Wednesday, December 1, 2010

The Coming Post-Job Economy

According to The St. Louis Fed, American manufacturing employment, as a percentage of total employment, has been falling for more than sixty years.


Because the American economy grew so rapidly after WWII, manufacturing employment here grew, in absolute numbers, into the 1970’s. In more recent years, however, the decline has been both absolute and relative, and there has been a tremendous increase in the number of jobs created in low-wage countries such as Mexico, China, and India. There is a natural tendency to attribute this shift to competition from low-wage workers. Some of it is, but the problem is not that simple.

American jobs are lost to the cheapest alternative to American labor. Sometimes, that alternative is labor somewhere else; sometimes it’s machinery right here. Domestic labor, foreign labor, and automation compete for the opportunity to produce things for American consumption. Unless American labor is the cheapest alternative, the jobs will be lost to one of the alternatives or the other. “Blaming” only one of those competitors sets us on the wrong path to dealing with our employment woes. If we could eliminate all competition from low wages, we would still have to compete with the machines.

The rise of automation can be seen in the way the loss of manufacturing jobs has affected manufacturing output. Over the past twenty-five years, American manufacturing production actually increased, at least until the 2008 recession hit.

Graph: Manufacturing Sector: Output


The growth has not been spectacular, but clearly, the volume of things our people make has not decreased nearly as fast as the number of our people employed in making them. Free-traders argue from these graphs that automation accounts for most of our job losses (since the volume of outputs has grown) and automation is a good thing because it frees up labor to do other things. I don’t buy either the inference or the platitude.

Clearly, automation has not displaced workers in every industry that has lost jobs. If automation accounted for all of the job loss in America, we’d still be making the same things we were making before, but with fewer workers. Instead, many of those things are being made by cheaper workers somewhere else, and we are making different things, things that rely so heavily on capital and technology to produce that labor is not a factor in their cost. Automation has not displaced workers; it has simply filled the trade vacuum created by poorer countries’ comparative advantage in labor services.

I do think, though, that many of the jobs lost to cheap labor would have been lost to automation if the cheap labor had not been available. If cheaper people had not come along to make the things we used to make, cheaper machines might well have done so. If that’s the case, the problem we face goes well beyond leveling the international playing field.

I do not mean to minimize the effect of cheap foreign labor on our economy. Globalization has eliminated natural barriers between labor pools, creating a trade in labor on a scale probably not seen since the days of slavery.

Labor is a Special Commodity

In David Ricardo’s classic example of comparative advantage, the English made cloth and the Portuguese made wine; in effect, they were trading English rainfall for Portuguese sunshine, capturing economies of scale with respect to each of those resources. Optimizing the use of these non-labor-resources enabled labor in each trading partner to flow to the local industry where it could add the most value. It may have taken a long time for the benefits of trade to “trickle down” to the average worker, but trade created jobs in both countries.

In contrast, much modern trade, especially US trade with Asia, is built on sharing the latter’s human resources, i.e., cheap foreign labor. All of the ordinary implications of trade still hold: prices are lower everywhere, and (first order) aggregate wealth is greater than without the trade. But whereas the cloth/wine trade created jobs in both partners’ export sectors, the man-made/machine-made trade creates few jobs in the high-wage country’s export industries. That sector, by hypothesis, requires fewer people, which means that former manufacturing workers have to find work making something that the high-wage country neither imports nor exports. That’d be sales, personal services and construction labor.

Free traders argue that we are endlessly creative, that we will think of things to pay each other to do that can only be done locally. All trade-based dislocations, they say, require adjustments. In making this argument, they offer an amazing example of chutzpah, citing as a reason for optimism the statistic that we have the most productive workers in the world. Look, they say, at how our productivity has grown:

But this chart can be inferred from the earlier ones: if we are making more things by employing fewer people, the ones still working in manufacturing must be very productive. This type of productivity says nothing about the displaced workers themselves other than that they were less productive than the machines and foreigners who replaced them. Someone has to push the buttons at the robotic factory. That person’s “productivity” does not reflect the skills of the American workforce. All it shows is that, consistent with Ricardo’s observation, the trading partner with a comparative advantage in capital (that’d be us) will trade capital-intensive goods for labor-intensive goods, and vice versa.

Such trade may free up people in the capital-intensive economy to do local work, but it does not create jobs for them in export industries. Every other form of trade creates jobs, but trade for labor does not. That’s why labor is a special commodity and why trade creates the current unemployment problem instead of solving it.

Why all else fails

The capital intensity of our manufacturing sector explains why traditional (Keynesian) efforts to stimulate the economy cannot reduce unemployment here.

Good, old fashioned fiscal stimulus does nothing for our local economy because stimulus spending is about the multiplier – the tendency of spending to create business for suppliers of suppliers of suppliers ad infinitum. Most of those suppliers are assumed to employ people in the economy where the money is spent. Today, however, the supply chain always leads abroad. When we say that something will have an effect on “the economy,” the economy we talking about is global. If we’re importing a lot of labor-intensive goods, we can expect our stimulus to create jobs where those imports are made.

Take a look at our trade with China for 2010, and see how well our stimulus is “working” – for China:

All figures are in millions of U.S. dollars on a nominal basis, not seasonally adjusted unless otherwise specified.

January 2010 6,888.8 25,185.1 -18,296.3
February 2010 6,855.1 23,363.8 -16,508.8
March 2010 7,403.6 24,300.2 -16,896.6
April 2010 6,591.2 25,905.7 -19,314.5
May 2010 6,752.7 29,036.8 -22,284.1
June 2010 6,715.0 32,866.5 -26,151.5
July 2010 7,344.7 33,260.0 -25,915.3
August 2010 7,253.5 35,288.5 -28,035.0
September 2010 7,168.2 34,999.2 -27,830.9
TOTAL 62,972.8 264,205.9 -201,233.1

  • 'TOTAL' may not add due to rounding.
  • Table reflects only those months for which there was trade.
  • SOURCE: U.S. Census Bureau, Foreign Trade Division, Data Dissemination Branch, Washington, D.C. 20233

Spending in the US by anyone – Americans, American governments, or the Chinese sovereign wealth fund – stimulates the economy in China (and, of course, in OPEC’s oilfields, but this post is long enough without dragging them into it). The Chinese recycle our money by lending it to us at low interest rates, but when we spend it here, we spend too much of it on imports, if not on the first go-round, then when the multiplier kicks in and the guy with the new job buys a flat screen TV.

Balancing trade – important as that may be – won’t solve our unemployment problem either. Even if our exports kept pace with our imports, the hours worked would not. By definition, a capital intensive trading partner needs fewer workers than a labor-intensive one to produce the same value of outputs.

By all means, we should try to balance our trade and to end Chinese mercantilist currency manipulation. The trade deficit transfers national wealth, which has strategic implications, and it distorts our capital markets with disastrous consequences. But doing so will not bring back a level of manufacturing employment in the US anything like that of twenty years ago, and any politician who promises that it will do so is doomed to disappoint.

What about infrastructure projects? In boom periods, labor isn’t available to work on the infrastructure, so there is plenty to do when things get tough. But infrastructure work alone is not enough. It might be enough if the multiplier effect were great, but today, it isn’t. Like reducing our trade deficit, we need to enhance our infrastructure, and we should have no qualms about borrowing to do it, but it will only create the direct jobs required to do the actual work. The multiplier will have too much of its effect abroad.

Historically, new industries have sprung up to take advantage of abundant labor. But that was when there was no hole in the employment bucket. If an American had a bright idea, he hired Americans to execute it. Now, we invent it here and build it there. It is in the nature of globalized trade that if an invention generates jobs, it generates them where the labor is cheap. Exceptions exist for things that can only be done locally, but we cannot build an economy on outliers. Every logical avenue ends at the capital intensity of domestic manufacturing. There may always be something new for actual humans to make, but there is no reason to believe under current conditions that those people will be Americans.

So, for now, the jobs that remain here – jobs outside the manufacturing sector, which has either been outsourced our automated – are in the personal service sector, where productivity is much lower than in manufacturing. Those jobs pay lower wages than US manufacturing jobs, a problem exacerbated by the oversupply of people available to do them. Training may put people back to work at these jobs, but it won’t send them and their families to Disney World.

And so we come to the place where classical economic theory meets political reality. The theory says that in the long run, we will adjust. We will find something to do. How long that will take, and with what alterations in our way of life are questions to which the theory is wholly indifferent. We cannot logically argue against the eventual outcome if the system is given enough time to sort things out. But Keynes wasn’t kidding when he said that in the long run we are all dead. There is no guaranty that we will, or should, have the patience to let the system sort things out. The system will not sort things out if social unrest destroys our democracy before it does.

When all else fails…

Having ruled out the usual job-creating suspects, we need to think outside the box. I think that means making our economic life as capital intensive as our manufacturing, to require only as much work from people as the economy has good work to offer, and to find away to share the benefits of the work others and machines are willing to do.

The recommendation that we not have to work all our lives to live all our lives does not imply that talents and energy should be wasted. But it does recognize that to get back to anything like full employment, we will have to put some very square pegs into some very round holes. Specifically, would-be manufacturing workers will have to become healthcare workers. There are other things that can only be done locally – construction and oil-drilling, for example – but the opportunities are limited. What cheap foreign labor has freed us up to do, and what we need lots of, is healthcare. But it seems fair to at least ask how well the actual human resources that America has to offer match up with these jobs that Americans need done.

The issue is fraught with gender politics. The only thing we need more of that lends itself to male proclivities is military service. It’s never a good thing when a country’s outlet for its excess testosterone is the battlefield. Temporarily, we are in the opposite situation: too many wars and not enough fighters. But if we can get past Iraq and Afghanistan, we really don’t want war to be the most attractive option for our young men.

In contrast, healthcare is essentially a feminine pursuit. Doctors have historically been men, but that’s changing, and a political and social consensus exists that women can do the job as well as men. I suppose there’s a certain amount of machismo in the operating room, but, again, the issue isn’t super-surgeons; it’s “ordinary” physicians and nurses and aides and technicians – jobs that there are a lot of, jobs whose salaries make the future of Medicare so daunting. Not having to manufacture has freed “us” up to do these jobs. What’s not clear, though, is exactly who will do them, with what implications for our social structure.

Toward a Post-Job Economy

Maybe we need to go back to the premise behind our jobs-based economy. At the end of the day, using jobs to allocate goods and services is simply one technology for doing so. There are others. Capitalism allocates goods and services to those who risk their capital. Communism allocates goods and services based on need. As a practical matter, we cannot all be capitalists: nothing would get done if no one labors. And if money needn’t be earned, nothing gets done either. So Jobs are how we make things, and jobs are how we get things.

The key, I think, is to recognize that our manufacturing sector will be permanently capital intensive. It may be capital intensive now because foreign labor is cheap, but even if foreign labor becomes more expensive, our inventors will step up and take their place. We are already seeing a concentration of wealth in the hands of those who own highly productive businesses. That concentration is unhealthy, and I believe we need to divert the flow of some of that wealth to people who have worked a “full” career, as adjusted to reflect the capital intensity of our industry.

Obviously, this is radical medicine, as it denies the ethical supremacy of the market and the associated degree of autonomy in the business sector. The anti-trust laws offer a good intellectual model for tampering with the “free” market. Those laws interfere tremendously in the unfettered activities of business titans. Why not allow a cartel? Lots of economies of scale, no destructive price wars, one-stop shopping. And yet, history teaches that the corrupting effect of power trumps the efficiencies of focus. Competition is good for consumers, but it is not good for monopolists. Competition requires meddling in the way business is done. So we meddle.

The same arguments apply to the concentration of wealth resulting from a capital-intensive economy. In a labor-intensive industry, the assets go home at night, and nobody owns them. In a capital-intensive industry, the assets are turned off at night (sometimes), and as few as one person may own them. So long as we have a mix of industry types, the workers do all right. But when workers, as a group, have nothing to sell, because foreigners or machines are under-pricing them, ownership of manufacturing assets shifts to the few who own capital-intensive businesses, and that is not a politically acceptable equilibrium.

Sadly, diagnosis does not always result in useful prescription. Marx understood the ills of capitalism quite well, but he didn’t have clue how to set up a better arrangement. The Europeans are in a mess now because they tried to do what I’m saying must be done – pay people not to work. They have proved either that it can’t be done, or that it can’t be done the way they tried to do it. I’m not sure what happens in France when they raise the early retirement age. If people work longer, other people won’t work at all, unless the austerity creates jobs, which is not how such things usually play out.

I do not know enough about the capital-intensity or concentration of wealth in Europe to draw strong inferences from those countries’ woes. I do understand, though, that a government can promise to much and tax too heavily. Still, if we are to allow trade or automation, we will have a capital-intensive economy, which means that we must do something about the concentration of wealth, and we must either find a way for low-productivity local jobs to pay what high-productivity jobs pay or for jobs to not be the way goods and services are allocated in our economy.

One way to reduce unemployment is to restore the one-earner family as the national business model. That would cut the (paid) adult workforce almost in half. The one-earner family has advantages over simply shortening working lives to thin the workforce: it allows people to work longer, which means that talents and skills are not wasted in early retirement, and it frees up one member of the family to rear the children, which is not a bad thing. But that sounds like trying to put Jeannie back in the bottle even before we look at the job the one earner would be doing. If that job is nursing, … well, as I said, the problem is fraught with gender politics. (If the one-earner thing happens, it will not be by political action but by peer pressure from out-of-work families on their two-job neighbors.)

In a labor-intensive society, people must work for a living. But in a capital-intensive society, we must all become capitalists. Since we cannot do that directly – the allocation of capital is a skill with enormous economies of scale – we must do the next best thing: tax the actual capitalists enough to keep the rest of us well fed (but not so much that they lose interest). Taxes, of course, take lots of forms, and not all taxes discourage economic activity. The Obamacare provision allowing “children” to stay on their parents’ health plans to age 26, which pays young people not to work, imposes a tax through the employers whose healthcare costs rise accordingly. Happily, 22-26 year olds are the cheapest to insure, so the tax does its job very efficiently.

I admit that what I am describing has an annoying European feel. Haven’t we seen this movie, and doesn’t it end badly? I’m inclined to a more granular view. The social democracies of Western Europe may have been too generous for their specific capital bases – too much cargo, too little engine. Giving displacement of American workers the best possible spin, let’s just say that our economy has achieved unprecedented productivity. Of course, the “natural” equilibrium of such an economy features concentrated, dynastic wealth. We must make that equilibrium something else – a level of general prosperity similar to when one manufacturing paycheck could support a family very nicely.

There is no logical or doctrinal obstacle to that result. I’m not proposing a communistic redistribution of wealth or a needs-based allocation of goods and services (although I would means-test all benefits by taxing them in the hands of high earners). People should work productively at some time in their lives, and, most important, their post-work lives (and, maybe the pre-work lives of their children) should reflect their actual contribution to the economy. I just believe that a larger portion of commercial revenues should go to compensation, not as wages, but as pensions and other benefits paid to people for leaving the playing field to the next generation of workers in the increasingly shrinking workforce. (Yes, this is wasteful of talent and skill, so feel free to support the one-earner-per-family alternative if you have the, er, courage.)

It may turn out that we cannot prosper in our two-earner model unless most of our people are employed in making the things we use. If so, we’re in trouble, because competition from cheap labor (and tariff-nullifying machines) will not go away. But everything turns on specific, contingent facts. The question cannot be answered with generalities or lazy inferences from others’ failures. Everyone who tried to invent a flying machine before the Wright Brothers failed, but none proved that a flying machine could not be built. We are not going to become less capital-intensive anytime soon. We should at least try to treat the challenge as opportunity.

Monday, October 18, 2010

Corporations and Free Speech

As the election approaches, some thoughts about Citizens United v Federal Election Commission, 558 U.S. 50 (2010).

I don’t want to get into jurisprudential issues raised by the decision. I’m more interested in what this aspect of our law should be than in what it actually may be. I tend to agree with Justice Stevens that the issue of corporate speech per se should probably have waited for a better fact situation, but such procedural business, like the proper respect for stare decisis in Constitutional cases, are not what I’m here about. I want to talk about corporate-sponsored political speech.

I think the whole “corporate speech” issue is a red herring. Corporations don’t “speak” any more than they pay taxes. People do both. The only question in the matter of corporate speech is whose money is being spent with what authorization. Instead of asking whether a “corporation” is a person, we should be asking whether a person’s right to free speech is affected by how he funds his soapbox. I cannot fathom how that should make a difference.

If I can stand on the street corner and declaim my distaste for Hillary Clinton’s candidacy to anyone who will listen, I don’t see why I should lose that right when the street corner is a web site, or I pay someone to record my message in stentorian tones, or I add pictures, or I decide to sell copies of my production, or I create a corporation to provide limited liability with respect to my (non-tortious) activities, or I raise money for the whole thing from people or companies. It’s still me “speaking.”

Nor do I lose my protection if I wear a mask when I speak. Anonymity is part of free speech. If you want to distrust me because I won’t reveal my identity or agenda, feel free. That’s your privilege. Mine is to choose to pay for my anonymity by sacrificing such credibility as it may lose me. If the KKK can wear hoods to its marches, I can wear a corporate veil on my website.

I really dislike the “electioneering communication” device involved in Citizens United. The relevant statute restricts corporate speech in the last few days of a campaign for reasons presumably – why else use the term “electioneering”? – analogous to those that justify banning last-minute speech at polling sites. I haven’t researched the electioneering cases, but I can easily see how “speech” at the polling place can be intimidating, so I fully agree with restrictions being placed upon it. But publication, as opposed to actual physical presence, cannot intimidate. It can mislead – in the same way that the term “electioneering communication” misleads – but that’s a risk we have always run, and I don’t see how we can say that we will risk having people who spend their money themselves mislead us but not those who authorize others (e.g., the managers of their corporate wealth) to do so. So the whole “electioneering communication” concept just smells bad.

The seminal case overruled by Citizens United is Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990). Austin was not about intimidation so much as the fear of corruption, or the appearance thereof. The syllabus to that case states:
Although 54(1)'s requirements burden the Chamber's exercise of political expression, see FEC v. Massachusetts Citizens for Life, Inc., 479 U.S. 238, 252 (MCFL), they are justified by a compelling state interest: preventing corruption or the appearance of corruption in the political arena by reducing the threat that huge corporate treasuries, which are amassed with the aid of favorable state laws and have little or no correlation to the public's support for the corporation's political ideas, will be used to influence unfairly election outcomes.
This argument misconstrues the very nature of politics itself in a way unique, I think, to liberal censors. What are we to make of “the threat that huge corporate treasuries, which are amassed with the aid of favorable state laws and have little or no correlation to the public's support for the corporation's political ideas, will be used to influence unfairly election outcomes.”? Let’s break it down.

Does size matter? Certainly, not all corporations have “huge” treasuries. Most do not. But under the laws at issue in Austin and Citizens United, all corporations are restricted by virtue of their form and not their size. And what possible relevance does the fact that the these treasuries were “amassed” with favorable state laws have to do with the matter? Can you imagine removing that fact and coming out with a different Constitutional result? Isn’t all private property “amassed with the aid of favorable state laws”? Indeed, doesn’t the corporation’s reliance on state laws give it a political interest in what those laws will be?

And that’s where Austin goes entirely off the rails. What does the public’s support for a corporation’s political ideas have to do with free speech? Politics is not about ideas; it’s about interests. The corporation’s treasury is the collective wealth of its owners. Advocacy of the owners’ political interests, not the public’s support for the “corporation’s political ideas,” whatever those might be, is what the Constitution protects. If the owners of the corporation’s treasury have authorized the corporation's management to speak on the owners’ behalf, what business is it of anyone to say “no”?

I don’t believe the PAC exception solves this problem. I have political interests as a shareholder that it seems entirely proper for my corporate managers to pursue on my behalf. That’s why a corporation can hire lobbyists to promote its shareholders’ interests. I don’t have to agree with the view that my corporation’s lobbyists espouse, and I don’t have to pony up more of my own money to enable the corporation to lobby on my behalf. Why should the election of officials be any different?

That leaves the question of what it means to influence election outcomes “unfairly.” We are not talking about voting early and often. We’re talking about one set of interest-holders being heard disproportionately because of the access to advertising that their money can buy. Where’s the unfairness? Is “equal time” a Constitutionally protected right of all interest-holders?

How many of the people one can fool how much of the time is important, but when the answer is “too many, too often,” the solution is not to restrain those who would do the fooling. The solution is a more savvy citizenry. Teach you children well, and all the bluster in the world will not avail the charlatans. McCain-Feingold and its supporters say, in effect, that the American people are too stupid for full-throated democracy.

In short, nothing in this lynchpin description of the rationale for suppressing corporate speech makes a whit of Constitutional sense. So I don’t believe Austin will be missed. Requiescat in pace.

Wednesday, September 8, 2010

For Innovation’s Sake, Close the Patent Office

I’m starting to worry about the pace of invention. In our capitalist system, people get patents so that they can exploit their inventions for a number of years to amortize the cost of inventing them. But suppose that no matter what you invented, something better would be invented a year or two later. Would you become an inventor?

Do you remember “planned obsolescence”? In Democracy in America (1840), Alexis de Tocqueville wrote: "I accost an American sailor, and I inquire why the ships of his country are built so as to last but for a short time; he answers without hesitation that the art of navigation is every day making such rapid progress, that the finest vessel would become almost useless if it lasted beyond a certain number of years."

In De Tocqueville’s example, at least someone was profiting from the advances in navigation that made durable ships uneconomic. But what about the advances in navigation themselves? Apparently, they were not happening so quickly that they, themselves, were not profitable. But wasn’t that clearly a matter of historical contingency, something that may or may not have been true?

There’s a bit of Yogi’s Paradox here: “Nobody goes there any more – it’s always too crowded.” The reason not to invent is that someone will come along and invent something better too soon. But why would superseding inventions arise if they, too, will quickly obsolesce? We end up in a sort of temporal tragedy of the commons, where, at first, too many people invent because inventing is profitable, and then nobody invents because too many people are inventing.

Ordinarily, we think in terms of things taking too long to be practical. But some people rely on things not happening too quickly, and that group consists largely of innovators. There is no reason to believe that more and more things will happen too quickly for those who depend on their not doing so.

Well, actually, there is a reason: the law of diminishing returns. It should be getting harder and harder to think up new things, and I suppose if one measured the pace of invention in computer cycles, the law might hold. But Moore’s Law has so far outpaced the law of diminishing returns. With computers thinking in teraflops, and many of the innovations improving the platforms used for innovation itself (think human genome project), we may be closer to the day when invention is uneconomic because obsolescence looms than because the work is too difficult.

Barriers to entry are an important part of any new business’s plan. What, the venture capitalist wants to know, is your unique value proposition? A patent used to be a pretty good barrier to a competitor’s entry. But now, considering how quickly people can invent ways to do things, one has to think twice about that.

The problem compounds itself at the consumer level. Why buy this year’s technology when you can have next year’s by waiting only a year? Once, believe it or not, there was no “next year’s technology.” For how many years was TV black and white? Or analog, with a 4:3 aspect ratio? Then, boom. My two-year old flat plasma won’t connect to the internet or run apps, and it only has three colors, not four, and it’s only 2-D. I don’t want to buy a new set now, both because I want to amortize the cost of the one I own and because a new one won’t have smell-o-vision, or whatever the hell else is next. If there is a next. So now the inventor thinks “Why bother to invent if no one will buy my invention for fear it will become obsolete?”

Obviously, we can’t close the patent office and declare a moratorium on invention. At least not yet. But I’m not sure that it would be a bad idea to limit patent filings to one-year windows every five years or such so that an inventor could count on making a few bucks on a good mousetrap before a better one comes along.

Tuesday, July 27, 2010

Marriage: Why and Who?

The debate over same-sex marriage should turn on why the institution exists at all.  No, it’s not procreation.  So don’t start with the “Why do we let old heteros marry?”  Marriage may be good for kids, but it’s not about kids.  Marriage – traditional western marriage, anyway – is about specialization. 

People once thought, rightly or wrongly, that men and women should play different social roles.  The man’s role was provider/protector.  The woman’s role was homemaker/nurturer.  One can speculate that the female’s biologically limited ability to produce children (relative to a man’s virtually unlimited ability to do so) made women the more important sex to protect, and that everything followed from that.  But for whatever reason, gender roles have existed for a very long time.

An important aspect of specialization is socialization.  Where gender specialization is the norm, boys train to behave as men and girls to behave as women.  They arrive, then, in adulthood, with skills and attitudes appropriate to their roles.  It is this specialization, not the care of kids per se, that marriage was created to support.  Obviously, not all straight men and women have marched to the beat of the same drum, but institutions like marriage are not about outliers.  Cars exist to take us places; that they cannot take us everywhere or that not everyone needs one says nothing about why cars exist or even about why everyone who owns one owns it.

The historic allocation of gender roles put women at risk.  A man without a wife can support and protect himself, but a woman without a provider/protector is in trouble.  No wonder, then, that feminists find the arrangement unacceptable.  Because gender specialization creates unequal burdens, we should expect it to last only for as long as it’s necessary.  As societies and technologies mature, women become less dependent on a husband’s protection to preserve their child-bearing abilities.  Moreover, although a complementary marriage offers its one earner the competitive advantage of a home-based support system, if the economy can offer plentiful, safe, paid work, a second income is often a better economic choice.  And so, specialization gives way to “liberation.” 

I’m not taking sides on whether this turn of events is a good thing or a bad thing; it seems to me to have  been inevitable, so what would be the point?  Arguments can be offered for or against specialization and for or against traditional marriage in aid of specialization. My own sense is that specialization is too unfair to women to persist in a world where many jobs are safe and the brigands are under control.  If the “Leave it to Beaver” family is “better” for kids, it’s not perceived to be enough better to retain the old model.   (Of course, should it turn out that the economy cannot offer plentiful, safe, paid work to enough people, we may need to rethink the family business model yet again.)

The question for now, though, is this: if the sexes no longer specialize, what’s left for marriage to do?  Absent complementarity, marriage gets you a date every Saturday night, someone to visit you in the hospital, and someone to help with the kids.  None of these things requires the state’s intervention or merits its support.  Why should the state provide tax benefits or enforce support or inheritance rights just so that two lovers can hang out?  Let them sign a contract, ask the blessings of their God if they have one, and get on with their lives. 

Marriage is still very special to the participants, who love each other and commit to each other.  But the message, at least in liberal circles, has changed.  The vows have been neutered, fathers no longer “give away” daughters, and I’ve seen Jewish weddings where the bride and groom both break the glass at the end lest the groom’s doing it alone say something – God only knows what – about the relationship.  Instead of being about specialization, marriage is now about love.  That’s a good thing for something to be about, but is it something for the state to pay any attention to?

This post-specialization relationship, still called “marriage,” with its no-longer-warranted legal consequences, is what same-sex couples now seek to enter.  I understand why adherents to traditional marriage oppose the idea.  Marriage, to them, is still a commitment between specialists who love each other to specialize for their exclusive mutual benefit.  They want the ritual into which they have entered to mean what they understand it to mean, for if it does not have that meaning for society, not only is the message they want to send to their community by entering into it is lost, so is the certainty that each partner understands what he or she is doing.  For at least some religious people, marriage is a sacrament, and to change its nature is to make it no longer one.  I’m not religious enough to know what that feels like, but I’m sure it matters a lot to the people to whom it matters at all.

For heteros who have accepted the modern notion of marriage as a partnership of unspecialized lovers, same-sex marriage is just like their own, so it’s fine with them.  But, these couples have no dog in the fight.  The battle is between homosexual couples, who want the same opportunity as straights to ritualize their commitment to love, and traditionalists who want to be able to ritualize their loving commitment to specialization.  They both can’t have their way, because both are concerned about what marriage “says” about them, and it can only “speak” in one language – the language of the “audience.”  If the polity recognizes homosexual marriage, then marriage signals a commitment to love.  If the polity does not recognize homosexual marriage, then marriage can still signal a commitment to specialize. 

The problem for the traditionalists is that they are defending what may be only a logical possibility.  If same-sex marriage is recognized, marriage cannot be about specialization; if it is not recognized, then marriage can be about specialization, but that does not mean that it is perceived to be so by the community at large.  Once the dominant mode of hetero marriage is the commitment to love, marriage no longer sends the message of a commitment to specialize, even if only heteros are allowed to do it.  So, to the extent that shift has occurred, the traditionalists have lost the war, and same-sex marriage should be allowed.  Politics is about such things as when an inflection point in perceptions of this sort has incurred, and the political process should be the place that the battle is fought. 

I do not see a Federal Constitutional right to same-sex marriage, at least not yet.  Supporting sex-based specialization within its borders seems to me something a state ought to be able to do.  I recognize how much such legal support looks like anti-miscegenation law, but looks can be deceiving.  Race-based “specialization” (aka slavery and discrimination) and sex-based specialization have very different histories and political consequences.  We have a national consensus on the former.  Should one emerge on the latter, the political system will address it. 

That consensus may even be expressed through public acceptance of a Supreme Court decision that there is a Constitutional right to same-sex marriage, although the legal niceties of such a decision seem to me mind-boggling.  The jurisprudentially correct way of applying such a right would, I think, be a holding that hetero-only marriage laws discriminate against gays and so hetero-only marriage laws are unconstitutional.  In such a case, the Court would not tell a state whom it must permit to marry, because the Court would then have to say what “marriage” entails.  Rather, the Court would tell the states that it may not marry anyone if it will not marry same-sex couples.  What the states do about that order would be up to them, but, in the meantime, the validity of all hetero marriages in hetero-only states would be suspect.  I just don’t see the Court opening that can of worms.

Friday, July 2, 2010

Why Free Trade has not Created Jobs for American Workers

In 1994, Thomas I. Palley, then a Professor of Economics at the New School for Social Research, wrote:

From the standpoint of orthodox theory, increased international trade is an unambiguous good, so that lower international transactions costs and increased multinational production are both seen as major sources of gain. Orthodox economists have therefore persistently pushed for free trade and the elimination of tariffs, and these policies have reinforced the secular reduction in transactions costs.

However, the conventional approach to trade draws no distinctions between types of trade. Instead, all trade is good, and the greater the diversity of the trading partners, the greater the benefits to trade. Thus, Americans supposedly have the most to gain from trading with countries like China, Mexico, and the Phillipines. Nothing could be further from the truth; instead, the benefits to trade depend importantly on who one is trading with. Without doubt trade can be enormously beneficial, and these benefits include: (a) greater product diversity, (b) lower prices attributable to economies of scale associated with larger markets, (c) lower prices attributable to the fact that some countries have climatic and natural resource advantages in the production of certain commodities, and (d) lower prices due to increased market competition.

However, trade ceases to be a good when it rests exclusively on wage differentials: in this case, it becomes an implicit instrument for battering down wages and raising profits. This forces a reconsideration of trade policy: where countries have similar wage structures, employee protection laws, and environmental protection laws, then free trade is desirable; where countries differ in these regards, we need to be much more cautious. Free trade predicated exclusively on wage competition is entirely unacceptable, and represents a major threat to popular prosperity in America and Western Europe.

Professor Palley was too early with his prediction of disaster, as the Clinton years featured economic expansion here even as the trade deficit grew. But being too early is not being wrong: every President since Richard Nixon has been “too early” in calling for an end to our dependence on foreign oil, and they were all absolutely right. Nevertheless, it is an unfortunate trait of human beings that we tend to regard as intrinsically bad, and therefore as “discredited,” any advice whose time simply has not come.

In 1994, American capital was "all dressed up with no place to go." Enough jobs were moving off shore to alarm labor-oriented economists like Prof. Palley, but aggregate demand had not dropped enough to offset the benefits of lower prices, especially as other sectors of the economy (tech mostly) were growing. More productive capacity had to be created abroad before American capitalists could take full advantage of the low cost of accessing it. Prof. Palley may have underestimated how long it would take for that capacity to emerge, but disaster delayed is not disaster denied.

Cheap labor has always been an important part of our trade with less wealthy countries, but those countries have not historically been able to compete with us on so many different classes of goods. Quantity, they say, has a quality all its own. Whether cheap Chinese jeans are good for America or bad for America turns on whether there are also cheap Chinese cell phones and cheap Chinese TVs and cheap Chinese snow shovels and, and…. There’s a limit on the list of “other things” we can make, and even if we invent them here, we cannot make them here if our neighbors across the shrinking ocean can deliver them to us for less.

Certainly, cheap Chinese goods put extra money in consumers' pockets, which creates demand for more goods, which creates more jobs. But that demand may be offset by a reduction in demand from the loss of American jobs, and much of the alleged additional demand is for additional cheap Chinese goods, so many of those new jobs are also in China. And yet, every argument I read in support of free trade with China assumes both that (i) the loss of US jobs results in no net reduction in US demand, and (ii) the demand for more goods will create significantly more American jobs. Neither of these assumptions is ever necessarily true, and, more important, neither appears to be true now.

This is not to say that the US has done all it can to be as competitive as possible in the export market. But our competition in the export market is not China; it's Europe. The Eurozone is doing better at selling to China, India, and Brazil than we are. Despite their high labor rates, Germany, Holland, and Ireland are all running significant trade surpluses, and, in general, The Eurozone's trade balance seems to oscillate around zero, thanks not only to their exports but, of course, to their running a much lower oil bill than we do. The important point for Americans, however, is not that we must compete with the Europeans, but that we must compete with them for the global market in capital-intensive goods, a market that by definition creates few jobs and so wouldn't be satisfactory even if we had it all to ourselves. So, the fact that we are not competing well in that market is salt in our wounds, but it does not point to an opportunity for national prosperity.

Competitiveness with Europe - while certainly to be strived for - is not the answer to China's broad wage-based advantage. The obvious antidote to that ill is the imposition of tariffs. Prof. Palley put it this way:

Where there are conditions of domestic monopoly or where countries have a natural advantage in the production of goods, free trade is desirable…. However, where the only reasons for trade are poverty level wages, and lack of obligations regarding pollution abatement, worker safety standards, and health and social insurance costs, … free trade will end up promoting a decline in the wages of American workers as companies either transfer production overseas, or use the threat of doing so to extract wage concessions.

Moreover, to the extent that the system of social and environmental protections becomes viewed as a source of cost disadvantage and job loss, this will unleash political pressures for its repeal. In the realm of free trade, market forces promote the lowest common denominator.

Given this, free trade is appropriate where the requisite criteria are satisfied…. However, if the criteria are not met, countries should be subject to a "social" tariff designed to compensate for their exploitative economic conditions. As conditions in countries improve, this tariff can be lowered thereby providing an incentive mechanism for governments in under-developed countries to advance the welfare interests of workers. Moreover, the tariff proceeds could be used to provide aid for purchases of U.S. exports, thus helping both the U.S. economy and under-developed countries.

Leaving aside the welfare of foreign workers as a basis for U.S. trade policy (a slippery slope not to be tested in tough times), Prof. Palley’s proposal makes sense. Mobile capital will not come here or stay here if it can take advantage of “exploitative” wages and conditions elsewhere. So we must either immobilize the capital – not likely – or, for our own sake, end the exploitative conditions “enjoyed” by our trading partners. Prof. Palley’s tariff, which allows for competition on other bases – German and Japanese cars would be welcome – seems well-designed for that purpose.

Free-traders will doubtless object to the tariff proposal, citing the usual undifferentiated litany of horribles associated with tariffs and, of course, invoking the worship words “Smoot” and “Hawley.” We’ll be told that tariffs raise the cost of trade, thereby reducing its benefits, resulting in slower growth of wealth everywhere, and a delay in the development and transformation of the low-wage states. Some of these claims would be accurate, but they would not be persuasive.

A tariff would raise the cost of trade and so reduce its benefits. But only in the short term. If the cheap foreign labor is putting Americans out of work, aggregate demand will fall, and trade will not have created any benefits to reduce. The tariff sacrifices short-term gain for long-term prosperity. To treat the short-term sacrifice as the whole picture is simply wrong.

I don't know what effect a tariff regime that reflected wage differentials would have on Chinese development. Wages are rising in China, and the country is already trying to develop domestic demand. Either way, the world does not owe China a living, so Chinese development per se ought not to be an object of American trade policy. The Chinese need to consume as many consumer goods as they produce (whether the former are domestic or imported) and not expect the West be their dumping ground. A tariff will encourage them to do that, at whatever speed they choose.

As for Smoot-Hawley, which is remembered by many as the tariff that ate the 1930’s recovery, experts like Ben Bernanke will have to step up and explain the difference between a mercantilist tariff imposed by a trade surplus country (us, then) and one imposed by a trade deficit country under economic attack by underpaid workers (us, now). I can’t do everything…

Sunday, June 27, 2010

Uncle Sam Should Tap his Credit Line

[This post first appeared on Seeking Alpha.]

Alan Mulally is credited with saving Ford Motor Company by borrowing as much as he could – $23 billion – in 2006, before the credit crunch hit other US businesses, to fund a major turn-around of the company's business. Uncle Sam needs to take a page from Mr. Mulally's book.

Because our private borrowers cannot absorb all the risk-averse capital our massive trade deficit brings in, the Treasury has an opportunity to borrow long-term at rates that seem ridiculously low in light of our national debt and continuing deficits. The money is just lying there. All the Treasury has to do is pick it up.

The biggest obstacle to this tactic is the skepticism of Republicans and their supporters, skepticism that is not entirely unwarranted (even if to some extent disingenuous) but is in any event ill-timed. Waste has been the hallmark of Congressional spending over the years, and conservatives do not want to give the liberal Congress another nickel to waste. But I think we need to think long and hard before passing up an opportunity this good.

Let me make clear that I'm not advocating purely Keynesian deficit spending, at least not as I use the term "deficit." I am advocating issuing a ton of long-term notes and bonds. The use is a separate matter, although I've got some thoughts on that, too. I am proposing three uses of the funds, only one of which is spending of any sort, and that's on investments that add more value to our national balance sheet than they cost.

Extend Maturities.

Low-rate, short-term debt is riskier to issue than low-rate, long-term debt. Short-term debt has to be rolled over and can become high-rate short-term debt if the market refuses to roll it over and the Fed is not willing or able to buy it. If we can get out of this recession, the Fed will want to raise short-term rates in order to prevent the economy from overheating. Hopefully, depression-expert Bernanke will show more restraint than Marriner Eccles did in 1936, but at some point, the Fed must tighten, and when that happens, the Treasury should not be caught with a ton of T-bills to roll over.

There are about $2 trillion in T-Bills now outstanding. So, every 1% increase in the T-Bill rate adds $20 billion to the deficit. The increase in pay-out seems inflationary even as the increased cost of borrowing is anti-inflationary. 5-6% is not an unusual T-Bill yield when the Fed is tightening. That's $100 billion in additional deficit relative to today just to service T-Bills, if we still have $2 trillion outstanding.

If the need to roll over a large amount of bills will hamper the Fed's efforts to slow the economy when it needs to be slowed, one of the best things that we could do with long-term borrowing would be to retire a significant amount of short-term debt, even at the 3-4% difference in interest that would apply right now. And long-term debt can be "repaid" in part by inflation.

Inflating away the debt is a time-honored strategy. See Aizenman and Marion, "Using inflation to erode the US public debt," 2009.) As this table (Joshua Aizenman and Nancy P. Marion © shows, the US has, until recently, matched the maturity of its debt to the magnitude of its debt: the more we owe, the longer-term we have borrowed, and the more inflation has done to repay it.


With our public debt now approaching 90% of GDP, history suggests that we should be at an average maturity of 100 months or so, not the 50 months currently applicable. Whether we can issue enough long-term debt at reasonable rates remains to be seen, but we can certainly issue more than we have, and we should at least be working our way out the maturity curve as far as we can go. I should add that inflation only works to devalue debt to the extent that inflation is not priced into the bonds in the first place. Only when the real rate of return on the debt is below the nominal growth rate of GDP does inflation actually hurt the investor. But there are times when the market under-prices long-term debt, and when that happens, issuers should move quickly to exploit the arbitrage maturities.

Get Rid of Tips.

As of November, 2009, the Treasury had issued $550 Billion worth of Treasury Inflation-Protected bonds, a/k/a "TIPs," perhaps the dumbest idea anyone in government has ever had. That's about 8% of the outstanding Treasury debt. What, really, were they thinking when they came up with this monster? How are we ever going to inflate our way out of debt that is inflation-protected? (I know what they were thinking – a low coupon in a period of low-inflation.) But still. What hubris to think we would never need to monetize our debt, when our very willingness to issue this financial accelerant shouts from the rooftop that we haven't the brains or will-power to escape that fate.

TIPs put us in the same bind as short-term bills, because, from an economic perspective, that's what they are. Instead of having to roll them over at a rate set by the Fed and/or the market, Uncle Sam has to roll them over at a rate set by the CPI. Either way, the rate is out of the Government's control. (I assume – but cannot say with authority – that the nominal maturity of TIPs is reflected in the table above, which distorts the maturity upward without providing an enhanced opportunity for monetization. The table should be constructed either without reference to TIPs or with TIPS treated as having a maturity of zero months.)

So long as raising interest rates depresses inflation, then TIPs aren't a problem. But, if raising short-term rates proves inflationary because so much of our debt is short term, TIPs will only make matters worse. Thus, along with taking advantage of current low long-term rates to move the nation's debt out the yield curve, the Treasury should buy back TIPs (and stop issuing them) so that when the time comes to raise short-term rates, the Fed will actually have the flexibility to do so.

Upgrade the Infrastructure.

Not all of the money borrowed should be used to replace existing debt. After all, re-funding debt requires no new money, so it shouldn't put much of a dent in the demand for Treasury paper. The whole point of the exercise is to borrow as much new money as possible at these low rates. That new money should be put to work putting people to work – on rebuilding our obsolete and decrepit infrastructure. Roads, bridges, aqueducts, power grid, high-speed rail, air-traffic control, alternative energy all need attention.

With so many unemployed workers, especially in construction, infrastructure projects are the perfect Keynesian antidote to what ails us. We just need the smarts to use long-term borrowing now (when the money is cheap) to fund the work, even the longer-term projects that won't be done until later.

And we need to get cracking, because Medicare is preparing to swallow all of our cash as fast as we can print it. Indeed, one of the best things we can do for our infrastructure would be to upgrade our healthcare delivery systems in advance of the coming crunch. But more about unfunded obligations later. For now, our leaders need to recognize that the infrastructure needs work, and our workers need work. And money is cheap, so if not now, when?

Saturday, June 12, 2010

Let’s Review

[A slightly edited version of this post can be found on Seeking Alpha.]

Much of this blog has been devoted to macroeconomics – the financial mess and the subsequent recession. The material sea-change change that accounts for these events, I believe, is globalization, the result of ocean-shrinking technologies. Here is a more unified narrative of how we got where we are and what we ought to do next.

The Trade Deficit.

Americans started losing jobs to imports some time ago, but the decline really accelerated with the advent of capitalism in Communist China. That country’s governmental “technology” seems to have evolved from a totalitarian state to an authoritarian one. There is no more political freedom than before, but there does seem to be some de facto democracy, in that leaders are subject to internal criticism based on the results they achieve as perceived by constituents.

Be that as it may, the ability to export to the US and Europe has made capitalism a viable approach to Chinese development. Absent those mature consumer markets, it would have been impossible for China to develop a manufacturing base, as they would not have had the customers for the scale of production that would make the capital investment worth the trouble. But once globalizing technology made capital investment in manufacturing worth doing, and the bosses figured out that there was a political payoff in prosperity, the genie was able to escape the bottle.

International trade is based on comparative advantage. The shrinking of the oceans has given China has a comparative advantage in labor-intensive manufacturing of goods even with the added cost of shipping them here. We in turn have a comparative advantage in capital-intensive manufacturing delivered to China. Consequently, they sell us labor-intensive goods, and we sell them capital-intensive ones.

But our demand for Chinese labor-intensive goods is greater than China’s demand for American capital-intensive ones, and we run a major trade deficit with China as a result. Why do the Chinese tolerate this imbalance? Why don’t they sell somewhere else? The reason, I think, is that the US has a comparative advantage in the distribution of consumer goods. Even with the improvements in China’s physical infrastructure, their consumer is not yet as willing and able as ours to absorb their goods. We are better at distributing goods, relative to producing them, than they are, so they make the goods and we distribute them.

Of course, the goods-for-distribution trade is inherently imbalanced. If a TV costs $100 to make and $100 to distribute here, then, in terms of international trade, it’s as if American consumers are paying $200 to the Chinese for the TV and the Chinese are paying $100 to Americans for distribution services. No matter how much the distribution costs, the amount going to China exceeds by $100 the amount “coming” to the US . The result is a soaring trade deficit with China and a loss of labor-intensive manufacturing jobs here. Defenders of free trade say that such dislocations are only temporary, that the system adjusts to create good jobs in some other industry in which we have a comparative advantage. It’s just not clear what those are or how quickly they will arise. And in the long run, as the man said, we’re all dead.

And then, of course, there’s oil. Thanks, maybe, to Three-Mile Island, and to our domestic oil industry’s political clout, and our stubborn refusal to do what’s best for us, we cannot get off of foreign oil. If we got as much of our energy from nuclear energy as France, we would not be drilling in the deep water off our coasts. But we are. More to the point, we also have a significant trade deficit with oil producers. The deficit has been cooled by the recession, but the subject today is what caused the recession, not what the recession caused.

The Repatriation Challenge

The trade deficit sends dollars abroad. What are our trading partners to do with them? International trade can be conducted in dollars, so some of the dollars stay off-shore, which is fine with us; we can always print more. But a lot of the money we send abroad is reinvested here. And the larger the outstanding balance grows, the more important those dollars become as a source of capital for US users, and the less so are the traditional sources of capital, domestic banks.

This change in the source of investment capital has changed how money moves in the US. Instead of the proceeds of consumer sales finding their way to local banks and then back out as local bank loans, the money goes abroad and comes back through Wall Street to buy securities backed by the loans that the local banks make. This shift makes retail bankers into loan brokers, whose interest is not in the quality of the loan but in the price it will fetch in the secondary market. That price is a function of the rating on the securities and the demand for securities of any given rating. And the demand is based on the growing reserves held by our trading partners and their appetite for risk.

Foreign holders of US reserves are more homogeneous than the investment public at large; they want very safe paper, and so it has become Wall Street’s job to it or make it. The demand for highly-rated paper was formalized in the Basel II accords, which prescribed capital requirements for banks that have been adopted in several places, including the European Community. Under those standards, a bank needs much less capital to invest in AAA-rated paper than in anything else, so the demand for such paper soared, perhaps beyond what the otherwise applicable risk tolerance would have permitted. The aggregate effect of these changes was tremendous pressure on Wall Street to generate AAA-rated paper.

But there is just so much AAA-quality credit. That problem can be cured in two ways. One way is to pretend that bad risks are good ones. Under the “issuer-pays” business model followed by ratings agencies, that proved surprisingly easy for investment bankers to persuade the agencies to do. But in order to do that, there had to be some investment that could at least ostensibly support that rating. Enter the subprime mortgage. Originated by someone with no stake in their performance and sold by investment banks with no stake in their performance, but bearing AAA-ratings (at least some tranches), these securities poured out of Wall Street to feed the maw of our trading partners’ Basel II-ized banks.

The other way to increase the supply of AAA-rated paper is to invent it from whole cloth. In 2000, Congress passed the Commodities Futures Modernization Act of 2000, which essentially allowed investment banks to make book on the performance of existing securities. A bet that an AAA-rated security will perform can be as safe as the security itself. These derivative securities – another new technology – made possible the processing of virtually unlimited amounts of money, in part because big U.S. institutions like AIG acted as counterparties on the risk.

In the search for people to blame, regulators early on identified the risky bets made by investment bankers with little capital. These bets certainly contributed to the collapse, but the dollars did have to be repatriated, and, in the financial world, leverage is bandwidth: without it, the volume of business that can be transacted could not have kept up with the demand for highly-rated paper. Recent history suggests, however, that if the investment banks had “just said no” to exceeding reasonable leverage requirements, the foreign money would simply have gone into Treasuries, as it does now. Our trading partners really, really don’t want to stop selling to us.

Moral Hazard

TARP and the other so-called “bail-outs” are said to raise issues of moral hazard – the possibility that financiers will continue to take large risks because they know Uncle Sam will bail them out. But the real moral hazard is the one that did us in originally.

In its most general version, moral hazard is the risk that a party to a bet will act so as to change the odds. The notion is usually applied to insurance, where insured people tend to take greater risks because the damage will not fall on them, but the idea applies as well to any immunity to consequence, e.g., politically mandated bail-outs, and it applies to any bet that can be rigged.

Every sports fan knows that when serious money is bet on an event, the temptation to fix the event becomes very strong. This blog started with a rant about Credit Default Swaps issued to speculators, who then worked to bring down the subject credits. That they did, and the cards fell, and the trouble began. Fortunes were lost, spending fell, credit froze up, and recession set in. The Congress is still working on financial regulation legislation, but it is not likely that it will go as far as is necessary to get rid of that sort of betting.

The moral hazard created by naked short-side bets was a major factor in the recent financial upheaval. I find it sadly ironic, then, that the solution to the problem – TARP – is so often criticized for creating moral hazard.To create a total collapse of our financial system, the taxpayer had to bail out failing banks and insurance companies, and, to the consternation of the torch and pitchfork crowd, their politically unworthy counterparties. The payments to the counterparties were somehow taken by demagogues as proof that the bail-outs were unnecessary or, at least, unnecessarily generous. But the bail-outs could only have succeeded as bailouts if they stopped all the dominoes from falling.

Carpe Diem

As Rahm Emanuel is said to have said, a crisis is a terrible thing to waste. The amount of money going abroad has declined by reason of the recession, but the US is still running a large trade deficit, and money is still coming here looking for a home. But now, with the ratings agencies credibility gone and the “AAA-rated” brand destroyed, the only AAA-credit that anyone trusts is Uncle Sam’s. Thus, despite a spiraling Federal deficit, foreign banks and American savers are lending money to the Federal government at historically low interest rates.

This change in financial appetites should not be wasted. The government should seize the opportunity to undertake massive public works projects, putting people to work using funds borrowed now (and not later, when the permits are granted and environmental impact statements are done, and interest rates have risen in anticipation of the work starting). This opportunity to upgrade our infrastructure may not come again. I don’t for a minute believe that such projects can be sold on the rational basis that exists for doing them. But I have infinite faith in our politicians’ ability to find some other reason to do what material conditions demand be done. By the middle of 2011, it will be clear to President Obama that the jobs lost to cheap labor are not coming back.

Lowering taxes will not help. That’s a supply-side solution, and the only problem with supply is that we cannot compete with China, for reasons that cannot be fixed by lowering our taxes. Obviously, reducing business taxes would make us less uncompetitive, and that might be part of a strategy we could use, but the real problem is that globalization has put the comparative advantage in labor-intensive goods across the shrunken oceans, and nothing we can do in the way of domestic incentives can fix that. All we can do is replace the ocean moat with tariff walls. I really think we should do that. Let China grow its domestic markets to where its employees live as well as ours. Then we can get rid of the tariffs and compete on quality.

Thursday, June 3, 2010

Pretext and the Middle East

Can you name one person who’s opinion of Israel was changed by a careful review of the recent boarding incident? I can’t. The purpose of the attempt to run the Gaza blockade was to embarrass Israel – to give people who hate Israel a media window to lie some more, and to give people who would like to hate Israel an opportunity to pretend they know something now that they did not know before. But no one who knows the Middle East believes for a minute that the people on the Mavi Marmara were seeking anything other than a violent confrontation that would end in the deaths of people who could be colored as humanitarians.

The mission was a success, just as 9/11 was a success. The media, including the American media, so famously controlled by "The Jews," are falling all over themselves to condemn the Israeli action. Some are unsympathetic to the blockade, but that’s a separate matter. The facts of this event are still the facts of this event.

I have no problem, by the way, with the tactics the anti-Israeli forces are using; they are at war and are no more obliged to be truthful than any other combatants. But I can criticize the media for allowing the tactic to work. This account by Israel’s ambassador to the US, albeit obviously written by an advocate, just sounds more credible to me than the rantings of Israel’s enemies, not because of the evidence adduced – evidence can always be planted – but because this is how asymmetrical war is fought.

I keep thinking of Lenin’s remark about how the capitalists would sell the Soviets the rope they would use to hang us. I wonder if Osama hasn’t said something similar about ink and the Jews.

Friday, May 28, 2010

Jobs and Money and Such

[This post is being revised.]

Dr. Strangetax – Or, How I Learned to Stop Worrying and Love the (Inflation) Bomb

In a later post, I want to consider the possibility that we have the capacity to produce enough goods and services to achieve universal prosperity. I believe, almost as a matter of faith, that this productive capacity will eventually be unleashed. But, because massive economies of scale can be realized with a small workforce, the ratio of manufacturing workers to consumers will shrink, and to the extent any particular bit of manufacturing is labor-intensive, it will not be done in the US.

We need a way to put Americans to work doing something else. Over time, our entrepreneurial ingenuity will find things for us to do, but it's not at all clear that they will be very valuable things. Meanwhile, our infrastructure is a mess, and, from a societal perspective, I think a case can be made that the best use of our underutilized workforce is in repairing it. If so, we need to think about how the government pays for things and especially about the possibility of inflation resulting from government spending. My sense is that if we undertake the big infrastructure projects - high-speed rail, nuclear plants, water systems, smart grids, etc., we will have some inflation, but that we will find it far less awful than opponents of major infrastructure projects think.

Inflation works like a tax. Anything the government does that funds public spending while reducing the general population’s purchasing power is, in economic terms, a tax. Inflation clearly reduces the purchasing power of dollars, so, if it is attributable to government spending, it seems appropriate to regard it as a tax.

The inflation tax is said to be “hidden” because no one votes on it. Politicians can “enact” it or increase it at will. There is some pushback - we hear about government spending being “out of control” - but when politicians use inflation to pay for things (i.e., to repay debt with cheaper dollars), there is no vote or announcement of that fact.

Hyperinflation results when governments start printing money to service their debt. The interest compounds faster than revenues grow, and the amount of new money eventually overwhelms the old, growing geometrically as economic activity grinds to a halt thanks to the unavailability of credit. Hyperinflation is bad, very bad. But I think the US can avoid hyperinflation by keeping short-term interest rates low. Our trading partners cannot afford to sell anywhere else for anyone else's currency, and no major currency issuer really wants to provide the world's reserve currency, because that job entails running a trade deficit to put money in circulation.

As a thought experiment, I want to consider a model of public finance that relies entirely on inflation: no taxes, and no government borrowing except from the Central Bank to create money. The government pays for everything it uses by simply issuing money. When money comes in to the government (from tariffs, user fees – i.e., not euphemistically labeled taxes) – the money is simply cancelled. This may sound like a radical change, and in thinking it certainly is, but let’s look at how little we would have to do to our current system to achieve the same economic result.

First, look at the Federal deficit. It’s growing, and it is being funded by borrowing. Some of that borrowing is through long-term bonds, some through short-term bills. Right now, the government gets a bargain on interest rates at both ends of the curve. The temptation, therefore, might be to borrow as much money as possible now at relatively low prevailing rates to be repaid much later. That way, the interrelated risks of inflation and rising interest rates are on the lender, and the government can be sure of not having to crank up the printing presses to pay increasing interest rates anytime soon, which seems like a good idea if you assume that the other available choices are what they currently are. But what if those choices were different?

The current alternatives to borrowing long-term are taxing and borrowing short-term. The latter is a bargain right now because the Federal Reserve is printing money for anyone who has a reasonable chance of repaying it. These low interest rates are expected to continue “for an extended period,” but what matters is that they are interest rates and the Federal government must pay the Fed the same interest rates that the Fed charges the general public (i.e., banks). Thus, Fed policy intended to stimulate or restrain economic growth affects what the Federal government has to pay for money.

Because any increase in what the Federal Reserve charges for money raises the interest rate on short-term Federal borrowing, such an increase must necessarily lead to a tax on those of us who will eventually have to cover Uncle Sam’s interest costs. Of course, if the Fed does not raise interest rates, the result is inflation, which is also a tax. If increased interest rates and increased inflation are properly understood as the taxes they are, it becomes clear that whatever the government spends is paid for by taxes; only the mechanism is at issue. Thus, The “radical” idea here is simply decoupling the interest rate the Federal government pays on short-term borrowings from what banks pay to borrow money from the Fed and then setting the government rate at zero, which is pretty close to where it is now. That doesn’t sound so radical, does it?

The reason it is radical is that it removes all reason for the government to borrow long term; indeed it relieves all reason for the government to borrow on anything but a “demand” basis from the Federal reserve, which will never issue a demand. Of course, we already have a word for a demand loan that need not be repaid and bears no interest: money. If the Federal government doesn’t have to pay to borrow from the Federal Reserve, it wouldn’t have to borrow from anyone else, and when it borrowed from the Fed, it wouldn’t need to borrow for a term. In short, when the government needed cash, it would ask the Fed to print it some money and hand it over. Should the government come into some cash, it would send it to the Fed, where it would go "poof” and disappear. All of this would happen simply by reason of the Fed not charging the Federal government market interest rates.

But what about inflation? Before we get to monetary matters, remember that the government would have access to unlimited, free money from the Fed. In other words, there would be no fiscal need for taxes. There is no need to “balance the budget” in accounting terms if there is no cost (other than inflation) to running over it. So let’s assume for now that there will be no taxes under the new regime. The government will fund its entire operations from the printing of money via interest-free loans from the Fed. (If you compare that to how things are now, when the government funds only a trillion dollars or so of its operations through near-zero interest borrowings from the Fed, the principle seems less bizarre.)

Obviously, there would be inflation. The logic is inescapable: all government spending is paid for by taxes, and inflation is the only tax other than statutory taxes. If there are no statutory taxes, there will be inflation. So the question is not whether there would be inflation, but whether, as taxes go, inflation is, or can be, a good tax. Let’s consider the pros and cons.

First, the good news:

Inflation is self-defining. Talk about reducing complexity! There are no loopholes, no shelters no nothing. The tax is the tax and you pay it automatically every time you buy anything or the purchasing power of your dollars declines.

Inflation is self-collecting. No forms to fill out and no withholding. No IRS. But no evasion either.

Inflation is universal. Everybody pays – workers, investors, spenders, savers, doctors, lawyers, hookers, and drug dealers. There is no hiding in the underground economy.

Inflation is self-leveling. Statutory taxes have to be calibrated. Inflation sets its own level. The more the government spends, the more money it prints, the faster the money supply grows (but not necessarily the inflation rate - that depends on how wisely the money is spent).

Now the bad news.

No-interest borrowing encourages government spending. A politician with an unlimited checkbook is likely to provide unlimited largesse from the public Treasury. Whether that urge can be overcome by other means remains to be seen.

Inflation encourages spending over saving. Consumers, fearing the loss of purchasing power, will spend today because “things” will go up in dollar value as the dollar goes down in purchasing power.

Inflation will kill international trade. This is a biggie. If the dollar is falling, foreign sellers won’t want to hold dollars, so they won’t sell to us. (This result is not surprising: if inflation is a tax, then, applied to imports, it’s a tariff, and like all tariffs, it depresses trade.)

Inflation changes prices constantly. Merchants really don’t like to have to change prices every day. With significant inflation, price increases would be commonplace, and the burden would be substantial. Ditto for consumers, who cannot budget if they don’t know what things cost. And wages would have to adjust more often and more significantly.

Note that I did not list hyperinflation in the cons. I’m not sure about this – after all, we’re just speculating here – but it seems to me that with no interest to compound, the government would never be in the predicament of having to print money to stand still. All money creation would be in return for goods and services provide to the American people by its citizens or foreigners. The money supply would increase, but I don’t see anything hyper about it. In fact, one might speculate further that “controlling” inflation by charging the government interest on its borrowings is what makes hyperinflation possible in the first place.

Assuming for now that all the pros are good things, let’s see what we can do about the cons.

Government Spending. The first step in this sort of analysis is to avoid static thinking. In a no-tax, no-government-borrowing world, a lot of things would be different from how they are now. For example, it’s not credible to me that there would be no political push-back against government spending. The economic problem with government spending is not that we cannot “afford” to pay for it, but that it crowds out private consumption of human and natural resources. Currently, we measure the public-private contention for resources through a combination of statutory tax levels and budget deficit (i.e., future taxes, statutory or inflationary). If statutory taxes went away, I think we’d find a way to measure the contention for resources with as much political feedback as is now the case.

Without a budget deficit to serve as a proxy, we might get a more direct look at the competition for goods and services between the public and private sectors. What would too much government spending look like? Shortages, I think – costs in some sectors increasing faster than the money supply. Right now, with high unemployment, we think of the government as the employer of last resort. But in good times, I think we would find ways to measure this pressure, and to correct it politically. If that’s done, the government’s unfettered access to cash won’t matter, because the voters will actually demand not that the government balance its budget, but that it just get out of the way.

Spending/Saving. Again, the problem is static thinking. The inference that people will spend rather than save in an inflationary environment depends on the assumption that investments will fall in value. But that is not necessarily true if inflation is the only tax. The Treasury currently issues TIPS – inflation protected securities. These would go away in a no-borrowing Federal scenario, but there’s no reason to believe that corporations would not issue them in a no-corporate-tax environment. Mortgages would be indexed to inflation, and the resulting bonds and CD’s would be indexed, too. When the dust settles, the necessity of saving will be the mother of appropriate savings vehicles, and the dislocations of an abnormally inflationary environment will not apply.

Trade. It’s important, I think, to recognize that it is fear of unexpected inflation that should concern our trading partners. Like our own savers, foreign sellers who run a dollar surplus are free to buy the inflation-indexed securities that are sure to emerge in a no-tax America. Thus, there should be no wholesale abandonment of the American market on account of future drops in the value of the dollar.

That leaves the effect of a predictably and perpetually falling dollar on other currencies. I don’t see why our trading partners cannot simply raise the price of things they sell here, knowing that American competitors get no advantage from the falling dollar, because domestic competition will be experiencing inflationary pressures as well. In short, exporters do not just choose not to sell to an established market. They withdraw after, and only after, their sales start to fall or their currency losses become intolerable. To prevent the latter, they raise prices and wait to see what effect that has on the former. I’m guessing, not much at all. (We’ll still need tariffs, but that’s another issue, and the revenue will simply reduce the government’s need to print money for some of the things it buys, thereby passing along to the “taxpayers,” in the form of lower overall inflation, the proceeds of the tariff.)

Price Changes. Actually, this would be the biggest headache. But it is also the most intensely practical, which is to say it has the least to teach us about the economics or politics of the system. The administrative problem might, if such a system were formally proposed, make a strong political contribution to its defeat, but since the drift of this post is that we are, well, drifting toward the no-tax/no-interest scenario anyway, I don’t think we need waste much time worrying about the annoyance it will cause merchants.

This analysis – recall that this is a thought experiment aimed at thinking through how things work, not a policy prescription for the real world – leads to the possibility that the Fed’s “extended period” of low interest rates may well last forever. After all, the Fed’s main job in setting monetary policy is to limit inflation. But if the Federal government is committed by its deficit to borrow a certain amount of money in the short-term market, increases in short-term interest rates that would otherwise be anti-inflationary because they slow private economic activity become inflationary because they increase the Federal government’s demand for dollars. Thus, the deficit can reach a point where increases in the Fed’s discount rate are inflationary. At that point, the Fed basically loses control over inflation in the private economy, and we are essentially, as to a portion of the budget, in precisely the no-tax/no-interest scenario that is the subject of this post.

My guess is that the Fed will not raise interest rates for the foreseeable future. The question then is whether, when Medicare really starts to drive up the deficit, the Fed will remain accommodative in the face of political obstacles to revenue increases. I think the Fed will realize that raising interest rates will exacerbate inflation rather than tame it, that the share of the tax burden paid by inflation will, therefore, increase, and that we will learn to live with inflation. The yield curve will steepen as investors demand higher long-term rates, but Federal borrowing will move to the short end of the curve to enjoy the Fed's cheap money. (The biggest risk is that the government will continue to issue TIPS, the worst invention ever, but that's for another day.)

If the government borrows short, and the Fed remains accommodative, we may not have to deal with the trade deficit either. We can put our people to work on infrastructure projects and let the poor of the world send us the labor-intensive consumer goods we need. That, I think, is how we can uncouple “productive” jobs from access to production, which is crucial to achieving near-universal national prosperity in an import-based economy. But I want to deal with the distributional aspects of our post-taxation economy in a separate post.

Monday, May 24, 2010

Rand Paul and the Civil Rights Act

The philosophical problem for big-L Libertarians is that they don’t understand the role of government in life’s Prisoners Dilemmas. I like my autonomy as much as the next guy, and I like to think that my property is mine to do with as I see fit. But I also recognize that, at least in the commercial realm, others’ bad behavior may preclude my good behavior, that my “liberty” is in fact lessened by an expansive interpretation of theirs.

Say, for example, I ran a luncheonette in the American South fifty years ago and I thought it would be in the best interests of the community if it were integrated. Several practical obstacles would have arisen, not the least of which that my White clientele could choose to eat somewhere else, viz., at a segregated competing establishment. The White community, not as enlightened as I, might take other reprisals against me for voluntarily going against the old ways.

It’s all well and good to call me a coward, etc. for not integrating my place in the face of these obstacles, but my being “brave” wouldn’t have changed who got to eat where. No, the only way to do that was to do what was done: make it illegal for anyone to maintain a segregated lunch counter. Such a law would have freed me, and any like-minded colleagues, to do the right thing, with no loss of business to competitors, and no reprisals. I realize that government rules are not the same thing as the “natural” impediments of competition, but if what I’m really concerned about is my ability to use my property as I see fit, the law is actually a libertarian win for me.

I do think it’s important to note that my competitors and I all own public facilities. All the taxpayers pay for the inspectors who inspect our establishments and the police who protect them, so why shouldn’t all of the public be allowed to patronize them if they have the money and manners to do so? Yes, the capital that went into the restaurant may well have been “private property,” but once that capital is contributed to a corporation in exchange for limited liability or is dedicated to the creation of a licensed business that imposes costs on the community to support, there is no philosophical property basis for arguing that the community cannot say who may or may not patronize the resulting business.

Of course, people who shout “racist” for a living will earn their pay off of Dr. Paul’s quibbles with the Civil Rights Act, but only the mainstream media will pretend there’s any there there. It is a fact of American political life that if you take a position adverse to the interests of an identity group, someone will say you are doing it because you “hate” that group. And some network news whore will treat the accusation as worthy of others’ attention, as if each new night following each new day were a new surprise. But that’s politics.

Anyway, not being a racist hardly makes Dr. Paul otherwise qualified for an office as important as U.S. Senator ought to be. He is raising an important issue about the nature of government, and that issue ought not to be missed in the kerfuffle over race. He’s wrong on that issue, but I suspect it won’t matter. In an ideal world, Dr. Paul would lose for being the Libertarian he is and not for being the racist he isn’t. But elections aren't decided by the niceties of game theory, so I may have to settle for him losing any way he can.

Sunday, May 16, 2010

Elena Kagan and The First Amendment

Prof. Kagan wrote most fully about the First Amendment in “Private Speech, Public Purpose: The Role of Governmental Motive in First Amendment Doctrine,” 62 University of Chicago Law Review 413 (Spring 1996). The article is over 100 pages long, and I do not claim to have read it all. But I do claim to take away from it a specific impression of Professor Kagan, namely, that she may be a better student than teacher.
The first part of the article concentrates on R. A. V. v. City of St. Paul, 505 U.S. 377 (1992). R.A.V. arose from a prosecution under an ordinance that made it a misdemeanor to "place[ ] on public or private property a symbol... which one knows or has reasonable grounds to know arouses anger, alarm or resentment in others on the basis of race, color, creed, religion or gender .... ." The majority of the Court assumed, arguendo, and consistently with the holding of the Minnesota Supreme Court on the matter, that the ordinance applied only to "fighting words," a category of speech not protected by the First Amendment. Thus, according the majority opinion, and Prof. Kagan, the issue before the Supreme Court was whether St. Paul constitutionally could prohibit some, but not all, unprotected speech - more specifically, fighting words based on race and the other listed categories, but no others.
I believe that only eight justices voted in the case. (For some reason, I cannot find a list of justices who joined Justice Scalia in the Court’s opinion, but I suspect that Justice Thomas, who was on the Court when the case was decided had not heard the case when it was argued.) Justice Scalia did address the issue as described by Justice Kagan and held that the ordinance was unconstitutional because it punished some fighting words and not others. But four Justices disagreed with Scalia’s reasoning, arguing that a subset of unprotected speech can be barred, but finding that the St. Paul ordinance went beyond “fighting words,” and was, therefore unconstitutional.
Prof. Kagan devotes a footnote to the concurring opinions of half the participating justices and then addresses the Court’s opinion:
Three explanations for the Court's decision offer themselves, the first two relating to different effects of the St. Paul ordinance, the last relating to its purpose. First, the Court might have held as it did because the St. Paul ordinance too greatly interfered with the opportunity of speakers to communicate their desired messages. Second, the Court might have reached its decision because the ordinance harmed the ability of the public-that is, the audience-to become exposed to a desirable range and balance of opinion. Third, the Court might have invalidated the ordinance because regardless how (or whether) it affected either speaker or audience, it stemmed from an improper purpose on the part of the government.
But there is a fourth possibility, the one that offered itself to the four justices who concurred only in the result, viz., that the Court’s opinion was wrong. That possibility, it seems to me, is where the fun is. Certainly, lawyers need to be able to deal with the legal landscape created by the “official” opinion, but that’s something for students and practitioners to wrestle with. The debate among the justices revealed a Court deeply divided about an important jurisprudential question, and I see far more food for scholarly analysis in that division than in the doctrinal mess that arose from treating the Court’s opinion as sound.
I may be biased, as I find Justice White’s concurrence persuasive. I also like Justice Stevens’s concurrence, although I think he saw more distance between himself and Justice White than was really there. Still, the difference that he found, which relates to role of context in categorizing speech, is philosophically intriguing and just the sort of thing I would want a scholarly piece to pick apart.
The philosophical split among the justices is especially significant in hindsight, as the Court, without admitting it, backed away from R.A.V. in Virginia v. Black, 538 U.S. 343 (2003). There, the Court reversed the Virginia Supreme Court, which had ruled that Virginia’s anti-cross-burning statute was unconstitutional under R.A.V. Somehow, the Court managed to distinguish R.A.V. away, in what I see as a legal fiction intended to respect stare decisis while recognizing that they had in fact got R.A.V. wrong. Obviously, Prof. Kagan did not have this history available, but she did have the chance to say, as four justices did, that Scalia et al. were wrong; instead, she tried to make sense out of a world in which they were presumed to be right.
The second part of the article considers three theories of First Amendment jurisprudence:
The first approach - call it the "speaker-based" model - understands the primary value of the First Amendment to reside in its conferral of expressive opportunities on would-be communicators. A system of free expression, in allowing individuals to communicate their views, enhances their "autonomy" or "self-respect" or "self-development" or other (equally amorphous but desirable) human quality. Under this theory, any limitation of expressive opportunities constitutes a harm because it interferes with some speaker's ability to communicate to others and with the benefit that speaker thereby derives….
By contrast, the second approach to the First Amendment - call it the "audience-based" model - focuses on the quality of the expressive arena. A system of free expression, under this theory, has value because it enables the public-the audience for the speech - to arrive at truth and make wise decisions, especially about matters of public import. In order best to fulfill this function, a system of free expression should promote not speech alone, but speech of a certain kind and mixture. Rich public debate is the goal; the concern is the expressive realm as a whole, rather than each opportunity for expression….
The third approach to the First Amendment - call it the "government-based" or "motive-based" model-claims that what is essential is not the consequences of a regulation but the reasons that underlie it. The point of attention is neither the speaker nor the audience, but the governmental actor standing in the way of the communicative process. Under this model, an action may violate the First Amendment because its basis is illegitimate, regardless of the effects of the action on either the sum of expressive opportunities or the condition of public discourse. Conversely, an action may comport with the First Amendment because legitimate reasons underlie it, again regardless of its range of consequences. The critical inquiry concerns what lies behind, rather than what proceeds from, an exercise of governmental power.
Again, Kagan seems to be getting the lay of the land, rather than digging into it. I am particularly interested in her description of the “audience-based” model, which I favor, but with a significantly different focus. The electorate does not do truth; it does politics. What I want to know as a member of the electorate, is what other people think. Not what “worthy” contribution they have to make, but what they think, however bizarre, outdated, benighted or obnoxious their thoughts. Justice Harlan (of course) understood this when he wrote in Cohen v. California, 403 U.S. 15 (1971:
The constitutional right of free expression is powerful medicine in a society as diverse and populous a ours. It is designed and intended to remove governmental restraints from the arena of public discussion, putting the decision as to what views shall be voiced largely into the hands of each of us, in the hope that use of such freedom will ultimately produce a more capable citizenry and more perfect polity and in the belief that no other approach would comport with the premise of individual dignity and choice upon which our political system rests. See Whitney v. California, 274 U.S. 357, 375-377 (1927) (Brandeis, J., concurring).
To many, the immediate consequence of this freedom may often appear to be only verbal tumult, discord, and even offensive utterance. These are, however, within established limits, in truth necessary side effects of the broader enduring values which the process of open debate permits us to achieve. That the air may at times seem filled with verbal cacophony is, in this sense not a sign of weakness but of strength. We cannot lose sight of the fact that, in what otherwise might seem a trifling and annoying instance of individual distasteful abuse of a privilege, these fundamental societal values are truly implicated. That is why "[w]holly neutral futilities . . . come under the protection of free speech as fully as do Keats' poems or Donne's sermons," Winters v. New York, 333 U.S. 507, 528 (1948) (Frankfurter, J., dissenting), and why, "so long as the means are peaceful, the communication need not meet standards of acceptability," Organization for a Better Austin v. Keefe, 402 U.S. 415, 419 (1971).
Cohen and the cases cited were all available to Kagan – she even cites Cohen in support of her convoluted “government-based” position even though, in my view, it actually explains why such an approach is unnecessary - but she chose to use secondary sources to inform her understanding of the “audience-based” model. “Wholly neutral futilities” do not contribute to substantive truth, but they provide politically useful information, and the reason we have a constitution, much less a bill of rights, is to do politics. By ignoring Cohen and its forebears, Kagan makes her own “government-based” model seem like an attractive alternative to an unconvincing competitor:
The discussion so far has assumed that the disparate impact of a law on ideas will distort the speech market. If that assumption is false, then the distinction between content-based and content - neutral laws - even if the most sensible way of determining whether a law disparately affects ideas -would not further the interest in balanced discourse.
But this reasoning assumes that the audience-based model is about balanced discourse, which, as Justice Harlan explained, it is not. When Cohen is added to the mix, I think a coherent audience-based theory of the First Amendment emerges without the need for what, I believe, is a circular argument about motives. Or at least, the possibility arises, and Kagan should have dealt with it.
I would not vote against General Kagan on the basis of her writings, but they do not suggest to me that she will be much of a counterweight to Justice Scalia et al. Of course, it seems to me that Justice Scalia’s work in R.A.V. was second-rate, and I suspect that if that opinion were a law review article and he were a nominee, I wouldn’t hold out that much hope for him, either. Maybe I’m just a tough room to play. We’ll see.