans. The Zimbabwean economy went into hyperinflation, because the Zim dollar was not held as a reserve anywhere in the world. The US hyperinflation may be delayed, because our money printing is being sopped up by foolish central banks worldwide in order to reward their export industries. In a non-manipulated currency market, the US would have to fund its budget with honest debt and repay it with honest money. But the chickens eventually will come home to roost for the US, just as they did for the poor Zimbabweans. The political pressure to print money is the same everywhere as are the laws of economic science.  Patrick Barron

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We’ll buy your bonds only if we give you the money to repay us

From today’s Open Europe news summary:

ECB disappoints markets by holding policy

The ECB yesterday held interest rates and revealed the details of its purchases of covered bonds and asset backed securities – the former will begin in the second half of October while the latter will start later this year. The ECB also said it would buy products from Greece and Cyprus event though they are not of investment grade rating, although such purchases would require added security including the fact that the country must still be under a bailout programme.

This month’s meeting was held in Naples with significant protests against the ECB taking place. In his press conference ECB President Mario Draghi said that such protests were “understandable” due to the economic pain but stressed that this is why reforms are needed and warned that such reforms would take place whether countries were in or out of the Eurozone.

 

The ECB will buy “…products from Greece and Cyprus…(that) are not of investment grade…” and only if “the country…(is)…still under a bailout programme.”  In other words, the ECB will buy worthless bonds from Greece and Cyprus only if it gives them additional money to repay the bonds. What more evidence do the Germans need to convince them that the ECB and the euro are nothing more than vehicles of capital destruction? Time for Germany to put an end to this nonsense and get out. Patrick Barron

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Will an ordinary German citizen challenge the lawless ECB?

From today’s Open Europe news summary:

German economist Hans-Werner Sinn writes in the FT, “Deflation is not a danger for southern Europe, but an essential precondition for restoring competitiveness.” He describes the ECB’s latest asset purchase plan as “nothing less than a fiscal bailout – something the ECB has no right to undertake.” Open Europe will host the London launch of Professor Sinn’s new book on 9 October. For details click here
FT: Sinn Open Europe event: Sinn
Herr Sinn calls upon German Chancellor Merkel to stand up for the rule of law. He states that, should she fail to do so, “…any German citizen can petition the court and force them to act.” Perhaps Herr Sinn can emulate Martin Luther and nail his own Ninety-Five Theses to the door of the ECB.
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Germany takes a stand against Keynesian stimulus

Re: US urges EU to do more to stimulate its economy

At the recent meeting of the G20 US Treasury Secretary Jack Lew led the majority of the industrial world’s finance ministers and central bankers to urge Europe to increase its spending in order to pull the continent out of its economic doldrums.  Fortunately for Europe Germany is taking a stand against this Keynesian nonsense. According to the Financial Times, “Any hope of a change of heart in Berlin was dashed before the meeting had even begun, with Wolfgang Schauble, Germany’s finance minister, warning against debt-financed growth.” Germany is the lone country in the EU that has consistently voted against expanding the European Central Bank’s open market operations to mimic the Fed’s quantitative easing programs. The ECB may go ahead with a QE program of some sort anyway, despite the prohibition of such action in its charter. These decisions are made by majority rule, and Germany was outvoted. Germany refuses to increase government spending, but it cannot stop the ever-increasing debasement of the euro by the European Central Bank. One wonders when Germany will decide that enough is enough, cease using the euro, and reinstate the Deutsche Mark. The steady debasement of the euro offsets many of the benefits that Germany derives from controlling its national budget. Primarily it cannot prevent price inflation and the skewing of its economy toward export industries at the expense of the rest of the the country. Germany is a sovereign country and has every right to control its own destiny rather than tie it in any way to policies that it regards as misguided. Leaving the eurozone would be a non-coercive act of rational self-interest. Only Germany seems to understand the irrefutable logic of economic science that saving and not spending is the path to prosperity.  Patrick Barron
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