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Archive for May, 2010

Am I a nutjob?

Consider the following thought experiment:  Everyone in the world is given a detailed ideological survey covering multiple dimensions with multiple measures.  Now assume a really good metric for calculating “ideological nearness.”  This metric is used to put people into groups of 100 who have very similar ideological views—political soul mates, if you will.

Would you like the people in your group?

A few weeks ago I stumbled across a web page that appeared to be a coalition of Tea Party groups.  The page I was looking at had a statement of principles—things like limited government, accountability, strict adherence to the Constitution, etc.—that I mostly agreed with.  But for some reason I felt that I wouldn’t really enjoy hanging out with a random sample of people who shared those views.

I also find that there are people who frequently scare me with the words that come out of their mouths, even when they are words I might say myself (though I think my tone and delivery would be much different, and tone might be more important politically than substance).  Similarly, I’ve always really liked Barak Obama, though I really detest many of his policy positions and almost all the positions of his vile political party.   Still, I’d much rather hang with Barak than with George W., who usually made me want to stick my head in a meat grinder every time he opened his mouth.

So, I’m wondering if this makes me a nutjob.    Many of the people who say things I believe are definitely nutjobs, and they scare me.  Demagogues like Glenn Beck scare me.  I saw a relative of my wife on TV when the Tea Party tour came through town a few weeks ago.  She is a wonderfuI person who I like a lot, but now she scares me, too.  This makes me wonder if maybe I should be scared of myself.

Obviously many people would respond that my politics aren’t nutty, it is just that I’m a snob.  There is some truth to this.  Even though I grew up in a very politically conservative culture, I was raised by educated, relatively liberal parents and went to an elite graduate school.  I like to associate with thoughtful, intelligent people, even those I disagree with.  Indeed, a shared ideological perspective is seldom an important criterion in pursuing friendships, though certain morally repugnant views can turn me off.

I’ve always hated the ignorance and racism of some on the Right, just as I’ve hated their indifference to the condition of the world’s poor and oppressed.   I tend to dislike people who lack the capacity to see the world from the perspective of their opponents, who demonize people who don’t share their values,  who are ignorant of the limitations in human understanding, who lack the capacity to forgive people for their human failings, or who are oblivious to any kind of nuance in political argument.  These kinds of people are found in all ideological groupings, of course, but for some reason I think there would be quite a few of them in my group of 100.

I like to think that my political views are a result of careful consideration of alternatives and rest on a solid moral foundation.  But maybe I’m just a nutjob.

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Memorial Day Salute

On this Memorial Day, a salute to all those Americans who have lost their lives in foreign wars.  

A special salute to Major Brian Mescall, a graduate of the Citadel, who was killed in action in Afghanistan.  And this is very, very sad to see.  Young man, your dad was a real American hero.   

And here is a graphic that shows the locations where Coalition deaths have occurred in Afghanistan/Iraq as well as where those individuals came from in the U.S.

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While perhaps not quite as silly as the Official Monster Raving Loony Party, Iceland’s Best Party has scoredCanadians do it surrealistically
perhaps the best electoral performance of a joke party at any election at any level in history, winning 6 of 15 seats and a plurality of votes in the Reykjavik municipal elections. What does the Best Party stand for?

Key pledges included “sustainable transparency”, free towels at all swimming pools and a new polar bear for the city zoo.

The party also called for a Disneyland at the airport and a “drug-free parliament” by 2020.

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Cool China Graphic

Update: Clicking on the image should give you a clearer view (I can’t get it to embed clearly).

HT: Slate.  And here is the original source.

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George Kennan (the father of containment) from American Diplomacy:

There seems to be a curious American tendency to search, at all times, for a single external center of evil, to which all our troubles can be attributed, rather than to recognize that there might be multiple sources of resistance to our purposes and undertakings, and that these sources might be relatively independent of each other.  (pg. 174)

 

. . . .the ruling of distant peoples is not our dish.  In this case, there are many things we Americans should beware of, and among them is the acceptance of any sort of paternalistic responsibility to anyone, be it even in the form of military occupation, if we can possibly avoid it, or for any period longer than is absolutely necessary.  (pg. 19) 

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Given the libgressive model of what government is responsible for and how the Bush adminstration was hammered over its response to Katrina, why isn’t Obama getting roughed up by the media, not to mention the liberal/progressive chatterazzi, for its ineptitude in “solving” the Gulf oil leak crisis? 

Indeed, since this industry is so thoroughly regulated, shouldn’t government failure in the Gulf be an important story? 

Maybe I’m just not reading or watching the proper things, but I don’t see a lot of non-”vast right wing conspiracy” folks hitting Obama all that hard or often on this (especially compared to Katrina).  Maybe libgressives have finally found one area in which they don’t believe the government is responsible for assuring the “proper” outcome (even when the gov’s problematic regulation – especially the cap on damages – is part of the problem)!   

Not being a hard scientist or engineer, I hesitate to offer any thoughts on how to deal with this myself.  But I thought I read somewhere that military weaponry could be used to seal the leak.  Is this just a dumb idea or is it not being considered because the government isn’t moving fast to take control of the problem or because such a fix would not be good for BP (and thus the company’s interests are being protected by its friends in the administration)?

Caveat: I have no brief for the Bush II administration and think “W” was one of our worst presidents, so don’t say I’m being partisan.

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Like a lot of some Americans, I am thinking about purchasing a car/truck during this Memorial Day weekend.  The question I’m confronted with is whether I should consider purchasing a vehicle built by one of the automakers who sought and ultimately took government money as part of the recent auto bailout.  In other words, should I buy a GM or Chrysler product? 

I’m torn.  On the one hand, I think it is important to vote with your feet (or your dollars in this case) and punish corporations that act immorally even when it is in their self-interest.  And rent-seeking is certainly immoral in my view.   

On the other hand, it is in my narrow self-interest to purchase the vehicle that best meets my needs in terms of price, quality, reliability, etc. regardless of the behavior of the corporation (or at least within some bounds – I’d never buy a product if I knew it had been manufactured using slave labor.  But this just begs the question of what the bounds are, suggesting that it is not narrow self-interest vs morality but a sliding scale about which acts one should punish at personal cost vs. those one is willing to overlook for pecuniary and other less-than-enlightened interests).  

It would be nice – but easy - if Ford best fit the bill so that I could have my cake and eat it too (indeed, maybe I’d be able to trick myself in that case into thinking I was acting in a morally superior way when I was merely satisfying my narrow self-interests).  But if Ford doesn’t, what should I do? 

It would be a lot easier, too, if I were rationally ignorant about the collective action problem – then I wouldn’t have so much angst about taking a moral stand at possible individual expense knowing that it is likely to have no impact as a sole action.  Indeed, the collective action problem is a huge difficulty for libertarians who believe that social change is best achieved without using the coercive power of the state.     

So, I’m flummoxed at the agora!

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When do people get to lie in public life without consequence?  I don’t think public officials lie about facts that often (and when they do, they usually get smacked), but they lie about motives all the time.

A classic example comes about in re-districting time, which most states will go through in 2011 after the 2010 Census numbers come in.  In addition to the normal adjustments involved with population changes, my state is poised to gain its 4th Congressional seat.   This state is completely controlled by Republicans, and redistricting will be all about gaining as much partisan advantage from this additional seat as possible.

Everyone knows that increasing partisan advantage is what redistricting is about.  In fact, it really isn’t about anything else, as any map of the screwed up legislative districts in the US can easily attest.    But politicians invariably say something like, “We are not trying to gain partisan advantage; we are just trying to promote the interests of all the state’s voters”  or “We are trying to get balance between urban and rural voters within districts.”

Another goodie outside the political realm is when university presidents–intelligent people with PhDs–say that the reason the BCS conferences don’t want to move to a national football playoffs in college football is because they are concerned about their “scholar athletes” getting their final exams messed up, or some similar gibberish.  The real reason, which everyone knows, is that BCS conferences and owners of the bowl games don’t want to give up the money and prestige they get from the current system.  This is not a mystery.

Another sports case will be the unsuccessful coach who quits “to spend more time with his family”  (only to pop up in a couple of months in some equally stressful job across the country).

So why is this blatant lying OK?  The media not only don’t care, they expect it and even facilitate it by letting these types of outlandish statements go unchallenged in many cases.  Put a typical Congressman in front of a TV camera, and you are assured of one thing: total B.S.  Congressman Spineless will never say “Ya know, I changed my vote for this bill because the Speaker completely intimidated and threatened me” even though everyone knows that is the truth.  Instead, Congressman Spineless comes up with some lame rationale for his changed tune, and everyone gives him a pass.

We could come up with a simple cost-benefit model of lying.    Motives are hard to prove, so lying about them is relatively low cost.  Winning votes and staying in power has a high benefit.  That explains a lot of it, I think.   But reaching a John Edwards level of sliminess seems to take a certain serious pathology that goes way beyond simple cost and benefits.

We have all become so accustomed to political lies that we barely notice anymore.  We recognize most of the spin for what it is, and we try to uncover actual motives without the delusion that politicians will ever say anything truthful about their motives.

We seemed to have arrived at this strange equilibrium where everyone knows that we are being lied to on a continual basis, but we put up with it.  Indeed, the more outrageous the claim, the less scrutiny it gets sometimes.  Apparently it is OK to lie if  what you are saying is complete balderdash and not a soul believes you.

Strange world.

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Good ole Bubba

The Clinton presidency actually coincided with a decent era in American history, especially compared to the last 10 years of reckless governance.  The post-1994 Clinton period was particularly good – because Clinton was chastened by the 1994 election, had to deal with a Republican Congress, or both.  Indeed, one might argue that once HillaryCare went down to defeat, Clinton got to be the New Democrat he actually wanted to be.  And our country benefitted from it.  

Of course, it was not ideal given my own classical liberal standards.  And at the time, I didn’t realize how good we had it.  But think about how bad the occupants of the executive branch have been over the last 100 years!  Most of our worst presidents have come from this period: Wilson, Hoover, “That Man in the White House,” Johnson, Nixon, Bush II, and Obama.  All men of system who expanded the power of the government (and the executive) at the expense of individual liberty. 

So, I’m clearly not in the full-on (Bill) Clinton-hater club. 

But isn’t it amazing how trouble and charges of corruption seem to follow this man?  He keeps getting pulled back into controversies (the Sestak issue for those not following the news) like Michael Corleone kept being pulled back into the life of crime. 

Maybe this time it wasn’t all that bad.  But it is funny how ole Bubba pops up when the things start to get mucky.

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White House Chief of Staff Rahm Emanuel enlisted Bill Clinton to approach Joe Sestak with employment“prominent advisory role” options in the administration while he considered his primary bid, according to this CNN report based on a statement released by the White House counsel’s office. You have to give the administration a little credit for coming forward with the truth. However, Rep. Issa concludes that this statement amounts to an admission to a misdemeanor.

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Emory political scientist Alan Abramowitz has done two studies of how voting ideology affected the electoral fortunes of Republican and Democratic senatorial incumbents over the 2000-2008 period. The study on Republicans is here, and the study on Democrats is here. Over this time period, 57 of 61 Democratic incumbents won their re-election campaigns, while just 52 of 69 Republican incumbents won theirs.

Using DW-NOMINATE ideology scores, which are based on congressional roll call votes, Abramowitz finds that for Republican U.S. Senate incumbents every additional point of conservatism correlates with a three-point decline in electoral performance relative to the Republican presidential candidate. However, for Democratic senatorial incumbents, there’s no such effect.

Does this mean that insurgent Tea Party candidates that want the party to “move right” will actually cause more Republicans to go down to defeat in November, while Democrats can afford to indulge their liberal wing? I doubt we can draw those inferences. It seems to me that there are two caveats about Abramowitz’s results.

First, Tea Party-ism focuses on fiscal issues, one area where most Republicans did not vote “conservatively” during the Bush years. DW-NOMINATE scores are not an absolute measure of ideology against some fixed scale (like the Nolan Chart), but a description of how often a senator tended to vote with other senators of his or her own party. It’s really a measure of partisan polarization. If you voted with leadership 100% of the time (including in favor of Medicare Part D, for instance), you would end up looking 100% conservative. By this standard, some Tea Party Republicans might have looked moderate during this period by this measure. It’s not surprising that Republican incumbents were punished by voters for sticking with the party line on issues such as Iraq, where the “party line” eventually became deeply unpopular.

Second, if politicians are strategic, there should be endogeneity in these voting-ideology models that biases the coefficients on ideology toward zero. If you expect to have a close race, you will modify your voting record in a moderate direction. Abramowitz does include state presidential vote share as a control variable, but the best thing to do would be to find some instruments for ideology – factors that cause candidates to become more partisan than their state is willing to support. A more sophisticated analysis might indeed find that, like Republicans, Democrats are hurt by party-line voting.

HT: Ed Kilgore.

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Still Lost

I’m sure that most followers of Pileus are too sophisticated and intelligent to have wasted any time watching ABC’s Lost over the last six years.  But I’m one of the unfortunate ones who got sucked into this hugely successful drama.  I started to dislike the show not long after I started watching it.  But lots of addicts hate what they do and are ashamed.  I certainly am.

The pull of the show was obvious: a bunch of unusually beautiful people get stranded on an uncharted island that has mysterious powers and mysterious inhabitants.  Will they survive?  Add in some decent acting, some humor, and high production values and you have a hit.

But I felt early on that I was just being toyed with for the amusement and financial gain of the creators.  Perhaps they felt they were just being “artists” by not wrapping things up in tidy packages.  While it is true that a lot of great literature raises and tackles important questions without answering them, great art is honest about this process.

Lost, on the other hand, specialized in raising hundreds of relatively trivial, yet maddening questions, and then refusing to answer them with the sole purpose of drawing viewers back and, likely, for the amusement of the creators.  For instance, Claire (a brand new mother) simply disappears without explanation when the cast was on one of its various cross-jungle tracks.  No one knows how or why.  A couple of seasons later, Claire is found again, still on the island.  The first question out of any normal person’s mouth in this case would have been “What happened to you?”  But none of them ever ask this question.  Nor are we privileged to learn how a nuclear bomb can be set off on the island with apparently no implications for anyone or the island.  You know, little stuff like that.

I won’t bore or aggravate readers with long lists of unresolved Lost questions.   In the final episode on Sunday, all the “good people” ended up in the afterlife and went to heaven together (so much for avoiding tidy packages).    But by that point, I was too ticked-off to care about any of them very much.  The show had become so frustrating that I lost interest in any of the characters–sort of like an addict who gets to the point of not even enjoying his fix.

My larger question is this: is there a larger question in all of this?  Does this whole frustrating experience teach anything (other than the obvious point to use more discretion in choosing TV shows)?

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In a 2008 piece in the Financial Times, Congressman Barney Frank, Chairman of the House Financial Services Committee, opined that the financial collapse was clearly an indictment of “America’s 30-year experiment with radical economic deregulation.” Leaving aside Congressman Frank’s diagnosis, it is worth considering briefly the question of deregulation. There is no better guide than the Regulators’ Budget Report produced by the Weidenbaum Center (Washington University, St. Louis) and the Regulatory Studies Center (George Washington University).

Some points worth reviewing:

  • Despite the above quote, during the period 1980 -2010,  regulatory budgets (expressed in 2005 dollars to adjust for inflation) increased from $15.3 billion to $50.4 billion. In short, they more than tripled, greatly outpacing the growth in GDP.
  • What of the presidency of George W. Bush? Between the year Bush entered office (2000) and the year he  left office (2009), inflation adjusted spending increased from $28.7 billion to $46.3 billion.
  • Ah yes, but didn’t Bush starve the financial regulators, hence the crisis? Once again, we have an ugly fact that slays a beautiful theory. Under Bush’s watch, financial and banking regulatory budgets increased (once again, in inflation adjusted terms) from $2.2 billion to $2.6 billion.

It is too early to make a judgment of how the Obama administration will perform relative to its predecessors, but the 2011 requests ($52.5 billion) are well above the levels he “inherited ($46.3 billion).

Adjusted for inflation, the proposed regulatory budget for 2011 would be 343 percent greater than when Reagan was elected. So much for a “30 year experiment in radical deregulation.”

Read the Regulators’ Budget. Like Pileus, it’s free,  informative, data driven and remarkably free of invective.

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Dead Cat Bounce Edition?

Dan McCarthy of The American Conservative (and perhaps the best young journalist on the so-called “Right”) replied to my recent post on the New Yorker cover and the Atlantic‘s slide by noting:

It’s sad how far The Atlantic has fallen in recent years, especially since last summer’s redesign.

Indeed.  And while it is good to see that I’m not the only one who has noticed this trend and is saddened by it, I wish we were wrong.     

Not too long ago, I used to get the Atlantic from the mailbox and have trouble putting it down.  I thought so highly of the magazine that I actually sent gift subscriptions to a few non-academic friends/family members.  I usually warmed up with the shorter pieces, caught up with the frequently interesting letters to the editor, moved to my favorite section – the Books section edited by Benjamin Schwarz, and then started chomping on the meaty long articles.  I fondly remember reading William Langewiesche’s controversial articles on the World Trade Center, Schwarz’s longer multi-book reviews on war and diplomatic subjects, and even the “Word Fugitives” that used to be at the back. 

The Atlantic was just plain great even though I frequently disagreed politically, ethically, and aesthetically with its writers.

Unfortunately, today’s Atlantic is filled with articles and book reviews that are boring, sloppily executed, or superficially partisan.  The really dumb “What’s Your Problem” page that replaced “Word Fugitives” probably best symbolizes the decline – though it is hard to match the State of the Union issue it produced in part with the New America Foundation for that honor.    

I wonder how much of the slide is due to Michael Kelly’s death in Iraq in 2003 (although Kelly had obnoxious views on the war and war critics) or the move in 2005 from Boston to Washington (which sucks everything in and makes most things worse for it).  But the Atlantic was still good well into the decade, and, as Dan points out, has really slid over the last year or so. 

But I have hope.  The last issue was pretty solid and harkened back to the good ole days.  The cover story by James Fallows on how Google is trying to save the news and the Mark Bowden article on the Conficker worm were solid, interesting pieces that were hard to put down.  Then again, it had an odd piece on Lady Gaga that reached the conclusion that she’ll kill off pop – an impossibility that has probably been uttered hundreds of times about past pop stars - and Michael Kinsley’s weak take on the Tea Party.

Here’s to the revival of this grand old magazine.  And let’s hope the last issue was not a dead cat bounce.

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Does this thing have legs? The story’s been at a low boil for a few days. Today congressional Democrats are pressing Joe Sestak to explain his claim that the Obama Administration offered him a job (rumored to be Secretary of the Navy) in exchange for dropping his ultimately successful primary challenge to Arlen Specter. Apparently such an offer would be illegal. The Administration has of course denied making the offer.

It seems to me that there are ways to make an offer without being explicit enough about the quid pro quo to make it a crime, so I don’t think anyone will ultimately get into serious trouble over this. But every little bit of light shone on the dirty corners of Washington’s halls of power is a Good Thing in my view.

UPDATE: Republican congressman Darrell Issa has apparently raised the prospect of President Obama’s impeachment over this. Hm, seems a little premature.

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A lot of historical analogies are being made these days to make sense of the current economic scene.  Our own Marc Eisner has recently discussed the possibility of a second dip similar to the 1937/1938 depression within a depression.  Eisner, in particular, worries that all of the frenetic political activity pushed by the Obama adminstration is creating instability and keeping recovery at bay (just as occurred in the 1930′s).   

But this time, what might be brewing is a combination of 1937/1938 (markets freaked out by government activity) with a contraction of the money supply similar to what occurred in the early 1930′s.  According to an article in the Telegraph, M3 - a measure of money supply favored by some economists but not tracked any longer by the Federal Reserve - has been falling in ways not seen since the Great Depression.  And just like in that case, governments might be making big mistakes by not realizing that they are part of the problem since, as monetarist Tim Congdon from International Monetary Research argues, “regulators across the world are pressing banks to raise capital asset ratios and to shrink their risk assets.” 

An article in the Wall Street Journal on Monday also highlights the potential for deflation:

Meanwhile, the fundamental trend in the West remains profoundly deflationary. Last week the U.S. government reported that the country’s core consumer price index (CPI) inflation rate slid in April to its lowest level in 44 years . . . . In America bank lending continues to decline as does the velocity of money in circulation.

On the other hand, M2 seems to be roughly stable over the last 12 months (April to April) with growth of 1.6% (though it has declined slightly over the last 3 and 6 months).  And the context for this low level of growth is important since it follows a dramatic increase in M2 in the 2008-2009 time period – which led many observers to worry about the return of inflation (or worse – stagflation).  However, solid growth in productivity may mean the money supply should be growing faster.

So, should we worry about deflation?  Or still keep our eyes on the possibility of stagflation if unemployment remains high, growth remains anemic or goes negative, and the Fed starts pumping money into the system?  Should we even worry about money supply all that much?  Add to these a million other questions we could ask in these volatile times.

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Pileus, like most classical liberal outlets, is not exactly bubbling over with optimism during these troubling times.  But not all classical liberals think the future is bleak. 

Matt Ridley, author of the wonderful books The Red Queen and The Origins of Virtue, has a new book out that makes the optimistic case that the future is likely to get better fast - hence its title The Rational Optimist.  In a recent Wall Street Journal piece, Ridley explains some of why he thinks the future is so bright:

Given that progress is inexorable, cumulative and collective if human beings exchange and specialize, then globalization and the Internet are bound to ensure furious economic progress in the coming century—despite the usual setbacks from recessions, wars, spendthrift governments and natural disasters.

I’m conflicted – part of me hopes Ridley and other classical liberal optimists are right (especially because I’m a long-run optimist as well), part of me worries that they (especially the “technology will set us free” people) underestimate the darker aspects of the future (especially in the short to medium terms during which those reading this post will live and die). 

But I still need to read the book to see his full argument.  Can’t wait for July when I’ll have some free time to do so!

BTW, couldn’t resist the obvious flashback to Timbuk 3′s classic – and bad – tune from that time of great optimism on the so-called Right: the 80′s.

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U.S. > Sweden. Hah!

In any academic discussion of social welfare policy, the debate usually ends up addressing the (tiresome) question of “Why can’t the US be more like Sweden?”  Sweden is widely seen as a prosperous and egalitarian, whereas the United States is seen as prosperous and individualistic.

A fascinating new NBER paper by Price Fishback turns the conventional wisdom on its head.  The usual statistics compare gross public spending on social welfare as a percent of GDP.  In this comparison, Sweden and the other Nordic countries spend twice as much as the U.S.

But Fishback makes three commonsense adjustments:

1. He changes gross expenditures to net expenditures.   In Nordic countries, taxes on social benefits are generally much higher than the US, and the US has various tax incentives (such as the Eearned Income Tax Credit) which should count as social expenditures.

2. He changes the comparison to a per capita basis, rather than share of GDP.

3. He adds in private social expenditures in addition to public.

So what we end up with is the net expenditures actually going to social welfare programs, such as health care, disability insurance, and old-age care on a per capita basis.   In other words, how much is each Swede getting on average from the welfare state v. how much each American is getting on average.

The surprising answer is that the US spends more on social welfare than any of the Nordic countries, and the gap has been growing in real terms since 1993.

Net per capital social expenditures (adjusted for purchasing power parity):

Now people (like me!) would argue that  the US being out front is not necessarily a good thing.  I also would exercise caution in claiming that these figures actually translate into social welfare.  I think the safety net in the US is much more porous than in the Nordic countries, for instance.

But it is always fun when careful analysis turns the conventional wisdom on its head.

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There have been some remarkably interesting posts and comments as of late regarding libertarianism. Some of them emerged in various postings on Rand Paul. Damon Linker, for example, congratulated Jason on diverging from “absolute libertarian principles” and approvingly posted Bruce Barlett’s take on Rand Paul:

“I don’t believe Rand is a racist; I think he is a fool who is suffering from the foolish consistency syndrome that affects all libertarians. They believe that freedom consists of one thing and one thing only–freedom from governmental constraint. Therefore, it is illogical to them that any increase in government power could ever expand freedom.”

The consistency syndrome is, indeed, common. It may stem from the fact that libertarians rarely [never] carry the weight of political power. Rather than having to make concrete decisions about how to address a complex problem in real time with limited information, resource constraints, and blunt policy tools, they often have the luxury of working within the confines of thought experiments constructed of simplifying assumptions and freed from historical context.

Name a problem, I got a solution. It will begin as follows:

“Assume we have perfectly functioning markets and perfectly delineated property rights. Assume, furthermore, that individuals behave rationally. Then we can eliminate [fill in blank with social or economic problem of your choice].”

Alright. This is a lovely posture to strike among academics and in the classroom.

But now comes the hard part. We will never have perfectly functioning markets and we will never have perfectly delineated property rights. Human nature is fixed and flawed and there is little reason to expect that rationality will prevail relative to the passions. Moreover, we have vexing problems and social pathologies that have been created or exacerbated by a long history of poor policy decisions. There is no way to cut the Gordian knot. There is no way to return to the original position. There are massive issues of path-dependency.

We see these problems in the financial mess. We see these problems in the current debacle in the Gulf of Mexico (and we certainly saw it with Katrina). The persistence of intergenerational poverty and the looming entitlement crisis (ditto).

So here is the challenge: assuming that what I have said in the above paragraphs is correct, what is the role of libertarians? How can libertarians be mindful of not falling into the consistency syndrome while still offering something of value to the policy debates and political discourse more generally?

What can and cannot be compromised in this quest?

My fear is that libertarianism could [has] degenerate[d] into:

  1. A set of insular debates grounded in a set of simplifying assumptions shared by the “tinfoil hat” crowd (or the remnant, to be more positive) but of no real relevance to flesh-and-blood policy problems
  2. A way for those who are more conservative in their political orientations to remain hip among their liberal friends (Hey, I believe we should legalize drugs and prostitution! Gay marriage? The state should not marry anyone!]
  3. The limited insight that, given the option, markets are preferable to non-market solutions. Beyond that, one can still embrace the welfare-regulatory-entitlement state in all its glory.
  4. Mere muckraking.  Focusing attention on government incompetence without simultaneously offering viable alternatives that could be implemented under existing constraints.

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In a recent discussion about the Hurricane Katrina disaster, I described a libertarian position that would reject public assistance and instead recommend private charity. My interlocutor suggested that only a person of questionable moral character could claim that the victims of Katrina deserved no help. I clarified that this position did not entail that they deserved no help, rather that it was private persons or entities, not the state, who bore any relevant moral responsibilities. To which he replied, “that’s the same thing.”

No, it isn’t. One does not understand the libertarian position if one does not recognize, or if one does not credit, the difference between public—i.e., state—aid and private charity. It is a critical difference, invoking, as it does, so many of the principles that constitute the libertarian position, including its positions on private property, on local knowledge, on incentives, on natural human motivations, on human dignity, on moral responsibility.

Many have made the case for the importance of this distinction. I have done so as well.I have even suggested that, as the scope of public aid increases, the opportunities to execute one’s personal moral responsibility to others correspondingly diminishes. And since one can develop moral virtue only by practicing it, increasing the scope of public aid may therefore have the undesirable consequence of reducing the ability for citizens to become virtuous by acting virtuously.

A similar phenomenon occurs with the notion of a “free market” and its correlative “capitalism.” We may reasonably quibble about some aspects of the definitions of these terms, but defenders of capitalism and of free markets will agree that the following are not among its features: government-protected corporate monopolies, legal restrictions on competition, taxpayer-funded bailouts for failing businesses, taxpayer-funded subsidies for industries, and businesses using government regulators to protect their interests. There are many other core features of capitalism and free markets—protections of private property and opposition to eminent-domain government seizure of property for private purposes, for example—but I bring up these particular non-capitalistic, non-free-market features of our current economic scene for a reason.

In today’s WSJ, Thomas Frank has a column in which he makes the plausible point that “criticism of business is as American as the Boston Tea Party.” He makes this point to deflect claims of some Tea Party members suggesting they believe that opposition only to government is what has characterized American political obstreperousness, when in fact criticism of various business practices have been part of our political landscape from the very beginning.

Fair enough. But the examples he adduces to make the point indicate that he does not recognize the distinction between, on the one hand, free markets and capitalism, and, on the other, crony, mercantilistic economic adventurism on the other. The British East India Company, for example, was a royally approved charter that enjoyed considerable state-provided privileges, immunities, and protections, none of which would have been allowed in an open, competitive (“free”) market. So it is quite misleading to characterize, as Frank does, “‘criticism of business’ as essential” to the Boston Tea Party. The East India Company was the Boston Tea Party’s accidental, not essential, target: The overreaching British government was the essential target.

Frank goes on to mock Tea Partiers for their apparent failure to see what free markets have recently wrought. “After 30 years in which the godlike, self-regulating market became a bipartisan article of faith,” he writes, “we have now suffered through a cataclysmic series of market failures.” Because markets are actuated by fallible human beings, they are not perfect. But the series of cataclysms Frank probably has in mind—the sub-prime mortgage crisis, the near or actual failures of major American firms that then requested taxpayer-subsided bailouts, rapidly rising health care costs and people without health insurance, etc.—did not take place in unregulated free markets. Indeed, the housing, banking, and health insurance industries are among the most tightly and highly state-regulated in the country. Perhaps the wrong regulations are in place (here and here); perhaps there were not enough regulations; perhaps the next round of re-regulation will get things right.

But the distinction between a free market, on the one hand, and a market in which governments are heavily involved in taxing, subsidizing, restricting, mandating, licensing, insuring, protecting, prohibiting, promoting, and selectively bailing out industries is, again, absolutely critical. Whatever else one might say about economies marked by government rules protecting and promoting politically powerful business interests, they are certainly not free markets and they are certainly not any part of capitalism.

Frank must know this. After writing about the “cataclysmic series of market failures,” he goes on to say that “each disaster [was] abetted by business-friendly regulators whose complacency was ensured by the same rotten ideology—if not purchased outright by business interests.” Things like “business-friendly regulators” whose complacency was purchased by business interests are antithetical to people who support free markets; indeed, such people frequently point to these phenomena as precisely the problem with government management of markets and industries.

Some distinctions make no difference. But these do. If we wish, then, to criticize libertarian political philosophy, or enumerate the failures of the free market, we need at least to understand what it is we criticize.

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The current catastrophe in the Gulf of Mexico is looking like a classic tragedy. It appears that BP and those who constructed the off-shore rig failed to meet acceptable standards in construction, warning and safety systems. In part this may have been a product of BP’s weighing of the costs and benefits, as suggested by an earlier memo ham-handedly thinking through the hedonic calculus via an analogy to the Three Little Pigs (See Rick Outzen’s piece in the Daily Beast).

The Minerals Management Service

Thankfully, regulators and inspectors at the Minerals Management Service were serving their duty as watchdogs watching porn on government computers, when they weren’t accepting gifts from the oil industry, dreaming of the revolving door, or hoping that the earlier evenings’ crystal meth wouldn’t cloud their judgment.

Meanwhile, it is good to know that the President—who seems remarkably disengaged from this situation—was able to find time to attend a fundraiser yesterday in California for Barbara Boxer.  Lisa Jackson, EPA Administrator, had the good sense to cancel a Manhattan fundraiser for Senate Democrats. One assumes the optics were bad. Luckily, this can be “hope and changed” with a symbolic presidential visit to Louisiana on Friday.

In any event, the effort to stop the tragic leak  via “top kill” is scheduled for today. Should one be optimistic? Apparently not. As the New York Times reports: “BP officials said the method of containing spills had never been tried so far underwater, and that it could take up to a few days to determine whether it had succeeded. They cautioned there was no guarantee that the gambit would work.”

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Crises (and yes, this has now become a crisis) are never self-interpreting. But I have a few quick thoughts.

Real world events always lead me to think that Stigler’s economic theory of regulation was too optimistic a portrayal of the underlying dynamics.  Elected officials seem to exhibit the depth and sophistication of Michael Scott (the character from the Office portrayed by Steve Carell) while regulators seem to exhibit the competence once would expect from the Three Stooges (if placed in the movie Brazil).  Corporations, while acting in their self-interest, rarely seem to act with enlightened self-interest.

I find it stunning and unacceptable that the oil industry can engage in deep sea extraction without having (1) a competent and exhaustive contingency plan; and (2) the equipment necessary to execute the plan ready for deployment. To begin consideration of how to deal with what appears to me to be a quite plausible event at this stage in the process is the height of arrogance.

Jason has made some postings about the precautionary principle that seem worthy of another read.  But here I want to focus on enlightened self-interest for a moment. Corporations work under what scholars commonly refer to as a regulatory warrant (i.e., what they are permitted to do under existing laws) and a social warrant (i.e., what they are permitted to do by the communities within which they are embedded). The social warrant can be very fragile, and thus self-interested firms must often go beyond what is required by regulations to nurture their reputations. Corporations must understand that, in many industries, they are “hostages of each other,” to use the title of an impressive book by Joseph Rees on nuclear industry self-regulation post Three Mile Island). Industry reputation is a collective good and a fragile good that can be easily destroyed by events like this. One would think that self-interested actors would recognize this and work collectively to develop coherent strategies for addressing these kinds of situations before they occur.

Tragically, if we can’t rely on the enlightened self-interest of corporations, the prudent and mature behavior of elected officials, and the competence of regulators, the crisis extends well beyond the events in the Gulf of Mexico.

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During and after the financial panic of 2008, we were exposed to a host of economists trying to explain the market meltdown, what should be done about it, and how we might avoid repeating it. Some of the leading lights in the discipline weighed in on the market problems. Now we have a reform proposal working through Congress that my fellow Pileus bloggers have written intelligently about (see here, here, and here).

Opinions are wide-ranging. I might share some of my own soon. But what unites all the various economists is a complete and utter cluelessness on the most important variable in the economic meltdown: fear.

Stock markets have been falling and have been highly volatile recently, apparently over the debt crisis in Europe (though I have to say that most media explanations for why markets move the way they do in a given day are complete gibberish). I would not be surprised to see the market slide even further, erasing most or all of the big gains of the past year.

Nothing in traditional finance can say anything useful about fear, nor can the macroeconomists. Perhaps there is something in the “new behavioral finance,” but I’m not aware of anything.  Keynes talked about “animal spirits,” but did not have a systematic theory of fear. To say that people behave irrationally is not a theory. A theory of fear would tell us something about why, when, and how fear develops and how it can be contained or modified. Similarly, we would could use a theory of the exuberance which leads to bubbles in the first place. I don’t think anyone really has a clue.

When the housing bubble burst, a lot of institutions were left holding high number of “toxic assets,” which were mostly mortgage-backed securities. Their price went to essentially zero, even though I cannot conceive of any model that would say a bunch of bad loans should have a zero price (even a really, really bad batch—say one where 50% of the mortgages will default—should still be worth 50 cents on the dollar, shouldn’t it?). Thus, the market went from systematically overvaluing these securities to systematically undervaluing them. What model of investor behavior can explain both phenomena?

Now we have debt problems in a few small European economies. Investors are acting as if the value of that debt is going to zero, though it is hard to imagine a complete collapse of the government that results in any European country simply defaulting on all its debt, though it is possible to think of cases where debt would need to be restructured and bond-holders would lose some value (in fact, the EU should require that to happen, rather than just throwing more money at these irresponsible states). This nervousness, this fear, spills over into other bond markets and into equity markets, which threatens the economic recovery. Systematic fear can be as devastating to an economy as real shocks.

People say that we need to understand the causes of the financial meltdown before proposing solutions. I think there are commonsense reforms that can be made, but these mostly won’t get at the real problem: no one has a clue about how to regulate either exuberance or fear.

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Obama and Sports

Sven will enjoy this Reason post about a ridiculously myopic and terrible (which is saying a lot given the quality of sports “journalism”) column on Obama and sports. I hope you do too.

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Judge Alex Kozinski issued an interesting opinion this week in Rodriguez v. Maricopa County Community College.  In it, he argues that:

Free speech has been a powerful force for the spread of equality under the law; we must not squelch that freedom because it may also be harnessed by those who promote retrograde or unattractive ways of thought.

Two quick thoughts occur that aren’t necessarily related to the facts of this case:  

1.  Universities should be bastions of free speech and the Court should be a powerful bulwark against government restrictions on speech (especially speech codes) if public universities adopt them.  Kudos to the 9th Circuit for standing up for the principle of free speech (though in this case they merely denied a claim rather than throwing out a government restriction.  But the case affirms the Court’s role in the protection of speech).

2.  More importantly, we should not forget that some speech is indeed “retrograde” and “unattractive,” and we should be willing to exercise our free speech rights to speak out against such talk.  Thus more and better speech is the remedy, not the suppression of speech itself (especially since this only forces the speech underground rather than dealing with the bad ideas behind it).   

In that spirit, two points on the particular case itself:

1.  In this case, a university employee used a campus-wide e-mail distro system to politick against multiculturalism in some very inflammatory ways.  What would lead one to think that the university distro e-mail system is the appropriate place to post a political message period?  Maybe that is how that system is designed to function at that community college, but I wouldn’t want such politicking in my campus e-mail distro (mostly because one cannot exercise exit while an employee in those cases  - though you can hit delete as Kozinski notes).  I’d much rather have speech conducted in the university quad.  And how about the campus newspaper?  The local newspaper?  A regional newspaper?  A campus forum?  The Chronicle of Higher Education?  Or pretty much any other place (except the classroom, of course). 

2.  The employee in this case sounds like a complete racist - and an idiot.  So we should speak out against him and his views, and I applaud those who responded with more speech.  This country will be a better place if it adopts color-blind thinking, including in the area of immigration, not policies that try to lock in some “White majority.”  And if the author wants to defend Western civilization, don’t mix it up with an unrelated racial agenda.  Defend the civilization and its ideas.

3.  It is interesting that Sandra Day O’Connor heard the case in retirement from the higher Court.  Would appreciate the lawyers telling me how this works.     

HT: Phi Beta Cons

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Great Cover

My preferences run towards the Atlantic rather than the New Yorker (at least in the past given the Atlantic has been on a downward slide lately that makes it less and less part of my reading life), but I gotta give it to New Yorker for this very well done cover.

Curious how Pileus readers interpret it, aside from the obvious.

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Books Matter

A recent article in Research in Social Stratification and Mobility finds that having a lot of books in your house increases the amount of education your children will attain. The cross-national research was conducted by M.D.R. Evans, Jonathan Kelley, Joanna Sikora, and Donald J. Treiman.  Here is a Chronicle of Higher Education post on this piece and the abstract is as follows:

Children growing up in homes with many books get 3 years more schooling than children from bookless homes, independent of their parents’ education, occupation, and class. This is as great an advantage as having university educated rather than unschooled parents, and twice the advantage of having a professional rather than an unskilled father. It holds equally in rich nations and in poor; in the past and in the present; under Communism, capitalism, and Apartheid; and most strongly in China. Data are from representative national samples in 27 nations, with over 70,000 cases, analyzed using multi-level linear and probit models with multiple imputation of missing data.

This isn’t all that surprising to me – though it is nice to see an effect even controlling for parental socio-economic status (SES).  I couldn’t get past the gate to the article so assuming that this is all up to snuff methodologically. 

Now assuming that more formal education is a good thing, this is basically, in my case, like telling a blow addict who cares about his kids that the presence of coke in the house will benefit his offspring: it will only serve to further an unhealthy addiction (in my case, one that has negative fiscal ramifications and health effects — breaking my back and threatening hernias every time I move).  Just kidding. 

This is great news that will assuage my conscience while surfing Amazon and help me effectively counter my wife every time she asks if we have enough books already.  The downside is my kids might get a Ph.D. 

But I still wonder what the causal path is as there might be a correlation without causation and I’d like some theory to explain how the IV causes the DV.

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The “resource curse” refers to a set of cross-national relationships between resource dependence on the one hand and economic growth and civil conflict on the other. Sachs and Warner were the first to document the negative relationship between resources and growth. The notion that countries blessed with abundant mineral resources tend to suffer slow economic growth was just counterintuitive enough to appeal to most economists, and the idea quickly became a piece of conventional wisdom.

Subsequent research delved deeper without questioning the basic relationship. Was all production of primary commodities associated with slower growth, or just mineral production? (Evidence suggested the latter.) What was the causal mechanism: “Dutch disease” via appreciation of the real exchange rate, a political economy explanation such as corruption or rent-seeking, or civil conflict? (Sachs and Warner argued for the first, Robinson, Torvik, Verdier, Moene, and colleagues argued for the second, and many political scientists and economists associated with the World Bank’s Economics of Conflict program argued for the last.)

The research on resources and civil war became a massive literature in its own right. Collier and Hoeffler kick-started the program in 1998 with their “rational rebel” model of civil war. For them, resources promoted conflict by rewarding looting. Fearon and Laitin found that oil exporters were more likely to see new civil wars. Some research also found a diamond curse in the 1990s, but Ross’ work has found that oil (especially onshore oil) is the only robust channel by which resources promote intrastate conflicts. To my knowledge, no one has yet quantified the deleterious consequences that resources have on growth via the oil-civil war link or determined whether there is a growth residual that civil war does not explain.

However, some of the latest research to come out is questioning the very basis of the resource curse, the cross-national negative partial correlation between resource dependence and economic growth. The criticisms of prior research have focused on measurement and modeling issues. Typically, resource dependence has been measured as resource exports divided by GDP. In the numerator, total resource production is not available for many country-years, and exports are therefore preferred. The main problem is that re-exportation of minerals is apparently counted in some datasets, and export of processed minerals (e.g., smelter production) is definitely included. What we ideally want is mine production of raw minerals. In the denominator, GDP is used rather than population in order to test the Dutch-disease, crowding-out argument. If resources are important relative to the economy, they may draw capital and labor out of more “productive” sectors that generate dynamic gains and drive up nontradables prices.

The problem is that an economy may develop resource dependence because of growth-retarding institutions that have persisted for a long time, institutions that discourage capital accumulation and the manufacturing and service sectors dependent on abundant physical and human capital, thus generating a negative partial correlation between resource dependence and growth that is spurious due to “endogeneity.” Endogeneity simply means that the errors in the growth model correlate with one of the regressors, in this case resource dependence.

To try to address this problem, Sachs and Warner included some geographic controls, on the assumption that geography would be the main omitted variable that could drive spurious results. However, they found no effects for their geography controls. Since then, we have discovered that geography as a determinant of growth has been vastly overrated. Once Acemoglu, Johnson, and Robinson include political institutions (instrumented by settler mortality rates) in their growth models of post-colonial countries, geography is no longer statistically significant. What this tells us is that endogeneity may still be a problem.

In two recent papers, Brunnschweiler and Bulte argue that resource dependence is a result of poor institutions and conflict, and that when instrumented, it no longer affects either economic growth or civil war. They report that a very broad measure of resource abundance (net present value of natural capital, including mineral, agricultural, and environmental assets) is positively related to growth and therefore indirectly related to less conflict risk (richer countries experience less civil war). Whether these new papers shake the conventional wisdom or not remains to be seen. Certainly, instruments can be questioned (presidentialism and trade/GDP play a prominent role, but these do not strike me as obvious choices), and their measure of resource abundance is fraught with measurement error, but at the moment, the evidence is not looking good for the conventional resource curse.

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Military leaders are frequently in the public eye.  They appear as guests on news shows and comment on political issues (a recent example here), they give speeches at universities (a recent example at Sven’s university here), and they meet with elites across the country.  Indeed, this list of speeches and remarks by General John Shalikashvili while Chairman of the Joint Chiefs of Staff shows just how much exposure top leaders get. 

But is this a good thing?

One could argue that this public engagement is actually good because it provides an educative function for the public and allows the military perspective to be heard by the ultimate principals in a democratic society (the people).    

However, it might not be a good thing for military leaders to enter the political ring and be active participants in battles about essentially political issues/questions given that their expertise and authority is only in the very specific application of physical violence.  Moreover, active engagement in politics may erode or threaten proper civilian dominance of civil-military relations in a democracy.  It may also lead people to consider the military as just another political actor and thus to discount the advice of military leaders on those matters for which they are experts and ought to be heard as objective advisers.  Indeed, these are only a few reasons such activity might be problematic.   

So, perhaps the military should take a cue from economist Arthur Burns when he was at the Council of Economic Advisers.   According to one speech given at his memorial service and published by the AEI under the title Arthur Burns:

The council’s economic analysis was widely regarded as poor in quality and as slanted to fit the policy preconceptions of the chairman.  From the outset, Arthur determined to change both the image and the activities of the council.  He set himself the task of converting the council into a source of objective information and analysis of economic options for the President.  Toward that end, he adopted a policy of refusing to make any public statements in his capacity as chairman.  He refused to appear on television programs or to give radio interviews.  Indeed, he went so far as to refuse to testify before the Congress except in executive session.  He insisted that he was an adviser to the President and not an independent operator on the political scene.

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The University of Chicago was a founding member of the Big Ten Conference, and was a football powerhouse from 1895 until 1946. They were, indeed, the original “Monsters of the Midway,” having won two national championships and seven Big Ten championships. Jay Berwanger, a halfback at the U of C, was the first winner of the Heisman Trophy in 1935.

In 1939, however, Robert Maynard Hutchins, then president of the U of C, decided football had become too important. He feared it was overshadowing academics, and so he began a controversial movement to end the program. In 1946, the U of C left the Big Ten and the football program was discontinued. Football returned to the U of C as a club sport in 1963, and a varsity team—but only at the Division III level—was reinstated in 1969.

In the New York Times, Bruce Fleming, a 23-year veteran professor at the Naval Academy, calls for a similar transformation. He argues that the commitment to athletics has become a distraction—even, in the Naval Academy’s obsession to beat Notre Dame in football—an unhealthy one. He argues that it has led the Naval Academy and the other academies to water down standards, to the point where their academic programs are no more challenging, and no more more likely to produce top-flight military leaders, than R.O.T.C. programs around the country.

He thinks things are so bad that he issues an ultimatum: either downgrade the athletics to far-less-competitive Division III status, or end the military academies altogether.

I vote for the former. I don’t know if things are as bad as Fleming says, but if the U of C’s experience is any indication, colleges can flourish academically without D-I academics. Perhaps it is time for Robert Gates to become the next Robert Maynard Hutchins.

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For those who followed the neo-Marxist debates on state theory in the 1970s (or were forced to learn about them by one’s professors), one of the more interesting contributions came from James O’Connor’s book, The Fiscal Crisis of the State. In essence, O’Connor argued that the state must simultaneously execute two conflicting functions: an accumulation function (creating the conditions for capital accumulation or corporate profitability) and a legitimation function (responding to the demands of voters and mobilized groups).  As elected officials meet the demands for social provision, they embrace higher levels of taxation, ultimately reaching a point where capital accumulation collapses. They can try to put off the day of reckoning (e.g., through incurring debt) but ultimately, the crisis would occur, perhaps as a result of an exogenous shock. Of course, some of what O’Connor argued could also be extracted from public choice arguments that were emerging at the same time (see Buchanan) and the work of Mancur Olson (see The Rise and Decline of Nations).

With this in mind, the press is increasingly full of pieces detailing the fiscal crisis of in Europe, which has come to a head as a result of the sovereign debt crisis.  I find these pieces interesting, in part, because they may foreshadow what will be occurring in the US in the next few decades.

As Michael Weissenstein reports, “the welfare state—cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism—is coming under its most serious threat in decades.”

Peggy Hollinger (Financial Times) reports that France is seriously contemplating an increase in the retirement age, “as it embarks on a contentious reform of its debt-laden pension system and brings public finances back into line.”  The unions are (insert shocked expression here) strongly opposed to any cuts and are planning a national strike on Thursday.

There was an interesting “debate” at the New York Times on whether we are witnessing the twilight of the welfare state and whether the sovereign debt crisis holds any important lessons for the United States.

It is my take (corrections are welcome) that the extent of the crisis in Europe is a bit overstated. First, the coverage of the crisis seems to suffer at times from what logicians call the fallacy of false dilemma (dismantle the welfare state or suffer collapse). There is often a failure to acknowledge that there is much room for reform and viable models within Europe (e.g., , flexicurity in Denmark).  Second, the European welfare states have been far more generous than the US welfare state. In France, for example, the debate focuses on whether to increase the retirement age from 60. And as one 92 year old Spanish pensioner said (in the Weissenstein piece above) “he was unlikely to live long enough to see the worst of the pension freeze, but had no doubts he would have to start relying on savings to maintain his lifestyle.” My guess is very few 92 year old retired civil servants in the US are starting to contemplate dipping into savings.

Yet, one must ask: to what extent is the current crisis in Europe a harbinger of what will occur in the United States (2030, or 2040)?  We are incurring ever-greater debt (and I know this may not strike a chord with Sven, but it certainly does with me) and this is only the beginning given the problem of long-term unfunded liabilities. Our demographic profile, while not nearly as bad as Europe’s, is nonetheless going to place ever-greater stress on a smaller proportion of the population, mandating levels of taxation that will have negative implications for growth and social cohesion.

The end result may not take the form of crisis, but a painful state of sclerosis and a moribund economy.  O’Connor may have gotten the basic story right, but in the end, Mancur Olson may have been far better in teasing out the implications.

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Texas State political scientist William Ruger and I give our take on the Arizona boycott here. Quick take: the politicians denouncing Arizona’s “police state” need to take a good look at the planks in their own eyes.

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Before I get voted off the island, let me say that I’m in favor of much smaller government, lower spending and lower taxes.  I’m also a supporter of reducing budget deficits.

That said, however, I cannot find a reason to get that worked up by the budget future of the U.S. or most developed countries.  I started thinking this way over 20 years ago when I was an undergraduate and Robert Barro came to campus to tell us that the trade deficit we were running at the time was not that big of a deal, nor was the budget deficit that the trade deficit was helping finance.  This was my first exposure to Ricardian equivalence, a concept that I still think is basically right.

Of course studying economics at Chicago didn’t really dissuade me from this view.  Our macro courses paid scant attention to government finance of any kind, and no one in Chicago (or elsewhere) was paying attention to fiscal stimulus or any other  Keynesian voodoo.  We studied real business cycle (RBC) models.  I never became a master of these models, nor did the hyper-technical, ethereal nature of these models seem to be something I would be interested in or something I would be good at.

But I did gain a sense of what was important in the macroeconomy: real things.  By this I mean machines, hours worked, human capital, technology, infrastructure, networks, relationships, and time.  Prices, deficits, interest rates, exchange rates—these are things determined in markets by the supply and demand for real things.  They are not in themselves real things.   [If you and I each sell each other one billion dollar bonds, are we both worse off or better off?]

The way to judge government spending is to determine whether we are spending money on things that have value (relative to opportunity costs), not how those expenditures are financed or how much money is being moved around and to whom.   Taking money from person A and giving it to Person B is just a transfer; it doesn’t have real consequences unless people start doing things with their real stuff to avoid those transfers, such as putting their capital in less productive uses in order to avoid taxes.

In a closed economy (which we are definitely not, but hold that thought for a moment), the idea that a society can live beyond its means is impossible.  We cannot borrow from our children’s future.  We can only borrow from the present.  People who buy those government bonds know that those bonds can only be paid back from future taxes.  This is the main idea behind Ricardian equivalence.  It doesn’t matter whether spending increases are financed by taxes or bonds.    If I want to buy a car, the important question is not whether I pay cash, or get a 4-year loan or a 6-year loan (assuming each option will leave me solvent).  The important question is whether I buy a Toyota or a Lexus.  I don’t want a Lexus government.  I want a Toyota government.  Policies that diminish productivity, reduce investments in technology and human capital, and lead individuals to divert real resources from productive uses to unproductive uses are the policies we need to be most concerned about—not how big the budget deficit is.

The humungous caveat to this analysis, however, is foreign debt.  We cannot borrow from future generations since they don’t exist, but we can borrow from the Chinese and other creditors.  This is a genuine concern, but not one that I am terribly worried about yet, at least in the short-term.   As long as people have faith in the US Government meeting its obligations (and every time there is a crisis, people flock to US Bonds), they have every incentive to keep those bonds.  A mass sell-off would only hurt the seller, since it would lower the price of bonds.

So let’s focus on what matters: what are we doing with our time, our talents, and our stuff—and how can we keep government away from it.

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I think the Rand Paul/Civil Rights Act episode might be the real beginning of the end. Here is why.

The only real opposition to the growth of the federal government in the last quarter-century has been the recent Tea Party movement. It may be too late to make any real difference, but it was a slender hope, a spark of life, a sign that perhaps there was still some fight left in the spirit of American liberty and independence. Then its numbers got bigger, its rallies got bigger, and, in a spectacular victory, it got one of its people—Rand Paul—the Republican nomination for senate. Wow!

The mainstream media, and the people defending and even desiring the expansion of the federal government, have correctly viewed the Tea Party movement as a threat, and they have worked hard to suppress it. One main strategy has been to dismiss them on the grounds that they are all really just special-pleading racists. Deep down, their real objection was to President Obama’s race or to the fact that people of color are now rising up and threatening their privilege. The media have tried very hard to find evidence of this racism, but, despite some initially promising attempts, they had had only limited success. But they still knew somehow that all those arguments about constitutionality and liberty were really rationalizations masking the true, ugly motives underneath.

And then . . . Rand Paul said that he wasn’t too sure about that 1964 Civil Rights Act. Maybe it violated business owners’ private property rights and thus constituted an unjust governmental incursion, he suggested. Ahh, just exactly what was wanted: proof—absolute, uncontrovertible, indisputable proof—that (a) he is a racist and therefore can be dismissed; that (b) therefore the movement supporting him is racist and can be similarly dismissed; and that (c) therefore everything he and his movement supported arose out of racism and can also be dismissed. Just to be sure, before pronouncing the final verdict, media members asked some prominent “libertarians” whether they too were against the Civil Rights Act. And they all duly said no, no, of course not: Paul is “wrong,” he’s  “brain-dead,” etc.

Well, that’s that, isn’t it? The whole Tea Party movement can now finally be safely disregarded as a racist rabble, unworthy of serious consideration. And all those people who have been arguing in support of the “free market,” “limited government,” “constitutional limits,” “individual liberty”? Well, they must be racists too, and we now know for sure those phrases are really just code words for racism.

Therefore, all the opposition to increasing federal debt, to increasing federal centralization, to government takeover of various industries, to increasing federal management and nudging of the markets by enlightened and benevolent philosopher-kings is just so much racist special-pleading. We are now safe to proceed apace, psychologically secure and confident in the purity of our motives and no longer needing to feel any guilt for not paying attention to those people “on the right.”

One might have thought that the Rand Paul affair is, in the grand scheme of things, just a small blip. How many politicians, after all, have said things that got them into hot water, even sometimes ending their political careers? But I fear this one is different because the stakes are so much higher. Although many of us prefer not to think about it, Europe is right on the precipice of a fiscal collapse, and the United States is hurtling in exactly the same direction. If the Tea Party movement—and all those who, though not exactly members, were cheering them along—are discredited and defeated, then there is no real opposition, no real brakes on our accelerating progress toward what now seems might be an inevitable end.

Perhaps my pessimism is getting the best of me; time will tell. But if one thinks that Europe does not have the will to solve its debt crisis, and if one thinks that the only way the United States will be able to weather that coming global fiscal storm is if we were to get our own house in order first, then Americans would need to make difficult and painful political and economic decisions very quickly. Perhaps the Rand Paul Affair will pass, without the significance I suggest here; indeed, I hope I am wrong. But if it does turn out to have simultaneously crippled those who are pushing for those difficult fiscal decisions and comforted those opposing them, then it may become a pivotal event sealing our fate.

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Fivethirtyeight has a fascinating account of how South Africa’s electoral system led to unchallenged National Party dominance and the imposition of apartheid. It’s just a little more evidence that the worst electoral system ever devised is single-member-district plurality rule. The discussion of emigration at the end is also interesting for providing another case in which free movement of labor and capital across borders promotes liberty:

By the end of the 1970s, the white population was actually falling by nearly 20,000 a year, a pace that would more than double by the beginnings of the 1980s. While the electoral system may have made it increasingly difficult for South Africans to oust the National government with their votes, it in many cases led them to vote against its system of Apartheid with their feet.

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This makes sense to me:

One of the fundamental problems with simplistic libertarian thinking of the type Paul is engaging here, is that it pretends like any given moment in time exists in a manner that is disconnected from a broader history.  One cannot simply say that private property rights are so sacrosanct that we must allow for discrimination when the state itself already used its power to create the conditions under which the discrimination took place in the first place.  Indeed, from a libertarian point of view, i.e., one that respects the rights of the individual above all else, the problems under discussion require a choice to be made between violating property rights or allowing a larger destruction of liberty (again, one created and enforced by the government to being with) to continue.

Put another way, and within the confines of a basically libertarian approach:  what is a larger harm to liberty?  Is it the imposition of non-discrimination policies on private businesses or is it the continuation of rampant discriminatory practices across society targeted at a specific segment of the population?

The above is from Steven Taylor at the Outside the Beltway blog.  It is taken from a discussion of Paul’s failure to endorse  the Civil Rights Act.

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U.S.S. Liberty

With many international observers focused on the Cheonan incident in Korea which killed 46 South Korean sailors, it is a good time to remember another tragedy at sea – and one that has become a pretty much forgotten episode in American history. 

On June 8, 1967, the U.S.S. Liberty - a Navy electronic  intelligence ship sailing in international waters off the coast of Egypt – was attacked by Israeli planes.  The assault killed 34 Americans with many more wounded.  The Israelis claimed it was an accident due to the mistaken belief that the ship was an enemy warship.  The U.S. government agreed it was an accident. 

Whether it was an accident or a deliberate Israeli attack is an on-going debate despite official inquiries on both sides. 

For what it is worth (proceed with caution!), here is Wikipedia’s entry:  http://en.wikipedia.org/wiki/USS_Liberty_incident.

Note: I am not suggesting the two cases are equivalent.  I’m merely remembering an international episode in American history that involved the tragic loss of life at sea.

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I have a somewhat different take on the financial legislation passed by the Senate than that presented by Jim Otteson, although I agree with his argument. Here is my take:

The New Deal era financial regulations created several separate financial industries, each governed by its own set of regulators and insulated by regulatory barriers to entry. Although this system functioned remarkably well for several decades, the pressures imposed by high inflation and new technologies forced a process of deregulation, which gained steam over the past several decades. In 1999, Congress passed the Gramm-Leach-Bliley Financial Services Modernization Act. It permitted the consolidation of commercial banks, investment banks, securities firms and insurance companies in financial holding companies, thereby eliminating the last vestiges of Glass Steagall. “Functional regulation” continued to exist, even if the functions were consolidated in financial holding companies. Moreover, while the 1999 Act essentially revoked Glass-Steagall, many of the changes had already occurred incrementally. For example, often through mergers and acquisitions, commercial banks had already made forays into investment banking and brokerage activities, creating more diversified financial service companies.

In an ideal world, a new regulatory architecture would acknowledge these changes rather than layering another set of processes and institutions over an already fragmented system.

As we discovered in the last few years, regulators will come to the rescue of large financial firms regardless of which industry or industries they are in.  Under the assumptions:

(1) We cannot return to the tidy world of Glass-Steagall where there are clear regulatory firewalls between financial industries, and

(2) There are few things more dangerous than implicit guarantees

One would have hoped that regulations would have subjected all financial firms, regardless of industry, to a form of insurance comparable to that in place with the Federal Deposit Insurance Corporation. The funds, could be used to rescue failing firms.  More importantly, the system could be used to subject insured firms to higher levels of oversight and there could be a uniform set of procedures in place for liquidating (or “winding down”) failing firms.

The Senate legislation makes motions in this direction (i.e., it expands the reach of the FDIC) but it retains the high fragmented regulatory structure and simply creates new means of coordination (i.e., through the creation of a new Financial Stability Oversight Council).

There are a number of potentially positive features of the legislation.

It makes sense to bring much derivative trading off of “dark markets.” The requirement that banks spin-off their derivative activities is unlikely to survive conference (and may well die at the Obama administration’s request).

Some of the duties assigned to the new Consumer Financial Protection Bureau are necessary. Markets cannot function effectively when there are great information asymmetries and this has been a serious problem  in consumer financial markets (as Elizabeth Warren has documented). However, one can question whether the Senate’s desire to place this new agency within the Fed will survive conference. Moreover, regulators often over-reach. Can we be confident that the new bureau will restrict itself to the functions promoted by Warren?

It is also quite positive that the legislation addresses the conflicts of interest among credit rating agencies (they are compensated by the financial firms whose securities they rate).

But there is also much room for mischief. Banks with more than $250 billion in assets will be subject to higher capital standards. One can imagine that the process of setting these standards will lead to efforts of social engineering (e.g., setting standards to create an “ideal” industrial structure).

Most important: I remain highly skeptical that this legislation is based on a coherent understanding of the causes of the financial collapse. If, as Gary Gorton has argued in his new book, Slapped by the Invisible Hand, the crisis was a panic in the repo market, it is unclear how this legislation will prevent a similar set of events from occurring in the future—or, more to the point, that such events can be prevented.

Of course, financial regulation is only part of the problem. The existing regulatory framework was inadequate. But absent the housing bubble, the collapse would not have occurred. The bubble, in turn, cannot be understood without reference to elected officials leveraging financial markets and using government sponsored enterprises (Fannie and Freddie) to engineer a desired level of home ownership, and  the Fed’s promotion of low interest rates rather than acting under the discipline of the Taylor Rule.

Needless to say, neither of these issues has been addressed by the legislation.

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The finance regulatory reform bill that the senate passed yesterday provides, among other things, for an array of new regulatory instruments and powers. According to the Wall Street Journal, they include:

1. Creating a “new council of ‘systemic risk’ regulators to monitor growing risks in the financial system, with the goal of preventing companies from becoming too big to fail and stopping asset bubbles from forming.”

2. Creating a “new consumer protection division within the Federal Reserve charged with writing and enforcing new rules that target abusive practices in businesses such as mortgage lending and credit-card issuance.”

3. Requiring “the Federal Reserve to supervise the largest, most complex financial companies to ensure that the government understands the risks and complexities of firms that could pose a risk to the broader economy.”

4. Empowering “the government in extreme cases to seize and liquidate a failing financial company in a way that protects taxpayers from future bailouts.”

5. And granting federal regulators “new powers to oversee the giant derivatives market, increasing transparency by forcing most contracts to be traded through third-parties instead of only between banks and their customers.”

There have been a lot of dirty hands at work in our recent economic woes, and some activities of some financial institutions have undoubtedly been among them. Who cannot feel disgusted when Wall Street executives extend one hand for bailouts from the public treasury while they put millions in their pockets with the other hand?

Still, one cannot fail to be impressed by the scope of the governmental powers and authorities enabled by the provisions of the senate’s bill. Should we be worried by these new increases in centralization of power and authority? Let me be more specific:

First: How confident are we that the drafters of this bill correctly understand the causes of the economic downturn, including the role that banks, traders, complex financial instruments like derivatives, and so on played? I note, for example, that the bill’s chief sponsor, Senator Chris Dodd, has never held a job in banking or finance, and apparently has no background in economics or finance (see his biography here). I note moreover that professional economists have offered many competing explanations and accounts of the current crisis (here are competing accounts—one and two), and Senator Dodd’s understanding is contradicted by some of them.

Second: How confident are we that their assessments are objective and credible, and reflective of concern for the public interest and not their own interests? Senator Dodd has played a role in the subprime mortgage crisis that has led some to question both his integrity and his disinterestedness. Moreover, allegations of rather-too-cozy relations between government officials and banking leaders abound (example).

Finally, How confident are we that these new powers will be used the way they are intended? How confident are we that the people who will be charged with executing these powers will do so faithfully and only (or even primarily) in the public interest, not in their own interest? Here I am reminded of David Hume’s argument in his essay, “Of the Independency of Parliament” (available here). He writes:

It is, therefore, a just political maxim, that every man must be supposed a knave: Though at the same time, it appears somewhat strange, that a maxim should be true in politics, which is false in fact.

Hume claims that in holding this maxim he is “justified by experience, as well as by the authority of all philosophers and politicians, both antient and modern,” but he also offers an argument. He writes, “For so great is the natural ambition of men, that they are never satisfied with power; and if one order of men, by pursuing its own interest, can usurp upon every other order, it will certainly do so, and render itself, as far as possible, absolute and uncontroulable.” Hume argues that in their private capacities people are “generally more honest” than they are in their public capacities because in their private capacities people act as individuals, representing, usually, only themselves. In their public capacities, by contrast, they act as parts of groups, which both diffuses responsibility for their actions and inclines them to serve the interest of their particular group instead of, or even against, those of other groups, including the public at large.

Hume goes on to draw policy conclusions from this description of human action—his discussion is typically brilliant; I commend it to you—but the “political maxim” of assuming everyone is a knave is brought to a sharp point by the senate’s finance bill. In order for this bill to do what its proponents claim it will, everything will have to go well: The people involved will all have to be supremely competent and motivated by the public’s, not their own, interest.

I hope this is the case, but how wise is it to assume that it will be the case? Hume’s argument is that it is not very wise at all. And given how difficult it is to find examples contradicting Hume’s argument—can you think of any?—perhaps we should reconsider our willingness to allow such a substantial expansion of centralized governmental authority.

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I like James Taranto’s take on Rand Paul’s view of the 1964 Civil Rights Act:

Far from being evasive, Paul has shown himself to be both candid and principled to a fault.

We do mean to a fault. In this matter, Paul seems to us to be overly ideological and insufficiently mindful of the contingencies of history. Although we are in accord with his general view that government involvement in private business should be kept to a minimum, in our view the Civil Rights Act’s restrictions on private discrimination were necessary in order to break down a culture of inequality that was only partly a matter of oppressive state laws. On the other hand, he seeks merely to be one vote of 100 in the Senate. An ideologically hardheaded libertarian in the Senate surely would do the country more good than harm.

As a matter of pure theory, it is wrong to use violence to force anyone to associate with anyone else. But in the context of U.S. history, it seems to me that a forceful, governmental response to ingrained discrimination was necessary.

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