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Archive for August, 2011

Perry has received a lot of negative press lately. Yesterday, a piece in Politico asked a simple question: Is Rick Perry Dumb?  There was no definitive answer in the article, although there was a Perry quote that I found a bit endearing: “My brain is like a chicken pot pie.”

Today the Washington Post has two pieces that seem to arrive at rather different reasons to oppose Perry.  Ruth Marcus provides a quick review of some of the “terrifying” statements in Perry’s most recent book, Fed Up.

Some of the revelations are startling(…even shocking). For example:

  • Perry would like to repeal the 16th amendment, thereby ending the income tax
  • Perry opposes the 17th amendment because the direct election of senators was a “blow to the ability of states to exert influence on the federal government”
  • Perry views the New Deal and the Great Society as (you may want to sit down when you read this) episodes of dramatic expansion in the role of the state. “From housing to public television, from the environment to art, from education to medical care, from public transportation to food, and beyond, Washington took greater control of powers that were conspicuously missing from Article 1 of the Constitution,”

Much of this is standard fare for those who embrace some form of libertarianism (for more on this topic, see Perry Bacon’s piece from this weekend).

Is Perry a libertarian? There are a few ways to address this. Previous postings on Pileus and press coverage of crony capitalism in Texas would suggest that there have been some rather expedient departures from libertarian principles. However, we need not embrace the empirical record in Texas. All we have to do is consider Perry’s faith.

Thus, in another piece in today’s WaPo, Dana Milbank dismisses the characterization of Perry as a libertarian. In his words:

Yes, Perry is passionately anti-government, or at least anti-this-government. But the man who suddenly tops the Republican presidential polls is no libertarian. Rick Perry is a theocrat.

Evidence: Perry opposes “the radical homosexual movement,” rejects evolution and embraces a literalist position regarding scripture and salvation. In Perry’s words: “The truth of Christ’s death, resurrection, and power over sin is absolute. . . . What we believe about it does not determine its truthfulness.”

But the term “theocrat” suggests that Perry hopes to establish a theocracy and use the power of the state to impose God’s law. I don’t see much evidence of this in Perry. If anything—and here Marcus has it right—he seeks to embrace the core provisions of the original (and “terrifying”) constitution, thereby dramatically reducing the role of the federal government to that envisioned under Article 1.

Let us assume that Perry’s religious statements reflect his personal piety rather than an opportunistic appeal to evangelical voters. Is it possible for one like Perry to simultaneously promote a conservative biblical faith and argue that the constitution should place hard limits on state authority?

Not according to some of his critics. For them, it seems faith = theocracy, unless it is the gooey faith of the largely secularized mainstream church that either ignores or severely discounts the hard words of the gospels.

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I want to piggy-back here on Mark’s great post on urban planning and the poor. I’ve been playing around with some state-level data on local land-use regulations and cost of living. The last decade in the U.S. has been one of very slow productivity growth. As a result, fast-growing states tend to be those with low growth in cost of living. This explains not just states like Texas but North Dakota as well (and at the other end, California). Take a look at the list of states with highest annualized real personal income growth over 2000 to 2007 (the deflator, a state cost of living index, comes from the newest, 2009 Berry et al. data, which explains why the series ends at 2007):

1. Louisiana – 2.8%
2. Wyoming – 2.8%
3. North Dakota – 2.6%
4. South Dakota – 2.1%
5. Oklahoma – 1.9%
6. Arkansas – 1.8%
7. Mississippi – 1.5%
8. Nebraska – 1.5%
9. Montana – 1.5%
10. Kansas – 1.4%

Surprised? These are hardly “knowledge economies.” In some cases, mining or energy accounts for strong growth, and indeed in multiple regression mining share of GDP in 2000 does strongly explain subsequent real personal income growth (per capita or total). And in Louisiana’s case Hurricane Katrina chased away a lot of low-income people. But part of the story is elastic housing supply leading to low growth in house prices during the 2000-2007 bubble. A better measure of state economic success is arguably total rather than per capita income growth, which rewards states that attract people. Here are those numbers:

1. Wyoming – 3.6%
2. Nevada – 3.1%
3. Florida – 3.0%
4. South Dakota – 2.8%
5. Arizona – 2.8%
6. Arkansas – 2.6%
7. Texas – 2.6%
8. North Dakota – 2.6%
9. Oklahoma – 2.5%
10. Louisiana – 2.5%

Again, these states have in common slow growth in housing prices during the bubble. And what explains slow growth in housing prices? Land-use regulation. I use the Gyourko et al. land-use regulation variable to predict both cost of living in 2000 and growth in cost of living over 2000-2007. It is an extremely strong predictor of both (statistical significance>99.99%). When net 2000-2007 in-migration (% of 2000 population) is regressed on both 2000 cost of living and the land-use regulation index along with controls (economic and personal freedom, 2000 accommodations GDP per capita), both are highly statistically significant and negative. When total personal income growth is regressed on migration, controls, and the land-use regulation index, land-use regulation is insignificant while migration is highly significant and positive. No surprise there – land-use regulation doesn’t reduce total factor productivity, but it does discourage labor inflows.

So here’s the big story of growth in those states that have experienced it in the last decade: lack of land-use regulation –> slow growth in cost of living –> more in-migration –> more income growth. Highly regulated states like California (-0.4% annual growth), Oregon (0.1%), Massachusetts (0.1%), and New Jersey (0.3%) could learn something. If we are entering a “great stagnation,” we may have to squeeze increases in living standards out of lower prices rather than innovation for a while.

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English poet John Milton (1608-1674) with some thoughts on the English Revolution that might be helpful for those contemplating or participating in the Arab Spring?

That a nation should be so valorous and courageous to win their liberty in the field, and when they have won it, should be so heartless and unwise in their counsels, as not to know how to use it, value it, what to do with it, or with themselves; but after ten or twelve years’ prosperous war and contestation with tyranny, basely and besottedly to run their necks again into the yoke which they have broken . . .

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This proposal in the UK to tax “fatties” highlights once again how once government gets deeply involved in funding health care, the pressures to control people’s lifestyles become significant. This is the same argument we hear from supporters of sky-high cigarette taxes, smoking bans, seat-belt and helmet laws, ad nauseam. “We all pay for it.” If only we didn’t.

More on the public health scam.

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AFL-CIO President Richard Trumka is threatening to refocus union funds to promote unionization rather than the election of Democrats. Having been disappointed on card check and dismayed by the administration’s post-2010 shift to deficits over job creation, Trumka is questioning whether the AFL-CIO will participate in the Democratic National Convention (to be held in North Carolina, a right-to-work state). Much, it seems, will depend on Obama’s job package. As the WSJ reports:

“This is going to be a moment in history when our members are going to judge him,” said Mr. Trumka. The consequence of a weak effort, he said, will be poor voter turnout among union members in 2012.

After defining the political agenda for a generation, the New Deal coalition has frayed. Is the defection of labor the last gasp for the party FDR built? I have my doubts, for at least two reasons:

First, while the AFL-CIO has had a rather elevated role in the Democratic Party (as the WSJ piece reports, at the 2008 convention “a quarter of the more than 4,000 convention delegates were active or retired union members”), unionization rates have fallen dramatically over the course of the past several decades. In 2010, the unionization rate was 11.9 percent (according to the Bureau of Labor Statistics), compared with 20.1 percent for 1983. More importantly, this number is inflated by the high level of unionization among public sector workers (36.2  percent) relative to private sector workers (6.9 percent). To state things plainly, the unions simply do not carry the political weight they once did.

Second, while Trumpka’s should be dissatisfied with the Obama administration’s failure to carry through on its pro-labor promises—and even more significant union defeats in several of the states–he has also announced that the AFL-CIO is going to create a Super PAC with “funds that will be collected from various unions along with outside donors. The money will be used…to deliver votes for union-backed candidates next year.”  If past union giving is any guide, the vast majority of this money will go to Democratic candidates.

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Many government interventions in markets though they are often justified in terms of the ‘public interest’ work to the disproportionate benefit of organised interests – often the rich or relatively rich – and at the expense of the unorganised and often relatively poor.

One area of public policy where this pattern is particularly evident is that of urban planning. In the United States, as Jane Jacobs showed so powerfully, the subsidised construction of luxury hotels, civic centres and highways has often paid precious little attention to the fate of the people and small businesses that have been ‘relocated’ to make way for politically high profile ‘regeneration’ schemes. The principal beneficiaries have often been large scale property interests who secure access to land on terms that would not have been available in a free market. In the United Kingdom meanwhile, large scale ‘slum clearance’ programmes in the post war era saw hundreds of thousands of low income people ‘relocated’ to high rise blocks – a process which often destroyed local community support networks but secured jobs for thousands of middle class local government housing managers and for large construction contractors which built what turned out to be some of the worst urban housing projects anywhere in the developed world.

As well as crimes against the poor in the name of urban renewal, urban planning has often prevented low income people from accessing housing in suburban and semi-rural areas where new and better paying jobs have been created. The primary culprit here has been restrictive zoning regulation – and in the British context the creation of development free ‘green belts’ around major towns and cities (now imitated by some US cities such as Portland). The effect of these controls has been to restrict the supply of land for housing forcing up the price well above free market levels. The major beneficiaries are of course existing home-owners in areas of high housing demand who benefit from increased property values and who use land use regulation to keep out ‘less desirable’ residents. In the UK specifically many analysts have pointed to a ‘drawbridge effect’ where the middle classes move out of the cities to rural and suburban areas and then promptly demand tougher regulation to ‘keep out’ the less well-heeled and the new building that would be needed to house them. Similar processes operate in the US where ‘large lot’ zoning ordinances that mandate minimum lot sizes of several acres in many states have been used to maintain neighbourhood exclusivity.

These predominantly middle class motivations are reinforced by the gains that flow to corporate housing developers who use urban planning regulation to reduce competition. Corporate developers favour a system which provides permission to develop their own land while affording opportunity to restrict access to land for their competitors. Smaller firms in particular tend to be squeezed out of the market owing to their relative inability to afford the expenses and legal fees needed to lobby effectively to secure development rights through the political process. The effects of this phenomenon have become particularly pronounced in the UK where the ‘self-build’ sector has been almost entirely eradicated. Individuals who might want to build their own homes or contract with a small developer often can’t afford the expense of going through the planning process themselves and must rely instead on the corporate sector.

Of course, to point out the pernicious effects of urban planning controls, is not to suggest that there is a case against all such controls. If we want to protect open spaces and other environmental assets then land use regulation has a role to play – but much of this can be provided privately and need not operate in a zero-sum manner. Homebuyers who value open space protection and other environmental controls, for example, may purchase developments with restrictive covenants or contract into private communities which impose land use restrictions on plots within their domains in order to maintain neighbourhood integrity. In these cases middle class homebuyers have to compete directly in the market with those who value land in alternative uses (land without housing controls) and are faced with the cost (via higher prices) of the level of regulation they demand.

All the evidence suggests that the demand for environmental protection is closely related to income. The rich and the middle classes have a stronger preference for land use controls than the poor. What state enforced, as opposed to private urban planning enables them to do, however, is to secure access to environmental quality ‘on the cheap’ and to do so at the direct expense of lower income groups. When those on middle and higher incomes have to pay directly for the right to regulate land via private contracts then they will tend to demand less of the relevant regulation overall. By contrast, under a state-directed system, middle class groups wanting more restrictive controls can simply lobby the political authorities for ever more restrictions on other peoples’ property. Because they do not face the full opportunity cost (higher prices and fewer homes for those on low incomes) of the policies they support, an excessive amount of regulation is demanded.

The effects of urban planning referred to in this post have been documented by academic analysts on both the ‘left’ and the ‘right’.* Virtually all of the studies conducted in the UK, USA and in many other countries confirm that government-led urban planning redistributes income and opportunity away from the poor and towards the middle class and the rich. The big question that needs to be asked is why, in light of this evidence, so many British ‘socialists’ and American ‘liberals’ who profess to be concerned about ‘social injustice’ continue to support it.

*‘Left of centre’ analyses of these effects include Logan and Molotch (1987) Urban Fortunes, University of California Press. Pahl (1975) Whose City? Penguin. (1975) Hall, P. et al (1973) The Containment of Urban England, London: Allen and Unwin. My own earlier work analysed these effects from a public choice perspective – see Pennington (2000) Planning and the Political Market: Public Choice and the Politics of Government Failure, London: Athlone/Continuum.

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At least, that’s what Conor Friedersdorf at The Atlantic claims. He reviews criticisms of Paul from Matt Yglesias and Adam Serwer, which basically boil down to: he’s pro-life; he favors enforcing immigration laws; he’s a bit kooky about the importance of the Fed. Friedersdorf then puts the boot in:

Wow. They make Ron Paul sound pretty bad. But they’re planning to vote for a guy who is even worse on civil liberties! That’s what gets me about these posts. I am all for critiquing Ron Paul. The newsletters to which he foolishly lent his name were awful. It is indeed wrongheaded that he wants to return to the gold standard. And if America were on the cusp of protecting the civil rights of black people for the first time, I’d campaign against Paul, despite being quite sympathetic to his stance on other issues. Do you know why? It’s because I care about actual liberty enhancing outcomes, whereas both Yglesias and Serwer are evaluating Paul’s candidacy in a way that is curiously removed from the issues that confront us or what would plausibly happen if he won.

As a libertarian who’s somewhat ambivalent about Paul because of issues like trade, immigration, earmarks, and DOMA, not to mention the racist newsletters, I have to say: Right on. If Paul ends up having a truly non-negligible shot at the nomination, I’ll probably vote for him. Otherwise, I’ll go with the guy who lacks these hangups: Gary Johnson.

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That’s from the lede of a new story in Mother Jones about the Free State Project, entitled “City on a Quill.” Mother Jones is definitely coming from the left, but the story is meritoriously free of those lazy, paranoid arguments ad Kochum that we’ve seen about Free Staters from The Nation (no, I’m not going to provide a link, they don’t deserve it). The Mother Jones story doesn’t appear to be online yet. With just a touch of ironic deprecation, the story elaborates accurately the main factional divide among libertarian activists in New Hampshire, between civil-disobedience activists mainly living in Keene and political activists spread throughout the state:

In recent years, Keene residents have been cited for violating the city’s open-container law (during a city council meeting), for indecent exposure and firearms possession (simultaneously), and for smoking marijuana (inside a police station). These incidents share a common root: They were orchestrated by members of the Free State Project–a plan, hatched in 2001, to get 20,000 libertarian activists to quit their jobs, sell their homes, and relocate to New Hampshire en masse.

The reporter also interviewed Free Staters who’d been elected to the legislature:

Dan and Carol McGuire relocated to New Hampshire from Washington state in 2005… Political novices, they both won seats in the House of Representatives (Carol in 2008, Dan in 2010).

They’ve taken different approaches to fighting tyranny. Carol’s goal for the 2011 session was culling anachronistic laws that have remained on the books through bureaucratic neglect. She succeeded in axing an 1895 statute, the result of lobbying by Big Butter, that requires margarine to be served in triangular containers so that diners don’t confuse it with the real thing. Dan had his sights on something of potentially much greater consequence. He and a few allies succeeded in passing a bill to eliminate the New Hampshire Rail Transit Authority, which is planning a high-speed line to Massachusetts. Their argument was simple: Government shouldn’t be in the business of building railroads. The state’s Democratic governor, John Lynch, vetoed the bill.

After summing up the disagreements among Free Staters on strategy and end goals (no government versus limited government), reporter Tim Murphy concludes: “And therein lies the problem with attempting to create a libertarian utopia: No one–least of all libertarians–can agree on what it looks like.” You might say that’s a problem for any effort to create a utopia.

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Florida recently passed a law requiring welfare recipients to be tested for drugs and throwing them off welfare if they test positive. Governor Rick Scott justified it as saving taxpayers’ money and discouraging drug use. It turns out to be costing taxpayers more money than it saves them, because hardly anyone tests positive. This isn’t conclusive proof, by the way, that the law isn’t discouraging drug use – after all, prospective welfare recipients could have modified their behavior after the law was passed – but it’s strongly suggestive that it is not, for low-resource citizens tend to have higher levels of political ignorance, and it would not be surprising if many of them did not know of the new law before applying.

Even if the law were working as intended, I think it would still be unjust. As Mike Riggs points out in the first link above, the law does not test corporate welfare recipients for drugs, only poor people. The fact that this is a government benefit does not mean that the government is justified in attaching any conditions it wants to it. Would it be justified in requiring every public school student (and parent??) to be tested for drugs? Would it be justified in requiring strip searches of welfare recipients? Drug testing is invasive and should always bear a significant burden of proof when conducted by government. In my view, while private employers have every right to test their employees for drugs, the bureaucratic, “zero tolerance” culture of drug testing has gone too far and should not be further encouraged.

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The web is a buzz with Paul Krugman’s supposed comments regarding yesterday’s earthquake:

“People on twitter might be joking, but in all seriousness, we would see a bigger boost in spending and hence economic growth if the earthquake had done more damage.”

Given the comment a just over a week ago regarding the economic benefits of an alien invasion, this may, in fact, be credible.  If we set aside Bastiat and the broken window fallacy, we can take pleasure in the fact that the new job program may be arriving sooner than the President’s upcoming speech.

Hurricane Irene is scheduled to hit the US in the next few days. If it fades from a category 4 to a category 1, we will know who to blame: the Tea Party and the GOP’s obsession with austerity.

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Last Friday, I had a post on the “Cost of Government Day.” According to a piece by Grover Norquist and Patrick Gleason, “the Cost of Government Day arrived Aug. 12 — meaning that the average American toiled 224 days to foot the bill for this year’s total cost of government.”

One reader (Greg) questioned the numbers: “Wouldn’t that make the government 61% of the whole economy? … What am I missing?”

The piece in question went beyond the issue of taxation to include the costs imposed by regulations, claiming that (on average) Americans worked an additional 77 days to pay for the $1.8 trillion in regulatory burdens.

The Cost of Government Day Report (p. 18) provides a somewhat more expansive discussion of the costs of regulation (although one wishes for a bit more on the underlying methodology). It notes:

Our conservative estimate of total regulatory costs takes into account only the cost of complying with regulations: the material resources and labor needed to carry out compliance. For example, if a regulation requires new pollution control equipment for power plants, compliance costs include the costs of manufacturing, installing, operating and maintaining the equipment.

It does not include “the negative economic effects of regulatory requirements—the deadweight loss of these policies” (i.e., the value of “goods and services forgone due to government rules”). “These hidden costs stifle the growth of the economy because they introduce inefficiencies and distortions, while reducing the economic reward left over for productive activity.”

In an op-ed today, Senator Kay Bailey Hutchison quotes Investors Business Daily:

“If the federal government’s regulatory operation were a business,” Investors Business Daily reported, “it would be one of the 50 biggest in the country in terms of revenues, and the third-largest in terms of employees, with more people working for it than McDonald’s, Ford, Disney and Boeing combined.”

The op-ed makes the argument that the growth of the regulatory state in the past 3 years has played a central role in impeding job growth, particularly among small businesses. The senator is seeking support for the Regulation Moratorium and Job Preservation Act she co-sponsored which would “place a moratorium on burdensome federal regulations until the national unemployment rate falls to 7.7 percent — below where it was when Obama took office.”

One cannot deny that the introduction of new regulations—and the anticipated introduction of future regulations—creates additional uncertainty for businesses, thereby impeding recovery. Yet, I can’t imagine that President Obama’s much anticipated but yet-to-be delivered job speech will include support for something like the Regulation Moratorium and Job Preservation Act given that  we have been told (repeatedly) that deregulation and the Bush administration’s commitment to laissez-faire  (insert laugh line here) were the causes of the catastrophic financial crisis.

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I’ve discussed Michelle Obama’s lavish lifestyle as first lady before.   Meanwhile, the President hasn’t exactly endeared himself to a nation struggling economically by recently bolting Washington for yet another vacation – this time in upscale Nantucket Martha’s Vineyard.  But it appears that Michelle and Barry aren’t the only ones who are politically tone deaf right now.  

The Washington Post reports that presidential candidate Mitt Romney is “planning to nearly quadruple the size of his $12 million dollar California beachfront mansion.”*  As if the size of the house isn’t enough to raise a few eyebrows, the WaPo also notes that Romney is bulldozing the more than 3000 square foot house currently on the site to make room for a brand-spanking new 11,000+ square foot ocean-side palace.  Apparently, according to his campaign, the old house is “inadequate for their needs.” 

I assume that Romney earned his money fair and square.  Therefore, I have no beef with him spending the fruits of his labor on a house that he and his family can enjoy.  Indeed, one is tempted to say that the project is a better “jobs plan” for the local construction industry than we’ve seen out of the current President.  So kudos to Mitt.

However, Romney’s move is a bit tone-deaf given it will look unseemly to many Americans having trouble making ends meet.  Now we can say that folks should refrain from being envious of the rich and shouldn’t hold Mitt’s worldly success against him at the polls.  But in the world as it is, I think it would have been much wiser politically for Romney to wait until after the election to start planning for a bigger West Coast nest.  Indeed, his move seems especially foolish since the Post notes that construction won’t even start until the campaign is over.  Although I value authenticity over signaling (and think macrovariables are more important to election outcomes than campaigns or candidates), politicians still need to be careful about what message their actions send or risk being seen as out of touch with “regular” Americans and their concerns.  Just ask wind surfing John Kerry.

* I read about it in the Tampa Tribune but the byline notes it was a Washington Post product.

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Philosopher Joel Marks has a fascinating personal narrative in the New York Times today called “Confessions of an Ex-Moralist.”

In this account he describes his recent and rapid transformation from a secular ethicist (one who believes “religion is not needed for morality”) to an amoralist and atheist.

He begins his account with the provocative claim that “The day I became an atheist was the day I realized I had been a believer.”  Here are some additional interesting snippets from his account:

The dominoes continued to fall. I had thought I was a secularist because I conceived of right and wrong as standing on their own two feet, without prop or crutch from God. We should do the right thing because it is the right thing to do, period. But this was a God too. It was the Godless God of secular morality, which commanded without commander – whose ways were thus even more mysterious than the God I did not believe in, who at least had the intelligible motive of rewarding us for doing what He wanted.

And what is more, I had known this. At some level of my being there had been the awareness, but I had brushed it aside. I had therefore lived in a semi-conscious state of self-delusion – what Sartre might have called bad faith. But in my case this was also a pun, for my bad faith was precisely the belief that I lacked faith in a divinity.

In the three years since my anti-epiphany I have attempted to assess these surprising revelations and their implications for my life and work. I found myself in the thick of meta-ethics, which looks at the nature of morality, including whether there even is such a thing as right and wrong…. And yet I knew in my soul, with all of my conviction, with a passion, that [some things] were wrong, wrong, wrong. I knew this with more certainty than I knew that the earth is round.

But suddenly I knew it no more. I was not merely skeptical or agnostic about it; I had come to believe, and do still, that these things are not wrong. But neither are they right; nor are they permissible. The entire set of moral attributions is out the window.

(emphasis in original)

Obviously Marks ends up with a worldview dramatically different from my own, and I would prefer he ended up dumping the “secular” from his secular morality, not the morality.  Yet, his transformation seems to be a very natural ending point for secular ethicists who are honest about what they are doing.  There are, of course, multiple approaches to secular ethics, and I have precious little expertise in critiquing them.  But whether one views the aim of ethics as promoting the survival and propagation of the species, the flourishing or happiness of the species, or a deontologically-based duty to other members of the species, none of these approaches has,  in my mind, any answer at all to the question of why the species should have value in the first place.  Why would an objective morality governing the species that could be intuited, discovered, or reasoned ever come to exist in the universe?

To put this another way, in a godless, arbitrary universe ruled only by chaos and random variation, there is no reason to think that humanity matters at all (or that anything matters or that we can even say what it means for something to matter).  To say that something has value is to imply that someone values it.  Intrinsic value is a nonsensical concept.  I may value myself (in fact I do) but why should my values matter to anyone else? Or if a sociopath says, “Humanity, including me, is completely valueless and meaningless,” what can a secular moralist of any stripe tell him?  Not much.

Thus while a secular approach to moral reasoning can discover a lot of things it cannot answer the question of why the enterprise should matter in the first place.  And by “enterprise” I mean not only the enterprise of moral philosophy but the human enterprise in general.

A better starting point for philosophers is the question asked by the Psalmist: “When I consider thy heavens, the work of they fingers, the moon and the starts, which thou has ordained, what is man, that thou are mindful of him?… (Psalm 8:3-4)

To know that we are valued and by whom is the only starting point to really understanding morality.

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In this post, I continue my series on left-libertarian economics by examining Kevin Carson’s arguments for the labor theory of value (LTV) in Studies in Mutualist Political Economy. I argue that this is one area in which left-libertarian economics does represent a degenerative research program, that is, a body of scientific theories that protects itself from refutation by redefining itself in such a way as to render itself nonfalsifiable. The problem is not that the LTV as Carson formulates it is false, but that it is simply a relabeling of the Marshallian synthesis with scientifically irrelevant normative claims added on.

Carson begins his book with a discussion of classical political economists’ understanding of the LTV. He persuasively demonstrates that the LTV of the classical political economists was not as naive as the later marginalists made it out to be. Both Ricardo and Marx recognized that demand played a role in determining prices, and that labor effort could not cause a good to become valuable. The classical political economists held a “correlational” LTV, that is, that in most markets the price of a good would correlate strongly with the amount of labor used to make it – and the “amount” of labor had to be understood as its opportunity cost. Expending labor on making a mud pie would not make it valuable, because no one would be willing to pay for it. Alfred Marshall synthesized the marginalist-utility and labor theories of value by modeling the way in which the interaction of supply (determined by cost of production) and demand (marginal utility) determines prices. In the short run, Marshall argued, (more…)

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Robert Kaplan in Foreign Policy:

“It is realism in the service of the national interest — whose goal is the avoidance of war — that has saved lives over the span of history far more than humanitarian interventionism.”

I’m not exactly sure his comment about the goal of the national interest (or the goal of realism) makes any sense, but Kaplan’s larger point about realism vs. idealism is interesting and almost certainly true in the American context.  I’m curious how Sven would respond.

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Free at Last

Yes, I know, the market remains in the tank, jobless numbers are up, and the world economy looks like it is on the brink of recession 2.0.   But a week ago, we could begin smelling freedom in the air. As Grover Norquist and Patrick Gleason explain:

This year Cost of Government Day arrived Aug. 12 — meaning that the average American toiled 224 days to foot the bill for this year’s total cost of government. Of those 224 days, 103 went toward federal spending, and 44 days for state and local spending. The regulatory burden, coming in at $1.8 trillion, took up an additional 77 days of work….before President Barack Obama took office, Cost of Government Day never fell later than July 21.

Of course, the smell of freedom remains distant for residents of the fine state of Connecticut, where I live.

 As for residents of Connecticut, the state with the latest Cost of Government Day for the past two years running, they won’t finish paying their tab until next month – Sept. 10.

Given that when I moved to Connecticut (in 1989) there was no income tax, this is quite a achievement. Those of you who are not living in Connecticut should raise a glass to the principle of self-ownership and one properly braced, consider the annual Cost of Government Day report (available here).

Free at last, free at last…

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As efforts continue to frame the debates over recovery, Paul Krugman discussed the merits of World War II and the potential benefits of an alien invasion on Fareed Zakaria’s GPS this past Sunday (video clip here).

Michael Pento (HuffPo) provides a useful critique. Money quote:

“the Keynesian economist’s favorite pastime is seeing people waste their lives digging holes in the ground or sacrifice their lives in war. Both acts create economic growth according to the topsy-turvy logic of men like Krugman.”

As efforts continue to frame the debate over recovery, Tim Cavanaugh (Reason) asks an important question: How Long Will it Take Keynes to Die?

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Few in power find it convenient to notice inconsistencies in their own conduct. Alas, but President Madison was no exception. Federalism and decentralization exist precisely because free constitutions should not depend on the good graces of those in office, but on the checks necessary to harry them back under the law.

Seeking the financial means to carry on his war, Madison did not appreciate New England’s opposition to his measures or her refusal to lend. As the enemy bore down from the north at various points along the Canadian border, Madison attempted to impose conditions on the New England militias, not trusting them, as he did the other states, to staff and command their own forces.

In these efforts, the fourth president was roundly rebuffed by the governors and legislatures of Massachusetts, Rhode Island and Connecticut. They correctly pointed out that the Constitution reserved to each state the right of officering her state militias: The president could certainly call those units into service according to the constitutional powers that authorized Congress to declare war, but he could not reorganize those units without a state’s permission. Unable to get his way, Madison refused to mobilize New England’s forces and subsequently refused to pay any expenses for her defense.

Governor Caleb Strong of Massachusetts organized and raised his own force of some 10,000 men at a cost of 1 million dollars, which was a considerable sum in that day. Facing such staggering costs and outraged by what they considered to be the unconstitutional and dangerous manner in which their region had been treated, the New England states elected to protest in the same spirit as they had done against the embargo, but this time they went a step further: Coordinated state action.

Under the inspiration of Harrison Gray Otis and Theodore Dwight (the brother of Timothy Dwight of Yale), Connecticut, Rhode Island, Massachusetts, and several counties of New Hampshire and Vermont sent representatives to meet in Hartford Connecticut between December 15, 1814 and January 4, 1815. There they formed a list of grievances and a call for constitutional amendments, concluding with a threat to organize another convention should these proposals not be taken up by the other states in the Union.

The men who attended this gathering tried to moderate the more extreme elements calling for secession and outright resistance to the national government (see Justin Winsor, Narrative and Critical History of America, vol. VII, Houghton Mifflin, 1888, p. 321 and notes) but the prospect of a convention sent shivers through the administration. It is not difficult to see why.

In “A Short Account of the Hartford Convention to which is Added an Attested Copy of the Secret Journal of that Body” (1823), Theodore Lyman, noted that Massachusetts was quite open about her aims, and “the sense of her citizens was at that time well known, and in relation to the Hartford Convention, she adopted without delay that course of conduct, of which an eminent example had been given less than half a century before, and which, in this juncture of affairs, was especially judicious, from the vast magnitude of the subject and occasion.” (p.8) That example was Madison’s own call at the end of the Annapolis Convention for the convention that followed in Philadelphia, which of course ultimately put an end to the Articles of Confederation.

When the Hartford Convention got down to business on its second day, it considered, according to the Attested Copy of the Secret Journal, the two constitutional grounds of New England’s grievances just mentioned: “The [unconstitutional] powers claimed by the executive of the United States, to determine, conclusively, in respect to calling out the militia of the States into the service of the United States; and the dividing the United States into military districts with an officer of the army in each thereof, with discretionary authority from the executive of the United States, to call for the militia to be under the command of such officer.”

The second grievance followed immediately after: “The refusal of the executive of the United States to supply, or pay the militia of certain States…on the grounds of their not having been called out under the authority of the United States, or not having been…put under the command of the commander over the military district.” These two grievances then formed the basis of the final and more damning constitutional conclusion that the national government had failed to meet its obligation as stated in the preamble “to provide for the common defense.”

In their protest the members stood on solid textual grounds. It was true that Section Eight of the First Article gave Congress the power “To provide for organizing, arming, and disciplining, the Militia, and for governing such part of them as may be employed in the Service of the United States,” but it specifically reserved “to the states respectively the Appointment of the Officers, and the Authority of training the Militia according to the discipline prescribed by Congress.”

Did this “prescribed” discipline give Madison the right to reorganize the New England militias? It might have, but only if Congress had specifically formed such a policy, and had done so equally for all parts of the Union. The fact that President Madison asserted this as a matter of executive authority, and the fact that he applied that policy unequally to some of the states and not to all of them, violated both the spirit and the letter of the fundamental law. With these arguments before them, the delegates proposed their Constitutional remedies.

They called for consideration on the part of the states for amendments that would permit the state legislatures “some arrangement whereby the States may be enable[d] to retain a portion of the taxes levied by Congress, for purposes of self defence (sic), and for reimbursement of expenses already incurred, on account of the United States.” They then proceeded to request further consideration be given to certain other constitutional issues: To restrict Congress’ power to declare war; to restrain its power “to make new States, and admit them into this Union; to limit Congress’ power to impose embargoes and restrict commerce; to prohibit a president from the same state serving two consecutive terms; and finally, and perhaps most ominously of all, to eliminate the 3/5ths provisions of the Constitution “respecting slave representation, and slave taxation.”

This last provision underscored a growing cultural and political divide already evident between the northern and southern states. New Englanders had always felt aggrieved to some degree by the so-called 3/5ths compromises in the Philadelphia Convention. Already by this time, they saw it as a principal driver of western expansion, and the Southern states made little bones about their desire to move the peculiar institution westward, and to form an alliance with that region in opposition to New England.

Thus the Hartford delegates sought restrictions on admitting new states as well as the elimination of the South’s use of slaves in calculating her population numbers. It is interesting to note that at this point in time, the South’s rising star, J. C. Calhoun of South Carolina, was a strong nationalist defender of the War of 1812 and a proponent of a new national bank so that the general government could more easily finance such military ventures in the future. The irony of ironies is that this situation was about to change yet again.

As reported by Theodore Dwight, the Secretary of the Hartford Convention, in his later history of that meeting, the timing of the delegates’ report to Washington could not have been worse. It arrived just as news from England of the War’s end came along with the report of Andrew Jackson’s victory in New Orleans. While the war had not gone so well for America in general, the popular sense created by this juncture produced a patriotic fervor that was ill disposed to consider of the resolves of the Hartford delegates.

The commission attempted to quietly retire back to New England, but the popular reaction, especially among Madison’s Republican Party was to revile its proceedings as radical secessionism, and the reputation of that convention has labored under such a misapprehension ever since.

Far from secessionism, however, the Hartford Convention presented yet another means of interposition through coordinated state action, and to the degree that such coordination gathered more sustained attention (even if in the negative) from the other states, to that degree it succeeded. With the war’s end, Hartford’s issues became moot, but one could easily imagine what might have developed had the exigencies of war persisted.

The next stage of development in the ideas of interposition, however, would raise the stake higher, actually attempting what Jefferson had contemplated in the Kentucky Resolves: Nullification. Interestingly, the author of this approach was our leading nationalist of the 1810s. Calhoun had been a student of Theodore Dwight’s brother about a decade earlier at Yale. Timothy Dwight shared his brothers’ attachment to the reserved rights and powers of the states. Calhoun had resisted such thinking as his student, but when the issue of tariffs touched his own state’s interests in the next decade, he began to avail himself of Dwight’s understanding, coming to a deeper appreciation of the need to constitutionally restrain centralized power, but he did so with an interesting and novel twist that would have a profound impact on the popular perception of state’s rights.

And Calhoun’s solution would prove perhaps the most difficult and cumbersome of all…

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Political Math’s piece on Texas’ amazing job growth has been getting a lot of attention around the ‘Net. As regular Pileus readers know and as Political Math’s piece confirms, job growth is largely a consequence of population growth, and population growth is largely a consequence of warm climate, low cost of living, low taxes, and high personal freedoms. Since Texas enjoys all four of those characteristics in spades (personal freedoms maybe a little less so), it is unsurprising that Texas has grown so much. To what extent can Rick Perry claim credit for that job growth? I think he can claim a bit of credit to the extent that he can point to a record in which he has supported policies that have kept cost of living and taxes low and personal freedoms fairly high.

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The President is on the tail end of his Midwestern bus tour, which was designed to focus on the issue of jobs. While there is no shortage of presidential remarks (punctuated by the obligatory hand shakes, autographs, and baby kissing), the lack of substance exhibited by the President is frustrating the NYT (see today’s lead editorial):

“Now, on a bus tour in the Midwest, he is bitterly pointing the finger at his opponents for their refusal to consider any new revenues to tackle the deficit and their insistence on deep near-term spending cuts that will only cause more economic pain. His anger is long overdue. But it would be much more effective if he combined it with strong ideas of his own for how to fix the economy, rather than the thin agenda he is now promoting.”

Yesterday’s editorial sounded the same note, suggesting the explanation could be found in the administration’s timidity:

“Mr. Obama and his advisers are still debating whether it is worth pushing any bold proposals, fearing that voters will see it as a failure if they don’t make it through Congress. That is an excuse for not trying.”

The Times is likely too harsh. The President’s armored bus tour (far different than the Biden Summer of Recovery tour from last summer) has allowed the President to gather much needed information. While some critics might question why the President would go to these states, given that Iowa and Minnesota have lower unemployment rates than the nation (6% and 6.7% respectively). However, as the WSJ notes, Press Secretary Jay Carney explained that the President was going to these states precisely for this reason: he wanted to see what was working.

The good news: this information will undoubtedly find an expression in a plan. Indeed, the administration has announced a bold, new plan. Well, alright, not a plan. But at least there is now a promise of a post-Martha’s Vineyard, post-Labor Day speech that will announce a plan. The AP cites a senior administration official who has presented the broad outline of the new jobs plan:

“The president’s plan is likely to contain tax cuts, jobs-boosting infrastructure ideas and steps that would specifically help the long-term unemployed. The official emphasized that all of Obama’s proposals would be fresh ones, not a rehash of plans he has pitched for many weeks and still supports, including his “infrastructure bank” idea to finance construction jobs.”

All of the proposals will be “fresh ones, not a rehash of plans he has pitched for many weeks”? The suspense builds. According to the AP report, “the [senior administration] official spoke on condition of anonymity because Obama has not yet disclosed his plans. No final decisions on the economic package have been made.”

The plans are going to be fresh but as of yet are undisclosed and have not yet been decided on. Precisely the assurance that the markets need in these rather tumultuous times.  Nonetheless, the President seems confident that the fresh, new economic ideas will force Congress to act. In his words:

“Hopefully, when they come back in September, they’re going to have a wakeup call that says we need to move the country forward.”

Hopefully…

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Like many libertarians and conservatives, I am quite eager to see President Obama in the rearview mirror of American politics.  He has been far worse than I expected.  Although I expected trouble on the domestic front, I figured he’d operate with a lot more restraint in the realm of foreign policy.  Instead, we’ve been given both a fairly ill-managed escalation in Afghanistan and a foolish war in Libya that has been executed in a manner unbecoming of a democracy governed by the rule of law (especially in terms of proper executive-legislative relations). 

Given my hope of seeing the Ryder truck at 1600 Pennsylvania asap, I have been a bit excited about the possibility of Rick Perry winning the nomination since he would be a formidable general election candidate.  However, there are more than a few potential downsides to a future Perry presidency.  Chief among them could be his foreign policy approach. 

Like the last Texan in the White House, Perry seems ready to embrace a very assertive foreign policy that would seem only to add a bit more internationalism to the basic neoconservative approach.  At least that is what Josh Rogin sees in his crystal ball.  And in my opinion, the unilateralism (to a point) was/is one of the few endearing features of  neoconservatism in foreign policy.  

In an interesting but thinly sourced piece at Foreign Policy, Rogin describes some of the elements of Perry’s thinking on foreign policy and notes that the Texan’s approach is basically, as one unnamed source put it, “hawk internationalist.”  Particularly disturbing is that Perry is talking to folks like Douglas Feith and has “called for higher defense budgets, warned about the rise of China, criticized the effort to reset relations with Russia, and said that North Korea and Iran represent ‘an imminent threat with their nuclear ambitions.’”  Wow, John McCain, Jr.!   

But is this really the right course correction to make in the face of Obama’s foreign policy?  Do we really want Bush II, II?  Or do we want to head in the direction we’ve seen many conservatives and libertarians map out in this post-Iraq, budget-constrained world?  Namely, a world in which the United States adopts a more restrained vision of its place in the world and the budget to go along with such a new, more realistic grand strategy.  In an age without a true peer competitor and where U.S. efforts to shape the world are as likely to blow-up in its face or drain its budget at minimal gain as work to America’s advantage, isn’t “restraint” (or “offshore balancing” or “strategic independence”) the recipe for securing core national interests and extending the US’s unique power position as long as possible?

If only Perry would listen a little more to fellow Texans like Chris Layne at his alma mater Texas A&M or Eugene Gholz at the University of Texas!

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“Left-libertarianism” can be defined in one of at least three ways. It can refer to “liberaltarianism,” a tactical stance and set of policy positions combining a substantially libertarian thrust with a preference for making alliances with the modern center-left. It can refer to a revisionist philosophical movement that differs from Robert Nozick’s entitlement theory of property rights in a more or less egalitarian direction, without going all the way to a Rawlsian social-ownership theory (Michael Otsuka, Peter Vallentyne, Philippe van Parijs, etc.). Finally, it can refer to anarcho-socialism, the original “libertarianism.” In what will probably be a fitfully updated series of posts, I am going to investigate the last of these, insofar as it has attempted to create a new school of positive economics.

I am going to focus, at least initially, on Kevin Carson’s Studies in Mutualist Political Economy, which seems to be one of the most influential recent works in this area. Carson’s theories have, for instance, had some influence on Auburn philosopher Roderick Long and a number of other libertarian public intellectuals such as Sheldon Richman, Gary Chartier, and others associated with the “agorist” and “voluntaryist” movements and with organizations such as the Center for a Stateless Society. And of course, influence has gone back the other way as well. Many left-libertarians, such as Fred Foldvary, have also been influenced by late 19th century economist Henry George, but I will not be focusing on their theories, which are relatively close to the neoclassical mainstream, compared to Carson’s mutualism.

Mutualism itself is situated to the right of (more…)

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Quote of the day

From Ross Douthat writing in the Times:

Imagine if the Democratic Party nominated a combination of Al Franken and Nancy Pelosi for the presidency, and you have a sense of the kind of gamble Republicans would be taking with Perry.

Douthat is trying to flatter Christie into running.  Now that would make for an interesting nomination race.

Perry Update: The latest Rasmussen poll shows Perry at 29%, Romney at 18%, and Bachmann at 13%.  They guy has good timing.

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One of the books I read this summer was Bryan Caplan’s Selfish Reasons to Have More Kids: Why Being a Great Parent Is Less Work and More Fun Than You Think. Having already read works like Judith Rich Harris’s excellent books The Nurture Assumption: Why Children Turn Out the Way They Do and No Two Alike: Human Nature and Human Individuality, I was not unfamiliar with much of the evidence Caplan adduces to support his thesis. And Caplan’s thesis is easy to state: A growing body of evidence suggests that the effect parents and their parenting style have on the kinds of people their children grow up to become is far less than they might have thought. Genes and peers seem to account for nearly ninety percent of children’s personalities as adults, which leaves a paltry ten percent for everything else, including accident, other environmental factors—and parents.

The moral Caplan draws is that parents should lighten up. If you are worried sick about your kids, about doing everything you can to make sure they lead good, happy lives, relax: Whether they lead such lives is largely not up to you, and little you do—beyond providing them the most basic nutrition—is going to make much difference.

Caplan also argues that if you took the long view of having children, focusing not only on the first two years of life, which are admittedly difficult, but on your whole life with your children, which includes the likely prospect of grandchildren, then you would see that the balance is decisively tipped in favor of having more children. A few years of difficulty is greatly outweighed by decades of pride, companionship, and love, and of course grandchildren are an almost unalloyed good. By contrast, the absence of children and grandchildren as one reaches one’s golden years can be a source of deep pain, regret, and loneliness. The lesson, then: There are good, rational, and selfish reasons to have more kids.

I highly recommend reading Caplan’s book: It is entertaining, lively, and provocative. But there are three things I believe Caplan missed.

First, Caplan argues that once a parent understands that he bears considerably less responsibility than he thought for what his children ultimately become, this can be a liberating realization enabling the parent to relax and have more fun with his kids. Perhaps that is true. But I think Caplan underestimates the extent to which this realization can also be dispiriting and dejecting. “Your efforts are unnecessary and largely pointless” does not strike me as an inspiring liberation. Imagine telling a priest, “Great news! We have now definitively proved that God does not exist. So now you don’t have to be as worried about saving people’s souls as you were before!” Okay, but the other side of that coin is that the proposition to which you have dedicated a substantial proportion of your life turns out to be false, and thus your efforts were pointless. Relaxing? Maybe, but perhaps just as likely depressing.

A second point relates to those “helicopter parents” whom Caplan particularly has in mind when he tells parents to relax. We all know the type: they schedule every minute of their children’s lives, drag them all over hell and gone for lessons and camps and enrichments, and worry, even obsess, about every little detail of their lives. The result, for both the parents and the children, is anxiety and frustration—and likely also disappointment when children inevitably fail to live up to their parents’ dreams and children perceive and even internalize their parents’ disappointment. Yes, such parents should surely take a deep breath.

On the other hand, it seems Caplan fails to realize that being helicopter parents is precisely what gives those parents’ lives meaning. That is their job. It is what gives them purpose, it is what gives them a sense of being needed, and its daily busy routine is precisely what gets them out of bed in the morning and keeps them going day after day. We may think they are making some kind of miscalculation, or engaging in ultimately irrational behavior, but that is only if we assume that the point of their behavior is only to gain some end to which their efforts are not likely to conduce. But their daily fretting and racing largely is the point; what it leads to is a secondary concern. So telling them to knock it off misunderstands what they are all about.

Third and finally. A thought I had recurringly throughout Caplan’s book was, “I’ll bet he doesn’t have teenagers yet.” And indeed he doesn’t. He has three kids, none yet a teenager. I am afraid to say that that explains a lot of his “just relax” attitude. Caplan substantially underestimates the difficulties and pain that the teenage years can cause, and the lasting effects that bad decisions of teenagers can, and lamentably often do, have. There is a sweet spot in parenting, when one’s kids are roughly four years old until they are about ten, when parents can think they’ve figured everything out. “Timeouts” work, children listen to their parents, a relative peace can reign. That often ends when children become teens.

Several times in Caplan’s book, he counsels parents of difficult pre-teens to “try a little discipline.” Timeouts work remarkably well, he tells them with only a hint of smugness. Yes, discipline, including timeouts, often does work—with pre-teens. Once a kid is ten, eleven, twelve, however, they don’t work. And what then? By the logic of Caplan’s own argument, the behaviors the kid will engage in are largely outside of the ability of the parents to control. Then that sweet spot is gone; all your theories about how great your parenting is, how cool and relaxed you are, all the relative peace and happiness that reigns in your family, can come crashing to a halt. What then?

Telling parents to “just relax” at that point is not only pointless, it can be inappropriate and even cruel. What if they also have pre-teen children and the teenager is effectively taking the whole family emotionally and psychologically hostage? This is the stuff sit-coms (not to mention reality TV shows) are made out of, so common and pervasive and intractable can the problems be.

I am not suggesting that all teenagers are terrible, or that the prospect of having children is no longer a good idea because children inevitably become teenagers. On the contrary, my own belief is that the tumultuous teenage years are part of the natural course of a family’s development, and in any case I reject the whole notion of doing cost/benefit analyses to determine whether one should have children. My point is instead that if one believes one should engage in that kind of cost/benefit reasoning—as Caplan’s argument presumes and recommends—then one has to take a full reckoning, which will include those potentially terrible teenage years. Will that tip the balance? I am not sure. But it would certainly make it far less obvious than Caplan seems to believe that selfish reasons to have more kids clearly outweighs reasons not to.

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There is an interesting (and frustrating) piece by Glenn Thrush (Politico) entitled “President Obama’s Vision Problem.”  The core thrust: Obama is having a difficult time articulating and communicating a vision to the nation.  The question is why?

A few possible hypotheses emerge:

“Obama’s supporters say that the problem is almost entirely due to the economic crisis and the political climate, which have required the president to simultaneously espouse two seemingly contradictory strategies: the stimulus, which is aimed at creating jobs, and deficit reduction, which is likely to result in a major loss of government jobs.”

Eh…the commitment to deficit reduction is both quite recent and, one might argue, more a response to short term political forces.

“But Republicans say Obama lacks an overarching vision — as proven, they say, by his unwillingness to lead and reticence to lay out specific proposals, leaving the details of his own agenda to Congress.”

A former advisor to Hillary Clinton adds the following:

“I think it’s a mistake to say he ran on ideology in 2008,” the person said. “He ran on his biography. The problem now is that nobody cares about his biography anymore, so what does he fall back on?”

This seems a bit more accurate. Candidate Obama won on a simple proposition: “I am not George Bush.” He had a compelling personal story. Yes, there was the “Hope and Change” stuff, but even with the long grocery list of proposed changes, it was hard to find a unifying vision. Nonetheless, with strong majorities in both houses of Congress, much of the “Hope and Change” agenda was quickly jettisoned. Perhaps this was a product of excessive delegation to Congress; perhaps it was simply a reflection of the fact that the agenda items were embraced as part of a coalition-building strategy.

I noted that the piece was frustrating, in part, because there is this overwhelming sense that Americans are in need of leadership—they demand to be led somewhere, anywhere. I don’t doubt that this is true for many. And that might be more frightening than anything else in the article. But that is a theme that goes beyond the confines of this post Back to the vision thing:

Thrush quotes Drew Westen:

“I don’t personally know where he wants to take the country,” says Westen, who recently vented his disappointment in a New York Times op-ed. “If the people who are following these things closely can’t figure this out, imagine what the average person trying to make sense of him from speech to speech and news conference to news conference [is] thinking right now. … There’s no comparison when you compare his message to that of conservatives — which is basically don’t tax the job creators. I think that message is wrong, but at least it’s clear.”

 Question of the day: Can anyone articulate Obama’s core vision? If not, why not?

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It goes way beyond Merck.

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Today, Aug. 13, 2011.  Rick Perry enters the race, having artfully played the waiting game to swell expectations while avoiding scrutiny and debates.  He will be the darling of the Tea Party and the evangelical right (the real start to his campaign was his recent prayer meeting in Houston), and he will be palatable to fiscal hawks and corporate America.   In all likelihood, he will be seen by primary voters as saving the party from Romney.

But the thing is, Perry will be chewed up by Barak Obama and his swarm of media supporters.  For Barak Obama, the key to victory is a GOP candidate who makes independents nervous and causes them to either return to the Obama fold or stay home.

Rick Perry is just the guy Obama had in mind.

.

Addendum: Perry definitely makes the race more interesting now.  I think it quickly becomes a three person race between Bachmann, Perry and Romney, with Paul hanging around for entertainment.  Who does Perry go after the hardest—Bachmann, because she appeals to the same people he does and will drain off his votes, or Romney, because there is more of a contrast for him to highlight?

I did like this Perry line: “I will work every day to make Washington, D.C. as inconsequential in your lives as I can.”

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I was reading a little this week about the arguments that John Calhoun and others made in defense of slavery in the antebellum South.  What makes these arguments so repulsive is how the Southerners justified the abhorrent practice of slavery using the language of Lockean liberalism.  They talk of Northerners trying to deny them their liberty and how the defense of their property (read, slaves) was such a noble cause.  Of course that type of language goes back to before the Revolution, as African-Americans were denied freedom in a revolution based on the idea of liberty and self-evident truths.

This great perversion of liberal thought was snuffed out by the Civil War at a terrible price, though it took another century for blacks to obtain full civil rights (and women were often treated by law and custom as barely more than property in the 19th century).  Of course, no one today would refer to advocates of slavery as liberals.

Yet I’m struck by how much the perversion of liberalism by the likes of Calhoun foreshadowed the perversion of liberalism in the 20th century.  Just as Calhoun could use liberal rhetoric to dehumanize a whole race, allowing them to be held as property by others, John Rawls turned liberalism on its head to strip human beings of self-ownership, leaving us all owned by the collective, with the government as the benevolent overseer.   Just as a slaveholding society argued that  black slaves were not capable of civilization and, indeed, were happier and better off having their savage natures subdued by the system of slavery, Rawls argues that, were we all given the opportunity, we would freely choose to live in a world where our talents, efforts, skills, and other natural endowments—and any economic fruits that might come from them—would not belong to us, but would be used to improve the material standard of living of the worst off (regardless of their work and effort).  In Rawls’ conception we are so dehumanized that the civil rights we have are of little use to us.  We are merely slaves to the collective.

Between Calhoun and Rawls, we could point to other perversions of liberalism, primarily the erosion and eventually elimination of freedom of contract, once enshrined in the Constitution, but effectively shredded by a Supreme Court that was afraid of FDR and then, decades later, became dominated by jurists who came to see virtually no limit on the constraints that the federal government could make on the freedom of individuals to contract with each other over their property, the most important part of which was ownership of their own labor.  Again, isn’t this the essence of slavery, to not own one’s own labor, to not be able to sell it to another for a voluntarily agreed upon price?

With the 13-15th amendments and with the enfranchisement of women a half century later, we stood on the cusp of, potentially, the dawning of true liberalism as the governing philosophy of our nation.  Instead, we now live in an authoritarian welfare state where modest efforts to reign in the leviathan and its cruel powers are chided by the media elite as “extremist.”

I have a policy never to refer to the political left as “liberals.”  They don’t deserve it.  They have perverted and corrupted that fine word and have used it only to enslave.  Shame on them.

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Because of this and this:

Pressed about the constitutional basis for the individual mandate, former Massachusetts Gov. Mitt Romney got snippy, and argued that it wasn’t the U.S. Constitution that mattered. “Are you familiar with the Massachusetts constitution? I am,” he all but sneered before proceeding to note that states force people to do all sorts of things, like make children attend school. Why should buying health insurance be any different?

Romney’s right. His health insurance regulations were a bad idea, but they weren’t unconstitutional, since state legislatures have plenary power. Any presidential candidate who says different should be considered automatically disqualified for the office.

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There is an all too predicable Op-Ed in today’s NYT (“Cameron’s Broken Windows”) by Richard Sennett and Saskia Sassen. The core argument: the riots in London are a product of austerity and if the Tea Party has its way, the same riots may be heading our way.

According to the authors, “Mr. Cameron’s austerity program is the Tea Party’s dream come true” and the spending cuts “have led to the neglect and exclusion of many vulnerable, disaffected young people who are acting out violently and irresponsibly — driven by rage rather than an explicit political agenda.”

The authors conclude:

Britain’s current crisis should cause us to reflect on the fact that a smaller government can actually increase communal fear and diminish our quality of life. Is that a fate America wishes upon itself?

Obviously, there is any number of explanations one could develop for the riots in London.  One should not be surprised with the general argument and the suggestion that efforts to reduce the growth of federal spending could lead to a similar outcome in the United States (indeed, I would have been shocked if this argument did not emerge in the NYT).

While I think the argument is a bit tortured when addressing the current problems in London, it seems to me that the kind of changes necessary to address the long-term structural deficit and debt and the $54 trillion in unfunded liabilities could be quite destabilizing.  Of course, a failure to make the necessary reforms could also prove quite destabilizing, as generations are consigned to confiscatory tax levels, stagnant growth, and little hope of prosperity.

Is London our future?

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Our fellow blogger Elizabeth Price Foley’s contribution to a symposium on ObamaCare: here.  The opening certainly suggests it is worth a complete read:

Health reform supporters have labeled lawsuits challenging its constitutionality as silly, frivolous, and purely political. To paraphrase Shakespeare’s Hamlet, methinks they doth protest too much.

Two lower federal courts – in Virginia and Florida – have ruled the law unconstitutional. While neither the Fourth nor Eleventh Circuits have yet issued their opinions, it seems likely that at least one – most likely the Eleventh Circuit – will agree, creating a circuit split upon which certiorari will be granted by the Supreme Court.  How the Court will rule is anyone’s guess, but a deeply divided Court would not be surprising, given the ideological gap that exists on two critical principles raised by these lawsuits:  limited government and federalism. These principles aren’t just quaint, outdated relics. They are designed to protect individual liberty by restraining government’s innate tendency toward ever-expanding power.

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And kind of mob behavior is always a tricky thing to explain and often frightening.  We are heartened by images of mass protest against tyranny, and we are shocked by images of teenage thugs causing havoc.  Given that teenagers, on the best of days, are so heavily influenced by peers, their behavior is even more frightening, given its irrationality and unpredictability.

Writing in the Daily Beast, Rosemary Righter (sort of an appropriate name, incidentally), argues that lack of parenting is the root cause of the current mob violence in the UK.  She paints an image of indulged youth with BlackBerries in one hand and bricks in the other.  She also holds society to account for the overly-tentative initial response by the police, among whom “a generation of senior police officers has earned promotion by learning the language of social workers, of ‘racism issues’ and moral relativism clothed as cultural sensitivity.”

I think Righter’s call to “sort out these children of ours” is understandable, but how does a society steeped in moral relatavism do that?  I think that from an early age, kids can recognize right from wrong, and they can be taught simple moral reasoning—if there is someone with moral authority there to teach them.  But efforts of responsible adults are undermined as kids are relentlessy bombarded with media images and stories (including social networking sites) of self-indulgent youth and young adults behaving badly.

But I’m tempted to think that a lack of moral reasoning amongst these adolescent thugs is not the central problem.  The best question is not “why weren’t these kids taught better?” but, rather, “where are their parents now?”  True, there are lots of kids that are morally and intellectually mature enough not to engage in lawless, disrespectful behavior.  But there are many that are not (and often it is hard for parents to distinguish the difference).  What kids need more than moral reasoning are real constraints on their behavior.  These come from parents, schools, law enforcement, churches, and other institutions.

There have always been and always will be rebellious kids.  Liberal, morally permissive societies get more rebellion; authoritarian societies get less.  How does a liberal society both value freedom and autonomy yet keep its youth in line?  Simple.  By recognizing that adolescents are not morally mature adults and, therefore, they must be subject to constraints and be subject to authority of adults and adult institutions.   The scary thing is that even the best parents cannot exert moral authority all by themselves.  As Hillary says, it takes a village.  Sadly, most of our villages in the Western world are seriously screwed up.

I am someone who places a very high value on individual liberty, yet my wife and I run a proudly and profoundly authoritarian home.  We know where our teenagers are (which is usually at home), who they are with, and what they are doing.  We have passwords to their email and Facebook accounts and check them.  We take their cell phones whenever we want and read their text messages and call lists without warning.  There are no TVs or computers in any bedrooms.   They do not take friends into their bedrooms (especially those of the opposite sex) or have have friends over if we are not there.  There are no sleepovers, at home or at friends.  They have no expectation of privacy.  Anywhere.  There is no habeus corpus, and we need no probable cause to conduct searches or seizures.  In general, there is no due process and no freedom from self-incrimination or double jeopardy.

They drive cars they do not own only with our consent.  They have almost no personal property and have only limited discretion on how they spend money, regardless of whether they earned it or not.   We cannot look into their friends’ homes, but we are confident that reasonably similar regimes exist there as well.

We also give our children more autonomy and decision-making ability as they mature.  They get our trust when they earn our trust.  We depend on them and rely on them.  We expect them to contribute to family goals.  We are loving, forgiving, patient. We hold them and show them affection, even as they get older.  We tell them constantly that we love them.   We listen to them.  We let them make mistakes and bad choices.  We reward good choices and punish bad ones.  We are optimistic and encouraging.  We teach them of God and his expectations for them.  We give them ample “opportunities” to serve their fellow man.  They are happy, loved, respected, valued.  They think for themselves, but know that they cannot always act for themselves.

We know that we cannot determine how they turn out or the lives they lead, but we also know we can give them a good start, even though we, ourselves, are far from perfect.    We know that to love them is to teach them, not indulge them.  They know right and wrong.  They contribute.  They serve.  They are honest.  Yes, they screw up, and we discipline them and forgive them.

What do we call this draconian, authoritarian regime?  We call it parenthood.

Unfortunately, that is not what is on display on the streets of London.

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In this third and final of the series on Ha Joon Chang’s critique of ‘free market economics’ I examine his account of ‘bounded rationality’ and the case for greater economic regulation. As in much of his work the policy conclusions which Chang draws simply do not follow from his premises.

In chapters 16 and 19 of 23 Three Things They Don’t Tell You About Capitalism, Chang asserts that free market economics rests on the view that actors are fully rational and that individuals always know what is in their best interests when deciding to buy, sell and invest. Drawing on Herbert Simon he argues that people often do not know what they are doing because the limitations of the human brain make the world too complex to fully understand. Thus, there are often advantages from restricting individual choice in order to reduce the complexity of the problems people face. One way to do this is to rely on administrative hierarchies such as firms, which operate on internal command and control procedures. The existence of corporate firms which ‘plan’ their activities Chang says demonstrates that so called ‘free market economies’ are to a significant extent ‘planned’ – and that the existence of such hierarchies demonstrates that ‘planning’ is often superior to more decentralised structures. Similarly, rules and regulations that limit choice can result in better decisions. Just as consumers who have limited attention spans often adopt routinised decisions – such as buying well known brands rather than risk unknown products – so rules and regulations can reduce the complexity of the choices people face and limit the things that may go wrong. From this Chang concludes that we should see greater government regulation not as an inhibitor of economic growth but as a way of reducing uncertainty. In the specific context of financial markets he argues that to avoid future crises complex financial instruments should be banned ‘unless we fully understand their workings and their effects on the rest of the financial sector and … on the rest of the economy’ (p.177).

Reading Chang’s book you would never know that free market economists such as Coase , Hayek and Vernon Smith have done more than anyone to examine bounded rationality and the role of hierarchy and rules as social ordering mechanisms. Granted, 23 Things is a semi-popular work not a purely academic analysis – but an honest attempt to convey what ‘free market economics’ is about would have made some reference to these writers contribution – assuming Chang understands it.

Hierarchy and rules have a role to play in any economy – but under bounded rationality there is uncertainty about what types and levels of hierarchy and which rules are desirable. Chang seems oblivious to the role that market competition plays in determining how much hierarchy, and what rules we should have. Having cited the extent of organisational hierarchy witnessed in firms he states that, ‘The question is not whether to plan or not. It is what the appropriate levels and forms of planning are for different activities,’ (p:209). True – but these words could have come straight from the mouth of Ronald Coase – a free market economist who won a Nobel Prize for work on the theory of the firm. In his Nobel address Coase notes:

“To have an efficient economic system it is necessary not only to have markets but also areas of planning within organisations of the appropriate size. What this mix should be we find as a result of competition,” (716).*

Unlike Chang, Coase recognises that the type of planning that goes on in markets is categorically different to governmental planning because – unless particular organisations are granted regulatory privileges by the state (of the sort Chang favours) – it is arrived at via voluntary cooperation. Freedom of contract enables people to enter into a range of competing institutional structures and to discover through a process of evolutionary learning which are best suited to different tasks. Big firms, small firms, owner-managed firms, joint stock companies, partnerships, mutuals and cooperatives all compete for workers, sales and investment capital. By contrast, government planning is imposed on all by the force of law. People cannot – save for leaving their particular country- exit from government plans. The scope for organisational learning is thus diminished and the risks of failure should fallible politicians and planners make mistakes, are correspondingly more far-reaching.

A similar argument applies in the case of social rules. Hayek and Vernon Smith argue that people rely on rules in order to overcome the limitations posed by their ignorance. But unlike Chang, they emphasise that these rules should, wherever possible, be voluntarily subscribed to and subject to competition from potentially better adapted alternatives. Voluntary conventions and private codes of conduct are typically enforced through reputation and ostracism rather than direct coercion. Those who wish to challenge a rule can ‘break’ the relevant convention without needing legal approval –and if successful they may provide role models that can be imitated. The role of government, therefore, should be limited to providing the basic protections, such as security of property and contract law, which give the maximum scope for people to experiment with their own private rules of conduct. The greater the extent of centrally imposed regulation the less scope there will be for decentralised evolution, the more difficult it will be to remove maladapted rules, and the greater the danger of a ‘systemic failure’ should the wrong rules be chosen.

Contra Chang the major lesson of the financial crisis is not the need for more regulation- but for greater competition between different forms of regulation in order to reduce the risks arising from the bounded rationality of regulators. As Jeffrey Friedman has shown in some detail the problems that afflicted the financial sector arose in large part from the inability of policy-makers to comprehend the combined effects of the maze of interconnecting regulations which have accumulated over the last fifty years. Regulators are as subject to bounded rationality as anyone else but with their unique powers of coercion and immunity from competition they have the capacity to do enormously more harm. From the decision of monopoly central banks to keep interest rates at excessively low levels; to the regulatory inducement of government-backed mortgage companies to relax lending requirements for low income families; to internationally enforced capital regulations which induced banks to securitize risky mortgages; the creation of legally protected monopolies in the credit rating business which prevented alternative ratings methodologies from arising; and the creation of deposit insurance and implicit bail out guarantees which have reduced incentives to avoid excessive risk, coercive government rules have induced all manner of disastrous unintended consequences.

With his proposals to ban complex financial products Chang seems unable to recognise that given appropriate background incentives boundedly rational actors in markets (whether individuals or institutions) can adopt an easy ‘rule of thumb’ when faced with decision-making complexity – ‘if you don’t understand it, then don’t buy it’. This is not an option they face when dealing with centrally imposed regulations and mandates. If the financial crisis has taught us anything it is that the public needs protection from regulators and central bankers who don’t understand what they are doing. If we are to reduce the risk of future crises then we should limit the scope for governments to impose new rules and regulations unless they can demonstrate what these consequences will be.

* Coase, R.H. (1992) The Institutional Structure of Production, American Economic Review, 82 (4): 713-719.

** Friedman, J. (2009) A Crisis of Politics not of Economics: Complexity, Ignorance and Policy Failure, Critical Review, 21 (2-3): 127-183.

This article has now been re-published in the collection ‘What Caused the Financial Crisis’ (2011): University of Pennsylvania Press.

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There’s been a great deal of debate about the “root causes” of the recent violence in England. Unfortunately, some British and American commentators have tried to score partisan political points by arguing that government cuts to things like “youth programs” are ultimately responsible for the violence. Never mind that the thugs doing the looting and random killings have never expressed an articulate political agenda.

Now there is survey evidence showing that the vast majority of British voters blame either “criminal behaviour” or “gang culture” as the causes of the violence (68% of all voters). Only 8% blame “government cuts.” The other explanations on offer – unemployment, poor policing, and racial tensions – garner even less support. Even 50% of Labour voters agree that either criminal behaviour or gang culture is the main cause of the violence, while only 16% of Labour voters blame Conservative-Liberal Democratic spending cuts.

Of course, saying that “criminal behaviour” is the cause of the riots is a bit like saying that bribery is the cause of corruption. By definition, what is going on is criminal behavior. Nevertheless, what most respondents who picked this option are probably thinking is that the criminals participating in the violence are doing it for self-interested motives, either loot or the fun they get out of vandalism and murder. So then the question becomes: why have people with this mentality been able to rampage for so long? The political science literature on how temporal signals solve coordination games may help us here. The shooting of Mark Duggan six days ago triggered protests and sent a signal to would-be troublemakers that police would have their hands full. As police stood back and appeared to allow the violence to rage, it quickly spread. Individual criminals apparently counted on low risk of being caught. Last night’s surge of police onto the streets seems to have changed that calculus and begun to quell the violence.

But the coordination explanation only tells us why the violence happened now, not why it was possible to begin with. For my money, one of the best explanations comes from Brendan O’Neill, who argues that “welfare-state mobs” have been created by public policies that encourage irresponsibility and social atomization. As Guido Fawkes points out, in Tottenham, the neighborhood where the violence started, as many as 80% of families are fatherless. Welfare policies that reward women for having more children, regardless of whether a father is around, surely deserve some of the blame for that situation, as do lax welfare eligibility rules that allow able-bodied but idle young men to live off the taxpayer.

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I recall a wonderful moment following the 2008 elections when a student left my seminar in tears: “Finally, things are going to be different!” With tears streaming down his face, he elaborated: “No more wars, no more GITMO, no more politics of division.” He was so cute I almost wanted to give him a hug. I refrained, knowing that the future would bring more tears for this gentle soul, albeit not tears of joy.

The record on the wars, GITMO and so many other things have been a source of great disappointment for supporters. What of the new civility? The politics of division? An interesting piece by Ben Smith and Jonathan Martin (Politico) explores the Obama’s strategy for 2012. The money quote:

[Obama’s] aides are increasingly resigned to running for re-election in a glum nation. And so the candidate who ran on “hope” in 2008 has little choice four years later but to run a slashing, personal campaign aimed at disqualifying his likeliest opponent.

In a move that will make some Democrats shudder, Obama’s high command has even studied President Bush’s 2004 takedown of Sen. John F. Kerry, a senior campaign adviser told POLITICO, for clues on how a president with middling approval ratings can defeat a challenger.

“Unless things change and Obama can run on accomplishments, he will have to kill Romney,” said a prominent Democratic strategist aligned with the White House.

The strategy, according to Smith and Martin, involves portraying “the public Romney as inauthentic, unprincipled and, in a word used repeatedly by Obama’s advisers in about a dozen interviews, ‘weird.’” There will also be an effort to frame his business consulting work as focused on destroying jobs to enrich himself.

Alas, the new civility looks like the old politics of division.  The more things change…

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Tall tales in the market

So, apparently the downgrade of US debt by the S&P has led to the market tanking.  Two problems with this story:

1. It was tanking before the downgrade.

2. Apparently people are now so scared of US government bonds that they are pouring money into…you guessed it…US government bonds.

My usual advice applies here.  When some says “the market is rising/falling because…..,” stop listening at the because.

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I like Michael Barone’s column today on “earned success” (an Arthur Brooks term).  This is the idea that Americans don’t want to be given money as much as they want the opportunity to earn success.  This is why Wall Street bailouts to people who fleeced investors while bearing no risk themselves or programs to support people with mortgages they never should have been taken out in the first place generate so much anger.

I think this hits the nail on the head.  I would add to this that Americans are also charitable.   They value safety net programs that catch people who, through no fault of their own, need help.  I would argue that most of those programs should be private efforts, not government ones, but there is a strong sentiment to help those who need help in either case.  Pundits cry that Tea Partiers want to shred the safety net, which is silly.  I think what they want to shred is a system that rewards those with political power at the expense of those without much power.

The left fundamentally misunderstands these sentiments.  They think that people want government to guarantee outcomes—you get a house, you get a job, you get health care, you get to send your kids to college, etc., etc.  This is partly the fault of economists who emphasize material outcomes above all else, but more the fault of ideologies rooted in fault premises about human values.

The biggest culprits promoting these values are the philosopher John Rawls and his followers.  Rawls argued that put behind a veil of ignorance where we do not know our situation of birth, a reasonable person (by which he means a person who agrees with him) would freely choose a regime that redistributed resources to the least well off.  In the Rawlsian world, effort and responsibility, as well as talents, result from the circumstances of birth and, hence, are owned by the collective, not the individual.  Indeed, the only real self-ownership Rawls recognizes is the right to agree with Rawls.

The political left doesn’t speak of Rawls the way the academic left does, but they are infused with the Rawlsian worldview.  By this I mean not only the desire for redistribution and egalitarian outcomes, but the idea that only economic outcomes matter, not effort or responsibility.  A man’s home becomes his castle when he earns that home.  Generations of immigrants came to this country and often lived, for a time, in terrible, squalid environments.  And generations of immigrant families worked their way out of those conditions.  It was only when government started providing housing and made able-bodied people wards of the state that the social fabric disintegrated and we institutionalized the underclass.  To divorce effort from reward is to debase an important aspect of what makes us human.

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The response to the S&P downgrade of the US credit rating has been quite interesting thus far. Those who for several weeks spoke in apocalyptic terms about what would happen if the US defaulted on its debt are now filled with shock: “A credit rating should reflect the probability of default, and the probability of the US defaulting on its debt is zero.”  Hmmm….

Beyond this 180 degree pivot, another response has been to shoot the messenger. As Austin Goolsbee, outgoing CEA Chair, stated:

“They made a $2 trillion math error, and they didn’t check their work.”

This line has been repeated like a mantra by members and supporters of the administration (is anyone noting a pattern in White House rhetoric? A few weeks ago, the President comparing Congress to his children and their homework and later making comments about “eating our peas?”)

Economist John Taylor has an interesting piece that clarifies things a bit.  Two key points:

First: the dispute did not arise from a simple arithmetic problem (e.g., “S&P failing to check their work”) but in a dispute over basic assumptions.  As Professor Taylor explains:

“if you examine the details of the S&P–Treasury–White House dispute, rather than a “math error” you will find what is better described as a “difference of opinion” about a forecast for future government spending.  In other words, the issue is about the appropriate “baseline” for government spending in the absence of more actions. Since when did different views or assumptions about the future become a math error?

In their original draft report, S&P evidently assumed that discretionary government spending would grow by about 5 percent per year over the next 10 years if no further action were taken (beyond the Budget Control Act of 2011). In the final draft, at the urging of the Treasury, they assumed that discretionary spending would grow at about 2.5 percent per year if no further actions were taken.  The first assumption leads to a higher level of debt than the second.  Over 10 years the difference is about $2 trillion.”

It should be noted that the Treasury concedes this point in its release on the “S&P’s $2 Trillion Mistake.”

“The error came about because S&P took the amount of deficit reduction CBO calculated from the Budget Control Act and applied it to the wrong starting point, or ‘baseline.’ Specifically, CBO calculated that the Budget Control Act, including its discretionary caps, would save $2.1 trillion relative to a “baseline” in which current discretionary funding levels grow with inflation.”

Second, as Taylor notes and the Treasury concedes in the above quote, the disagreement over assumptions revolved on whether to adopt the CBO’s alternative fiscal scenario, the scenario that the CBO and many others view as being far more credible than the “extended baseline scenario.”

Ultimately, the math error seems to have come down to a difference in opinion regarding long-range scenarios. Elected officials—insert gasp of surprise here—tend toward Rosie Scenario. Those who are not nearly as interested in spinning and framing tend toward more realistic scenarios.

For our elected officials who combine the “math error” with statements about S&P’s past errors in assessing the risk of the mortgage backed securities in the years leading up to the financial collapse, one quick reminder: S&P was never indicted for being too pessimistic—quite the opposite. If anything, it seemed to understate the magnitude of the risks.

Given the $54 trillion+ in unfunded liabilities currently on our books, it might be difficult to overstate risk. If you have any doubts, take a few minutes and read the most recent CBO Long-Term Budget

 

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It’s the economy, stupid!  That is the political slogan made famous during Clinton’s successful attempt to convince enough voters that the economy in 1992 was really bad when it really wasn’t.

But what is the economy anyway?  What does it mean that the economy is weak?  Many are pointing to the persistently high unemployment numbers.  But why?  High unemployment is definitely politically relevant and morally relevant.  The unemployed are dominantly unskilled, poorly educated workers that are getting left behind–many of whom would have been left behind even without the financial crises and its ensuing consequences.  Why, in an economic sense, do we care about them?

High unemployment might indicate a depressed economy, but there are good reasons why it might not, too.  When new technologies develop, old ones get left behind.  The fact is that many of our unskilled workers are, pardon the crass comparison, like the stacks of old electronic typewriters that are piled up in junkyards around the country.   The modern economy doesn’t need them.  There is still demand for unskilled labor, but it is limited, especially when it can be obtained internationally for much lower wages.  Many people are unemployed because there is little economic use for what they can do.  This is a human tragedy, perhaps a moral tragedy, but not an economic one.

Some advocates of free markets mistakenly assume that just because capitalism creates growth that it will distribute the fruits of that growth to everyone who wants to participate in the system.  But capitalism only gives income to people who own something useful—meaning capital, including human capital.  If you don’t have physical capital, financial capital or some type of productive human capital, capitalism doesn’t give you anything.  It’s harsh, but true.

The second reason unemployment might not indicate a poorly performing economy is that labor markets might not be working because of distortionary government policies, things that governments do to raise labor costs above the productive value of labor.  Minimum wages are an example, as are mandated employment costs, including payroll taxes and regulations that make hiring workers expensive.  Casey Mulligan at the University of Chicago has argued frequently in recent years that increases in the minimum wage over the past several years have contributed significantly to unemployment.  Few are listening to him.  Extensions of unemployment insurance operates on the supply side of the market, lowering labor supply and increasing the unemployment rate.

Unemployment exists because there is a surplus in the labor market.  If you remember your Econ 101, the way that surpluses are dealt with is by lowering prices, which in the labor market are wages (a surplus in the labor market and unemployment are not exactly the same thing, but they are related).   Since labor markets aren’t clearing, what policymakers need to be doing if they care about unemployment is to be addressing policies that are keeping wages higher than they need to be.  The Keynesian fantasy is that government increases labor demand by spending and hiring workers, but those dollars have to be taken from people, which causes them to reduce their demand as government is increasing its spending.  Whether they do so by taxing or borrowing (and taxing later) is of little consequence.  So, policymakers should be thinking about how we can lower wages.  Now there is a politically winning strategy!

Our per-capita economic production is much higher than it was in the heydey of the Clinton years when, according to lefties, the economy was so awesome.  Firms seek to maximize profits, and profits across the economy are sky high lately.  The economy is better than ever.  Even within the shackles of excessive regulation, American industry continues to perform, getting more product per worker and per unit of capital than ever before.   Growth is not high for a number of reasons, but economic commentators obsess far to much about growth and forget how much we have grown and where we are (just because there is a higher mountaintop doesn’t mean the one we are on is so bad).  Put another way, even if we never grew again, economic performance is better than ever before.  And, anyway,  we will continue grow, if in fits and starts.  (I should write another post asking whether we should care about economic growth?)

Truth be told, I care a lot about unemployment.  I care about the people who are struggling making ends meat.  I know and love some of them.  I would argue that we should, as a nation, care about unemployment.  We should eliminate the government-induced market distortions that creates it, for starters.

But to care about unemployed people is different than caring about unemployment as an economic performance measure.  When it comes to how the economy is doing, it just doesn’t matter that much.

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Chasing Success

Warning: today is self-promotion day.

For a few years I have been part of a team of researchers studying foreign aid.  Part of this project has been the development of the world’s most comprehensive database on development assistance, AidData.  In a forthcoming paper in World Development I take a look at the question of whether foreign aid targeted at the health sector actually improves health.  This is done using the most basic and important health indicator: mortality  (I look at life expectancy, child mortality, and infant mortality).

Since I approached this project with a healthy degree of skepticism about the effectiveness of aid, I wanted to avoid the problem of letting my expectations bias my conclusions.  Therefore, rather than starting with what I thought was the best empirical method, I had the following plan.  I’ll toss out the rule book and do anything I can to come up with a positive result.  Later I would see if such a positive finding was robust or not.

But I failed.  No matter how I sliced and diced, excluded and included, fudged and smudged, it just wasn’t there.  Development assistant for health (DAH) just had no effect on mortality.  I’m not talking about results that were statistically insignificant; I’m talking about precisely estimated effects indistinguishable from zero.   If anything, the simplest OLS models tended to imply that DAH actually raised mortality in recipient countries.  In the paper, you can see results from multitudes of regressions, but they all tell essentially the same story: zero.  No effect.

The graph below is not appropriate for drawing conclusions about the effects of DAH (that is what careful longitudinal statistical analysis is for), but it tells a true story.  On the X-axis is the level of aid; on the Y-axis is the change in mortality from 1975-2005.   If you were to fit a regression line to these points, it would be flat.  Most countries had significant reductions in infant mortality over the period (that is the good news).  But countries receiving high levels of aid had no more improvement than countries with low aid receipt.

I want to stress that I’m not saying that public health programs in poor countries are ineffective.  When rehydration kits get delivered, death from diarrheal diseases will drop; when needles full of vaccine get stuck into kids, they don’t get the terrible diseases that would otherwise kill them; when drinking water is cleaned up, vast improvements in health occurs.  When public health measures are implemented in a community, they work.  We know how to do this.  There is no mystery.

But when foreign aid dollars are allocated in Washington or Paris or Stockholm to achieve these ends, what happens?  That is a complicated question, but what my and other research shows is that mortality does not fall.  I don”t have the data or analysis to identify the culprits in this story.  I can only say that it hasn’t worked.  I find some evidence in the data that particular kids of aid programs (HIV/AIDS funding, family planning resources, infectious disease control) are having some positive effect, but the magnitude of those effects are tiny.  They suggest that the general direction that organizations like the Gates Foundation are taking make sense, but, overall, health aid isn’t doing the job.

What does improve health is economic growth.  This is clear from the econometric evidence I present and, frankly, from just thinking a little about world history.  There are no rich countries with high infant mortality.  Even authoritarian regimes improve their life expectancy as they grow.  Even if China continues to be the wretched, totalitarian nightmare that it is today, economic growth in China will continue to improve health outcomes.

But another interesting finding emerges from this paper.  Increases in aid do not lead to subsequent reductions in mortality.  However, when mortality falls for other reasons, DAH skyrockets.  In other words, the development agencies are chasing success, not causing it.  They see where conditions are improving and respond by pumping aid into those countries.  Sort of like a dog chasing its tail.

I’m not an enemy of foreign aid in principle (especially emergency relief in humanitarian crises), but maybe it is just one of those things that governments can’t do effectively because they are governments [insert favorite public choice argument here]I don’t know.  Some would say that my analysis doesn’t find any effect simply because the overall level of foreign aid has been too small.  If, the argument goes, we were to significantly increase aid, then we would start to see the effects.  Maybe, but where is the evidence for that?

When I go to conferences, I usually go around to all the different booths to see what kind of free stuff I can score.  Pens, key chains, do-dads for the kids (hey, it’s more productive than listening to the typical scholarly panel!).   I’ve never taken in such a haul as I did when I presented these results awhile back at the meetings of the Global Health Council in Wahsington, DC.  (After my presentation I was told that my paper was “dangerous,” according to one.  “What would happen if policymakers were to get ahold of them?” another audience member asked.)  The booths were the glossiest, costliest ones I’d ever seen at a conference.  Most of the displays were by development NGOs, which are legion.  Indeed, the point struck home to me that there is a vast industry of development professionals—rich westerners, largely— living off of foreign aid.   And those are the “good guys.”  What happens when your typical African tyrant gets his hands on a little development assistance?

The sad thing is that what that poor countries most need are the things that foster economic growth: freedom, property rights, low tax rates, limited regulation, government transparency, rule of law, and the ability to trade freely on world markets.  These are things money can’t buy.  But instead, we give them money, which can be used to buy all sorts of terrible things in addition to good ones.

[Disclosure: This research was conducted with funds from the National Science Foundation, the Gates Foundation, and the Hewlett Foundation.  All conclusions are my own.  A paper describing more about current debates on foreign aid, the development of AidData, and an introduction to the special issue of World Development based on papers presented at a conference at Oxford University in 2010 (in which my paper appears) can be found here.]

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