Corporations and Free Speech

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

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

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

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

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

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

The seminal case overruled by Citizens United is Austin v. Michigan Chamber of Commerce, 494 U.S. 652 (1990). Austin was not about intimidation so much as the fear of corruption, or the appearance thereof. The syllabus to that case states:

Although 54(1)'s requirements burden the Chamber's exercise of political expression, see FEC v. Massachusetts Citizens for Life, Inc., 479 U.S. 238, 252 (MCFL), they are justified by a compelling state interest: preventing corruption or the appearance of corruption in the political arena by reducing the threat that huge corporate treasuries, which are amassed with the aid of favorable state laws and have little or no correlation to the public's support for the corporation's political ideas, will be used to influence unfairly election outcomes.

This argument misconstrues the very nature of politics itself in a way unique, I think, to liberal censors. What are we to make of “the threat that huge corporate treasuries, which are amassed with the aid of favorable state laws and have little or no correlation to the public's support for the corporation's political ideas, will be used to influence unfairly election outcomes.”? Let’s break it down.

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

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

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

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

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

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

For Innovation’s Sake, Close the Patent Office

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

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

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

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

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

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

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

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

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

Marriage: Why and Who?

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

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

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

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

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

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

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

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

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

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

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

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

Why Free Trade has not Created Jobs for American Workers

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Uncle Sam Should Tap his Credit Line

[This post first appeared on Seeking Alpha.]

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

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

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

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

Extend Maturities.

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

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

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

Inflating away the debt is a time-honored strategy. See Aizenman and Marion, "Using inflation to erode the US public debt," 2009.) As this table (Joshua Aizenman and Nancy P. Marion © 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

[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

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.