remarK's Remarks

The Birth Control Mess

2012-02-11T08:47:00.004-05:00

True or false: an ounce of prevention is worth about 7 lbs. 6 oz. of cure. Somewhere buried in the dust-up over contraception as a health benefit is the the claim that it pays for itself in economic terms. As a result, insurance companies "forced" to give it away will be like Br'er Rabbit hurled mercilessly into the briar patch. As will those Catholic institutions which, their hands clean of actually endorsing contraception, will have lower health insurance bills on account of the preventive benefits that the insurance companies with which they deal are compelled by Big Brother to provide.

So, in effect, The Church is willing to pay for its employees to eschew contraception; indeed, it will help them do so by not paying for contraception. But if an employee chooses to get it on her own, the Church will, presumably, receive the savings as the preventive benefits reduce the cost of the employer's insurance. Moreover, because using contraception saves money, the employee can get it at no charge from the insurance company - which will provide it at no charge only because it is also providing coverage to the employer. In a logical universe, that "only," not to mention the cash benefit, would somehow implicate the institution in the provision of the services. But, fortunately, we're not in a logical universe. We're in church.

Gingrich for Candidate

2011-11-27T18:36:00.003-05:00

I'm supporting Newt Gingrich for the Republican nomination in 2012. I don't want any of the current Republican crop to win the election. They don't understand economics worse than BHO doesn't understand economics. Of the two candidates with serious prospects, Romney has disqualified himself as a candidate by his ads that quote BHO out of context, ads that Romney defends, apparently, on the grounds that two wrongs make a right. He's a liar, and as I heard Grover Norquist say just this morning, we shouldn't elect people who lie their way into office.

Actually, that not right. What I don't want is a candidate who lies his way to the nomination, because such a candidate will not be any fun at all to watch try to get elected. What I want is an interesting campaign, and Newt and Barack will bring an intellectual depth to the proceedings that will be refreshing for those of us who have endured nearly a lifetime of brain-dead politics. It won't be Olympian, or even Phialdelphian, but it will be substantive, with at least the possibility of the candidates raising some of the right questions. That's really all one can hope for in a national campaign, and G-d knows, we can't expect the media to ask them.

So if you get a chance, see if you can't get Newt on the ticket, even if you want the GOP to lose (or maybe, especially if you want the GOP to lose). The civics lesson will be worth the price of admission.

2 Broke Girls is Broke

2011-10-04T09:12:00.000-04:00

A brief TV review.

I decided to check out 2 Broke Girls on CBS last night. It's not very good, but that's hardly news. What is news is a bit of dialog. The two young women to whom the title refers were shopping in a Good Will Thrift Store. One picks up a pair of shoes marked at $8 and asks the cashier for a discount. The other girl says to the first: "I can't believe you're trying to shoe her down." At the GOOD WILL store, yet. Oy.

Arizona Christian School Tuition Organization v. Winn

2011-04-14T15:38:00.014-04:00

I don't like this case. I don't mind the outcome - the tax credit doesn't bother me. But the Supreme Court has screwed the pooch on standing in Establishment clause cases, and now it is so tied up in knots it can't think straight.

The question in this case is whether the plaintiffs have standing to challenge a tax credit that Arizona is giving to private school donors. most of whom are contributing to religious schools. Let's ignore stare decisis for a moment. No one relies on "standing" jurisdiction in ordering their affairs, so observing precedent isn't terribly important. Suppose, instead that our "standing" jurisprudence consists of (i) the "case or controversy" language in Article III and a prudential notion that a citizen, qua citizen, has no standing to complain of governmental action. One good reason for such a rule is that someone who is actually aggrieved by the government action is a better representative of his side of the argument than a citizen who is merely, allegedly, opposed to it. I mean, how do we know that the complaining citizen is really not just shilling for the government, that he won't lie down and play dead once the case is brought? Moreover, the courts are too busy to waste time on complaints without real complainants. If no one is hurt enough to complain, why bother to address the alleged problem? (I'm sure all of this has been covered ad nauseam in the relevant authorities, but we're just a couple of guys talking here, not legal scholars, so we'll leave reading the authorities to people who get paid.)

In most constitutional matters, the challenged action does affect someone directly. Someone is held liable for exercising free speech, or denied a permit to assemble peaceably, or not allowed to bear arms, or searched unreasonably, or not Mirandized, or denied counsel, or sentenced cruelly and unusually. But is the same thing true of the Establishment clause?

Suppose that Arizona, instead of allowing a tax credit for donations, had gone right out and declared Shinto the "State religion," but only in the sense that the saguaro cactus flower is the state flower, i.e., with no legal consequence to anyone. Who could complain? Who is hurt? Suppose some guy is denied a job by a private employer on the grounds that he is not a follower of Shinto, the employer reasoning, and admitting, that he believes it's good politics and customer relations for him to hire someone of the state's "official" religion. Our victim might then have a case. But doesn't he already have one under Title VII of the Civil Rights Act? Would he ever get to the Establishment clause? Indeed, is it possible to envision a violation of the Establishment clause that prejudices an individual but does not give rise to a complaint under the "equal protection" provision of the Fourteenth Amendment or some civil rights statute or other?

So, as a practical matter, it may well be that the only violations of the Establishment clause that don't have a remedy outside the Establishment clause are those that involve spending public money to favor one metaphysical worldview over one or more others. As a result, perhaps, the chosen avenue of attack has been the taxpayer suit, wherein someone alleges that the government has misspent his money in violation of the Establishment clause, even without a demonstrable link between such action and any individual harm to the complaining taxpayer.

Enter Flast v. Cohen. In that case, the Court held that a taxpayer, qua taxpayer, can contest Congress's exercise of the taxing and spending power, and because any taxing or spending done in violation of the Establishment clause necessarily exceeds Congress's authority to act, a taxpayer can challenge an Establishment clause breach that involves spending or taxing. That may sound narrow, but recall that any other violation of the Establishment clause would almost certainly create an individual harm that would support standing by an actual aggrieved party, under some other provision of law. Thus, Flast effectively created a taxpayer's remedy for "victimless" Establishment clause violations. Or, so it seemed until Arizona Christian STO came along.

Flast seems to me to rely on the legal fiction that the plaintiff taxpayer is aggrieved because it's his money being spent. If, as Chief Justice Warren argued in Flast, standing is required to assure that the parties are "sufficiently adversarial," the tenuous interest of an individual taxpayer in an insignificant government expenditure - the plaintiff's share of which would surely be de minimis in any other context - seems weaker than that of an atheist to be protected from the consequence of that spending. It does not appear that the plaintiffs in Flast complained of harm as non-religious persons, so I don't know what would have happened if they had. Nor does it appear that the plaintiffs in Arizona Christian STO claimed anything beyond taxpayer status. Still, that seems to me the only acceptable basis for an objection to government establishmentarianism.

Arizona Christian STO points up the weakness in Flast as the only basis for standing in Establishment clause cases. Flast opens a back door, and not everyone fits through it. Non-taxpayers don't fit through it, although they may be aggrieved as members of a derogated religious minority. And now, we find, tax credits don't fit through it either. There is something ironically theological about the dispute over whether a tax credit somehow causes the state's income tax to be unconstitutional. Is forgiving a tax the same thing as spending it? The tax laws routinely allow deductions for gifts to religious organizations. Why not a credit? But I won't be lured into counting the angels on that pinhead. The question should never have arisen. Where an Establishment clause issue exists, a plaintiff should be required to show only that he is objecting on the basis of his religious views being denigrated by the state, and not on the general, problematic basis that the taxing authority has overstepped its bounds.

Flast's kludginess also raises an issue of Federalism that bothers me. I get how the Establishment clause is incorporated into the Fourteenth Amendment's guaranty of liberty, but I'm not sure whether the issue of standing to protest the misuse of state funds under a taxing power that does not arise under the U.S. Constitution is governed by Flast. Imagine a state law that, to save the state money, provides that no taxpayer suit may be brought to contest any tax or expenditure where the taxpayer plaintiff's pecuniary interest in the matter is less than $10 per year. Would such a law be unconstitutional? Would it magically become unconstitutional if applied to a case where the bad taxing or spending violated the Establishment clause? If so, would that not, er, establish that Flast is a dodge?

I believe that the plaintiffs in Arizona Christian STO v. Winn should have had standing to press their claim as members of a group disadvantaged by the law, if they could credibly make that claim. I don't know enough about the group to say. Otherwise, they should be denied standing, not because a credit is different from an expenditure - which I suspect it is, but I don't have to decide yet - but because their interest as taxpayers is de minimis and, therefore, their adversarial bona fides are not sufficient under Article III.

Euphemasia – Huck Finn and the Founding Fathers

2011-01-08T11:49:00.001-05:00

There’s an Op-Ed this morning in the NYT by Adam Kirsch, Editor of The New Republic, protesting the racial Bowdlerization of The Adventures of Huckleberry Finn (replacing “nigger” with “slave” throughout) and the omission of the so-called “three-fifths compromise” from the reading of the Constitution when Congress opened this week. Mr. Kirsch called his piece “First Drafts of American History,” and, in that context, I think he is right to complain of the changes. But life is full of contexts.

First, the more trivial problem of the Constitution. That document’s text is hardly in danger. It is the organic law of the land, and it will always be available in its original version for lawyers and scholars and anyone else to read. What happened in the House of Representatives on opening day was not a reading of the Constitution; it was political theater featuring a reading of the parts of the Constitution that were relevant to the theatrics. I see absolutely nothing wrong with omitting from that reading whatever cannot be called legally misleading, and if the three-fifths compromise is no longer operative, the House does not advance the project of comparing government’s recent actions to the current version of its authorizing law by including it in a reading of that law.

The object of the deletion is not to rewrite history. (I would say “whitewash,” but the unintentional puns and allusions would be confusing.) The purpose is to shine the light of current organic law on the actions of Congress. I’m not here to protest any Congressional action as unconstitutional, especially the mandatory aspects of Obamacare, which are fine by me. But I would defend the decision not to read parts of the original document that are both offensive or embarrassing and no longer operative. I would be very much against an attempt to publish what purports to be the text of the Constitution without all of its original verbiage, but what the House Republicans did in reading the House’s marching orders seems to me exactly right.

Then there’s Twain. The problem with Huck Finn is that it’s taught too early. If it’s as great a book as the experts say – who am I to judge such things? – why isn’t it first taught late enough in school to make ‘nigger” bearable? On the other hand, if there is a good reason to teach Huck to youngsters, the subtleties of Twain’s views on racism embodied in his method are beyond their ken (which, of course calls into question the reason to read the book in the first place), and they should, indeed, be protected from the surface-level nastiness.

The danger in fiddling with Huck is not that kids won’t get its anti-racist drift without its real words. Kids won’t get its drift with its real words. The problem is that the kids’ text will somehow become the text, that editions that include the original wording will be shunned by libraries now that there’s an anodyne version available, that politically correct colleges will take the easy way out and teach the inoffensive Twain. What the House of Representative read last week does not purport to be the ur-text of their governing document. But euphemizing Huck Finn seems to me a dangerous precedent.

The change to Huck Finn is of a piece with other accommodations to dullness and decay in our national way of going. Should class size be calibrated to an historically high level of absence so that each teacher gets to teach a full classroom? Should we drop caveat emptor because consumers are too dumb to protect themselves from deceit? Is the revision of Huck Finn not just the nanny state assuming we aren’t smart enough to read the original? And is the nanny state right? Or should we work on toughening our skins? Will we become too dumb to govern ourselves? Have we already?

Anyway, I’m fine with that the House did and not fine with what they did to poor Huck.

The Coming Post-Job Economy

2010-12-01T10:28:00.006-05:00

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

(Enlarge.)

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.

(Enlarge.)

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.

Month	Exports	Imports	Balance
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.

Corporations and Free Speech

2010-10-18T17:37:00.003-04:00

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 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 think 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 Austin will be missed. Requiescat in pacem.

For Innovation’s Sake, Close the Patent Office

2010-09-08T12:39:00.003-04:00

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.

Marriage: Why and Who?

2010-07-27T10:35:00.001-04:00

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.

Why Free Trade has not Created Jobs for American Workers

2010-07-02T16:04:00.008-04:00

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…

Uncle Sam Should Tap his Credit Line

2010-06-27T23:23:00.002-04:00

[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 © voxEU.org) 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?

Let’s Review

2010-06-12T10:30:00.006-04:00

[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.

Pretext and the Middle East

2010-06-03T13:03:00.005-04:00

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.

Jobs and Money and Such

2010-05-28T16:14:00.020-04:00

[This post is being revised.]

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

2010-05-28T15:15:00.015-04:00

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.

Rand Paul and the Civil Rights Act

2010-05-24T15:49:00.006-04:00

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.

Elena Kagan and The First Amendment

2010-05-16T17:21:00.020-04:00

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 not 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.

Justice Kagan on Hate Speech and Pornography

2010-05-13T18:42:00.004-04:00

In her 1995 U. Chicago L. Review piece on hate crime and pornography (which I found here), then Professor Kagan wrote:

This Essay on the regulation of hate speech and pornography addresses both practicalities and principles. I take it as a given that we live in a society marred by racial and gender inequality, that certain forms of speech perpetuate and promote this inequality, and that the uncoerced disappearance of such speech would be cause for great elation.
.…
The question I pose is whether there are ways to achieve at least some of the goals of the anti-pornography and anti-hate speech movements without encroaching on valuable and ever more firmly settled First Amendment principles.

In other words, while the uncoerced disappearance of certain forms of speech would be a good thing, let’s see what we can do to coerce its disappearance. Missing entirely is the argument that would signal Ms. Kagan’s stature as a serious thinker. That argument is the one in which she takes us from how good it would be if all forms of speech that perpetuate and promote racial and gender inequality would disappear without coercion to the premise that we should find ways to get rid of them by coercion. (Also missing are descriptions of “hate speech” and “pornography” sufficient to let us know what we are talking about.)

We do get a robust, if utilitarian, defense of viewpoint-neutral First Amendment jurisprudence, in which, for example, Prof. Kagan outlines the reasons why regulation that claims to be “harm-based,” as opposed to “viewpoint-based,” would in effect be viewpoint-based and should, therefore, be rejected. But, whereas her defense of viewpoint neutrality against claims of harm-based regulation seems to make hate-speech and, especially, pornography, beyond the scope of regulation, she continues:

None of this discussion, of course, denies either the possibility or the desirability of crafting carefully circumscribed exceptions to First Amendment norms of viewpoint neutrality, and in the last section of this Essay, I briefly consider whether and how this task might be accomplished.

Say what? “[C]arefully circumscribed exceptions to First Amendment norms of viewpoint neutrality”? Circumscribed by whom under what standard of care? Yikes.

Her suggestions:

The four approaches are, in order: (1) the enactment of new, or the stricter use of existing, bans on conduct; (2) the enactment of certain kinds of viewpoint-neutral speech restrictions; (3) the enhanced use of the constitutionally unprotected category of obscenity; and (4) the creation of carefully supported and limited exceptions to the general rule against viewpoint discrimination.

1. The enactment of new, or the stricter use of existing, bans on conduct. In this category, Prof. Kagan included the enhanced punishment of hate crimes and the prosecution of crimes incidental to the production of pornography, specifically, “the sexual assaults and other violent acts so frequently committed against women in the making of pornography.” So frequently? If she says so. Certainly, kiddie porn and snuff films and any other degrading video in which anyone is forced or conned into appearing should give rise to prosecution. But that hardly seems worth the trouble to say.

Prof. Kagan rejects the application of prostitution, pimping, and pandering laws to porn. She rejects prostitution prosecution, which won’t work anyway seeing as how it’s almost impossible to prove in what jurisdiction any particular act occurred, because such prosecution would make a criminal of the “victim” – viz., the female performer. But that argument seems to misconstrue her own complaint against pornography in the first place, which is not that it victimizes the performers but that it promotes and perpetuates gender inequality. Whatever, we are left with only a proposal to outlaw assault and deceit. Fine.

2. The enactment of certain kinds of viewpoint-neutral speech restrictions. Here Prof. Kagan runs smack into her own premises. Recall that she wants to get rid of speech that perpetuates and promotes racial and gender inequality. Those are viewpoints. Not nice ones. But viewpoints nonetheless. That’s why their uncoerced disappearance is to be wished for. But how do we impose viewpoint-neutral restrictions on something we want to get rid of precisely because we don’t like its viewpoint?

Prof. Kagan wrote:

A law prohibiting, in viewpoint-neutral terms, not merely fighting words but other kinds of harassment and intimidation would (and should) face greater constitutional difficulties, relating most notably to overbreadth and vagueness; but a carefully drafted statute might well surmount these hurdles, and such a law surely would not be subject to the selectivity analysis of [R. A. V. v. City of St. Paul, 505 U.S. 377 (1992)]. Viewpoint-neutral laws of this kind - whether framed in terms of fighting words or in some other manner - might be especially appropriate in communities (such as, perhaps, educational institutions) whose very purposes require the maintenance of a modicum of decency."

That’d be speech codes on campus made into law. I’d want to see a more exhaustive defense of that one.

There’s more than a whiff of “nothing’s impossible for the man who doesn’t have to do it himself” in Prof. Kagan’s proposals. Such proposals. without well-defended examples, are vacuous. Just what the careful drafter would have to be careful to do is not made clear, and so the job is assumed to be doable without evidence that it is.

And it won’t do to say, as Prof. Kagan does, that she cannot give these tough questions “the extended treatment they merit.” Then why show up at all? Anyone can ask hard questions. (Which is not to say that Prof. Kagan has asked the right hard questions. Indeed, until you try to answer your own questions, you can’t be sure that they are the right questions.)

3. The enhanced use of the constitutionally unprotected category of obscenity. I have to admit that I have read the section of Prof. Kagan’s piece about redefining “obscenity” to capture sexually violent pornography on the basis of the harm such works do to women, and I do not get it. She says that “the obscenity doctrine itself may benefit by transformative efforts, as these efforts bring the doctrine into greater accord with the harm-based morality of today, rather than of twenty years ago.” But that is precisely the sort of harm-based argument that she rejected earlier because, as she so ably argued, all viewpoints worth the trouble to suppress harm someone. So, having come out against harm-based subterfuges in one part of her essay, she seems to be advocating one in another.

More disturbing, this portion of the essay seems the most blatantly political. I have no problem with Ms. Kagan having a political views, including certain feminist views that I don’t think much of, but I do have a problem with her trying to find ways to suppress speech that she clearly opposes on political grounds by pretending that it is not political speech.

Obscenity, above all, is apolitical. Otherwise, it’s not obscenity in the Constitutional sense. I’m not saying that a producer can put a political fig leaf on obscene material and make it not obscene. But I am saying that if the reason we oppose obscenity is because it does harm to a group (as opposed to public morals generally) by the message it sends, then we are admitting that it is, ipso facto, political speech and that we are suppressing it for that reason. Thus, Kagan’s “enhanced” use of obscenity is code for the political use of obscenity, and that’s, well, obscene.

4. The creation of carefully supported and limited exceptions to the general rule against viewpoint discrimination. This section seems to reveal a shallowness in Kagan’s understanding of viewpoint neutrality. She cites existing exceptions to viewpoint neutrality in cases where the Court has permitted certain speech to be suppressed. As regards obscenity, she writes (in footnote 73):

It might be argued that such a redefinition of the obscenity category would render it viewpoint-based and therefore inconsistent with the First Amendment. This argument depends first on the proposition that a statute framed in terms of sexual violence is viewpoint-based…. As important, the argument depends on the proposition that the obscenity category is not now viewpoint-based - in other words, that it does not now constitute some kind of exception to the rule of viewpoint neutrality. This proposition is difficult to maintain given the obscenity test's reliance on community standards of offensiveness. [Citations omitted.] As between an obscenity doctrine that focuses on sexual prurience and offensiveness and an obscenity doctrine that focuses on sexual prurience and violence, the former would appear to pose the greater danger of viewpoint bias.

The last sentence of this footnote is crucial. The purpose of the First Amendment – not of the judicial rules implementing it, but of the Amendment itself – is to protect the flow of political information. The question, therefore, is not whether a law suppresses a “viewpoint” per se, – every obscene work can be seen to express the “viewpoint” that we should not to be disgusted by what we see – but whether the law in question favors or disadvantages a political interest, i.e., the interests of something less than the community at large. Yes, we have carved out public morals as an exception to viewpoint neutrality, but only to the extent necessary to prohibit material that offends community standards.

We enforce obscenity laws because we recognize, I would argue, that obscene materials raise no serious issue regarding competing political interests. As soon as one says, however, that a form of speech disadvantage some subset of society, then the protections afforded political speech come into play. That’s why a statute based on offense to the community causes less Constitutional concern than one based on potential violence against a group.

Thus, Kagan writes:

Could it possibly be the case that viewpoint discrimination built into the very definition of a low-value category is permissible, whereas viewpoint discrimination carving up a neutrally defined low-value category is not?

No, it cannot be. Not if the viewpoint discrimination relates to a political matter, including the relative status of interest groups in society. And so we return to the beginning. Speech that perpetuates and promotes racial and gender inequality is political speech. and, as such, there should be no way to suppress it, and no one, least of all a Supreme Court nominee, should be looking for a way to suppress it.

Prof. Kagan recognizes the modesty of what can be done even under her reading of the authorities:

But … the hard question remains: should the Court accept pornography or hate speech as a low-value category of expression? The currently recognized categories of low value speech seem to share the trait, as Cass Sunstein writes, that they are neither "intended [nor] received as a contribution to social deliberation about some issue. [Citation omitted.] That definition offers several lessons for any regulation, concededly based on viewpoint, either of hate speech or of pornography. In the case of hate speech, such an ordinance should be limited to racist epithets and other harassment: speech that may not count as "speech" because it does not contribute to deliberation and discussion. In the case of pornography, any ordinance should be limited to materials that operate primarily (as obscene materials operate primarily) as masturbatory devices; in addition, an explicit exception, like that in the obscenity standard, for works of serious value ought to be incorporated. Only if pornography and hate speech are defined in this narrow manner might (or should) the Court accept them as low-value categories - a classification that, it must be remembered, depends at least as much on the non-expressive quality of the speech as on the degree of harm the speech causes.

The Professor’s point about masturbation rings a bell. In 1993, Carol Iannone wrote an article for Commentary contesting McKinnon-Dworkin on pornography. I don’t recall Ms. Iannone’s arguments, but she seemed to me too quick to accept the idea that pornography could be Constitutionally regulated. I wrote a letter to the editor, which was published in the January, 1994 issue of the magazine:

To the Editor:

Without disagreeing at all with Carol Iannone's points [“Sex & the Feminists,” September 1993], I would urge upon her a stauncher defense against Catharine MacKinnon's assault on the Constitution.

MacKinnon's argument is simple: because the Constitution protects speech to enhance the search for truth, the government should be able to suppress specific views that cannot be true, at least where there is a compelling state interest to be advanced by the suppression. Because anti-egalitarian speech cannot possibly be true, and equality is a compelling state interest, the former should be suppressed in furtherance of the latter. Miss Iannone seems to accept MacKinnon's premises, arguing back only that some ideas MacKinnon would suppress are at least debatable. In this, she rises too willingly to the bait.

To suppress speech on the ground that it cannot be true is to miss entirely the point of the First Amendment. As organic law, the First Amendment is not about truth; it is about politics. Political information . . . is the lifeblood of our electoral democracy. If a view that cannot be true cannot be expressed, we cannot learn that the view is even held. As a result, we are denied important information about the beliefs of the electorate. We cannot adequately develop a platform on which to run or a basis on which to vote. (Imagine trying to conduct a public-opinion poll on the status of the sexes in Catharine MacKinnon's America.)

When the First Amendment is properly understood as protecting the flow of political information, MacKinnon is hoist by her own petard. Unlike conservatives who would ban pornography because it has no more social importance than a vibrator, MacKinnon would suppress it because it contains a dangerous political message. If pornography really does contribute to the oppression of women, and especially if its producers intend that effect, pornography ipso facto has redeeming social importance and is protected speech (I take the word “redeeming” in the phrase “redeeming social importance” to mean redeeming from mere prurience, not redeeming in any uplifting sense). The pornographer's message may demand rebuttal but, if he does have a political message, censorship is not our way of rebutting it.

Prof. Kagan seems to have come down on the side of the conservative vibrator crowd. The question is, though, on what basis do we ban masturbatory aids? And is that really what this fuss is about.

Prof. Kagan’s piece seems to me something of a sop to feminists who wanted her to say something at a time when the issue was hot. Because, in the end, she says very little, giving them, perhaps, a slender tree to bark up, and specific suggestions of the slightest practical import. But it’s discouraging to see how quick she is to wish she could squelch unpopular speech. I want a justice who will defend my right to know what my most obnoxious neighbors think, not apologize for her inability to suppress it.

Oil Spills and Financial Hemorrhages

2010-05-04T04:11:00.007-04:00

I don't know why BP's Deepwater Horizon rig blew up, but it's pretty clear that the ensuing environmental mess results from the failure of the blow-out preventer, a gadget whose job, I have to assume, is to prevent blow-outs. So, while President Oblamer has assured us that BP is responsible and that BP will pay - that, as Interior Secretary Salazar put it, we will "keep the boot on their throat" - that'll help fend off some of that nasty Nazi imagery the Right favors - we should probably be looking into who made the BOP.

The BOP sounds like the ratings agency of the deepwater drilling world. The thing worked fine while the demand was manageable, but eventually, the demand got so strong that the agencies got in over their heads, in deep water, so to speak, and failed to stop a leak of toxic assets into the environment. Until the BP rig explosion, I had been analogizing the financial crisis to a flood, and the ratings agencies as the leak in the dam holding back the inflow of sino and petrodollars. But the demand for AAA-rated paper and demand for safely drilled oil are a pretty good match. Someone had to make sure that investment value could be safely extracted from US real estate, and the ratings agencies were the blow-out preventers.

The real problem facing deepwater drillers right now is the possibility that none of their BOPs work. If, as would make sense, the companies carry insurance against the failure of their BOPs, there must be some scared insurance companies out there, and one can imagine that premium costs will rise for companies that buy such insurance in the future. There is some sort of limit on the damages that BP can be made to pay for this mess - although the costs of repairing the leak, which may not be insured, and which BP will pay, at least until it can collect from the BOP maker, if that was not BP itself, will dwarf those statutory damages.

In contrast, I don't think anyone carries insurance against the failure of the ratings agencies. But then, who needs insurance when the only way to prevent collapse of the financial system is for taxpayers to bail out anyone hurt by the blow-out. Presumably, the same will hold true of this oil spill. What if BP just walked away? Wouldn't we "bail out" the marshes?

There's more to be written about this spill, but I'm betting its genesis and treatment will look a lot like the financial mess through the right set of lenses. Just replace the red ink with black goo...

Goldman in the Crucible

2010-04-27T19:59:00.004-04:00

A bit of a witch trial in Washington today. I cannot say that the Goldman folks acquitted themselves well, but that’s not really very interesting. What was interesting was that Senator Levin had a mission to make Goldman look bad, so when they didn’t, he simply said they did. He asked stupid, unanswerable questions, or questions in service of non-sequiturs as if the answers mattered, and got all steamed when the Goldman guys refused to pretend that he was making sense. I thought of that Congressman worrying about whether too many marines would cause Guam to capsize. What do you say to the man who asks whether you walk to school or carry your lunch?

Two examples. In an email, one Goldman guy writes to another, referring to the portfolio in the SEC case as having been picked by “ACA/Paulson.” According to the author of the email, who was sending it to someone who fully understood Paulson’s role, whatever that was, “ACA/Paulson” was shorthand for that relationship, not an indication of Paulson’s status as an equal partner in the deal. Levin only wanted to know if the email was “accurate.” Well, as between the sender and the recipient, it was accurate if the recipient understood it to mean what the sender intended it to mean. But to Senator Levin, the email, if it were “accurate,” would prove that ACA and Paulson were equal partners in the selection process, because that’s what the words would mean to an outside observer. Now, it’s entirely possible that the author of the email is lying about the import of the note, but Levin didn’t say that. He simply acted as if his interpretation of the note matters more than those of the sender and the recipient, and that’s beyond stupid.

But Senator Levin wasn’t done. He grilled Goldman’s CFO over whether the firm was “short” the mortgage market throughout 2007. This is important to Sen. Levin because he wants to say that Goldman was peddling mortgage paper during the year despite being short all year. The CFO said that the firm’s net position was mostly short during the year, but not consistently so, and not significantly so. Well, that didn’t help the Senator, who wanted no part of the CFO’s obfuscatory use of the word “net.” “I don’t care about net,” said the Senator, or words to that effect, “I just want to know if you had a short position throughout the year.” The witness tried to explain that the firm had short positions at all times, but was net long at times, which, one would think, would be what matters in determining whether the firm had a conflict of interests. But not to Senator Levin. He just wanted to establish that the short positions were in place, no matter what the firms’ uses for them or its net position on the mortgage market. Since witnesses don’t get to ask questions, the CFO never got to say “What the fuck difference does it make, you moron?” But the thought was hard to escape.

Well, they say we get the government we deserve. What we did to deserve Sen. Levin isn’t clear to me, but I want to apologize from the bottom of my heart for my part in whatever it was, because it must have been a doozy.

(None of this is meant to deny that investment banking has lost its way or that Goldman Sachs has some ‘splainin’ to do. But that’s sort of the point. Intelligent questions from Senators who actually wanted real answers would have been very helpful in illuminating what has gone wrong. Instead, we got theater intended to promote the regulatory bill making its way through the sausage factory. Pity.)

Goldman’s Super-Senior Moment

2010-04-25T11:08:00.010-04:00

Not by Damon Runyan

Johnny the Hedge walks into Goldy’s bookie joint and says "I think the Mets lose big this year. Here’s my bet:

I'll pay you $100 if the Mets win at least 60 games. But if they win fewer than 60 games, you pay me $25 per game under 60. And just to pay you for the trouble, we’ll start with a $15 credit to you."

Goldy says, “I’ll get back to you. I have to see if I can lay the bet off.” She then looks through her rolodex for Mets fans and finds two that interest her.

Ikey B. loves the Mets, always has. Goldy offers Ikey B. a deal:

"I’ll pay you $79 if the Mets win at least 60 games. You pay me $25/game for every game fewer than 60 that the Mets win, up to $150 max."

Ikey B. is sure that the Mets will win at least 60 games, so he takes the bet. But Goldy isn’t done. She has laid off $150 of her risk on Johnny’s bet, but what if the Mets win fewer than 54 games?

So Goldy turns to Al “Citifield Action" (ACA to his friends). Al’s a really well-heeled Mets man. Goldy says to Al:

"I’ll pay you $10 if the Mets win at least 54 games. Otherwise, you pay me $25 per game fewer than 54 that the Mets win."

Goldy offers ACA so little because, well, winning fewer than 54 games? C’mon, no one ever does that. ACA sees a chance to pick up an easy ten-spot, and he jumps at the chance.

So let’s take a look at where Goldy sits:

If the Mets win 60 games or more (the most likely outcome, if history is any guide), she collects $115 from Johnny and pays out $89 to Ikey B. and ACA, netting $26.
If the Mets win 54 games, she pays $10 to ACA, collects $150 from Ikey and pays it to Johnny, less the $15 she gets to keep for her trouble, netting $5.
If the Mets win 50 games, she collects $150 from Ikey, $100 from ACA, and pays $235 to Johnny, netting $15.
If the Mets win 20 games, she collects $150 from Ikey, $850 from ACA, and pays $985 to Johhny, netting $15.

In the quaint patois of Wall Street, Goldy’s bet with ACA is called a super-senior tranche. The concept is very simple. Ikey B.’s bet – that the Mets would win at least 60 games, is rated AAA by the mavens because it is (apparently) risk-free. But, in the strange world of investment banking, some risk-free investments are more equal than others. If a bet that at least 80% of mortgages will pay off is rated AAA, what about a bet that at least 60% will pay off? By breaking its bet with Paulson up into tranches, GS was able to arbitrage the spread between what Paulson was willing to pay to bet against 80% of the pool and what ACA would demand to insure the top 60%. (These numbers are illustrative, not actual.) All that was required was for someone to take the AAA-rated tranche represented by pay-offs in the 60-80% range, and IKB did that.

Thus, the money for GS was not in its deal with IKB. The money was in the arbitrage between what GS was charging Paulson for its bet on the whole pool vs. what it was paying ACA to cover the “super-senior” tranche of the pool. That super-senior opportunity is what drove the synthetic CDO market.

Basel II and the Goldman Thing

2010-04-24T12:40:00.004-04:00

This is one of those posts where the logic is more important than the facts assumed because, if those specific facts are wrong, the logic still holds for a large number of actual situations.

Basel II is the second of the Basel Accords, which are recommendations on banking laws and regulations issued by the Basel Committee on Banking Supervision. I wasn’t there, and I haven’t studied the workings of the conference, but here’s the logic that seems to have led to the conclusion that was reached:

1. Banks that lend to good risks need less capital than banks that lend to bad ones.

2. Under current standards, the amount of capital required does not adequately reflect the relative safety of the loans being made, i.e., too much capital is being required for very safe loans.

3. With the growth in imbalanced international trade (think oil and China), the financial system has an ever-increasing need to convert surplus countries’ reserves into deficit countries’ capital.

4. If capital standards are reduced for highly-rated loans, more money can be repatriated.

5. Therefore, banking standards should allow significantly higher leverage for highly-rated loans.

The flaw in this logic is the unstated assumption that premises 1 and 2 are independent, that the safety observed for highly-rated loans is independent of the rules limiting their amount. I believe that implementing the conclusion – reducing the capital required for highly-rated loans – actually caused the safety of such loans to suffer. As the folks in the philosophy biz might say, making the descriptive prescriptive has made the description false.

The weakest link in the financing chain holding up Basel II is the ratings system. Highly-rated loans are safer than non-highly-rated loans for one simple reason: they deserve to be highly rated. They are not less risky because they are highly rated; they are highly rated because they are less risky. So, if something changes in the financial system so that ratings are no longer reliable, capital standards based on ratings become dangerous.

What can cause the ratings system to become unreliable? How about an exponential rate of increase in the demand for highly-rated paper? That demand creates a demand for investment bankers to spin Baa straw into AAA gold, and investment bankers, in case you haven’t noticed, have lots of money to spend to make the lots of money they make. The demand for highly-rated paper after Basel II was unprecedented, and the pressure on the ratings agencies to polish turds became overpowering. This is not to excuse the raters. To the contrary, I see them as the biggest culprits in the whole mess, the people with the last clear chance to stop the madness. But their fallibility still needed to be reckoned with in the human engineering of Basel II.

Of course, blaming the whole thing on our trade deficit as I do, I see Basel II as just another inevitable consequence of too many dollars needing to come home and us having to take them in. The bandwidth of the financial system had to be increased, and increased bank leverage does provide increased financial bandwidth. The alternative to more leverage would have been more capital. Foreign-held reserves would have to be used to capitalize new or existing banks, something that the owners would have resisted. It’s hard to imagine the political will to reach that result absent a crisis, so Basel II seems like the natural domino to fall once the trade deficit ballooned. Now that we’ve had the crisis, if capital levels are restricted, capital infusions will follow. Goldman, Sachs, & Al-Waleed Sinobank. Ick.

But I digress. Today’s moral is simply that you cannot codify an observation and expect that the observation will not change. Much of our regulations make this mistake. We should be on the look-out for examples in the big policy prescriptions coming along in healthcare, energy, and financial services.

Top Ten Bad Apologies for Goldman

2010-04-20T11:21:00.013-04:00

[This post was last revised on April 25, 2010.]

For future reference, linking purposes, and the general edification of the bloggerati, I want to catalog the excuses Goldman is making and why the ones I’ve seen so far seem bogus to me.

1. Big boys don’t cry.

The argument is that IBK and ACA should have inspected the mortgage pools themselves and made their own judgments, whatever Paulson’s role may have been. On this score, IKB and ACA stand in different positions, but not necessarily with different outcomes.

IKB is a foreign investor buying US RMBS. It turned to a gilt-edged investment bank and demanded that a respected, independent bond-picker select the assets and that the CDO be rated AAA. If a foreign investor has to do more than that, then the dollar has no business being the world's currency, because it's too damn risky to hold. I mean, all this boils down to GS saying "You trusted me?"

ACA is in a slightly different position. As the selector of the reference portfolio, it cannot claim to have “relied” on anyone, and, in that role, I think it acted negligently in allowing itself to be fooled about Paulson’s game. IKB, I would think, has a case against ACA (if it or its assets can still be reached!) for simply not doing what it was paid to do.

But ACA’s parent, which was not getting paid to select the portfolio, took the biggest loss in this game, and the fact that it was foolishly separated from its money does not mean that it was not defrauded and does not have a cause of action against GS and/or Paulson if the facts support that position. Yes, as insurer, ACA Holdings had an opportunity to inspect the insured portfolio. (I hate to use insurance words about a contract unsupported by insurable interest, but it saves time.) But insurance is a subtle thing. A good underwriter will take into account perils “known and unknown,” including unquantifiable adverse selection. Paulson’s involvement in the selection process raises a serious issue of adverse selection, and, despite being dumb enough not to dope out Paulson’s role when he rejected the Wells Fargo bonds, ACA can certainly claim that Paulson’s role as insured and portfolio selector, if known, would have posed too great a risk of adverse selection to permit the CDS to be issued.

2. For every long, there’s a short.

IKB and ACA are supposed to know that every sale has a seller who thinks that the assets are worth less than they are, so they should not have been surprised to learn that there was a short on the other side of their deal.

Not every sale is a bet against the buyer. When I buy a car, I am betting that it will run. Is the dealer betting that it won’t? When I buy a Treasury bond, I am betting that the Government will pay it off. Is the Government betting that it won’t? If I buy the bond from a private party, is he betting against me? Maybe, but maybe not. Maybe, he just needs some cash to buy a hot stock. There is no implication that he believes the bond will fall in value on account of something other than a general rise in interest rates. Thus, serious mispricing is not a necessary element to a sale.

IKB’s piece of the synthetic CDO in the Goldman case was nothing more than a loan from IKB to GS on which GS did not have to pay in the highly unlikely (according to the AAA-rating) event that the bonds defaulted. IKB was entitled to believe that GS was doing this transaction for the super-senior opportunity, or to provide a real hedge against securities they or a customer owned and liked, and not because anyone thought the bonds would fail. Indeed, just in case GS might be betting against it (and might, therefore, pick a weak reference portfolio), IKB insisted that ACA be brought in to pick the portfolio. IKB thus tried to assure that, whether or not there was a short, the portfolio was picked by a long.

ACA Holdings, the issuer of the CDS did have reason to assume that someone was shorting the portfolio, but, again, the short could have been hedging a long position or betting on interest rates, and ACA Holdings did not know, and had a right to know if it asked, that the short player had in fact helped to pick the portfolio. Thus, the “for every long there’s a short” argument is simply a non sequitur as to ACA Holdings. ACA knew there was a short, but it did not know about the adverse selection in the pool it was insuring.

3. Investment bankers do not reveal counterparties.

This argument assumes that Paulson was “the other side” of a trade with IKB and/or ACA. As to IKB, that argument has no place. IKB did not have the right to know who, if anyone, was on the other side of the trade. But it did have a right to know who picked the mortgages.

As regards ACA, this confidentiality thing is one of the places where the failure to treat CDSs as insurance contracts turns things upside down. Whereas a broker is expected to maintain the confidentiality of the people on each side of a financial deal, an insurance underwriter must take into account adverse selection and moral hazard, both of which are unique to the identities of the ultimate insured and its actual interest in the risk. ACA needed to know at least that the portfolio was chosen by a short and that the CDS was actually reinsurance of GS’s CDS to that very same short. Those are relevant underwriting facts because ACA’s CDS was not a “derivative security” any more than a horse with feathers glued on is a bird.

Moreover, the law treats an insurance contract as being uberrimae fidei – of the utmost good faith. Because of the asymmetry in knowledge, the buyer is required to disclose all relevant underwriting facts. But a CDS isn’t insurance, right?

4. Any portfolio of Sub-prime mortgages would have cratered, so no harm, no foul.

IKB’s claim against ACA for bad portfolio picking might indeed run into trouble if IKB cannot prove that its portfolio actually underperformed because of how it was selected. But ACA is not the interesting defendant here. That would be GS and maybe Paulson as co-conspirator.

If fraud is proved against GS and/or Paulson, IKB may be entitled to rescission of its deal, whether or not it would have lost money on another pool. Why should the defrauder have the benefit of that doubt?

ACA Holdings should have an easier time getting rescission as a remedy. It can reasonably claim that it would not have issued its CDS had it known the facts, so its damages are whatever it lost. ACAH did not pay GS to find it a portfolio to insure, so it does not make sense to me that ACAH’s remedy should be measured by reference to some other portfolio it might have insured. ACAH should be entitled to rescission of the contract.

---------

I know. That’s not 10. But the night is young..

I Hate to Say “I told you so,” but…

2010-04-18T12:23:00.006-04:00

Here’s an excerpt from my very first blog post:

Credit Default Swaps violate every relevant principle of underwriting and public policy. Why, then, are they legal? I can only guess that insurance people were not asked to think about them, or if they were asked, that their answers were ignored. (Insurance is such an arcane thing and all.) Instead, in what can most charitably be called an act of boneheaded stupidity, Congress tried in the Commodities Futures Modernization Act of 2000 to put CDS contracts outside the reach of state insurance laws.

John Paulson bought a CDS on bonds he did not own. Not only that, he created the bond pool himself from assets he thought would crater. Yes, he and Goldman Sachs had to fool some folks into thinking that Paulson had not suggested mortgages that he thought were undervalued, but that’s the point: if it weren’t possible for Paulson to buy a CDS on assets he did not own, the assets in question never would have existed, and no one would have had any reason to defraud anyone else into buying them.

The preventable causes of the Goldman case are the massive trade deficit that put so much money on Wall Street and the deregulation of derivatives, which made it possible to cheat people out of that money. Bill Clinton says that Rubin and Summers, who argued against regulation of derivatives, underestimated how much money they would involve. Maybe they didn’t grasp the importance of our growing trade deficit. But, in any event, an insurance contract without an insurable interest is a prescription for trouble, and trouble is what we got.

It did not occur to me that players would be able to invent their own assets to short, but there is no point in trying to guess what form of mischief a stupid rule will enable. Insurance people speak of “perils known and unknown.” I know that if you can insure something you don’t care about, trouble follows. The shape of the trouble is really irrelevant. Just give the worst and the brightest a financial regulation that makes no damn sense. They’ll figure out the rest.

(A follow-up: Roger Lowenstein joins the call on April 20, 2010: "Congress should take up the question of whether parties with no stake in the underlying instrument should be allowed to buy credit default swaps." Lowenstein also calls for transparency in trading derivatives, but that seems wholly unnecessary once the ones with no skin in the game are banned.)

A Place for Prosperity

2010-04-15T13:02:00.017-04:00

Thomas Hobbes observed that man’s life without government was no bargain:

In such condition there is no place for industry, because the fruit thereof is uncertain: and consequently no culture of the earth; no navigation, nor use of the commodities that may be imported by sea; no commodious building; no instruments of moving and removing such things as require much force; no knowledge of the face of the earth; no account of time; no arts; no letters; no society; and which is worst of all, continual fear, and danger of violent death; and the life of man, solitary, poor, nasty, brutish, and short.

Governments were instituted to solve the problems of uncontrolled competition, to, among other things, make "a place for industry." Why is a place for industry a good thing? Obviously, industry creates goods, the ones we need and the ones we want. It creates sustenance and it creates wealth. But, in a society in which the government gets its legitimacy from the consent of the governed, exactly what should that "place for industry" be? If we are to enable the production of goods, should we also permit the accumulation of wealth? And how should the goods, and such wealth as is permitted, be allocated among the people who have enabled their creation?

Production does not just happen, nor can it reasonably be compelled. It must be enabled by a legal infrastructure. First come enforceable property and contractual rights. But property and contractual rights merely do for production what geography and climate do for life: they make it possible, not good. Just as government regulates primal competition, it must regulate capitalism if the economy is to be anything more than a subset of Hobbes's mayhem. Government must not only create a place for industry; it must create a place for prosperity. But how?

If, as I and many Americans believe, that government is best that governs least, we should start by allocating the fruits of production to those who make it happen. And we should allow those who have capital to seek out those who have talent on their own to make it productive. And allow those with talent to organize enterprises as they see fit (for, if we could do better, we should be doing better).

Unfortunately, history teaches that this minimalist approach to political economy causes wealth to be created but also to be concentrated. The problem is labor. Aside from returns on capital, compensation for work is the only satisfactory alternative to largesse for delivering goods into people's hands. But there is no guaranty that the supply of labor will not outstrip the demand for it, that competition for jobs wil not force down the standard of living of those with only their labor to sell. That has been the case in the early days of all capitalist economies, including some now in their infancy.

The competing capitalist must extract the most he can from the labor pool at the least cost. Demagogs attribute such competition to some moral failing among capitalists, but unilaterally raising wages drives away customers or capital, so no other path is available in a laissez-fiare system. Consequently, where labor is abundant and competition for jobs unregulated, only the barest subsistence finds its way to the mass of people. As a result, much of their labor is directed toward producing luxury goods for the few who get to keep the fruits of the laborers' toil. Because the number of people needed to make such goods is limited by the relatively small size of the market, the system equilibrates at a level that is far from satisfactory for most of its participants.

How, then, is prosperity to happen? It won't do just to confiscate the capitalists' wealth and give it to the poor workers to make them rich. Wealth will not be created if capitalists and entrepreneurs are not allowed to benefit disproportionately for their risks and exertions. Still, shouldn't society aim to minimize the disproportional allocation of the fruits of production? We all voted to make capitalism possible, and we all pay taxes to support the enforcement of property and contractual rights. Shouldn't we all benefit from it?

How about laws protecting labor from the natural consequences of its meager bargaining position? Imposing a minimum wage (the simplest way to protect workers from selling their services too cheaply) would surely increase the money in the workers’ pockets, but then what? If the government orders capitalists to pay their workers enough money to buy a lot of stuff, will production shift to the things workers want and, thanks to the higher wages, have money to buy? Or even better, will new production of such goods be undertaken, requiring more labor and thus making the minimum wage merely a bridge, taking wage rates to where they would be set by the market if workers were customers, too. If so, business might see government's "intrusion" not as a restriction, but as a boon.

The "bridge" scenario assumes certain things about the nature of production and distribution. Capitalist systems equilibrate within technological limitations. What if we don’t know how to build a factory that can produce a car for every garage? What would then be the point of paying people enough money to buy a car, or of establishing a bank to lend them the money or insurance companies to insure them, or building roads on which to drive them? A minimum wage – any accommodation to workers, really – is only viable if the productive and distributive technologies are adequate to serve a nation of well-paid workers. Otherwise, we have the classic Soviet worker's lament: we pretend to work, and they pretend to pay us.

Certainly, the case could be made that labor laws would have hastened the invention of technologies that would make them affordable, but as things worked out, the opposite occurred. Henry Ford invented mass production, and American business faced the excellent problem of excess capacity. Rather suddenly, it became possible to produce enough stuff for a whole lot of people, but the people weren't earning enough to buy them. So, almost like magic, despite the assumed (feigned? half-hearted?) resistance of big business, we got anti-trust laws for the consumer and labor laws for our workers. The result was a massive, temporary diversion of revenue from master to servant, who then spent it on what the boss had to sell. The poor got less so, and the rich got more so. Together, Henry Ford, and We, the People, in Congress assembled, made a place for prosperity.

Laissez-faire types oppose economic regulation. They say that the market is a better regulator of excesses than is the government. They argue, for example, that if the economies of scale make higher wages more profitable than lower ones, then higher wages will emerge through market forces. I see two objections to that view.

First, as Hobbes might have said had he been able to study game theory, the emergence of higher wages presents a coordination problem. Raising wages does not make a company more profitable unless other do it, too. So no one company could ever raise wages in the hope that national wages will rise. Or, as Hobbes did put it:

From this fundamental law of nature, by which men are commanded to endeavour peace, is derived this second law: that a man be willing, when others are so too, … to … be contented with so much liberty against other men as he would allow other men against himself…. But if other men will not lay down their right, as well as he, then there is no reason for anyone to divest himself of his: for that were to expose himself to prey, which no man is bound to, rather than to dispose himself to peace.

The laissez-faire supporter will purport to agree with Hobbes, but the liberty he is willing to grant other men against him exceeds what most people would allow. Maybe, he believes that he has the wherewithal to win the war that coordination would avoid. Or maybe he just doesn't understand how things work.

Second, and this is something laissez-faire capitalists refuse to recognize, politics is often just market economics continued by other means. If political action is seen as a tactic available to market participants, rather than as some external feature of the world, political action can be seen as the market’s response to business’s coordination problems.

How, for example, in the absence of government coordination, would the market bring about wage increases? Two thoughts come to mind: collusion and unionization.

By collusion, I mean all of the employers in America getting together and agreeing to raise the wages of all of their employees to a level that will produce enough demand for their products to offset the increase in costs. Obviously, not all employers will see the light, so getting such an agreement would be impossible. But even if only a substantial majority of employers need to join the wage cartel for it to be effective, think of the logistical difficulties in creating and enforcing such an agreement. (Let alone the genuine anticompetitive collusion such a scheme might engender.) A far better approach for the same employers would be to go to Washington and lobby for a minimum wage, or at least not to object too strongly when labor does so.

And what about unionization? Employees are an even more fractious bunch than employers. How would union discipline be enforced short of thuggery? Would employers negotiate with a union that purports to speak for a whole industry but has no legal status? Would a collective bargaining agreement be enforceable? (Early "labor law" consisted of court rulings that treated unionization as a tortious interference with the employer's business.) The emergence of a practical labor-relations scheme cries out for codification. And, because of the aforementioned economies of scale and all, employers really have no reason to resist, if the productive and disributive technologies to exploit a well-paid workforce exist.

Labor laws provide a mechanism for allowing wages at all skill levels to keep up with gains in productivity and distributive capacity. It’s what the market would do if it could. So, perhaps political action regarding at least some labor laws should be seen not as intrusions by government but as enlistment of government. (I refer here to some labor laws, not all of them, so don’t tell me about every silly OSHA rule that makes your life needlessly difficult.)

Because of (in my view), or despite (in others' view), government action, the diffusion of prosperity in the US over the past 100 or so years was remarkable. The inherent tension remained between the need to create wealth and the need to distribute it in a politically satisfactory way, but, until recently, and with some notable busts, the wealth kept growing and the income disparity kept shrinking. The movement toward equality, however, must at some point end lest the incentive disappear and the revenues with it. From that point, expansion of the pie, everyone getting richer, becomes the source of perceived improvement in our national lot.

One thing that can contribute to growth is international trade. Natural resources and the skills to turn them into useful products give localities comparative advantages in the production of those goods. Trade between countries in the goods as to which each has such a comparative advantage can bring additional revenue to each country, maximizing the aggregate revenues of the traders (but not necessarily maximizing the revenue of each). If trade brings more revenue to a country, then that country is better off, but only if the usual revenue allocation structures apply. Otherwise – if, for example, the trade process itself adversely affects the revenue allocation mechanism within the borders of the trading partner – trade cannot be counted as “advantageous,” no matter how much revenue it generates. And if trade causes revenue to fall, and the allocation mechanism comes to be perceived as less equitable, and the financial system becomes overburdened by capital seeking repatriation, then trade can be a very bad thing indeed.

If economic benefit is defined as increasing national revenue (or decreasing national expense) without decreasing the politically perceived equity of the revenue distribution, then free trade can fail to benefit a trading partner in two ways.

First, if a nation runs an aggregate (i.e., worldwide) trade deficit, repatriation of money spent abroad must occur through the capital markets. That process may or may not be benign, depending on those markets' ability to process that money into revenues that are shared consistently with the pre-trade regime. For example, if the US ran a trade deficit equal to its deficit with oil exporters, and the petrodollars were invested to make housing more affordable for people with otherwise good credit, the trade for oil might be beneficial as I have defined the term. But if the deficit is so large that the money cannot be invested soundly, it will either be invested unsoundly, or it will be lent to the government, which then incurs ongoing interest costs until tax revenues increase, which cannot happen if money is leaving the country and returning as loans to the government.

Alternatively, repatriated trade deficit dollars can be invested in corporations. But that brings us to the second way that trade can fail to benefit us. Trade is trade, but competition is competition, and the two can co-exist most unhappily. The classic Ricardian example of comparative advantage posits England’s advantage in wool vs. Portugal’s in wine. In Frederic Bastiat’s defense of free trade, Belgium is said to have a comparative advantage in iron, presumably for geographic reasons. In neither case is it assumed that a country has an advantage in labor per se. Rather, for any skill level, the assumption is made that each trading partner has a comparative advantage in a product that will employ anyone who might otherwise be employed in making the imported product.

Where a country has a comparative advantage in labor costs, it will tend to make the things that require the most workers, and its trading partners will make the things that require the fewest. Such trade can be entirely balanced. Indeed, China is running a trade deficit against the world, primarily because it is importing natural resources, which no amount of cheap domestic labor can produce. But the US is not a major exporter of natural resources (maybe because we’re too dumb to use our natgas and sell our oil, but that’s for another day). So, we export food, which has become increasingly capital intensive, and we export high-tech things made by other high-tech things. That trade, too, could be balanced; it’s not, but, even if it were, it would still be a problem for us, because it would mess up our revenue allocation mechanism, aka the labor market.

So we have another of what so-called perfect storm: a massive global trade deficit that generates larger capital inflows than we can put to productive use and massive trade with low-wage countries, which disrupts our labor market’s ability to distribute the revenue such trade generates (such as it is).

Again, free traders assert that absolute free trade is best, that displaced workers will find new work, funded by trade deficit dollars, if a deficit there be. I have never understood the economic basis for the claim by laissez-faire supporters that government intervention hurts business but trade with low-wage partners does not. If you say that cheap foreign labor destroys jobs, they say that the workers need only find something else to do in a more productive industry. But then they turn around and say that labor laws cost jobs by raising costs. I don't see how foreign labor's downward pressure on prices and domestic government's upward pressure on costs can be distinguished in terms of the adjustments that businesses and workers can make to them.

Free traders also complain that protective tariffs on cheap-labor goods transfers wealth from those who have it to those who don’t. They argue the case as if the alleged transfer were from the oppressed consumer, who would have to pay more for imports, to the entrepreneurs who own the protected industries. Such a transfer, they say, is morally indefensible. Sort of like bailing out European counterparties to US banks. Or bailing out the banks themselves. Of course, such transfers are only incidental. The real transfer – the one that makes a tariff good policy – is the one from consumers to the workers whose jobs are protected, people who not only are like those consumers, but sometimes are those consumers, or would be, if they could get jobs.

Finally, the free traders get all upset about their liberty. But I think Hobbes (and Kant) put that one to rest. There are no formal lines between liberties we are willing to give up (e.g., murder) and those we are not. Libertarians try to draw bright lines, but at the end of the day, the matter is entirely subjective: we are willing to give up the liberties to do what we would not want done. Unfortunately, not only is that judgment contingent on our own perception of our strengths and vulnerabilities, but it is also dependent on our grasp of how things work.

Free traders, who are, of course, laissez-faire capitalists, simply do not get that an economy exists at the political sufferance of the citizenry, and that it has two purposes, the creation and distribution of outputs, both of which are essential to analysis of any economic policy. Viewed through the right lens, then, protectionist tariffs, here and now, however they might in other places and times, protect neither workers nor industries as such. They protect our national system of distributing revenues in a politically acceptable way. That distribution is as essential a goal of government as enabling the creation of wealth in the first place.

Without a politically viable distribution of revenue, why would We, the People, give a rat’s patoot about the creation of wealth? We wouldn’t, and that’s a scary thought, because if the golden eggs aren’t getting to the far end of the table, the only logical move for the folks down there is to rise up and cook the goose.

They can have my Chinese cell phone when they tear it from my cold, dead hands-free bluetooth device!

2010-04-07T12:17:00.002-04:00

How people think is often way more interesting than what they think.

I visited a site called the Hayek Cafe recently. It’s run by a guy named Don Boudreaux, who seems to get off on defending free trade with inane analogies. Here’s an example from an open letter to Lou Dobbs:

A few years ago I bought your book Exporting America. Have you bought my book, Globalization? If not …, was I made worse off by my purchase? Were you the only party to gain from that trade? Should I be concerned about the trade deficit that I now have with you? Were you practicing “unfair” trade? Was I “exporting” a part of myself – a part never to be regained unless and until you buy my book?

This bilateral, one-trade “deficit,” of course, teaches nothing about how a massive, aggregate global deficit might affect a country. I had the temerity to make that point in a couple of other threads on the blog, unleashing a firestorm of angry bullying by the faithful. The high point was this:

Buddy, poor man. You still stand in your room throwing shit at the walls hoping something will stick.
Like I pointed out to JohnK, talking to you is like bouncing a ball against a wall.
Absolutely nothing in all your diatribe, er...debate, addresses the one single point both Scott and I make, which is all your efforts, ideas, and actions (you personally Kramer) have one basic thrust, and that thrust is to remove my liberty, my freedom, and to harm me in the long run. And, you do it all in total disregard to the harm you do me, as long as it seems to mitigate your neighbor's burden of bad choices.
Pay close attention to the word seems, Kramer, because you have no evidence at all that my choice harms your neighbor.
What you do have is evidence that your neighbor's choices have hurt himself.
It is bullshit, Kramer, total bullshit.
You're wrong, you're a statist, aka socialist, a collectivist at heart, and like most of your ilk you seem completely terrified by the concept of freedom.
Like most collectivist you can not give one single good rational logical reason why vidyohs in Texas should part with his wealth to keep Kramer's kinfolks in Michigan (or where ever) alive and healthy. I do not know your kin, I do not care about your kin, I did not bring them into the world, and I probably will never have the occasion to escort them out of this world, I seriously doubt I will ever see the people you are so concerned about, and I resent you and your ideas about redistribution of my wealth. Just as I resent those same ideas as they were presented by Marx, Lennin [sic], Mao, Fidel, et. al.
And, I will not bounce my ball against the wall of Kramer, no more on this topic.
Can it be more clear on where we stand in relation to each other?

This rant came after a whole lot of posting on my part to the effect that tariffs would be in our mutual self-interest, not that we should do something to help those strangers that Vidyohs was so pathologically proud of not caring about. (I knew better than to preach mere compassion in the house of the self-reliant, where the only love is tough love.) But no matter how hard I tried to argue that we were shooting ourselves in the foot, all I got back was venom and stupidity.

The theme running through these rants is that access to cheap Chinese goods is the apotheosis of liberty. It’s all binary to them. A 10% tariff, chattel slavery, just a difference of degree, except that they see no differences of degree. Buying that cell phone is an exercise of a God-given right to control the fruits of their labor, associate with whom they want, and so on. It’s all very bumper-sticker.

These are real people, with real, for lack of a better word, opinions. And I admit, they fascinate me. I simply cannot imagine what it is like to see the world through Vidyohs’s eyes. The rage, the identification of disagreement with enmity. The pettiness. How does anyone come to boast about how callous he is? We’re not talking Keyser Söze here. This is just a pathetic little man living in Texas and raging at the machine (unless it’s from China). And there seem to be so many of them.

I think they all see themselves as elephants, as in “’It’s every man for himself,’ said the elephant as he danced among the chickens.” They don’t realize that they need the eggs. Many don’t even realize that at least some protectionists are claiming that they need the eggs. To them, the protectionists just want to save the chickens because they care about chickens. Others do understand the claim, but they don’t buy it.

Some of the illogic was stunning. I said in one post that if our trading partners have a comparative advantage in cheap labor, they will have a comparative advantage in labor-intensive manufacturing, and we will have a comparative advantage in capital-intensive manufacturing. That bombshell provoked this non-sequitur:

This is the first unrealistic assumption. The businesses of the world do not divide neatly into two categories: the labor intensive versus the capital intensive. There is, rather, a continuum of labor/capital mix with businesses distributed all along it.

That’s all this fellow needed to move on to his real bugbear:

Nor do you take into account the on-going war our Federal and State governments have waged over the last 70+ years against American businesses. The Code of Federal Regulations, which indexes administrative rules, is 161,117 pages long and composes 226 volumes. The great bulk of that regulatory burden rests on the shoulders of America’s businesses. Who can say how much employment has been destroyed -- or run overseas -- by that onslaught of regulation?
Your model ignores all that.

Yeah, who can say? This mess is FDR’s fault.

Of course, empty blue barrels make as much noise as empty red ones, as any visitor to the Daily Kos during the Bush years can attest. Is Al Franken a nicer person than Rush Limbaugh? They’re really the same kind of person, wishing their political opponents personal ill where intellectual argument fails them. Or so it seems to me.

Obama divides and conquers, again

2010-03-31T11:11:00.002-04:00

From BHO’s remarks on the signing of the Healthcare Reconciliation Bill, which included changes in the law applicable to student loans:

Now, I’ve said before and I’ve repeated this week the health insurance reform bill I signed won’t fix every problem in our health care system in one fell swoop. But it does represent some of the toughest insurance reforms in history.
….
Now, the debate on health care reform is one that’s gone on for generations, and I’m glad -- I’m gratified that we were able to get it done last week. But what’s gotten overlooked amid all the hoopla, all the drama of last week, is what happened in education -- when a great battle pitting the interests of the banks and financial institutions against the interests of students finally came to an end.
You see, for almost two decades, we’ve been trying to fix a sweetheart deal in federal law that essentially gave billions of dollars to banks to act as unnecessary middlemen in administering student loans. So those are billions of dollars that could have been spent helping more of our students attend and complete college; that could have been spent advancing the dreams of our children; that could have been spent easing the burden of tuition on middle-class families. Instead, that money was spent padding student lenders’ profits.
Now, it probably won’t surprise you to learn that the big banks and financial institutions hired a [sic, at Whitehouse.gov] army of lobbyists to protect the status quo. In fact, Sallie Mae, America’s biggest student lender, spent more than $3 million on lobbying last year alone.
But I didn’t stand with the banks and the financial industries in this fight. That’s not why I came to Washington. And neither did any of the members of Congress who are here today. We stood with you. We stood with America’s students. And together, we finally won that battle.

And this is the President of all the people? All the people except those who oppose anything he wants to take from them. He doesn’t “stand with” the special interests, unless, of course, they’re unions or trial lawyers. No, those bastards in the insurance and financial services biz aren’t like you and me: they’re “unnecessary middlemen,” with sweetheart deals. This Obama is a very zero-sum guy: there’s no getting without taking. It’s a good thing there are so many evil people out there for him to scapegoat, er, I mean win battles with.

The new healthcare bill does not include the “toughest insurance reforms” in the past week, much less in history. It mandates coverage so that insurance companies - who would like nothing better! – can now afford to cover pre-existing conditions, because there won’t be any pre-existing conditions. BHO calls it “reform” so that he can pretend that he is throwing the insurance companies under the bus, when in fact he is throwing them more claims to handle.

The political case against insurers is built on the silly idea that insurance companies bet against their customers. But they don’t. The insurance company processes claims and marks up the transaction. Insurers have an interest in denying claims only because that keeps premiums down so that customers stay so that more claims can be processed. Now, they will have more claims. Tough on them.

The student loan thing does hurt the private lenders. Of course, only the “big” banks and financial institutions sent the armies of lobbyists. The little ones are ok folks, I guess, even though this law removes them from the student loan process, too. Collateral damage – you can’t make an omelet without breaking eggs, right?

I have no idea whether the single-lender approach will be workable. Maybe it will. Certainly, removing the private companies from the process makes it unnecessary to demand repayment, and that’s gotta be nice for the politicians who get to bestow that bit of largesse on future supporters. But, nah, that can’t be what’s going on here. This is about sweetheart deals and, ugh, middlemen. Yeah, right.

Healthcare! With an immodest proposal for REALLY fixing it.

2010-03-22T15:24:00.001-04:00

Now that the lies are done being told, what have we got?

In political terms, we have goodies that will be apparent before the next Congressional election and costs that won’t be apparent until after the next Presidential election. I wonder how that happened.

I believe the Republicans are wrong about the political unpopularity of this bill. I might go so far as to say that they are not wrong about it, but, rather, were lying about it in the hopes of spooking some conservative Dems. It takes a certain amount of Chutzpah to lie to people about how bad a bill is and then cite their credulity as evidence that the bill is unpopular. But that’s pretty much what the Republicans did, I think. And now they will be whipsawed by the timing of the benefits and the costs.

Not that the Democrats earned any points for candor. They railed about special interests fighting the bill, all the while kowtowing to Big Labor and the Plaintiffs’ bar. They demonized insurance companies for having the temerity to refuse to sell health insurance to people who are already sick. (Ask anyone if an insurance company to which they pay premiums should be required to sell insurance to people who are already sick, and they’ll shout “Hell, no.” But ask them what they think about those dastardly pre-existing conditions clauses, and see how well they’ve been lied to.)

But enough politics. There’s still an exploding usage problem, and we need to do something about it. Of course, there’s only one way to make universal healthcare work: doctors in the aggregate have to make less money. The mechanism whereby that happens has to be that the profession gets paid for keeping people well rather than for curing them when they get sick. Unfortunately, under our hyper-specialized system, we cannot pay surgeons to practice preventive care. Making this omelet is going to require breaking a lot of eggs!

One way to reduce what doctors make as a group is to increase what family practitioners make as individuals. If my doctor could earn a million dollars a year by knocking a couple hundred thousand off the income of ten or twenty surgeons, that would be a net win for the system. I don’t know if that calculation makes any practical sense, but I know the math works. But that research has been done, and it seems clear that more of at least some types of preventive care – and especially lifestyle fixes that cost very little – would save a lot.

The missing ingredient from the current system is an economic incentive for people to take care of themselves. The new law requires coverage of preventive care, and it may even require that it be provided without deductible or co-pay. But I think it stops short: a patient’s co-pays for treatment should be higher if he or she has not undergone the free preventive care provided by his insurer. (It’s odd how being healthy is not its own reward. We can’t be sure that an ounce of prevention will be worth a pound of cure. Some folks hear their wallets better than they hear their better judgment.)

It might be a good idea to enlist the family practitioners in the effort by changing their incentives, too. Those docs should be rewarded if their patients file fewer claims for treatment. If we’re going to pay family practice guys more and surgeons less, then let’s pay the family practice guys out of the money that we don’t spend on surgery. Seems like a no-brainer.

But what’s the mechanism for creating these incentives? Suppose every employee in a company were enrolled automatically in a healthcare cost reduction plan. The company’s baseline healthcare costs would be established as a bogey for the plan. To the extent that the company’s overall costs for a year are less than expected, a percentage of the savings would be shared with employees whose claims were less than their premiums. (The formula is a detail. Any scheme that pays out net savings to those who take care of themselves - and maybe to their family practitioners - ought to work.)

It’s not hard to create incentives for preventive care and healthy lifestyles. Employers just need to want to do it. I say “employers” because insurers have no incentive to reduce costs. Reducing costs reduces premiums, which, absent aggressive price competition reduces profits. Maybe that’s the sense in which a public option would “keep insurance companies honest.” But I believe that task should fall to employers, who, so far, simply have not put their minds to it. Some “promote” wellness, but few if any reward it with hard dollars. And I don’t know of any that pays family practitioners for keeping their patients well. That seems so obvious a place to go. Oh, well.

Drug Re-importation

2010-03-17T12:56:00.004-04:00

First, let’s get clear that no one actually wants to re-import drugs. That would be a total waste of fuel and transaction costs. What people want is for drug re-importation to be legal, so that drug prices here will make re-importation unnecessary. But would it? (Hint: No.)

Right now, US drug companies charge the Canadian Health Service less than they charge American pharmacies. But what if re-importation were legal? Well, one thing that seems pretty certain is that Americans would not be paying Canadian prices for drugs. Anyone who thinks drug re-importation is a good idea because they would actually be able to go to Canada and buy prescription medicines for the price the Canadian health service pays (plus some reasonable mark-up), is nuts. There just is no dynamic by which that happens.

From whom would we “re-import” the drugs? The Canadian Health Service? Why would they do that? And why would drug companies sell the Canadian Health Service more medicine than it needs if all the extra pills would just come right back at reduced prices? So we may get legalized re-importation, but we won’t get re-importation, and if we don’t get re-importation, there won’t be any pricing pressure from re-importation. So what’s the point?

It seems to me the only way we get price equalization between the US and Canada is for the price to equilibrate at around 97% of the current price. If we assume that Canada pays 30% less than we do, and they represent 10% of the demand for a given drug, then the average price of a pill is about 97% of the American price. So that’s what the drug company will demand for the drug, or it won’t bother to invent it in the first place.

That’s the missing ingredient in all drug-pricing debates: the drugs are assumed to have been discovered and approved and to cost virtually nothing to manufacture, so any price is “profitable” for the drug company. But the drugs that exist are not the issue. It’s the money to be made on new drugs that drives research. Perhaps if we found a way to subsidize drug research, we could impose lower prices. But no one has yet found a reliable, incorruptible, or more efficient way to choose among drug candidates than capitalist risk-assessment. There may be a better way, but I guess no one has figured out how to profit from thinking it up, so it hasn’t been thought up. Sort of like the drugs that won’t exist if the prices aren’t high enough.

The Heritage Foundation made the arguments against drug-re-importation several years ago. The logic of their analysis seems sound to me: drugs cannot profitably be invented for sale here at Canadian prices, so they won’t be invented here for sale at Canadian prices. Drug companies won’t sell the drugs to Canada in sufficient volume to permit re-importation, and Canada won’t jeopardize its deal by buying enough drugs for re-importation. At least not in volumes that make a difference to American consumers.

I’m not saying that we should subsidize other countries’ socialized medicine plans. But we should not be misled into thinking that the purchasing power of Canada’s single-payer system is indicative of what Medicare, for example, could do here if it used its purchasing power in the same way. Canada is a remainder market. Drug companies can accede to the CHS pricing demands because US consumers are paying the cost of development. We are subsidizing Canada because that’s how remainder markets work, not because it has a single-payer system. Canada could just as easily have have imposed price controls on its pharmacies under a US-style healthcare system, and the result would have been the same – drug companies happily selling to Canadian importers at the controlled prices, because Canada is a remainder market.

The only way for the US to end the subsidy is to impose an export tariff on drugs sold to developed nations for less than the average wholesale price in the US. I don’t know how many trade deals that would break or require renegotiating, so I’m not advocating for or against its being done. I’m just saying that it’s the only way to do what drug re-importation is supposed to do.

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A Universal DNA Database: Yea or Nay?

2010-03-15T15:49:00.008-04:00

I was struck by an op-ed in the NYT this morning. It’s by a Yale Law Student named Michael Seringhaus. Mr. Seringhaus was reacting to a proposal to include the DNA profiles of all arrestees, whether or not convicted, in the national database of such profiles. Mr. Seringhaus suggests that we should not just take these DNA profiles from arrestees but from everyone. His logic, though, strikes me as odd. His principal concern seems to be that collecting this information only for arrestees will cause a disproportionate representation of Blacks in the database. Let’s assume this is so, as it already is of the fingerprint database, also compiled for anyone booked for any offense (as well as for a gazillion other reasons). What I don’t get is why this is a bad thing, if, as Mr. Seringhaus claims, it would be a good thing for us all to included in the database.

As far as I can tell, being in the database has three consequences:

1. You are more likely to be caught for a crime you did commit.
2. You are less likely to be accused of a crime you did not commit.
3. “Big Brother” has a way to track your whereabouts in addition to the tools he already has.

Now, if you are concerned about Big Brother, then having a universal database is a bad thing. Mr. Seringhaus does not seem concerned with that aspect of privacy. He does explain that DNA profiles do not reveal personal genetic information. They record info about “junk DNA” that can be used for identification but not to determine anything about the subject’s operative genome. With this aspect of “privacy” out of the way, Mr. Seringhaus seems unconcerned about the general issue of the Government being able to track our comings and goings any more than it already can. And he may be right – the chances of leaving no footprints as we go about our daily lives of charging and EZ-passing are quite small. Still, it’s nice to think that we could stay off the grid if we wanted to go to the trouble.

That leaves consequences ##1 and 2. Although Blacks are more likely to be arrested than Whites, Mr. Seringhaus has not made the claim that they are more likely to be unjustly arrested. I’m not talking about traffic stops for Driving While Black, or even being rounded up with the usual suspects. Those things aren’t arrests and so do not trigger DNA collection under the current proposal. I’m talking about “Turn around, you’re under arrest for ….” Maybe such arrests are disproportionately skewed racially, but, as I say, Mr. Seringhaus has made no such claim. He seems to think that a database made up of people arrested with good reason (whether or not the case is ultimately dropped) is a bad thing because more Blacks than Whites are arrested even with cause. I don't see, however, precisely what consequence of being in the database offends Mr. Seringhaus on this score.

As regards consequence #1, Mr. Seringhaus’s argument boils down to this: We should not collect DNA profiles of arrestees, because that would cause the percentage of Whites who get away with crimes to be greater than the percentage of Blacks who do. I agree that if the system were designed to achieve that result, it would be bad. But whatever the merits of “disparate impact” analysis in the world of employment discrimination, it seems to me inapplicable where the only downside of being in the disfavored group under a facially neutral policy is that you may not get away with a crime. Remember, this is not racial profiling, where anyone in the database is stopped or hauled in or questioned about crimes on account of being in the database. This is about getting caught for a crime one actually did commit.

And this is where consequence #2 comes in. Leaving Big Brother aside for a moment, the more likely one is to be suspected of a crime one did not commit, the more likely one is to want his or her DNA in the database. If there is DNA evidence at a crime scene, being among the usual suspects becomes less onerous if DNA has already ruled you out. Thus, for anyone arrested unjustly, the DNA profile will make a reoccurrence less likely rather than more likely. Again, getting away with a crime becomes harder; but being wrongly accused becomes less likely. That strikes me as a good deal. (Maybe Whites should complain that the disproportionate arrest of Blacks makes Whites more likely to be wrongly accused, as their exonerating DNA is not on file. Sounds dumb? Can you articulate a reason that doesn’t make Mr. Seringhaus’s claims evaporate?)

Mr. Seringhaus raises another objection to expanding the DNA database to include all arrestees, and that’s the growing practice of using DNA near-matches to identify family members of people in the database for suspicion. He seems to be concerned about false positives – results that identify people who are related to someone in the database but not, as it turns out, related to the perpetrator. He says such false positives “cripple” the technique, but he does not say how. The possibility of a false positive turning up someone who might otherwise “look good” for the crime seems pretty remote. And even then, one swab and the confusion is cleared up.

If near-misses are used to identify suspects, consequence #2 also operates at the family level: if I’m in the database, and the DNA at the crime scene does not look at all like mine – which will be the case in an overwhelming majority of cases – then my whole family’s off the hook, too. That’s bad because…?

Mr. Seringhaus says that the near-miss approach effectively “includes” in the database people who have never been arrested, and that’s a bad thing because of the racial aspect. Again, he makes no practical arguments. I would think any over-suspected demographic would cheer the exonerating implications of the technique.

I just don’t see the difference between DNA profiles and fingerprints. It seems to me that whoever gets fingerprinted for whatever reason should also give DNA. The two biomarkers serve the same purpose – conclusive identification – and DNA just seems to me a better mousetrap, a belt under the suspenders.

And a universal database – any universal database – gives me the creeps. As William of Occam might have counseled, such things should not be multiplied beyond necessity.

The Filibuster Train Picks up Steam

2010-03-10T10:32:00.001-05:00

In an Op-ed today, two professors explain how the “virtual” filibuster – the practice of achieving the goals of a filibuster merely by threatening one – actually works. The Majority Leader has the power under current Senate practice to change the subject. He can’t stop debate on a bill, but he can switch debate to something else, so that the filibuster “continues” but the Senate is not tied up by the actual debate. Thus, what has come to be termed a “hold” – a single senator’s ability to stop any piece of legislation – is actually a filibuster going on “in the background,” while the Senate goes on with other business.

Anyway, these two profs want the Senate to renounce the so-called “tracking” system that allows business to go forward while a filibuster continues. They are, of course, a bit late to the party, but they are welcome to join Gail Collins and me in the campaign.

The tracking system is an excellent example of careless wishing. Robert Byrd instituted it to keep Republican filibusters of Civil Rights legislation from stopping the Senate. It certainly must have seemed like a good idea at the time to keep the Senate moving while the filibuster held up only one bill, but it turns out that being responsible for tying up the Senate was the only political disincentive to filibustering. The tracking system switches the onus of shutting down the Senate from the filibusterer to the Majority Leader, who has the power to keep moving while the filibuster continues. The additional power given to the Majority Leader is in effect the power to be to blame if the Senate bogs down. That power and responsibility must be returned to the filibusterer. The weapon must do enough collateral damage to make senators unwilling to deploy it on a whim.

The frequency and intensity of public calls for restoring the filibuster’s messiness is encouraging. Maybe this country is governable after all.

The Healthcare Summit

2010-02-26T14:00:00.002-05:00

Political theater for sure.

There is no earthly reason for serious legislative work to be televised. Posturing, yes, that should be televised. Otherwise, why do it? So this summit was an excellent opportunity for Dems to appear reasonable and Republicans to act like populists. It was, in some ways, a reversal of the usual rap that the left and right throw at each other. Usually, liberals say that conservatives are mean, and conservative say that liberals are stupid. Yesterday, the liberals were accused of tyranny and the conservatives of “not getting it.”

On one score, the liberals were surely right: affordable insurance cannot cover pre-existing conditions if you can wait until you’re sick to buy it. So, everyone must be required to buy insurance (or someone must buy it for them), so that there won’t be any pre-existing conditions. And the insurance everyone must buy has to cover the conditions that would be excluded as pre-existing if the insurance were purchased later. If you can buy a policy now that costs $5 a month because it only covers bunions, you can’t expect to buy one later that covers everything for a reasonable price. No, the policy that qualifies you to avoid a pre-existing condition exclusion has to cover all the conditions to which that condition might apply. Otherwise, the opportunity to game the system remains.

The result, of course, is that we need a one-size fits-all “basic” coverage that people must buy and insurers must sell. Beyond that, individuals might be offered additional benefits, but insurers must be permitted to deny the extra benefits with respect to conditions existing at the time the policy was upgraded. Open enrollment at a give age might be used to enable people to get full expanded coverage – that’s for the actuaries to figure out – but in general, the coverage that cannot be denied on the grounds of pre-existing conditions must match the coverage that individuals are required to buy at an early age.

This analysis is obvious, and yet the Republicans whine on about “Washington deciding what everyone must have,” and how “people don’t want to be told they have to buy insurance,” all the while joining the mob that wants to stone the insurance companies for, as Jay Rockefeller (not a Republican, maybe not even a Rockefeller) said, “putting profits ahead of people.” As if Wellpoint were a charity. But I digress – my point is that the Republicans were singing the same tune as Democrats about pre-existing condition exclusions “going straight to the insurance company’s bottom line,” but without the logical consistency of mandatory coverage to make a solution work. When BHO said that he had campaigned against mandatory coverage, one of the moronic Republicans shouted out “Bless you!” The President was making the point (true or false) that he “had to be dragged kicking and screaming” to the conclusion that mandatory coverage was necessary.

Of course, in Washington, you can’t tell who’s dumb and who’s pretending to be dumb. Somewhere in the Republican ranks is someone who gets this stuff. I mean, this same sort of domino logic applied when ERISA was passed in 1974. That law sought to provide insurance for workers pensions, but to do it, it had to establish rules about participation waiting periods, benefit accrual rates, vesting schedules and investment management. Otherwise, the system could be gamed or moral hazard would infect fund management. So this pre-existing condition thing ain’t rocket science.

Maybe politics-watching has always been an exercise in telling the knaves from the fools. But if wasn’t always, it sure is now.

Glazier Nation

2010-02-23T09:00:00.002-05:00

French Economist Frederic Bastiat is best known for this parable:

Have you ever witnessed the anger of the good shopkeeper, James Goodfellow, when his careless son happened to break a pane of glass? If you have been present at such a scene, you will most assuredly bear witness to the fact, that every one of the spectators, were there even thirty of them, by common consent apparently, offered the unfortunate owner this invariable consolation—"It is an ill wind that blows nobody good. Everybody must live, and what would become of the glaziers if panes of glass were never broken?"
Now, this form of condolence contains an entire theory, which it will be well to show up in this simple case, seeing that it is precisely the same as that which, unhappily, regulates the greater part of our economical institutions.
Suppose it cost six francs to repair the damage, and you say that the accident brings six francs to the glazier's trade—that it encourages that trade to the amount of six francs—I grant it; I have not a word to say against it; you reason justly. The glazier comes, performs his task, receives his six francs, rubs his hands, and, in his heart, blesses the careless child. All this is that which is seen.
But if, on the other hand, you come to the conclusion, as is too often the case, that it is a good thing to break windows, that it causes money to circulate, and that the encouragement of industry in general will be the result of it, you will oblige me to call out, "Stop there! Your theory is confined to that which is seen; it takes no account of that which is not seen."
It is not seen that as our shopkeeper has spent six francs upon one thing, he cannot spend them upon another. It is not seen that if he had not had a window to replace, he would, perhaps, have replaced his old shoes, or added another book to his library. In short, he would have employed his six francs in some way, which this accident has prevented. Bastiat, Frédéric, That Which Is Seen, and That Which Is Not Seen (1850).

The sort of thinking Bastiat sought to combat is especially prevalent in hard times, when a glazier’s job in the hand seems to be worth two shoe salesman’s or bookseller’s jobs in the bush, especially since the glaziers know who they are and have a vote and can contribute to a PAC, whereas the cobblers and bookbinders don’t know that the shopkeeper’s six francs will go to them.

In a democracy, the political power of glaziers matters. As fewer and fewer of us earn our livings actually making things, and more and more of us are paid to fix life’s metaphoric broken windows, Bastiat becomes more and more relevant and less and less listened to.

Among those “glaziers” are many of those whose livelihood depends on the inefficiency of our healthcare delivery system. (No need to name names; they know who they are!) The efforts to reform our healthcare delivery system are being stymied by the political demands of these glaziers. Mind, our political system runs on self-interest, so I don’t want to blame hard-working glaziers for not wanting their business to vanish or for working to make it not vanish. Rather, I am wondering aloud if we can, or have, reached a tipping point where, to paraphrase the old saw, if it weren’t for bad jobs, we'd have no jobs at all.

Ironically, one of the ways we might spend the money now wasted on healthcare is on repairing “windows” – rebuilding our crumbling infrastructure. The infrastructure needs repairing because we have neglected it, and we have neglected it because we’ve been spending our money on things less deserving than maintaining it. And now, when we have to repair it because we failed to maintain it, we are making a virtue of necessity by claiming that the repair project creates jobs.

Of course, featherbedding has always been with us, and people have always made money on inefficiency. But what if the new shoes and books that used to be made here by other employed Americans are now made in China? What is the economic and social calculus? I don’t have the numbers to do that math. But I do worry that we can no longer afford efficiency in any area of our national economic life because not enough of our people earn their daily bread doing the things that efficiency would make possible.

Think fast.

2010-02-17T09:26:00.001-05:00

Here is the key part of Tom Friedman’s piece in today’s New York Times:

China, of course, understands [what’s going on], which is why it is investing heavily in clean-tech, efficiency and high-speed rail. It sees the future trends and is betting on them. Indeed, I suspect China is quietly laughing at us right now. And Iran, Russia, Venezuela and the whole OPEC gang are high-fiving each other. Nothing better serves their interests than to see Americans becoming confused about climate change, and, therefore, less inclined to move toward clean-tech and, therefore, more certain to remain addicted to oil. Yes, sir, it is morning in Saudi Arabia.

This observation points out an important difference between dictatorships and democracies that has until now served democracies and particularly the US well but is not necessarily going to do so forever. The difference is that the US can never “understand” anything complicated. Our system depends on the nation never really understanding anything. We believe some important things, and our intellectuals understand some important things, but our government does not operate by understanding – it operates by resolving the power vectors of people with competing beliefs, beliefs determined by short-term interests, which can be greatly at odds with how things really are.

China’s bosses do have to answer indirectly to the people. Everyone talks about how the Chinese mercantilist strategy is intended to prevent some sort of political upheaval. How can there be an upheaval in a true thugocracy? But the Chinese political system does not have nearly the give and take of ours. The bosses are the bosses until they are not the bosses. So if they think nuclear, wind, and solar energy would be good for China, then they will implement them, and they will not have to worry about being voted out in the next election. If the policies fail – if the growing prosperity stops growing – then they may have something to worry about. But for now, there is no one to stop them from turning pretty much on a dime – no 41-vote minority of an opposing party – to stand in their way.

The point here is not specifically that dictatorships can move quickly. That has always been true. But dictatorships’ power to move quickly has, in the past, ended badly, as ideologues implement rules that stifle rather than promote innovation and prosperity. But things change. The Chinese dictatorship appears not to be terribly ideological, at least not in the way we are used to seeing Communists be ideological. Nor do they appear to be thugs in the sense that they kill their political rivals the way Stalin and Pol Pot did. Yes, they suppress dissent, but they have not suppressed innovation, allowing some measure of economic, i.e., entrepreneurial freedom, which is a great release valve for restless minds.

The point, rather, is that there are times when speed matters more than at others, and there are world conditions to which a democracy, unable to reason, cannot respond effectively, whereas a dictatorship, if it has the right people in place, can respond intelligently and rapidly. The odds may very well favor democracy, in the sense that a confluence of difficult problems and wise dictators doesn’t happen often enough to make dictatorship the “right” strategy for a people to pursue. But that does not mean that such a confluence does not happen or that it is not happening right now, precisely as Friedman describes it.

The whole idea of saying “China understands…” is alien to us. When do we ever say “The United States understands…”? We don’t say it. We say, in retrospect, that some American leader understood something and was able to persuade folks to act on it. Or not. Jimmy Carter understood how damaging our dependence on foreign oil was. But did the US “understand”? Not hardly. We had just lived through an oil embargo that had disrupted life here significantly. Still, instead of starting a crash program to become energy independent, we watched the price of oil fall back to comfortable levels, as if it would never rise again, and went back to our stupid ways. Like the hillbilly in the Arkansas Traveler’s song, we can’t fix the roof when it’s raining, and we don’t need to fix it when it’s not.

A traveler was riding by that day,
And stopped to hear him a-practicing away;
The cabin was a-float and his feet were wet,
But still the old man didn't seem to fret.
So the stranger said "Now the way it seems to me,
You'd better mend your roof," said he.
But the old man said as he played away,
"I couldn't mend it now, it's a rainy day."

The traveler replied, "That's all quite true,
But this, I think, is the thing to do;
Get busy on a day that is fair and bright,
Then patch the old roof till it's good and tight."
But the old man kept on a-playing at his reel,
And tapped the ground with his leathery heel.
"Get along," said he, "for you give me a pain;
My cabin never leaks when it doesn't rain."

Apparently, the old man didn’t understand.

Jobs=Tariffs.

2010-02-09T16:41:00.006-05:00

In a recent op-ed Bob Herbert listed the unemployment rates for various income levels, and then wrote:

The point here is that those in the lower-income groups are in a much, much deeper hole than the general commentary on the recession would lead people to believe. And none of the policy prescriptions being offered by the administration or the leaders of either party in Congress would in any way substantially alleviate the plight of those groups.

Mr. Herbert calls for “bold, targeted (and, yes, expensive) government action.” Such programs may indeed provide some short-term relief, but the lower group includes many inner-city Black men, a group that wasn’t doing very well before the crash. The patient who couldn’t play the violin before hand surgery cannot play it after. So we need to do far more than just undo the damage of the current recession.

One of the problems facing the lowest income group has been facing them for some time: despair born of limited opportunity. Look at this chart:

Forget for now about how well the top 5% (P95) is doing. The important point for P20 is not how well P95 is doing; it’s how well P60, and P40 are faring, and, as it turns out, they have been making steady gains in family income. So, while P80 complains about the bonuses in P95 Land, P20 needs to know why P60 and even P40 are doing so much better than the bottom quintile.

President Obama’s election sent a powerful message to every young Black man: you can be anything you have the talent, training, and drive to be. But that sort of message can be problematic. The election shows only that White racism is less of bar to success than it once was, not that there are a lot of jobs for young Black men to fill. So, where is are the jobs that would make it as wise as we say it is for young Black men to stay in school?

I’m afraid that many of those jobs have gone to White women, especially married White women. Of course, the jobs themselves are held by Whites of both sexes. But the issue isn’t who has the jobs, but how the increase in available jobs compares to the demographic changes in the workforce. If jobs have increased, and White female participation has increased, but Black male participation has not, it seems fair to say that the new jobs, viewed as statistical opportunities for work, have “gone to” White women.

By extension, then, if those jobs had not gone to White women, i.e., if White women had not entered the workforce in such numbers after 1970, Black men (and immigrants) would have had to fill the void. Nothing induces affirmative action like a shortage of workers. Scholarships, mentoring, all of the things that go on in token volume today to satisfy political demands would be happening instead in earnest if young Black men were seen as source of scarce labor. But they are not, and they know it, and, as a statistical cohort, they are behaving rationally in response: they are giving up.

In 1970 or so, Black Americans encountered one of those nasty confluences that we have come to call “perfect storms.” Equal opportunity can only be won when a bigger pie lowers the stakes for those made to share what they once had to themselves. The expansion of the economy after WWII made possible the early Civil Rights movement. It takes nothing away from the brave people of all races who demanded equality for Blacks to say that those demands would have borne little fruit if material economic conditions were not so hospitable to the cause. But it also takes nothing away from the brave people of both sexes who made the same demands on behalf of women to say that the influx of White women into the job market after 1970 was not a boon to Black men.

And the influx of women into the workforce, especially into the professions and higher paying jobs, was driven by something about those newly available jobs: they increasingly demanded higher education, something middle-class White women already had or had access to whereas inner-city Black men had neither. The Bell Curve identified this ominous trend in American employment. Not only was income inequality, growing, but the dividing line between the high and low was was increasingly correlated with intelligence. The good jobs created since 1970 have increasingly gone to the smartest people.

In this context, debating the meaning of “intelligence” is pointless. Quibbles about IQ may call Herrnstein and Murray’s science into question, but they do not change the facts. Faced with a burgeoning demand for smart workers, employers had to expand the job pool, and when they got to college campuses, they found that the expanded pool consisted primarily of White women (and, of course, Asians of both sexes, but not in the same numbers).

The trend identified in The Bell Curve was exacerbated by globalization. Not only was work becoming more cerebral, manufacturing jobs for which a college degree was not required were moving off shore. The kind of jobs that an emerging social class needs were drying up just as Black men were allowed to fill them. Picture Lucy holding that elusive football and telling Charlie Brown that it was finally his turn to try a field goal.

Given this history, the current economic mess, standing alone, is almost a non-event for young Black men. Yes, Black unemployment, especially among young men, is off the charts, but it was already horrible for the reasons mentioned. White women are probably not going to get out of the way (although economically rational strategies like fielding only one worker per household in tough times do have an odd way of becoming mores). So what else have we got? How do we create a job shortage here so great that even two earners per White family cannot fill it. I’m afraid that the choice is really simple: someone in China, India, Mexico, Vietnam, or the Philippines will have to step aside.

And so we come back to the trade deficit. It costs us jobs, and because it costs us jobs, it costs us opportunity for social change. We need job growth not only to employ people in general; we need it on steroids to force employers to look to the inner cities for help, and for the people in the inner city to see the light at the end of their own hellish tunnel.

And it starts with tariffs.

Republican Nonsense

2010-02-08T12:25:00.002-05:00

I usually vote for the Republican candidate, because he or she usually has policy positions closer to mine than the Democrat. But sometimes, I vote for a third party or abstain from voting to express my dissatisfaction with both parties’ selections. I think low turn out sends a negative mandate, and I want to participate in giving that message.

Because I’d like to have a say in whom the Republican Party nominates for office, I’m registered as a Republican. (I think NY has closed primaries – and I strongly believe that all primaries should be closed – so it seems to me only right that if one wants to vote in a party’s primaries, one should join the party.) But I don’t believe that “joining” one of our major political parties commits one to that party’s platform or obliges one to defend what that party’s leaders do. Especially, as now, when what that party’s leaders do is indefensible.

I’m the first to argue that BHO has no mandate, that his election was a perfect storm of anti-Bush sentiment, economic collapse, and feel-good expiation of racial taint. But there are things that both parties want to do that the Republicans are refusing to do because it is more important to them that BHO and his party get blamed for things staying bad than that things get better. That strategy is not necessarily objectionable: one can imagine a ruling party so bad that getting them out of power is worth any price. But IMHO, this ain’t that. This is just sore losers trying to get their perks back.

And what good would a “return to power” do the GOP once they’ve established that the role of the minority is to gum up the works? They are destroying the car they want to drive. I hope that BHO presses and succeeds in his efforts to embarrass GOP legislators for standing in the way - for voting against bills they themselves sponsored, for putting "blanket" holds on nominations to extort pork for their districts - all in the cynical expectation that the the majority will be blamed if things don't get better.

Meanwhile, the party leadership continues to act as if Sarah Palin might actually be Presidential material. What better badge of unseriousness can a party have than the adoration of so empty a suit? The 2008 ticket was a match made in Democrat heaven: a Prez with a short life expectancy backed up by a Veep with no qualifications. It’s scary that they won the states they did.

Anyway, one expects Democrats to complain about GOP tactics, but rants by disaffected Republicans like me are less likely to be dismissed as partisan crap. I may be wrong, but I’m not predisposed to be where I am, and that ought to count for something.

The Filibuster Pledge

2010-02-06T10:05:00.002-05:00

Gail Collins has obviously been lurking on this blog. She is complaining about Senator Shelby’s hold on some 70 Obama nominees, a hold that he will release if he gets some pork for his state. Apparently, the inner workings of a senatorial hold involve the filibuster rule. I’m not sure why, maybe the senators “respect” each other so much that you can’t get forty of them to vote to ignore a hold, although I have also read that holds have on occasion been ignored. Anyway, I’ll take Ms. Collins’s’ word for it that holds depend on the tacit observance of the filibuster rule.

Yesterday, I was asked by credoaction.com, a liberal website, to sign a petition demanding that Shelby be made to defend his hold by actually filibustering. Again, I don’t know why that’s the issue, but since Credoaction.com says it is, I’ll assume it is. (I signed the petition.)

Unlike Ms. Collins, who appears to support elimination of the filibuster, an elimination I would oppose, Credoaction.com merely wants those who say they will filibuster to have to go ahead and do it. Amen to that.

So here’s a proposal for next election cycle. Every senatorial candidate must pledge that he or she (i) will not threaten to filibuster a bill unless he or she will speak for twelve hours non-stop (with pee-breaks made possible by “questions” from colleagues) against the bill, and (ii) will call for a vote on any issue that the opposition has threatened to filibuster, so that the opposition will be forced actually to filibuster bills it cares enough to do the work to stop.

Don’t Ask

2010-02-03T17:24:00.006-05:00

I think every American should have the right to kill Taliban. That includes homosexuals.

But I don’t want to impair our aggregate ability to kill Taliban in order to include homosexuals in the effort. I’m not saying that including openly gay men and women in the armed forces will impair our ability to kill Taliban, just that effectiveness has to be considered in limiting membership in the force.

Effectiveness has two aspects: recruiting/retention and unit cohesion. I don’t know how permitting open gays to serve will effect either of those phenomena, but I am worried by the arguments advanced that it won’t affect them.

First is the claim that there have always been homosexuals in the army, and many have served bravely and effectively in units that have not been disrupted by their presence. The problem with this claim is that it is completely unresponsive to fears about openly gay service members. Don’t ask, don’t tell permits closeted gays to serve, presumably because closeted gays have no effect on recruiting/retention (except to expand both to include closeted gays) and no discernible effect on the performance of their units (although one cannot know what one gay soldier’s crush on another might mean in a pinch). But nothing about the experience with closeted gays tells us anything about a force that welcomes openly gay soldiers.

Second is the concern that we may lose valuable talent, specifically Arabic translators. It seems to me that this argument cuts both ways. If losing gay translators is a problem, then losing straight translators who don’t want to serve with gays would also be a problem. It won’t do to say that homophobic translators aren’t worth worrying about, because the whole point of the argument is that we need translators. Any policy change that produces fewer net translators cannot be defended on the ground that we need translators.

Third is the claim that a growing number, now a majority, of armed forces members say they would have no objection to serving with openly gay unit members. Maybe. But doesn't that imply that a significant minority of the current force and of the potential recruiting pool would be uncomfortable? And if so, would there really be enough openly gay recruits to replace those straight soldiers who quit and those straight young men who refuse to be recruited. BHO is fond of saying how his stimulus bill kept jobs from being lost. Can't we apply the same logic to claim that Don’t ask, don’t tell has prevented many resignations and abstentions from enlistment?

Fourth is the argument that Blacks were integrated in the face of similar hostility. That is true, but when Truman integrated the service, there were way more Blacks looking to serve than there are gays. History records that Truman’s Executive Order, issued in 1948, wasn’t really implemented until the Korean War demanded a larger recruitment pool. Thus, racial integration appears to have helped recruitment. By 1986, nearly 20% of the armed forces members were Black. That cannot be the case for gays. How the recruitment/retention consequences will play out is hard to predict, but the irrelevance of the Black experience seems to me safe to assume.

Finally, there is the affecting claim that forcing gays to live a lie in order to serve their country in a service that values personal honor is just plain wrong. That’s a good point. But then what? Why do people think that one good argument is all it takes for their position to win the day?

And then there’s unit cohesion. Again, the experience of closeted gays is irrelevant. The greatest threats to unit cohesion arise from (i) straight soldiers’ squeamishness about being sex objects of identifiable platoon-mates, and (ii) romantic entanglements of openly gay soldiers with each other. Undoubtedly, there are Brokeback Mountain relationships in the service now, but the number is too small to matter. If openly gay men and women are invited to join, the number of couples, and, worse, triangles, may expand exponentially.

I am not arguing here that homophobia and the resulting animosity between soldiers are a reason to exclude gays (although it could prove to be). I am talking about the real fact of serving in close quarters with someone who views you the way you view the opposite sex. A straight male soldier showering with a gay is entitled to feel as if he were showering with a woman or as if he were a woman showering with a man. An enlightened indifference toward the co-showerer’s sexual preference per se is fine, but it has no bearing on one’s comfort level in the shower with someone whose idea of a sex partner is you.

I don’t pretend to know how admitting gays into the military will work out. I do know, however, that the arguments advanced, other than fairness and “honor,” i.e., the ones not related to recruitment, retention, or unit effectiveness, are all bogus, and it would be nice if something more cogent could be offered in its support.

Finally, there is the matter of risk. Certainly, there is some risk that admitting openly gay service members will have a negative effect on recruiting, retention, or unit effectiveness. Whether that risk is small enough to run depends not only on whether the change is "right" as a matter of social policy, but also on how bad the consequences of being wrong would be and especially, how difficult reversing the policy would be if it harms our military readiness. How would that be known? Would our political machinery ever acknowledge that a drop in recruiting/retention absent a ban on gays was the result of ending that ban? Or would that old stand-by, a demand for impossibly absolute proof, be trotted out? My guess is that the genie will be permanently out of the closet.

Intergenerational Games

2010-02-02T12:16:00.001-05:00

Game theory has something sad to say about the state of intergenerational relations in the US.

Imagine that you had to support your retired parents if they could not support themselves on their savings and private pensions. One thing would be true, at least in somewhat functional families: the intergenerational transfer from younger to older would be negotiated with some attention by the elders to the solvency and happiness of the younger generation and its offspring. We care about our children and grandchildren.

But what if we can rely on Social Security and Medicare to care for our retired parents? Or more, important, what if our parents do not have to impose on us directly because they get support from us indirectly? The consequence is that there is nothing our parents can do to relieve us of the burden of caring for them. Our payroll taxes are due no matter what. Of course, wealthy parents can give gifts, but we’re talking about parents of modest means with parents of modest means. Where those parents might, absent Social Security, try to accommodate their children’s economic needs, they don’t have to do that for the mass of payroll tax payers who support elders’ entitlements. The oldsters can say “we’ve earned it,” and demand that the bills be paid by someone other than their own children, unable to do anything about the fact that someone else is making those children pay for them.

Without socialization, we could assume that the aggregate intergenerational transfer would be the sum of what the younger generation can afford. With socialization, the amount of the transfer is dictated by the voting power of the respective generations, or the ability of the young to impose inflation on seniors, something the latter have dealt with at the ballot box by indexing Social Security benefits and providing Medicare benefits in kind. Because I cannot protect my kids from the tax voted by others, I might as well vote for those taxes so that I get what I've “earned.” It’s a version of the tragedy of the commons, which is really a massively multiplayer prisoners’ dilemma game.

No one wants to ration healthcare. But Medicare is on a bad trajectory, one that cannot be saved by tort reform or “insurance reform” or “pay for outcomes” or any other increase in medical productivity. What we need are fewer old people consuming less care. But not only can’t you always get what you want, sometimes, you can’t even get what you need. Who will put the bell on that cat?

David Brooks argues in the NYT today that we need oldsters to step up and match their aggregate demands to their kids’ aggregate ability to pay. But where is the political will to do that? How do we get seniors to reduce their entitlements to fund the war in Afghanistan or pay for better schools? Or healthcare for the uninsured. Hard to see a happy ending…

Politics in a nutshell

2010-01-26T11:51:00.001-05:00

This morning, an Op. Ed article in the New York Times included the following:

[P]opulism is popular with the ruling class. Ever since I started covering politics, the Democratic ruling class has been driven by one fantasy: that voters will get so furious at people with M.B.A.’s that they will hand power to people with Ph.D.’s. The Republican ruling class has been driven by the fantasy that voters will get so furious at people with Ph.D.’s that they will hand power to people with M.B.A.’s. Members of the ruling class love populism because they think it will help their section of the elite gain power.

I think that about sums it up.

CITIZENS UNITED v. FEDERAL ELECTION COMM’N

2010-01-24T12:20:00.008-05:00

Big Supreme Court cases are too unwieldy for a simple “rightly” or “wrongly” decided to mean much. Justice Stevens in dissent lists a whole catalogue of reasons why the Court should have resolved this case without reaching the issue of corporate speech per se. I have not read those arguments, not because they may not be persuasive but because I do not care if they are persuasive. Justice Stevens may be entirely correct that the Court should not have taken up this issue at this time, and a future Court may hold that everything this Court said about the issue was “mere” dictum, worthy of little or no jurisprudential respect. But that’s not what I’m here about today.

Likewise, Justice Stevens says that the decision does harm to the Court as an institution by procedural error. That’s a big deal, and, again he may be right. So, again, the case may well have been “wrongly decided” if, absent those errors, the result for the parties would be other from what it is. And, again, I don’t care about that today. This post is about what the Court should have done if the issue were properly before it, not about whether that was or was not actually the case.

The arguments in the opinions seem to me somewhat simplistic. Clearly, the First Amendment was intended to protect the political speech of citizens, and advertisements for or against a candidate are political speech. But, as the dissent points out, we restrict the political speech of soldiers, civil servants, foreign nationals, etc., and we don’t let people electioneer right next to polling places. These are things we do to serve other societal interests and with which we have made peace. Thus, it is wrong, I think for the majority to say that the BCRA is bad because it imposes “any” restriction on political speech, but the dissent is wrong to say that it is OK because it only slightly abridges the freedom of the press. Some slight abridgements are permissible, and some slight abridgements are not. The binary arguments of both sides strike me more as advocacy, not jurisprudence.

My own jurisprudential sense sides with Justice Stevens on the procedural side. The Court should do as little as possible, and that, it seems to me, makes it difficult to defend on jurisprudential grounds the broad holding in this case. But that leaves open the question of what the law ought to be in this regard, i.e., whether the Court's holding and dicta are good or bad for America, whether or not they were right or wrong for the Court to issue. These things are not always aligned, although one hopes that the most often are.

The law is always drawing lines, and the lines almost always do some injustice. Here’s an excerpt from a hypothetical corporate prospectus for XYZ Widgets:

The greatest obstacle to the success of any American widget company is competition from cheap Chinese widgets. This competition has driven virtually every American widget maker out of business. We believe that if American trade law were changed, an American company that is set up to make widgets would have a competitive advantage over others that have closed shop and moved on. To that end, we intend to use the first $100,000,000 of capital we raise to elect legislators and a President who support tariffs on Chinese widgets. Advertising in support of suitable candidates will be a key part of our strategy. Our success as a business depends on those legislative changes, and the use of our capital to achieve it seems to us the best possible use of that capital. Shareholders should, therefore, understand that their capital will be used to influence the outcome of elections.

Conceptually, I cannot imagine a legitimate restriction on the advertising that this corporation seeks to undertake. The political change is essential to the corporation’s success, the shareholders are aware of the proposed activity – and so don’t have to invest if they want someone else to be elected – and the ads are clearly political speech on behalf of the individuals with an economic interest (as are most political interests) in the outcome of the elections in question.

Practically, however, I see the problem. If this corporation can place ads, what about the corporation whose shareholders don’t share the views of management? It’s not always so clear which candidates do or do not support things that are in the shareholders’ interests. And what about pension funds and mutual funds? Many of us are invested in companies whose identities we do not know, much less their political machinations. And then there are labor unions, where the membership or contribution may be a condition of employment? Or non-profits whose contributors don’t all share management’s politics?

Assuming some of these entities can rightly be prohibited from some political action, where do we draw the line? Can we draw it so sloppily that it catches my electioneering start-up? Or must there be an exemption for truly voluntary enterprises that have stated their political plans for all to see? What about a donor-financed non-profit that has made the same disclosures?

PACs are intended to allow shareholders to band together to support candidates, but individual contributions to PACs and contributions by PACs are limited. For me, those limits vitiate any argument about how PACs allow shareholders to do what BCRA prohibits corporations from doing. If, however, the limitations on PACS were removed, and corporations that have disclosed their intentions to shareholders are permitted to use contribute corporate funds to PACS, I don’t think I would have much objection to a requirement that PACs be the conduit for political action money. But then, why bother?

As in so many things, transparency seems to me to the key here. If a corporation clearly has political interests, and it makes clear to investors what those political interests are, and no one is forced to invest in that corporation, then I don’t see why the corporation ought not to be able to use corporate funds to advance those announced interests. Right now, we have no such law, and the Supreme Court cannot write one. If this decision is seen as the Court’s way of getting that law written, and we end up with such a law, the correct philosophical view, I think, is not to assume that the Court wants or has enabled the wholesale use of corporate funds for political purposes, but only that it has said to Congress “give it another try.” Frankly, I have not, and may not read every word of every opinion in this case. It’s only as interesting to me as it is. So I cannot say whether the Court invites or does not invite Congress to take a Mulligan. But it doesn’t matter. Congress certainly will try again, and maybe this time, they’ll get it right.

The sky is not falling.

Who Shot John?

2010-01-18T15:45:00.002-05:00

I have several objections to the efforts to assign personal responsibility for the financial mess. They all pretty much boil down to asking the wrong question, because the question itself proceeds from a bad premise.

That premise is that things will be all better if the person or persons responsible are “held accountable.” I do not believe that premise holds. We suffered a systemic collapse, and we need systemic solutions. Finding wrong-doers is necessary, but it is not sufficient, and it is not more important than finding systemic causes and fixes.

We build dams to hold back rivers. But what happens when there is a storm upstream, or unprecedented ice melting, or whatever, and the river comes at the dam with unprecedented fury? If the dam breaks, we can, and should ask why it broke. But that answer won’t help us if we have not dealt with the possibility that, if the dam had not broken, it would have been overtopped, causing some flooding anyway, or that the banks would have flooded, hurting the people who live along the river instead of those in the town below the dam. We must deal with the fact that the water had to go somewhere.

Now, we certainly don’t want our towns defended by dams that will not hold, so something must be done about the dam. If we can figure out whose contribution to the dam failed, we need to find a new contributor for that part of the damming process. But we ought not to fool ourselves: the real problem was the river. We need to be asking what we can do to prevent the river from coming down on us like that, and nothing else we ask should be viewed as more important than, or as a substitute for, that inquiry.

And even if we do identify a “culprit” – someone who should have done a better job – we need to find a way to prevent the person who gets that job next from being able to make the same mistakes. Probity and competence are nice, but systemic changes – regulations – are critical to counteract human foibles. To the extent that removing people becomes an obsession, fixing the system that made their bad behavior possible loses its urgency. So, again, actually naming names and lopping heads can be counterproductive, however satisfying it may be.

Consider one domino in the financial mess: the ratings agencies. They were, in my opinion, the guys whose part of the dam cracked. Goldman Sachs is accused of selling short against securities that they created, after “persuading” the ratings agencies to issue those securities high ratings. What if the agencies had said “no.”? What if no subprime-backed paper got AAA ratings? What if the ratings agencies announced that paper backed only by alleged property values (and by none of the usual mortgage underwriting tests) would only be rated AAA if it could withstand a 50% decline in the value of the underlying real estate? What would have been issued, what would have been sold short, what defaults could have been swapped, etc.?

I don’t know the actual numbers associated with the various things that went wrong. I’m quite certain that credit default swaps should have been illegal from Day 1, and that CDS contracts unrelated to mortgage-backed securities could have done enormous harm even without the sub-prime mess. But again, if I were at a ratings agency, I would never issue an AAA-rating to any security that could be backed by a CDS: the moral hazard imposed on the securities by the very existence of CDS contracts would be enough to make the security risky. Indeed, the mere legality or, at least the apparent, and so-far untested, legality of CDS contracts should have been enough to make ratings agencies unwilling to rate any paper as virtually risk-free.

But what are we to do about the ratings agency problem? To the extent that ratings agencies were corrupted or insufficiently vigilant by reason of their business model – issuers paying for ratings – we need a new ratings mechanism, something like the Underwriters Lab, where the people with skin in the game pay for the rating and demand toughness rather than accommodation from the agency. But that may not be enough, because I’m not sure anyone at the ratings agencies should have been able to dope out the moral hazard created by naked CDS contracts, and, especially those situations where naked short selling was used as an accelerant for torching the underlying paper.

To prevent the systemic risks, we need bans on CDS contracts and naked short selling. Those bans, I submit, would be more important than a change in the agencies’ business model. Not because changing the business model wouldn’t be a good idea, but because the business model has been in place for many years, and absent systemic threats like sub-prime lending and naked CDS contracts and naked short-selling, the occasional ratings error wouldn’t bring down the whole house of cards. Because there wouldn’t be a house of cards.

So even blaming the people that I blame the most for the mess – in terms of being the weakest link in the chain – would be a distraction from the systemic changes necessary to keep the dam from breaking. And even those systemic changes would be a distraction from figuring out what caused the flood, and whether shoring up the dam would have prevented the mess, or merely changed its shape.

My earliest posts to this blog were about the water – petro- and sino-dollars, but I have not tried to figure out where those dollars would have gone if we had not created phony AAA-rated paper to receive them. The answer, I think, is to financing the Federal debt, and the consequences of that deserve their own post or two. For now, though, I only want to say about that inquiry is that nothing in the blame game leads us to it – that Mr. Angelides’s lynch mob, charged with “inquiring” into the causes of the financial crisis, doesn’t seem at all interested, and that all this talk about taxing banks and bankers is a further distraction. When the scapegoat has been slaughtered, will we still care - have we ever cared - what really happened?

One Cheer for the Bank Tax Proposal

2010-01-16T11:30:00.002-05:00

Politics is a messy thing. In this country, it’s the art of getting stupid people to support good ideas, and that almost always involves lying to them in some sense. I oppose the bank tax because I believe it is an ex post facto bill of attainder – an unconstitutional twofer. Here are two responses to that argument:

1. Robert Gibbs, White House Press Secretary:

If you want to be on the side of big banks, then you're certainly — this is a great country — you're free to do so.

2. Lawrence Summers, White House economic advisor:

It's surprising to me to see institutions who have benefited so substantially at a time when there is so much economic distress among others in the country to be complaining about the justice of what has happened to them from their executive suites.

Neither response is a rebuttal. Neither says “No, it is constitutional.” Both say “Any stick is good enough to beat a dog.” This is how things are done in our democracy. Politicians defend their bad actions by attacking someone, by implying that anger is argument, which, since they know better, is lying.

But, as I said, given the limited intellectual resources of the electorate, one must lie to get them lined up on the right side, so it is hardly surprising or necessarily wrong for our politicians lie to us. How else could they govern?

I believe the bank tax proposal is a lie, too, like the unconstitutional proposal to tax the AIG retention payments retroactively. No one believed that that tax would pass, but everyone wanted to be seen as “for” it. In other words, the only way our politicians can “prove” that they hate bankers as much as we all should is to appear to throw a tantrum and propose that they be fed to the lions. Eventually, other politicians, who can then be painted as bank-loving jerks, will stop them, or an “out-of-touch” Supreme Court will throw the law out. There is thus very little down side to proposing a bad law that violates our principles to attack bad people.

The bank tax strikes me as special because it stokes anti-Semitism. So I do not approve even of the proposal. But for the sake of philosophizing, let’s take the parallel to Nuremburg off the table. Let’s suppose no one identified Wall Street with any particular demographic other than greedy bastards. The tax would still be unconstitutional, and I would still oppose it, but I’m not sure that I would think any less of the politicians who proposed it. That’s because there will be an anti-banker residue from the process that I believe is salutary, or would be if so many bankers weren’t Jewish.

Warren Buffett said this in an interview with the BBC:

If 50 of us were on a ship and there was a shipwreck, we all swam to an island, we knew we'd never be rescued - and fortunately it was a fertile island so we could all plant rice and grow enough to take care of ourselves. We would not take the five smartest people out of the 50 and tell them "why don't you start trading rice futures and speculate among yourselves", and by the way we think that's so valuable we're going to give you the most money and probably a favorable tax rate on top of it. Hell no, we'd get everybody producing rice.

We have too many of our best minds trading rice futures, and we are diverting too much of our GNP to compensating them for doing it. In a free society, we cannot and should not single out an occupation for a legal restriction on income. The power to impose such a limit is corrupting, and the temptation to engineer society by doing so would be overwhelming. It would be a bad idea.

But there is no reason that the people cannot hold their vultures in low esteem. We can certainly feel free to shame the rice traders when there is no rice being produced, in part because the human capital essential to its production – those best brains working on financial engineering – are misallocated. It’s no accident that Buffett, who describes himself as “allocating capital” for a living, would have strong views on the allocation of human capital as well as money capital.

Nor is it wrong for the President to use the bully pulpit to foment some of that low opinion. But it’s a tricky business. It will be messy, there will be excesses. There are always excesses. Still, as I wrote earlier, there is too much money to be made on Wall Street doing too little to enable the growing of rice. And the bankers have behaved badly, as might be expected when there is so much money to be made.

On the other hand, we do need bankers. And then there’s that Jewish thing. Ain’t nothin’ easy.

The Road to Nuremburg II

2010-01-14T12:38:00.006-05:00

Today, President Obama, upset about the "obscene profits" being made by big banks, proposed that they be charged a “Financial Crisis Responsibility Fee” so that the American people can recover the money they lost bailing out AIG and GM. (The President is taxing banks for the same reason Willy Sutton robbed them: that's where the money is.)

The fee is, of course, a bill of attainder aimed at Wall Street bankers, and like it or not, "Wall Street" means "Jewish" to a lot of bad people. Folks blame the mess on people and firms with names like Goldman, Sachs, Blankfein, Greenberg, Lehman, and even Dimon (who who isn’t Jewish but sounds like he might be, which is close enough for the torch and pitchfork crowd). The President’s plan, and the speech announcing it, validate resentment, and in so doing, give a green light to the mob to do its worst.

I know BHO was a Constitutional Law professor. But what country’s constitution did he teach? Implicit in his proposal is the principle that it is ok to tax those people that our politicians blame for our ills. That seems to me bad medicine, but if we are to adopt that principle, we ought to do it right. Why limit the evildoer's punishment to mere confiscation of assets? Certainly, some degree of opprobrium should attach and a way be found for the rest of us to spot and shun those responsible for our problems. I suggest that anyone associated with a taxed bank be required to wear some emblem - I'm thinking a green arm-band with a dollar sign on it - to indicate that he is responsible for the financial crisis and ought not to be treated by ordinary citizens any better than he is treated by their government. That is the point, is it not?

Just a thought.

Wall Street Pay

2010-01-13T15:53:00.004-05:00

This is another reductionist exercise. I don’t care what people on Wall Street make. But I am interested on why they make so much, and I want to apply a reductionist analysis. They are obviously doing something for which the demand exceeds the supply. What is that thing, and why the imbalance?

My starting point for almost all inquiries into new phenomena is “What’s changed?” Why is there so much money available and so much money paid, relative to the past? These questions assume that Wall Street pay is in fact higher than it used to be. I’m going to take that as a given. If I’m wrong, then never mind.

I have already identified one component of the problem: the trade deficit causes money that would ordinarily flow through Main Street to flow through Wall Street instead. I should take this opportunity to add a second point, which is that personal savings in this country has come more and more to mean pension accounts of some sort, and most of that money, too, flows through Wall Street and not Main Street. All of the money wants securities, so the securities industry is where the money goes. That’s why there’s so much money available for Wall Streeters to siphon off for themselves.

But why are money managers and traders paid so much? Why aren’t there thousands of them chomping at the bit to work for a nice six-figure paycheck? Why eight, nine or ten(!) figures? I’m thinking it’s the law of diminishing returns.

Remember The Bell Curve – Herrnstein and Murray’s book that everyone thinks was about race but wasn’t? The Bell Curve was about the skewing of rewards in our society toward the brainy end of the spectrum. For whatever reason, it appeared to the authors that we were developing a bimodal income distribution, with a big and growing divide between the manual labor class and the intellectual labor class. The divide was especially ominous because the entry of women into the workforce was reducing social mobility. Doctors marry doctors now, not nurses; lawyers marry lawyers, not secretaries. Remember when there were secretaries? Remember when smart women were teachers? But I digress…

Anyway, the world is paying more and more for smarts, and the reason, I submit, is that the law of diminishing returns applies to intellectual projects. Consider legislation. How hard is it to come up with a law against murder? Over time, just about all of the obviously necessary and easily constructed legislation has been constructed and enacted. But there is always an ongoing battle between the law and those who would avoid it (not evade it, which is a matter of policing, not legislating). So legislators need to be smarter. But they aren't getting smarter, because we'er not smart enough to raise their pay enough to attract smarter people. Read any good laws lately?

Here’s Jules Verne on two characters in From the Earth to the Moon:

“Now if Barbicane was a great founder of shot, Nicholl was a great forger of plates; the one cast night and day at Baltimore, the other forged day and night at Philadelphia. As soon as ever Barbicane invented a new shot, Nicholl invented a new plate…. Which of these two inventors had the advantage over the other it was difficult to decide from the results obtained. By last accounts, however, it would seem that the armor-plate would in the end have to give way to the shot; nevertheless, there were competent judges who had their doubts on the point.”

The weaponers vs. the armorers. The eternal struggle between problem and solution. The better the solution, the trickier the next problem. But just how smart were Messrs. Barbicane and Nicholl, or, more to the point, how smart were the people they hired to do their R&D? And how much did they pay them? How much would they have to pay them? And wouldn’t the price rise as the task got harder, as the ability to think up the next solution became rarer and rarer?

And what else could those very bright people be doing? The world is their oyster. Why gun-making or plate-making? Why banking? Why software? Some people, of course, work at what they like, and money isn’t everything. But money biases decisions:

The graduate with a science degree asks," Why does it work?"
The graduate with an engineering degree asks, "How does it work?"
The graduate with an accounting degree asks, "How much will it cost?"
The graduate with an arts degree asks, "Do you want fries with that?"

And Wall Street has the clearest path to riches for the very bright. Because the amount of money there is growing rapidly, and because the benefit of a small advantage is measurable in dollars, and because only a few people can create even small advantages now that the easier questions have long since been answered.

The easy questions are those relating to the allocation of capital. Howard Dean recently said in an interview that his family worked on Wall Street for generations, but that they were in the business of capital allocation (that’s what Warren Buffett says he does for a living, too), and now Wall Streeters are in the business of financial engineering. Dr. Dean sees financial engineering as unproductive, as compared to capital allocation, which he, rightly, considers a very important function in a capitalist system.

Dr. Dean is right and he is wrong. Many money managers do get paid to allocate capital, to keep it flowing from weaker industries to stronger ones. But there is also a lot of money to be made by exploiting tiny market-inefficiencies that are, in the scheme of things, too small to matter, but nevertheless, with the right technology, can add up to handsome profits for socially useless effort. The brains are being used not to detect inefficiencies, but to detect them milliseconds more quickly than others. As if that really matters to the allocation of capital. That, I think, is why people are so pissed off at Wall Street. You can make a lot of money there doing nothing that needs doing. Not only is it a waste of the money you make, it’s a waste of the talent you employ.

Most people who think Wall Streeters are overpaid cannot articulate why they are overpaid, because they don’t know what they do. But that’s the point. The contribution these financial engineers make to the general economy doesn’t seem to be worth the compensation. It can’t be, or there would be some tangible evidence. It’s not just that financial service companies deal in intangibles. People seem not to resent venture capitalists. They don’t even resent mutual fund managers, who really do allocate capital. No, it’s the ones who just appear to be fixing unimportant anomalies that get their goat.

Of course, there is always a baby in the bathwater. There is something harder than the allocation of capital that is also an essential function of Wall Street: the transmogrification of capital. Investment bankers used to match up risk-takers with risk-creators. Now they match up risk-avoiders with risk-creators. That’s a very much more difficult thing to do.

It started with ERISA, the Employee Retirement Security Act of 1974. That law required that all defined benefit pension plans be funded and that virtually all retirement plans of all kinds be prudently invested. By fiat, a major portion of the capital of the United States was being told what level of risk it could take. But that did nothing to change the kind of risk that entrepreneurs were creating. The capital structure of American business had to be reshaped so that the demand for capital matched the capital available, not only in amount, but in style, where the style was changing rapidly from risk-taking to hyper-risk-averse.

A review of the 1970’s and 1980’s will reveal, I think, capital structures divided into two parts: (i) as much low-risk, senior paper as could be generated, and (ii) a high-risk common stock element. And the LBO was born – leveraged buy-outs, where the (relatively) careful money took the debt and risk takers remaining in the economy – the rich getting richer – took the risk. Of course, the risk was nowhere near as great as the price it could command with so much of the money tied up in “prudent” investments. So there was lots of money to be made by the common shareholders, and so lots of money available to pay the investment bankers who created the debt. Junk bonds were everywhere, and the paychecks were fat, indeed.

In the last decade, the sovereign wealth funds of our trading partners have augmented the pension funds, taking even more risk capital out of the system and also preferring to buy as much safe paper as possible. As the law of diminishing returns teaches, the more prudent capital there is to invest, the harder it gets to find prudent investments. Really, really smart people were needed, people who could demand a lot of money for putting together really complex deals. And they could get a lot of money because the investors were more concerned with safety than return.

This sort of financial engineering is really quite valuable to the economy, because the idea of “allocating capital” per se begs the question of how risk tolerance, and if there is a big mismatch between the risks being created and risks investors will take, financial engineering is the only solution. ERISA and the trade deficit created the need for that engineering, and the more money flows into those capital pools, the more money there is to be made allocating it, and the harder it gets to do so. The natural result is that the people who are ready, willing, and, above all, able, to perform these feats stand to earn enormous amounts of money.

But that's just the baby. There’s still that nasty bathwater of useless trading and the corruption that attends so rich a pot. This post has run on too long already, though, so…

Financial Crisis Inquiry Commission

2010-01-13T10:40:00.001-05:00

What joke!

I don’t even know if there was a Katrina commission, but if there was, and I was on it, I would first ask “why were the levees inadequate?” If the guys running the FCIC were running that commission, their first question would be “Well, Brownie, what was the worst thing FEMA did?” At least that’s what Chairman Angelides thought the world most wanted to kno about the financial crisis: “Specifically, Mr. Blankfein, what two negligent or wrong things do you most have to apologize for?” or words to that effect.

The whole idea that this commission starts with organizational issues at the investment banks, rather than the macroeconomic environment in which they operated, blows my mind. Of course, the day is young, and only the most political members of the commission have spoken as I write this. But the fact remains that the first panel of grillees consists entirely of scapegoats, when it should, of course, consist of scholars. We can get to the bad actors – some people certainly misbehaved – but no one operates in a vacuum, and this Commission’s indifference to macroeconomics, or, to put it more bluntly, its lust for fault, is simp0ly embarrassing.

Yikes.

The Road to Nuremburg

2010-01-08T08:38:00.002-05:00

CNBC reports that Goldman Sachs has been sued by a pension fund and an individual in Illinois over the bonuses it plans to pay (has paid?) for 2009. These are odd suits, filed by shareholders in a company whose stock doubled in 2009.

I’m not much of an alarmist, but I must say that the focus of the financial mess on firms with Jewish names or Jewish leaders has been, as we say, very bad for the Jews. I cannot help thinking that in the same way that right-thinking Americans have gone to court to fix things that legislatures won’t touch – think Brown v. Board of Education – wrong-thinking ones are doing the same thing, trying to do in the courts what Hitler did with the infamous Nuremburg laws.

As a wise man once said, our weaknesses are just our strengths taken to excess: we all have the vices of our virtues. A court system that remedies social injustice is such a strength; it is an important national virtue. As such, however, it is a cause for vigilance lest it be subverted, and this suit sets off alarm bells for me.

Suspended disbelief – why?

2009-12-31T14:33:00.005-05:00

One of the questions I asked in my first post on this subject is why we can suspend disbelief for fiction. Oddly, I think it may be connected to how we process reality.

Philosophers have wrestled forever with the problem of solipsism. How do we know that our individual consciousness is not all there is, that everything we experience isn't just a figment of our imaginations? I think the odds are against it – if my consciousness is the only intelligence in the universe, how did that intelligence come into being? (Is it just you and me, God?) But there is no logical requirement that the universe consist of more than our own minds.

What makes solipsistic speculation possible is the fact that we do have to put the entire universe as we know it through our consciousness in order to be conscious of it. That doesn’t mean it’s not out there, but it does mean that what we see is our version of what’s out there, not really what is out there. I don’t mean to make too big a deal of the idiosyncratic nature of this translation. It’s not interesting to me, today anyway, whether you see “blue” differently from me. On many days we can agree that the sky is blue; we perceive such things similarly enough to do business, and that makes language and, therefore, civilization possible. So the differences can wait.

I recently ate at a restaurant where the menu stated “Substitutions are not allowed, but additions are welcome.” Adding is easier than substituting, and nowhere is that more so than in nature and, especially, evolution. I suspect that how we process reality differs from how a hamster or a fish or a puppy processes it only in added complexity. Thus, I think that our ability to process events is an extension of our ability to process things, that the machinery we use to see that an event is more than a series of random motions, or a process more than a series of random events, is really the same machinery that we use to determine that a chair is not a random assemblage of material.

Applying machinery powerful enough to construct narratives to figure out that a chair is a chair seems wasteful, so we probably do use neural shortcuts for such things, but those shortcuts seem to me to be derivatives, memories of the larger machine’s earlier workings. Nature creates machinery and derivative shortcuts rather than direct alternatives – additions, not substitutions – like Jack Nicholson’s famous order of toast in Five Easy Pieces. “Now, just hold the chicken.” (A case of “addition” by subtraction: Jack adds to the concept of a chicken sandwich the concept of absent chicken. In logical terms, adding mayo and removing chicken are analogous processes – amendments to the chicken sandwich template.)

How, though, do we know, for example, that a side order of toast is “like” a chicken sandwich without the chicken? To make that connection, we must be able to recognize patterns. There are lots of surfaces we can sit on besides chairs, and we know instantly that something is sufficiently “chair-like” either be called a chair or, at the very least to be sat upon. Categorization is about analogy – we make decisions based on our perception that something is like something else. Otherwise, how can we learn anything useful? Unless what we encounter strikes us as like something we have learned, how do education and experience help us cope?

If we are to be able to recognize things, we need to be able to recognize patterns, and if we can recognize things and patterns, we should be able to apply the same mental gear to recognize events and common narratives.

Which brings us to fiction. Nature abhors excess capacity as much as she does a vacuum. If we can learn by analogy to events, why should we be limited to events that actually happened? (Assuming for the moment that history, as Napoleon said, isn’t just lies agreed upon.) Maybe there are fictions that, if we could internalize them – if we could make them equivalent in teaching power to actual experience – would teach us common lessons, especially the cautionary ones, that are useful to know.

How, then, from an evolutionary standpoint, do we imbue fiction with the power to teach? Can we most profitably listen to a story, always aware that it’s just something some guy made up, something that didn’t really happen? Wouldn’t it be great, if, just while the story is being told, we could immerse ourselves in it as if it were really happening? Could any other posture elicit a greater dose of education from the story?

In other words, it seems to me that if we didn’t suspend our disbelief toward stories, we could not learn from them, at least not as well. We wouldn’t enjoy them as much, wouldn’t seek them out, tell them (to a bored audience), or, given the dull response, even bother to make them up. What I’m saying is that we have fiction precisely because we are willing to be a good audience for it, that is, to suspend our disbelief. And given the pedagogical power of stories, the idea that we could not come up with fiction as a way to deliver more of them just seems foolish. Of course, we have fiction, so, of course, we have learned to suspend our disbelief to accommodate it. Otherwise a race of story-tellers would have taken our natural selection lunch long ago.

The Funny Game of Suspended Disbelief

2009-12-23T15:37:00.009-05:00

Another of those philosophical musings I promised myself. SPOILER ALERT – Movie plots discussed.

Why do we suspend disbelief? Why can we? And what are the nuances?

I found myself asking those questions after stumbling onto the last five minutes of “Funny Games” on cable. I knew what the movie was “about” – more on that later – and I knew that the action was too brutal for my taste. So I’ve never watched it all the way through. I did, however, watch the last two minutes some time ago to make sure that the central home invasion ends as Hollywood likes, with dead invaders, and I was surprised and disturbed to learn that it does not. But I did not know the details. By watching the last five minutes last night, I picked up that one of the victims is casually drowned right before the sociopathic villains start their mayhem over again with new players. It was quite a disturbing scene.

Today, I searched for reviews of the movie to see what there was to like about it – why people actually paid to see it. Many of the reviewers liked that the movie, as an exercise in terror, thwarts the viewers’ expectations of the bad guys getting their comeuppance. But several reviewers mentioned three related (to me) aspects of the movie of which I, having not watched all of it, was unaware. The first is the breaking of the fourth wall – in one scene (or more?), one of the villains speaks directly to the audience or mugs for the camera. The second is a scene where the female victim succeeds in killing one of her attackers, but the other then accuses her of “breaking the rules,” - an ironic reference, perhaps, to the fact that the movie was about to "break the rules" - and uses her TV remote to “rewind” the movie so that he can prevent that particular outcome. The third thing, which seems unrelated at first, is that, according to the reviewers, all of the violence in the movie takes place off screen (though not out of earshot).

What seems to have bothered some reviewers most was the “rewind” scene, the physical impossibility of the action. There we are, all caught up in suspended disbelief, treating the invasion as if it is actually happening, and then, pow, we are reminded by the illogic of the action that we are watching a fiction, and that sucks, at least it does if we are in some sense pretending that it is not a fiction. But should we be?

Have you seen “The War of the Roses”? If so, can you summarize the plot? Hint: it has nothing to do with Michael Douglas and Kathleen Turner beating each other’s brains out. No, the plot of “The War of the Roses” is “A divorce lawyer tells a potential client a cautionary tale to test his commitment to the process.” The tale he tells, which takes up the bulk of the movie, and which tempts us to move inside its wrapper and suspend our disbelief as to it, is simply incredible. But instead of complaining that the “plot” is incredible, we need to understand that, even within the movie, the story is a fiction, an exaggeration of the perils of divorce litigation. By treating the excesses of the tale as mere embellishments by the lawyer character to make his point, we can dismiss the incredible as being intentionally so without disrupting the flow of the main plot, which, perhaps unbeknownst to us until we reflect on why the extravagance of the story is intentional, is the lawyer’s meeting with the potential client.

So, too, I think, was Director Michael Haneke’s goal in “Funny Games.” The story is too brutal actually to tell as if it were really happening in an imaginary universe. It certainly was for me: so long as I thought that the plot was “Two sociopaths invade a home and torture/kill a family,” I had no interest in watching it. But if the plot is “Some guys make a movie about home invasion to explore how the use or non-use of Hollywood conventions affects an audience” – if that is the plot of the movie I am watching, and not just (but maybe, also) the purpose of Haneke’s making the movie itself, then I can suspend my suspension of disbelief from time to time to remember that I am watching the making of movie, and not that movie itself. But I have to be able to go back into the movie within the movie in order to allow the moviemaker to find out how I would react to such a movie, if he actually made it.

The notion that we are watching what is essentially an academic exercise is heightened, I think, by the low-budget touch of off-screen violence. Yes, there is an inquiry to be made into the effectiveness of such action, but there is also the practicalities of the film budget. “Funny Games” is not necessarily a low-budget movie - $15,000,000 I think – but the film within the film clearly is. The real actors are highly paid in the real world, but the characters, if they are actors, too, within the movie, are nobodies as far as we know. Why waste money on stunt doubles and FX violence, especially when you can use the device to see how off-screen violence plays? Necessity as virtue. Nice.

And if any doubt remains, just listen to the apparently nonsensical jabbering of the killers in the last few minutes of the movie, where they talk about colliding universes of reality and fiction, and which is to be treated as “real.” That’s a lot of writing to be pointless. But the setting and action during that scene are so distracting that we don’t listen. These guys are crazy, right? And they speak so fast…

I think “Funny Games” is a masterful piece of moviemaking. That does not mean that I could stomach watching it, even thinking that it's about what I think it’s about. But I may give it a try, this time with my disbelief firmly in place, if only to see if that’s possible.

Of course, this little movie review doesn’t even address the question of why we can suspend disbelief much less answer it. Maybe next time…

C-CSPAN and the Law of Unintended Consequences

2009-12-20T12:20:00.005-05:00

I admit to a sort of obsession with dominoes, how one thing leads to another. One of my domino constructions starts with C-SPAN – C-SPAN 2 to be precise – and ends with governmental paralysis.

Remember “Mr. Smith Goes to Washington,” where Jimmy Stewart’s young Senator holds the floor for days on end until public opinion turns to his view and his filibuster saves America? The movie is pure fantasy, of course: 65 senators (back then) could have cut off debate, which means that there were at least 30 other senators who shared our hero’s view of the pending legislation. Where were they?

Anyway, the fact is that filibusters used to be conducted by real senators giving real speeches. The current practice, though, is for senators who oppose a bill to announce their intention to filibuster it and, thereby, to require sixty votes for its passage. According to Wikipedia, Senate Rule 22, which, of course, is not written in English, allows for speechless filibusters. The same Wikipedia article also says that the Senate Majority leader can order that real speeches be made. I admit that I cannot find any evidence in the rule that any of this is so. Nevertheless, the Senate makes its own rules, and the Senate can change them – though even there Wikipedia says that one Senate rule requires a 2/3 vote to change the Senate rules – a Gödelian nightmare if ever I saw one. (What if the rule said that the rules could only be changed when Hell freezes over?) Thus, if there are speechless filibusters, the Senate rules clearly countenance them, and those rules clearly could be changed to get rid of them.

Why, then, are speechless filibusters allowed? I can think of only two reasons, although I’m well aware that that’s not the same thing as saying that there only are two reasons. One of my candidates is laziness. Both parties use the filibuster when they’re in the minority. Why should they oblige themselves to actually have to blabber on? If one side makes the other actually speak, the same will happen to them when their turn comes. My second candidate, though, is the first domino in my chain: C-SPAN 2, which provides coverage of Senate floor speeches. I don’t believe that filibusters are all that attractive, and I think that if the American people got to watch enough of that particular bit of sausagery, they would not react kindly. As a result, the Senators, in order to preserve their own jobs and to preserve the filibuster, per se, have agreed that they should not actually have to carry one out.

I am sympathetic to the Senators’ plight (but only to their plight). The filibuster is an important tool whereby the tyranny of the majority can be constrained. And I’m perfectly happy that this current Senate needs 60 votes on such major things as healthcare reform. But on judicial nominations, or Pentagon appropriations? On things for which Senators would not have taken the trouble actually to filibuster, or over which they would have looked foolish while filibustering, things for which a majority in all good conscience should be enough to get done? Nah, I think Senators should be made to play the game on those bills. But, I agree, that the cost of making them play the game is too high with C-SPAN documenting every wasted minute of it.

That’s why I’m sympathetic to the Senators’ plight. But the answer, it seems to me, is quite simple. The Congressional Record records every word spoken in the Senate, and members of the Press are permitted in the gallery. So, there is no fear that the Senate will become a secret society if the C-SPAN 2 cameras are turned off during extended debate. I think the senators should be made to filibuster the bills they really, really, want to stop, and the first hour of each senator’s speech should be televised, so that if he actually has something to say, the people will have access to it, but after that, the cameras are turned off until the next speaker rises.

A televised filibuster is not a baby; there is no reason not to cut it in half to preserve the device and yet to restrict its use to cases where it’s worth the trouble to use. Tom Friedman has been complaining about how our system is only capable of “sub-optimal solutions.” Maybe we could make them a bit less sub-optimal if some of them only required 51 votes to get out of the Senate.

Absolutely (not).

2009-12-18T13:01:00.012-05:00

Dragged by events into policy issues, I have posted almost exclusively on politics and economics, when I had actually hoped to hold forth more on philosophical stuff. With what appears to be a break in the action, here’s something along the latter lines.

The subject is moral absolutes. In what follows, I may use the terms “morals” and “ethics” interchangeably in some places and not so in others. I can't find a reliable distinction that makes one word always preferable to the other in every context. But where the distinction can be observed, I will use "ethics" to describe behaviors from the actor's perspective, and morals to describe them from the perspective of the community that the behaviors affect, either directly or as a consequence of the community's being made up of members who exhibit them.

But back to moral absolutes. Are there any? I say “no.” But then what? Relativism, at least as it’s commonly understood, is not necessarily the only place one can go without absolutes.

I start from the premise that we think about morality with the object of forming principles on which to base our ethical decisions. I recognize that some people reject the whole notion of “thinking" about morality, favoring instead the notion that one ought to strive to acquire the aretaic virtues, extracting ethical principles only as descriptive of how virtuous people are observed to be, not prescribing them as deontic rules to be observed. But to me, aretaic and deontic ethics are the vinyl and CD of the same music. I will say, though, that the aretaic school has one thing right: if there are no rules, per se, then a fortiori there are no absolute rules. And that’s really the point of this post: to harmonize aretaic and deontic ethics on the issue of absolutes.

At the outset (four paragraphs in, and I’m still at the outset – yikes!) I must declare my affinity for aretaic ethics. It’s like the old line “Don’t marry for money; go where money is, and marry for love.” Good people don’t need rules; the rules need them. But we live in a world where much of ethics is debated on the deontic plane, and rather than say that the issue of absolutes merely demonstrates the futility of deontic analysis, I prefer to refine that analysis so that it can be of use to those who find it useful, even as a way to grow in arête.

Actually, I want to, er, press the vinyl analogy. Leaving relativity and quantum mechanics aside for the moment, there is no set limit on how high or low a sound an analog disk can record. But a CD is expressly limited to the range that can be represented by the 0’s and 1’s available to code pitch. And yet, one assumes that for most ears CD technology is adequate for recording all of the music that has ever been recorded on vinyl. Some audiophiles can hear analog nuances that are lost in digital recordings, but those of us who are not audiophiles get along quite well with CD’s as our music source.

Can we say, therefore, that CD technology is “always” adequate? Well, for some people – most people, really – it is. If one of these people has to decide whether to buy a CD, is there any point in that person inquiring as to whether some audiophiles might find a particular CD inadequate? Or should the person, being one of those people who cannot tell a CD from a vinyl recording, simply order his or her musical life on the “absolute” principle that, for him, CDs are absolutely adequate? Even if we tell this person that there could be a piece of music for which even he would find a CD inadequate, unless he can actually identify such music easily, what good does the information do him? In other words, whether or not CD technology is always adequate, many listeners are best advised as a practical matter to behave as if it is.

In the ethical realm, this logic brings us to a question of human engineering. Is it better for a society to teach its children that (i) honesty is the best policy, or (ii) we cannot be 100% sure that honesty is the best policy, but there are no known instances in which honesty is not the best policy, i.e, it is the best policy so often, and our ability (dulled by both ignorance and bias) to discern situations in which honesty is not the best policy is so suspect, that we ought to behave as if honesty were the best policy? (I’m using “honesty” here in the sense of deception intended to defraud someone for the benefit of the defrauder and the detriment of the defrauded. Little white lies don’t count: no harm, no foul.) For some people, it makes sense that they be taught that there are moral absolutes and that honesty is one of them. For others, it’s ok, I think, to say that there are no moral absolutes, but there are some principles that are so often true that we are best advised to act as if it they were absolutes.

If, as a matter of selective pressure, the people in a society are most likely to survive if as many of them as possible behave as if honesty were the best policy, what follows? Moral absolutes, I think. Thou shalt not bear false witness. Teaching moral absolutes (like honesty is the best policy) works better than teaching the truth (how ironic!). How, then, can we be honest and still teach the simplified version? I submit that we must believe that there are moral absolutes so that we can honestly teach that there are moral absolutes, because it is in our community interest that the absoluteness of those moral rules be accepted, and we cannot teach it if we don’t believe it. (The Soviets tried to teach things that they knew were false, and look where it got them.)

Moral absolutes thus join Voltaire’s God among those things we would invent if they did not exist - not coincidentally, seeing as how morality is one of God’s principle contributions to our purported understanding of things. So maybe it’s immoral for me to argue that there are no absolutes, just things that are true often enough that we should act that way. But I can’t lie. That would be wrong.

A Convenient Lie

2009-11-25T12:26:00.008-05:00

The “Dead Peasants” thing has a bearing on the economic mess. As I have argued, we need to bring back tariffs. But the bad name of Smoot-Hawley haunts the effort. A case can be made, however that Smoot-Hawley had the deleterious effects that it did, not because it protected domestic industry, but because it protected domestic industry at a time when America was running a massive trade surplus. We were prospering off of other countries’ unemployment, and Smoot-Hawley turned the knife. Still, the surviving myth is that protecting industry is bad, not that protecting a trade surplus is bad. And no matter how much evidence is adduced to demonstrate that the trade surplus is what matters, that China’s yuan policy is really a form of Smoot-Hawley, the free-traders will continue to use Smoot-Hawley as a conversation ender at every turn.

The poster child for such indifference to truth is Charles W. Wilson, who asserted his belief that General Motors was so tied to American prosperity that “what was good for the country was good for GM, and vice versa.” The potential ambiguity of such a remark was known as long ago as Plato. In Euthyphro, he asked: "Is the pious loved by the gods because it is pious, or is it pious because it is loved by the gods?" Is something good for GM because it is good for America, or is it good for America because it is good for GM? Wilson’s point, I think, is that there was no causation involved, just a community of interests. To suggest causation, to allege that Wilson intended to imply causation, is at best to err, and, to do so with animus is to lie. And yet, the implication that he saw GM as the source of all good things persists, because the lie is too useful to pass up.

I have written to Mike Myers, the lawyer who says that “Dead Peasants” referred to dead employees to tell him that the term actually referred to former ones who were still alive. So he now has reason to know that his explanation of how “Dead Peasants” insurance got its name is false. Will he change his story? Will he express at least some personal ownership of his inference, as opposed to his current flat statement of fact? I doubt it. The lie is too valuable, and, it has become sufficiently entrenched that he can pretend not to be responsible for its perpetuation even as he perpetuates it. Of course, I could be wrong. I could get an email from him any day thanking me for correcting his misapprehension, or he could amend his website to tell the story about how the media found the expression “dead peasants” in a memo and appropriated it to name the product, all on its own. One never knows. But one can guess.

In the scheme of things, Myers's inaccuracy isn’t that big a deal. Like the difference between calling it “janitor insurance,” as was done, and calling it “dead janitor” insurance, which was not. Indeed, I suspect the term “dead janitor insurance” was a corruption of “janitor insurance” in a sense “licensed” by the industry’s allegedly calling the product “dead peasants” insurance. (The little lie has babies.) But without the “dead peasant” or “dead janitor” label, outraged bloggers could not get all huffy about how “even the name” makes them cringe. Sort of like Obama’s death panels. Even the name makes me angry. (What, you say there are no death panels? Prove it, Commie bastard!)

A lot of comments on the aforementioned blogs are themselves mini-rants about how bad corporate America is. Care to lay odds that any of these posters will offer a heartfelt “oops” when they are told that companies who bought janitor COLI plans only made money while the employees lived? These are people who would happily admit that they know absolutely nothing about how COLI plans work – that the term “experience rating” is gibberish to them – but they will remain certain that the employers got rich when employees died, because, well, that’s what corporations do, isn’t it?

My claim that the COLI companies made money off living employees and not dead ones will be dismissed, coming as it does from someone who does not share the ranters' clear perception of corporate evil, someone who, therefore, must be lying. It’s a form of denial, really. They have a certain amount of emotional momentum, and no amount of truth is going to change that, not when there is a “bigger truth” (corporations suck) to support the rage, and the object of the game is not to know the truth but to pretend to have a reason to vent the rage.

And yet everyone in this drama would swear on a stack of Bibles that they are themselves not liars, and that they don’t like liars, like, for example, those big corporations and their apologists who say that COLI plan purchasers only made money while employees lived.

Not enough is riding on the rehabilitation of dead peasants insurance for anyone to care whether it was a good thing or a bad thing for employees. It’s been assigned to the “bad for” bin, and there it will stay. But Smoot-Hawley is another matter. We desperately need to end our addiction to foreign goods. We cannot run an economy if our only comparative advantage is in capital-intensive goods. I believe tariffs are coming, and I think the harbingers will be increasingly public questioning of Smoot-Hawley’s role in its time. Two rhetorical titans - “Protectionism caused the Depression” and “China is stealing our jobs” are going to duke it out. Just letting Smoot-Hawley into the ring is progress. Whether it can punch its way out of its historical prison remains to be seen. Our fondness for convenient lies argues against it. But stay tuned.

Dead Peasants Insurance – Fifteen Minutes that Came and Went

2009-11-24T14:07:00.021-05:00

So there I was watching CSI: Miami, when one of the characters said that the life insurance policy his corporation owned on another character’s life was “Dead Peasants Insurance,” a term I had never heard before. I had, indeed, heard – and used – the term “dead peasants” in connection with corporate-owned life insurance, but I had never heard this particular usage. Whereby, as they say, hangs a tale.

I used to work for a company that sold life insurance to corporations. One of our main products was what we called “Broad-based Corporate-Owned Life Insurance (COLI).” Less charitable observers called it “janitor insurance,” because the policies in question covered the lives of all employees from the CEO on down the payroll to, for example, the janitor. (It’s no accident, I suppose, that the deceased in last night’s CSI: Miami episode was, in fact, a janitor.)

Broad-based COLI programs were first and foremost tax-avoidance schemes. Life insurance proceeds are exempt from tax, but the tax advantage of broad-based COLI program did not arise from the tax-free windfall on an employee’s death. Rather, the advantage arose because the company could borrow the money to pay the premiums, deduct the interest it paid on the loans, and then receive a death benefit that effectively refunded the interest without tax. This particular gambit had always been permitted by the tax law, and was to some extent regulated and limited by then-existing law. But whether or not the tax benefits were valid, broad-based COLI worked best if the employees lived a long time. The death of an employee terminated his policy, leaving the employer with one less source of tax advantage. It was, therefore, in the interest of the employer that the employees live, not that they die.

There was no windfall when an insured employee died. A provision of the COLI plan allowed the insurer to raise future premiums to recoup any mortality losses, so the employer didn't get to
keep any money it made by reason of early deaths. In case of catastrophic loss, the recoupment mechanism would fail, and the employer would receive a net gain on the insurance. But the loss of that many lives would almost certainly cost the company more money than the insurance could cover, so that was hardly the object of the game. The insurance element of the plan was not a profit engine, and, pace Michael Moore et al., the employer had no reason at all to seek or wish for the early deaths of its employees.

The tax advantages accruing on account of an individual remaining insured explains why employers continued to carry insurance on former employees long after they could claim any insurable interest in their lives. It is these former employees that we, at our company only, and for internal purposes only, referred to as “dead peasants,” an allusion to Gogol’s Dead Souls, in which the main character seeks to buy the registered ownership of dead serfs from feudal owners so that he could secure a loan against their future outputs, something he could do because banks used outdated census rolls to underwrite such loans. Our clients were securing loans on life insurance on “employees” who no longer were employees, so the analogy to peasants who were, in a sense, no longer peasants seemed apt. It never occurred to us that the term “dead peasants” would be applied to dead employees, in part because we already had a different use for the term, and in part because, as described above, the plans we were selling were designed to work best if the “peasants” lived.

But the football of life takes some odd bounces. In 1999, the Tax Court labeled the broad-based COLI program at Winn-Dixie Stores – a program that we sold – as a sham and denied Winn-Dixie the deductions it had claimed on the ground that the program had no business purpose, in part because it was never expected to show a pre-tax profit. Buried in the record of the case was this memo that I wrote. Mike Myers, a lawyer who has made Broad-based COLI his meal ticket, links to the memo in his blog, adding that “the ‘dead peasants’ referenced in the memo were deceased Winn-Dixie employees whose deaths resulted in policy benefits to the company.” On this score, he’s just plain wrong. As I said, “dead peasants” was short-hand for former employees. But reporters – he cites a couple – seemed to have reached the conclusion Myers offers, and that, as they say, was that.

An interesting aside: the “section on dead peasants” mentioned in the memo would have addressed a quirk in the tax law that made certain limitations applicable to a policy if the insured “is” an employee. Since a former employee was no longer an employee, the limits arguably did not apply to a former employee, i.e., someone who no longer is an employee. It was soon after our investigation of this subject that President Clinton held forth on the meaning of the word “is” in connection with Ms. Lewinsky. Needless to say, we enjoyed that bit of tap-dancing immensely.

I left the COLI business before the Winn-Dixie case was decided, and I never saw another reference to dead peasants until last night. I now find, on further Googling, that Michael Moore used the term in his farce “Capitalism: a Love Story.” He presents a family outraged by the notion that their loved one had been insured and that the company got paid the amount of the policy when he died. No mention is made of the fact that the company didn’t get to keep the money but had to give the cash back to the insurance company as an adjusted future premium on existing policies. That would’ve spoiled the mood, I suppose. Indeed, one of the reasons the tax case was so weak was that, at least to the satisfaction of the IRS and the courts, the “insurance” wasn’t really insurance. The plan failed its purpose precisely because its purpose was not to profit on the deaths of employees. But the fact remains that profiting from lives, not deaths, is what the plan was about.

So, if the subject of dead peasant insurance comes up at a cocktail party, you tell 'em that you know the guy credited with providing the sobriquet, however unintentionally. It's not Susan Boyle type fame, but it's a start.

Technorati Tags: Dead Peasants,COLI,Janitor Insurance,Michael Moore

Whither Chimerica?

2009-11-18T18:44:00.008-05:00

I’m trying to figure out what becomes of Niall Ferguson’s Chimerica. The US and China are locked in a tight embrace. But, as described below, I think the Chinese are better positioned to break away and leave us hurting.

My analysis depends on a certain view of the creation of money. Unfortunately, I don’t know anything “official” about how money is created. I only know what I think about how money is created. So, it only seems fair that I say how I think things work.

In the days of the gold standard, a guy with a gold bar went to the Treasury and said “Here’s some gold; give me some money.” The Treasury gave the guy some money and put the gold in its vault. The guy then put the money in the bank, and the bank lent it out to borrowers.

The money the bank had to lend was “backed by gold.” But there is only so much gold, and a growing economy needs more capital than the gold supply can support at a fixed price. Of course, there is no a priori reason why gold should be the only thing backing currency. German money after Weimar was backed by land. Saudi money is effectively backed by oil (and dollars). And if tangible assets can back money, why not intangibles like an ongoing business? Or an idea and a business plan? When I get money, I don’t care what specific thing of value stands behind it. So long as the money will buy something of value, the money is, well, money.

A well-known Soviet-era joke explained Soviet economics as follows: “We pretend to work, and they pretend to pay us.” Soviet Russians had lots of rubles, but they couldn’t buy anything with them; there was nothing to buy. So, were the rubles really money? Robert Frost wrote that home is where, when you have to go there, they have to take you in. Money, I think, is what, if you have to spend it, they will recognize as payment. All the Soviet Union had, once the price of oil fell, was the ability to force people to pretend to work. Not much value there.

Guys like Ron Paul criticize our financial system by claiming that so-called “fiat money” is worthless because it isn’t backed by anything tangible. They are right that it isn’t backed by anything tangible. But they are wrong to think it matters. What matters is whether anyone who receives a dollar believes that America has something worth a dollar available for sale. The problem with fiat money is not that it isn’t actually backed by real value, but that there is no way to be sure that it is so backed, so the temptation to issue it without any backing is politically overwhelming.

That temptation is exacerbated if a major recipient of your currency actually doesn’t care whether it will buy anything. That, I think, is how China views the dollar, and why the Chinese are not about to revalue their currency or sell dollars any time soon. (But may eventually do both.) And it is why we are not hesitating to print dollars unbacked by assets and products, dollars that others may soon reject.

*****************************

China doesn’t care what the dollar is worth because China is using the dollar to keep score in its newly competitive economic regime. China’s goal is to become self-sufficient in just about anything it could buy from the US. Buying stuff from us is the last thing on their minds, so what the dollars can actually buy is of no moment to them. They are happy to own zero-interest T-bills that produce a negative return if that will keep their factories humming.

China faces the daunting problem of booting up a capitalist society. Chinese entrepreneurs need customers above all, and the US has the most and best to offer. We provide a demand for quantity and quality, both essential to the long-term success of any enterprise. We are, in effect, the judges in their game of “So You Think You Can Run a Business.” We buy the outputs of their most effective companies, and that’s (a) how they know who those companies are, and (b) how their people and the rest of the world know that the yuan is “backed” by the productive capacity of a real economic engine.

The Chinese pay us for service as judges by selling us stuff at artificially low prices and lending the money back to us at artificially low interest rates. Such largesse is not, however, without consequences: we have lost jobs to cheap imports and borrowed too many cheap dollars at both the private and public levels. But that’s not China’s lookout. And, as described later on, cheap labor is cheap labor, whether or not it is even further subsidized by a cheap currency.

To understand China’s indifference to the value of the dollar, try this thought experiment. Suppose the Chinese government announced that Chinese exporters no longer needed actually to export their goods to America. Instead, Chinese companies can simply dump their outputs in the ocean and receive yuan equal in value at the official exchange rate to the dollars the company would have collected if the goods had been sold in America. (Think cash for clunkers.)

Why would this not work? Certainly, it would stimulate outputs, and thus jobs, and it would give Chinese workers and entrepreneurs money to spend. One reason it would not work is that there is no way to prove that Americans would have bought a merchant’s products at the price he says he could have sold them. As they say about upsets in the world of sports, that’s why they play the game. So, without regard to whether China actually needs to get dollars for the yuan it issues, the American consumer serves a valuable purpose just by buying one Chinese company’s outputs rather than anyone else’s. They play the game, and what we buy from them is their score. The winner has actually proven an ability to produce desirable goods at a good price, and that means that the yuan issued to it with respect to its sales are “backed” by productive capacity, whether or not they are also backed by the dollars the Chinese government gets for them.

Now let’s look at how important it is that the Chinese actually get those dollars, or, more realistically, whether those dollars hold their value or earn a positive investment return. Instead of the merchants destroying the goods in our experiment, suppose they have to make real sales, but that the Chinese government destroys the dollars it gets for the yuan it issues. (After all, lending to us at zero interest is as close to burning the money as the Chinese can realistically come.) The only real issue for the Chinese is whether the yuan issued on account of the goods sold to the US would be respected by those asked to accept it.

Those yuan are fiat money, but lots of countries issue fiat money. The yuan are nominally backed by the dollars received, but they are, I submit, also, increasingly (and more importantly) backed by the entrepreneurial infrastructure and labor of the Chinese people. Real factories will have produced real goods for this money, proving that the money can be spent on real products from real factories. So, what’s the difference to Chinese yuan-holders whether the dollars received for the exported goods are overvalued when received or become more so in the Chinese government’s hands? More and more, it is the Chinese economy, not the dollars, that make the yuan credible. Thanks to our willingness to buy good Chinese products, the Chinese workers do not have to pretend to work, and the Chinese government does not have to pretend to (provide the money) to pay them. No wonder the Chinese government has no interest in revaluing their currency: getting more dollars for less product might make economic sense, but it makes no political sense at all.

So we and the Chinese are for now co-dependent. We are addicted to their products, and they are addicted to our custom. Which of us, if either, will get over our addiction? China, I think. The very prosperity that China seeks to create must inevitably lead to consumption there. Even modest consumption would be significant. One little car in each of 1.2 billion garages, a chicken in every one of 1.2 billion pots, is a lot of consumption. When their own consumers are buying their own outputs, we won’t be so valued a customer, and the yuan will be allowed to appreciate against the dollar (again, “destroying” China’s dollar reserves, as in our experiment).

Chinese prosperity can cure China’s addiction to American customers. But what will we do when the Chinese don’t need us to buy from? One possibility is that like a bee, we will simply move on to the next flower. Other countries may want to emulate China’s entrepreneurial path, starting as China did with no indigenous consumer class. But the Chinese flower may be unique. The sheer number of people, the policy coherence, the level of education, the cultural work ethic may all have conspired to make China a once-in-a-century opportunity for economic symbiosis. There may well be a place that doesn’t care what the dollar is worth, but it probably won’t be able to absorb as many dollars as we have become accustomed to printing. (And we will still be attached to the oil teat, exacerbating the trade deficit. We desperately need an energy policy that provides certainty that home-grown energy will not be rendered uneconomic by global action.)

What makes our situation so troubling is that the villain in the piece is something most of us, including me, think of as usually benign: international trade. I like the idea of comparative advantage. When two economies have comparative advantages in mutually desirable goods, trade between them is good for both. But the law of comparative advantage ignores the effect of trade on displaced workers. Trade may be advantageous to the traders precisely because it displaces workers. Of course, the gains from trade can create capital that then reemploys the workers at higher wages. But that’s a contingent event: sometimes it happens, sometimes it doesn’t. And when one trading partner’s comparative advantage arises from its people’s willingness to live poorly (broadly defined to include preferring poverty to torture or death), the other partner’s workers are likely to be dragged down to that level if they hope to stay employed.

I’m not making a moralistic argument about how our trading partners treat their people. That argument is available, but there are counters to it that don’t need to be addressed if the argument isn’t made. Whatever one may think of slavery as a form of economic specialization, one ought not to volunteer for it lightly. A national trade policy that costs jobs here because labor of equivalent skill is cheaper elsewhere is a mistake: such practices create a race to the bottom; we get stuff cheaper, but we can afford less of it. And “trade” in which they send us stuff and we send them money is not “trade” at all.

To understand the ramifications of dealing with cheap labor sources one need only apply the classic comparative advantage paradigm. If England sells Portugal wool and Portugal sells England wine, there are fewer vineyards in England and fewer sheep farms in Portugal. Presumably, the people who would have produced English wine or Portuguese wool are busy making English wool or Portuguese wine. But if the Third World sells us all of the labor-intensive goods we need, we can only sell them capital-intensive ones. A country cannot sustain a workforce by selling only capital-intensive goods. Such a country becomes a land of rich entrepreneurs (and bankers) and underemployed proletarians. Sound like any place you know?

We have to stop living for deals. We need jobs not bargains. We need protectionism, not because it’s “good” or because free trade is “bad.” We need it because the Chinese – and everyone else with coolie like labor – should not be allowed to exploit a comparative advantage in labor per se. Any comparative advantage they can get from geography or innovation or education or organization is fine. But we ought not to compete on whose workers are willing to live worst.

I understand that if we impose tariffs or quotas on Chinese goods, we may have a trade war. But that assumes that we are not already in one and losing it. If our trade imbalance with China goes away because they don’t import from us, I believe that our domestic consumers will more than pick up the slack over time, and the stronger dollar will enable us to maintain low interest rates permanently. I know Smoot-Hawley is said (increasingly by people who don’t know anything about the matter) to have made the Depression worse, but that idea seems to have been largely discredited by a host of economists with the perspective that only time permits. China will not revalue the yuan voluntarily, and even if it does revalue it, other cheap-labor states will fill any void created unless we impose real quotas that enable well-run American companies to employ well-educated and well-paid workers. Otherwise, what good are cheap toys?

Decisions Only a Lawyer Could Love – Part I

2009-11-16T16:25:00.003-05:00

Two recent court cases reminded me how differently from real people lawyers are taught to view the world. Both decisions support Mr. Bumble’s pronouncement that if the law is as described, “the law is a ass,” as both decisions produce bad results. But neither decision, I submit, is wrong.

The first case involves JFS, a Jewish private school in London. Under British law, religious schools receive state support, and they may give admissions preferences consistent with their religious orientation (as determined by a religious authority). They must not, however, discriminate on the basis of ethnicity. This puts Jewish schools in an odd position, because one of the tenets of orthodox Jewish belief is that a child is Jewish if, and only if, his or her mother is Jewish, by birth or orthodox conversion.

JFS gives an admission preference to “Jews” of all level of observance. The school’s admission policy is intended not only to enable the observant to remain so but to enable the uninitiated to become observant. This policy may be perfectly laudable, but it is not consistent with the purpose of the English law, which is to allow parents to send their kids to schools that teach the parents’ religion. One can easily imagine non-observant Jewish parents sending their child to a Jewish school not to get a religious indoctrination but in spite of it. Such children would be given preference at JFS, contrary to the purpose of the state support. The school’s admission policy is thus inconsistent with the law, and, according the the English Court of Appeal, a mid-level appellate court, its implementation violates that law.

The JFS case involved a boy whose mother was converted by a non-orthodox method and was denied admission by the school on this ground under the schools’ policy of giving preference to “Jews” as defined by the Orthodox rules. The court held that a school may not use the matrilineal test because that is an ethnicity test, not a religious one.

The case has raised a big stink for a couple of reasons. First, if one doesn’t look too closely, the court appears to be deciding who is a “Jew.” But it is not. The court doesn’t care who is a Jew. The court is saying that a school for “Jews” is a tribal, discriminatory place, whereas a school for the children of people who practice orthodox Judaism is not.

Second, inside the Jewish beltway as it were, the ongoing battle of orthodox and non-orthodox rabbis over the nature of conversion is being played out. If the boy’s mother’s non-orthodox conversion had been accepted by the school, the whole thing would never have come up. Of course, the legality or not of the admissions policy would remain the same, but there’d be no plaintiff to make a fuss. The political furor over the case is stoked by this internal battle, but it seems to me wholly irrelevant to the legal case.

To the lay press, the case seems to be about the state meddling in the internal affairs of a religious denomination, deciding to whom a Jewish school may give preferences. But to a lawyer, the case is about whether there can be a “Jewish” school at all, as opposed to a “Judaist” one, a straightforward question of statutory law. The matter is clouded by what many see as a bad result – an orthodox Jewish school not being able to restrict admission to people who can be orthodox Jews – but that result is bad only if you think such a school is worth having, and if you think the state should pay to subsidize it. These are interesting policy questions. But they have no bearing at all on the correctness of the court’s decision.

And Another Thing (about driving in Europe).

2009-11-03T07:19:00.002-05:00

Lane discipline. What’s so hard about driving on the right unless passing? Why can’t/won’t Americans do it? It’s the law here. It’s the proper etiquette here. But good manners are simply un-American.

The autostrade in Italy have a speed limit of 130 kph (about 78 mph), except when it rains, when it’s 110. (What’s up with that? Two speed limits, like two flush buttons. Those furriners can handle some complex stuff, by golly!) They enforce the speed limits – laxly, it appears - with roadside cameras rather than patrol cars. And lots of people speed. It’s not at all uncommon to see someone zoom by in the left lane going 100 miles an hour. But on a perfectly maintained (or maintenance-free rubberized asphalt) road, with no morons on cell phones clogging up the left lane, there seems to be no problem.

I think there’s something to be said for the American disdain for rules. Rules are how the undeserving rich stay rich and the undeserving bosses stay bosses. But no one ever accused the French or Italians of being a particularly ruly bunch, at least not recently. The Germans and Brits, yes. But not the French and Italians. Yet they seem to have figured out that driving on the right is a good idea. It lets them go faster. They break the rules by speeding, and they observe lane discipline so that they can speed. They observe a rule so that they can break a rule. Chew on that one for a bit.

Too Big to Fail?

2009-10-30T11:17:00.001-04:00

What, exactly, is it that’s too big to fail? I don’t mean “How big is too big?” I mean, what thing is it that is too big? We have been operating on the theory, I think, that the thing is an entity - that GM or Chrysler or Lehman or Merrill or AIG is too big to fail. But I think that’s a bad mistake.

As I argued in my earliest posts, what matters is the brand – the USA AAA paper brand. And if the brand is what matters, it is the brand that is too big to fail, which means that the size of the entity selling it is unimportant. And what matters to the brand is what is being sold under it. If subprime mortgages were sold only by smaller investment houses, would there have been any fewer of them, or would they simply have been spread among more distributors? What difference would it have made if the issuers were not “too big to fail”? The systemic risk would have been the same, because what has killed the credit markets is not a lack of faith in the distributors, but a lack of faith in the paper itself.

What would have happened if AIG had been allowed to collapse that would not have happened if twenty smaller companies one twentieth its size had been writing the same type of contracts? If AIG did not have the capacity it had (or thought it had) to write the CDS contracts it wrote, would no one else have issued them? AIG’s capital would have been somewhere in a world where AIG was not allowed to have it. Would that capital not have imitated the business practice of industry leaders (e.g., AIG)? If one of those twenty little firms had been allowed to fail on account of those practices, would they not all have failed? And would it have made any sense to say that one big firm would have been too big to fail, but the many doing the same thing were not, in the aggregate, too big to fail?

The major policy error being made is the failure to think existentially. Tradable Credit Default Swaps are, existentially, a bad idea. It makes no difference how like any other instrument the contracts are. A CDS allows someone to profit from the occurrence of a bad thing. No amount of technical or formal analysis can change this simple behavioral fact. Likewise, systemic risk arises because players may lose faith in the system itself. The size of entities is a detail. The question is whether the failure of any player or players of whatever size to deliver on its promises taints the system. Just how many bad bottles of Tylenol did it take to cause a panic?

Whatever we do to limit the size of entities so that they are not “too big to fail” will be irrelevant. We’ll feel better maybe, thinking that we no longer have institutions that are too big to fail, but we won’t be any safer. If our ratings agencies figure out how to rate, and investors, especially foreigners, regain their faith in those ratings, things will get better. If not, then not. And if that faith is regained, and it is then lost again, the damage will be as severe regardless of the size of the entities involved.

I suspect that the only effect we will see from “outlawing” too big to fail is that we will lose the economies of scale that come from the bigness. Otherwise, the risks will remain unchanged, exacerbated by the Government’s mistaken notion that smaller companies are not “too big to fail.”

A Few Good Ideas

2009-10-28T10:17:00.004-04:00

Traveling in Europe in the past two weeks, I saw some things that, as an American, I am embarrassed to admit we are either too dumb or too corrupt to adopt. Here are a few.

Credit card lanes on toll roads. It's so simple. You drive up, stick your credit card in a slot, and go. On "turnpike ticket" type roads, you insert the ticket in one slot, the card in another, and you're done. It's quick because you don't have to wait while the machine processes the transaction. If the machine can read the card, and the card is of a type it accepts, the card is returned and the gate goes up. Defaults are dealt with later, and just aren't a big deal, as the numbers are always small. Of course, they have an RF system like NY'NJ's EZ-PASS, too. Still, the card is a big deal because tourists don't have tags, and so many EU visitors travel freely around the continent but don't all speak the same language.

I don't know why our toll booths can't take credit cards. I suspect union opposition is an issue, but it's hard to accept that our unions are more obstructive than those in France.

Eye-level trafic signals. This one seems like a no-brainer. At intersections where it is difficult for the first car in line to see the overhead signal, the signal post has an additional, mini- signal at eye level that is easy to see. It's just a great help. Why don't we have it?

Variable flush toilets. Ever heard of "country rules"? (If it's yellow, let it mellow; it it's brown, flush it down.) Anyway, the Euros have their own version. The toilets have two flush buttons, one big and the other little. Picture, for example, a circle divided unequally into two parts. The small button produces a "small" flush, which is perfectly adequate for removing liquid. The big button produces a bigger flush. The average flush is probably less than the 6.0 liters our toilets allow, but the big flush is big enough to get the job done. Seems like a much better arrangement than our one-size-fits-all approach. Are we too dumb to use it? Too whatever to use the small button? What? (Dual-flush toilets are available here - just Google on "dual flush toilets" - so maybe they're coming to a public restroom near you. But I haven't seen one yet.)

The question isn't why we can't think these things up. Surely, we can, and even if we didn't, we could adopt them. The question is what about ourselves or our systems prevent that from happening.

Oslo Syndrome

2009-10-12T13:26:00.003-04:00

A psychological condition in which one thinks he is the Trustee of a more fun foundation. Sometimes called “genius envy.”

BHO won a MacArthur Foundation award on Friday. That’s the one that goes to very promising people in the hopes that they will someday win a Nobel Prize. The prize was awarded by the Nobel Committee, but that’s a detail. Clearly, it’s more fun to look for people with great potential than to provide the anticlimactic icing for cakes already baked. So the Nobel Prize Committee has decided to reward aspirations. Hey, it’s their money, right? (No point in consulting Mr. Nobel’s will, which has pretty much been ignored for so long that its provisions don’t matter.)

Now all we need is a prize for major achievements. There are lots of almost-dead billionaires. Someone will step up. Not to worry.

Health Care - Some Substance

2009-09-26T15:35:00.002-04:00

The trouble with commercial insurance companies is that they are not in the business of reducing risk. They are in the business of lending money. The risk thing is just their way of collecting deposits and determining which depositors to repay. As a general principle, however, they want to insure the largest possible risk, as that creates the largest amount of deposits and, therefore, the largest amount of profits.

Insurance companies compete for premiums on price, but that does not give them an incentive to reduce the risks for which those premiums are collected. An insurer cannot own an insured’s best practices. If your insurance company teaches you how to reduce your risk, you can still shop elsewhere and offer your new, improved risk profile as an inducement to the new carrier to lower its rates. So what’s in it for the commercial carrier to reduce your risk?

Captive insurers provide a different dynamic. They can have lowering their premiums as an objective, as they do not seek to make money for their stockholders on money they get from their insureds (the two groups being identical). So captives are a source of risk-reduction innovation. Nevertheless, mutual insurance companies, which are really very large captives, are not thriving. Mutuals tend to have difficulty raising capital, don’t get the focus from their owners that true captives get, and end up being bureaucracies that exist to provide claims-handling jobs to their employees.

Still, there ought to be a way to tweak the health insurance company’s business model so that it seeks to reduce losses. One way to do that, I suggest, is for the insurance companies to ally themselves, through investment or otherwise, with providers of medical technology. In other words, just as a car company offers financing, medical technology companies should offer health insurance, with enhanced benefits to users of their products. But since no one company offers enough cost-saving technologies to support an entire insurance company’s worth of enhancements, the medical technology industry needs an insurance company that advances a wide array of devices and technologies and makes its money if those technologies actually work to reduce costs.

Imagine, then, a health insurance company that offered reduced co-pays and deductibles for treatments with (or, in some cases, relapses or sequellae after using) a given treatment. Just as patients shop for “in network” docs and hospitals, they would seek out practitioners who use “in network” technology. Because the insurer would receive money from its arrangement with the vendors, it would not seek to maximize the risk it insures. That would give it the ability to pressure competitors into adopting similar subsidies, which would in turn encourage the use of the company’s technologies, making more money for the company even as it loses market share on insurance.

To put it another way, just because insurers have always been bankers, it’s not at all clear why bankers are the only ones who can be insurers. If bankers can use insurance to attract deposits, why can’t manufacturers use it to attract customers? If your product will save lives and reduce costs, why not agree to sell insurance against those costs at a price that reflects the savings you think you can generate? All the manufacturer needs is someone to provide the insurance function, and that someone ought to be a free-standing operation that can make each manufacturer’s product more appealing by offering incentives for the use of many manufacturers’ products.

Indeed, the insurer should offer subsidies for the use of competing products, so that each manufacturer prospers only if it makes the best version of the thing it makes, with that call being made by medical professionals, not by the insurer. Of course, the manufacturers will have to pay to be granted favorable treatment under the insurance policy, a preference analogous to in-network and out-of-network coverage of providers. But competition among in-network technologies should be encouraged.

Anyway, the idea of an insurance company that makes its money from the enhanced sales of “in-network” technologies could facilitate the adoption of good technologies, lower the cost of insurance, and improve the health of insureds. Just a thought…

The Economy – what’s next?

2009-09-17T18:04:00.006-04:00

So I have this high-altitude narrative working. According to me, too much money found itself chasing too few goods, only the goods weren’t real goods, they were investment assets, and safe ones at that. The surge in demand for good paper came about because (i) our baby boomers increased their savings rate as their age went up and their risk tolerance went down, and (ii) our trading partners found nothing on our shelves that interested them.

Too much money chasing too few of anything causes the average price of that thing to rise. Most often, the increase in price is achieved through an increase in the actual selling price of the item. But other mechanisms can achieve the same result. Most notably, the product can be adulterated or counterfeited. In that case, the price can stay relatively stable as new “supply” appears to meet the new demand. And so it was with American mortgage debt. When we ran out of borrowers with real credit buying homes with real value, we started pretending that the homes were worth more than they were, and that the borrowers’ credit - which never really mattered in itself but did signal to the attentive that there would be no bigger fools available to buy the homes should the need arise – was better than it was. That way, the nominal yields stayed high (i.e., the nominal price of the instruments stayed low), and everybody was happy. Until the music stopped.

So now what? The boomers aren’t getting any younger, and their appetite for paper has only increased as they try to recoup what they lost in blue-chip stocks, mortgage-backed securities, and other “prudent” investments. We’re still importing oil and toys, and we haven’t achieved any new comparative advantages to support a boom in exports. So. too much money will again be (or is still is?) chasing too few good pieces of paper. But the fraud option is no longer viable. How does that play out?

The stubbornly low yield on Treasury paper, and the bull market in stocks, both in the face of a stagnant economy and a soaring Federal deficit, are the first natural consequences. The prices of these instruments have gone up because the investments are, for the most part, what they claim to be. And people have to put their money somewhere.

On that score, the Americans have little choice. We will pretty much buy American, although a lot of people certainly are loading up on Asian stocks. My two largest holdings – largest because they have done so well and not because I invested heavily in them - are a Chinese travel agency and an Australian mining equipment maker. But still, our major averages are up nicely since March, and the need for Americans to rebuild their savings seems to be driving that.

What, then, will the Chinese and OPEC countries do with their dollars? Remember the wag’s description of the Soviet economy? “We pretend to work, and they pretend to pay us.” Although we can no longer pretend that a dollar will buy anything, our trading partners can pretend otherwise, converting export dollars into local currency for use by the local economy to stay employed and to continue to grow. It doesn’t really matter that the yuan or rial is backed by dollars and the dollars are backed by nothing. If our currency can be backed by nothing, why can’t theirs? (Actually, all currency is backed by the issuing country's ability to offer things for sale - manufactured goods for China, oil for OPEC.)

The only thing our trading partners cannot do is refuse to export to us, until, that is, they don’t need us as an export market. And that’s the game we need to follow now. The risk we run is that the US will outlive its usefulness as an export market. We may experience a functional embargo, a “shortage” induced by everyone else turning to serve the Chinese market because, in the case of Chinese sellers, the domestic growth is a good thing, and, in the case of OPEC, the Chinese have something to sell in exchange for the oil they import. Why should the world’s leading exporters continue to deal with us if they can deal with China? Wouldn’t you rather export to a country that has stuff to sell than to one that doesn’t? Wouldn’t you rather sell to your neighbors for your own currency than to foreigners who have nothing to sell you for theirs?

Eventually, the growth of demand in Asia and elsewhere could bring about a renaissance of manufacturing here, as cheap foreign goods are no longer available. But, just as we need a floor on the price of oil to promote alternative energy, we need a floor on the price (or ceiling on the quantity) of foreign goods to promote investment in production here. That may sound like a trade barrier, but it won’t be one if the barred products aren’t coming anyway. But still, the counterintuitive nature of trade restrictions, and the reluctance of capitalists to rely on them, may augur a period of significant shortages here until we get the political will to stimulate our own production.

This will be a slow process, taking shape as the domestic Chinese (and Indian and Brazilian) economies continue to grow, fed, ironically, by the myth that US dollars represent wealth. That’s because, at the end of the day, those dollars are just an excuse for deciding who among the Chinese, Brazilians, and Indians deserves to be wealthy. Exports to America become a way of keeping score in the game of “Who Makes the Best Stuff.” Because our consumers are good judges of stuff, the stuff we buy the most of is the best stuff (in terms of marketability, not necessarily quality), and that’s the stuff that should be made available to the domestic markets - and the producers thereof made rich for their efforts. We have, for the nonce, a comparative advantage in consumerism – an ability, unique in all the world, to advertise, distribute, test, and validate the products brought to us. That’s a useful thing, and we will benefit from acting as judges of foreign stuff until our trading partners’ own consumers are able to to the job for themselves. Until, again, the music stops.

The Presidential Race

2009-09-16T21:39:00.001-04:00

Irwin says Joe Wilson wouldn’t have said what he did to a white President. Pres. Carter echoed that belief, if not in so many words, last night on NBC. Let’s suppose it’s true. Then what? Do we really want a President who cannot be criticized as aggressively as W. was by, say, Al Franken? Is there any doubt that the angry and obnoxious things said about the last administration would have been attributed to bigotry had the President been in an historically oppressed class?

A wise young man said to me last summer that all Presidential candidates should be WASP males. Not because WASP men make the best Presidents, but because they make the best targets when they are not the best Presidents (or candidates). Look at all the ink spilled on the race or sex of Senators Clinton and Obama and Gov. Palin. Not a dime’s worth of it had anything to do with health care or Iraq or Afghanistan. It was all a lot of self-congratulatory feel-goodism: “Look how cool we are letting these ‘others’ take a shot.” Three cheers for US.

Of course, there’s some irony in the claim that BHO would not be receiving the abuse he is receiving if he were not black. After all, he wouldn’t be President if he weren’t black. He might have got there some day, after he had actually shown some skill as a legislator or character in crisis, but in 2008, he had no such credentials. The nomination was Hillary’s to lose, and she lost it, but her inevitability strategy would have worked just fine, I think, if she could have counted on her due share of the black vote. And only a black man could have snatched that from her. (After that, all BHO needed to get elected was to not be a Republican.)

So the election was distorted, first by Hillary’s sex, then by BHO’s race. And as the twig is bent, so grows the tree. The political hurly-burly, the part of our process that ain’t beanbag, must now be fought with kid gloves lest someone be accused of bad thinking. What do we think of these pics? Over the line? No? So can we put BHO in them? Nope. New rules apply.

Liberals make a big mistake, I think, by demanding special consideration for their man. It’s hot in the kitchen, and if the American people get the sense that we have to turn down the heat for a black President lest we be accused of turning it up on him, we will be reluctant to go down this road again, especially since we have already assuaged our collective consciences for all that slavery by sacrificing Hillary to the gods of political correctness. (Irony there, too: so much of feminist politics is a coat-tail play on the mistreatment of African slaves; it’s time we were reminded of the relative magnitude of the atrocities to be rectified, and BHO’s victory over HRC did that very well.)

Joe Wilson’s War - continued

2009-09-14T01:49:00.004-04:00

This post responds to Irwin’s last comment. It turns out that comments are limited to 4096 characters.

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Irwin -

You say my dislike of BHO is showing. Am I obliged to like the President? Or are you saying that once I decide that I don't like him, I am somehow disqualified from commenting on the things about him that I don't like? Who are we to expect to criticize the President if not the people who don't like him? His acolytes? I am not saying "trust me, the President is lying"; I am saying "LOOK - Here are the President's lies." I don’t see whether the status of those statements as lies turns on my like or dislike of the man making them.

Your reference to Jefferson is ironically apt. You have read Founding Brothers. Ask John Adams if Thomas Jefferson was a liar. But otherwise, the analogy doesn't hold. The Declaration of Independence was not intended to mislead anyone regarding the issue of equality. BHO's pronouncements are intended to mislead real Americans about things they really care about. That's lying.

Your reference to finding "lies" in the Gettysburg Address suggests that my standard has something to with naked accuracy. I'm not complaining that BHO's statements are inaccurate like Jefferson's claim about all men being created equal. BHO's statements are all accurate. But they are nevertheless intended to mislead. Bill Clinton said that he did not "have sex" with that woman. That was accurate, too, but it was hardly true. That's why I call BHO's statements on Healthcare Clintonesque.

I doubt that I used the word "liar" to describe the President. I said he is lying and that he lies to advance his political agenda. But I am not uncomfortable with political lies, and if you'll notice, I have not really condemned BHO for telling his. I have simply said that he is behaving like other politicians: that he does not represent a "new" politics, that when he speaks, he should be taken no more seriously than his less articulate predecessor. And that we can learn something about the possible effects of his proposed legislation by looking at the things he chooses to lie about.

This may sound like parsing, but I draw a very sharp distinction between "he is lying" (or even "he lies") and "he's a liar." Liars lie to pretty much anyone whenever it suits them. But everyone lies sometimes ("No, you don't look fat in that dress, dear"), and politicians lie because politics is the art of the possible, and sometimes lying is the only way to get things done. It’s no big deal ethically, but it’s a datum not to be ignored.

The sensitivity you feel about the term "liar" is well-founded. But if you search this page for the word, you will find it only in your comments (until right now). I do think Bill Clinton is a liar. But not BHO. He's only a politician whose lies happen to follow Clinton's model. Which leads me to say that my first paragraph was offered arguendo. In fact, I don't dislike BHO. I just don't think he's as special as you and he say he is.

You say "only the most tortured interpretations of what is (in fact) in the House bill would find concern in whether or not illegal aliens could 'sneak' into the health care system." But then you say "I trust that you are not suggesting that it would be wise and cost efficient to set up an elaborate verification system for people who come into use hospital or MD services to make sure that they are illegal. That is simply not a workable solution." So, why are we to eschew an elaborate verification system? Because the House bill "covers the issue," or because the verification system would be unworkable?

Why do you doubt that people would lie to get health insurance? As I have said, I don't care if they get it; I just don't want the President to pretend that they won't get it just because the law says they can't. The law says they can't be here, and yet here they are. Why would a legal provision denying them health insurance be any more effective than the ones denying them entry?

With regard to the public option:

1. Did you try pasting the link into your browser? It isn't a real link. You can't click on it. You have to copy it to the browser's address window. But here it is as a link (I hope).

2. I don't see the inconsistency in my position. The public option is still up for debate, and its form will be relevant to its implications. More important, its implications will probably be too hard for me to fathom even when I know what the law is. I have no idea how the actual carrots and sticks will play out - the system is too complex. But if you tell me that a bill denies a thing to illegal aliens, but does not require that those who seek that thing prove they are not illegal aliens, I'm pretty comfortable with the expectation that illegal aliens will get that thing. One question is hard, the other is easy. I can't answer the hard one. I can answer the easy one. What's the problem?

3. I don't know or care whether the public option issue is "dead." I care about whether the President is lying about it. That's the subject of my posts - the President's credibility. If he were lying about the price of tea in China, in which I have no interest at all, I would still find it noteworthy that he was doing so.

4. I have not said that the pending bills will "force" anyone to do anything. I have said that whether the language "forces" anyone to do anything is irrelevant, because only the effects of the law matter. Thus, for the President to say that the law will not "force" anyone to change their plans, as if that meant that they would not, in fact, end up with changed plans - which is, after all, what they care about - is disingenuous. That's why taunts about finding language that will do X or Y are misdirected. It is precisely the irrelevance of the President's accurate claims that I find telling about his political methods.

5. Of course, BHO knows the difference between overhead and profit, but he saw fit to cite profit as part of the "overhead" that a public option will obviate. If he knows profit isn't overhead, and he lists profit as part of the overhead that makes private insurance bad, what word are we to use for his doing so? "Spin"? "Puffery"? "Sizzle?" I think "lie" is the word we'd be looking for. Don't you?

How can I engage in debate about "Obama's Health Plan." First, he has not spelled it out, so how can I debate it? Second, it provides universal coverage, will not reduce anyone's benefits, and won't raise the deficit. Except for the higher taxes I will pay, which I'd be OK with if he can put a unicorn in every stable, what's not to like? It's a great plan.

I'm dead serious when I say that I don't know what effect the plan actually adopted will have. It's too hard. Like the guys in Plato's cave, I can only look at the shadows on the wall. In this case, those shadows take the form of the President's rhetoric, and I know enough about political rhetoric to know that he is promising things that don't matter. He says I won't be "forced" to change my plan and that illegal aliens "won't" be covered, which means to me that I may find my plan changed as a result of the law, and illegal aliens may very well get coverage by deceitful means (making the deficit claim unreliable). That's precisely why I have been posting about the rhetoric. The substance is too complex for us mere mortals to get. But the lies are pretty easy to spot.

As for your inference that Joe Wilson would not have said what he said to a white man, what would agreeing to that claim change? Would BHO's statements be rendered no longer misleading? Would the public option become more or less a dead issue? Would more or fewer illegals lie to get coverage? Your post started with an ad hominem argument (that my alleged dislike for BHO somehow taints the facts or deductions I have offered), and it ends with one (that alleged racial bias in Joe Wilson's effrontery makes his claim less true). But ad hominem arguments are just a form of genetic fallacy; they have no persuasive force on the merits of the issue. Why would I comment on an irrelevance in discussing a post that protests irrelevance?

Joe Wilson’s War

2009-09-12T11:02:00.002-04:00

Rep. Joe Wilson (R-SC) shouted “You lie” at the President during the latter’s speech to the Congress on Wednesday night. (The President had just said that his healthcare plan would not cover illegal aliens.) Of course, Wilson was right – I’d be hard-pressed to deny that the President lies, having taken that very position on this blog more than once, and I think he was lying in this particular case – but Wilson was also surely out of line to say so then and there.

Gail Collins writes this morning that “just to make sure nobody else ever goes off the rails like this again, the Senate Finance Committee is changing its version of the health care bill from one that does not provide benefits to illegal immigrants to one that absolutely, positively, for sure does not provide benefits to illegal immigrants.” I think that Ms. Collins, funny as ever, has sacrificed truth to accuracy. What really happened is that the Senate Finance Committee is changing its version of the health care bill from one that says it does not provide benefits to illegal immigrants to one that actually does not provide benefits to illegal immigrants.

This little distinction sadly captures the essence of the President’s method. His plan, recall, will not “force” anyone to change their health plans – it will merely result in their having no practical choice but to do so. Likewise, to say that the bill prohibits illegal aliens from getting free healthcare is like saying that our immigration laws prohibit them from being here in the first place. As, of course, they do.

On the merits of the issue, I don’t care. Indeed, I actually prefer illegal aliens’ being covered to my having to prove that I am a citizen. I mean, if healthcare is a universal human right, if we provide it to convicted felons, why on earth should we not provide it to anyone who can figure out how to get to the doctor? If the only effect of the bill is to make illegal aliens the only ones who still use the ER as a primary care center, what’s the point of the exclusion? And if I think that way, can we believe BHO does not think similarly? Which means he’s lying about what the bill does not because he thinks it lacks a flaw that it has, but because that flaw is entirely consistent with his program.

And, as Forest Gump might say, that’s all I have to say about that.

Obama on Healthcare II - More of the same

2009-09-11T01:19:00.002-04:00

First, if you are among the hundreds of millions of Americans who already have health insurance through your job, Medicare, Medicaid, or the VA, nothing in this plan will require you or your employer to change the coverage or the doctor you have. Let me repeat this: nothing in our plan requires you to change what you have.

Now, I don’t know how much BHO’s plan will look like Hillary Clinton’s plan, but his speeches are certainly channeling Bill Clinton’s style of dissimulation. No, the President’s plan won't force anyone to lose anything; it will simply make it impossible for a business to remain competitive and continue to provide the plan it is is providing. No coercion there, nosiree.

But by avoiding some of the overhead that gets eaten up at private companies by profits and excessive administrative costs and executive salaries, it could provide a good deal for consumers and would also keep pressure on private insurers to keep their policies affordable and treat their customers better

Are you paying attention? “overhead that gets eaten up at private companies by profits … and executive salaries.” So we are going to have a level playing field after all. The private companies can compete successfully simply by paying their senior executives on the Civil Service scale and paying their shareholders, well, nothing.

Let’s leave aside the fact that the President is lying about the equal playing field. Obviously, an insurer that does not have to pay for its capital or compete for managers – it’s not clear why the public option companies won’t have to pay a lot for competent management, but I guess it’ll be a good place to get your ticket punched on the way to a big salary at a for-real insurance company, if there are any left when the smoke clears – such an insurer can do what it does more cheaply than can a company that actually has to raise capital in the private market and recruit real executives who know something about running an insurance company.

No, let’s leave the nonsense about competition aside. Let’s ignore Mr. Obama’s specious analogy to co-existing public and private educational systems. Let’s focus on the President’s claim that profits are somehow the problem – that the private sector could deliver better health insurance to more people if private companies weren’t saddled with the need to make money. How can the President of the United States of America denounce profits per se – not “windfall profits,” or “gouging” or “profiteering,” but the very essence of free enterprise itself as something Congress should pass a bill to obviate?

When conservatives claim that the President is a leftist – not a liberal, but a leftist – they sound shrill. But what are we to call a man who thinks profit is overhead, or that executive talent grows on trees? These are precisely the things that socialists and communists believe. They believe not only that the profit motive is corrupt – it certainly can be corrupting -but that ipso facto an economy can operate without it, and it is government’s job to see to it that it does.

The President’s speech was downright Orwellian. Not only does his plan do what he says it won’t do – compel businesses (by the gravity of competition rather than the force of law) to drop their private plans in favor of a one-size fits all public plan – but it reveals his complete and frightening alienation from the entrepreneurial model that drives our economy and, by extension, the economies of all of the less entrepreneurial states (read, Canada and Europe) that live off our innovation and hide behind the military shield our wealth supports.

Confessions of an Existential Socialist

2009-08-28T09:04:00.003-04:00

A libertarian premise that seems to go too often unchallenged is that we “own” stuff in more than a legal sense. Ownership is strictly a legal invention. Society gets together and says that it will authorize and direct certain of its number to enforce members’ control of certain resources. I get to say who lives in “my” house only because I can call the cops on anyone who contests my right to do so. Absent that ability, I can claim to “have” my house for as long as I can defend it, but not to “own” it.

It follows, I think, from this notion, that society can say to what extent “ownership” confers privileges. Nuisance laws exemplify this point. If there are certain things you just cannot do on “your” property, then there must be strings on its “your-ness.” Society may allow you to do more things with “your” stuff than with other stuff, but that’s society’s decision, not yours. Everything belongs to everyone because everyone can decide at any moment that nothing belongs to anyone.

Viewed in this light, the arguments between capitalists and socialists become less philosophical than the participants make them out to be. The question that matters is not whether “ownership” confers privileges by natural magic but, rather, what privileges ownership will confer by common consent. Within this argument, there is a lot of room for the laissez-faire view that ownership should confer a very wide degree of control. But those arguments should not take as their premise the circular claim that “it’s my money.” If we’re trying to figure out what consequences should flow from it’s being “your” money, how can we say that some particular consequence arises necessarily from its being “your” money?

The idea that private property is a social construct is like the idea that morality is socially developed. Both leave the absolutist with no place to stand. Nothing “has to be” a particular way. All rules are arrived at by active or passive consent to their promulgation or unplanned emergence. And this broad idea feeds back into the choice of evolutionary questions generally, specifically, “Why did x arise?” vs. “Why does x persist?” “Why does a bee sting?” is not as useful a question as “Why do stinging bees out-reproduce non-stinging bees?”

Economic systems, morality, and evolved traits all depend on their consequences. Whatever has what it takes to persist, persists; everything else goes away. Not because some authority says so, but because nature is inherently competitive, the more survivable supplanting the less so in every realm. It is this essential competitiveness that drives my reductionist view of things: if everything is competitive, analysis of all things should begin with the question of how competition brought it about and kept it in place.

Everybody Hates Game Theory

2009-08-04T11:30:00.002-04:00

I wrote in April about the Prisoners Dilemma as the template for situations in which Government regulation is appropriate. I have been putting that idea forward for some time in various fora, and it has almost always been greeted with hostility. Not disagreement – although, of course, that, too – but outright hostility. Something there is that does not love game theory.

I’m engaged in another round here. Note how testy some people get. I get accusations of intentional obtuseness, claims that I’m arguing red herrings, and, in general, a flurry of desperate evasions from some very intelligent people who would would see through the same level of logic if it were aimed at them. People just don’t like the thing. And that’s interesting.

I think the problem is that game theory has no agenda. You cannot trust it to support you, and it takes the fun out of being right when it does support you. Where game analysis of a situation suggests that coordination of action would benefit all involved, the result is a prescription for government intervention. But the prescription comes without the feel-good element of sacrifice. To raise the minimum wage because “no one should have to live like that” makes liberals feel all warm and fuzzy, but the emotional pay-off is diminished if, as game theory teaches, the businesses paying the inadequate wages had no rational alternative, and so weren’t villains after all. Even worse, the change will actually increase everybody’s wealth, including the idea’s supporters. Where’s the fun in that? Consequently, liberals tend not to like what game theory has to say.

Conservatives, especially libertarians, don’t like game theory because, where it supports intervention, it impinges on their autonomy. I like autonomy. I like to decide for myself what risks to take, where to shop, how much to pay, etc. So I’m suspicious of nostrums that restrict my action, and when you tell me that it’s in my interest because John Whackjob Nash says it is, well, that’s not likely to change my mind. The whole thing reeks of ivory tower mad science. So what amounts essentially to an immune response to the unknown includes not just resistance, but ad hominem attack. Conservatives do not so much refute game theory arguments as reject them as inconvenient. I think the response is perfectly natural, but it is unhelpful. And fascinating.

I’m not sure why I’m so comfortable with game theory as a tool of policy analysis. Maybe I like the idea that it ignores my prejudices rather than feeds them. Also, I’m not wedded to the outcome of the exercise as determinative of my policy position. Almost all “good” things are only contingently good. Thrift is good unless it destroys consumption. Efficiency if good unless it puts people out of work or shortcuts full exploration of options. That’s a big one: the fastest way to find a qualified person to do something is to limit the pool arbitrarily to the smallest number likely to contain a qualified applicant. You don’t get the "best" person, but you get an adequate person, where, as is often the case, the marginal cost of getting the best person is far greater than the maginal value of the improvement. Nevertheless, that sort of efficiency is unfair, and that matters, no matter what game theory says. Not being overly committed to what game theory suggests, I’m not worried that it will unthinkingly take me where I don’t want to go.

On the other hand, as a philosopher friend once remarked, self-descriptions are not privileged, i.e. I may have no clue as to why I find game theory so hospitable and others don’t. But I do know that I do, and that they don’t, and that it shows.

Limiting Pay

2009-08-02T22:24:00.002-04:00

There are a lot of reasons why people want to limit the pay of CEO’s, investment bankers, and money managers. Most of those reasons are bad. Yes, there is an unseemly disparity in income levels between the top and the bottom, and yes, no one needs to make $1,000,000,000 or more per year managing other people’s money. But limiting income disparity artificially and paying people “according to their needs” are bad ideas; they either remove incentives for achievement that create the wealth of the nation, or they delegate to fallible and corruptible bureaucrats decisions that the market can make in a dynamic and self-correcting manner.

But there is a second-order consequence of limiting pay. The current pay regime allegedly creates incentives to risky behavior – behavior of a sort that could bring down the financial system and the economy. If the claim is true – it is just a claim – then one needs to consider effectively limiting those incentives, and if limiting those incentives involves limiting pay, then that’s just how that cookie crumbles. One need not have a socialist bone in one’s body to want to protect our economy from collapse.

So, two questions arise. First, is economy-threatening risk-taking a product of the opportunity to make a ton of money risking other people’s money? And, second, if so, what should we do about it.

I can’t answer the first question. I can only say that I would entertain the possibility, and until I know the answer, I wouldn’t oppose efforts to limit compensation on principle.

As for the second question, how to limit pay, I think the income tax is the only viable approach. The progressive tax structure should add brackets at $1,000,000, $5,000,000, $25,000,000, and $125,000,000 of ordinary (not capital gain) income. And partnership income (e.g., hedge fund contingent management fees) should be treated as ordinary income to the extent the partner does not have a proportional amount at risk.

But that’s only if the case can be made that risk-taking was a but-for cause of the late unpleasantness. And I’m not sure that case can be made.

Bob Herbert is a racist.

2009-08-01T13:06:00.002-04:00

His Op-ed today contains the following:

Mr. Gates is a friend, and I was selected some months ago to receive an award from an institute that he runs at Harvard. I made no attempt to speak to him while researching this column.

Nosirree, Bobby, don’t you get yourself all confused by the facts. Just join the list of liberals who are most proud of not having had to be there to know what went down there. Only an idiot would actually have had to see what happened at Gates’s house to know that the man was a victim of racist cops run amok. He was doing nothing wrong (disorderly conduct being a civil right, not a misdemeanor), and he was black. Res ipse loquitur.

There is a metamessage in every complaint about race. Every such complaint reveals that people are still complaining about race under the circumstances being complained about. My guess is that most white Americans see what happened at Gates’s house as unexceptional and unexceptionable. All Gates had to do to avoid this mess was behave the way any white man would have behaved in the same situation. Maybe, a white man would have been cut more slack for behaving badly, but then, charges or implications of anti-black racism are, one hopes, uniquely obnoxious, so maybe the reaction it allegedly provoked is the best evidence of its untruth. (Do you think a black man could have pissed off a white cop fifty years ago by accusing him of racism?) But even if Gates were allowed a bit less slack than a white counterpart might have been, that’s the sort of thing one should want to know more about before assuming to be the case. Is Bob Herbert really spilling all that inky bile to say “Crowley should have cut my hotheaded friend some more slack”?

Herbert calls Gates’s offense “being angry while black.” Compare that to “being unjustifiably angry and verbally, race-baitingly abusive while black to a man who is risking his life to protect your home from reported burglars while white.” Do I know that’s what happened? Nope. I wasn’t there!!! Does Herbert know it didn’t? Yes, because he. like Gates, is black for a living and so didn’t have to be there.

DWB stops are unacceptable because the victims are not doing anything that a white person wouldn’t ordinarily do under similar circumstances. Driving is not some misdeed a white man might get away with, and stopping a black man for doing it (and not also exhibiting other antisocial indicia – pimped-out ride, darkened glass, etc.) is racially motivated police action. But in the Gates situation, race may have at most been an unconscious element in a loss of patience. Or maybe not; maybe the accusation of racism, terrible thing that the accuser routinely tells us that it is, more than the race of the accuser, was the accelerant to this particular conflagration.

Such distinctions – the difference between having a short fuse for black citizens and being called a racist by a black man whose house you have come to protect – are lost on racists like Herbert, for whom not inquiring further is a badge of honor. After all, how could an event be symptomatic if it is idiosyncratic? The details can only detract from the outrage. Sometimes, the devil wants no part of the details.