The Thinking Heads

Releasing the Special Interest Hounds

2009-01-02T14:39:00.005-05:00

So the much anticipated "stimulus" package to be enacted soon after the new Congress comes into session with a price tag potentially reaching $1 Trillion, will likely become the largest pork barrel bill in history. The centerpiece of the plan is infrastructure projects. Now infrastructure can be beneficial if there is a positive return on investment. However, considering the size and the speed at which this bill is likely to be enacted, it is likely going to be dominated by special interest “bridges to nowhere” and not legitimate public investments.

Also embedded within this bill will be all the various special interests who try to direct the funding to their pockets. One of these is the steel industry, which is currently lobbying Congress to include a “made in America” clause into the bill, which would force all projects to use solely American made inputs, specifically in this case – steel. This will only benefit the steel industry at the expense of everyone else. Projects will be slowed down due to supply bottle necks if potential supply sources are limited, and the costs of the projects will be higher. This means a worse deal for the taxpayer. Possibly more importantly however, is that it will divert greater amounts of capital to these projects then would have been required, displacing it from other areas of the economy. Ultimately this will destroy more jobs in other industries that are competing in the capital markets.

The irony is that one of the first things the Bush Administration did when it entered office was place a steel tariff on imports in order to “protect” steel producers. However, many more companies use steel then make it and the net result was a loss of jobs and higher prices for consumers. The Obama Administration would be prudent to not follow in Bush’s footsteps and create his own steel industry bailout at the expense of everyone else.

-EJB

The Next Round of Bailouts: The States

2008-12-29T15:46:00.007-05:00

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.

-EJB

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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.

~JSK

The Next Dick Cheney?

2008-12-23T11:18:00.006-05:00

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.

-EJB

Charts Are Fun

2008-12-20T04:53:00.005-05:00

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 initiatives...at 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.

~JSK

The Auto Bailout Is Here and on Shaky Legal Grounds

2008-12-19T09:17:00.011-05:00

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.

-EJB

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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.

~JSK

Summing Up the Total So Far

2008-12-18T09:48:00.008-05:00

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.

-EJB

Way to be, Portugal

2008-12-13T11:29:00.003-05:00

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.

~JSK

Bailouts: Italian Style

2008-12-11T22:20:00.013-05:00

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."

-EJB

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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.
~JSK

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

2008-12-07T13:39:00.011-05:00

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.

-EJB

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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.

~JSK

Goodbye Gitmo?

2008-12-04T00:59:00.005-05:00

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.

Here.

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.

~JSK

Tax and Spend Liberals

2008-11-28T17:02:00.008-05:00

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

~JSK
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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.

-EJB

How Capitalism Gave Us Thanksgiving

2008-11-26T10:59:00.008-05:00

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. :)

-EJB

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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.

~JSK

On Enemy Combatants, International Law and the War on Terror

2008-11-21T00:03:00.007-05:00

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.

~JSK

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

2008-11-17T22:53:00.007-05:00

-EJB

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"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.

~JSK

A Caricature of Bush's "Conservatism"

2008-11-14T19:09:00.007-05:00

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.

~JSK

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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.

-EJB

News Media Priorities

2008-11-13T02:19:00.003-05:00

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 cnn.com and foxnews.com 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.

~JSK

On Executive Orders and Barack Obama

2008-11-10T03:27:00.002-05:00

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 really...you'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. So...it'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.

~JSK

More on the Fed and the Housing Bubble

2008-11-09T13:17:00.008-05:00

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.

-EJB

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

2008-11-05T14:24:00.010-05:00

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.

-EJB

________________________________________________________________

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 armies...now 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.

~JSK

A Rose By Any Other Name

2008-11-05T08:06:00.004-05:00

Congratulations to President-elect Obama and the Democrat party in general for their victories last night. Obama's quasi-landslide, facilitated by the fact that he pretty much swept every key swing State, surprised me slightly. And the Dem's picked up some key Senate seats (take that, Elizabeth Dole), but will not reach 60 for a super-majority...I guess we'll have to wait a little while longer for the complete nationalization of private industry, the elevation of unions to Big Brother-esque power, free unlimited abortions for every woman and the changing of our national symbol from the bald eagle to the hammer and sickle. Here's hoping for 2010, though.

Obama must obviously be excited - in the same way that any comic who is informed that he'll be performing after Carlos Mencia is excited; safe in the knowledge that he can't possibly do any worse than the last guy. Seriously, if Obama sat in the Oval Office and played Sudoku for 4 years, he'd go down in history as a better President than GWB. Not content to sit around and do nothing, however, Obama apparently has plans and goals.

So it's been less than 12 hours since the Obama victory was announced and, much to my surprise, there has been no noticeable change in life (for better or for worse). The sky did not open up, fire did not rain down upon us and I did not even hear a single trumpet (if you got that last one, I'm impressed. If not, here.) On the flip side, the blind still cannot see, the water in my sink is not wine, wars and genocides continue globally, and it is still true that white colonists enslaved Africans 300 years ago. But like I said above, Obama has plans.

I'd just like to forewarn Obama backers that they should temper their excitement a little. This article, though a few months old, gives good reasons why: he can't possibly find the money for all his change. $6billion for rebuilding bridges and dams? $15 billion for developing clean energy? $10 billion to bail out foreclosures? $18 billion for education? I guess my favorite is $50 million a year to "help make men better fathers" - I assume that means giving that money directly to the dad's so they can buy their kids an IPod...that automatically makes you a better father.

The article notes that Leon Panetta, Bill Clinton's former chief of staff, suggests that Obama is going to have to cut back his plans a bit. Fortunately, Robert Rubin, a former Clinton adviser has been working closely with the Obama campaign. This is a good sign. It may just be that Obama realizes, much like Clinton in the 90's, that he will have to forgo many of his campaign promises in order to focus on deficit-cutting. It will be difficult because Obama promised so much to so many people...but if he takes even a modest step towards balancing the budget and reducing our national deficit, he will be serving the people in a manner more praiseworthy than any government program he had planned on creating.

~JSK

Our Politicians and the Constitution

2008-11-03T02:12:00.009-05:00

I'm just going to go ahead and declare this as unassailably true - politicians, our elected legislators and executives who create and enforce the laws of our country, should know the Constitution. And I'm not talking about knowledge of the Constitution. For instance, it is not enough for a politician to say, "Oh yes, the Constitution! I have heard of that document. They tell me it is fantastic." No. This is not what I mean. Politicians should know the text - line by line, word by word - by memory. It should be ingrained in their hearts; its words should paper their bedroom and office walls (yes I used paper as a verb...deal with it) - because it is the supreme Law of the Land.

So it both saddens and angers me when our leaders reveal a distinct ignorance of, arguably, the most important document in their lives. Let me preface the heart of my post by disclaiming that I am not picking on any one politician - especially Sarah Palin. I'm not highlighting any of these cases with the intent of mocking someone's intelligence. I am posting about this subject because it frightens me that politicians can get away with such dangerous ignorance. They create new laws! These laws are supposed to be in line with the Constitution. How could this be possible if those creating and ratifying these laws do not even understand the governing document? Anyway, let's get into it.

Some of you may have heard Ms. Palin's attack on the media. If not, here's the article, (it links to the ABC article). Ms. Palin points out that some media outlets are refusing to publish her comments about Barack Obama because those outlets deem the statements to be inflammatory and overly negative. Now, I'm not writing to discuss the merits of that claim - let's leave that to the talking heads. The important thing here, though, is that she argues that this refusal to publish violates her First Amendment freedom of speech rights, because her words are being unfairly singled out and will not be heard by the media's audience. This is nonsense. It informs us that Ms. Palin does not understand - or perhaps, may never have read - the First Amendment.

Let me dispatch with her argument quickly before I talk about the policy ramifications of her statement. First off, textually, the First Amendment prohibits only the Federal Government's passing of laws which abridge the freedom of speech ("Congress shall make no law"). This was later extended to the States by the Fourteenth Amendment. Thus, for the most part (with limited exceptions), private individuals can deprive you of your right to free speech. That's why students have a limited First Amendment right in class. That's why private businesses can control - to some extent - what their employees say. That's why I could tell you to be quiet. So, Ms. Palin's First Amendment rights are not violated by privately run media corporations because the First Amendment does not prohibit them from silencing her. But that brings us to the next point...they aren't silencing her! She can still say whatever she darn well pleases. I guess her argument is that, because enough media outlets are refusing to publish her statements, they are keeping a large audience from hearing her thoughts and expressions. There would be some bite to this argument if the media were State-run. Of course, we're not North Korea and media outlets are private. But even if that were not true, Ms. Palin would still have her work cut out for her in court. Why? Because the First Amendment - and this is important to understand - does not create a private right to an audience. We have the right to express ourselves. We do not have a right to have our expressions recognized or even heard by anyone. In fact, in some cases we have the right to be free from hearing certain types of speech (loud campaigning from "sound trucks," for instance). So, Ms. Palin is on no solid ground whatsoever when she makes her case.

So why even bother with this post? Isn't this the type of "gaffe" we promised we wouldn't discuss in our introductory post? I don't believe that it is. This is more than a mere "misinterpretation." Her comments reveal an utter lack of knowledge of Constitutional scholarship. This is dangerous because she could be the President-in-waiting. But the real issue here is that this is just the tip of the iceberg. Like I said, I'm not picking on Palin. I'm calling out every politician who holds irrational views about the Constitution. Just as EJB wrote about politicians and their lack of economic knowledge, I note the problems of electing leaders who do not understand the underlying principles of the laws they are expected to create. This problem is, unfortunately, bipartisan. I've already pointed out Joe Biden's misquoting of the Constitution. There is the famous case of Ronald Reagan's Secretary of State Alexander Haig, who failed to understand the proper Constitutionally-mandated Presidential line of succession (he yelled out "I am in control here" after Reagan was shot). Even President's are guilty of Constitutional ignorance. Nixon famously argued that "when the President does it, it is not illegal." And President Bush has taken Constitutional ignorance to its logical (and deplorable) outcome: shunning the Constitution entirely ( "a goddamn piece of paper").

This is cause for concern. Reading the Constitution ought to be a prerequisite for holding any national public office. It is the backbone of our legal system and the preserver of our freedoms. How can we hope to live in a constitutionally protected society when our leaders can't correctly quote or appropriately reference the document? I'm not arguing that every politician must be a constitutional scholar. I'm simply hoping that those entrusted with the role of creating the laws which govern our society can find it in themselves to take the time to sit down, grab a muffin and some coffee, and just read the damn thing. It's short - I promise.

~JSK

More on The Financial Mess

2008-11-01T05:53:00.006-04:00

So I posted a while back on how despite all the political rhetoric and anti-business bashing going on, that our current economic woes were not simply due to "greed" but rather in large part due to a set of polices that changed market incentives. I talked relatively in depth about the role that monetary policy had in creating the housing asset bubble.

So, here is an article that I would not have been surprised to have found on the editorial page of the Wall Street Journal, but was completely shocked to find it in the Washington Post. Apparently even their editorial board, not normally a bastion of free market thinking, agrees with this premise and is attributing much of the blame to poor governmental market intervention.

...the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

Though I don't agree with its entirety, the article is a good brief overview. I found the comparison to Canada, which I was not familiar with, particularly interesting.

-EJB

___________________________________________________________________

Since the early days of the crash, EJB and I have discussed the matter of blame extensively - via phone, email, text message, pony express and even carrier pigeon. He has done much to convince me that the free market was not entirely to blame and that, in fact, private entities were simply taking advantage of a system which incentivized their risky behavior. Of course, it goes without saying that in events like these, it is impossible to blame any one factor entirely. There were multiple causes, with varying degrees of blameworthiness.

To that end, I point you, the reader, to the blog of one of my favorite people in the world - Richard Posner. I don't always agree with Judge Posner - especially with his attempt to analyze the tort system in purely economic terms - but he has a theory of what happened during the crash that deserves some consideration. The article is essentially Posner's attempt to explain why the warning signs of the crash were ignored or misunderstood. The crux of his argument is this:

Which brings me to the last and most important reason for the neglect of the warning signs, because it suggests the possibility of responding in timely fashion to future risks of financial disaster. That is the absence of a machinery (other than the market itself) for aggregating and analyzing information bearing on large-scale economic risk. Little bits of knowledge about the shakiness of the U.S. and global financial systems were widely dispersed among the staffs of banks and other financial institutions and of regulatory bodies, and among academic economists, financial consultants, accountants, actuaries, rating agencies, and business journalists. But there was no financial counterpart to the CIA to aggregate and analyze the information--to assemble a meaningful mosaic from the scattered pieces. Much of the relevant information was proprietary, and even regulatory agencies lacked access to it. Companies do not like to broadcast bad news, and speculators planning to sell a company's stock short do not announce their intentions, as that would drive the stock price down, prematurely from their standpoint.

Sort of like EJB being surprised to see a free market defense in the Washington Post...I'm utterly shocked to see this argument put forward by the creator of the law and economics movement. But, when one carefully examines the argument, one realizes that Posner is not advocating for government regulation - he is advocating for government oversight. This, I think, is a key difference that has been conflated by the media. Like Posner says, there is no agency that could "aggregate and analyze" scattered pieces of market information. These are important words - aggregating and analyzing information does not include the creation of rules and laws that would constitute regulation. It simply means, there ought to be an agency that gathers information already available to the public, which that agency could then analyze to discover what types of risk or how much risk any given market is prone to. Posner calls this the most important reason for the failure to detect the impending crash and I completely agree. The SEC does not fulfill this important role. A new agency must be created - one which cannot issue regulatory rules, but can only compile and analyze global market information. It should perform a risk assessment function and report its findings to the relevant authorities. Posner, I think you nailed this one.

~JSK

Putting Some Taxes Into Perspective

2008-10-30T22:32:00.011-04:00

So, Exxon Mobil announced its third quarter earnings today, which were a record $14.8 billion for the quarter. And with it comes accusations from politicians that big oil isn't paying its "fair share" of taxes. From all the political noise you would think that oil companies don't pay any taxes at all. Well this couldn't be farther from the truth. The untold story that gets lost in all this corporate bashing is that along with that $14.8 billion in earnings, Exxon Mobil also paid a record $11.3 billi on in income taxes. For the past year, the company has paid $49.1 billion in income taxes.

To put this in perspective, the bottom 50 percent of income earners in the US will have paid an estimated total of $35.5 billion in 2008 (estimated from 2006 data, the most recent available), and this number does not include the rebate checks earlier this year. The effective tax rate for Exxon Mobil was 44.4 percent over this past year while the average rate for the lowest 50 percent of income earners was 3.0 percent in 2006. Keep in mind also that this is only Exxon Mobil's income tax; it does not include royalties, property taxes or their share of the sales tax. So this one company pays more in income taxes then half of the country's working population. So is Exxon Mobil really not paying its "fair share"?

Furthermore, and very importantly, corporate taxes are not really paid by corporations; they only collect them. Corporations are just legal entities for organization. The actual cost or incidence of the corporate tax is really paid for by people as it it gets carried over as a business expense. Workers pay them through lower wages, consumers pay them through higher prices, and investors pay them through lower returns. The corporate tax allows politicians to tax people without them knowing it.

-EJB

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As a point of concurrence, I would not argue that Exxon has not paid its "fair share." But I would also like to add that I think the amount of taxes it has paid (and everyone in the top 1% has paid) is entirely reasonable. EJB rightly points out that Exxon paid more in taxes than the bottom 50% of income owners. However, to be fair, it should be noted that the actual income difference between these two entities is enormous. To qualify for the dubious distinction of being in the bottom 50% of income owners, one must make less than $31,987 a year. The average tax rate for a person in this bracket (per EJB's website stats) was 3.01%...roughly $960. That left your average Joe Bottom-Fifty-Percent with about 31k a year (less state tax and all that jazz). Now, Exxon, this year, had a net income (after taxes) of $43,643,000,000 (about 45 billion). Its gross profit was around $200 billion, with total revenue equaling $404 billion.

Forty-five billion dollars. That's ONE company. I was unable to find any detailed information about the salaries of Exxon execs. However, in 2006, Exxon parted ways with its former CEO, Lee Raymond, and granted him a mind-boggling "retirement package" of $400 million dollars. In addition, he received two years of free home security, use of the corporate jet, a $1 million consulting deal and a car and driver. This is unconscionable. After hearing stories like this, I find it hard to believe that anyone could argue that a tax rate of 22.79% for the upper 1% is too much. Now I know that not everyone at Exxon (or in the 1%, for that matter) receives 9-figure "golden parachutes." But that's not the point...the point is to illustrate the copious amounts of wealth that is undeniably present in Exxon - and in many of the larger, more successful corporations. My point here is that it makes sense to tax the bottom 50% less because the $30k they are left with is far more important to them than the billions which are spread amongst Exxon's managers, directors and shareholders. It is an essential fairness and undoubtedly just.

Furthermore, as the abstract to this article states: Individual income taxes and payroll taxes now account for nearly 80 percent of federal revenue and corporate income tax revenue makes up about two-thirds of the rest. Thus, corporate income tax only accounts for two-thirds of 20% of the federal revenue - roughly 14%. If you consider that the top 1% paid about 40% of all income taxes paid to the United States, this means that approximately 54% of federal revenue is coming from the top 1% (assuming that the set of people within the top 1% and the set of people who pay substantial amounts of corporate tax are the same or nearly the same). I think I can live with the idea of the top 1% paying around 50% of the federal revenue - especially considering that the income cutoff for the bottom half is under $32,000.

I would also urge everyone to read the article that EJB cites. This one. I don't think it fully supports the conclusion that the actual cost of the corporate tax is covered by the people. Instead, after citing previous historical theories on where the burden of the corporate tax falls, the article states:

Modern economic opinion is divided on the incidence of the corporate income tax, but few economists today believe its burden falls entirely on the owners of capital.

Not exactly a ringing endorsement of the view that "the actual cost or incidence of the corporate tax is really paid for by people as it it gets carried over as a business expense." If anything, the article suggests that this could be the case, or is, at most, a popular contemporary economic theory. But again, empirical proof it is not. Corporations, after all, are not simply "legal entities for organization," they are reified by most courts in what has been termed a "useful legal fiction." EJB, like many economists, views the corporation as a network of contracts and organizations - this explains the definition he uses in his post. But like I said, the legal world does not hold such a view. Personally, I agree with EJB's definition and hope that one day courts will drop the unnecessary, confusing and often problematic viewpoint of corporation as "legal person."

Finally, because I am not well-versed enough in economics or tax law (next year...can't wait...), I can only post a brief bit of the previously cited article to muster a defense of the corporate tax:

The arguments in favor of leaving the corporate income tax alone are politically compelling. For one thing, the tax has a proven ability to raise revenue, an important consideration for a nation that has run chronic budget deficits. For another, the old aphorism that “an old tax is a good tax” has some validity. Any major change in the tax code changes expectations and imposes new costs and complications during the transition period. But the most compelling rationale for the corporate income tax is the difficulty in assessing its incidence. Since no political constituency sees itself as the primary payer of the tax, none is willing to lobby aggressively for change. Indeed, the art of taxation, as seventeenth-century French administrator Jean-Baptiste Colbert reportedly said, “consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing.” Judged solely by this standard, the corporate income tax has worked well.

~JSK

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A few things.
On Equating the Bottom 50% of Earners to Exxon Mobil
It is true that as JSK states that from a legal standpoint, corporations are defined as people. However, as he acknowledges for all practical purposes it is an association of contracts for the purpose of organizing labor and capital for the purpose of production. However, despite this practical acknowledgement, he continues to treat Exxon Mobil as an individual in his comparisons. He states, "However, to be fair, it should be noted that the actual income difference between these two entities [bottom 50 percent and Exxon Mobil] is enormous." He compared the income of the median individual, one piece of the group aggregate with the total income of the entire company. But just as the bottom 50 percent of earners is a collection of many individuals, Exxon Mobil is just a collection of over 100,000 employees and tens if not hundreds of millions of individual share holders. If he is going to use the entire income of the company, he has to compare it to the entire income of the bottom 50 percent, or has to compare the income per shareholder (data is not available). So the total before-tax income of Exxon Mobil over the past year was $110.6 billion (I'm not sure where JSK is getting his 200 billion number from). In comparison, the bottom 50 percent of earners in aggregate had wages of $1,016 billion. Clearly the company pays a much higher rate of taxes then individuals in this group.

Side Note: It is true that I used the bottom 50 percent of earners because this was what data was available, but understand what that is exactly. As JSK states, technically the cutoff for this group is about $32,000 per year. However, this includes part time workers and people who didn't work all year. The 50 percent cutoff for people who work full time all year around is about $41,000 and the median household income is about $51,000. Also note that this only includes wages, and not compensation through fringe benefits, which are increasingly becoming a larger portion of total compensation. Also this number does not include income from sources including interest, dividends, capital gains, rents or government transfer payments.

On CEO Pay and the Wealth of Exxon Mobil
Similarly in JSK's discussion about executives, he continues to use the framework of the company being like one person. He insinuates the absurdity of just one company earning 45 billion dollars. But once again, this is money that is divided amongst a huge amount of shareholders. Large companies tend to have more holders then small ones. Though this number is often good for press stories and political attacks, what is more important in analyzing the profitability of a company is not the raw amount of earnings but rather the rate of return on investment. The company's average market capitalization (the total value of its shares) averaged about $410 billion over the last year. Therefore the rate of return on devoting ones money to investment is 45 billion/ 410 billion or about 11 percent. In other words for every 100 dollars a shareholder gives up, he or she received 11 dollars this year in earnings. This is really not that absurd considering the stock market as a whole, for both large and small companies averages about ten percent growth per year. One has to look at proportions, not raw numbers. Just as in comparing the national incomes of differnt countries where we look at it in per-capita terms, one has to look at corporate profits in per-capita terms as well.

This similarly applies to corporate pay. Though JSK may find it personally disturbing that an individual makes millions of dollars per year, it is only because the CEOs of large companies have fiduciary responsibility over a larger amount of shareholder wealth relative to smaller firms. The cost of employing the CEO per dollar of investment is no more then a smaller company paying their execs less. This is why CEOs of large companies tend to make more then CEOs of small companies.

On Who Pays the Corporate Tax
It is true that empirically, it is difficult to measure exactly the incidence of corporate taxation. This isn't because it hasn't been done, but that is it very difficult to get estimates on the elasticities of supply or more plainly the relative responsiveness that labor and capital have to changes in prices. However, logically it has to be paid in some proportion from the three areas I earlier mentioned: labor, capital, and the consumer. Unlike what is often misunderstood to be, corporate profits are not what is available for executive pay; this is the earnings of the entity after expenses including executive compensation. So in theory this is the money to now be divided amongst share holders. But if this money is taxed, then the rate of return on investment is reduced and share holders now no longer invest as much in the company, which reduces demand for labor, and reduces the production of goods, which respectively lower wages and increase the price to the consumer. So all three are hit to some degree. It is increasingly becoming generally agreed upon however that a relatively small percent actually gets paid for by those who own capital, because capital is easily movable. Investment can go to other companies, even other countries or investors may just decide to save less and spend more. Whereas workers can not as easily move to other locations to find work and work income is generally more of a necessity then investment income for most individuals. So in the end the cost of the corporate tax more heavily gets absorbed by reduced wages. This is why most developed nations in the world have recently been slashing their corporate tax rates in order to attract more investment which in turn creates wage growth. The US now has the second highest corporate tax rate in the developed world and I am more then willing to bet that it is one of the reasons why manufacturing activities are moving oversees and done so not at the expense of investors, but workers.

On Who Owns Oil Companies
But for the sake of argument, lets assume that the bulk of the corporate tax does indeed fall on capital, or investors. Well who actually owns these shares? Obviously "rich" people own more stock then poorer people, but unlike the common conception and what JSK implies through his adding the corporate tax rate to the rich 1 percent income tax rate and stating its more fair to tax shareholders, stock ownership is a lot more spread out then most think. The emergence of 401ks, IRAs and online discount brokers, has allowed the middle class to broadly participate in the stock market. As of 2005, an estimated 50.3 percent of US households owned stocks either directly or through mutual funds. The median family income for this group was $65,000 (more then the country average but by no means not in the middle class). Also, about another 15 percent of households who don't own stocks, do so indirectly through participation in pension plans. Therefore, about 65 percent of American households own stocks either directly or indirectly. Also understand that this is a snapshot in time. Young people with few assets don't own as much stock and retired people often liquidate their shares for income, so the percent of households that will have owned stock at some point in their lifetimes is even higher. To the extent that the corporate tax does fall on capital, it is more then a tax on just the rich.

Likewise, the following chart derived from a recent study breaks down oil company ownership in the US.

*All direct ownership not included in IRAs
**Mutual funds not held in IRA's, pensions, hedge funds of by other institutions
*** Among others, includes charitable trusts, university endowments, and other financial companies
Also note that due to the overlap in categories and the use of data from multiple source in the linked study, I had to make an estimate for individual investors, mutual funds, IRA's and pensions where the real percentage value could be off be a couple of percent. The data for executives and hedge funds was directly reported from the study.

Notice how small of a percent of stock ownership is in the hands of the executives, the object of resentment and perceived target of increased taxes on corporations and capital. Also this is for the entire industry; the percent for the large integrated oil and gas companies, such as Exxon Mobil is even less at 0.7 percent. Also note that the bulk of ownership fits in retirement accounts, mutual funds and pensions, all largely owned by the middle class. Many of the individual investors are also small, as it includes your average guy with an E-Trade account.

I agree with the quote that JSK cited about the art of taxation in that it, "consists in so plucking the goose as to obtain the largest possible amount of feathers with the smallest possible amount of hissing", but we derive different meaning from it. The corporate tax is good at this, because it is a hidden tax paid by people who don't even know they are paying it. So as far as raising revenue, sure its effective at JSK implies with the quote, but it comes at significant economic cost. I wonder if the mass of people who not only tolerate corporate taxes but champion them would have the same attitude if they knew they were arguing for themselves to be taxed more?

-EJB

On Judicial Activism

2008-10-28T21:11:00.013-04:00

The NY Times has produced this article which details the staggering amount of conservative judges appointed to the United States Circuit Courts over the last decade or so. The impetus for writing the article is a case which was recently heard by the Eighth Circuit (which, as you can see here, is a combination of red and blue States). A recently passed South Dakota law forces any doctor who is giving advice to a woman contemplating abortion to tell her that "abortions terminate the life of a whole, separate, unique living human being." If the doctor does not utter those precise words, in that specific order, he has committed a crime. I will not here go into the unbelievably nonsensical nature of such a law and how it essentially robs doctors of autonomy and certain First Amendment rights. The law is relevant here because a group of doctors in South Dakota filed suit claiming the law was invalid and seeking to enjoin its enforcement. The District Court sided with the doctors. It deferred to scientists on the matter of whether human life starts at conception. An appellate panel upheld that ruling.

The Eighth Circuit, in a 7-4 decision, overturned the District Court's ruling, claiming that it was "objectively true that human life begins at conception." Apparently, the Eighth Circuit has been staffed with scientists, not judges. I mean...that has to be the case, or else how could seven of them be so sure about the truth of this matter when even the scientific world has yet to reach a solid consensus? Or perhaps, what is much more likely, the judges let their personal beliefs guide their voting in this specific instance.

I write this not to criticize the opinion or even the Eighth Circuit's thinly-veiled activism. What I have a problem with is the fact that not a single conservative commentator has called these judges out on their activist ruling. I speak specifically about all these religious conservatives and even United States Congressmen, who so vocally condemn "liberal activist judges" whenever they feel that those judges have abused their inherent Constitutional powers. Their main claim, of course, is that judges may only interpret the laws created by the legislature - they may not simply create new laws and rights whenever their intuition calls for it. Thus, when in Roe v. Wade the Supreme Court held that the Constitution implied a right to privacy, conservatives were outraged and immediately condemned the Court for its activism. They claimed, and still claim, that the Court was not interpreting the Constitution, but merely creating a new right out of thin air.

Interesting, now, how the tides have turned in the present case. Conservative judges on the Eighth Circuit have now "interpreted" the First Amendment in a way that allows a State to force a doctor to say words which he may not believe (or worse, scientifically disagree with). That's funny...I don't see those words anywhere in the Amendment. I guess the judges must have made that up.

Where are the activism cries? Where are those conservatives who were so concerned about the proper role of the judiciary? What ridiculous hypocrisy. This case reveals the true nature of those who employ the term "judicial activism." It's merely a code word, used by people who disagree with the substantive outcome of any specific case. It is a pejorative insult, slung by those who could not convince a majority of judges to feel the same way they do. And when those judges do agree with them, but employ the same judicial method that those people once abhorred? Not a problem...because they sided with us this time.

Some may say I'm being too partisan on this issue - that I'm not being fair to conservatives because liberals too only like judges who side with them on their issues. But that's not the point. Find me a liberal commentator, professor, scholar or politician who uses the term "activist judge" to describe judges they disagree with. There aren't any (or at least, so few in comparison to conservatives). The "activist judge" slander campaign was mainly a conservative attack on liberal judges. Thus, I believe I have every right to call out those same conservatives when their silence goes seemingly unnoticed by others. That silence speaks volumes about the legitimacy of the "activist judge" critique. It was, and still is, nothing more than a hypocritical slander campaign, leveled against judges who simply disagreed with conservative ideologies.

~JSK

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A few points, both in concurrence and contention.

On Hypocrisy
I looked into this case a bit, not being aware of it prior, and in my limited understanding of it, I have to agree with your point about hypocrisy. The justification for this being Constitutional was essentially that because the bill defined person, "an individual living member of the species Homo sapiens, including the unborn human being during the entire embryonic and fetal ages from fertilization to full gestation" that it was therefore acceptable to mandate this disclosure. This rather tautological argument does appear to be rather "activist" in nature. However, I do disagree with JSK's implied reasoning for why this is in violation of the 1st Amendment. He states that this is faulty at least in part because the state can force doctors to say something that, he may not believe (or worse, scientifically disagree with)." But since when is a personal belief in the truth of a statement a condition of of being allowed to remove oneself from mandatory disclosure laws? Drug companies must disclose "likely" side effects of their drugs, police officers must reiterate Miranda Rights, individuals can not distribute campaign literature unless they disclose from what group funding originated; none of these groups are waived from being forced into this speech because they personally do not agree of believe what is being said. The reality is, the arguments on both sides of this have motives that have less to do with any fundamental right and more to do with a certain policy that they agree in. I'm agreeing with your accusation of hypocrisy, but that charge more then goes around to almost everyone now.

The reality is that neither major party or the mainstream right or left actually believes in fundamentally protecting the Constitution. Social conservatives, as you put it, who base much of the claim for the overturning of Roe in steadfast beliefs in adhering to the Constitution and therefore interpreting it through a originalist viewpoint, are often the same people who are in agreement with expanding the size and role of the welfare state, all of which was declared unconstitutional under an orginalist interpretation. Likewise, those on the Left who have been outraged by recent actions on habius corpus, domestic spying, etc, and argue the their outrage is based in destroying the Constitution are the same people who don't seem to have any problem with Hilary Clinton's proposal, for example, of enacting a foreclosure moratorium, which is a clear violation of contractual rights and obligations as well as the Constitutional ban on post facto laws. Where is the outrage here, if the outrage were indeed grounded in the Constitution? The reality is, that very few people who claim that any given policy should be restricted based on Constitutional grounds actually fundamentaly believe that. It is just a means of appealing to authority in order to achieve the policy goal one wishes.

For example, both of our Presidential candidates have essentially stated they don't actually believe in adhering to the constitution. Obama, in a 2001 radio interview, before he was under the scrutiny of a Presidential campaign, was talking about the Supreme court, the civil rights movement and how it failed to redistribute wealth. He had this to say:

...the Supreme Court never ventured into the issues of redistribution of wealth, and of more basic issues such as political and economic justice in society. To that extent, as radical as I think people try to characterize the Warren Court, it wasn't that radical. It didn't break free from the essential constraints that were placed by the Founding Fathers in the Constitution...

And that hasn't shifted and one of the, I think, tragedies of the civil rights movement was... [the]tendency to lose track of the political and community organizing and activities on the ground that are able to put together the actual coalition of powers through which you bring about redistributive change.

Essentially he is admitting that the Founders intended to place constraints on the powers of the Federal government, specifically in this case the ability to redistribute wealth. He is then criticizing the Court for not "breaking free." Therefore, he has no intention of actually abiding by an objective Constitution, but rather having it "evolve". The entire interview can be listed to here.

Similarly McCain, in reference to his campaign finance laws stated:

"I would rather have a clean government than one where quote First Amendment rights are being respected, that has become corrupt. If I had my choice, I'd rather have the clean government."

So he does not fundamentally believe in individual rights either. Those rights are only protected in so far as the government does not see a more important national cause. But if that was the intent of the Founders, why have a Constitution in the first place? Why not just allow democracy to do whatever the majority deems fit?

On the Idea of Activist Judges
Though I agree with you on the hypocrisy point, my dissent is largely in how you seem to suggest that the notion of an "Activist Judiciary" is only a concocted one and the reality is that there are just differing "judicial philosophies." Though there may be hypocrisy from many of the messengers, that does not change the message, and this is a more then legitimate claim.

It is true that as the Founders would say, "reasonable men can disagree," but we have not been adhering to the notion of a constitutional republic for 70 plus years now. FDR began the dismantling of the Constitution and it has continued ever since. Many of his programs were deemed unconstitutional and therefore he tried to stack the court. He famously stated, "We have been relegated to the horse-and-buggy definition of interstate commerce." So he is saying then that there is an "old" definition of the Constitution. That therefore implies, there is a "new" version. This ultimately means he had no intention of abiding by Constitutional law as had been determined by years of precedent, but rather wanted the Court to become activist. Even the term "Progressive" has its roots in an understanding that we had moved beyond the need for the original meaning of the Constitution and the role of government, There was an acknolegment that advocates of such policies were not adhering to the Constitution as had been in the past.

FDR eventually got what he wanted over the years as he appointed judges that shared his desire. They overturned the recent precedent created when the court originally struck down his Railroad Retirement Act, National Industrial Recovery Act, and Agricultural Adjustment Act. How could this possibly not be "activist" when juts a few years prior, the courts had struck down any expansive definition of the interstate commerce clause? Now we have bastardized the clause to allow the Federal government to get involved in virtually everything and this is the legal backing behind the modern welfare state.

Likewise, Roe v Wade was similarly "activist." Roe's reasoning essentially derived from the following chain of logic.

1. No unreasonable search and seizure as well as no quartering of troops implies that there is a Constitutional right to privacy or at least in ones personal home.

2. Under this notion of this implied right to privacy, state contraceptive bans were deemed unconstitutional in Griswold v. Connecticut.
(So I'm in general agreement to this point)

3.Because Griswold had to do with reproduction, the right to privacy likewise extends to the notion of abortion.

This is a huge very week stretch to get to this last point. The argument for why privacy applied with contraceptives was because this act only occures in the privacy of the home (which is more directly implied in the Constitution) between intimate consenting individuals. Furthermore, and importantly, in order to enforce this law, it would require search and seizure within the home and investigation of sexual behavior. Abortion does not fit into this framework at all. However closely the two may be linked in purpose, they are worlds apart in terms of privacy. Abortions do not take place in the privacy of ones personal home, preventing them does not require investigation of private sexual behavior, and they involve persons(doctors) other than sexual partners. Furthermore, a commercial transaction occurs. If this broad of a definition of privacy where applied in general, then that means that all laws that states enact to regulate commerce, restrict use of drugs and other substances, control what can be manufactured, and mandate things ranging from required smoke detectors to barring the use of led paint in your home are all unconstitutional because they violate the principal of privacy. Obviously there are very few people, and even fewer who argue pasionatly about protecting abortion, that would argue for this.

The other component was citing the 14th amendment. A state law infringing on a fundamental right is reviewed under a rigorous "strict scrutiny" standard to detemine of the Federal Government has the power to overturn a state. The right must be "deeply rooted in the history and traditions" of the American people or "implicit in the concept of ordered liberty" at the time of the Amendment's enactment. But most states had laws restricting abortion at the time, an no one in the late 19th century was arguing abortion was "deeply rooted in history and traditions." So this argument is not only factually incorrect, but absurd.

Casey v Planned Parenthood more or less acknowledged how pathetic this reasoning was.

We do not need to say whether each of us, had we been Members of the Court when the valuation of the state interest came before it as an original matter, would have concluded, as the Roe Court did, that its weight is insufficient to justify a ban on abortions prior to viability even when it is subject to certain exceptions. The matter is not before us in the first instance, and, coming as it does after nearly 20 years of litigation in Roe's wake we are satisfied that the immediate question is not the soundness of Roe's resolution of the issue, but the precedential force that must be accorded to its holding.

So essentially the Court is admitting that the reasoning behind Roe was faulty (or at least is unwilling to reaffirm its reasoning), but it was only upholding its core principals because there was now precedent. But the only reason why there was precedent was because of faulty reasoning!

So I will wait and see what variations of precedent JSK is able to put together to argue for the legitimacy of these two examples I give. However, even if such a thing can be done, it can only be done so because we have had over 70 year are such lose interpretations of the Constitution, where there is virtually no restricts on the power of the state, and individual rights can be created and destroyed at the whim of a justice, so that a "reasonable" individual can now construct justification for basically anything. We are far gone from the days when we actually lived under constitutional government.

-EJB

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On Hypocrisy

I’m glad that EJB agrees with me that the Eighth Circuit opinion strays from a reasonable reading of the Constitution. He unfortunately disagrees with me on the First Amendment issue present in this case. His point, apparently, is that there are other places where individuals are forced to express certain speech that they may otherwise not want to. Let me first say that his rebuttal misses the mark by shifting the debate so that I must now defend his examples. Hypothetically, then, I could simply defend my original point (which was a literal reading of the First Amendment) by refusing to justify his examples and claiming that they too are unconstitutional. But I don’t even need to go that far, because his examples are inapposite.

My original point, of course, was not that the law was unconstitutional simply because the doctors might disagree with their forced utterances – that is merely an aggravating factor. The law is unconstitutional because it serves no legitimate government purpose. A law which violates any constitutional amendment must pass strict scrutiny – that is, it must be narrowly tailored to fulfill a vital government interest. This is where his examples break down. The Miranda warnings pass strict scrutiny because there is a definite and important government interest in making sure that those in custody are aware of their rights. This benefits both the apprehended and the government – the former because he may have been unaware of his rights and the latter because informing someone in custody of their rights will decrease the risk that they can get off on a technicality. Similarly, disclosure laws and product safety warnings serve the important government interest of protecting consumers from information asymmetries and bodily injuries. In the present case, however, the law cannot pass strict scrutiny. What is the important government interest here? Is it to protect life? Clearly it is not because 1) if the woman’s life is in danger, then trying to dissuade her from having an abortion does not protect life but actually does the opposite and 2) the judges have simply decreed what “life” is defined as! EJB correctly points out the tautological nature of their opinion. Judges cannot simply create an important federal interest by mere fiat.

I also totally disagree with EJB’s “reality.” The claim that people who oppose or support abortions “have motives that have less to do with any fundamental right” and more to do with “policy they like” is creating a distinction where there is no difference. That is, the “policy they like” is the protection of a fundamental right! Pro-choice supporters urge protection of privacy and bodily integrity. Pro-life supporters urge the protection of a “right to life.” Thus, there could be nothing further from the truth to hold that either side of this debate could care less about rights.

EJB claims that my accusations of hypocrisy “go[] around to almost everyone now.” Why? How are pro-choice supporters hypocrites for opposing this South Dakota law? Because they tacitly support mandatory disclosure laws or consumer protection laws? Please. I don’t see any justification for leveling this claim.

Apparently, one such justification is that both Presidential candidates do not abide by the Constitution. Here, EJB confuses activism for the notion of the Constitution as a living document. Obama’s comments cannot necessarily be read as “criticizing” the Court for not breaking free of the constraints. It seems to me that that entire quoted section is a defense of the Court – a claim that counters the oft-employed conservative attack of “judicial activism” during the Warren years. This is especially true considering that Obama is talking about the civil rights movement. I think something EJB fails to appreciate is the sui generis nature of the civil rights movement. Because the Constitution was a document that protected and ensconced slavery and racial bias, it was necessary to force a change in the system by straying beyond the literal words of the document. If this is “activism,” then count me in.

On Activist Judges

I am deeply saddened by my learned friend’s belief in the notion of “judicial activism.” He sets up a false dichotomy of “old” Constitutional definitions and “new” ones. This is only the case if you subscribe to the “originalist” school of Constitutional interpretation – a method of interpretation that is so riddled with fallacies that I could not hope to fully expound upon them here (here's an article that dismantles the myth of "originalism" pretty well, though). EJB’s assumption that because FDR disliked the way “interstate commerce” and been defined in 1790 and thus pushed for a more modern interpretation of that term must necessarily imply that judges were “activist,” ignores the simple fact that interstate commerce had actually evolved since 1790! The originalist viewpoint is self-defeating from the start – it assumes, incorrectly, that the Founding Fathers intended every word in the Constitution to be perpetually defined by that era’s parlance. The Framers were not this stupid. The judiciary cannot be this stupid. If that reading were true, then the only guns we could own would be muskets and flint-locks. “Men” (in terms of suffrage) as defined in 1790, would not include those who do not own land. “Cruel and unusual” punishments would mean only those punishments which were, at that time, considered cruel and unusual! The consequences of an “originalist” interpretation are absurd. As Professor Erwin Chemerinsky of Duke Law School puts it:

...specific intent originalism often leads to absurd conclusions.
If the Constitution's meaning is defined only by the drafters'
specific views, the Constitution could not govern the modern world.
Congress' power under article I to raise an Army and Navy could not
include the Air Force because that was not the framers' specific
intent.

Thus I agree that “progressive” means realizing the need to move beyond traditional definitions. This need directly coincides with the actual changing nature of American culture and technology. EJB seems to believe that if a Court overrules precedent, it is being “activist.” This is not the case for if it were so, it would mean that reasonable men could not change their minds on any opinion. That one definition of “interstate commerce” took hold and replaced an older one does not evidence “judicial activism.” It merely recognizes the changing landscape of the American economy.

And this is the real problem with anyone who uses the term “judicial activist.” They tend to level that claim simply because they hold an opposing viewpoint and did not get their way. To claim that a decision is “activist,” one would have to prove that the decision was entirely unreasonable and mere fiat. That the notion of “interstate commerce” broadened is true. That this new interpretation is irrational is just simply not true. The only evidence anyone who levels a claim of judicial activism can ever point to in the hope of proving total unreasonableness is that they disagree and that previous court’s disagreed. If that were enough, then why bother having a Court at all? Every issue would be settled, all words clearly defined. Change and growth would be halted entirely. We would live our lives under a law that pretended to adhere to 18^th Century standards. Does that really make any sense??

OK, so here we go with the Roe stuff. I’m not going to launch into some long-winded defense of the Supreme Court’s reasoning in Roe – not because I can’t, but because this is not a Constitutional Law seminar class. I don’t have the time or the patience to explain why Roe is not “activist.”

I will say this though – someone who claims that Roe v. Wade was “activist” must also claim that certain other subsequent cases were “activist” which relied on Roe or employed similar reasoning. These cases include Brown v. Board of Ed (ordering desegregation of schools), Griswold (holding that States could not criminalize the sale of contraceptives), Loving v. Virginia (holding that States could not criminalize interracial marriage), and Lawrence v. Texas (holding States could not criminalize sodomy). Like Roe, these cases rest on the undeniable fact that society evolves and has evolved since the writing of the Constitution. Thus, under an “originalist” interpretation method – to which, I assume, EJB adheres – there would be: 1) legally segregated schools; 2) State bans on condoms, birth control pills and other contraceptives; 3) State bans on interracial marriage; and 4) the criminalization of homosexuality. Is this what the Framers had in mind for our country? According to EJB’s flawed Fourteenth Amendment analysis, they did. Now, I cannot chastise my friend for incorrectly stating the standards since he is not in law school. The “deeply rooted in the history and traditions” of the American people idea is NOT the standard for finding an implied right. As Justice Kennedy wisely stated in Lawrence v. Texas, it is a starting point, not an endpoint. Supreme Court cases recognize the evolution of societal standards and do not – to the detriment of Justice Scalia – simply employ a “traditional” standard.

As far as Casey “acknowledging” Roe's “weak reasoning,” this point is wholly unsubstantiated. The quote EJB highlights says nothing about the weakness of the argument, but instead simply notes that the legal question that was before the Court in Casey did not involve the soundness of the Court’s method of constitutional interpretation. This is not in any way damaging to the Roe opinion.

The real problem, of course, is that any claim of "judicial activism" is hopelessly subjective and mostly inconsistent. Take EJB's response, for example. Nowhere can he adequately define what "judicial activism" is, although it's pretty clear he believes it exists and is adamantly against it. The closest thing I could find is this: "such lose interpretations of the Constitution, where there is virtually no restricts on the power of the state, and individual rights can be created and destroyed at the whim of a justice, so that a "reasonable" individual can now construct justification for basically anything." The use of words like "loose interpretations," "virtually no restrictions," "created and destroyed," "whim of a justice," and "construct justification for basically anything," already presume his conclusion (that judicial activism exists). What are "loose interpretations?" Who decides that? What objective standard are we holding these decisions up to? What's the difference between "creating" and "protecting" a right? Well, it will please EJB to know that in my two years of Constitutional law studies, I have seen plenty of arguments fail because they could not adequately "construct justifications." For instance, we do not have a right to vote. We do not have a right to life. We do not have a right to death. We do not have a right to dignity. We do not have a right to health care. These are rights that the Court refused to find in the Constitution. Perhaps one day, a new Court will interpret the Constitution to hold one or more of these rights impliedly. But just because we have not respected them previously, does not mean they are non-existent. The Framers even recognized this by adding into the Constitution the Ninth Amendment.

I know I cannot convince those of you who agree with EJB. But I will, however, suggest to you a fantastic book entitled "The Myth of Judicial Activism." It is a wonderfully coherent look at what is meant by the phrase and also a fantastic empirical study of past cases. If it does not convince you of the utter emptiness of the phrase "judicial activist," then I guess we're stuck with a worthless term for the indefinite future...

~JSK

More of This, Please

2008-10-27T20:32:00.002-04:00

We couldn't have put this any better ourselves.

This entire campaign season has really felt like an "endless purgatorial reality show."
It's over soon, right?

~JSK

A Case To Keep an Eye On

2008-10-27T13:46:00.019-04:00

So there is a small obscure legal case that is in the works that has potential to set precedent moving forward that could have an important role in shaping our health care system into the future. Three retired men whom have saved money for private health care coverage for their retirement wish to opt out of the Medicare system. For a second article, you can read here. The crazy part about the system currently however, is that if one opts out of Medicare, that person must also opt out of Social Security. Furthermore, if you are enrolled in Medicare, you are forbidden to purchase additional private insurance outside of a few restricted MediGap programs, which must work in conjunction with the normal medicare system. In addition you can not participate in Health Savings Accounts. Apparently the government won't let you save them money even if you want to.

Anyway, these men wish to opt out of the prior, because they prefer to seek superior, unrationed private care as well as desiring to keep their private information out of the hands of a government bureaucracy. They wish to stay enrolled in Social Security however. The result is that a suit is being taken up.

Now beyond the lunacy of this policy, this struck me as having potential consequences moving forward that are much more profound then the condition of these few men. If the courts indeed rule that the government is within its right to force participation in Medicare if one wishes to participate in Social Security, then this greatly strengthens the ability of the government to ration health care in general through statute. The baby boomers are nearing retirement and therefore they will soon be enrolled in Medicare. Furthermore, it is very likely that there will be an expansion of government run health care programs in the next Congress, so between the two a much larger percent of the population, perhaps even the majority will be enrolled in government run health programs in the near future.

As costs continue to escalate through the entire system, and Medicare and Medicaid move into insolvency, the government will be forced to increase its rationing efforts, restricting access to patients. We are already beginning to see this in Medicare where doctors are not reimbursed 100%, so that they are forced to squeeze more patients into a short period of time, or in some cases doctors are just refusing to participate in Medicare or are limiting the amount of new patients. If the courts rule in favor of the current government policy, this will allow it to enact in the future a rationing method long employed by the Canadian system, that being that it is illegal to purchase privately funded health care even if done so with your own money. Though I doubt it would be explicitly made illegal here, for all practical purposes is would be so if it were tied to other programs, just as Social Security and Medicare currently are, so that if you do go ahead and purchase private care, you lose access to all other programs or see various tax credits and deductions nullified. This is how the Federal Government currently gets away with mandating that states comply with the drinking age; they threaten to take away hiway funding if they don't cooperate.

The argument for such a policy in Canada has been that it is unfair to purchase health care privately that uses resources that can not be used by the public system. So as a means of rationing to reduce costs, this action is prohibited. This forces everyone to utilize the rationed public system where certain procedures are restricted. The result is that many Canadians who have money often come to Boston, Cleveland or Seattle for superior treatment. Canada's argument is very similar to the rationale used in the 90's when Social Security and Medicare were linked, where the argument at the time was to prevent a "two tiered system." It was unfair that some individuals would be able to have higher quality treatment, even if they could afford it without burden to the tax payer.

So keep an eye on this. I will likely comment on it when a decision is reached. It may be an indicator of to what degree you will have options and choice in your health care moving forward into the future.

-EJB

__________________________________________________________________

Interesting case, EJB. It sounds like an issue that, no matter what the trial outcome, will be appealed to the Circuit and eventually Supreme Court. Let's just hope they feel that the issue is ripe for certiorari, or else the question may never be fully answered. I too recognize the bizarre nature of this policy. It seems difficult to argue that the connection between Social Security and Medicare is so strong that one cannot subscribe to the former without participating in the latter. This will come in handy later, but first, a few clarifications.

Contrary to EJB's assertion, Canada's health care system does not prohibit individuals from buying private health care. It leaves this decision up to the individual provinces, most of which have simply enacted legislation that has disincentivized private health care. Dr. Robert Steinbrook wrote this article, published in the New England Journal of Medicine, calling for the Canadian government to let private health care providers increase the types of services they can provide. He points out that while much of Canada's total health care spending comes from the public sector, there is still room, even under the current system, for private providers:

As explained in a 2003 report, the Canadian health care systemis "unique in the world in that it bans coverage of . . .[physician and hospital] core services by private insurancecompanies, allowing supplemental insurance only for perquisitessuch as private hospital rooms. This ban constrains the emergenceof a parallel private medical or hospital sector and puts pressureon the provinces to meet the expectations of middle-class Canadians."¹That only 70 percent of total health care funding in Canadacomes from the public sector — less than in many Europeancountries but considerably more than in the United States —reflects the fact that private payments are common for otherexpenditures, including drugs, dental services, optometry, andhome care. Private insurance and private care are also commonin niche areas, such as work-related injuries and cosmetic surgery.

I also have the feeling that the US government is in no rush to duplicate the Canadian system because of its notorious "wait lists." And I agree with EJB that these wait lists are deplorable. However, this one negative consequence of the Canadian system should not end the conversation regarding the efficacy of universal health care. Dr. Robert Bell, in a letter to the WSJ, writes that Canadians spend about 55% of what Americans do on health care and enjoy longer life-expectancies and lower infant mortality rates. He also details a plan to target and eliminate long waiting times. Let's not short shrift the Canadian system.

Similarly, the Canadian Supreme Court recently ruled in Chaoulli v. Quebec that the 1984 Health Insurance Act cannot be read to prohibit the purchase of private health insurance. The Health Insurance Act actually left it up to each province to decide for itself whether it wanted to allow or prohibit private health care providers. This case marks the end of that reading - at least in Quebec - because such an interpretation would violate Canadian citizens' right to life (something we could really use down here in the States).

The case EJB briefly refers to when he mentions Congress conditioning highway funds on state drinking laws is South Dakota v. Dole. There, a 7-2 Supreme Court majority, headed by Chief Justice William Rehnquist, held that Congress has the power, as provided by the Taxing and Spending Clause, to attach reasonable conditions to funds it disburses to the States. EJB claims that the Federal Government "gets away" with doing this; but actually it is a perfectly legitimate power that has always been assumed as part of the Taxing and Spending power. It is important to notice, I think, just who supported this decision. Both Justice Scalia and Justice Marshall joined with the majority opinion. This startling fact (startling because Scalia is probably the most conservative Justice in recent memory and Marshall was quite possibly the most liberal) reveals that the decision was not political. Justices with drastically differing political views were able to overcome those differences and decide that a proper interpretation of the Constitution called for this holding.

Two ideas follow from this. First, the power of Congress to attach reasonable conditions to disbursements is not unlimited. Dole sets up four restrictions for Congressional conditioned spending: 1) it must promote the "general welfare"; 2) the condition must be explicit and clear; 3) there must be a reasonable relation to some legitimate federal interest; 4) other Constitutional provisions may supersede the conditional grants.

Thus, we would have to ask if tying Medicare to Social Security meets these four conditions. To me, that seems a very difficult task. However, it may not even get to that stage. For, it is important to note that the Dole case involved the Federal Government disbursing money to the States in exchange for their cooperation in certain federal mandates/programs. Dole has nothing to say about individuals accepting Federal money. There may be significant distinguishing characteristics here that make Dole inapposite - for instance, the idea that the Taxing and Spending Clause does not extend its reach to private citizens, but only applies to the States. It is also important to consider that while Medicare is considered a privilege, Social Security payments (once established) are considered to be a property right, the removal of which would be subject to the the due process provision of the Fourteenth Amendment, and actionable via 42 U.S.C. 1983.

So, like I said earlier, there are many legal issues here that I hope the higher courts decide to deal with. Will Dole apply, thus shifting the burden onto the Government to defend its conditioning one program on another? Will Goldberg apply, thus forcing the Court to deal with Due Process concerns in the event that social security entitlements are lost? I would add one more thing, in response to EJB's concerns that any decision would be a catalyzing precedent for further liberalization. I think that, no matter what the outcome, the District Judge will likely attempt to limit her holding to the specific facts of the case. Courts do this when dealing with matters where they are likely to be walking a fine line between interpreting laws and violating the separation of powers. I would be surprised to find a decision written in broad terms. Thus the decision might not have has many negative or even positive consequences as might be imagined.

~JSK

___________________________

JSK brings up a lot of points here; I am going to try to hit all of them.

1. "Canada's health care system does not prohibit individuals from buying private health care." So yes, this is not a complete ban as JSK has said, and in some cases it it not actually a banned, but rather an implicit one by creating legislation that highly disincentivizes the development of private methods of delivering care. Even though people buy many "extras" through private means, even JSK admits though his quote that, "...it bans coverage of . . .[physician and hospital] core services by private insurancecompanies." My point still stands, that even if this is not universal through the entire system, banning or severely limiting private access is still a heavily employed method of rationing in Canada.

2. [Canadians] enjoy longer life-expectancies and lower infant mortality rates.
This is a classic example of the expression "there are lies, bigger lies, and statistics." When you actually look at what constitutes the data behind this often repeated "fact" that government run health care proponents often use, you see the truth is quite different.

Infant mortality rates are relatively high in the US compared to other developed nations for two reasons. First, the definition of infant mortality that is used by different nations differs greatly and the US definition is one of the most highly inclusive ones, so that many new born children who die in other nations are not reported in the statistic as they are in the US. As Economist John Goodman concludes in his study:

"Taking into account such data-reporting differences, the rates of low-birth-weight babies born in America are about the same as other developed countries in the OECD [Organization for Economic Cooperation and Development]. Likewise, infant mortality rates, adjusted for the distribution of newborns by weight, are about the same."

The second reason, and to me what makes the fact that we are not lower then most nations more impressive, is that in the US, when prebirth conditions become threatening, we often attempt to save the unborn children via C-Section, and at a rate much higher then in most countries. Many are indeed saved that would have died (myself included; I was two months premature); however, the mortality rates of these sickened early born children are higher the average. In other less developed countries they would have never been born in the first place and therefore would have not been included in the mortality statistic t begin with.

Similarly, life expectancy statistics have to be taken with a grain of sale, because they include factors outside that of the heath care system. So for instance because we drive more then most nations, we have a higher rate of death by car accidents. We also for whatever reasons, have a relatively high homicide rate. Both of these are not reflective of the health care system. As Economist Mark Perry points out, if life expectancy data is adjusted for car fatalities and homicide, the US has the highest life expectancy rate in the world. Now whether these calculations are correct or not, doesn't change the point that there are many factors that go into life expectancy other then the quality of heath care. I would argue that the American propensity for obesity (our eating and exercise habits) has a lot to do with dragging down our life expectancy, and not the health care system.

This is why when actually trying to analyze the merits of a health care system compared to another, we should not be primarily looking at statistics that have a multitude of factors, but rather look at metrics that actually measure how well a heath care system works once it is employed. When you look at things like cancer survival rates, the US has the highest in the world. So for instance, "Women who get breast cancer in Europe are four times more likely to be diagnosed when the tumor has spread and are less likely to survive the disease than women in the United States." Or another is, "For leukemia, for example, the American survival rate is almost 50%. The European rate is significantly lower, at just 35%. Esophaegeal carcinoma is often deadly - but American patients far much better than those across the Atlantic. 5 year rates in the U.S. are 12%; European, just 6%." The chart to the left from the Economist shows US 5 year prostate cancer survival rates. Both avove quoted stats and others found here.

I think my point is made.

3. Canadians spend about 55% of what Americans do on health care (Presumably at no lost benefit, which I talked about in my previous point). But why do Canadians and other nations with government health care spend less? Well there are many reasons but I will address two of the major ones, if not the primary reasons.

Other nations give you less health care, essentially you get what you pay for. Through rationing techniques, government restrict access to health care in various ways in order to reduce costs. The result is a much lower "quantity" of health care. So for instance:

Canada lags badly behind the United States in terms of basic diagnostic machinery. Indeed, Canada lags behind most Western countries. The OECD analyses the availability of such machinery and ranks the various countries. Canada's results are striking: it ranks 21st of 28 OECD nations for CAT scanners, 19th of 22 in availability of lithotriptors (used to treat kidney stones and gallstones), and 19th of 27 in availability of MRIs. Canada ranks 6th of 17 in availability of radiation equipment.

This would be the reason why the wait times are so notoriously long in Canada; there simply isn't enough "health care" available due to rationing. And despite this being an election year issue every cycle and more and more money promises have been made to lessen lines, they continuously get worse. And as I pointed out in my previous point, this IS done at the expense of quality, which can even be anecdotaly confirmed by the fact that so many Canadians come to the US for health treatment. Another example:

Antipsychotics, the main treatment for schizophrenia, have been revolutionized in the past decade. Newer drugs are linked with fewer and more benign side effects. In the United States, 60% are on the newer drugs. In Spain, only 20% are, while in Germany, fewer still at just 10%. Some patients, of course, may opt for the older medications but studies suggest most prefer (and do better on) the new so-called atypical antipsychotics. Thus, when it comes to the treatment of mental illness, Europeans get the best the 1970s provided.

The second major reason for why heath care costs so much here is that through our tax subsidy system, we incentivize over consumption. Because insurance paid for by your employer is tax free, but expenditures paid out of pocket have to be done so with after tax income, there is an invective for the both the employer and the employee to structure compensation packages with larger amounts of insurance and less cash. The result is the evolution of heath insurance in this country to something that is less like insurance and more like prepaid care via low deductibles and co payments. As is a problem with any type of third party payer system, private or public, when the cost of a transaction is paid for up front and not at the point of sale, there is an incetive to purchase excessive amount because the marginal cost of doing so is nothing or very little. So for instance, instead of waiting to go to your doctor on Monday for a minor ill, you go to the more expensive emergency room on Sunday because it only costs you at that point of transaction a small copay. Without this tax subsidy, health insurance would have likely developed more in line with auto insurance, where regularly occurring payments are done out of pocket, and the insurance only kicks in when you have catastrophic damage. This would reduce the moral hazard of over consumption and reduce prices as demand falls. A more detailed discussion can be found here. A survey illustrating this moral hazard can be read here. What we have seen is that the US pays a very low percentage of its expenses out of pocket even compared to most western nations, and this trend has only increased over time as the chart shows.

I would also mention as a side note, that Canada has lower drug cost because of price controls. US firms continue to sell drugs to Canadians at these lower prices because the marginal cost of producing more pills is less then the price received; however, in the absence of the American market, the more costly fixed cost of research and development could not be covered. In essence US consumers are subsidizing low cost Canadian drugs. So we are partially paying for their health system and though I am not familiar with the legal technicalities of it, I am surprised the US had not brought suit to Canada in the WTO over this for unfair trade practices.

4. Regarding the Highway Funding Analogy, States don't "get away" Perhaps I was unclear, but I am not calling into question the legality of the Federal government withholding funding to states. My analogy was simply that like in the case where the Federal government is not allowed to explicitly force the states into the drinking age laws, so that it "gets away" with this by implicitly doing so via essentially extorting the states, a similar technique could be used in the case of restricting private health care by extorting you through the loss of other programs such as Social Security.

5. The conditions that the government has to comply with to withhold entitlements and Goldberg v. Kelly and Social Security as a property right. I agree that the current link between SS and Medicare seems iffy, but the whole premise of my post was watch this case. IF the courts uphold the move, then that would imply that the 4 criteria that JSK outlines have indeed been interpreted to have been upheld. If this is the case, it follows that this rationale could be used to ration health care moving forward.

Furthermore, I can't say I was aware of Goldberg v Kelly, but I was aware of Helvering v. Davis, which stated that, "The proceeds of both [employee and employer] taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way." This essentially means that you have no right to any benefit simply because you have paid into the system your whole life. FICA payments are simply taxes like any other. I am not going to comment further, not knowing the technicalities that differentiate these two cased. Perhaps it is simply because of my lack of knowledge in the subject, but barring that I wouldn't be surprised that to say that at a minimum there is some fuzziness between these two cases and further precedent will have to be written in order to clarify exactly if the government can deny SS. But either way, it is mute because as JSK states, Medicare is a "privilege" legally and other heath care would likely fall under this same notion.

So If you've made it this far, I applaud you. At least it will justify the greatly above average time it took me to write this response. :)

-EJB

Financial Bailout Act III

2008-10-26T23:01:00.006-04:00

So I earlier posted on the financial bailout and among other things talked about how in our panic, the purpose of the $850 billion bill was quickly evolving, and that Congress basically gave the Treasury an open ended check. First it was to buy bad mortgage securities, then it was to buy equity stakes in banks, eventually forcing nine institutions to sell part of themselves to the government. Now, as lobbying forces descend on Washington armed with the precedent of government bailouts, other industries are lining up for th eir share.

Insurers, automakers and American subsidiaries of foreign banks all want the Treasury Department to cut them a piece of the largest government rescue in U.S. history.
The betting is that many with their hands out will be successful, especially with financial markets in a stomach-churning dive and predictions the economy is about to tumble into a deep recession.
Lobbying efforts are intensifying.
The Financial Services Roundtable wrote Treasury officials on Friday requesting that the initiative to buy $250 billion in bank stock grow to cover insurers, auto companies, securities dealers and U.S. subsidiaries of foreign companies, including banks.

Who's going to be next? Lets just socialize all risk in the economy and make the government part owner in every industry? I've lost some money in the stock market recently. Where's my bailout?

-EJB

_________________________________________________________________

I must preface my response by noting that there is a certain, noticeable, interior inconsistency between the first and second parts of my blabbering. This is because the first part (in which I defend the policy) is premised on the idea that the bailout was intended to remedy the current credit freeze. The second part, which seems contradictory, is only so if one rejects the premise underlying the first part; namely, that the bailout is not going to increase liquidity and stimulate bank loans, but will, instead, simply act to reshape the relationship between industry and government.

I think allowing other industries to accept some of the bailout money is actually a pretty good idea. The open-endedness of the bailout plan allows for a high degree of flexibility in its approach to dealing with the financial crisis. If the 850 billion came conditioned upon its use for one or two narrowly defined purposes, then the Treasury would be unable to alter its plan in the event that lawmakers and economists discover new and better ways to help ease the crunch. I think it's also important to note that the article does not assert that these industries are asking for a larger bailout. Thus, the bailout amount would stay the same; however, different portions of it would go towards various uses which had not been originally discussed.

Now I see that part of EJB's argument is a type of slippery slope idea and it's probably a valid one. Allowing different industries to take a piece of the government handout would, perhaps, set a dangerous precedent for the future - should the economic condition worsen.

However, the credit market is absolutely frozen. I supported the bailout because, originally, it was intended to improve the liquidity of these major banks - thus allowing them to loan and borrow more money. The article EJB links to seems to suggest that allowing these other industries to take a piece of the pie will also help to unfreeze the credit market:
"The institutions that are excluded play a vital role in the U.S. economy by providing liquidity to the market," Bartlett wrote Neel Kashkari, the Treasury Department official running the bailout program.

If that were true, I'd have to fully support the move (especially since I'm crossing my fingers that my law school loans come through for one more year).

Unfortunately, there's this news from the NY Times. It turns out banks aren't actually using the new money to make new loans - they're simply buying out smaller banks. I was going to make a separate post about this, but I figure this is as good a time as any to break the bad news. Under the guise of "improving liquidity in the market by incentivizing new bank loans," the Treasury has essentially begun to fund a new round of bank consolidations.

This is not good. Instead of targeting the crippling credit freeze, the government has decided it would rather try to reshape the banking industry. I'm not bothered by the pro's or con's of this move - I'm bothered by the fact that I don't know the pro's or con's of that move because we never heard any debate on the issue. The government's ulterior motive was never discussed ex ante. We ought to have been fully informed so that Congress could have had a meaningful debate on the subject.

So, linking this back to EJB's initial post. The article he links to seems to claim that letting other industries in on the bailout money would help to improve liquidity and would require no extra tax-payer money. The truth of that proposition, though, must be seriously scrutinized in light of the fact that "improving liquidity" by helping banks to make new loans has seemingly ceased to be a governmental priority. EJB asks, "Where's my bailout?" Until this week, I could have responded that he doesn't get one because bailing him out would not significantly help improve the status of our credit market. But, apparently, no part of the bailout is doing this anyway. Nuts.

~JSK

Not Such A Crazy Plan?

2008-10-26T03:55:00.009-04:00

I don't even know why I'm bothering to open up this line of discussion, but in the interest of presenting all sides of the story: 401K's are failing.

Say what you will about trust in the free market, but the simple fact is many people lost up to 20% on their 401k's with this crash. Imagine if social security had been privatized. 401k's open individual employees to the systemic risks of investing in the market. This is especially dangerous when your average employee at any given job is uninformed about how to even manage investments. Plus, those who couldn't get loans before (and many who can't get loans now) are dipping into their 401k's just to pay off debt. What do we say to them? Tough luck?

I'm not arguing for nationalization, I still don't think it's coming. But it is pretty clear that, like Social Security, something has to be done because there is just no money to sustain 401k's.

The now infamous Teresa Ghilarducci, the professor who is testifying before Congress, calculated a possible scenario for those with $100,000 in their 401ks:

"She calculated what you would end up with in 10 years if you had $100,000 in your account in August and lost 20 percent of it last month. If you were paying 2 percent in administration fees — as many 401(k) plans charge — and the stock market remained flat for three years — a real possibility given how it has performed — and then earned 1 percent per year — as it did in the 1970s — you would have $67,000 by the end of the decade, she said." “With a flat market at best and high fees, it is likely they will have less than they and their employer put in,” she said.

I think I'm going to start putting some money under my mattress...

~JSK

p.s. - This is in no way a concession of my previously (and currently) held beliefs that Congress will not nationalize 401k's and that fear of such action is premature.

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It appears this topic just won't die, but I'll still indulge. The argument that 401ks are "failing" is ludicrous. We are in a bear market period, just as we have had before. Stocks by their nature are volatile, and that is why stock investment is very risky in the short run. But this volatility is why investors on average achieve high rates of return (8 percent inflation adjusted) in the long run compared to binds (3 percent) and why long term, diversified investment (like in 401ks) is very safe. As I love charts, I point your attention to the one below, which shows the cumulative, inflation adjusted value of a $1,ooo dollar investment in 1962 thought 2007 (this was the last year of annual data), which is approximately the time that one works in his or her career (45 years). But even add roughly a 20% drop for 2008, and you would still be better off.

There has never been a 20 year period in which the stock market was lower at the end of it compared to the beginning, including the Great Depression. To illustrate my point even further, I included a 1 percent annual stock account fee and a 0 percent bond account fee (in reality, bonds have fees as well, and any government run program will also have costs). The professor's 2 percent fee example is high; the average is closer to 1%. But even with 2 percent, stocks still outperform bonds. Furthermore, many of these fees are under the control of the participant based on what funds they buy and whether they want paper or electronic statements or other options they can chose from.

But this kind of analysis, that the professor gives, of being a lump sum over a period of time is deceiving, because this isn't even how these accounts work. First, you don't place a lump sum; you buy regular increments over a period of time so that you employ what is called dollar cost averaging. This means you buy some shares when they are low, some when they are high and over time, this smooths out the performance and makes it less volatile. The even bigger fallacy in her argument is that she cherry picked a period to begin the drop and then took a historical period that happened to be bad as assumed this to be the norm. In reality, if you only had ten years left before retirement (how her example implies), then you likely wouldn't have all stocks anyway. Every personal investment adviser will tell you that when your young and have time to wait, you buy more stocks in your retirement accounts, but as you get older you buy more bonds for your accounts because you cant afford to risk the drop off. They even have time adjusted accounts now that automatically adjust this for you so you don't have to manage it yourself.

Now yes, you could ignore this advise and keep all stocks, but you are given "options" with 401ks which JSK described in a recent post and seems to agree is superior then not having options. This is the real reason why certain people dislike these accounts. Any time people are given freedom to chose their behavior, there is going to be an inequality of results. Some people will take the better advise, and some know how to manage investment better. A government run program, even if its returns are far worse makes it "fair" by forcing equality of being on everyone.

But lets go with the professor's very flawed example for a moment. Lets assume we'll now have another 1970s period. Well why did the 70's stock market act the way it did? Well quite the opposite of being the "free market" it was because government monetary and fiscal policy destroyed the stock market. Operating under the now proven false premise of the Phillip's Curve, the Federal Reserve inflated the money supply drastically causing the heavy inflation of that period. Now mix this with a much higher nominal capital gains tax rate in the 70's, which in turn is not adjusted for inflation, and the result is an average inflation adjusted capital gains tax of between 80 percent and 150 percent over this period! No wonder the stock market didn't perform well. If the government is going to take your entire gain, why would one invest? For more on this you can read this.

As long as we don't employ these similar policies again, the stock market should not have a similar long run behavior. Now maybe government will and then we can argue for the professor's plan, but that sounds similar to arguing that the remedy for taking a daily dose of poison is to take the counter medication. Well why not just stop taking the poison in the first place?

Though not by design, the 70's era stock market was a living example of how Lenin described how the bourgeoisie (those who own capital, ie stocks) could be destroyed, "the way to crush the bourgeoisie is to grind them between the millstones of taxation and inflation."

If we decide to learn from our past, a similar scenario will not occur.

-EJB

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I'm not going to defend the Professor's work, because I really don't know enough about the details and mechanisms of this process. I'll leave it up to the readers to do their own research and come to their own conclusions about whether to believe EJB or not. But I will point out one thing which sticks out as a fundamental philosophical point.

EJB says:

Now yes, you could ignore this advise and keep all stocks, but you are given "options" with 401ks which JSK described in a recent post and seems to agree is superior then not having options. This is the real reason why certain people dislike these accounts. Any time people are given freedom to chose their behavior, there is going to be an inequality of results. Some people will take the better advise, and some know how to manage investment better. A government run program, even if its returns are far worse makes it "fair" by forcing equality of being on everyone.

First of all, returns from government-run programs are only "far worse" if you actually receive and follow good advice regarding your 401k. Because your 401k is subject to the volatility and systemic risk inherent in the market, there is absolutely no guarantee that you'll make any positive return whatsoever. Some people are just more naturally risk averse than others and it seems to me that there are those who would rather take the government run program because you're guaranteed at least SOMETHING. 401k's, however, are phasing pensions out and this is a problem. EJB is correct to say that I am in favor of options...thus I would say that 401k's should continue to exist, but only as supplements to a pension plan, if the employee so desires.

Another fault with EJBs reasoning here is the idea that people might "ignore" good advice. What this assumes is that they even have access to that advice in the first place, which cannot be assumed. Not all of us enjoy researching market information as much as EJB seems to. Not everyone even has basic access to the means of initiating that research. So it is just not the case that, if your 401k suffers, it's because you "ignored" good advice. Even those who do enjoy access to market advice can fall prey to incompetency, through no fault of their own. To these people, EJB would seem to say 'tough luck.' Suddenly equality, and specifically equality of opportunity, is a vice? Pension plans "force" equality on people?

If this were merely a case about "inequality of results" then I would graciously accept the argument that 401k's are a better means of retirement savings. But this euphemistic language hides the fact that what's really happening here is that the 401k system favors those who already have the means to access competent retirement/market advice. These are the people who need the least help with retirement. It is the menial job workers, those who cannot hire a private investment firm to aid them with their account, that suffer the most when the market tanks. We should not take away their ability to rely on their employers for retirement, like so many did during the time when pensions were standard. 401k's can stay, but they should not wholly replace pension plans.

~JSK

Democracy Restored In NYC; Cabs Continue To Stink

2008-10-25T16:02:00.005-04:00

A funny thing happened in NYC this week. The City Council voted 29-22 to extend the Mayoral term limit so that current Mayor Michael Bloomberg could run for a third term. This is interesting for a few reasons: first, it was Bloomberg himself that pushed for the adoption of these term limits. Second, it is another indication of how quickly rules can be bypassed when a "crisis" is afoot. Third, it engages multi-faceted democratic discussions. It is this third point that I wish to expound upon.

When the vote was over and the course of action decided, spectators from the gallery booed the decision. Some city council members and many NYC citizens were vehemently opposed, not necessarily to the bill itself, but to the process by which the measure was enacted. Many opponents argued that the measure should be put to a city-wide referendum because 1) the bill that put the term limits in place was enacted via referendum; and 2) it's a more democratic way of enacting legislation. Legal experts agreed that the Council was acting within its rights to overturn a law enacted by referendum without holding a similar referendum. But claim #2 is the interesting one.

Essentially, what the opposing Council-members and citizens claim is that, by refusing the hold a public referendum, the Council is acting undemocratically. It must be true, then, that these opponents assume that democracy, or democratic values, are valuable. What's really interesting is that term-limits themselves are a decidedly undemocratic institution. Term limits limit the choice of the citizens by striking from the pool of candidates one extra candidate, namely, the current mayor. Think about it, if one were to seriously value and respect democracy, then one would have to argue for increasing the pool of possible candidates - trusting in the good judgment of the citizens to vote wisely. Thus the concern that a mayor could gain office and turn into some sort of un-oustable tyrant is checked by the democratic institution we call voting.

Thus, the bill's opponents are arguing that the Council should be more democratic in allowing the people to impose undemocratic measures on the City. This seems awfully hypocritical.

What opponents also need to understand is that this bill does not guarantee Bloomberg a third tirm - it does not automatically make him Mayor again. All it does is allow him to run for a third term. What are the opponents of this bill so afraid of? If the people are against Bloomberg's candidacy, they will refuse to vote for him. Problem solved.

The truth behind this matter, I believe, is that these "opponents of the Council" are actually just people who disagree with or dislike Bloomberg himself. They were hoping to get rid of him via statutory limit, whereas now they'll have to go about it the democratic way - securing enough votes to win the majority. So, back to the drawing board, Bloomberg detractors. You have a lot of work to do if you plan on convincing the rest of us New Yorkers that Bloomberg ought not to be Mayor.

~JSK

So This Just Keeps Getting Better and Better

2008-10-24T12:05:00.012-04:00

So yesterday, I posted about Argentina grabbing private retirement accounts and transferring them into public pensions in order to fund the government. JSK and most of the commentators couldn't possibly believe this could happen in the US.

Now, I must have been ahead of the curve (if only I could pick stocks like this). In today's online version of USNews, there a piece about how Congressional Democrats have invited a professor to testify in front of a Ways and Means Subcommittee to explain her plan to do something very similar to Argentina's action. This is also talked about more in depth here. Her plan is in short:

"In place of 401(k) plans, she would have workers transfer their dough into government-created 'guaranteed retirement accounts' for every worker. The government would deposit $600 (inflation indexed) every year into the GRAs. Each worker would also have to save 5 percent of pay into the accounts, to which the government would pay a measly 3 percent return."

The chairman of the appropriate subcommittee, Rep. Jim McDermott (D) had this to say regarding this proposal:

"the savings rate isn't going up for the investment of $80 billion [in 401(k) tax breaks], we have to start to think about whether or not we want to continue to invest that $80 billion for a policy that's not generating what we now say it should."

(Read: This is my excuse for taking your tax preferred accounts)

Now this doesn't mean this will happen, and even if a bulk of Congress wanted to, I doubt the new Congress will spend political capital on this move in the short run. However, the fact that this is even being discussed in a serious manner as a possibility is a start in that direction . Maybe we aren't so far from this after all and my my post yesterday wasn't so crazy? Maybe if the stock market declines further and people start panicking more, people will be willing to tolerate another power grab? As one investment fund manager said:

“People are afraid because their accounts are seeing some volatility, so Democrats will seize on the opportunity to attack a program where investors control their own destiny.”

Crisis is the health of state anyone?

-EJB

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A careful read of the article reveals that the plan the professor has in mind is likely to be ignored. If any action is to take place, it seems much more likely that (as noted in the second article EJB posts) 401K's will be taxed. I have less of a problem with this, since it would not constitute an illegal taking. Actually, even the first plan EJB links to isn't a perfect analog of the Argentina fiasco. Employer-sponsored 401-K's would be nationalized, but individual retirement funds outside of those would be left untouched. Thus one could keep their Roth-IRA out of the hands of the evil government.

Shocking, also, that an investment fund manager would be upset that government is looking to increase its control over private investment management. Perhaps, if we sink into a second Great Depression, this type of Argentina-style legislation would pass. But I still believe that EJB's concerns are premature. Congress, even a super majority democrat Congress, would be unlikely to pass these measures. That's because history has shown that just because the President and the Congress are controlled by the same party, doesn't mean that party's national agenda will be automatically ratified. NPR does a good job of illustrating this here.

Buck up, everyone. We will not descend into socialism. The sky is not falling. So confident am I of this fact, that I have offered EJB a wager of $20. If an Argentina-style bill is passed by Congress, my money is his. If it doesn't, I'll gladly take his twenty. He has yet to accept and likely never will, because this legislation will not pass. (Pictured above: EJB, in theaters everywhere Nov. 4th)

~JSK

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I can see that you continue to perfect your ad hominen capabilities which each passing day; you really need to stop doing that.

But I believe your outright dismissal of any reasonable chance of this occurring is rather naive. Congressional hearings are almost never used as actual information gathering devices. Congressmen do that behind closed doors. Rather, they happen almost always for only one of two reasons. Either they are to place on record "expert" testimony so that it can be said that due diligence has been done for any given bill, or it is to be used as a show trial like in baseball steroids case, or grilling oil execs etc. In this case it is not that latter. So the implication of this hearing means that at least some group of Congressmen have already made the decision that this plan, or something very close to it is something they wish to pursue. The fact that it is the chairman of the relevant subcommittee in which such legislation would have to originate makes it that more of an issue.

Now like I said, I don't believe this will happen immediately as Congress has other issues they wish to go after and there is not enough political capital for this given action. However, as discussed in all these relevant posts, crisis allows for a lot of action previously deemed impossible. As mentioned, the government purchasing stakes in banks would be unheard of just a few months ago. If I had told you of the Patriot Act in 2000, you would have laughed that such things were going nowhere, yet it overwhelmingly passed in the days after September 11th. With both it and Iraq it is often argued that there were members of the Bush administration who wanted these things all along but just needed to wait for the opportune political moment in the wake of panic. Likewise, the relevant Congressional powers have now indicated they want this type of program; it is therefore only a matter of having the opportunity that they will try to enact this.

So when is that opportunity? When the next financial crisis hits when our entitlement programs go bankrupt. Just as what happened in Argentina, the government's ability to sell bonds greatly diminishes as confidence in government to pay the loans falls. A similar thing could happen here. Moody's, a ratings agency recently said it may have to consider dropping the government's AAA bond rating. In this case, not only would this hurt the economy as a whole, but the dollar would plummet, and the stock market would fall. In this panic, mixed with the need and desire for more government revenue, then Congressmen who have had this desire all along are able to use the excuse, like in Argentina, that they are "protecting retirees." In reality this is just another power grab to force the purchase of treasury bonds which will allow more government spending, while at the same time transferring an incentive program to a universal "fair"one.

I do not believe as JSK tries to distort my argument that the Democrats desire to make the US the Soviet Union. I do believe; however, that many of them, if not most, wish to turn this country into something closer to France, Germany or Sweden, a social Democracy. The Democrats have also had a recent precedent of opposing any of these programs that incentivize a certain action and instead favor a centrally managed government program. They have apposed Health Savings Accounts, semi-private social security accounts, Medicare Advantage Programs, technology investment credits, capital gains tax cuts and so on. Instead they want universal programs because ideologically they believe in equality and "fairness" over flexibility and choice. In any of these incentive programs, there will be greater winners where some fair better then others. 401ks and IRAs are both creations of the past 25 years when Republican dominated ideas where prevalent. There has already been talk in Congress about removing or fazing out Medicare Advantage and HSAs; so it is not a stretch that 401ks also fit into this category, especially if the events described occurs.

So instead of outright dismissing this notion, where there is past precedent, a foreign example, an indication in Congress, and a logical scenario derived from a possible situation, maybe you should entertain this idea. I dispute that this is simply your belittling notion of fear mongering, simply because I am not asserting that is will definitely happen and therefore there is uncertainty. We will see moving forward, but I will not be surprised at all if some attempt similar this idea is made in the future.

-EJB

PS. Your comment on the fund manager is another ad hominem.

Fun With Circular Arguments

2008-10-23T16:48:00.006-04:00

I had an interesting little conversation today with a classmate who was tired of hearing about how ex-felons should have the right to vote. Why shouldn't they, I asked. Because, they're felons, said she. Hmm. So, ex-felons should be disenfranchised because...they're ex-felons. There's really no way to counter that argument, other than to point out it's inherent circularity. But this brings me to the issue of whether it's right or just to disenfranchise felons. Now I am not necessarily in favor of allowing incarcerated prisoners the vote, though I haven't considered that proposition in depth, but I see no reason for stripping people who have paid their debt to society of such a fundamental right.

Oh wait, voting is not a right. The wonderfully cogent and undoubtedly fair case of Bush v. Gore established that. This is the first hurdle for anyone arguing that felons should be able to vote. It is telling, though, how shocked most people are to find out that they don't have a Constitutional right to vote. Technically, it's a State-granted privilege. In my opinion, the right to vote precedes the Constitution, much in the same way the right to freedom of expression or gun ownership does. The Framers' were reluctant to include a universal suffrage amendment because they needed to placate the wealthy landowners who could potentially cause a rejection of the Constitution. Plus, they didn't like women and slaves. The right to vote, though, is so obviously fundamental to both the preservation of the republic and the self-actualization of its citizens, that it boggles the mind to conclude that voting is merely a privilege. It also leads to absurd consequences, to wit: if voting is merely a privilege, does that mean a State can arbitrarily decide that it will no longer hold elections for offices? In other words, couldn't a State simply revoke all of it's citizens voting privileges, except for perhaps, those already in office? Clearly a State could not do this and pass Constitutional muster. But what this highlights is the simple fact that voting is already treated like a right. Why not just go ahead and title it appropriately?

Anyway, back to the prisoners. Now, assuming that voting is a right does not necessarily lead us to ex-felon enfranchisement, because all rights are subject to reasonable regulation - you can't yell fire in a crowded theater, the government can search a person without a warrant if certain exigent circumstances exist, etc. But what reasonable arguments are there for denying ex-felons the right to vote?

The basic argument, which is what I think my friend was trying to elucidate, is one of pure retributive justice. Someone who committed a felony should be punished for breaking the social contract. They don't deserve to vote. Or something like, they showed that they make bad decisions and thus we cannot trust them to make good decisions when voting. The amount of paternalism that lies in these arguments is astounding. Plenty of people who aren't felons make bad decisions. I'm an expert in that field. Yet, I'm allowed to vote...scary thought. Let's also look at this retributive scheme a little more closely. Does the purported punishment have any bearing to the committed crime? Punishment meted out must be proportional and reasonably related to the crime. Disenfranchisement does not satisfy this requirement. Someone who, on one single occasion, sells two ounces of cocaine and spends five years in prison, made a bad decision indeed. But is taking away his right to vote proportional to the crime? For a clearer example, consider that violent felons, once released from prison, are barred from owning a gun. This is certainly proportionate - handing a gun to a person who has proved themselves violent in the past is a bad idea. But what would that same person do (or in other terms, who would that same person endanger) with the right to vote? What are we so afraid of, that they'll vote Democrat?

Let's also consider that retribution is not the only pillar of justice. What about the oft-ignored notion of rehabilitation. The first point here would be that, once a felon has done his time, he has paid his debt to society and his rights should be restored (within reason). Second, how can an ex-felon ever hope to be rehabilitated or feel like a normal citizen after incarceration if the State strips him of such a fundamental right? Disenfranchising ex-felons actually inhibits the possibility of rehabilitation and readjustment.

Finally, let's talk about deterrence. Punishments can be considered fair if they are likely to have a deterrent effect on anyone poised to commit the crime for which the punishment is handed out. But common sense dictates that the last thing on a person's mind, seconds before the felonious act, is "Oh God, I could lose my right to vote in the next election!" The deterrent effect of disenfranchisement is likely nil.

Let's move away from punishment as merely vengeance. I hope that one day we can take the idea of fair punishment as rehabilitation seriously. To arbitrarily deem ex-felons as incapable of voting, or to simply forcibly disenfranchise them ought to be a serious Constitutional problem. It should, at the very least, levy a large burden on those seeking to justify such actions. Instead, we continue to pretend that voting is a "privilege." Until we see a shift in that terminology, I'm afraid we won't ever stop stigmatizing those who have paid their debt to society.

~JSK

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First off I agree with you on the circular argument point. I also tend to agree with the idea that once one has served one's time, that his or her voting right whould be restored. However, it is possible that losing the right to vote after being let out can be part of the punishment in principal if it were designed that way. Just as punishment often has stages like jail time to probation after release, therfore there could be a period where voting rights are suspended. I'm not necessarily advocating for this, but that it could be justified in principal.

However, I also realize that this is not the structure or the argument that states who have this process argue for in having this policy. The reality is that the politics over this issue on both sides usually has less to do with any higher argument, but rather who gains politically. In Rhode Island, when this issue was on the ballot in 2006, all of the Democrats in the state all of a sudden had a huge moral conviction on why this should be allowed while the Republicans were stedfast against it. Why? Because fellons tend to be poorer and more concentrated in minorities whom overwhelmingly vote ofor one party. I would argue that States that generally don't allow ex-fellons to vote are largely because the politcal forces that would be hurt be allowing them have been able to hold power over this issue.

-EJB

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So yeah, I mean we can just quickly take care of the first part of your response by pointing to the limits of the Eighth Amendment. Someone who committed a minor felony like 3rd degree battery (essentially a fist fight in most states) or minor drug charges could not be forced to permanently give up a right. Even the right of ex-felons to own guns is being challenged (with some success) in courts these days. And also, like I said, the punishment must be proportionate. I just can't see how a judge could logically tie in voting rights with violent felonies.

And I generally agree with your second explanation, except that you're entirely too non-partisan about it. In every state it is Democrats who are fighting for prisoners voting rights. Like I said in my post, it's likely that this may be a political move because ex-cons do tend to vote Dem, but it's also pretty clear that there is a large pro-civil rights movement within the Dem party that is not linked to pure political capital. I would disagree with your "reality" that these problems have more to do with politics than basic human rights. We may live in a society that is so disillusioned with our politicians that it may simply seem like every move is a political one, motivated by personal gain - but I personally know many of the students here at Fordham who are working on the briefs of the prisoners' cases. They are not politically motivated, but are urged on by an inner moral belief that it is the right thing to do. These are the people who truly energize the prisoner's rights campaign and I hope one day we can move beyond the simple political aspects of the issue.

~JSK

Argentina's Property Grab - Should We Be Worried?

2008-10-23T12:09:00.009-04:00

So quite the timing; Argentina just announced that due to deteriorating fiscal conditions, the government will be seizing all private retirement accounts (their equivalent of 401ks and IRAs) and nationalizing them. In a country that has a long history of intervention in financial markets as well as cycles of over spending that along with other factors, ultimately end up causing economic woes and civil unrest, this is not an unexpected move. This is interesting to think about in relation to me recent post on the banking bailout and what it means for property rights, and my post yesterday dealing with the quote on the fall of democracy due to "loose fiscal policy."

Our own entitlement programs are reaching insolvency. Will our government some time in the future, now armed with the precedent of semi-nationalizing the financial industry, look to take over the private retirement accounts of the "rich" in order to "protect" our public pensions?

Though obviously we have a much stronger tradition of property rights then a Latin American republic, it is an interesting thought to ponder. Up until this last month, the government buying a stake in the banking industry would have been considered more then improbable to say the least. Will the next financial crisis create the political capital to move ahead with this kind of move as well?

-EJB

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Argentina is, and I quote:
a country that has a long history of intervention in financial markets as well as cycles of over spending that along with other factors, ultimately end up causing economic woes and civil unrest.

Fears of the US government taking it's cue from Argentina are unwarranted. Government did not seize the assets of the wealthy elite during the Great Depression. Instead it relied on loans from those men. I would be much more inclined to predict that that will be the outcome again.

~JSK

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I wouldn't be so sure. In Argentina's case, this wasn't an outright grab. It basically transferred the private accounts into a public pension much like social security. The argument being that it was a move to "protect" these accounts from turmoil in the stock and bond markets, as the President said, "While the U.S. and other countries are stepping in to rescue their banks, Argentina must protect our retirees." For more details on the process, you can read this. But the reality is, this was done so that just like how the US and virtually every other country raids their social security funds to fund the general government and then just gives IOUs to the fund, this will allow Argentina to take this money, and just owe it back.

Likewise if the crisis becomes big enough, I can see the potential of the US taking 401k money placing it into a national pension which will "protect" those close to retirement from the "woes of the stock market." But the government will just tap these new funds, providing a cheap source of funding for government bonds. Or, it can indirectly do this if it does not have the political capital to do so, by starting to tax these accounts, which by design are supposed to be tax sheltered. After all, those who have IRA's and 401ks tend to be middle to upper middle class individuals. These "rich" people can surely join in with the regular social security fund that the "working class" people depend upon to help those who are in need of social security checks. It is after all the "fair" thing to do, is it not?

I highly doubt we would ever have an outright talking of these accounts, but either through taxing them, or transferring them into public funds, the money will be raided one way or another. Once again, we wouldn't have tolerated a bank buyout just a year ago. What type of political pressure do you think would exist if tens of millions of retirees, who tend to vote in high numbers, were faced with the situation of the fund drying up?

And I'm not really sure what you are referring to by "relied on loans from those [rich] men" in the Great Depression. The government didn't actually take large deficits then; between Hoover and FDR, it drastically raised taxes and confiscated all gold coins making their ownership illegal. I think that move is very similar to the process I've outlined that could potentially happen.

-EJB

Well, Iran Seems Reasonable

2008-10-23T01:10:00.007-04:00

Much has been made of the presidential candidates' differing stances on initiating diplomatic talks with Iran. Obama has held that he would be willing to open discussion - below the presidential level - with Iran without any preconditions. McCain has argued that such a stance is dangerous and would not engage Iran diplomatically without their having met certain conditions precedent.

The WSJ today posted this interesting article about what the Iranian government thought about all this diplomatic talk. They admitted to having two preconditions of their own before they'd consider diplomatic discussions with us. As we might have expected from Iran, those conditions are entirely fair and reasonable:

"Mehdi Kalhor, Vice President for Media Affairs, said the U.S. must do two things before summit talks can take place. First, American military forces must leave the Middle East -- presumably including such countries as Iraq, Qatar, Turkey and anywhere else American soldiers are deployed in the region. Second, the U.S. must cease its support of Israel. Until Washington does both, talks are "off the agenda," the Islamic Republic News Agency reports. It quotes Mr. Kalhor as saying, "If they [the U.S.] take our advice, grounds for such talks would be well prepared."

Yes, well...I think it's safe to say that neither of those two conditions will be met in the foreseeable future (though I am with them on that first one). What's interesting about the article, though, is that it's titled "So Much for Obama's Diplomacy." Apparently, the author of this article thinks he is devastating Obama's stance and winning the debate for McCain. But is that what's happening here? I think not.

Three years ago, my friend Rob and I entered into a debate round against a formidable Harvard team. They proposed that the United States should reauthorize political assassinations of foreign leaders and diplomats. Wow, I thought, this will be easy to defeat - killing is bad! So Rob and I spent a good 25 minutes listing and analyzing the myriad negative consequences of reinstating political assassinations. In their final speech of the round, Harvard dropped a bomb on us. Their argument went like this: "Well...we never said we'd actually USE the assassinations...we just see no reason to indiscriminately take it off the table. We, Mr. Speaker, give you more options than those jackasses!" They blindsided us by shifting the debate. Needless to say, we lost.

Mr. Obama, I will speak to you now. You went to Harvard (law), use their tactic - it's a debate winner! Remember that, because Iran is insisting on these ridiculous preconditions that will never be met, it's likely that this entire policy debate is a wash, because we will NEVER engage in summit discussions with the Iranians! Contrary to the belief of the author of that WSJ article, this fact cuts in your favor because, if the Iranians ever were to reconsider their position, you would give the United States more options than your opponent! You would not categorically reject unconditioned talks. And like I said, it's entirely likely that Iran will never agree to any talks anyway.

Seriously, though...McCain's stuck in the position poor Rob and I were. His only real argument against Obama's viewpoint has been that unconditioned talks would "legitimize" Iran's government. Odd...do we not recognize the legitimacy of Iran's government? Oh we do, right. Are we really a culture who would believe that we endorse the views of any government we engage in diplomatic discussions with? I can't believe that. Thus, Mr. McCain...you might as well just move on from this line of argument. Obama has successfully blindsided you with an "options" move. I know, I know...what a Harvard thing to do. Bastard.

~JSK

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Though I partially concur with the point being made about Iran, I disagree with your analysis of this being the infamous "options" scenario. Being an option would be keeping this idea on the table, which is quite different then what Obama has been saying for the last two years, which is essentially that he is attacking Bush for not talking with Iran. This says he just doesn't want this as an option, but rather that we should do it. That distinction is quite important.

However, both Obama and McCain have shifted their positions in Iran quite a bit, at least in rhetoric over this election cycle. In the primary, Obama suggested that unlike Bush, he would make it a priority to have high level or even presidential level talks with Iran as soon as he was in office. This then shifted eventually to leaving it open as an option and then only an option at lower diplomatic levels. McCain in turn, adamantly argued against any level talks without preconditions, which then transformed into simply no high level or presidential talks and now seems to be hinting to be open to lower level talks. The fact is that what both of these men are now suggesting we do actually comes pretty close to the current policy, as Bush has eased his position himself quite a lot and we already have had numerous talks with Iran at 3rd party locations such as the Middle East summit in Baghdad this past year. This seems to not be picked up by anyone. It would appear the media is enjoying letting the campaigns try to paint each other as being extreme.

But with that said, my thoughts. The entire main focus over Iran is obviously their nuclear program. Either way, I think we're in trouble if our goal is to stop them from achieving this. Despite the official Iranian line about creating reactors for electricity, its pretty obvious that no country is willing to absorb major sanctions and diplomatic conflict just for electricity, especially when the country is sitting on a huge oil reserve and the country lacks a tremendous amount of more basic infrastructure. They have their heart set on achieving this, and there is nothing we can really do about this. So a few points:

How we got here: We basically screwed up with this in two areas. First, through our actions with North Korea in the 90's as well as more recently, when they achieved a weapon, we showed the world that a country working towards weapons could use that as leverage to extort aide packages and other giveaways. Dealing with the problem that North Korea was trying to developed a nuclear program, the Clinton administration, via Secretary Albright gave a whole host of aide packages to North Korea as well as nuclear materials if in return they gave up pursuing nuclear weapons. They took our aide and then developed a weapon anyway. The Bush administration in turn, has offered even more aide packages to give up these weapons programs. The result is that the world has seen that nuclear programs are great leverage in getting what you want.

Mix this with the fact that the US is considered by many, particularly in the Middle East, to be very weak and without a stomach. A few examples: a letter between militia groups in the 1983 Lebanon bombings stated, "If we kill 15 Marines, the rest will leave." We did nothing when Saddam kicked the weapons inspectors out in the 1990s. Bin Laden referred to the US military as a "paper tiger." Essentially there is precedent that the US will do little even if it sees a nation as being belligerent.

Second, is where I agree with with both Obama, and presumable JSK, is that yes, the invasion and following [mis]management of Iraq has only intensified Iran's abilities because of fueling a very strong anti-Americanism in the region, while at the same time, we removed Iran's biggest regional rival that kept it in check.

So Now What? So this leaves us in a big jam. I'm not sure what talks are supposed to achieve. I don't buy into the argument that our problems with Iran are simply a "lack of understanding". They want a nuke for the reason already mentioned, but also so they can intimidate and gain power in their region against rivals such as the Saudis. Our larger problem is that we have almost no leverage with Iran. We already largely don't trade with them, so no more sanctions can be placed. The UN won't place more sanctions because Russia and China want access to their oil fields, and Europe won't push too hard because they are worried about Russia, which holds them hostage via natural gas supply. Iran knows that we can not exercise any military action, both because we are logistically bogged down in Iraq and Afghanistan, but also because of those two wars, there is absolutely no political will to take action against Iran within the US. And even if there was, what are we going to do? Take over another country, and then we have all the problems we have in Iraq?

So sticks are off the table; maybe we can offer carrots, but that is exactly what one of the goals of trying to achieve a nuclear program is. If we comply, this will further entice more nations to develop weapons, just as our North Korean example likely did. In the past with other nations, such as the Soviets, there were many bargaining chips available. But in this case having high level talks (and give Iran that propaganda tool) is one of the only, even if very limited, bargaining chips we have. Part of this is because we are tied down due to the Bush administration's past insistence on denying talks, calling Iran the "Axis of Evil" and so on. Any policy change now would seem to be a sign of weakness and defeat, which will be used politically within Iran and as propaganda with other countries to bolster anti-American sentiment, strengthen internal power and hurt the US position, and in the end they don't actually and their program. Either way we are in trouble.

The only way in my opinion that we can do anything with Iran is find some way to play the internal powers against one another. Ahmadinejad has little official power, but the theocracy has allowed him much leeway partially because he has been able to bolster the diplomatic position of the country within the Middle East and the perceived leadership role of Iran through feeding on Anti-Americanism (partially due to Iraq). Furthermore, the theocracy fears him, because unlike most past presidents who came out of the theocracy, he has his ties with the military, and if he feels that he is being pressured, as along as he stays relatively popular with the people, he could likely initiate a coup (or at least that's a possibility). The key is to weaken Ahmadinejad's internal position so that the theocracy feels comfortable reining him in. Perhaps some carrot can be offered, for instance helping to refine their very heavy crude that they can't process, so his ability to keep using anti-American sentiment is less convincing. But this leaves open the extortion problems earlier discussed. Quite honestly, the only thing I see working is oil has to come down in price and stay down for a while so that the sanctions on Iran actually become crippling as their export dollars decrease. Other then that, talks or no talks, I don't think this debate has any real positive consequences either way outside of our own election battles. We have basically messed up on this for almost 20 years and talking or not talking isn't immediately fixing it.

-EJB

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Well, the entire last three-quarters of your response is a nice detailing of the history of our relations with Iran and one possible course of action (playing the sides against one another). I'm not going to disagree with the historical part because I think we've all come to realize that once North Korea was able to weaponize their nuclear program, the US lost much credibility in the eyes of other countries looking to bolster their global position. It's interesting, though, that you went with the idea of attempting to get the theocracy to reign in Mahmoud. I would've thought - and would propose as the better or more likely option - that we'd go for the academics and youth culture, who have shown an amazing openness towards Western culture. The theocracy stays in power because they use fear to control the larger population. In reality, it is only a few, very vocal, extremists who are dictating the current anti-American policies of Iran. If we can sell ourselves to the new generation of Iranians, it is entirely possible that they could form the new ruling class and begin to tear down the cultural divide erected by a few religious extremists.

But I do disagree with your observation that this is not an options case. You only mention one real reason for not calling this an option case and that is that Obama would actually utilize the option his side is offering. But that alone cannot distinguish this Iran example from any other "options" example. Obama wouldn't necessarily engage in these discussions (plus, with the Iranian demands in mind, it's unlikely he'll have the chance). But even if he WOULD, it's still an options case - the Harvard team could very well argue that they'd use assassinations and they'd still have a valid options argument. This is because an options case is just simply defined by one side of a debate incorporating all of the other sides' options/benefits, but adding just one more of their own. So Side 1 has A amount of options. Side 2, to pull a successful options argument, would simply argue for A+1. That is what Obama is doing here.

Whether Obama's and McCain's policies are indistinguishable currently is really a mystery. I could sort of see why you'd argue that they're functionally the same, but I don't think this is simply a case of pure rhetoric. The statements of each candidate - regarding this issue - mean more than simply the words they use. The candidates' positions inform people of their general disposition or philosophy in regards to foreign policy. The fact that Obama's plan began with a more open and receptive stance than McCain's allows us to validly assume (for now) that Obama would simply be more flexible in foreign policy. Whether this is a good thing or not is a matter of debate - but their stances do reflect the very opposite world-views they hold. So before we go all consequentialist on this topic and just claim that either 1) both views collapse into one simply because they would likely lead to the same outcome; or 2) this debate is meaningless because the policies share a similar end-goal, let's also realize that the means to the end says as much or more about a candidate than simply looking to and judging their goals.

~JSK

A Quote I Ran Into Today

2008-10-22T14:42:00.020-04:00

So someone I know sent me an article that had a really interesting old quote in it. Sounding to be too contemporary in language, I looked up the person this was attributed to, and it turns out it likely actually wasn't from him, and may not actually be that old either. However, the idea is still an idea in of itself. I've always found the following Ben Franklin quote to be profound, "When the people realize they can vote themselves money, that will herald the end of the Republic." So the following is along the same line:

“A democracy is always temporary in nature; it simply cannot exist as a permanent form of government. A democracy will continue to exist up until the time that voters discover that they can vote themselves generous gifts from the public treasury. From that moment on, the majority always votes for the candidates who promise the most benefits from the public treasury, with the result that every democracy will finally collapse due to loose fiscal policy, which is always followed by a dictatorship.”

-Alexander Tytler "The Fall of the Athenian Republic" 1787
(allegedly)

Using this frame of logic, this would explain why the Democrat party dominated US politics from FDR through the 70's, once it was accepted that the Federal Government was to have a major role in wealth redistribution, social programs and so on. The Republicans were then only able to dominate from the early 80's through the last few years because two things happened.

1. The political version of supply side economics/ trickle down theory (opposed to the real economic ideas behind the terms). Now, the argument for lower taxes was not the classically liberal one of it being beneficial for the rights and sovereignty of an individual, but rather that tax cuts and smaller government would give you something, mainly a better economy. Voters in essence were then still voting for the candidate whomever would give them the most.

2. The social conservative movement. In order to patch together a ruling coalition, the Republicans needed to sway voters via issues unrelated to their direct economic benefit, so that they would forgo voting to give themselves money and instead vote for the party that was going to align with your social values. The Democrats is turn also try to appeal to certain voters via social issues. This is why politics since the Vietnam era has been the battle ground for the culture wars and even recently issues such as gay marriage have such a profound impact on the results of elections.

So I thought I'd throw this out there and see anyones thoughts on are potential grim end.

-EJB

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First, EJB posts about the coming Democrat super-majority which, in tandem with Barack Obama being elected president, will overthrow our capitalist system and replace it with socialism. Now we get another doom and gloom piece about how increasing the amount of democracy in our government would cause a total collapse into totalitarianism. The quote is utter nonsense, for a few key reasons.

Before I go into those reasons, though, I'd like to point out that the author of the article EJB links to is Neal Boortz. Neal Effing Boortz. Are you kidding me? This is a man who claimed that the "primary blame" for Katrina goes to the "worthless parasites who lived in New Orleans." Boortz also declared that the victims of the Virginia Tech shooting are to blame for their deaths because they "stood meekly" around "waiting for this guy to execute them." He refers to the homeless as "urban outdoorsmen" and believes that ADD and ADHD are medical myths that parents, students and drug companies use to scam the public. Now I know that EJB does not subscribe to these beliefs. I also know that this is an ad hominem attack and it does not necessarily shed any light on the validity of the quote. But Neal Boortz is a wretched man, no matter how you cut it. In the article EJB linked to, Boortz cites this quote as proof that Barack Obama is claiming to only tax the richest 5% because he is trying to commandeer votes. He says:

"Here we have Barack Obama promising that he’s only going to raise taxes on the evil rich who make over $250,000 a year while 95% of Americans will get tax cuts. Think of this in terms of votes; higher taxes for 5% of the voters, lower taxes for the other 95%. It really doesn’t take all that much brainpower to figure out how this is going to work at in an election does it?"

This is the absolute worst kind of political punditry. There is no validity to this statement, because if you carry it out to its logical conclusions, it would mean that any tax policy (or any political policy for that matter) which benefits more than 50% of the population is merely a scheme to try to win votes, rather than legitimate public policy. The worst part about this type of assertion is that it can never be proven false. Obama can cite Rawls' "Justice as Fairness" philosophy until he's blue in the face, but it can never overcome the assertion that policies which benefit a large number of people are only meant to attract their votes. You cannot prove that it isn't, because you cannot prove a hypothetical negative. In other words, I could argue that McCain chose Palin because he had a secret affair with her and she blackmailed him into giving her the position. Prove to me they didn't have an affair! Anyway, I think my point is made and I once again reiterate that EJB does not subscribe to Boortz' argument...I just had to get that off my chest.

Now back to the quote, it's illegitimate for a few reasons. First and foremost, it's historically incorrect. I would challenge anyone to find a democracy (a pure democracy) that has failed because of "loose fiscal policy" and then collapsed into tyranny. I can't find one; you can't find one; because there isn't one. The quote purports to be "historical" in nature, but that isn't true. It's hypothetical or, at best, predictive. Athens did not fall because the people voted themselves more money. Rome was not a pure democracy, but even it did not fall in the way the quote predicts. These civilizations fell because of weak internal rulers, unsustainable population growth and several outside pressures. Here's a history of democracies. Find me the one that fell because the people voted themselves "large gifts from the Treasury."

The idea that "democracy" cannot persist as a permanent form of government might be true, but we cannot ever hope to prove or disprove that assertion. How could anyone ever prove that any type of governance is "permanent" in nature...we don't even know if government itself is permanent.

We are not a democracy. Perhaps the only true democracy did indeed fall. But most civilizations and governments fall. We have yet to find a style or type of governance that is "permanent" in nature. Ideas evolve and cultures shift. It is even possible that our democratic republic will be replaced in the future by a newer, more efficient governmental model, the likes of which we haven't yet seen or created.

I think what EJB's two ideas (trickle-down economics and the rise of social conservatism) really prove is that politics is cyclical. Nobody is happy with the way government is run...there is a natural discord between rulers and the ruled. Thus, when one political party holds office for too long, too many negative events can be attributed to them - sometimes fairly, sometimes not. Nevertheless, the will of the populous necessarily shifts to another political party or philosophy. That party takes power and the cycle continues. I do not think "trickle-down economics" and the social conservative movement support the idea that democracy doesn't work because people will vote themselves money. I guess I just don't see the connection.

Finally, the people have always been able to vote themselves money! Why hasn't our Republic fallen? Franklin's quote is naive; he claims that people will one day "realize" they can vote themselves money. The American political landscape hasn't evolved in this way. We did not start as a country whose people were ignorant of the possibility of voting themselves more benefits. We are not now a country whose people are singularly driven by the desire to vote themselves wealthy. That has ALWAYS been the case. That's the point of having a republican system; our elected officials act as both a delegate and a representative. That is, they act in the way they believe their constituents would want, but at the same time, they act in concert with each other to do what they believe is best for the country. That's why not every pork barrel project gets passed or even put to a vote.

Our Republic is not ending. Well...it might be, but the cause won't be "loose fiscal policy" caused by "people voting themselves money." And we certainly won't devolve into tyranny.

~JSK

__________________________

So where do I start? I have to admit I was laughing through half of this. You have not only responded in ad hominem as you admit, but you have brought the ad hominem to a completely new level, perhaps a double ad hominem, so to speak. The entire first half of your response was attacking the messenger (Boortz) of the messenger (Tytler). Not once did I even mention anything that Boortz was talking about, but rather that quote just happened to be used by him in the article in which I read it. I could have very well got it from any other source without even having Boortz in this at all. So I got a laugh at this, but I'll give you your ability to get this "off your chest" as you say.

So now lets look at the actual part about the quote. First off, I'm not necessarily agreeing with this is its entirely, I just found the quote interesting and decided to put it up there.

Continuing though, your response fits into two parts. One is that the idea is weak because anything can be explained as helping the 50% + 1, not just distribution of wealth. I agree; however, there is something different about what a majority believes is good for national security, something that theoretically helps everyone, or whether to build a bridge or not, in theory a "public good", and a policy that is directly designed to take from one group of people to give to another for the sole purpose of "they need it more." I do believe a distinction can be made.

Along this line, you say Franklin's quote is naive because people have always realized they can vote themselves money and this concept in not new. True, I'm sure people realized this very early on, but structurally there were institutions in place for the first 150 plus years of the nation that restricted this ability. This was the whole reason for having a constitutional republic and not a democracy, that being to limit the power of the majority. The Founders greatly feared popular takeover of property and as you have agreed with me in the past, just take a look at the Federalist Papers. So early on, voting rights were restricted largely to those with property (not that I'm advocating this), limiting the ability of those without assets to use the government to take them. But more importantly I believe, until the early 20th century, it was understood that an individuals private property was off limits for the purpose of redistribution. The income tax was considered unconstitutional (though that was breached temporarily during the Civil War) and required an amendment to change that. The courts (a non democratic institution) therefore used to find most social programs unconstitutional, hence why FDR had to threaten to stack the courts until he got a couple of justices to loosen that interpretation and eventually he just appointed new judges who didn't hold that precedent. It is at this point, that the dominance of Democrats began and the major political battles, with the exception of desegregation, were largely ones of class warfare. The Republicans then came to power in the 1980's, partially due to this new version of "giving you something" of supply side economics. The other part was cultural, and therefore, are politics of late has less to do with the class warfare of old, but rather culture battles of rural vs urban areas, secular vs religious and so on.

Secondly, you talk about how no democracy has ever fallen because of loose fiscal policy. I agree there really hasn't been much, and most nations fall from outside forces, but to some extent this was true with both Rome and Athens that have been talked about. The people of Rome had expected "Bread and Circus", government distributed food and entertainment, financed partially by foreign plunder. This desire to "vote yourself money" was one of the driving factors of Rome's expansion. When Rome began to wane, these giveaways decreased and civil unrest within the empire became far more prevalent, including class warfare, in its end days (I am not saying this is the only factor at play at the time). Even before that, the essential end of the Republic, when Julius Caesar came to power, was made possible because the Senate lacked funds to finance the war in Gaul partially due to domestic expenditures in Rome (loose fiscal policy), so it turned to aristocrats, like Caesar to personally finance armies. He ignored the Senate, conquered all of Gaul, and his soldiers had in turn been paid via that land for their service, as this was a major political battle at the time, so they supported this dictator out of the desire to "vote themselves land."

Athens likewise fell due to war with Sparta. But, populous arrogance got them into that war largely driven by the desire for more spoils like those taken from the Delian League following the Second Persian War. After rebuilding the burned city with that money, they realized such expenditures could not be sustained (loose fiscal policy). Again, the people wished to "vote themselves money" by taking it from someone else, just in this case it was someone foreign. I realize these are not exactly perfect examples, partially because we really haven't had a long human history of representative government.

But you can even look at most of the western democracies currently and they all have something in common; their entitlement programs are on the verge of bankruptcy, and we could end up "fixing this" via the methods that caused the long decline of the Spanish Empire, largely taxing the merchant class to oblivion (as the Church and the Nobility, the ones "voting" in that society wished to destroy an "immorality" in the prior case and avoid taxation in the later case). This was in addition to massive inflation of the money supply, as government financed itself, largely benefiting the clergy and nobility, through new coinage as so they could reap benefits without having to pay for it themselves.

Some other contemporary examples would include the back and forth history of Argentina. A populous leader promising to give a list of things to the people gets swept into election, later to only drive the nation in bankruptcy, which causes turmoil and then is ultimately taken over via coup by a dictator to start the whole cycle again. Many Latin American nations have similar histories. I'm willing to bet you that Chavez (elected into office), if oil prices stay low, will be violently removed from power as turmoil erupts due to economic damage from overspending and inflation due to all his giveaways (loose fiscal policy).

I realize non of these examples perfectly align with the idea. I'm also not saying that the exact dynamic of this quote is correct, but I have some sympathies for its sentiment and I believe there is some truth to it.

-EJB

Unions Help Workers, Right?

2008-10-21T12:23:00.013-04:00

So given the pretty dynamic discussion about “Card Check” that was fostered by my last post, I thought I’d throw out this bomb shell to see what happens. If this above mentioned policy gets enacted it will likely have the effect of increasing union membership; that’s the reason why unions are in such favor of the policy in the first place.

Without getting into the arguments for the right to unions and so on, I want to just look at the macroeconomic effects of unionization. Though all unions are not monolithic, the primary goal is to negotiate a wage for members that is higher then what would have been received in their absence. For any given employer then, a union has a monopoly on a firm’s labor supply. As we all know, monopolies have the ability to charge higher prices than in a competitive market. As a result, union members on average therefore receive higher wages and benefits then non-unionized labor. However, this gain is achieved at the expense of workers who are not unionized and the unemployed, as well as the general economy. The Law of Demand states that the higher wages required for the same labor reduces the total quantity of labor demanded by employers, lowering the wages and the job opportunities for everyone outside the union (as well as union members themselves through lower long term growth in wages).

So to test this theory out I looked at the relationship between union membership and general employment growth. I took a bunch of state data from the Bureau of Labor Statistics on unionized labor rates and employment growth over the past ten years. As seen by the chart below there is a negative correlation between the percent of unionized labor and the growth in overall employment over the time period. I used a ten year period in order to capture an entire business cycle and minimize the effects of one-time events such as Katrina and September 11th.

The result was that over this period, for every 10 percent of workers that were unionized, the state’s job growth rate was 2.6 percent lower. The median “Right to Work” state had job growth of 13.7 percent compared to 10.2 percent for states without these laws. This translates to a growth rate that is 34 percent faster.

*Note that the blue dots are states that are “Right to Work” meaning that it is illegal to mandate that workers join a union if a given employer is unionized. These states on average have much lower rates of unionization, and that is why unions generally oppose such laws. On the other hand, these laws are likely only able to be passed in states with low union membership.

Obviously there are many more factors that affect job growth then just unions (this is why there is a good amount of variance between the data points), including education levels, tax rates, access to infrastructure and so on. Furthermore, the two may just be correlated to some other third condition. However, on average there is relationship between the two. That put together with the logical analysis suggests that larger union states have a more difficult problem with attracting employers who wish to create jobs. A more accurate statistical analysis would require, for those math prone, a multi variable regression analysis. Lacking the software, the time and the desire to exert that effort, I have not done so, but you can look at other studies. As executive summary of one can be found here or the entire paper here. It is only one paper (and written by self desrcibed "free market economists"), but it looked at a host of variables that have an effect on growth and emperically found that after the relative state income tax rate, the second most significant variable was a state’s “Right to Work” laws, which not only has an effect in of itself, but as seen in the chart, is correlated with lower rates of unionization

Some of the outliers in that chart can also be partially explained by the type of unionization that is prevalent. There are two components of the negative effect unions have on overall employment. The first is the income effect, where the quantity demanded of labor gets reduces as the price rises simply because it would require a larger amount of the employer’s money. This effect is relatively even across states. The difference is the second component, the substitution effect, which causes the consumer to reduce the quantity demanded because they shift to alternatives at lower prices. This effect by state varies greatly by the characterizes of the unions of those states. The blue dot at the top of the graph for instance is Nevada, where the bulk of the union presence is related to casinos in Las Vegas. Because gambling is illegal in most areas int he country, there really aren’t many alternatives for operators of casinos so they have to hire this union labor. Likewise, states where the unions are dominated by municipal workers, by that very nature these employees cannot be hired elsewhere. The contrast is manufacturing unions which dominate Ohio, Michigan and other rust belt states. Their labor can very easily be moved to other states, which is why for example, Honda, Toyota and Nissan are building plants in “Right to Work” states such as Texas, Kansas and Tennessee. Even further, labor can be shipped to foreign countries, which is why for instance, GM has built most of its new plants not in Michigan but in Canada and Mexico. This is why unions generally support import tariffs in order to protect their above market wages from competition. (note also that the powers of unions to achieve higher then market wages varies by state due to the legal structure of each state).

In the end even though it would be very reductionist to argue that unions are the only negative drag on the economy, on average they are indeed a negative factor on overall employment. Both logical principles and empirical data suggest that this effect occurs. If this legislation does pass we can expect slower employment growth, slower wage growth, and higher unemployment then we would have going into the future.

-EJB

___________________________________________________________________

So let me start off by saying I am not in favor of the "Card Check" program. I am also generally a supporter of Right to Work laws, because workers should not be forced to unionize. If belonging to a union is highly beneficial to the average worker, then it would follow that workers would voluntarily choose to join - no mandate should be, or would be, necessary. But I must make a few points regarding EJB's post.

First, for those of you who don't know me, I worked as a welder for four summers during my college days. I welded depth gauges for oil fields and submarines. Pretty sweet, I know. Paying dues to the local union was a condition for attaining summer employment with this company. Thus, I was (and continue to be) a nominal member of the union. I had my ups and downs with them. Essentially, I paid union dues but did not receive the full extent of protections and benefits that they offer full-time workers. This and their re-routing of my dues to certain political candidates bothered me. However, I also made well over the market rate for similar summer employment; a fact which can be directly chalked up to the power of the union I joined.

EJB entitles his post "Unions Help Workers, Right?" Then he goes on to show that the increase in unionization tends to cause (or at least, loosely correlates with) a decrease in employment growth. I guess I can't really argue with another chart (how the hell do you have the time to create these charts?), but I can tell you that EJB's initial premise (which is reflected in his title) is flawed. Unions don't help workers, they help their workers. Unions exist to aid their members and that's it. If we substitute my new premise (let's call it..."correct premise A") for EJB's premise (let's call this one..."painfully flawed premise B"), then his chart and data don't carry much force because unions don't - and, according to Correct Premise A, shouldn't - care about unemployed people looking for work; they are not union members.

Now, it is also obviously true that unions DO help their members. EJB rightly points out that union members, on average, make more than their non-unionized counterparts. I have countered your chart with TWO of my own! (stolen from the afl/cio website, via Dept. of Labor Statistics). Besides just a higher average income, union membership helps narrow the income gap between genders and races. Plus, unions help secure greater benefits for their members.

So, I recognize that EJB would not contest the fact that unions help their members. His point, really, was to show that this aid comes at the expense of certain sectors of society - namely, the unemployed and the non-unionized workforce. But I suppose my response to that would be, so what? Unions were not formed (and are not formed) to benefit society as a whole. They are explicitly and unabashedly fighters for their own members' causes. And while I do not support legislation that would force workers to join unions, I would suggest to anyone that works in a factory to join their local union and reap the benefits and protections they have established.

~JSK

_____________________________________

A couple of things. You state that my premise changed via my title and the post. When I titled this post suggesting unions do not help workers, I was referring to workers at large, so I don't think I was being misleading. This is because as a matter of public policy it is often argued that more unions are better for workers in general and that workers have been hurt by declining unionization rates over the years.

I completely agree that obviously in the static moment, unions do benefit their members relative to non-members. However, even union members are hurt in the long run. This is because over time, less and less union labor will be demanded via the substitution effect previously explained. This is why the car companies are not building new factories in Detroit.

As the chart to the left shows, the Detroit US manufactures annual car production declined over this period. But this was not the case in the larger US industry. The Asian companies who produce cars in the US (in largely right to work, low unionization states) greatly expanded their production. Now obviously there are other factors with the companies going on here, but this shows that even the unionized workers are hurt in the long run because the demand for their labor decreases, resulting in slower wage growth and more unionized workers now finding themselves unemployed. On the macro picture, this is why unionization has been on a steady decline for decades and unions are finding it increasingly important to use the power of government to enact laws that essentially force increases in their membership.

-EJB

The Sad Case of Patrick Lett

2008-10-20T01:22:00.008-04:00

This is the story of a US Army veteran who, after serving two tours of duty in Iraq, came home to a life in shambles. His fiancee died during his final year in Iraq. His father died shortly thereafter. Many of his friends had been killed in the war. He had trouble supporting his three children from a former marriage and he lapsed in and out of clinical depression. He developed a drinking problem. Tempted by his cocaine-dealing cousin, he began using crack and cocaine. Once addicted, his cousin talked him into selling small amounts of it in his neighborhood. Unfortunately for him, his major client was an undercover criminal informant. But before the sting could go down, Lett quit the drug selling business. He repented his ways, turned to God and begged forgiveness for his actions. He had begun to turn his life around; then he was arrested. Lett did not fight the charges, he plead guilty and begged for leniency. Character witnesses testified at his trial all about his heroic acts in the line of duty. The Court even found him to be an "exemplary NCO (non-commissioned officer)." The District Judge felt sympathy for Mr. Lett. He honestly believed that Lett had turned his life around and, noting that Mr. Lett had no prior criminal record, decided to impose a mandatory minimum sentence. Here's where it gets weird: unfortunately for Mr. Lett, the District Judge misread the sentencing statute. He mistakenly believed that he was statutorily bound to impose a 65 month sentence for this felony. Thus, in a noticeably regretful written opinion, the District Judge sentenced Mr. Lett to 65 months. Eleven days in, a friend of Mr. Lett's, who attended law school, caught the error. He notified Mr. Lett, Mr. Lett's counsel, the prosecutor and the Judge. The Judge rejoiced and changed his opinion: he re-sentenced Lett to "time already served" (11 days) and probation. The Government appealed. The Appellate Court overturned the District Judge's action, holding that it was against the Federal Rules of Criminal Procedure to amend a sentence after seven days and without "clear error." The Eleventh Circuit affirmed. And yesterday, the Supreme Court refused to hear the case.

Stories like these make me sad to be heading into the profession I have chosen. Nobody attends law school with the belief that form should dominate substance and that justice is truly done when the rules are blindly obeyed. The preservation of order cannot trump substantive justice. Stories like these, wherein the legal system is so painfully ignorant of a universally recognized miscarriage of justice, do not inspire confidence in the "system."

It is simple: this man does not deserve to be in jail for 65 months. Why? Because the judge presiding over his case did not believe him to be deserving of that sentence. This unfortunate law took decision-making power out of the hands of the judge (or so he believed). Imagine the IRS having you pay $80,000 in taxes, only to find out that you actually only owed $500, at which point you are told that, even though the error was their fault, and even though they really don't want you to pay that much, it's against the rules to refund your money.

I do not know who to blame most in this situation. Many share in the shame of this case. The defense counsel should have read the statute. The judge should have re-read the statute. The Government should not have appealed. The Appellate Court and the Circuit Court allowed form to veil the merits of the case and for this they deserve blame. And finally, the Supreme Court, the citizen's last resort, the final bastion of justice, the arbiters we turn to when we're locked in the unjust machinations of federal law, declined to even consider this case. It does not matter who is most to blame, because what is readily apparent is that the system failed. The system broke.

I will not bore our readers with a detailed elaboration on the legal technicalities of the courts' decisions. But, to put it simply, the higher courts refused to overturn the case because the judge's mistake did not constitute an "arithmetical, mechanical or clear error" and because the judge tried to change the sentence after eleven days, not seven. Four days and the definition of the word "clear" is keeping Patrick Lett in jail for 65 months.

This case is, I believe, a clear sign that mandatory minimum sentences are a failed experiment and need to be repealed. There are numerous other reasons for doing so: simple fairness, lack of judicial discretion, prison overcrowding and it's failure to deter; but this case highlights the major problem with minimum sentence statutes: they are ambiguous and difficult to apply. There will be more Patrick Lett's.

Now, I realize that there must be SOME order to the judicial system. And of course rules are important. I am not advocating for the repeal of the Federal Rules of Criminal Procedure. But in cases like these, where the merits of the case implore judicial circumvention of rules - and especially where the remedy does not prejudice the other party (here, the Government) - there ought to be a narrowly drawn exception. This would not open the prison doors. This would not involve new judges overturning rulings of other cases. It would simply be a tightly tailored equitable exception to overly strict rules of form and procedure.

Patrick Lett deserves at least that much.

~JSK

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I don't disagree with the absurdity of this case, and I also have my views on drug laws, but that's another issue. However, I don't come to the same general conclusion as you, that being that mandatory sentencing in principal should be repealed. This situation is similar to the idea of statute of limitations (before getting on my case I realize they are not the same thing; I am only comparing the general principal). Unless there is some other reason for this 7 day limit that I am unaware of, then I would be arguing for reforms in this area instead.

I know that JSK places a tremendous amount of trust in judges, which seems rather inconsistent with a scepticism of executive power that he has expressed. Minimum sentencing laws are a way to limit the arbitrary power of judges. It is a check and balance mechanism; the Constitution gives the Congress the power to control the jurisdiction and ranges of authority that courts have. Without this you also end up with equally absurd cases, such as a sex offender who was sentenced to only 60 days of jail time. Though the judge had his reasoning for this decision, basically being that he wanted to expedite the ability for this man to get rehab, the judge very arbitrarily decided that there was no need to punish this individual while at the same time reducing the deterrent to conduct such crimes. Though the efficacy of these two purposes is quite debatable, It doesn't change the fact that these decisions were not made by a legislature representing the people, but rather a single individual basing his decision on his person preferences.

-EJB

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EJB, I find nothing inconsistent with my mistrust of executive power and my desire for judicial autonomy. The two posts function in entirely different ways. The Constitution specifically deals with how to check the power of the President and thus foresees the myriad problems involving the separation of powers. But judges, when acting to sentence criminals for crimes they've committed, are not considered to be trampling on the separation of powers. It is within their exclusive purview to oversee these decisions. It is only when the Judiciary encroaches upon Congressional or Executive powers that Constitutional troubles are triggered.

I point specifically to the Constitution's prohibition of bills of attainder. This simple clause sheds light on the fact that the Framer's considered it the Judiciary's job to try and sentence criminals. By prohibiting Congress from passing judgment on individual criminals, the Constitution implicitly condemns mandatory sentencing statutes. For what are they, really, except large, all-encompassing bills of attainder? The judge was entirely within his Constitutional authority to sentence as he did. The Constitution does not envision the fate of criminals being left in the hands of "the people" at large. In fact, the notion of a jury is not evidence that democratic values are condoned in the trying of criminals, but is merely considered to be a criterion of fairness to the accused.

Sure there will be decisions that anger us, but there are indeed checks and balances. Putting political pressure on the legislature can force an impeachment or, in the case of elected judges, a new judge through recall. I'm not sure what your point is when you mention that Congress has the authority to place limits on the jurisdiction and authority to hear cases of the federal courts. Yes, that is true...but Article III does NOT give Congress the right to substitute their decisions for those of the judges they've put in place. Congress can only grant or revoke jurisdiction, not discretion.

~JSK

"The Change That We Can Believe"... Is Coming

2008-10-17T14:20:00.018-04:00

With all of the attention directed towards the Presidential race, we often miss the other story and that's the Congressional races. In what looks like will be another tidal wave year for Democrats in Congress, it is becoming increasingly likely that in addition to a President Obama, the Democrats will come very close to if not reaching the 60 seat threshold required to gain a filibuster proof majority. The last two times this occurred with a Democrat president was in 1933 in the New Deal era and in 1965 in the Great Society era.Both times saw unprecedented increases in the role and power of the welfare state. And this was when the parties were not as ideologically pure and there were still numerous Southern Conservative Democrats. I hope America realizes that out of its disgust for recent Republican governance, that it is about to hand a super majority to the left that has not been seen in a generation. This Congress will be an even greater rubber stamp for Obama then it was for Bush.

Considering that ideological shifts have not occurred nearly to the extent of party affiliation, voters might be in for a surprise in upcoming years. A recent WSJ/NBC poll showed that voters self identify themselves as:

43% Democrat
36% GOP
20% Independent/Other

While at that same time:

23% liberal
37% conservative
36% moderate

(sorry, I'm looking at the hard copy and can’t find the online page to link)

Today's Wall Street Journal has an overview of various bills that have either passed in the House recently but have been blocked in the Senate, or ideas that are being proposed by the majority that will likely get passed in a 60 Democrat majority. Though the article writes about these in a largely negative light, it still is a good summary. Some of the examples include:

Medicare For All- although Obama is not actually advocating a complete state-run medical system, his plan is a big step in that direction, "Mr. Obama wants to build a public insurance program, modeled after Medicare and open to everyone of any income. According to the Lewin Group, the gold standard of health policy analysis, the Obama plan would shift between 32 million and 52 million from private coverage to the huge new entitlement." The public program will be designed to displace privately insured individuals until the bulk of the populous is comfortable with state run health insurance. It is then only a matter of time before rationing and heavy taxation become a necessity as is the case in nations with national systems.

Union "Card Check" - In a blatant attempt to bolster a Democrat special interest, the right to a secret ballot for union organization will be removed so that union bosses can go back to the day of being able to intimidate workers into joining a union. This is such a blatant attempt to reward a special interest group that even stalwart of the left George McGovern has strongly come out against this.

Taxes Will Have to Rise Drastically - If the Democrats are going to deliver on all the new spending programs they are promising, unless they are going to greatly increase the deficit, taxes are going to have to be raised to a level much higher then what Obama is proposing.

Free Speech - The so called "fairness doctrine" could be returned, allowing the FCC to regulate political speech on television and radio.

Huge Intervention in Business - Everything from price controls on pharmaceuticals, increased government stakes in financial insitutions to arbitrary oil "windfall" profits taxes are likely. Free markets will soon take a serious blow.

Higher Energy Costs and Carbon Taxes - Whether or not carbon emissions are something we should worried about does not change the fact that by design, any cap-and-trade system or carbon tax will make energy and therefore everything else we consume more expensive. In addition there will be a huge new bureaucracy to manage this, which will be a lobbyists wet dream as every special interest will have a reason why they need "adjustment credits."

We are still paying heavily for the first two giant leaps in the welfare state, as Social Security and Medicare/Medicaid are both going insolvent. I hope we can afford the likely third wave that is about to come upon us.

-EJB

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Hmm, EJB...I don't think your post is nearly clear enough on how you feel about a possible Democrat super majority.

Anyway, let's get back to reality. I'm not going to sit here and try to argue that a liberal super majority would be an out and out good thing. No sane person would argue that ANY super majority is a good thing, because we all recognize the importance of internal checks and balances. But I do have a few things to add:

1) The WSJ argument is flawed in a few ways. First, it is a simple appeal to fear - something we see entirely too much in the news media these days. In fact the entire tone of the article is akin to "the sky is falling!" and almost seems to encourage voters to vote GOP simply to avoid a parade of horribles. This is not a good reason to cast a vote. If the Dems reach a super majority it will be because our republican system functioned properly - it will be the choice of the people, and likely, a consequence and direct reaction to the failed policy of the last regime. Second, the ONLY gauge the article uses to predict the impending future welfare state is that, when Dems had Congress and the Presidency, the power of the State increased. First, causation is NOT established by this reference to two time periods. The correlation is strong, to be sure...but many other factors played a role in the then Congress' decisions to back certain plans (the Great Depression, FDR's unique personality, WWII and Korea, for instance). Let's also not forget that both parties are very different from what they used to be, even from the 60's.

2) It isn't anywhere near clear that this liberal super majority is even feasible. Estimates from different sites and polls are all over the place in terms of just how many seats the Dems will pick up.

3) The Democratic Party is NOT monolithic. Let's give some credit to the different factions and philosophies that are amalgamated into what we call the Democrats. I fully expect the Blue Dog's to strengthen their voice in a super majority because we they would understand the downsides of absolute, unchecked power. In fact, many of the new Dem Congressmen would likely be of the same type as Heath Shuler, not Ted Kennedy. Also, "Democrats" like my own Senator Lieberman or Bernie Sanders have shown no problem with taking sides against the party line.

4) There would be some positive benefits to a Democrat super majority. The education system would be drastically improved as we could finally get rid of the failure that was "No Child Left Behind." Obama's plan to improve and repair the national infrastructure would bring a much needed technological upgrade to our nation's highways, railroads and airports (much like FDR's infrastructure plan did - sans the airports). Anyone driving up 95 from NYC to Boston could tell you that they wouldn't mind paying a little more in taxes if it meant a safer and wider highway. Bridges and overpasses are literally crumbling all across the country. I also must disagree that the implementation of a State-run Health Care system would be a negative consequence of this supposed super majority. The quality of life for many of our poorer citizens would improve with Democratic policies. I'm not going to go into a full list of every possible beneficial policy that could get enacted.

Nobody should be arguing that a Dem super majority (or any super majority) is the best possible scenario for our country. But come on, EJB (and NTC), have some faith in our electorate. You guys are libertarians, you're supposed to believe in the power of people to choose the path that is most right for them. Thus a super majority would be right simply because it was so elected. And if they really do screw things up like you say they will, it'll only last two years because the people will shuffle them right out. The sky is not falling...we are not heading for a totalitarian welfare-state...let's get real.

~JSK

____________________________________

Few things. First, I definitely acknowledge the tone of this article upfront saying, "Though the article writes about these in a largely negative light, it still is a good summary."

Second, you set up a straw man when you say, "Second, the ONLY gauge the article uses to predict the impending future welfare state is that, when Dems had Congress and the Presidency, the power of the State increased. First, causation is NOT established by this reference to two time periods." The major premise of this article is that the bulk of the things listed are bills that have already been passed in the Dem controlled House in the past two years, but were blocked in the Senate. Or, they are things that Obama supports and the House would likely pass. This is not mere correlation, it is based on very recent history. The correlation only compares past historical precedent.

Third, though yes the Dem party is not monolithic, it is far more uniform then it had been in the past two time periods shown. There are the Blue Dogs, but they are far from the old southern democrats which in the Senate, we probably saw the last real one retire in Zel Miller. The legacy of the Southern Democrats is largely now in the Republican Party (for instance Sen. Shelby from AL was initially elected as a Democrat). The only current Dem Senator currently which I would argue could be called a conservative democrat is Ben Nelson from Nebraska. If he wins, Musgrove from Mississippi might be considered one too, maybe. I don't see many Democrats, particularly in the Senate, blocking anything the leadership puts through with the exception of some decisive social issues. As far as spending and social programs, they will pass just as they did with all the Blue Dogs currently in the house.

Fourth, I'm not saying a super majority is definitely going to happen. But its quite feasible. I even use language as "increasingly likely that they will come close if not reach" and place a "?" on my chart. I am only discussing a possibility that is quite feasible but not guaranteed.

Neither am I arguing that a Dem majority necessarily brings all bad things, but it brings the list that I discussed (though I would argue that No Child Left Behind needs to be totally scrapped).

Fifth, you seem to not get what "libertarian" means when you say, "But come on, EJB (and NTC), have some faith in our electorate. You guys are libertarians, you're supposed to believe in the power of people to choose the path that is most right for them. Thus a super majority would be right simply because it was so elected." I do believe in the ability for the individual to chose the path for themselves. I don't believe in the ability of the individual to dictate that an authoritative power decide whats right for another individual.

Lastly, I am not making the argument that we are going to become the Soviet Union or an "authoritative welfare state." What I am arguing is that assuming that the Democrats get 60 seats, we are very likely to see the next major leap towards the expansion of the welfare state, just as the the last two occurrences did, and what has been passed in the House already is a very good indicator of what will happen if the Senate and President are on the same page. We will further move more in the direction of a European Social Democracy and away from a Liberal Republic.

-EJB

Anything You Can Do, I Can Do Better

2008-10-17T00:51:00.005-04:00

Ah, the UK...just like us in so many ways. Sure we have our differences: they drive on the left, call elevators "lifts" and insist on measuring things in meters. But when it comes to the important things like domestic spying and data mining, we're on the same page. This from the BBC: "Proposals for a central database of all mobile phone and internet traffic have been condemned as 'Orwellian.'"

Yes, indeed. The plan is to organize and store the details of all the times, dates, locations and duration, numbers called, websites visited and addresses e-mailed within the UK. Oh but never fear, there are "no plans for an enormous database which will contain the content" of all those emails. Plus, local governments won't even be allowed to access this database! It'll just be for the central government...and the EU government...and EU investigators...and UK police and special services...but other than that, nobody!

What's really adorable is that they don't even try to make the distinction that President Bush and Alberto Gonzales (seen here applauding his own "resignation") did with the NSA electronic surveillance program (nicknamed the Terrorist Surveillance Program). Bush justified this plan, which illegally and unconstitutionally allowed the CIA, FBI and NSA to wiretap electronic communications without a warrant, by claiming that the only communications being intercepted were those which involved 1) so-called "transit traffic" - foreign powers communicating with foreign powers, which just happened to come through the US; and 2) communications between a foreign entity and a US entity, at least one of which had connections to terrorist groups. Oh, well, Mr. Bush, if you're only spying on foreigners here in the US, that's cool...it's not like they share the same Constitutional rights that we citizens do. Oh wait, they do. Nuts.

Even more interesting, did you know that the United States had(s?) this exact type of database in place for a few years? It was called the Multistate Anti-terrorism Information Exchange but was hilariously nicknamed MATRIX. Destroying privacy rights is funny, right? Well, MATRIX was "shut down" in 2005. What's interesting, though, is that, clearly, that information had to go somewhere. It obviously wasn't destroyed or dispersed. It wouldn't surprise me at all to find out that the NSA still accessed such a database routinely.

It will be interesting to see how the UK learns from our precedent. As I mentioned, we did install such a database, but the public outcry was too much and it forced our government to destroy it...or just push it underground. Already, the Liberal Democrats have spoken out against the new database. They are calling for the government to present a "convincing justification" for this "exponential increase of the power of the state." Can we expect an answer other than "to stop terrorism" or "to decrease the risk of violent crimes?" Such assertions are broad enough to cover the bases and ambiguous and scary enough to be surprisingly, forcefully persuasive. But it's like EJB said in the last post...crisis is the health of the nation.

~JSK

"War [Crisis] is the Health of the State"

2008-10-15T13:38:00.013-04:00

Yesterday, the Treasury announced that it will embark on an historically unprecedented semi-nationalization of a major industry. With the continuing evolution of the “bail out” package, the Treasury will now force nine major financial institutions to sell $250 billion in preferred stock to the government.

I don’t wish to discuss here the economic argument for and against this or whether it will help us in our current situation. Personally, I think there is some merit in this in the short run for stabilizing the economy, but I want to address the broader picture.

What really bothers me is the long term implications of this action with regards to the role of government, the preservation of freedom, and the very system that this country was founded upon. It was famously said by Randolph Bourne, that “War is the health of the state.” I think in general "crisis" is more accurately the health of the state, because in our panic we tolerate the enhancement of unprecedented government power. The problem is, that almost always these extended powers never get removed after the crisis ends. There are a number of areas with this recent action where I have some concerns and questions.

1. What does this mean for property rights? Even though some of these institutions are more then willing to participate in this deal, others are having this forced upon them. By issuing more shares to the government, even if they are being bought, this necessarily dilutes the stake of existing share holders, reducing the percent of the company that they own. In effect, they are having a portion of their property forcibly taken from them. Paulson allegedly told the officers of these nine firms that “they needed to participate in the program for the good of the national economy.” Having this rationale in the wake of the recent Kelo decision, where the Supreme Court ruled that a local government can seize property for the sole purpose of “economic development,” begs the question is there anything fundamentally sovereign about property rights anymore? Do we as individuals only have rights to property in so far as government does not see a better use for it? This completely falls in the face of the principles of no unreasonable search or seizure of the 4th Amendment, where with the exception of eminent domain and punishment for crime, property is protected. Will this set the precedent that government can take your personal property for any reason it sees fit?

2. This only expands the corrupt and disastrous merging of corporate and government power into a Corporatist system. Much of our problem with Fannie Mae and Freddie Mac was its hybrid public/private nature. The government backed private risk taking. These private firms were some of the largest campaign donors to the very people who are charged to oversee them (including our fellow PC alum Chris Dodd, chairman of the Senate Banking and Finance Committee). There were accounting scandals in 2004 that would have been punished by courts in the private sector but largely overlooked because of political influence. Essentially now, the Federal Government has a huge conflict of interest in partially owning a private industry, while at the same time the private industry will be able to wield tremendous power in the halls of government.

3. What happened to personal responsibility? Despite having many incentives to engage in risky lending in recent years, some banks such as Wells Fargo largely avoided this. Now they are being punished for their prudent action. What is the incentive for participants to act responsibly moving forward? What is the disincentive to not act recklessly in the future?

4. This is a major increase in the power of the state and the executive in particular. The “bail out” bill essentially gave a 700 billion dollar blank check to the Treasury Secretary to use as he sees fit. And the purpose of this seems to be changing by the day. First it was to purchase bad mortgage securities via a reverse auction from willing institutions. Then it was extended to include all forms of debt. Then, as the Democrats in Congress wanted, the Treasury COULD buy equity stakes if the firms voluntarily agreed to it. Now the government is forcibly buying equity stakes in these firms. What will it be tomorrow? The forced nationalization of the entire industry? Furthermore, there is no requirement regarding when the government must sell these shares in the future. They could simply keep them indefinitely.

I feel like I need to read my copy of Hayek’s The Road to Serfdom again. I suggest those who have never read it get a copy.

-EJB

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While I agree with your concerns, EJB, I believe I'm less worried about this Congressional act than you might be. Thus while I concur with your basic argument, I must write separately to point out a few things.

First, the comparison to Kelo. Now, as those of you who know me know, I am a strong supporter of private property rights and a staunch opponent of eminent domain (to the point where I would suggest abolishing it in all cases). I've even been thrown out of my Constitutional Law class for telling Supreme Court Justice Stephen Breyer that his decision to join the majority in Kelo makes him partially responsible for the fourth worst Supreme Court case in history (closely behind Plessy v. Ferguson, Korematsu v. US, and Buck v. Bell). I also recognize that you are NOT equating the two cases...you are NOT arguing that the bailout is just like Kelo.

However, you do make the argument that: "By issuing more shares to the government, even if they are being bought, this necessarily dilutes the stake of existing share holders, reducing the percent of the company that they own. In effect, they are having a portion of their property forcibly taken from them." This is not exactly the case. Nothing is actually being taken from shareholders, because the preferred stock that is being sold to the Treasury is being created for this specific purpose. Yes it dilutes the value of the stake of the shareholders, but that's all it does. For eminent domain purposes, it would be similar to the government putting a prison right next to your house...it would certainly decrease the value of your property, but it would not constitute a taking. Unless your argument is that the AMOUNT of stock is not the property, but the VALUE of the stock is - however, nothing like this has ever been upheld by the Supreme Court and, in fact, Palazzolo seems to expressly close that avenue of argument.

Similarly, you make the point that the government paid for these shares. This is crucial in any examination of a Takings Clause violation, because takings are allowed if the property owner is "justly compensated." This is why I hate our current Takings Clause analysis. What is "just compensation?" Does it include idiosyncratic value or subjective valuation? (No.)

It's also interesting that you mention the Fourth Amendment. Nowhere in that Amendment is there mentioned an explicit right to private property. But I agree with you that Eminent Domain and other unjustified takings violate the spirit of the Amendment! Does this mean you recognize an implicit fundamental right to both private property and privacy!? I can't believe this is the same EJB that I knew in college!

I completely agree with #2 and #3.

Finally, a few comments on #4. First, "a 700 billion dollar blank check," is logically impossible, because a blank check, by definition, includes no written value. But that's technical. To your point about the drastic increase in executive power, I will say that I'm not as alarmed about that as one might be if this were the executive acting AGAINST the express will of Congress. In Youngstown, the inherent power of the President was examined because Truman tried to take over the steel industry when its workers went on a mass strike during the Korean War. Justice Jackson's concurring opinion is, to this day, the lodestar for such analysis. Basically, the Executive's power is at its strongest when he acts according to the express or implied authority of Congress. His power is at its weakest when he acts contrary to their express or implied will. And there is a middle zone that gets murky when we're not sure what Congress has said on the issue. In this case (the banking crisis), I feel slightly more comfortable with this increase in executive power because it was expressly authorized by Congress. These two forces are naturally opposed to one another, so the fact that they are working in tandem should probably evidence the fact that the increase in power is necessary to quell a pressing problem. Perhaps your "parade of horribles" argument is right and this is the first step towards the nationalization of industry. But with Youngstown firmly in place, I trust it will never come to that point.

~JSK

Congress Gets One Right, Restores Posse Comitatus

2008-10-15T01:12:00.004-04:00

We here at The Thinking Heads have been awfully hard on our leaders thus far. We've attacked politicians for their lack of economic knowledge, their willingness to abandon principle for popularity and their propensity for deviousness. But I bring to you, our loyal reader(s?) what might be the first Thinking Heads post to celebrate a political action. And I'm willing to bet that it's one you didn't even know occurred.

This year, Congress passed HR 4986: National Defense Authorization Act for Fiscal Year 2008. A small but extremely important part of this bill repealed certain amendments to the Insurrection Act that were a part of the Defense Authorization Act of 2007. This is fantastic news and here's why.

The Insurrection Act (1807) is a set of laws that governs the President's power to institute martial law - that is, to deploy American troops (Army, Navy, Air Force, Marines - but not the Coast Guard) to put down insurrections and rebellion. The Insurrection Act is highly deferential to State and local governments and strictly limits the plenary power of the President. This Act, in tandem with Posse Comitatus Act, provides a barrier against domestic military policing.

However, last year, in section 1076 of the Defense Authorization Act, Congress amended the Insurrection Act. In response to the "growing threat of terrorist acts committed within the United States," Congress grossly expanded Executive power in dealing with "national emergencies." The Amendment reads in relevant part:

(1) The President may employ the armed forces, including the National Guard in Federal service, to--

(A) restore public order and enforce the laws of the United States when, as a result of a natural disaster, epidemic, or other serious public health emergency, terrorist attack or incident, or other condition in any State or possession of the United States, the President determines that--

(i) domestic violence has occurred to such an extent that the constituted authorities of the State or possession are incapable of maintaining public order

Whoa, hold on a second. Did you see what happened there? Here's a hint, read the text I've conveniently marked in red. Instead of allowing martial law only to quell rebellion or insurrection, Congress granted the President power to impose domestic military policing whenever there's a "serious public health emergency" or "other condition." Other condition! One cannot help but marvel at the astonishing ambiguity of the text. There are absolutely no clarifications as to what type of "other conditions" satisfy the "other condition" standard. Terrorist attack? Send in the Army. Communist uprising? Call in the Marines. Martians attack? Deploy the Air Force! NYC riots after Jets win the Superbowl? Anchors away, Navy!

The sad fact is, this alteration - which created the potential for persistent and severe Constitutional violations and deprivations of liberty, was barely noticed. And for you WWII history buffs, another sad fact is the frightening resemblance between this Act and the Reichstag Fire Decree. Not so much in text, but in spirit.

Thankfully, Congress woke up. Section 1068 of the Defense Authorization Act of 2008 completely repeals Section 1076 of last year's Defense Authorization Act. Thus, the original terms of the Insurrection Act have been restored and we can, once again, sleep comfortably in the knowledge that (for now) our President cannot impose military rule upon us. Thank you, Congress, for actually helping to restore our Constitutional freedoms and maintain a healthy balance of governmental power.

~JSK

The 95% Tax Cut Myth

2008-10-13T14:20:00.018-04:00

Sen. Obama often uses the line that if elected to be President, his plan would cut taxes for 95% of earners. First off, one has to make the assumption that this could even be feasibly done considering our fiscal situation. Estimates of his spending and tax plans state that he would increase the deficit by about $280 billion per year by the end of his first term. And this assumes Iraq spending comes to an end, and includes a very generous estimate of what his health care policies will cost; his campaign vaguely argues it can find unspecified $93 billion per year in "health care savings" within the existing budget programs. To be fair, Sen. McCain's proposals would also increase the deficit by about $230 billion per year according to the same linked study.

But if one can get beyond all this reality, there remains the myth that Obama really would cut taxes for 95 percent of people. The Wall Street Journal has a pretty good article in today's paper explaining how most of these "tax cuts" are really just welfare payments. As the article explains:

For the Obama Democrats, a tax cut is no longer letting you keep more of what you earn. In their lexicon, a tax cut includes tens of billions of dollars in government handouts that are disguised by the phrase "tax credit."

The truth is that most of these "tax cuts" are due to creating a laundry list of "refundable" tax credits. What this means is that if you qualify for a credit worth x amount of money, put you pay less then that amount in taxes, the government refunds you the additional amount in excess of your taxes. The result is that what is described as a tax cut is really just a welfare payment via the tax code. Realizing that the term "welfare" is not a good political starter, his campaign has disguised it as "tax cuts."

According to the the non-partisan Tax Foundation, under his plan, 44 percent of all tax filers would pay no income taxes (up from about 32% currently), with the bulk of these people receiving back more in their annual refund than what they paid in taxes. The result is a $647 billion increase in transfers via these credits over the next ten years to over $1 trillion, or 4 times more then what is currently transferred through "welfare."

Furthermore, these tax proposals have a major problem that conventional welfare programs also have, that being the welfare trap. This is the dynamic that occurs when people who are receiving payments are disincentivized from working more or harder to get off of welfare because doing so would cause the benefits one receives to phase out with more income. The result in that the policy increases the amount of poor and government dependents (or at least reduces income mobility). Similarly, because these tax credits phase out with greater income, the marginal effective rate of taxation on low income workers will become very high under Obama's plan as seen by the chart from the Wall Street Journal (keep in mind this is for only one scenario of tax credits). Why would a low income worker put additional effect in overtime for example, if 35 to 4o percent of that gain would be lost in income taxes and phasing out credits? And that is only the Federal Income Tax. That does not include payroll taxes or state and local taxes. The combined marginal rate would likely be closer to 45 to 55 percent.

-EJB

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Well, EJB, I have to say I'm a little disappointed in the subject of this post. Not because it involves economics (I am slowly learning to love the dismal science) but because you seem to disguise (or are ignorant of) the fact that this is not a WSJ piece. This information and research comes from the AEI, a noted conservative think tank (the authors are AEI "resident scholars"). Thus, I immediately am weary of the validity of its conclusions. However, as a court does when considering a motion for summary judgment, let's presume all facts and allegations to be true and proceed from there.

I will start by linking to these two pages, which I think are fair game, even though they're obviously Obama-campaign-run sites (since you opened the door by bringing in AEI articles). Each page contains various rebuttals and counter-availing considerations to the aforementioned article. Some arguments/considerations stand out, and I'll briefly highlight them below:

1) Let's be REALLY careful when we look at what this chart represents. I know you pointed this out already, but I'd like to reiterate: this involves marginal tax rates (not average tax rates) and it only involves a single, highly specific circumstance, i.e. a household with two wage-earners and two children, one in college and one getting child care. These somewhat drastic marginal rate differences would NOT show up in many other cases. And, as the WSJ article even points out, Obama's tax plan would actually increase the amount of money in pocket for low-income earners.

2) The idea in economics of bounded rationality. Bounded rationality theory simply notes that while most economic theories presume that humans are "hyperrational," there are all sorts of other concerns that make choosing the "rational" outcome infeasible. Bounded rationality's effects become even more noticeable and relevant in discussions of low-income earners. It's all well and good to argue that phasing out tax credits will increase marginal tax rates. Hypothetically, this will create a disincentive. But to then make the leap and claim that this disincentive will actually cause someone making less than $25k to reject a higher paying job is pure conjecture - and, I might add, blatantly counter-intuitive. There are absolutely no empirical studies to back up this theory. Plus, even if it were true, then the effect is ONLY important/magnified at the margins!

3) I won't go into much depth here, but there are plenty of philosophical problems with the "welfare trap" theory - to ground an entire argument on that idea is to build a house of cards. There are also proposed solutions to the "welfare trap" that Obama could then implement - for instance, a guaranteed minimum income or a negative income tax.

4) A public policy argument. Obviously, any tax cut for the middle or lower class will increase marginal tax rates (because they'll be phased out when you move up in tax brackets). So, if we're going to argue that tax cuts for the poor are bad, because it disincentivizes climbing the wealth ladder, is it then necessary to argue the contrary position (namely, that we must INCREASE the incentives for income mobility?) I'm not saying that this necessarily follows, but it seems like it could. This result would be highly problematic because it would involve one of two things, either: a) only cutting taxes for the extremely wealthy (may be a good way to incentivize people to earn more, as if they needed more incentive; but not a good way to increase government revenue); or b) increase taxes on the poor! Taxing poor people at a higher rate means they'll have all the incentive they'll need to get out there and work! In fact, let's just cut welfare altogether...the resulting increase in deaths and decay among the poverty-stricken will surely incentivize income mobility! No longer will anyone bask in the glory of being welfare-dependent. Which brings me to...

5) Lost in all this economic talk is the simple fact that Obama's plan would leave people at a given low level of income significantly better off.

And finally:
6) Marginal rate incentives are stressed entirely too much, especially when compared to effective rates, which have plenty of efficiency implications (considering that they describe what the private sector spends compared with the public sector). The chart itself, I believe, is rather meaningless.

EJB, I don't expect you to respond to each and every point and I don't actually disagree with the thesis of the original post. I have simply found and compiled any and all counter-arguments that I could find and submit them for your disapproval. Once again, I am playing out of my league, and I fully expect corrections that help me to see the errors of my post.

_________________________

First off, the article linked IS from the Wall Street Journal; however, the chart that I posted (also from the WSJ) used data from AEI. But in this line of attack JSK comes very close to responding in ad hominem. He is attacking the messenger (AEI), not the message. But then after placing that out there for the readers, he covers himself by saying essentially that we should assume it is factual. It is true that AEI is a think tank with ideological leanings, but so are all of them; it still produces academic work where methods are disclosed and information is sourced. This is far different from most campaign sites that JSK suggests are similar. The link regarding the deficit estimates for example borrows heavily from work from the Brookings Institute and the Urban Institute, both left leaning think tanks, though I did not discriminate there. Furthermore, as JSK points out (and he makes note that I also mentioned it), the chart is for one scenario. However, if you read the linked article, one can easily put together a whole host of likely combinations of proposed credits that a "normal" family would qualify for, and the results will all be similar even if they vary by degree.

But now lets actually address some argument. My post basically had two parts following the discussion of the effect to the annual deficit. The first (and what the WSJ article focused on), was not an argument that these proposals would not have the direct effect of putting more money into lower income workers pockets. In fact, I think it is quite clear that I am saying it will do just that in that I am calling these proposals to be similar to welfare. The point of that discussion was not that it would or would not directly harm or benefit a poorer household, but that a huge growth in welfare programs is being disguised as "tax cuts." It would seem that JSK is making a counter to an argument that was not being made.

The second component is what JSK spends most of him time discussing. This is the notion of the "welfare trap" and the associated chart. Essentially the argument against this effect happening is that it ignores total income and that it is crazy to think that one would turn down a job advancement because of a large marginal rate. His argument that total income or total tax burden matters more then marginal rates with regards to behavior is a common one; however, it bucks the entire theory behind behavioral decision making. People make decisions on the margin; when the marginal benefit (or at least the perceived benifit) of performing an act exceeds the marginal cost (once again, the perceived) of performing it, one will engage in that act. This profound understanding came along in the 1870's in what would become called the Marginal Revolution . If you are interested in reading about the basic economics of this beyond what I put here, fell free to read the link (side note: I wonder if Marx, who like Smith based his thinking under the Labor Theory of Value would have had different reasoning had he lived 30 years later).

This marginal benefit/ marginal cost mechanism answers the classic Water/Diamond Paradox. That is why is water, which is essential to existence cost virtually nothing, but diamonds, which have virtually no practical purpose valued at such a high price?:

Human beings cannot even survive without water, whereas diamonds were in Smith's day mere ornamentation or engraving bits. Yet water had a very low price, and diamonds a very high price, by any normal measure. Marginalists explained that it is the marginal usefulness of any given quantity that determines its price, rather than the usefulness of a class or of a totality. For most people, water was sufficiently abundant that the loss or gain of a gallon would withdraw or add only some very minor use if any; whereas diamonds were in much more restricted supply, so that the lost or gained use would be much greater.

Similarly, when one is making the decision to work an additional amount, pursue a higher paying job, and so on, people base their decision not on the total income (price) that is received for their total labor, but rather the marginal benefit relative to the marginal cost of that additional action. It is true, as JSK states via Bounded Rationality, that people are not always making a calculated decision, but over time peoples actions through experience drift into this equilibrium. Think for a moment your decision to purchase a second hamburger after eating the first. You are not doing a detailed analysis of the marginal benefit to you in buying another, but through past experience, you know how fulfilling that second burger will likely be, and you make the marginal decision to stuff your self or not when you compare it in your mind to the cost of doing so.

I will give a historical example of the "welfare trap" due to the reduction of marginal benefits of working to support my case as well as a personal anecdotal example. The welfare reform of 1996 was explicitly enacted because the total amount of people on welfare, particularly people who didn't work at all, had been steadily increasing. This is because the program was completely based on meas testing where a family would receive cash and other benefits solely on their condition. So if an unemployed individual started working, then these benefits would phase out, and therefore the marginal benefit of working was greatly reduced. The 1996 reform in general, restricted access to welfare programs to able-boddied individuals who were not pursuing work or further education or training. The relative marginal benefit of working further increased with these reforms. As a paper by a fellow at the left leaning Brookings Institute stated (in case you still don't trust "right leaning" think tanks).

The 1996 reforms have been followed by a major decline in the welfare caseload, big increases in employment and earnings of single mothers, substantial increases in total income of families headed by mothers, and the biggest declines in child poverty since the 1960s.

Now as he points out, some of this improvement can be chalked up to strong economic growth in these years; however, there had been strong economic growth in the mid to late 80's as well and no such effect occurred, so it is pretty safe to say that at the very least a good portion of the improvement was due to these reforms.

Lastly, I bring attention to a personal example. During my last year of high school, i worked a considerable amount. When applying for federal student aide for college I learned that the way the formula worked was once a student surpassed a certain threshold in annual income (somewhere around $4000 thousand at the time if I remember correctly), each additional dollar earned translated into a 50 cent reduction in student aide for the year. Just like the phasing out tax credits that Obama proposes, I had a benefit phase out, which had the effect of raising my marginal "tax rate" to about 72 percent when all taxes were included. So what I did was quit my job two months early and I sat on my butt for the summer. It didn't matter that my total average tax rate for the year was much lower, because I had already made those decisions and it was the marginal rate that effected me at that point. I essentially was effected by the "welfare trap" where a social program benefit (student aide) disincentivized me from working further to benefit myself and in turn society. Marginal rates are important, and I didn't even understand anything about economics at that time in my life. :)

-EJB

Is This Really Obama's Death Penalty Policy?

2008-10-11T15:18:00.009-04:00

From the WSJ: Barack Obama criticized the Supreme Court’s 5-4 decision today striking down the use of the death penalty in cases of child rape.

For someone so fiscally and socially liberal, it strikes me as odd that he would denounce this particular decision. Then again, as we've noted in other posts, honesty does not a winning campaign make. Perhaps Obama is actually pandering to a country that he believes still supports the death penalty. However, this is not the case (in terms of % of Americans that believe the death penalty deters crime). The problem with Obama's view, though, is that it does not simply support the death penalty, it actually expands the scope of the death penalty to cover crimes wherein the criminal takes no life.

He supports his viewpoint with the statement:
“I disagree with the decision. I have said repeatedly that I think that the death penalty should be applied in very narrow circumstances for the most egregious of crimes,”

But this is the fundamental problem with allowing an expansion of capital cases, what exactly are "the most egregious of crimes?" If someone rapes a 5 year old, but does not kill them, is that any more egregious than the same criminal raping and killing a 21 year old? The problem with drawing arbitrary distinctions like this (besides their being TOTALLY indistinguishable in constitutional terms) is that it cheapens the punishment for other crimes that should be considered just as heinous. The family of a 21 year old girl who is raped and murdered will want to know why their daughter's life was worth less (in terms of the punishment dolled out) than that of a 14 year old girl's. If you're going to argue that child rapists should be put to death, then you MUST also argue that all rapists should be executed, lest you decide to arbitrarily distinguish between the two cases. Another problem with this line of thinking is that child rapists, more often than not, cannot be deterred by punishment. This is because their crimes are driven by psychological afflictions. Now, I am not arguing that they should not be held personally responsible for their actions. What I am saying, however, is that if one justifies the use of the death penalty by its deterrent effect, then that justification loses most of its bite in cases of child rapists. Just be honest and disclose that you would kill a child rapist out of vengeance.

The WSJ article makes, I think, an excellent point towards the end. The author recalls a "Michael Dukakis moment" in which Dukakis was asked, during a debate, whether he would want someone who raped and murdered his wife to be put to death. He stuck to his philosophical guns and told the truth. His poll numbers dropped substantially the following day. Sadly, this is an issue where we may never hear the truth about a candidate's views. It is too risky a proposition to come out strong either way on the death penalty...it's like the elephant in the corner of the room. At least ONE site has some evidence that Obama believes in an outright ban of the death penalty.

~JSK

Not too much to say on this one. I agree that this is a position that Obama is likely trying to hide. Furthermore, personally, though believing that the death penalty is perfectly allowable, I am quite mixed on whether it makes for good policy.

However, one thing to add to this discussion - another major problem with extending the death penalty to crimes that do not include the killing of an individual, is that to the extent that the death penalty is a deterrent, there is now no reason for a child rapist to not go ahead and kill the child also. Any form of penal system should be designed so that there is escalating severity of punishment with the escalating severity of the crime.

-EJB

A Frank Response from a Local Economics Professor

2008-10-10T12:28:00.013-04:00

Don Boudreaux, the chair of the economics department at George Mason University, in my local Northern Virgina, responded to a request from a campaign volunteer for Sen. Obama. The volunteer requested that the Senator be able to come to the school to talk about his economic plan in order to inform students. This is what the professor wrote in reply and then posted it on his blog:

Dear Mr. _______:

Thanks for your note asking if GMU Econ is interested in inviting Barack Obama to campus in order for him to outline his "economic plan."

I can't go along with your suggestion. First, and most practically, such an invitation would really have to come from either the Office of the Provost or the Office of the President -- not from the Chairman of the Department of Economics.

Second, and most importantly, I have negative willingness to be part of an effort to give any politician a platform to speak about economics. Very few of them have any knowledge of the subject, and even fewer of them are courageous enough to speak about it honestly.

Listening to politicians, regardless of party, discuss economics makes me sick both to my head and to my stomach. And the only people who are not similarly affected, I fear, are persons whose knowledge of economics is sufficiently scant -- or whose ethics are sufficiently perverted -- to protect their senses from being insulted by what issues forth from the mouths of politicians speaking on economic topics.

So as an economist, I am no more interested in having Sen. Obama (or Sen. McCain) come to GMU's campus to lecture us on "how to manage the economy" than I would be, say, to have O.J. Simpson come to GMU's campus to lecture us on how to manage one's marriage.

Sincerely,
Don Boudreaux
Professor and Chairman
Department of Economics
George Mason University

I can't say I disagree with the sentiment. Listening to debates and stump speeches on the broad topic makes me want to throw something at the TV. Though formal education isn't synonymous to knowledge, isn't it comforting that out of those men and women who are trying to deal with our housing crisis, 80 percent of them have no background in economics, finance, or business? The scary thing is that we use the political process, populated by those with little knowledge on the subject, electing those with little knowledge on the subject, to determine such policies. This is analogous to using the voting booth to determine what the proper procedure for surgeons is when performing a quadruple bypass surgery.

-EJB

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Well, that is a pretty strongly worded letter - about as strongly worded as your own feelings on the subject. If one were to read only this post, it would appear that economists everywhere were fed up with (and vaguely angry about) politicians purporting to know economics, but failing. However, as with every story, there is a flip side.

I'd like to start with the possible notion that - EJB, close your eyes - economics may not be a science. Barbara Bergmann, an economics professor from the University of Maryland and American University has penned this article (link is to the abstract but below that is another link to the article itself) in which she claims that new methods of empirical study are necessary in the economics field because economists are simply "making it up." The late nobel-prize winning physicist (and all-around genius) Richard Feynman might agree with Professor Bergmann. Further reading here and here.

My point would be, I suppose, that if economics is merely a "social science," then it wouldn't be fair to lambaste the candidates for failing to keep up with the cutting-edge notions of economics (just as it would be unfair to blame them for not surrounding themselves with sociologists, psychologists, criminologists and other pseudo-sciences.)

My second point, however, is that, whether it seems like it or not, these candidates have actually done a good job in surrounding themselves with top-quality economic advisers (most of whom are economics professors). For instance, Obama's economic brain-trust includes: Austan Goolsbee (Professor of Economics at UChicago), Jeffrey Liebman (Professor of Economics and Public Policy at Harvard) and David Cutler (Professor of Economics at Harvard). These are all leading figures in the field and their teaching credentials are rock-solid.

McCain, meanwhile, has surrounded himself with former Reagan advisers like Jack Kemp (former US Representative and strong supporter of supply-side economics) and Phil Gramm (former US Senator and PhD in economics from Georgia).

I suggest that what makes Professor Boudreaux and EJB so irrationally infuriated by the economic policies of Mr. Obama and Mr. McCain might be that they simply subscribe to a different school of economic thought. I dare not delve into the pseudo-science of sociology, but it is simply my educated guess. I must profess that I know next to nothing about economics and its various internal philosophies. I am slightly educated in the law and economics movement, whose main advocate is Seventh Circuit Judge Richard Posner. Thus I may be playing out of my league and I whole-heartedly expect EJB to put me in my place in his follow-up post.

~JSK

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First off, your line "economics may not be a science" and then your talk about the problems with empirical methods - It is true that economics is not a hard science in the sense chemistry and physics are. So in some respect on this point, I agree. But there are many generally agree upon principles that cross schools of thought that somehow don't make it into politicians proposals.

The problem is that you are responding to an argument not made here. The point of the posted email has more to do with the line "Very few of them have any knowledge of the subject, and even fewer of them are courageous enough to speak about it honestly."

JSK gives his analysis of this line saying, "I suggest that what makes Professor Boudreaux and EJB so irrationally infuriated by the economic policies of Mr. Obama and Mr. McCain might be that they simply subscribe to a different school of economic thought." He chalks this up to disgust driven by disagreement over legitimate academic debate.

It is true that both I and Boudreaux draw many of our positions from different schools of thought then many of the economists you just listed. I am somewhat familiar with Goolsbee (for those of you interested, he was also on APDA). If this were just a debate over schools of thought, I would not be frustrated. In reality, that is not what this is about, as your comment alleges, "then it wouldn't be fair to lambaste the candidates for failing to keep up with the cutting-edge notions of economics." Most politicians stated economic views don't even line up with the grander theory behind their advisers, never mind "cutting edge." They don't even correctly argue for the ideas that have been around for decades that show up in the intro level text book of any econ 101 class.

I will give a couple recent examples. First are the stimulus checks. When being passed in Congress, last spring, many of the Democrats argued that we had to "pay" for the stimulus checks by raising taxes. Likewise, Obama's plan to give another $1,000 "stimulus check" to each household will be payed for by more taxes. Neither of these ideas are grounded in any school of macroeconomic thought, even the ones his advisers represent. Textbook Keynesian theory, traditionally the school that the American left has associated with, including many of Obama's advisers, states that the whole point of government stimulus is to take deficits. In doing so, the government finances further consumption, and therefore increases aggregate demand. If taxes are raised to pay for them, that defeats the whole purpose, as every dollar of new "stimulus" is countered by a dollar taken away through taxation; the effect is null. Rather, these kinds of ideas do not have their motives based in macroeconomic policy as advertised; it will not increase employment or increase output growth. It has more to do with a long held desire to socially engineer through wealth redistribution. By claiming it to be macroeconomic policy, it becomes a convenient political opportunity. I can assure you, that none of Obama's economic advisers can honestly tell you that handing out checks paid for by an equivalent increase in taxes will have any macroeconomic benefit. In fact, despite many politicians blaming our current economic woes on government deficits, according to Keynesian thought, in the short run this deficit spending should have actually increased growth over the past 8 years.

Second is the "gas tax holiday" promoted by both Sen. McCain and Sen. Clinton. The idea is absurd, because in the short run the supply of gasoline is relatively fixed (you just cant build a new refinery overnight), therefore, any increase in demand from the lower price by removing the tax will simply result in a price increase back to the level it was with the tax imposed (or at least in the short run) and now the tax savings will just go to the producer, not the consumer. This is why Clinton, when asked could not name one economist who thought this was a good idea (even her own advisers). I'll even entertain you with a Harvard economist, Gregory Mankiw, who stated, "What you learn in Economics 101 is that if producers can’t produce much more, when you cut the tax on that good the tax is kept . . . by the suppliers and is not passed on to consumers."

Like Boudreaux's line said, few understand economics, and the ones who do don't speak truthfully out of a desire for political gain. The result is that we have politicians claiming to "fix" the economy and "create" jobs. This only reinforces the popular notion of the messiah-like powers that politicians supposedly have over the economy. Much of this is because politicians give up all integrity in order to gain power and therefore know they really make no sense. However, some of this is that they truly don't understand a lot of this as evidenced by the recent comments of Sen. Tester, asking Bernanke to tell him what was going on giving his usual line, I'm just a dirt farmer, or a House Financial Service Committee member saying, "You mean the dollar isn't backed by gold anymore?" As spoken about in my recent post, I truly believe some politicians really think our whole mess is just "greed."

It is true that I don't expect our leaders to be experts in every field. However, at the same time they should not be claiming to have the mighty power of controlling, micromanaging and "fixing" the economy just as it would be absurd for a political candidate to claim they know the secrets of cold fusion, how to magically cure all psychological ills in the nation, or debate over the technicalities of complex surgical operations.

-EJB