Archive for July, 2011

Well, actually I think the time is well-spent.  But it is funny how often economic thinking and concepts directly intrude on my thoughts the older I get and the more time I spend with economists in person and in print.  Two cases in point, both related to the concept of opportunity cost:

1.   I was stuck at the airport for much of last Saturday and so perused the magazine racks there at some length during breaks from the pain of trying to work in an airport chair.  At one point, my eyes wandered over to the newest edition of Psychology Today – a pretty awful magazine – and noticed the front cover advertising an article titled something like: Why Smart People Have Less Sex.  I instantly and without really thinking at all said to myself, “Well that must be due to their higher opportunity cost,” before I even processed anything on a more intellectual level or even picked up the magazine.  I decided to see if the article did touch on this (obvious) possible explanation and was disappointed during a quick perusal to see it wasn’t really discussed as an alternative in anything more than a cursory fashion.

2.  My eldest son was taking forever eating his dinner tonight so I tried to explain to him the concept of opportunity cost.  I was tired of just telling him to eat his supper and stop playing with his food, so I thought I’d try to rationalize with him once again.  I proceeded to teach him the phrase opportunity cost and how he should think about what fun he was foregoing by taking twice as long to eat as it should even allowing for enjoyable organic family conversation.  When I quizzed him about what this all meant, he responded such that he certainly knew what I was talking about.  I thought victory was at hand.  And then he proceeded to tell me that it was still so much fun to make his pasta into a ski jump – thus handing me a defeat in my quest to get him to eat faster than paint dries.  However, I was pleased that his internal economist is working quite well since he seemed to be calculating the trade-offs!

Note: I wrote this post before David Henderson said this earlier in the week about opportunity cost.  Worth a look.

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There once was a man who, by every possible measure, had reached a girth that was too great to be compatible with a long and flourishing life. One could have considered any number of indicators if one had wished—percentage of body fat, body mass index, blood pressure—and they all pointed in the same direction and carried the same dire consequences. Although the man usually shrugged them off (“My mother always told me I was a husky boy with big bones,” he would tell himself), in his heart he knew the truth and understood the consequences of continuing the habits that had left him in this awful state. Indeed, he did not have to look too far to see others with similar weights suffering from sclerosis and, in some cases, facing a premature death. He decided to seek out advice from some of his most trusted friends.

One day a friend dropped in for tea to discuss the situation.  The fat man sighed and said: “Perhaps after years of eating too much and exercising too little, it is time again to get on the scale and face up to my situation.” The friend put down his cup of tea and scolded: “We have been down this path before. Every few years you get on the scale and each time you weigh more. This time will be no different.  Do not get on the scale until you are fully committed to a new fitness regimen. To do so, would simply make you fatter.” The fat man didn’t quite understand the logic. “The scale does not make you fat, no more than any other indicator I have read about.” The friend looked sternly across the table and replied: “This is the very thinking that you into this situation. Follow my advice and refuse to get on the scale. Make it a pledge.”

The logic seemed to escape the fat man. Fortunately, another friend dropped in and offered a glass of chardonnay and some competing advice. “Three things, my friend. First, don’t even use words like ‘fat’ since they are often a hallmark of intolerance. There are many large people—far larger than you—who are very happy. Who ever heard of a jolly thin man anyway? Second, throw the scale away altogether. Eat, drink and be merry! As long as you have credit, you can enjoy a wealth of world pleasures. In the long run, we are all dead! Finally, think about how your decisions will affect others—the most vulnerable among us. The minute you stop eating dessert, the poor people who cook your pastries and scoop your ice cream will find themselves with less demand for their services. Do you really want to pursue health on the backs of the food service industry?”

The conflicting counsel confused the fat man. Fortunately, a third friend came to the door and offered a quick critique of the earlier pieces of advice. “You must get on the scale. It only tells you what you already know and however much you want, you can’t change your past decisions about eating and exercise. Just jump on and jump off. If you don’t like what you see, you can always start planning your New Year’s resolutions.”  The fat man frowned: “I have tried the resolution route before. It never ends well.” The third friend winked and lit a cigarette. “Well then, get on the scale. But do so with a commitment to stop ordering cheesecake after dinner. In a few months, you can commit to getting on the scale again but only if you combine that with a further decision to stop drinking milkshakes.” Fatman looked a bit puzzled. “I don’t like cheesecake and rarely drink milkshakes.” His friend smiled once again: “Even better. Those things are high in calories—they have been scored as such by the nonpartisan USDA—even if you don’t normally consume them, even if you gave them up years ago, there is no reason why you shouldn’t view these commitments as important steps toward a new healthy lifestyle. There is an additional advantage: if you frame your commitments with care, you might even bring your other two friends aboard. We have found consensus in the past.”

Regardless of which advice he followed, the fat man finally concluded, he would still be fat, and most likely fatter as the years progressed. He had read the reports on the long-term consequences of morbid obesity; the projections of the health problems he would face in future years were sobering. That day he made an important decision. The first step to good health was clear: get a new set of friends.

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I don’t want to speak for the other Pilei, but I am in favor of nearly total drug legalization.*  The large majority of harm (and potential benefits) from drug use itself is largely internalized by the person engaged in that particular behavior.  When there are spillovers to others not party to the drug use (what economists call externalities), the government can legitimately punish the resulting behavior if it goes so far as to constitute a substantial violation of the rights of others.  For example, it can arrest someone who while drunk unjustifiably punches another at a bar due to the drug-induced inability to exercise appropriate judgement.  Or more obviously, it can throw the book at someone who kills another in a drunk driving accident.  It can also step in when someone is doing something while “on” drugs that is so potentially threatening to the rights of others as to justify preemptive intervention as in the case of drunk driving.  However, in these cases, what you are punishing isn’t really drug use but a behavior that whether drug-induced or not violates the rights of others who didn’t sign-up for the experience.  So drug use itself isn’t really a problem legally unless you think the government should define the kinds of things we should be able to do with or to our own property – our body and mind. 

Of course, this is a hard position to maintain in a society such as ours even in normal times.  However, it is especially difficult to advocate this position in the immediate aftermath of any bad news related to the misuse of drugs.  Enter rehab hating Amy Winehouse and her sad death (sad especially to those like me who loved her retro music).  I am sure that Drug Warriors will take the occasion of Winehouse’s death to tell the body politic how terrible drug use is and how we need to keep up the legal fight against the production, sale, and use of drugs deemed too dangerous for unprescribed or even prescribed use.  In other words, they’ll sing “Amy shows we shouldn’t le-gal-ize, no, no, no” to the beat of “Rehab.”

Despite my support of drug legalization and opposition to the Drug War, I don’t think we should forget that with liberty comes great responsibility — and that we should expect those who cannot exercise that responsiblity to pay the costs for their behavior, whether to the self or to others whose rights they may violate.  In the case of Winehouse, if we are going to respect her autonomy and human dignity, we also have to assume that she accepted the potential costs and benefits of her behavior, discounted the costs as she saw fit, and proceeded to use drugs despite the costs.  It isn’t the choice I would make.  Moreover, I would argue that such a choice is immoral given how inconsistent it is with human flourishing.  But it is a choice we should respect politically even if we don’t ethically.  To do otherwise would allow the state to make more choices about what we ought to do than it is capable of making, especially given our vastly different preferences and discounting rates (not to mention different moral theories and the information paucity governments face).  Even more important, as Frank Meyer and the fusionists claimed long ago, state restriction on non-rights violating moral choices essentially takes away our ability to be virtuous since it can hardly be said that being forced to act in a certain way makes us truly good. 

Therefore, if you love liberty and virtue, you can mourn Winehouse’s passing, get angry she made such a self-destructive choice, and even scorn her behavior.  But we should also applaud the idea of a legal system that would have allowed her to define what a good life for her was (without acting in violation of the positive law) and allowed her the freedom to be truly virtuous should she have taken a different path.            

 *I think certain drugs like antibiotics should be regulated on the grounds that usage dictated by individual choice would have huge negative externalities or may be viewed as a rights-violating act (see Jason Sorens here on this latter claim).   Given the collective action problem, individuals would rationally take antibiotics even when medically unnecessary (or would misuse them as is the case when you take these drugs until you feel better as opposed to the entire duration prescribed) and this will cause antibiotic resistant bacteria to be more prevalent.

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The WSJ has an editorial today entitled “Entitlement Nation” in which it outlines America’s political history that has led to so many millions of us today receiving, even living off, payments of money, goods, or services from the government. The numbers are shocking: “50.5 million Americans are on Medicaid, 46.5 million are on Medicare, 52 million on Social Security, five million on SSI, 7.5 million on unemployment insurance, and 44.6 million on food stamps and other nutrition programs. Some 24 million get the earned-income tax credit, a cash income supplement.”

The Journal rightly argues, “Congress has made so many promises to so many Americans that there is no conceivable way those promises can be kept.” It is because the current debt-ceiling negotiations are not even discussing the drastic changes to Medicaid, Medicare, and Social Security that would be needed to keep us fiscally afloat that they are really just playing pretend. We are still looking for the proverbial Adult In The Room. 

When the subject of reforming the Big Three entitlement programs arises, one often hears, especially from people receiving payments from them, some version of: “I paid into those programs, so I’m entitled to get my money back.” It seems like a reasonable position: people should get what they paid for, especially when they were promised to get what they paid for.

The problem is that what you paid is long gone. The money you paid over your working career was spent immediately on all manner of government cornucopia—programs, benefits, bureaus, agencies, institutes, centers, initiatives, divisions, projects, expenditures, studies, commissions, summits, departments, and on and on. You may not have noticed, or may not have been paying attention, but every single penny that was taken from your paychecks was spent. Not saved, not invested: spent. So it is now gone. Indeed, it is more than gone, since what has been spent is a lot more than what came in—which means that not only was every penny they took from you spent, but they’ve promised others a lot more of your, or someone’s, pennies.

The obvious question must now be asked aloud: If all that money, and then some, has already been spent, what is funding those entitlement programs right now, today? Answer: it is being extracted from other people’s paychecks, and financed by debt that other people will have to pay in the future. People receiving entitlement payments now are living off the money taken, or promised to be taken, from other people.

Should it be this way? Should the government have made promises it could not keep? Should it be the case that the government actually spent the money they took from you instead of saving or investing it? No, no, and no. Alas, what should be often is not.

The moral status of some people living off wealth taken from others, as so many millions of us Americans now are doing, is a separate question. I have my own view about it, but coming to a correct moral judgment about it requires first coming to a proper understanding of the situation.

It might well have been your money that was taken from you all those years, and, especially in retrospect, it might well have been wrong of the government to take it from you. But the money you are receiving now is not that money: it is someone else’s, someone who no doubt also would claim ownership of it. If you accept the money, you have to face that fact squarely.

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The ever-entertaining Jonah Goldberg on the President’s handling of the debt-ceiling limit:

Imagine you’re in a burning office building. Obama’s plan for getting out alive: “Okay, you guys break up into different groups and come up with a series of proposals about how we get out of the building. I will then negotiate with each of you separately and then together, and then separately. Then I’ll get on Skype and tell the world what I think of your respective plans and criticize you for their lack of seriousness. I will insist that we have balanced approach of applying both water to the fire and opening the windows, which some say will only provide more oxygen for the flames. But my base says window-opening is essential. Oh and I will blame all of the gasoline I threw around on the lower floors of this building on the guy who moved out two years ago. And I will veto any plan that requires we have a new plan should we get stuck on another floor. And, did I mention this mess was created by the former tenant and….ahhh what’s that smell?

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The Daily Caller reported recently that a high school in Medina, Ohio has begun charging parents fairly hefty fees for various of the activities and extras that it offers, even for seemingly basic courses like Spanish I and Earth Science. Parents are upset, of course, believing that since they are already paying taxes they shouldn’t also have to pay these additional fees.

They have a point. Why should they have to pay twice? On the other hand, by that logic, why should people who do not send their children to public schools be required to pay the taxes to support them anyway? (The response “because public schools are a public good from which everyone benefits” fails, I believe, on both moral grounds and on empirical grounds, but that is a discussion for another day.)

In Medina, Ohio’s case, I would like to offer a qualified “Good!” The introduction of these fees will expose parents to more of the costs associated with running their school. Although those costs are almost certainly inflated, still as individual parents are asked to pay them for their own children, that will tend to level, ever so marginally, the playing field for other educational alternatives.

Right now all private schools face a significant competitive disadvantage because parents who choose to send their children to their schools must nevertheless still continue paying for the public schools. They have to pay twice. (Imagine someone arguing that because the United States Postal Service was so important to this nation’s [whatever], anyone who sends a package via UPS, FedEx, or any other private service must still pay a fee to the USPS—and the USPS will itself largely determine what that fee will be!) Because everyone in the district must pay the taxes, however, the costs are distributed among a much larger group of households than the actual number that have children in the system. Thus the costs to households using the service are subsidized by households not using them.

The introduction of user fees at the public schools will seem to affected parents much more personal. They will feel it directly, because they will have to write a check for it. This is a good thing. Not only will it help remind people that there’s no such thing as a free lunch, but it may also help those parents who are considering a private option be able to do so. They might think, “If I have to pay $4,446.50 extra for my daughter to take Spanish I, Earth Science, and band, maybe I should just send her to the Catholic school we’d thought about anyway, whose annual tuition is only about $2000 more than that anyway.”

That might lead to competition, which would benefit everyone—public and private alike.

So while the fees in the Medina, Ohio case might well be buoying bloated budgets, benefits, retirement packages, etc., still a little competition spurred by a little personal responsibility can go a long way.

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Here is the budget deal I’d love to see the GOP propose:

Mr. President, you are right that we need to close all those tax loopholes that both parties have been giving rich people for far to long.  No more subsidies.  No more tax credits or waivers.   Tax rates are too high already for everyone, but these giveaways to the rich are a disgrace.  And, why we are at it, let’s cut all government benefits for those greedy rich people.  Why are people who fly to vacations in Vail on the corporate jets eligible for Medicare and Social Security?  Let’s strengthen the social net by making it truly a safety net: something that catches people when they fall, not something that is supposed to lift everyone up to a comfortable living regardless of their effort.  So, let’s start this way: the rich get nuttin’.

I’m not holding my breath.  Whenever the Democrats play the class card, the Republicans just roll over and play dead or repeat the rhetoric that keeping taxes low on corporations and small business owners creates jobs.  Never mind that that rhetoric is actually true.  It’s just such a hard sell.  So, start beating a different drum, one that turns the tables on Democrats by forcing them to justify why we spend such a large chunk of our federal budget on expenses (health care and retirement) that responsible people should be paying for themselves.

How about a GOP that said, “We’ll help the orphans, the widows, the truly poor and destitute, the disabled, the insane.   But, to do so, we need to construct a credible, limited social insurance system in which the great majority of  citizens provide for themselves throughout their lives through hard work,  through saving and sometimes borrowing, and through prudent expenditures.  This will allow us to keep taxes low, to make commerce free once again, and to reign in the size and scope of government.”

Now that would be a party to reckon with.

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The last issue of The Economist has a feature on “middle-income fragile and failed states” (MIFFs). It compares the World Bank list of countries by development level (high, middle, and low) to the OECD list of “fragile and failed states,” finding that fragile and failed states are by no means exclusively low-income:

[S]ome 15 of the 56 countries on the bank’s lower-middle income list (ie, over a quarter) also appear on the list of fragile and failed states. . . They range from Côte d’Ivoire to Yemen; the most important of them are Pakistan and Nigeria. State failure, it appears, does not necessarily go hand in hand with other human woes, such as poverty.

The article then bemoans the fact that because of their lack of absolute destitution, MIFFs often do not qualify for as much foreign aid. The unstated premise, of course, is that more foreign aid would do them good – but where is the evidence for such a claim? The article notes that the list of fragile and failed states includes both countries in “total collapse (Somalia, Chad) and those which merely contain large ungoverned spaces.”

Should governments and international institutions be aiming at making these fragile states stronger? The Economist assumes so. But might the phenomenon of middle-income fragile states instead tell us something about the comparative irrelevance of state strength, as such, for bringing people out of poverty? Admittedly, the list of MIFFs includes some countries that are non-poor purely by virtue of large mineral deposits (Nigeria, Equatorial Guinea), and these countries often feature yawning income gaps between the rent-seeking rich and the powerless destitute. But when it comes to MIFFs like Cameroon, Djibouti, Kiribati, Pakistan, Papua New Guinea, and Solomon Islands – would they really be better off if their states were more empowered? Or have the “large ungoverned spaces” served them well? As Ben Powell and Peter Leeson stress in their work on Somalia, the only way to answer those questions is by considering the alternatives that are realistically available. Liberal constitutionalism is not coming to Pakistan. So the real question is – do we want Pakistan to have a dysfunctional, powerful state or a dysfunctional, weak one? It’s not an easy question to answer, and I wish complacent journalists and aid agencies would acknowledge that.

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Nobel Prize-winning economist Joseph Stiglitz argued recently that both the economic downturn of the last two years and the looming debt crisis are the fault of “a powerful ideology—the belief in free and unfettered markets,” whose “30-year ascendance” has “brought the world to the brink of economic ruin.”

As an economist, I can’t hold a candle to Stiglitz. Still I am puzzled by a couple of Stiglitz’s claims.

The first is his claim that the last thirty years has seen the ascendance of “deregulated capitalism.” It is not immediately obvious to me how to measure, and thus evaluate, a claim like that, but a few likely indicators seem to point against Stiglitz. For example, measured in constant dollars, government spending, both federal and combined federal, state, and local, have increased every single year during Stiglitz’s window (he said “the early 1980′s to 2007″; I represent below 1980 to 2007). Here is total spending:

As a percentage of GDP for the same period, total spending has remained fairly flat:

I could not find detailed numbers on regulatory burdens and costs before 1995, but in reports compiled by the U.S. Small Business Administration (a federal government entity) in 1995, 1998, 2001, 2005, and 2010 (all available here), total cost of regulatory burdens increased each year. Moreover, according to economists Veronique de Rugy and Melinda Warren, both total budget outlays of regulatory agencies and staffing of such agencies has steadily increased since 1980, outpacing both inflation and population growth. And economic regulation in particular—which may be what Stiglitz is primarily thinking of—has also increased throughout the period.

All of this is difficult to explain on Stiglitz’s hypothesis.

The second claim of Stiglitz’s that puzzles me is that during the last 30 years, “most Americans saw their incomes decline or stagnate year after year.” But whether measured in nominal or real terms, most incomes across the classes have increased since 1980, even if modestly. Here is income distribution from 1947 to 2007 in constant 2007 dollars:

Here is real median household income in constant 2009 dollars by race:

File:US real median household income 1967 - 2009.png

This indicates that most incomes have risen when measured in real dollar income. But even that leaves out the important fact that what those incomes can buy in terms of goods and services has increased dramatically. Because the cost of most goods and services tends to go down over time, and because innovation not only finds more efficient ways of bringing current goods and services to market but also produces new goods and services, what people can buy with their money—even if their incomes stayed relatively flat—has increased. Consider just one conspicuous example, the sharp decline in the price of computing power.

That point leads to my final comment on Stiglitz’s essay. Consider this passage, in which he offers his remedies for the fiscal challenges we face:

The remedies to the US deficit follow immediately from this diagnosis: put America back to work by stimulating the economy; end the mindless wars; rein in military and drug costs; and raise taxes, at least on the very rich.

Many people, including the president again just last night, have been calling for raising taxes on the rich as at least one part of the way out of the morass. The president suggested that by “the rich” he meant those making over $250,000 per year, which is about 1.5% of American households.

I shall make no comment about the economic sense of the president’s proposed policy, or about what seems to be his zero-sum-game conception of wealth. But let us try to gain some perspective on this definition of “the rich” by comparing it to worldwide standards. People making over $250,000 in annual income are, by any worldly standards—whether measured by the rest of the world today or, even more so, in historical terms—wealthy to a degree that would have been unimaginable just a few generations ago. But then again, everyone in America is.

For most of human history, people survived on something like $1–3 per day in current dollars. Over the last seven generations of humanity, however, that has increased by something like sixteen-fold (read McCloskey’s latest for the data). Average per capita income in the U.S. in 2010 was $47,200, approximately fifty times the average for most of human history. Not a fifty percent increase, not a five hundred percent increase, but a five thousand percent increase. Worldwide, average income in 2010 was $11,200—an astonishing increase by historical standards, but only one-fourth that of the United States.

Indeed, the proportion of the American citizenry whose income is above that of the current worldwide average is . . . do you have a guess? What would you have guessed? It is eighty percent. Eighty percent of Americans earn an annual income higher than the worldwide average, which includes about two-thirds of those Americans who currently pay no federal income tax at all. Today, effectively zero percent of Americans have incomes equal to or lower than double the average worldwide income for human beings throughout most of their history.

All Americans are rich—indeed, we are rich at unprecedented levels. We are not equally rich, but we are all rich. Perhaps therein lies the rub, what really is bothering Stiglitz and others? What if it turned out that the only way we could all have these unprecedented levels of wealth is if we allowed great inequality?

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Although I did not watch POTUS live last night, I have seen clips and read the transcript. A few thoughts:

1. POTUS chastised House Republicans for rejecting an increase in the debt ceiling. The President explained: “Understand – raising the debt ceiling does not allow Congress to spend more money. It simply gives our country the ability to pay the bills that Congress has already racked up.” As the President correctly noted, increasing the debt ceiling has been routine in the past. Of course, this is not the position that the President took during his ever so brief stint in the Senate. When he decided to vote against increasing the debt ceiling, he explained (h/t Peter Suderman, Hit and Run):

“The fact that we are here today to debate raising America’s debt limit is a sign of leadership failure. It is a sign that the U.S. Government can’t pay its own bills. It is a sign that we now depend on ongoing financial assistance from foreign countries to finance our Government’s reckless fiscal policies. … Leadership means that ‘the buck stops here.’ Instead, Washington is shifting the burden of bad choices today onto the backs of our children and grandchildren. America has a debt and a failure of leadership. Americans deserve better. I therefore intend to oppose the effort to increase America’s debt limit.”

Sounds like talking points issued by the Tea Party.

2. While we are drawing on historical quotes, POTUS gave a nod to President Reagan by quoting his statement about tax increases.

“Would you rather reduce deficits and interest rates by raising revenue from those who are not now paying their fair share, or would you rather accept larger budget deficits, higher interest rates, and higher unemployment? And I think I know your answer.”

But let us not forget the context. When Reagan was elected, the income tax had 15 brackets and a top marginal rate of 70% percent. When Reagan left office, the income tax had 3 brackets with a top marginal rate of 28 percent. Another contextual point: although the Bush tax cuts are often vilified–and with justification–they were extended for two more years in a deal negotiated by Obama in December 2010. Although this angered the Left, the President justified the bill as “a package of tax relief that will protect the middle class, that will grow our economy and will create jobs for the American people.”

3. Oddly, POTUS seems to be making the case for a combination of taxes and cuts that is no longer in the opportunity set. The House isn’t going to pass on new taxes (and all taxes must originate in the House). Senator Reid’s solution—one that POTUS spoke of approvingly last night—calls for $2.7 trillion in “cuts,” but with no taxes. Like it or not, the issue of new taxes is not on the table. Which raises the question: why President Obama would deliver a speech that might have been far more effective in framing the debate six months ago?

My guess is that the speech had more to do with 2012 than with the current debt-ceiling debate. Polling has likely revealed that independents embrace the notion of a “balanced approach” and this speech provided the President the opportunity to use the term repeatedly (including three times in a single paragraph). Moreover, the speech allowed the president to jump in front of a parade that has left him behind (something that he may have learned from President Clinton’s playbook).

In the end, I still imagine that something symbolic will be passed in the next week (combining Reid’s $2.7 trillion in “cuts” and some debt commission), thereby allowing everyone to claim victory and return to fund raising without angering key constituents.

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It appears that the political theatre of the past few weeks may be drawing to a close. There is little question that we have a significant long-term structural debt problem. In my mind, at least, the tens of trillions of unfunded liabilities and the ever-growing debt cannot be addressed without significant cuts in domestic and military spending, serious entitlement reform, and tax increases. One would hope the last component would include reforms to eliminate the tax expenditures that create all kinds of market distortions and have become our transfer-seeker driven exercise in industrial policy (think Ethanol).

The recent debt-ceiling debates—a manufactured crisis if there ever was one—could have opened the door to significant debt reduction but for the insistence that every eliminated tax-based subsidy is a tax increase, a position that essentially took serious reform off the table (thank you for the exercise in irony, Americans for Tax Reform).

Now it appears that a deal is close as Senator Reid is supporting an increase in the ceiling with $2.7 trillion in cuts and no increases in taxes. Score one for the GOP—the Democrats blinked. As Ezra Klein (WaPo) notes, even if we don’t know the specifics of the final deal, “it’s a safe bet that it won’t include any tax increases. Which means that whether Republicans realize it or not, they’ve won.”

But have they won? If the goal was to do something significant with respect to addressing long-term fiscal sustainability, the answer is clearly no. But what of the $2.7 trillion in cuts? Isn’t that serious money? It depends on how many times you count it.

As Alan Fram notes, some in the GOP are skeptical that the cuts may be illusory, particularly that the $2.7 trillion includes “$1 trillion or so in savings claimed by troop cuts in Iraq and Afghanistan over the coming decade. Reid counters that House Republicans claimed the same savings windfall when they passed their budget earlier this year.”  Indeed they did. And in Washington, double and triple counting is par for the course.

Ultimately, one can imagine that most of the “cuts” will fall into a few basic categories: (1) cuts already claimed but counted once again; (2) reductions in the rate of future increases that will prove largely unenforceable; (3) further victories against “wast, fraud and abuse,” and (4) cuts that are “too be announced.”

Meanwhile, the long-term structural debt remains untouched, entitlements remain unreformed, the tax code remains a testament to transfer-seeking, and our elected officials have done enough to support credit claiming (“We held Obama’s feet to the fire”… “We prevented the GOP from trying to balance the budget on the backs of the most vulnerable”) and ensure a continued flow of campaign contributions. The circus continues.

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This weekend I went to see the last Harry Potter film. I agree with a number of critics I’ve read that it was the best and most satisfying of the series. But I was struck by a moment late in the film when Harry is talking with Dumbledore. Harry asks, “Is this real? or just happening inside my head”? To which Dumbledore replies, “Of course it is happening inside your head, Harry, but why on earth should that mean that it is not real?” (If you have the book, the passage is on p. 723.)

Dumbledore’s words were striking to me, because they struck a philosophical nerve. Moral philosophers have for some time been struggling with a similar question about morals: are they real, or just happening inside our heads? Dumbledore’s response rang true to me, because it is hard to see why what is happening in our heads wouldn’t count as real. Of course, that depends on what it is for something to be “real,” and that in itself is a difficult question to answer.

Beyond that, though, the question got me to wondering. Why do we care? We are we so concerned about the distinction? I am inclined to think it is because we can’t help but see ourselves as agents — creatures who act on the world to shape it, in a way which involves seeing our thoughts and plans as causes of the effects we bring about.

Now, we are of course constrained agents: we live in a world of constraints of many sorts. One thing that matters to agents is to know what is within their power to change, and what is not. Banging your head against a brick wall is a notoriously frustrating and painful way to try to bring down a brick wall. So part of being an agent is knowing what in the world we need to take as fixed, and what is within our power to change. I suspect the need to know the difference runs pretty deep in us.

Where does that leave us with morals? It seems to me the operative question isn’t whether morals are “real” or not — whatever that might mean. It’s whether morality is fixed, in a way that is not subject to human agency, or whether it is open to determination by us, individually or collectively. The plausible answer to that question seems to me a mixture: some elements are relatively fixed, others relatively up to us in some way remaining to be specified. Of course, that’s a long way short of saying which is which, but it’s a start on the kind of investigation that is likely to be most useful.

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Weekend Musing

O Capitalism, how I adore you. You are always thinking, day and night, of ways to make my life just a little bit easier. Like pull-tabs on the top of cookie packages so that they stay fresh – what a great idea. But O dear, sweet Capitalism – why doesn’t every wine bottle have one of those convenient little pull-tabs in the foil at the top?

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Noel Johnson, Matt Mitchell, and Steve Yamarik have a new working paper answering that question in the affirmative. They look at state fiscal and regulatory policies and find that Democrats generally like to increase taxes and spending when in control of state houses and Republicans do the reverse. But when states have tough balanced-budget requirements called “no-carry rules,” Democrats and Republicans don’t differ much on fiscal policy. Instead they try to appeal to their constituencies by pursuing regulatory policies – in general, Democrats increasing regulation and Republicans cutting it. As the paper’s still in the working draft stage, they are looking for comments on it.

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Professor Ha Joon Chang has become something of a hero to those who champion heterodox economic theory and who rail against the supposed intellectual hegemony of ‘neo-liberalism’. In a number of books such as Kicking Away the Ladder Chang sets out to overturn the alleged orthodoxies of mainstream economics by questioning the case for free trade as an appropriate development strategy in poorer countries and more widely making the case for a high regulation/big government agenda. These themes are vividly on display in Chang’s latest best seller 23 Things They Don’t Tell You About Capitalism. Unfortunately, also on display in this book is Chang’s penchant for misrepresenting opponents, the use of straw man analyses and claims to theoretical innovation for what amounts to ‘re-inventing the wheel’. In several posts in the coming weeks I aim to highlight these aspects of Chang’s work in the hope that his readers (should they venture onto this blog) might reconsider his ‘guru’ status.

If there is a core characteristic to emerge from Chang’s work it is a tendency to emulate the writing style of that other hero of heterodox economics – J.K Galbraith. In common with Galbraith Chang depicts himself as one of a few lonely voices standing up against the ‘conventional wisdom’. The particular wisdom he targets in ‘23 Things..’ is that of ‘free market economics’. As with Galbraith, however, one will scour Chang’s texts in vein to find serious and detailed reference to the work of authors alleged to subscribe to the positions he attacks. Thus, in a 285 page book which purports to offer a critique of ‘free market ideology’ Chang manages a grand total of just three references to work by said ideologues and makes no attempt to distinguish schools within ‘free market’ thought, such as the Chicago school, the public choice school or the Austrian/Hayekian tradition (surprisingly, or perhaps not, Larry Elliot the economics editor of The Guardian describes 23 Things as ‘superbly researched’). There is good reason for this tactic – detailed consideration of the actual views of ‘free market economists’ – as opposed to what Chang claims they say – would make it much more difficult to construct the caricatures that Chang wants to attack. In book selling terms, better to play to the left wing gallery and construct an ideological edifice – crying out for demolition by a Chang (or a Galbraith). In this post I will focus on just two examples of this tendency. Subsequent posts will discuss further illustrations.

One of the first ‘myth’s’ that Chang sets out to correct is the very idea of a ‘free market’. In classic Karl Polanyi mode he asserts that the ‘free market’ doesn’t exist because all markets are embedded in political/institutional relationships and require rules in order to function effectively (see my recent post Down with Karl Polanyi on this type of thinking). Immigration controls, for example, have an impact on the price of labour and illustrate how apparently ‘free prices’ are in practice determined by political regulation. When free marketeers highlight unjustified or distorting government ‘interventions’, therefore, this is little more than an ideological smokescreen – a pretence that the boundaries of the market are ‘natural’ and can be objectively identified when in reality they represent a nakedly political attempt to promote a very particular set of rules that reflect the prejudices of ‘free market’ advocates.

Anyone who has even cursory familiarity with Nobel winning ‘free market economists’ such as Vernon Smith, Ronald Coase, James Buchanan and F. A. Hayek – none of whom are ever cited or even mentioned by Chang – would know that they have never denied that markets depend on institutions and rules. What they have been concerned to identify is the character of the rules compatible with a social order that increases the scope for voluntary exchange between individuals and associations, rules which facilitate competitive experimentation in production and consumption methods and which encourage positive sum interactions rather than leading people to live at one another’s expense. There has never been any claim by these thinkers that the market economy constitutes the ‘natural’ state of humankind. Indeed in the Fatal Conceit, Hayek in particular offered an account (though not an entirely persuasive one) of the ‘natural instincts’ that lead people to resist ‘free markets’. Overall, the economists mentioned above start from certain propositions about the limited nature of human knowledge and/or the importance of incentives to human action and offer an account, backed with evidence (none of which is discussed by Chang), about the capacity of market institutions to improve the human condition, relative to political alternatives.

Within this context, there is legitimate scope for disagreement on the appropriate extent of ‘the market’ and the precise role of ‘the state’. In The Constitution of Liberty, for example, (a ‘free market’ manifesto, if ever there was one) Hayek sets out a range of government actions, including basic social security measures, educational provisions and environmental controls which he judges compatible with the basic principles of a liberal market economy. As a classical liberal, I think Hayek goes too far in the specific areas where he sees a positive role for government action, but there is no contradiction between the way that Hayek argues for specific policies and his overall defence of the ‘free market’. The interventions that Hayek recommends are informed by his view that social institutions should not thwart experimentation and should encourage the internalisation of costs. Thus, Hayek’s support for environmental controls such as town planning regulation is qualified by the requirement that these controls should be conducted at the local government level in a context of inter-jurisdictional competition. Chang, by contrast, offers no coherent theoretical framework or worldview against which to judge his own pet schemes. These appear to amount to little more than whatever Chang thinks will raise his profile as a heterodox thinker. Notably, in opposition to just about every other economist – neo-classical, Keynesian, monetarist, Chicago or Austrian, he has recently advocated the widespread adoption of tariffs as an appropriate way to deal with the current recession!

To suggest that there is no such thing as a ‘free market’ because there is no strictly objective way to define the boundaries of such a market is equivalent to saying that democracy is meaningless because no ‘pure’ form of democratic organisation has ever existed. Certainly, the existence of immigration controls no more undermines the case for the ideal of an open market economy than their existence undermines the case for democracy. Are we to conclude that the existence of nation states which limit voting rights to citizens to the exclusion of people from other nations somehow undermines the very notion of a democratic ideal?

In a particularly dishonest attempt to highlight the supposed inconsistency of free market economics Chang claims that there is a fundamental contradiction between support for free markets on the one hand and the fact that most free marketeers do not support free immigration (p.27). This claim is made without evidence and without a single citation to any relevant economist. I am a free marketeer and advocate the abolition of border controls. I do not claim to know all of the detailed policy positions of free market economists, but I do know that many, though not all, do in fact support free immigration. If one takes the economics department at George Mason University as one of the major hubs of contemporary free market thinking then most of its economists –Boettke, Coyne, Leeson, Klein, Boudreaux, White, to name but a few, are passionate supporters of the free movement of people. Moreover, those market-oriented economists who do not advocate free immigration (misguidedly in my view) tend not to be opposed to the free movement of people per se, but to be sceptical of its compatibility with contemporary welfare states. Of course, Chang isn’t interested in presenting such subtleties to his readers. Better to proceed on the entirely reasonable expectation that the average reader of The Guardian or The New York Times, won’t bother to check the facts.

This is already a rather long post and I have only begun to scratch the surface of Chang’s failures to present an accurate view of what free market economists actually say. Subsequent posts will turn to Chang’s views on development economics and on planning, complexity and government regulation.

* These are a reference to Adam Smith (p.13), a reference to a paper by Robert Barro (p.55) and a paper by Bruno and Easterly (p.55).

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In classical (pre-Keynes) macroeconomic thinking, there was no accounting for the creation of bubbles, the fact that bubbles might burst, and that the burst might lead to painful, lengthy consequences.  In the classical world, prices adjust and markets clear.  End of story.

Of course markets sometimes take a long time to adjust, and Keynes got the economics profession to think about those dynamics, the downward spirals that can occur, and what might be done to reverse those spirals and, thereby, dampen the swings in the business cycle.  This was the Keynesian revolution.  In the 25 years following WWII there was a convergence in Keynesian and classical thought  called the neoclassical synthesis, which thrived until the Great Stagflation of the 70s, during which the neoclassical levers of fiscal and monetary policy were challenged.

It was during the 70s that a new revolution was born, the rational expectations revolution.  Whereas Keynes tried to account for consumer psychology (“animal spirits”), the rational expectations thinkers emphasized consumer foresight—namely that consumers and investors do not merely respond to changes in prices; instead, they look to the future.  Keynesian models work on paper because they assume the government is this magical entity responding to shortages and surpluses in aggregate demand.  When government spends in the Keynesian world, aggregate demand (and hence GDP) rises because consumers are simply non-thinking automatons that observe the new spending and feel happy about it (those dang animal spirits again!).  But in the rational expectations world, consumers can see what the government is doing and ask, “What does this spending mean for the future?”

The rational expectations revolution killed the myopic consumer and myopic investor.  There were now “New Keynesians,” but all their models had some kind of rational expectations framework built in.  Even though the New Keynesians emphasized sticky prices and other factors that would keep markets from adjusting (thereby creating a role for traditional fiscal and monetary policies), no one believed anymore that people could be duped into not thinking about the consequences of government finance.

But the Great Recession brought forth a resurgence of old style Keynesians, led by their new arch bishop, Paul Krugman.  They argue, once again, that the problem is inadequate demand and that the solution is for government to raise aggregate demand by spending.  Deficits are of no concern because people don’t ask about the future.  There is only today.  For them the size of government and the future size of government are irrelevant.  People aren’t spending enough so government has to fill in the gap.  Krugman argues again and again that concerns about the deficit are silly because interest rates are low.  He neglects to emphasize that they are low primarily because the Fed is keeping them low or that demand for debt might fall rapidly in the future as investors around the world get more nervous about the future solvency of the US government, thereby sharply raising rates.

In a world where government is relatively small and constrained, attempting to run counter-cyclical policy has little consequence (it doesn’t do much good, but doesn’t do much damage, either).  But what Keynesianism completely neglects is the crisis in confidence that is occurring as citizens see their government spiraling out of control–spending vast amounts of money on stimulus, creating huge new entitlement programs, and saddling markets with an ever increasing amount of regulation.   In the Keynesian world, government is unconstrained; markets fail but government can’t fail.  In the Keynesian world, people don’t worry about what government is going to spend the next year and the year after that.  All they care about is the present.

But in the real world, people are terrified, with just cause, about the ability of government to meet the rapidly growing pile of obligations on its balance sheets.   We know that when those obligations get paid, we (and our children) are the ones that will have to pay them.  And we see a federal government that seems so completely unconstrained by constitutional limits or by reason, always willing to make promises it can’t keep, always willing to pass new productivity-killing regulations, always willing to see new ways to creep further into our lives.

In short, the continued health of the economy depends on constrained government and economic freedom.  It depends on a renewal of the idea that people are not idiots.

Long live the rational expectations revolution!

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You are not worthy

Perhaps it is because I’m trying to whittle down a list of books for a class this Fall that won’t make all the students lynch me or drop the class, but I was amused by this professor’s approach:

Henry Liang, who teaches finance in English at Shanghai Maritime University, notified students on his personal blog last week that all course materials, including tests and PowerPoint presentations, would be in iPad format only. He then wrote: “If you cannot earn merely 4,000 yuan (U.S. $618.40) in the two-month summer vacation, you are not suitable to learn finance or be my students.”

Under pressure he backed off his demands.  He sounds like an arrogant jerk who students would be better off to avoid, but, in an age where we are all worried about upsetting our consumer-students, I admire his candor.

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Chart of the Day

ppaca & employment

My only problem with the chart is its title. I don’t think a simple bivariate correlation is enough to establish causality. But it’s a suggestive piece of evidence, since both regime uncertainty and the employer mandate associated with the PPACA are plausibly related to slowing job growth.

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Last year I had a little run-in with the town authorities over my garden. Fortunately, it ended well. However, for other people around the continent troubles with the local lawn nazis seem more severe, possibly involving jail time! Some of you may have heard of the woman in Oak Park, Michigan who faced jail time over her front-yard vegetable garden. (Charges were later dropped.) Now there’s a story out of Lantzville, British Columbia about a man who is also facing potential imprisonment over a two-and-a-half-acre organic farm in a residential area. This part of his account is particularly interesting:

The previous owner used an excavator and dump truck to mine and scrape the land bare. He had a soil screener set up on the property, selling the soil, then sand, then gravel, which resulted in lowering the level of the property by about four feet. When Dirk assumed ownership, all that remained was gravel. There were no worms, no grasshoppers, no birds, no butterflies; essentially – no living creatures!

Since 1999, Dirk has made a tremendous effort to heal the land, beginning slowly – one wheelbarrow at a time. Nicole joined him at the end of 2006. It has been a gradual, organic process from planting a few fruit trees and having a small growing area, to expanding with more hand-made soil using wood chips from local tree companies and a small amount of horse manure from local, Lantzville stables. Now we have four kinds of bees, several types of dragonflies, numerous types of butterflies, frogs, toads, snakes, hundreds of birds and much more!

To sum up: scraping your land bare, killing everything living there – totally OK. Growing vegetables and fruit trees – illegal.

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The NY Times has a clever (if politically motivated) piece poking fun at the new Tea Party congressmen who publicly condemn earmarks but, nonetheless, are fighting for earmarks in their districts.  These include bridges, beaches, harbor dredging, and military projects.

In defense of these projects the Republicans use the tried and true defense of “my earmark isn’t really an earmark.”  Some say they are “merely providing constituent services.” Others argue that, yes, they are against earmarks, but their earmarks are “vital” or “critical.”  Rep. Scott of South Carolina says his earmark is not an earmark because it is “open and transparent.”  Rep. Duffy of Wisconsin and Rep. Bachmann of Minnesota (yes, that Bachman), say that the bridge they want to connect their districts is not an earmark because there are no specific costs or financing attached to the bill.   Rep. Palazzo of Mississippi says the targetted defense programs he wants are not earmarks because, according to his staff, he did “not  request funds for any specific project, but merely to transfer funds to increase spending on the programs.”

I’m quite perplexed at why unfunded or vague earmarks are better than actual appropriations.  Doesn’t that make them kind of worse?  And why does making a project transparent make it OK?  Does not a rose, by any other name, smell just as sweet (or in this case, putrid)?

We need to get rid of not only earmarks (whatever those are), but any localized appropriations by the federal government, no matter how open and transparent the process may be.   If a bridge or a beach or a harbor makes sense from a cost-benefit standpoint, then the states can go ahead and build them.  It matters little whether the project comes about by bureaucratic fiat, by the normal appropriations process or by sneakyery of legislators.   If the project can be geo-coded, it shouldn’t be a federal project.

What about externalities, such as interstate trucking?  Some states have long roads, but few people.  Similarly, some states have harbors that facilitate commerce in other states.  Shouldn’t the federal government provide this needed infastracture since people in many states benefit?  In general, no.  Those who use these facilities should be charged for their use.  This can occur through tolls, fees, and taxes.  Projects whose benefits are greater than the costs can be funded by the states, and those that fail a cost-benefit test, which they almost all do, don’t deserve federal funding.

Other than facilitating trade and resolving disputes between states (what the Commerce Clause was really intended for) there is little if any role for the feds in local projects.  Whether an appropriation is called an earmark or not is of little importance.

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According to the editors at the NY Times, pledges that candidates make to not raise taxes “undermine the basic principles of democratic government built on compromise and negotiation.”

I’m wracking my brain to think of what type of political theory supports the notion that compromise is a principle.  A strategy, yes.  A necessary evil, sometimes.  But a principle?

To compromise is to sacrifice one’s principles in one area in order to achieve a greater good that is consistent with one’s principles in another area.  Pragmatists and utilitarians can usually compromise without causing themselves painful cognitive dissidence.  Kantians, on the other hand, are not well-suited for compromise since they are governed by imperatives that are, well, imperative; they prefer to let the perfect kill the good.  But I don’t think any sensible political theorists would say that compromise is a bedrock principle of democratic government.  To do so is to deny that there are bedrock principles that one should fight for in a democracy.  The Times claim is the ultimate in political cynicism, in which nothing matters except political expediency.

Many of those who make the claim that compromise is a principle are really just centrists using disingenuous rhetoric to advance their policy views.  Instead of justifying and arguing for a centrist position, they tout a supposed moral authority by claiming that compromise—in itself—is the goal, something that responsible statesmen do to serve the public interest.  Certainly centrists are allowed to promote their policy agenda, but I wish they would spare us the noble-sounding nonsense about “putting aside differences” or “working for the common good.”  The danger of this rhetoric is that it promotes a view among the public that government doesn’t get things done because of petty squabbles or childish tiffs (OK, sometimes that is true) rather than the real reason agreements are hard to reach, which is differences in principles.  So, go ahead and argue for a centrist position, just don’t pretend that that position is the best one because it comes about through compromise.

Given how often the public becomes disillusioned by broken campaign promises, shouldn’t we be lauding those who have principles and stick to them.  If they are not the principles shared by voters, then the voters can put someone else in place with different principles.  Grover Norquist shouldn’t be blamed for trying to get politicians to make and keep their pledges.  He should be criticized for making up a dumb pledge.  Believers in a just and limited government should be chomping at the bit to close down tax loopholes that are simply welfare programs for monied interests, especially if this comes with the added benefit of reductions in government spending.  That is what is known as a twofer.

I don’t know what kind of compromise will come out of the current fight over the debt ceiling.  The Republicans seem to be folding, thereby strengthening a weak president.  But let’s judge the resulting policy on its merits and skip the silly idea that compromise is a virtue.

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Is liberty an “amenity” that people find attractive? We know that people do not necessarily tend to vote for liberty, in part because they are politically ignorant or even irrational, but when it comes to where they choose to live, people can be expected to pay close attention to how the laws in different places affect their quality of life. Economists model migration rates across jurisdictions as a function of economic opportunities (real income differentials) and “amenities” (example). Thus, it is standard practice in the literature to use inter-state migration rates in the U.S. (adjusted for the component predicted by economic growth) as a proxy for the desirability of different states as places to live. The question I address here is whether liberty is an amenity; in other words, do states with more freedoms attract more people?*

My study with William Ruger, Freedom in the 50 States, addressed this issue briefly. We find that both economic and personal freedom are associated with net inter-state migration over the 2000-2009 period. In other words, freer states attract people from less free states. The relationship holds when we control for climate, measured as average January temperature in a state’s largest city. We also find that real personal income growth (total, not per capita) over 2000-2007 is positively associated with economic but not personal freedom. Thus, it remains an open question whether economic freedom attracts people because people find it desirable for its own sake, or whether it attracts people by promoting economic growth. However, it does appear that people are attracted to personal freedom for its own sake.

This blog post offers a first look at a much more sophisticated analysis of the issue, bringing in more control variables and more advanced, appropriate estimation methods. (more…)

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This rant below by Steve Wynn (of Las Vegas fame) is absolutely Back to the Future – as in 1930′s.  It is more evidence that part of our problem today in fully recovering from the Great Recession is that we are again experiencing a “capital strike” due to the anti-growth, anti-capitalism policies of the current regime in Washington (not to mention those that have accreted from prior administrations, including Bush II).  Here is part of it (with highlights from Business Insider):

I believe in Las Vegas. I think its best days are ahead of it. But I’m afraid to do anything in the current political environment in the United States. You watch television and see what’s going on on this debt ceiling issue. And what I consider to be a total lack of leadership from the President and nothing’s going to get fixed until the President himself steps up and wrangles both parties in Congress. But everybody is so political, so focused on holding their job for the next year that the discussion in Washington is nauseating.

And I’m saying it bluntly, that this administration is the greatest wet blanket to business, and progress and job creation in my lifetime. And I can prove it and I could spend the next 3 hours giving you examples of all of us in this market place that are frightened to death about all the new regulations, our healthcare costs escalate, regulations coming from left and right. A President that seems, that keeps using that word redistribution. Well, my customers and the companies that provide the vitality for the hospitality and restaurant industry, in the United States of America, they are frightened of this administration. And it makes you slow down and not invest your money. Everybody complains about how much money is on the side in America.

You bet and until we change the tempo and the conversation from Washington, it’s not going to change. And those of us who have business opportunities and the capital to do it are going to sit in fear of the President. And a lot of people don’t want to say that. They’ll say, God, don’t be attacking Obama. Well, this is Obama’s deal and it’s Obama that’s responsible for this fear in America.

The guy keeps making speeches about redistribution and maybe we ought to do something to businesses that don’t invest, their holding too much money. We haven’t heard that kind of talk except from pure socialists. Everybody’s afraid of the government and there’s no need soft peddling it, it’s the truth. It is the truth. And that’s true of Democratic businessman and Republican businessman, and I am a Democratic businessman and I support Harry Reid. I support Democrats and Republicans. And I’m telling you that the business community in this company is frightened to death of the weird political philosophy of the President of the United States. And until he’s gone, everybody’s going to be sitting on their thumbs.

Unfortunately, Wynn’s beautiful but depressing verbal screed reminds us that we aren’t learning from history.  Robert Higgs some time ago laid out his compelling “regime uncertainty” thesis that part of the explanation for the long duration of the Great Depression is that capital sat on the sidelines fearing Washington’s attack on wealth and property.  Why haven’t we learned?  Heck, even FDR’s Treasury Secretary Henry Morgenthau understood the problem back then better than those in Washington today.  According to Higgs, Morgenthau exclaimed at one 1937 Cabinet meeting, “What business wants to know is: are we headed toward Socialism or are we going to continue on a capitalist basis?”[1]  

The clarity of Wynn’s own “strike” thesis is astounding.  Equally so is that Wynn isn’t a Republican, a member of the Old Right, or a businessman irked by the NRA’s Blue Eagle. Instead, he is a self-proclaimed Harry Reid Democrat.  It would be nice if businessmen – regardless of party – would unite courageously in one voice to defend the free-market system that allows for the kind of wealth creation we’ve seen in our history and that made America the envy of the world.*  Instead, we have the world feeling the need to make remarks like this one from a Chinese executive in 2008:

“Right now we do not have the courage to invest in financial institutions because we do not know what problems they may have,” Mr. Lou said as part of a panel discussion on the second and final day of the Clinton Global Initiative conference [in Hong Kong].  . . .  Mr. Lou said that the sheer pace of new initiatives and new rules issued by Western regulatory agencies was disconcerting and made it even harder for him to choose worthwhile investments. “If it is changing every week, how can you expect me to have confidence?” he asked. [2] (emphasis added) 

* And yet I doubt it for reasons the Old Right clearly understood — some businessmen are nearly as much of the problem as the politicians in Washington.

[1] Quoted in Robert Higgs.  “Regime Uncertainty in 1937 and 2008.”  Independent Institute’s The Beacon Blog.  December 6, 2008  http://blog.independent.org/2008/12/06/regime-uncertainty-in-1937-and-2008/

[2] Quoted in ibid.

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President Obama has some real trouble with birthdays.  As ABC News reports, first he got Malia’s birthday wrong, now he has apparently forgotten his own birthday.*  Of course, since he’s the smartest President ever, I’m sure these important dates are crowded out of his brain by much deeper thoughts.  Actually, I have some sympathy for people who are scrutinized so closely that every misstatement is catalogued and mocked.  But the press and the intelligentsia seem to apply a double standard since the Bachmans and Quayles of the world make simple mistakes and are pounded as rubes whereas President Obama has made all manner of such errors (for example, 57 states in the Union) and is still lauded as a genius and the errors virtually ignored. 

The interesting questions to me are:

When should we honestly consider a string of such errors to suggest something about the man or woman?  And what level of error-making should we just chalk up to the difficulties of appearing in public so frequently and often under great pressure and time constraints.

I honesty don’t know the answers (do we know it when we see it?) – but I’m pretty sure that lots of folks are making partisan-related “fundamental attribution errors” or “dispositional attributions” when they chalk up a relatively harmless gaffe like Quayle’s to his alleged stupidity (while ignoring similar mistakes by others).     

* And no, I’m not a “birther” as I’ve noted before.

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I’m sure something like this has been said before, but this earlier comment by John Feinstein (of the Washington Post) is worth reposting in light of the Women’s World Cup soccer game just decided by penalty kicks:

You don’t decide Stanley Cup hockey games in shootouts. Regular season, fine, but when the championship is at stake you keep PLAYING HOCKEY. You don’t stop a postseason baseball game—or any baseball game for that matter—after 12 innings and have a Home Run Derby. You don’t have a free throw shooting contest at the end of the second overtime in a basketball game.

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The GOP and the President seem locked in a game of chicken over the debt ceiling (remember the scene from Rebel without a Cause). The GOP is hoping the President capitulates on cuts without taxation (i.e., that the President swerves). The President is hoping the GOP accepts taxation with some amorphous spending cuts (i.e., that the GOP swerves). Both sides claim that they have no intention of swerving (as recent rhetoric suggests). The game of chicken is an interesting and often cited one from a game theoretic perspective (see here).  Unfortunately, in the game of chicken, both actors may rationally choose not to swerve—and crash (or in this case, default on the debt and let the market crash).

Senator Mitch McConnell pitched a plan earlier this week that seems quite interesting as a means of avoiding the potential for a crash. The key features are summarized by Manu Raju:

Obama would be able to request that Congress raise the debt ceiling in three increments through the 2012 elections. In each request, Obama would be required to outline specific budget cuts, but those cuts would not need to be enacted to approve the debt ceiling hike.

At that point, Congress would vote on a motion to disapprove Obama’s request, which almost certainly would prompt a presidential veto. If a two-thirds majority does not override Obama’s veto, the president would get the additional borrowing authority — which is estimated to total $2.5 trillion through the 2012 elections.

The strategic beauty of the plan is clear:

  1. It forces the president and the Democrats to assume responsibility for proposing and supporting increases in the debt ceiling in the months leading up to 2012 (I can already see the GOP ads trumpeting the number of times President Obama increased the debt ceiling)
  2. It insulates those who signed the Norquist pledge and/or promised their constituents that come hell or high water, they would never vote to increase the debt ceiling. Even if they carry the majority (as they might in the House), they would never be able to override the president’s veto.

Obviously, this does absolutely nothing to address long-term structural deficit and debt issues. It is simply a gambit to exit the current game of chicken (which may be a worthy goal since  there is no stable equilibrium in chicken).

Of course, President Obama and the Democrats clearly understand the vulnerabilities associated with the McConnell plan. Will they nonetheless prefer it over default? Much will depend on (1) their uncertainty over whether the GOP will swerve in the current game, and predictions regarding (2) the severity of the market response to default, and (3) the probability that the blame for default will be placed on the President rather than the GOP.

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There is a bit of a blind spot among certain classical liberals when it comes to children.  Rand is the most notorious, but not only, example of this.  However, we here at Pileus have frequently tried to think through some key issues in terms of how the state should deal with children and what limitations, if any, there should be on parental rights (Herehere, and here just to give three of many examples).    

Unless one thinks that children should be treated like property and thus parental rights would be relatively absolute, it is easy to imagine cases where the state has a proper role in protecting children when parents violate their trustee role vis-a-vis their kids.  The difficulty is knowing where to draw the proper line such that you respect the rights of parents to raise their own children as they see fit and respecting the human dignity and future autonomy of adults-to-be by protecting children from abusive parents.  I’m not sure I know exactly where that line should be, but I dont’t think it is that hard to see when the state or parents have obviously overstepped their authority or violated their trust.

Case in point if one Harvard researcher had his way:

David Ludwig of Harvard University’s School of Public Health* thinks that the state should be able to take a kid from his/her parents if the child is suffering from severe obesity.  As he notes in JAMA: “In severe instances of childhood obesity, removal from the home may be justifiable, from a legal standpoint, because of imminent health risks and the parents’ chronic failure to address medical problems.”  According to ABS News, this would represent about 2 million kids in the US who could be subject to state intervention!

There are so many things wrong with this proposal.  First, it assumes that the state will do a better job caring for the child in all areas – not just at the dinner table – than his/her parents.  Do we really expect the state child care system to provide everything a child needs – love, attention, spiritual/virtue training, education, etc – even if it feeds the kid his veggies?  And will it actually feed him/her better?  In the ABC News article linked to above, one doctor questions even that assumption made by Ludwig: “Dr. David Katz, founder of the Yale Prevention Center, said that there is no evidence that the state would do a better job of feeding children than their parents.”

Second, it assumes that obesity is a parental problem alone – or even one so dangerous that a child needs to be ripped from every mooring in his/her life when a kid is most fragile.

I have a hard time imagining that obesity alone constitutes a good ground for taking a child away from his/her parents.  But we could imagine cases of exceptional parental negligence related to diet that would justify such actions: starvation and severe malnutrition (which could result in obesity, say, in a case where the child was only fed chocolate bars for each and every meal).  But I’m guessing such instances would be quite rare.     

Lastly, I think that this issue taps into the general food fascism problem we face in certain quarters of society.  Namely, there are just a lot of people who can’t stand the fact that we all have different preferences when it comes to what we consume – and some of them (Mayor Bloomberg) want to outlaw our freedom to do so as we wish.  God forbid we might eat the wrong things and eventually suffer and even die from our choices (wait a second, we’re all going to die?  Hit the existential angst button stat!).  Does this mean we shouldn’t counsel our family members and friends to make more healthy choices so that they’ll increase their odds of being around longer for us to enjoy or improve the quality of their lives?  No.  But forcing them to do so – a bridge too far!   A healthy legal respect for our preferences and the trade-offs we wish to make would go a long way to making us a bit more free and probably a lot happier.

* Why do so many would-be tyrants work at some of the best schools?  A good subject of debate for the future…

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1. In the below video, Senator Rand Paul criticizes John Pistole and his TSA for their ham-fisted and invasive pat-downs, especially on children.


Senator Paul makes several good points. What struck me in particular, however, is one part of Mr. Pistole’s response. He said that pat-downs on children and seniors are driven—and, apparently, justified—by bona fide intelligence: he knows of a case in which a child under twelve was used as a suicide bomber, and another in which a 65-year-old couple were suicide bombers as well.

Isn’t this exactly the kind of invidious stereotyping and discrimination that prevents the TSA from targeting Muslim males for enhanced scrutiny? The argument given against targeting Muslim males is that not all Muslim males are terrorists. It does not follow from the fact that some tiny proportion of them is that therefore they are all suspespects, so targeting all of them for enhanced scrutiny is prejudice.

Yet here is a case in which Mr. Pistole apparently thinks that because a single child was allegedly once used as an attempted suicide bomber, therefore all children are equally suspicious and must be subjected to enhanced scrutiny. Moreover, because two seniors allegedly attempted to become suicide bombers, therefore all seniors are equally suspicious and the TSA is justified in patting them down too.

Well, Mr. Pistole, which is it? Is assuming that a trait that belongs to some members of a group therefore belongs to all members of the group morally acceptable, or not?

2. In other TSA news, my nomination for American Hero of the Week: Andrea Fornella Abbott of Clarkesville, Tennessee. According to this report, while traveling through the Memphis airport, Ms. Abbott would not allow the TSA goons to molest—er, enhancedly pat down—her daughter. When she refused, they reminded her that they, not she, will be the ones who will decide what is “inappropriate touching,” thank you very much, and she may now just be quiet and stand over there while they have their way with her daughter.

Apparently Ms. Abbott refused, vociferiously. Upon reconsideration, the TSA agents recognized that she was not under suspicion of any crime, that they had no evidence of criminal behavior on her or her daughter’s part, that in a free society people have a right to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures that shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized, and that it is just plain sick to grope minors anyway, so they relented and let her go on her way.

Uh, no. They arrested her on the charge of “disorderly conduct” and put her in jail. For defending her fundamental liberty, for defending the bodily integrity of her daughter, even in the face of arrest, and for giving the rest of us passive and docile ennablers a reminder of what is at stake and an example to follow, I salute Ms. Abbott.

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Agricola will love this attempt by Texas to circumvent the federal incandescent light bulb ban.

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From the Economist, which succinctly notes about the situation: “It is not pretty.”

















HT: Reason


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In an interview with CBS News, the President has issued some stark predictions of what will happen should Congress fail to extend the debt ceiling.

“I cannot guarantee that those checks go out on August 3rd if we haven’t resolved this issue. Because there may simply not be the money in the coffers to do it.”

For those who have been following entitlements, this seems hard to reconcile with the assurances issued by OMB Director Jacob Lew a mere four months ago.

“According to the most recent report of the independent Social Security Trustees, the trust fund is currently in surplus and growing. Even though Social Security began collecting less in taxes than it paid in benefits in 2010, the trust fund will continue to accrue interest and grow until 2025, and will have adequate resources to pay full benefits for the next 26 years.”

Of course, Lew’s views of the trust fund have changed overtime. When he was working as President Clinton’s OMB Director, he was a bit less sanguine:

 “These [trust fund] balances are available to finance future benefit payments and other trust fund expenditures—but only in a bookkeeping sense. These funds are not set up to be pension funds, like the funds of private pension plans. They do not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. The existence of large trust fund balances, therefore, does not, by itself, have any impact on the Government’s ability to pay benefits.”

See Peter Suderman (Reason) on the shifting interpretation of the trust fund.

The President’s recent warnings about the cessation of Social Security payments post August 2—while undoubtedly overblown–would suggest that he takes  Lew (2000) more seriously than Lew (2011). Stated another way, that the assurances of earlier this year were a less than accurate portrayal of our entitlement crisis that may not be sustainable in the full light of day (like Social Security).

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At The American Interest, Walter Russell Mead makes a prediction about the future of the drug war. Unlike many libertarians and legalization activists (whom he calls the “Stoner Lobby”), he believes that legalization would be a disaster – but that continuing the drug war would be a catastrophe. As a “least bad” option, he believes that what ought to and will eventually happen is legalization of supply combined with strict, perhaps even harsh, demand-side measures. His arguments against public control of the supply of hard drugs, as attempted briefly in Switzerland and advocated by some moderate legalization activists, are interesting and difficult to refute.

As a challenge to both sides of the debate, this piece is worth a read. I am not so sure that the demand for hard drugs is anywhere near as price-elastic as he believes, however.

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The Frum Forum’s has an article up besmirching the Congressional move to repeal the incandescent light bulb ban.  Jacob Sullum nicely eviscerates it at Reason‘s Hit and Run.  As Sullum points out, David Jenkins – the author of the Frum article - makes his case by relying in part on the fact that the light bulb industry supports the ban.  Not only does this bring to mind Yandle’s “Bootleggers and Baptists” argument, it also caused me to recall something Garet Garrett wrote to Herbert Hoover (undated but probably in the 1930′s):

Almost I am persuaded that business itself has done more harm to capitalism and to its principles of liberty than all the demagogues [1].

Sometimes I am “almost” persuaded as well.  And then I listen to the typical politician or public intellectual! 

Fortunately, there are people like Michael Cox and Michelle Fields (and TFAS) trying to remedy the situation and save capitalism from its detractors, in and out of business:


[1] Quoted in Bruce Ramsey’s  biography of Garrett, Unsanctioned Voice.

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Michael Tanner  of Cato has an interesting piece today on the debt ceiling. Tanner is less concerned about the events of the next few weeks than I am but does a good job of placing things in historical context.

“If the government is not able to borrow more money after Aug. 2, spending will have to be reduced to the amount of revenue that the government has. That would require roughly a 44 percent cut in federal spending.”

Tanner places this in historical perspective (one that reminds us how much things have changed in the past decade)

And what about that 44 percent cut in spending? That would require the federal government to cut spending all the way back to what it spent in 2003 — a year not notable for mass starvation and economic collapse.

Tanner concludes with a useful reminder:

The real fiscal Armageddon that this country faces comes not from a delay in raising the debt ceiling, but from out-of-control federal spending and government debt.

The Tanner piece is brief and worth a few minutes of your time.

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Why do “red” states that tend to vote Republican in presidential elections take more federal money than do Democratic-leaning, “blue” states? This surprising correlation between ideology and federal dependence has been often noted (see for instance here, here, and here). Indeed, this fact seems to be trotted out whenever we hear “what’s the matter with Kansas/Connecticut” arguments from the left/right, respectively. Are conservative states hypocritical and liberal states self-abnegating, or is there some deeper explanation?

First, let’s take a look at that correlation. In the chart below, I’ve plotted each state with federal grants to state and local governments in that state, as a percentage of personal income, for fiscal year 2007-8, on the Y axis, and percentage of the vote for Obama, McKinney, and Nader in the 2008 election on the X axis. The line through the points represents the least-squares line of best fit. As you can see, there does indeed appear to be a negative relationship between liberal ideology and acceptance of federal grants.

Is the correlation statistically significant? To see this, I (more…)

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An increasing number of pols and legal analysts (and the NYT editors) are making the claim that if Congress fails to raise the debt ceiling, the President could claim the constitutional authority to continue borrowing money. After all, section 4 of the 14th amendment notes:

The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.

Laurence Tribe has a decent piece in today’s NYT addressing the weak foundations of this strategy. With respect to the Constitution, Tribe explains:

The Constitution grants only Congress — not the president — the power “to borrow money on the credit of the United States.” Nothing in the 14th Amendment or in any other constitutional provision suggests that the president may usurp legislative power to prevent a violation of the Constitution. Moreover, it is well established that the president’s power drops to what Justice Robert H. Jackson called its “lowest ebb” when exercised against the express will of Congress.

Then there are the practical problems:

Once the debt ceiling is breached, a legal cloud would hang over any newly issued bonds, because of the risk that the government might refuse to honor those debts as legitimate. This risk, in turn, would result in a steep increase in interest rates because investors would lose confidence — a fiscal disaster that would cost the nation tens of billions of dollars.

Tribe is correct. Yet, is there any reason to believe that the explicit words of the Constitution would suddenly provide a firewall against the expansion of executive authority?

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How much money would it take for you to give up the internet for the rest of your life? $1 million? Yet how much do you pay for your access to it?

The Fund for American Studies just released a provocative short video using those questions as a basis to explore the benefits that wealthy “first adopters” unintentionally provide for the rest of us. Check it out:


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Interesting piece on Robert Barro in today’s Telegraph.  Money quotes:

On the stimulus package:

Turning to the $600bn (£373bn) to $800bn US package, he added it was “mainly a waste of money”. Stimulus programmes, he said, offer little more than “rearranging the timing” of economic growth. “Possibly you could make an argument that it’s worth it. But it’s going to be a negative-sum thing overall, so you have to think it’s a big benefit for boosting the recovery.”

Stimulus, when necessary, should only direct funds to programs that can be justified on their merits.

“The lesson is you want government spending only if the programmes are really worth it in terms of the usual rate of return calculations. The usual kind of calculation, not some Keynesian thing. The fact that it really is worth it to have highways and education. Classic public finance, that’s not macroeconomics.”

But in the long-run, such programs may impose greater costs than benefits:

Mr Barro argued that, taken over the long term, for every £1 spent, the cost to the economy will be more than £1 – creating what he called a negative fiscal multiplier. Orthodox thinking is that current stimulus programmes have a positive multiplier effect by creating growth.

Barro will be delivering the Institute of Economic Affairs Annual Hayek Memorial Lecture. I am looking forward to reading the transcript.

Update: A recording of Barro’s lecture is available here.

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Last week saw large scale strike action from public sector workers here in the UK, campaigning against changes to pension arrangements and more generally ‘cuts’ to government spending. The most common refrain from these workers, as on similar days of action in the UK and elsewhere, was that because the public sector was not responsible for causing the financial crisis it is ‘unfair’ to expect its workers to pay towards undoing the morass. It seems to me that there is more than a grain of truth to this charge because whatever one thinks of high public spending it did not cause bankers to become over-exposed to sub-prime mortgage investments. It is equally true that banking institutions both on grounds of justice and the need to avoid future moral hazard should have faced more of the costs of their own failure.

All this said, the claims of ‘unfairness’ might warrant a more serious hearing if public sector workers in the UK and elsewhere had marched against the enormous increase in government spending (between 4 and 6 % of GDP in the UK) that took place on the back of the financial bubble that prevailed between 2001 and 2008. Few, if any of those spending increases were ‘deserved’ by public sector workers. They certainly didn’t come as result of productivity increases. Yet those who work for the public sector (and I include myself in that category) were perfectly willing to cash in on the spending increases that were funded in part by taxing the gains made in the banking boom. Now that boom has disappeared someone has to pay the full bill- including the public sector. If union leaders had marched through the streets demanding public spending restraint and campaigned for higher interest rates during the last ten years – as any genuine guardian of the ‘public interest’ should have been expected to do – then and only then might they have a valid reason to gripe about the present ‘injustice’.

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Phil Arena has the answer.

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