Monday, December 29, 2008

The Next Round of Bailouts: The States

So with all these bailouts, one of the effects they are having is greatly increasing the moral hazard throughout society. One of the reasons why we are in the mess we are currently in is that a huge moral hazard was created via the implicit guarantee of Fannie Mae and Freddie Mac. Investors correctly felt that the institutions would be bailed out if they got in trouble and this allowed the two firms to borrow money at a below market rate and pump an excessive amount of capital into housing. So apparently not learning from our lessen, we’re now doing exactly that again with banks, auto makers, your uncle who’s delinquent on his credit card and so on.

So the next one on the list is bailing out state governments. Senator Schumer has stated that his state of New York will likely be getting $5 billion in increased transfer payments via the Obama administration's proposed stimulus package. It has also been suggested that California is to be bailed out. One of the beauties of State governments is that unlike the Federal Government, they cannot borrow endlessly. This is mixed with the fact that if they raise taxes to too high of a level residents and businesses will move out. These two forces combined place a check on State budgets and this forces them to be fiscally responsible and relatively efficient. These two mentioned states, along with many others went on spending sprees in the most recent good years without regard for long-term planning. California’s budget grew almost 30 percent in the past 3 years. But now that the Federal government will step in and bail them out, the moral hazard of over spending has increased greatly for years to come. The California legislature is being resistant to spending cuts currently. Perhaps it’s because they know if they wait long enough, they will be bailed out? Now every state legislature knows it does not need to keep spending in line or create rainy day funds for use in recessions, because every time we get into one, they are going to be bailed out.

This creates the obvious problem of promoting irresponsible behavior on the part of the States, which ends up being paid for by the Federal taxpayer. Beyond that however, is the continued erosion of the notion of the States being sovereign bodies. Rather than being independent levels of government, if the budget processes are now created with the assumption of Federal help, the States become more similar to the French Departments, merely administrative districts rather than separate governments. Power therefore only becomes more centralized and less in touch with constituents. Furthermore, how come New York and California are the ones in which the bailouts are being designed? Why not Rhode Island, Virginia or Arizona, which have huge budget problems themselves? Could it possibly be that both these states are heavily Democrat (and therefore the same party as the current controlling government) with influential Congressmen representing both of them, including the Speaker of the House, the Chairman of the Ways and Means Committee, and a woman soon to be Secretary of State? Bailouts just become another mechanism of corruption and party hackery. Just as soon to be former Senator Stevens was allowed to get away with his abhorrent pork projects because his party controlled Congress, so will those who now have favor with the current government.



It certainly seems like, in this new culture of bailouts, there ought to be an increased risk of the moral hazard that EJB mentions. After all, it stands to reason that if the Federal Government is willing to bailout banks for bad business practices - and now, apparently, some States for their failure to adequately plan for their future - other sectors of business (and indeed, other States) would feel comfortable knowing that their fiscal shortcomings will be federally insured. I'm not sure it's just that simple though. Look especially at the recent automobile bailout. Officially, I guess it is a bailout but the bill never got through Congress; Bush had to semi-legally divert funds to GM from the original "stimulus package." I think it's safe to say that a large contingent of the population (and of Congress) is tired of taxpayer bailouts. This shifting of public will may not allow for further bailouts. Furthermore, all it takes to soften the blow of the moral hazard is one major bailout proposal rejection. We may have seen that with the auto bailout. If the Federal Government refuses to bailout a company or State that is asking for money, other entities won't be so quick to assume that they'll be guaranteed any sort of insurance.

Now to the California and New York stuff. Again, I think it's sort of facile to point out that NY and CA are liberal states and thus, wink wink nudge nudge, they're getting bailed out. I'm not saying there isn't some truth to that, but EJB points out later in the post that Rhode Island isn't being bailed out. Is there a more liberal State than Rhode Island? I've lived there. There is not.

Also, I bet we could discover all sorts of plausible rationales for the bailing out of New York and California. My first thought was to note that these are two of the largest States, by population, in the country. In fact, they are first and third in that category. Thus a State business bailout or a capital injection that props up Medicaid in New York helps more people than a similar plan in Arizona. Perhaps Obama, curtailed by a sinking economy, is implementing a fiscal triage.

But maybe you don't buy this strict utilitarian explanation. Fine. I think another relevant factor in the bailing out of California is the fact that the State is literally out of money. As much as I'd like to back EJB's moral/philosophical argument about moral hazards and learning important lessons, it's probably vitally important to first make sure that each State has enough capital to continue its operations. Otherwise we're simply winning the battle to lose the war. Or perhaps we'd be throwing the baby out with the bathwater. All I know is, there must be some folksy idiom that applies here.

As for NY, another possible explanation for bailing it out is that this could be a very good move for the national economy. NY ranks fifth amongst the States in GDP per capita. Thus it seems logical to conclude that more business is done in NY. Complete the syllogism and it points to the fact that bailing out NY is more economically beneficial for the Federal Government than bailing out Alabama.

So anyway, I'm not sure why they're doing this. Perhaps EJB is correct and this is merely a political pork move. I think there's probably some truth to that. But I propose that there are other, more legitimate, reasons for the NY and CA bailouts.


Tuesday, December 23, 2008

The Next Dick Cheney?

So whether you agree with it or not, we are all aware of the office of the Vice Presidency greatly expanding its role under the Bush administration. Cheney was a key player in many of the major policy decisions of the past years and was privy to information and authority in many areas on par with the President. Though it appears that Biden may not have as a powerful role (symbolically, it has already been announced he will not get a daily national security briefing when the President does), we may be seeing a similar advancement happen elsewhere.

Where that may be? The Hillary Clinton State Department. The New York Times reported that a Clinton aide explained that Clinton wishes to expand the role of the State Department regarding the current economic crisis. She is even hiring one of Bill Clinton's old budget directors to by a deputy on economic issues. This is interesting because this is a role in which the State Department has in the past only been indirectly involved. Trade agreements are negotiated by the US Trade Representative and there are a list of other agencies that deal with foreign aide. Foreign activity dealing with the recent economic crisis has largely been dealt with by the Treasury Department and the Federal Reserve.

But more interesting to me is the idea that this may just be an early sign of things to come. It's commonly known and even joked about on Saturday Night Live over how much Hillary wanted the Presidency, and this is not a weak personality (think Cheney). Armed with connections all over Washington from the Clinton presidency, compared to the relative Washington newcomer, Obama,(once again think Cheney) she may be in a place to greatly increase the power of her office. If she can't have the Presidency in name, perhaps she can have it in effect. Time will only tell.


Saturday, December 20, 2008

Charts Are Fun

Sometimes they're also a bit misleading. This one's probably a little suspect because obviously there are many factors left out. However, that being said - it's still a pretty stark reminder of just what is going down this year.

Click on it to get a better view - it's rather large.
The stats come from this article.

Well, as far as this bailout costing more than these other least we can justify it by pointing out how much more important financial institutions are, right? I mean, seriously, the Marshall Plan? Who cares about Europe immediately post-WWII? They turned out pretty socialist anyway, yeah? And the Louisiana Purchase? Bah. What good has ever come out of Louisiana? In fact, all they ever gave us was James Carville...not worth 217 trillion dollars. The Korean, Vietnam and Iraq wars? Worthless. NASA? Privatize it - we'd be vacationing on Mars today.

All in all, it's pretty clear that these other programs were less than worthy causes. No wonder our government has seen fit to spend more money on bailing out investment banks than it spent on all of these other things combined.


Friday, December 19, 2008

The Auto Bailout Is Here and on Shaky Legal Grounds

So details are yet to come out, but the Treasury announced this morning that GM and Crysler will get a $17.4 billion loan through at least March 31st to be taken out of the TARP program (the $700 billion bank bailout). This is likely only the first installment.

But you've got to love this administration. The bailout failed to get Congressional approval, so they just go around it and do it themselves with the proverbial FU. Where the Treasury gets the legal authoirty to do this when the bill passed uses language that clearly states it is to be used for financial institutions only, is a mystery to me. The bill defines "Financial Institution" as:
FINANCIAL INSTITUTION- The term ‘financial institution’ means any institution, including, but not limited to, any bank, savings association, credit union, security broker or dealer, or insurance company, established and regulated under the laws of the United States or any State, territory, or possession of the United States, the District of Columbia, Commonwealth of Puerto Rico, Commonwealth of Northern Mariana Islands, Guam, American Samoa, or the United States Virgin Islands, and having significant operations in the United States, but excluding any central bank of, or institution owned by, a foreign government.

But then again since when does this administration or the Federal government in general care about following the law? I will be interested in seeing if and how many Democrat Congressmen come out against this action, considering it is violating the bill but at the same time the end result is something they want and tried to get through Congress. We will have an oportunity to see if the years of complaints by Democrats about the Bush administartion breaking laws was true outrage in principal or whether it was just political opportunism. In this case they are fine with breaking laws as well as long as its for their purposes. I'll be watching.

UPDATE: Obama's reaction:
Today's actions are a necessary step to help avoid a collapse in our auto industry that would have devastating consequences for our economy and our workers. With the short-term assistance provided by this package, the auto companies must bring all their stakeholders together — including labor, dealers, creditors and suppliers — to make the hard choices necessary to achieve long-term viability.

Maybe he would have preffered it go through Congress, but it looks like he's ok with the executive branch stretching and bending both the spirit and letter of the law as well. So much for "change." It will just be a different set of issues in his Presidency in which the end justifies the means.



Sorry for my absence lately, everyone. EJB has done well to hold down the fort while I finish up my finals. It's all over now so, let's get right back into it.

I'm pretty sure that absolutely nobody is shocked by this move. The Bush Administration has done nothing if not circumvent federal law every step of the way. Let's talk about the language of the TARP that EJB highlights.

Clearly, the plain meaning of those words leads to the conclusion that an auto company is NOT a financial institution. I fully expect a lawsuit to climb the court-ladder and be available for certiorari soon (though, the tricky aspect will be who has standing to actually bring the suit). But the Bush Administration has a plan - of this we can be certain. They would not have pushed forward with this move if their legal counsel hadn't advised them of a litigation strategy, should their move be challenged.

One clause, in particular, worries me. That a "financial institution" can be labeled as a "security broker or dealer" or an "insurance company" might be the text that the Bush administration relies on. Do the automakers insure their sales? Do they buy and trade in other company's securities? If so, it is entirely possible that a court could label them a "financial institution." EBAY was so labeled in a case under Delaware Corporate law - despite the obvious fact that EBAY is not a financial institution. But because EBAY dealt in corporate securities - and lots of them - the court found it fit to consider them a securities dealer. This, I think, would have to be Bush's defense plan, should his illegal move be challenged.

And can I just mention one more time, what the hell is going on with this Republican administration!? Congress, despite being strongly Democrat, shoots down a bill that would help auto companies (traditionally a strong Dem interest) and then a Republican president circumvents Congress and exerts fictional Article II powers to redistribute capital!? WHAT!? What country are we in? What year is it? This whole thing blows my mind.


Thursday, December 18, 2008

Summing Up the Total So Far

So pretty much everyone is aware of the $700 billion “bank bailout” and the pending “auto bailout,” but what most people don’t realize, is that these are only a fraction of the total government expenditures and guarantees that have gone on so far over the past year. Government agencies and the Federal Reserve, which get less media attention and have no legislative hurtles have gone about instituting many other programs on their own.

So I was reading a WSJ article this week that has outlined that the Federal Reserve’s balance sheet has exploded in recent months, ballooning from about $800 billion to about $2.2 trillion since September. For the most part, the Fed has essentially printed $1.4 trillion dollars to purchase or borrow other assets. If this is kept in the system for too long once a recovery begins, we will be seeing inflation like we haven’t seen for years. The Fed says that it will tighten its policy when needed, but given their recent track record, I wouldn’t put much faith in that. And the market seems to agree with me as gold has been inching up recently.

But this whole thing got me thinking and I went about grabbing other info I have accumulated recently and came up with a list of all the various programs created over the past year. I’m probably missing a few small ones, but here is what I came up with.

(If amount allocated is yet to be used in it's entirety, the amount used thus far is in italics.)

Federal Reserve - $4.75 Trillion

Commercial Paper Funding Facility - $1.8 trillion ($312 billion)
Buys short term notes from private firms

Term Action Facility - $900 Billion ($415 billion)
Auctions off loans to banks

Term Securities Lending Facility - $250 billion ($190 billion)
Allows financial firms to borrow treasury bonds in exchange for low quality debt

Money market Investor Funding Facility - $540 billion ($0)
Buys assets from financial companies that support money market funds

Credit Extension to AIG - $123 billion ($87 billion)

Citigroup Bailout - $291 Billion
Guarantee of toxic assets

Discount Window - $92 billion
Banks directly borrowing cash from the Fed

Discount Window II - $50 billion
Extends direct bank lending function to securities firms

Commercial Paper Program II - $62 billion
Loans money to banks to buy commercial paper from mutual funds

Bear Stearns Bailout - $29 billion ($27 billion)
Guaranteed assets in brokered JP Morgan buyout

Overnight Bank Loans - $10 billion

Other Assets - $606 billion
Includes treasury bonds purchased with printed cash in order to help finance the government

FDIC - $1.55 Trillion

Temporary Liquidity Guarantee Program, Secured Debt Guarantee Program, Transaction Account Guarantee Program, increase of deposit insurance limit and other interbank lending guarantees - $1.4 Trillion
Various insurance programs backing debt between different parties

GE Capital Bailout - $139 billion
Debt Guarantee to General Electric's lending arm

Citigroup Bailout - $10 billion
Guarantees Citi’s toxic assets

Treasury Department - $947 Billion

Troubled Asset Relief Program - $700 Billion ($336 billion)
Originally for purchasing distressed assess; now for buying equity positions in companies

Stimulus Package - $168 billion
“Rebate Checks” of earlier this year as well as some other minor tax credits

Bank Tax Credits - $29 billion
To compensate for the government wiping out Fannie and Freddie securities held by banks

Treasury Exchange Stabilization Fund - $50 billion
Designed to manipulate currency markets - now used to insure money market funds

Federal Housing Administration- $300 Billion

Loan guarantees for refinanced mortgages for struggling and delinquent home owners

Nationalization of Freddie Mac and Fannie Mae - $5.2 Trillion

Capital Injection - $200 billion ($25 billion)
Government buys preferred shares and opens up line of credit

Mortgage Debt Guarantee - $5 Trillion
Government acquires the guarantee on all mortgage securities sold by the two GSE’s

Total Earmarked: $12.45 Trillion - Used So Far: $8.74 Trillion
Spent: $4.09 trillion
Loans: $1.49 trillion
Guarantees: $6.78 trillion

Likely to be passes soon:
Auto Bailout: $75 to $125 billion
Stimulus Package: $500 to $850 billion

(Sources: FDIC, US Treasury, FHA, Federal Reserve, Washington Post)

Keep in mind too that these are only the new or expanded programs. This list does not include preexisting “normal” expenditures like increased unemployment compensation or the FDIC deposit insurance. Even without these, the totals are mind boggling. With the likely auto bailout and upcoming stimulus package, various government bodies will have spent, loaned out or insured somewhere around $13 trillion in less than a year! To put this into perspective, the entire output of the US economy in a year is about $14.4 trillion. The amount of $13 trillion is larger than the annual economic output of China, India, Brazil and Indonesia combined, the four largest countries not including the US, which include over 2.9 billion people. This amounts to about 30 percent of all financial wealth of all US households combined. Or it translates into about $43,000 per US resident or about $108,000 per household! So this is your piece of the pie so far.

Now all of this isn’t spent money. The majority is either loans or insurance, so all the money will not be lost. Likely, most of the loans will be paid back and not all the insured assets will go bad (though a lot of them will). Furthermore, much of the spent money went to buying assets that will likely have at least some value to sell back later on.

I guess my point however is to show exactly how large and unprecedented this is, and that is goes far beyond the “bail out” bills. At the macro level, the government has essentially taken control over the entire financial system. In broad areas, capital is no longer largely allocated to areas that investors believe are most profitable and therefore most productive, but rather to what areas government has deemed it to go to. And much of this has been done by agencies and the Fed using extremely loose legal interpretations of their powers. The amount of raw power and authority the Fed, FDIC, and Treasury have been allowed to wield without Congressional approval is unbelievable. Distortions are done directly by the partial nationalization of the financial industry (soon to be done with the auto as well), or it’s done by placing guarantees on various assets, incentivizing more capital to flow into these over other alternatives that government bureaucrats deem less worthy. Event the stock market of recent months reacts little to earnings reports and instead has violent swings based one expectations of various government actions.

We are now in a political economy. The gigantic “stimulus package” soon to be passed is going to be the largest pork barrel project in history as every mayor, governor, and special interest down to a city councilman’s cousin who owns a paving company is lining up to the trough for a piece of the handout. This is the closest thing to a command and control economy that this country has faced since WWII. And all this done under the watch of a President whose critics have attacked him for being a “free market ideologue.” If this is what a champion of free market capitalism brings us, I don’t even want to know what the next administration and Congress is going to do. Maybe buying gold is looking good right now.


Saturday, December 13, 2008

Way to be, Portugal

Sticking with the European theme: I wrote here about the complications caused by Obama's eagerness to close down Guantanamo Bay - the major problem being no place to put non-dangerous detainees whose lives were threatened in their home countries. The US was receiving very little help solving this problem, especially from the EU. Until now. Portugal seized advantage of its chance to make itself globally relevant and decided to offer asylum to some of the cleared detainees. They also wrote a letter to the EU urging others to follow its lead. Hopefully this is the first step towards fully dedicated EU aid regarding the Guantanamo problem. If so, then the negative consequences of closing Gitmo are drastically reduced. It would go a long way towards a very peaceful, problem-less transfer of power. Thank you, Portugal. I always knew you'd come through.


Thursday, December 11, 2008

Bailouts: Italian Style

So in the US, we bail out the banks, the auto companies, the insurance industry... So what does the Italian government do? They bail out the Parmesan cheese industry!
Producers sought government help in the face of prices that have fallen some 25 percent over the past five years, said Giorgio Apostoli, who represents dairy farmers for the Coldiretti agriculture lobby. The producers faced pressure from distributors who offer sharp discounts on the grateable cheeses to lure shoppers into supermarkets

So thanks to the industry's lobbying power, at the expense of taxpayers the government will buy up 3 percent of annual production in an attempt to drive the price up. The official reasoning... to buy food in order to give to the poor. But of all the things you can do for a food program, the government decides to go with Parmesan cheese?

In reality, just as the auto companies come crying to the US government looking for money because they make inferior products that can't stand up to competition, so do the cheese makers. So instead of letting consumers purchase the cheese that they want to buy at the given market price, thanks to their elected officials, Italians will now have to use their tax dollars to make their cheese more expensive. Looks like lobbying power wins out again. Instead of spending the resources to innovate, cut costs or find some other way to compete in the marketplace, they instead decide it is worth while spending resources lobbying so the government can use other people's money to keep them in business, harming society as a whole. As Jeff Flake, one of the few Congressmen I actually like famously said, "I would argue this is one cannoli the taxpayer doesn’t want to take a bite of."



When I first read EJB's post, my immediate reaction was to begin my response with some tasteless ethnic jokes about Italians - seeing as both EJB and I are (at least half) Italian, and I figured I could get away with it. On second thought, this might not be the place for such offensiveness. Rest assured, my jokes would NOT have been about smelling bad and beating your wife...

Anyway, I had two non-offensive thoughts after reading the article. First, the Italian government's stated purpose for the "bailout" (they're actually just agreeing to buy one hundred thousand wheels of Parmesan) is that they will donate the cheese-wheels to the needy. So it's win-win; Parmesan cheese-makers get to stay in business and the poor get fed. But wait, they're giving Parmesan cheese to poor people? What are they supposed to do with it, sprinkle it on top of their non-existent soups, salads and all-you-can-eat breadsticks? Who gives someone a wheel of Parmesan cheese when they're hungry? I kind of find this cruel: "Oh you're out of money and starving? Here, have this 66 pound wheel of crumbly, foul-smelling curdled milk." Come on Italy, the last thing your hungry need is Parmesan cheese. Man up and confess that you're only doing this to bailout an important industry that probably donates money to Parliament members.

My second thought was the role the EU plays in the great cheese bailout. The article EJB links to mentions an EU program that is intended to help feed the hungry. It also implies that some of the bailout money will come from the EU itself. From what little I know about EU law (and believe me, I have a very limited knowledge of the black-letter law itself), EU monetary disbursements of this nature only go towards (or primarily benefit - again, I'm not completely sure of the legal language) foods or beverages which have been labeled with "Protected Designation of Origin" status. Sure enough, Parmesan cheese is just such an item. Thus, as European economies continue to stumble alongside ours, we can look forward to other wonderful EU bailouts of Asiago cheese, Champagne and - my personal favorite - "Melton Mowbray pork pies."
I would not eat that.

Sunday, December 7, 2008

So I'm Agreeing with Ralph Nader of all People... Sort Of

So putting aside the debate of to what extent global warming exists, to what extent human carbon emissions are causing it and to what extent mitigation of carbon emissions will lessen temperature change, I am going to assume for the sake of argument that we should indeed implement some kind of national system to reduce carbon emissions. I do this because this is the political reality we are currently in. With the current complying Congress, as soon as Obama and McCain were both nominated, this debate effectively came to an end, as both of these men are in favor of such a system.

With that said though now comes the debate over exactly how to go about doing this. On this topic, Ralph Nader has a very solid piece in the Wall Street Journal earlier this week in which I generally agree. There are essentially two big issues to still deal with in creating a system:

1.Unilateral Action vs a Global Scheme

One of the major problems with the Kyoto Protocol was that it only affected industrialized nations and exempted countries such as China, India and Brazil, the nations with the fastest growing output of emissions. In China’s case, it may actually outtake the US this year for the largest total emissions as well. So why was this bad? Is not getting some nations on board better then none? The problem is that any system that tries to mitigate carbon emissions does so by making the output of carbon more expensive or carbon producing activities more expensive. Therefore there is a substitution effect where firms that emit a lot of carbon simply move their facilities to a country like China that does not have restrictions. The end effect is no global reduction, just substitution, while at the same time deepening the trade deficit and destroying jobs in the developed nations. As Nader states:
Cap-and-traders assume, without much justification, that one country can put a price on carbon emissions while another doesn't without affecting trade or investment decisions. This is a bad assumption… Good intentions to limit big polluters in some countries but not others will turn any meaningful cap into Swiss cheese. It can be avoided by relocating existing and new production of various kinds of CO2-emitting industries to jurisdictions with no or virtually no limits…Because of the sheer scale of the challenge and the state of the hyperglobalized economy, we will need the same price on carbon everywhere, or it won't work anywhere.

This was one of the reasons why the US never signed onto Kyoto and up until last year, Australia didn't either. Doing so may have made a bunch of greens on the west and east coasts feel good about themselves that the US would be emitting less carbon, but all we would have done is export our carbon to other nations and destroy many Midwest factory jobs while we were at it. If there is going to be a carbon limiting system, it must be done on a global scale where virtually every country is on board and must include all the major industrial powers, including China, India, etc. The incoming administration and Congress would be unwise to rush a system into place in order to fulfill a campaign pledge if it is not done in tandem with some type of global arrangement.

2.Cap and Trade or Carbon Tax?

The vogue idea right now is to place a cap and trade system into place. The government will set some cap on the total amount of carbon allowed to be emitted across the economy and will give out or sell credits to various firms. The firms are then allowed to sell them to each other with the theory being that firms that can easily reduce emissions would rather sell the extra credits where firms were it is difficult to do so, will buy extra. This is designed to limit the economic damage of such proposals.

In theory this should work, but is has a tremendous amount of practical problems, that make a carbon tax more appealing. First, this will require a gigantic regulatory scheme and bureaucracy in order to orchestrate this massive planning endeavor. It would likely be very complicated and the cost burden both to the government and to private firms in implementing this would be heavy. As Senator McConnell stated, “This proposes to be the largest restructuring of the American economy since the New Deal.” A carbon tax is a lot more simplistic, applied at a few key areas of production, say at natural gas hubs, or refiners, etc, and then the tax cost will be passed down through the system.

Second, a cap and trade system would become a lobbyist’s paradise as every special interest will want some type of adjustment credit, exemptions, etc. Furthermore, members of Congress with given industries in their states will want exemptions for these firms and will be very happy to oblige to their lobbying power. Because the effective measuring of carbon output at virtually every stage of production is required for this to work, there will be tremendous wiggle room for special interest to effect how this is done so that it is done in their favor. Nader states:
…administering billions of dollars of carbon credits in a cap-and-trade system in an already chaotic regulatory environment would invite a civil war between interest groups seeking billions in carbon credit handouts and the regulator holding the kitty. By contrast, a uniform tax on CO2 emissions levied at a small number of large sites would be relatively clear-cut.

Lastly, a carbon tax is a lot more intellectually honest and straight forward to voters and consumers. Any restriction on emissions will increase the cost of goods to some extent. Whether this is done directly through a tax, or indirectly through cap and trade, it still has the effect of being a consumption tax. Lets then call it for what it is.. a tax. Just as we tax cigarettes in order to dissuade that behavior, but it makes that behavior more expensive for those who still indulge, taxing carbon works in the same manner.

To effectively put in place a cap and trade system, it would require a gigantic federal bureaucracy and one that every political group will wish to fight over for its control, destroying the original intent of the program in the first place while just giving us more ineffective large government.



Let me begin by addressing the issue that EJB neatly puts aside in his first paragraph; I'd like to just briefly touch on the global warming idea because it is obvious that my colleague reserves some doubt regarding its truth. The problem, of course, is the idea behind a "consensus." The best way to criticize a position or theory, regardless of the substance of that theory, is to claim that there is no scientific consensus surrounding its validity. This is obviously because the scientific community is a very large group of people and, quite likely, there will be dissenters. Now, some have claimed that there is a consensus as to human exacerbation of global warming (but, as is clear, there are respected scientists who do not agree). My point though is that consensus should not be the standard by which we evaluate the legitimacy of certain claims. If we did, we would have to seriously doubt evolution and certain precepts of non-Newtonian physics (after all, there are people in the scientific community who would strenuously disagree with those theories). Asking for total agreement on an issue is simply too high a burden. But when the US National Academy of Science and the American Association for the Advancement of Science both claim a relative "consensus" on the issue, I am willing to lend them credence because they really have nothing to personally gain from public belief in those statements.

The Kyoto Protocol is a solid first step towards reducing global carbon emissions because it strengthened and legitimized (as a global concern) the idea that we can help reduce global climate change. EJB's point - that it will not sufficiently or efficiently reduce those emissions because major CO2 producing countries are omitted - is well taken; however, it might be asking too much to posit that the United States should not move forward with carbon reducing initiatives until the point at which everyone in the global community is similarly acting. Negotiating within the global community is extremely difficult because of the large number of nations we would be dealing with. The more parties you enter into negotiation with, the more transaction costs each party incurs. Thus, if we were to hold, as domestic policy, that we would not initiate CO2 reduction plans until the world decided to work in tandem with us, we would be waiting a very long time - not a good move for the world's leading CO2 emitter (though not for long, thank you China).

I would also point out that Nader's argument - as with any good economic argument - is valid only because he restricted the scope and frame of his inquiry. This is the key to winning any good economic or legal battle. While it is true that anti-climate change initiatives would increase operating costs for businesses, corporations are incentivized to relocate their factories elsewhere only if all other conditions are assumed to be equal. To argue, as Nader does, that Company X will simply move to China if we institute a CO2 tax because China does not have one and thus they will save money only makes sense if there are no other better reasons for staying in the United States. We do not hear much about this question and there is no empirical data that I can find which supports the theory that carbon taxes will significantly increase the outsourcing and relocation of American business.

As for the debate over cap-and-trade vs. a carbon tax, I must say I haven't had the opportunity to fully consider either option. EJB (sharing Nader's concerns) seems to argue that we should favor a carbon tax simply because the cap-and-trade method would necessitate the creation of a large bureaucratic system. Perhaps. However, there is reason to believe that cap-and-trade systems need not be plagued with the necessity of creating new bureaucratic institutions. Such a system already exists for the attempted control of acid-rain.

This interesting op-ed piece further suggests that cap-and-trade would work more efficiently than a carbon tax. The author notes the cap-and-trade system already in place within the US for controlling the creation of acid-rain - and that this system has worked astonishingly well. The author also responds to EJB's second argument (regarding the likelihood of special interest lobbying and hand-outs) by noting that taxes, too, are susceptible to exemptions and special treatment of certain groups. This seems patently obvious - interest groups are hard at work attempting to secure tax breaks and reductions for their clients. The major thrust of the argument, and the important policy difference illuminated by the juxtaposition of the two systems is this:
But the key difference between a carbon tax and the cap-and-trade approach comes down to the issue of certainty. A tax provides for cost certainty; the cost is fixed because of the tax. Cap and trade, on the other hand, provides for environmental certainty. What's fixed is the cap itself -- and it is based on an assessment of the level of emissions you need to get to in order to protect the climate.
While the carbon tax may be more "intellectually honest" - and by that I assume EJB means something along the lines of "easier for businesses to calculate and foresee their expenses" - the cap-and-trade system better works to protect the environment by definitively limiting the amount of carbon our country emits.


Thursday, December 4, 2008

Goodbye Gitmo?

In an interview with CBS on 11/16, President-elect Obama maintained his position that he would close the detainee camp at Guantanamo Bay soon after taking office. He reiterated that the move would work to "regain America's moral stature in the world." Perhaps. I think it's clear, though, that there are other reasons for closing Gitmo that strike most people as rather self-evident: a symbolic departure with the Bush Administration's handling of the "war on terror," an attempt to end foreign pressure regarding torture and illegal detention, a need for increased transparency into the actions of the Executive branch. These are all well and good - but I just have to ask...maybe this is coming a bit too soon? I thought I was crazy when, a few weeks ago, I suggested to EJB that we develop a debate case centered on the theory "Obama should not close Gitmo within his first 100 days." The move just seems so morally justified. Thankfully, I've confirmed that I am not crazy - others are just as concerned as I am.


There are a few concerns I'd like to just mention, but, considering length constraints, I'd rather not fully develop arguments for any of them.

First, where will you put the detainees? Domestic prisons will absolutely refuse to accept terrorists amongst their ranks. NIMBY is one reason. Concern over increased prison violence is another.

Second, what of the 100 or more detainees who are still proclaiming to be hostile to the United States? We can't simply deport them - they'll immediately rejoin the ranks of al Qaeda and take up arms against us.

Third, what of the 150 or more detainees who are NOT hostile to the United States, but cannot be deported to their home States? This is a weird concern because the options are 1)continue to illegally detain a non-hostile innocent; or 2) ship the non-hostile innocent back to a country like Syria or Iran where he is wanted and will likely be tortured or executed. Which option is best for the individual's well-being? Do we have the right to act so paternally? What of those detainees whose home country no longer exists and whom no other country is willing to accept?

Fourth, under what system are we to try those who are triable? If we try them under a civilian system, many will be acquitted for lack of evidence. If we try them under a military system (which might not even be allowed under Geneva), we'd still have to find a place to incarcerate them.

Needless to say, this is a difficult situation. I am not sure how to answer any of these questions and thus I cannot profess to side with those who would close Gitmo or those who seek to keep it operational. The only thing this does prove, I believe, is that, considering the delicacy and difficulty of the situation, it would be unwise to move quickly towards any decision. There is absolutely no rush to close Gitmo - it has survived international scrutiny since 9/11. I would be wary of huge political moves made in haste.


Friday, November 28, 2008

Tax and Spend Liberals

No need for much text in this post, I'll let the picture do the talking.


So there is indeed some truth to this cartoon and I realize what it is trying to say, but I hope that people realize that this is a very simplistic explanation of the past budget deficits. I could just as easily make a simplistic analysis of who controlled congress over those periods (and the branch with the most control over the budget). The Democrats controlled the House for all of Reagan’s term and the Senate for half of it. They controlled Congress during all of Bush I’s term. The Republicans then controlled congress for 6 out of the 8 years of Clinton’s terms, including all of the years of surpluses. Lastly, even with Bush II, the years where the deficit grew from the previous year, Congress had Democrat control. The first two, the Dems had the Senate, and in the last two, where they had both houses, the deficit has ballooned from $160 billion to a projected $1.1 to $1.5 trillion deficit for this budget year. But this is too simplistic as well.

But first, just a side note. Partially because of horrible fiscal stewardship ont he part of the Republicans in recent years, the Democrats have successfully been able to turn the meaning of "fiscal responsibility" to one regarding only deficits and not rampant spending in of itself. So deficits are not even necessarily as good of a measure of being “fiscally conservative,” as total spending is. Deficits after all are not a measure of spending growth or how the money is spent, but simply the gap between inlays and outlays.

But getting back to the main point, lets briefly look at the dynamics that existed under all these administrations. First, Reagan was unable to get the budgets he wanted. Though the Southern Democrats went along with his tax cuts, they wouldn’t go along with his spending cuts, or at least not enough of them to balance the budget. Without that block in the House, he could not get anything through it. Also, in order to cut many programs, 60 votes in the Senate would have been required, which he usually did not have. Furthermore, many Republicans didn’t want to cut certain programs either because any given spending program has its entrenched interests. Had Reagan actually gotten the budgets he sent to Congress, there would have been a cumulative budget surplus by the end of his term. Now proposed budgets always get altered and it is likely Reagan didn't expect those to actually pass, but it does show that he was trying to reduce spending much more then he was able to do. Now some also say, “well wait, Reagan drastically increased military spending.” Well this is true, but his increase really only brought defence spending back in line as a percent of GDP with what had been the Cold War average. Defense spending had been falling through the Ford and Carter years being replaced by domestic spending.

Next was Bush I. He had a very hostile Congress that would not go along with any substantial spending cuts at all. But regarding the deficit, he got hit with a recession. Because of the social safety net and the progressive income tax system, a recession naturally reduces tax revenues while at the same time increasing outlays. These were all programs already in place and not the direct hand of Bush. In the end, he compromised with the Democrats and raised taxes, because he could not get cuts, and the rescinding of his famous “read my lips, no new taxes” pledge ultimately contributed to him losing his reelection (furthermore, Bush I was not nearly into the small government thing as Reagan was... remember “Voodoo Economics”, and therefore was much more willing to go along with the Congressional Democrats in the first place.)

Clinton, started out as a big tax and spend liberal as the title in the cartoon states. He raised taxes and then tried to get through his massive universal healthcare program. However, a combination of the program's high cost, the complexity of it and the political infighting within the Democrat party, he didn’t get this through. The Republicans then took the Congress and at this point they actually believed in restricting spending. They also had the partisan incentive to go against Clinton backed spending. But also at this point, Clinton then began to rule as a moderate, likely out of political necessity, and encouraged by his Treasury Secretary Rubin, who is obsessed with budget deficits, stopped pushing for more spending. The Republicans essentially made policy for most of the decade. Even think of the major achievements of the Clinton administration, NAFTA, welfare reform, capital gains tax cuts, balanced budgets... these were all the Republican Party platform issues in 94 and 96. Furthermore, he spent most of his second term using his political capital to blunt the various sex allegations. Clinton also had the short term benefit of the stock bubble, an unsustainable period of economic growth that yielded a temporary benefit, but led to the recession to follow in 2001. And just as a recession naturally reduces revenues and increases outlays, the opposite is true during a boom time. The late 90's saw the largest percent of GDP collected as tax revenue since WWII. This was why Bush II was so attement about putting in place a tax cut durring his 2000 campaign and why even Gore was advocating a smaller tax cut.

Bush II is where this cartoon has the most truth, because the administration has actively pushed for massive increases in spending over its tenure, whether it be Medicare D, No child left behind, farm subsidies, Homeland Security, etc. However, even this is not the full story. He got hit with the 2001 recession and 9-11, both of which reduced tax revenues and increased outlays. Now we have a massive deficit with all the bailouts, but these have been quite bipartisan, or at least Bush and the Congressional Democrats.

So this is still a very brief overview of the various administrations that doesn't do any of them justice; however, in general, this begins to look at the more complex dynamic.


Wednesday, November 26, 2008

How Capitalism Gave Us Thanksgiving

So the rather unique American holiday of Thanksgiving comes upon us tomorrow and I wish all our readers a happy and tasty one. Though the official holiday itself began during the Civil War period as Lincoln declared a day of thanksgiving in 1863, we are all familiar with the origins being traced back to the Pilgrims in the Plymouth Colony. As every school child knows, a great feast of celebration was had after the abundance of a large harvest, which followed the previous long period of suffering in the new wilderness.

The story that few school children will ever know however, is why it took until 1623 to have this abundant harvest, three years after the colonists first landed in 1620 (there was a celebration in 1621, celebrated by the original survivors after making it the first year, but the first feast of abundance that we associate the turkey and the other mythological imagery with was in 1623). By the short simple answer, the Pilgrims for the first two years suffered under socialism and in 1623 were saved by capitalism. The original colony was set up as a communal farming community. Every man worked on common fields and all produce was shared collectively. The result was the tragedy of the commons. Because all of the benefit of an individual's work would be shared but all of the cost of one's work must be assumed alone, the incentive to work is greatly diminished. One begins to free ride off of others. However when every worker thinks this way, total output rapidly declines and harms the greater whole.

Seeing these results over the first two seasons, reforms were made. The colonial governor, William Bradford, wrote in his diary on this problem:
So as it well appeared that famine must still ensue the next year also, if not some way prevented. Therefore [the colonists] began to think how they might raise as much corn as they could, and obtain a better crop than they had done, that they might not still thus languish in misery. At length after much debate of things, [I] (with the advice of the chiefest among them) gave way that they should set corn every man for his own particular, and in that regard trust to themselves. And so assigned to every family a parcel of land.

And there for the first time, the colonists of Plymouth had private property rights. Each family was solely repsonsible for the upkeep of its land, but in return was able to keep the produce from it. The result was a massive increase in farming output that season as every man had an incentive to work hard and efficiently. Bradford further wrote:

This had very good success...for it made all hands very industrious, so as much more corn was planted than otherwise would have been. By this time harvest was come, and instead of famine, now God gave them plenty, and the face of things was changed, to the rejoicing of the hearts of many.

A very similar pattern also happened in Jamestown, where the original settlers were largely indentured servants, and their work was split communally with the colony. After the first 500 or so settlers largely perished, the new governor Thomas Dale abandon the indentured servant model and gave each family a parcel of land. The result was the thriving of the colony. Famous settler John Rolfe stated that once men were granted property they went about, "gathering and reaping the fruits of their labors with much joy and comfort.” The settlers went from bartering for food from the local natives to selling excess food.

So this Thanksgiving when you're feasting on turkey and other delights, omong other things, make sure you take a little time to be thankful for property rights, free markets and capitalism. :)



Leave it to EJB to bring free market theory into Thanksgiving festivities. I only have a few random thoughts to add to this one.

First, the "tragedy of the commons" is a questionable theory; and I emphasize the word "theory" because there are no great societal examples of this phenomenon. The author of the phrase (which served as the title of his article) was Garrett Hardin, professor of sociology at California. His article purports to base the "tragedy of the commons" theory on the old English "Commons," communally owned pastures where shepherds would bring their sheep to graze. These "Commons" were eventually replaced by private farms. Hardin would have you believe that the downfall of the communally owned pastures was an inevitable consequence of letting property be owned communally in the first place. New research confirms (or, at least, strongly supports the idea) that the Commons fell because of other reasons.

Besides the complete lack of empirical evidence, the "tragedy of the commons" theory, upon closer inspection, seems to be flawed rationally as well. Hardin premised his theory on the assumption that if a resource were left to communal rule, and thus not protected by individual property rights, there would be a rush by individuals within the community to use all of that resource for themselves - thus destroying the resource and the environment. This article, by Ian Angus, notes that that assumption appears slightly myopic:

"Contrary to Hardin's claims, a community that shares fields and forests has a strong incentive to protect them to the best of its ability, even if that means not maximizing current production, because those resources will be essential to the community's survival for centuries to come."

A community, just like any individual person, can foresee, comprehend and adequately prepare for future scarcity.

My last point is more social than economic. It is a sad fact of history that "tragedy of the commons" theory - or, more broadly, the Lockean theory of private property supported by "tragedy of the commons" thinking - has been used to forcibly displace and destroy indigenous populations and civilizations. There is no better time to consider this embarrassment than Thanksgiving. The brutal oppression of the Colonists over Native Americans was fueled and subsequently "justified" by theories of private property. This is made clear by a conveniently on-point quote from Chief Justice John Marshall in his opinion in the case of Johnson v. McIntosh (wherein the Court held that private citizens could not buy land from Native American tribes):

"But the tribe of Indians inhabiting this country were fierce savages, whose occupation was war, and whose subsistence was drawn chiefly from the forest. To leave them in possession of their country, was to leave the country a wilderness..."

Thus, while EJB suggests being thankful for Locke, Friedman and property rights this Thanksgiving, I suggest that those with the good fortune of being descendants of the peoples who have most benefited from the imposition of private property rights consider themselves lucky and give thanks - descendants of the conquered (the few left, of course) might not consider themselves as lucky.


Friday, November 21, 2008

On Enemy Combatants, International Law and the War on Terror

Federal district court judge Richard Leon ruled today that President Bush must release five detainees currently held at Guantanamo Bay. One of the five prisoners is Lakhdar Boumediene, whose case prompted the Supreme Court to allow federal courts to review whether detainees captured during the "war on terror" were being properly held. Judge Leon's ruling is the first of its kind and it is a resounding critique of Bush's handling of the "war on terror." To sum up, Judge Leon ruled that the five detainees were not properly designated "enemy combatants" because the evidence the Government used to detain them was a single, unidentified source. Finding this evidence to be entirely too flimsy, Leon ordered their release. Because I agree with the outcome of the decision, but disagree with the rationale, you may consider this post my concurring opinion.

Judge Leon did the right thing by ordering the release of the prisoners. However, by ruling that the Government had not properly designated Boumediene and his friends as "enemy combatants," Judge Leon is assuming that there can be properly designated "enemy combatants" in the "war on terror." This is a fundamental misreading of the international laws of war (as governed by the Geneva Conventions - treaties which the United States is a party to). In the interest of brevity, I will limit my argument to its fundamentals, so forgive me if it seems a bit choppy and underexplained.

First, Article I, Section 8, Clause 10 grants Congress the power to "... [D]efine and punish piracies and felonies committed on the high seas, and offenses against the law of nations;" Thus, constitutionally, it is the Congress that should be defining the criteria of "enemy combatant" status - not the Executive. However, according to the Supreme Court in Hamdi v. Rumsfeld, Congress delegated this authority to the President when it passed the AUMF immediately following 9/11. So far so good. Except that there's this wonderful little line of cases espousing a principle of constitutional interpretation called the "Charming Betsy rule." This rule dictates that U.S. statutes should not be read to violate established international law of war principles. This makes sense, our very Constitution was shaped and informed in light of international law. Plus, the policy of promoting comity between nations is one of the leading justifications for obeying international law principles - even when dictating domestic law. Thus, it is vital that our Constitution and the statutes which flow from it are interpreted according to the international standards that are accepted by the global community (this is especially true when considering jus in bello rules, which have remained unchanged since the time of Thomas Aquinas!).

So we turn to the Geneva Conventions to decide what to do about detaining "enemy combatants." Articles Three and Four of the Conventions dictate the law of war rule of "distinction," that is, in "armed conflict" there are civilians and combatants. Combatants are defined as those who belong to an enemy military and/or take up arms in "direct hostilities" against another warring nation (civilians are anyone else). Does this cover terrorists? It might appear to, since terrorists do seem to act in "direct hostility" to the United States. Here's the catch that the Supreme Court missed - Articles Three and Four of Geneva also divide "armed conflict" into two types: international and non-international. International armed conflict is what you think of when you think of war: State A vs. State B, WWI and WWII. Non-international conflict is defined as a nation vs. a non-national organization or group. This would include civil wars, rebellions and international criminal organizations. Thus we have the category that al Qaeda falls into; clearly, the "war on terror" is a non-international armed conflict according to international law of war principles. Finally, the most important fact to take note of: non-international armed conflict is not covered by Articles 3 and 4. It is covered by Common Article 3 and various Additional Protocols. These documents do not recognize the existence of the class of "enemy combatant" in non-international warfare. This is key! There's no such thing as an "enemy combatant." Does this mean we cannot detain terrorists? Of course not. The law of war contemplates (and commands) that in non-international warfare, detainees are subject to the domestic law of the captors! Thus, terrorists should (indeed, must) be tried in civil courts, like any other criminal. Amazingly, the Supreme Court has recognized that the "war on terror" is indeed a non-international armed conflict (it did so in a case called Hamdan v. Rumsfeld - not to be confused with Hamdi). However, it failed to make the necessary connection that "enemy combatant" status does not exist in the "war on terror."

Think about it, what happened to Timothy McVeigh, the Atlanta Olmypic bomber and the captured 9/11 terrorist plotter? They were all tried in civil courts for the domestic crimes of conspiracy to commit murder and murder. This is the correct answer to the question of captured terrorists. Sadly, while getting the result correct, Judge Leon failed to recognize the right way to get there. He ignores or does not realize the unconstitutional nature of detaining civilians in military courts. I trust that other district court judge's will see the light and follow the principles of Charming Betsy, Hamdan and the Geneva Conventions.


Monday, November 17, 2008

This Would Be Even Funnier If It Weren't So True



"America needs the money hole!"
"I love the money fires."

Brilliant, yet tragic...though the idea of people arguing over whether the free market can discover the best way to destroy money warms my heart.


Friday, November 14, 2008

A Caricature of Bush's "Conservatism"

President Bush, in what could be the final important act of his presidency, is lobbying hard for a $25 billion dollar "bailout" (read:investment) of the Big Three American automobile makers - GM, Ford and Chrysler. Taxpayer money would essentially be used to buy an ownership stake in the companies, with the attempt of keeping them afloat and potentially reimbursing tax-payers once their stocks rise in the distant future. Essentially, this would be a partial nationalization of the automotive industry; and it comes under a GOP President - oh, the irony.

I would like to think of this act, should it pass, as a caricature of Bush conservatism. In other words, the exact opposite of what conservatism meant only 20 years ago. There is little doubt that, had you told Goldwater or Reagan that a conservative President would expend political capital to nationalize a major American industry, they would not have believed you. Small government and free market ideology were at the heart of conservatism.

But oh how things have changed. Bush, who recently publicly defended the free market system, has either changed his mind on that sentiment, or just does not understand the definitions of the terms "free" and "market." Or maybe even "the" and "system." (It's not unprecedented for a President to be unsure of even the simplest definitions, remember that Bill Clinton was perplexed by the meaning of "is.") Now, Bush advocates for bailing out companies that have failed on the market. Consumers agree (as indicated through horribly failing stock prices), GM, Ford and Chrysler cars are not worth their price. Facing competition from Honda and Toyota, Japanese imports that are - on the whole - cheaper, more efficient, get better gas mileage and last longer, American car companies have struggled in the last decade. Some chalk this up to the incredibly poor business decision made by many of these companies to pursue an increased development and production of gas-guzzling SUV's. That is certainly part of the picture. What seems to be going unsaid, however, is that the products these companies make are just horrible. Have you driven a Chrysler lately? It is not worth its weight in salt. My family owned a Chrysler mini-van for a few years. I can remember the transmission falling out of that van on at least three separate occasions. The front axle was always misaligned. And it handled incredibly poorly in snow and ice. These factors -and doubtless many more - played substantial roles in pushing customers towards buying foreign cars. Now, suddenly, we're talking about bailing out businesses that create and market inferior products. They have failed on their own merits - it is time to let them find their own way to succeed. I would suggest (should the CEO's of these companies be reading this page, which I'm sure they are) that they retool their operation entirely. Trucks and SUV's are floundering thanks to a surge in consumer gas conservationism. Hybrids and low gas-mileage cars are clearly the future. Work on that.

Now, I am not blind to the other side of the story. Two competent reasons are put forward for saving these industries. First, they employ a great deal of workers. Allowing them to go under would drastically increase unemployment and the poverty rate - especially in Detroit, a city which could itself use a bailout. Second, if these companies were to collapse, we would miss their manufacturing plants if we ever become involved in an old-fashioned international state-to-state war. The likelihood that this will happen is remote; it seems like the "war on terror" is the foreseeable altercation our country has decided to engage in. But should a war with Russia or China or some other mechanized state erupt, the loss of car manufacturing plants would cripple our ability to domestically manufacture military trucks, tanks and other necessary equipment.

Thus, I am not advocating that we should not bailout the auto industry. There are valid arguments on both sides. What I am merely pointing out is that our current President, a purported conservative, is fighting the hardest for this attempt at nationalizing the automotive industry. I find that ironic and indicative of the current state of the GOP.



First, I'm not so sure the Bush administration is the one really pushing for the nationalization of the auto industry. They have been luke warm thus far. This one has been more driven out of Congressional Democrats. But obviously it was the administration that initiated the push for the financial bailout.

But I agree with this point. One of the most frustrating things from the viewpoint of a Conservative is that Bush is seen as the example of what conservatism is. Goldwater and even Reagan are rolling over in their graves right now. We have had a huge government Republican claim the mantle of conservatism. Under his rule, government power, and in particular executive power has only increased in any way you measure it and government spending has exploded. This is no conservative. He is more synonymous with the old socially conservative Southern Democrats - he's a Dixiecrat. With the exception of some of the social issues, his presidency has more in common with LBJ's then any other modern president.

Though this was written before the financial mess in September and October, Charles Wheelan has a similar discussion on Bush in that he doesn't know what he is. He calls him a "neo-neoconservative", all the liberal spending without the perks. Read here.


Thursday, November 13, 2008

News Media Priorities

Just a quick post to highlight why EJB and I even started this blog (and why we continue to despise the news media). If you haven't yet heard, the BBC (and seemingly every other international news network) is reporting that German doctors have used a bone-marrow transplant to cure a man of AIDS. Yes, you read that right...this is a possible cure for AIDS.

'Could this be true,' I thought to myself. 'What wonderful news!' I remarked in my own head. Certainly I can read more about this on CNN or Foxnews. Certainly this type of news calls for front page status. Shockingly - nothing. Well, not nothing. In fact, both and did actually pick up the story, but hid the link in the bottom corner of the page (accessed by scrolling down, sifting through other "today's news" stories and following the links).

So what is it that CNN and Foxnews found to be more important than a possible cure for freakin AIDS??

CNN headline: "Breaking News: Palin: I Wish I Had Done More Interviews!"
Foxnews headline: "MSNBC Duped Into Palin Hoax!"

First of all, Sarah Palin is no longer a news story. Nothing she does is news anymore, and I doubt it was ever legitimate news to begin with. Second, I don't know which site should be more ashamed of themselves. CNN listed their "story" as "breaking news," which it is clearly not. The subject matter is the opinion of a former vice-presidential candidate who "wishes she had done more interviews." I wish I had played more tennis this year. Not breaking news. Fox is an interesting one. Its "story" is actually just a shot at its rival, MSNBC. Is this more like news than CNN's "story?" I can't even tell, really. The major point here is that both sites ought to be ashamed of themselves. They are lowering the standard of intelligent discourse in this country. Seriously, readers, get your news from the BBC or some international source - they typically contain actual news.


Monday, November 10, 2008

On Executive Orders and Barack Obama

I've been defending you, Barack Obama. It seems like everyone around here (and elsewhere) wants to fear your policies and philosophy. They claim you're going to nationalize some private industries. They swear that you'll further centralize and concentrate power in the Executive branch. And I've been on your side, giving you the benefit of the doubt. I've argued to the point of exhaustion and crippling carpal tunnel. But're making it much harder to do. This, from Yahoo news. Obama plans on using "executive orders" from day one. We just suffered through eight years of a President who unconstitutionally power-grabbed by abusing and exploiting the executive order. Now you're considering doing the same thing? And from day one? Really?

Well...the article does say that Obama plans on using the executive orders to "undo policies enacted by Bush." If that is honestly the limit of these executive orders, then I guess I'd be somewhat placated. But only because I'm a loose consequentialist. If I were more of an instrumentalist, I'd probably be wondering if it is just to undo bad policies by implementing the exact same means that caused all the problems in the first place. Thankfully, I need not concern myself with such an inquiry because, in this limited case, I'm willing to let the ends justify the means (it's not always a bad policy!).

But wow, you're already thinking about issuing executive orders? No honeymoon period? No easing into this gently? I bet Barack is that guy who, when you and your friends sit down to start a poker game, raises on the very first hand. And then check-raises after the flop. Relax. You have at least four years to undo the horribles unleashed by Bush's executive orders. All this noise about "acting without waiting for congressional action" is a little unnerving. I'm not the biggest fan of Congress, but I do believe that they were granted the power to create laws.'s probably a good thing to go ahead and discuss your ideas with them. And just a final warning: the economy is going to get worse. We have not hit rock bottom. So, the more you do, the more closely your work will be tied to the recession - even if the legislation has absolutely no correlation with the state of the economy. It's just how it works, ask Herbert Hoover. Thus, you might want to go easy, early on. Let the recession take hold and work itself out, all the while blaming President Bush and Republicans. That's a sure road to glory, ask FDR.


Sunday, November 9, 2008

More on the Fed and the Housing Bubble

I ran into this article today. It's a bit more technical then what I've previously linked to in the past, but if your willing to read through it, its worth it. I had previously posted about how loose monetary policy had been a large contributor to our housing mess. This argues along the same notion. From the article, here are a couple of relevant charts.

Fed Funds Rate

Growth of Subprime Loans

Notice the correlation with subprime growing starting in 2001 and accelerating through 2005, the periods when the Fed held very low interest rates stoking a bubble in housing investment. Whats just as important is realizing that this mess want just subprime, but an explosion of housing lending in general, which is discussed more in t e article. The growth began to slow as the Fed raised rates and then started to fall as the housing bubble popped.


Wednesday, November 5, 2008

History Repeats Itself: A Look at This Election in a Certain Cyclical Perspective

I hope you are willing to bear with me on this long post.

So with last night’s election results, the nation moves forward with a new President and Congress. Part of me is overjoyed that this long process is finally over and part of me is intellectually curious to see how a Democrat controlled government will rule after years of Republican dominance. I see certain benefits to this change in the hopeful end of our cowboy diplomacy of late (though I’m no fan of the Democrat’s propensity to surrender national sovereignty to international organization either) and hopefully the end of a Republican party clinging to power via cultural battles. They have to begin some soul searching again and develop new ideas to actually govern, while at the same time I am willing to bet that for political reasons, the Democrats will largely avoid their own social issues agenda in the near future.

But the overarching shift that I see occurring right now in our balance of political coalitions is disturbing. JSK and many others continue to dismiss the notion of this as being a great leap in favor of government power and the social state, chalking this up to me worrying and over reacting. It is true, that we are not going to suddenly see a socialist workers paradise, or a sudden rise of the next Soviet Union, but I have never been saying that. The Republicans, if they survive recounts seem to have held 43 to 44 Senate seats, maintaining their power to filibuster, but even if they hadn’t we still wouldn’t have seen these extreme developments. What I do believe, however, is that we are about to likely take the next large step in the direction of a socialist democracy, and all the pains that accompany it. Six time early 20th century American Socialist Party Presidential candidate Noram Thomas said:

The American people will never knowingly adopt socialism, but under the name of
liberalism, they will adopt every fragment of the socialist program until one
day America will be a socialist nation without ever knowing how it happened.

If one looks back now at that party’s platform in the early 1900’s virtually all of its policies are now in place and his words have a prophetic feel to them. Take a look at Marx’s ten planks of how to transition a nation into Socialism. We have most of them at least partially implemented currently.

Along this theoretical framework, American history of the past century has been marked by a period of movement towards social democracy, followed by a period of backlash after years of poor economic conditions created or at least exacerbated by those very policies. In this latter period, most of the programs earlier created are not removed, but the growth of new ones is hampered. Then when the cycle repeats itself, it picks up from where it left off.

The first period was the Progressive era, and more in particular the Wilson years, where the Federal Reserve and income tax came into full fruition. In addition, America’s isolationist tradition came to an end with an expansion of government power abroad via the involvement of the country in WWI. Partially due to the war, partially due to high income tax rates to finance the war, and partially due to a Federal Reserve that had no idea what it was doing, the latter half of the period was marked by heavy levels of inflation and general economic pain in addition to the struggles of war. Between the burdens of the war itself, and the inflationary period, this episode came to an end with the overwhelming election victory of Harding with his pledge to “return to normalcy.” He and his congressional allies cut taxes, reduced the size of the military and largely governed in a hands-off approach, in direct contrast to their Progressive predecessors. He and Coolidge thereafter presided over a period of general peace and prosperity.

This changed however, when Hoover, a big government president, who redirected his previously laissez-faire party into one of trade protectionism, much higher tax rates, wage controls in industry, centralized industrial and agriculture planning, government regulation and so on. Scrambling to react to the Stock Market crash, these large government responses only exacerbated the situation, turning a recession into the beginnings of the Great Depression. Despite Hoover being the most interventionist President to that date, this didn’t stop FDR from blaming the current situation on the free market and Hoover not doing enough. FDR rose to power as a savior figure, promising to do so by greatly increasing the power of the government. His policies elongated the Depression by taxing investment heavily, creating uncertainty in markets, and driving up unemployment particularly in the 1937 “Depression within the Depression.” This latter phase was partially driven by the implementation of the Wagner Act, which had the effect of forcing increased union wages without any increase in productivity while labor demand was already weak and by raising taxes for Social Security. They combined to drastically raise unemployment. These policies were the same things Hoover did in 1930 just rehashed and taken further. Rexford Tuggwell, one of FDR's advisers later commented that although no one would admit it at the time,

...practically the whole New Deal was extrapolated from programs that
Hoover started.

The backlash occurred starting in 1938 and 1940. Despite FRD winning a third term on the grounds of the developing WWII, his liberal congressional allies were defeated in these two elections. The Republicans gained many seats in the Congress and allied with the Southern conservative Democrats, this “conservative coalition” was formed. First led by Senator Taft and later Senator Goldwater, this coalition marginally controlled Congress from 1938 until 1964 with the exception of two of Truman’s years. Though not powerful enough to repeal most of the New Deal programs (as many members now wished to preserve those programs already created), it largely prevented the creation and expansion of new ones. Government policy in this era focused around infrastructure development and scientific research, and not increasing wealth redistribution and social engineering as it had in the New Deal. Further aided by Kennedy’s large tax cut, this period was one of general prosperity.

The cycle reset itself beginning in 1964 with LBJ’s crushing victory over Goldwater, where he gained a large number of Congressional seats. Government went back to the business of increasing wealth redistribution and social engineering. Furthermore, the Federal Reserve started expanding its role again, trying to not only provide price stability but by actively trying to increase employment operating under the notion of the Phillips Curve. This Congressional coalition ruled until 1980, and its Presidents following LBJ were all big government proponents (accept maybe Ford, but he had little policy influence in his two years). As Nixon famously exclaimed, “We’re all Keynesians now.” He continued LBJ’s intervention with price controls, more market intervention, high taxes and via getting off the gold standard completely, now gave even more control to the Federal Reserve. These years from LBJ through Carter saw ever increasing inflation and rising unemployment, a deteriorating fiscal situation and under performing financial markets.

After years of pain, the message that Goldwater failed to win by, Reagan used to sweep to victory in 1980 and with him a new Congressional coalition. The Republicans took the Senate, and gained enough seats in the House that along with the Southern “boll weevil” Democrats, gained an effective majority. In a period of reducing social programs, deregulation, lower taxes, and tighter monetary policy, prosperity began to reemerge. With the exception of the first two years of the Clinton administration, this new Congressional coalition held control from 1980 until 2006 (though they stopped governing this way in the 2000s). Unemployment rates steadily decreased, inflation lessened and the stock market saw its greatest 20 year period in history. This too changed however. Much like Hoover, our outgoing president has been a big government ruler. He took a previously small government party and turned his years of governance into the largest spending increase over a 6 year period (2000 to 2006) since LBJ. The government increased regulations heavily in the wake of September 11th and via Sarbanes Oxley, diminishing the US competitive position, energy markets were manipulated through ethanol and trade protectionism, the fiscal condition worsened, and government continued to gets its hands more involved in housing markets via Fannie and Freddie and the FHA. Foreign intervention became the dominating political issue via Iraq and Afghanistan. And just as FDR blamed a big government Republican for being laissez-faire, so has our next President blamed Bush and the free market, when in reality as I have talked about before, our real mess was largely due to poor government involvement (here and here).

So now there returns a liberal pro-government majority in the Congress, with a President promising larger government yet again. The question now is that is this simply a two year period, as with Truman and Clinton where it is only a pause in the smaller government portion of the cycle, or is this the beginning of the next phase? I hope it is the prior. It may be so, considering this election was more about the electorate being against Republicans then for Democrats. However, I feel it is likely the later. The Republican Party is a damaged brand and is blamed for the mess that we are currently in. The Party furthermore was no longer governing on the small government principals that got them elected in the first place. Also and very importantly, the narrative that was supported by both presidential candidates this year, that “greed” and the lack of government regulation is the root of our mess, is commonly held amongst the electorate. The message of small government is therefore greatly harmed at present. McCain’s concession on this argument has probably done more for the cause of large government than anything else, because it now admits politically and solidifies that the popularly held lessen from our recent problems is not the overreach of government trying to manipulate housing markets but that it was a failure of the free market. That is now mainstream, accepted by both parties with only fringe political forces arguing otherwise. Unless the Democrats now overeach and attach to themselves a lable of being too extreme, then it will be quite some time before the electorate is both in favor of small government again and at the same time trusting in the Republican party to deliver that.

So we are now going to likely have to feel a period of pain again, just as was required in past cycles, before the electorate is once again willing to accept the notion that as Reagan said, “Government isn’t the solution to the problem. Government is the problem.” It took about 7 or 8 years in the Wilson era to come to this conclusion, 10 to 12 years in FDR’s, and about 16 in LBJ’s. It may then be another decade before we wake up in this phase. Enlightening in Obama’s victory speech last night was the following disclaimer about his Presidency that was very slyly snuck into his speech when referring to our problems, economic and other:
The road ahead will be long. Our climb will be steep. We may not get there in
one year or even one term...

He is setting the narrative already for his 2012 reelection. If he gets many of his advocated polices through, raised taxes on capital, greater union power, protectionism through double taxation of foreign profits, and market intervention, which are all strikingly similar to the policies implemented during the past rises of government power that exacerbated our situation, he too will only postpone our recovery now. He is showing us already that his message in the face of a still troubled economy will be the same as FDR’s; that being blame your predecessor for the problems to deflect critisism away from your own failures. FDR and his coalition were able to successfully do that for eight to ten years. I hope this President will not have as much success at that. So maybe Obama will rule in a manner different then what he has said on the campaign trail, and maybe I will be very wrong in my predictions, but if history is a guide, I think we are in for a period of malaise and rough times.



I'm not sure why I'd even attempt to temper EJB's concerns. Frankly, I'd be happy to accept them as perfectly valid and believe that the GOP is in the midst of being relegated to a prolonged minority status. I say this for two reasons: first, much like the penitent man must suffer to attain atonement, the GOP should be punished for the last eight years of incompetent leadership; and second, because I hope that such punishment will help purify the party - and by this I mean, return it to the party of small-government proponents.

I agree with EJB when he posits that much of what we witnessed on Election Night was a public backlash against the GOP for President Bush. The message was loud and clear. Similarly, I also agree with EJB in that I believe the Dems will not push their social agenda anytime soon - Democratic strategists should recognize that the election was not a liberal mandate, but instead an "anyone but them" decree.

EJB lays out the Arthur Schlesinger model of the cyclical nature of American politics quite nicely. Although I have some minor quibbles with his assertions (Wilson as the catalyst of the Progressive Era? TR might have something to say about that), we're not here to debate about the historical accuracy of the Schlesinger model. I would argue, though (as commenter Kim points out (Hi Kim!)) that there is reason to believe that there is a strong undercurrent of fiscally-conservative thought amongst the younger generation. The unprecedented internet popularity of Ron Paul and burgeoning young conservatives like Bobby Jindal testify to this latent potential. If conservatives of that mold step up within the next four years, the 2012 election will be quite interesting - and dare I say it, EJB's concerns might be overstated. So buck up, young Reaganite, your future is not so bleak.

One other reason to question the legitimacy of the fear of Obama ushering in a socialist paradise is the Bill Clinton/George Bush example of unfulfilled expectations. What I mean is that, prior to Clinton taking office, the country expected him to implement all sorts of liberal policies - like universal health care, increased social welfare spending, etc. Instead, because of the deficit left to him by the previous administration, Clinton went small-government and drastically slashed the budget. He famously declared that the era of big government was over. Enter George W. Bush, who, so the country thought, would stick to his campaign promises of cutting taxes and spending. Nobody could have guessed that a conservative - a mere 15 years after Reagan - would increase the strength of the federal government in such ways as we have seen. And as I pointed out in my previous post, Obama has surrounded himself with Clinton aides (Rahm Emmanuel and Robert Rubin, to start). So perhaps we should expect the unexpected from Mr. Obama.

Finally, before I get into my major point (which, as you should all expect of me by now, involves the judicial system), I'd like to respond to the idea that our society has "partially implemented" Marx's ten planks of transitional socialism - because, honestly, I just don't see it.

1)Abolition of all property in land and application of all rents of land to public purposes.
Well...we still have privately owned property and land is not rented for solely public purposes. In fact, we have a pretty strongly supported system of private property in this country. True this Lockean system was undermined by Kelo...but let's be serious, Kelo has not been extended by any District Court. Nobody likes that decision and in fact, many States have enacted legislation directly contrary to its holding. So we're 0 for 1, thus far.

2)A heavy progressive or graduated income tax.
We could have a year-long debate about the definition of "heavy" but I'll be nice and concede this one. You got us there - Sixteenth Amendment? Totally socialist. Next.

3)Abolition of all right of inheritance.
I can tell you, after suffering through four agonizingly painful months of studying property law, that we are nowhere near the implementation of this one. Inheritance of land and chattels is still the default rule in every single State. In fact, the State can only inherit property if the decedent has absolutely no living kin survive him. And, even more interestingly, Article III, Section 3 of the Constitution expressly forbids "Corruption of Blood" and "Forfeiture" as a punishment for Treason. Looks like we're 1 for 3.

4)Confiscation of the property of all emigrants and rebels.
While it is true that there are many in Texas who would whole-heartedly support a law like this, we've yet to see one in any State (thankfully). 1 for 4.

5)Centralization of credit in the hands of the State, by means of a national bank with State capital and exclusive monopoly.
Here we do see some similarities. We have a Federal Reserve which does act as a national bank. The State does have an exclusive monopoly on the type of currency we can use, as well. But credit is not wholly centralized in the State and there is no such monopoly there. Perhaps Obama will act to fully nationalize the credit system due to the crash, but isn't that the crux of our disagreement (whether that will actually happen or not)? This one gets half a point: 1.5 out of 5 now.

6)Centralization of the means of communication and transport in the hands of the State.
Amtrak! I knew it! Socialist bastards. Private communication companies are prevalent. Private transportation companies are prevalent. We do have the DOT, but they're regulatory...they don't own the means of transport. This one fails. 1.5 for 6.

7)Extension of factories and instruments of production owned by the State...the improvement of soil in accordance with a common plan.
Again, I suppose we could argue that the Department of Agriculture does fulfill this tenet, somewhat. But there's a huge difference between regulating agriculture and "improving soil according to a common plan." Farm subsidies abide, but there are still privately owned farms and factories. In fact, it is the norm. I'll be generous and give this one a half point. 2 for 7.

8)Equal liability of all to labor. Establishment of industrial armies, especially for agriculture.
Industrial agricultural that would be a sight. And to dispel the notion that we're all equally liable for labor, I point to myself as evidence. I don't do anything. 2 for 8.

9)Combination of agriculture with manufacturing industries; gradual abolition of distinction between town and country, by a more equitable distribution of the population over the country.
Zuh? I mean...I guess we could argue that the rise of federal supremacy has acted to "gradually abolish the distinction between town and country," but that's a stretch. Our federalist system, especially since the Rehnquist Court, has never been stronger. And what's all this jazz about redistributing the population equally over the country? Evidence that this has not happened: electoral college. 2 for 9.

10)Free education for all children in public schools. Abolition of children's factory labor.
Socialist scum! How dare they want to educate all children free of expense and liberate them from factory work! Seriously, public schools aren't free in the sense that we pay for them through taxes. Plus "all children?" Not even close, sadly. Though we have abolished child labor. So this is a half a point that I think we should be proud of.

The final tally, then is 2.5 out of 10. We're 25% socialist; mainly because we ended child labor, set up the DOT and Dept of Ag and we have the Federal Reserve. I think I'm OK with this.


But here's the real meat of my response to EJB's post. I am most interested not with what EJB has included in his post, but what he has chosen to leave out of the discussion. He mentions the Executive and the Legislative branches and details their progressions, but nowhere is the Judiciary mentioned. This is a key issue when pondering the question of whether Obama's policies will move us even further to the left than FDR and LBJ because it will be the Supreme Court which will ultimately sign off on any Obama-created socialist policy - and it's where we can definitively distinguish Obama's future term(s) from FDR's or LBJ's.

Now, any socialist policy that would continue the work of the New Deal or Great Society would need to be passed pursuant to the Commerce Clause. Everyone pause to shudder while we think of what has become of the Commerce Clause. FDR's Supreme Courts (the Hughes Court and the Stone Court) essentially aided FDR's New Deal by drastically expanding the definition of "commerce" and altering the previously entrenched constitutional interpretation of the Clause. The Court packing scheme that FDR tried to use was not a result of the Court stonewalling him - but actually an attempt to get the Court to approve of every single proposed measure, rather than a mere majority of those measures.

The Hughes Court (1930-1941) included such "judicial activists" as Louis Brandeis, Oliver Wendel Holmes, Harlan Stone and even Hughes himself. These Justices sided with FDR's "commerce" interpretations and helped usher in the New Deal. In fact, only four Justices (McReynolds, Butler, Van Devanter and Sutherland -known collectively as the "Four Horsemen") stood up to FDR during the 1930's. The addition of Benjamin Cardozo gave FDR the edge he needed. Also important to note, FDR had nine Supreme Court appointments starting with Hugo Black in 1937 and lasting through Rutledge in 1943. The other seven were Reed, Frankfurter, Douglas, Stone (to Chief Justice), Byrnes and Jackson. By the time the Stone Court (1941-1946) rolled around, it was filled to the brim with FDR supporters. Thus, the New Deal was approved and facilitated by a very progressive, very executive-deferential, Supreme Court. (Though, if any of you Supreme Court history buffs out there want to yell at me about calling Frankfurter an FDR supporter, I'll accept your criticism...he was the only one, though, who really went conservative after appointment.)

As for LBJ, EJB himself admitted in a previous post that the mid-60's was the height of the Progressive Court. LBJ presided under the Warren Court (1953-1969), which included the most liberal/progressive Justices ever amassed on a single bench. William Brennan (my favorite Justice of all time), Thurgood Marshall, Hugo Black (the very same FDR appointment), Harry Blackmun (who authored the Roe decision), Byron White (who, despite the name, sided with Justice Black quite often), Potter Stewart (a centrist who leaned left) and Tom Clark. The Great Society stood absolutely no chance of being ruled unconstitutional by these guys. None.

Now we have Obama, who comes to the Oval Office in the midst of the Rehnquist "Federalist Revolution." The leading case is US v. Lopez, it was the first time in over seven decades that the Supreme Court limited the government's interpretation of the Commerce Clause. Lopez and its progeny (most importantly Morrison) signaled the end of the Progressive judicial movement. It also sent a message to the country that the Court would no longer defer to the President or to Congress; they would be entirely willing to strike down a democratically passed law if they felt it stretched the Constitution too far. This was a monumental swing. Here's the majority in Lopez: Rehnquist, O'Connor, Scalia, Kennedy, Thomas. Now here's the important part - George W. Bush sealed Obama's fate with unbelievably excellent (in conservatives eyes) Supreme Court appointments. Chief Justice Roberts, who clerked for Rehnquist, is his predecessors student - and an apt one at that. Justice Alito will easily fill in the void that O'Connor left. Thus a strong majority still exists (Roberts, Alito, Scalia, Thomas, Kennedy). Even more encouraging for those worried about a socialist rebirth, none of those five are going anywhere for the next eight years. Scalia is 72 but shows no signs of slowing. Kennedy is 72 as well, but has expressed no hint of retirement plans. Thomas is 60. Alito is 58. Roberts is 53 (53! A thirty-year Roberts Court is entirely possible! Blech...). Thus, any Supreme Court vacancies that Obama would get to fill would likely be liberal Justices (I'm looking at you Stevens, Ginsburg and Souter - all of whom have expressed their desire to retire if Obama is elected).

So, I too apologize for the length of this post, but I feel that it was important to note. I think it is the most important issue regarding this debate, because, again, it is the Supreme Court that must ultimately decide the fate of any proposed legislation. Fiscally-conservative conservatives (or Goldwater republicans or classically liberal republicans or small-government conservatives or whatever you guys choose to call yourselves these days) can rest easy in the knowledge that their hold on the judiciary (in the Supreme Court at least) is pretty strong. That's one thing Bush did well for his party.