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Brooks Wilson's Economics Blog: October 2009

Tuesday, October 27, 2009

Frank and Government Regulation

In a Real Clear Politics video of an interview of Ralph Nader and Barney Frank (Rep. MA), Frank declares, "We are trying on every front to increase the role of government in the regulatory area." There is a noun for Frank in the Spanish language, sinverguenza; roughly translated, it means shameless. For those who don't recall, Frank was deeply involved in fighting tighter regulation of Fannie Mae and Freddy Mac, the two GSE's that were deeply involved in the financial crisis.

While it may be fair to assert that the regulation was wrong, it is disingenuous to assert that financial regulations were nonexistent. The government currently has layers and layers of regulation on banks and other financial corporations. Those layers increased with the Sarbanes-Oxley Act of 2002. This act is both costly to government in establishing and maintaining a regulatory structure, and more importantly to the private sector in compliance. The international Basel accords govern financial institutions in more than 100 countries. The regulators who implemented the accords and other regulatory measures failed to recognize and stop the financial crisis. Perhaps regulators are no wiser than market participants. All regulation should be approached with caution for their unintended impact on innovation and growth as well as their direct cost. Members of Congress who are working to tighten financial regulation should read the empirical findings of Robert Barro in "Determinants of Economic Growth."

The regression (a statistical technique)...shows a significantly negative effect on growth from the ratio of government consumption (measured exclusive of spending on education and defense) to GDP...The particular measure of government spending is intended to approximate the outlays that do not improve productivity. Hence, the conclusion is that a greater volume of nonproductive government spending--and the associated taxation--reduces the growth rate for a given starting value of GDP. In this sense, big government is bad for growth.

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Chicago and Tax Cheats

(HT Drudge) Cook County is asking neighbors to turn in their tax-cheating neighbors. Andrew Greiner of nbcchicago writes in "Rats! City to Pay for Informing on Tax Cheats," that
Chicago and Cook County residents aren’t the only ones about to get shocking tax news; the city is debuting a “tax whistle-blower” plan that could turn neighbor against neighbor in Chicago’s business community.

The folks at city hall will pay cash bounties to informants who turn in business tax cheats around the city. The reward would amount to some sort of percentage of the tax money that the city recovers.

"It's just another way of bringing people into compliance," Revenue Department spokesman Ed Walsh told the Sun-Times.
I find the county's action both distasteful and understandable. What do you think?

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Monday, October 26, 2009

Things I Learned in California: Thomasson and Health Insurance

I spent a bunch of time this weekend traveling to and from California.  In flight, I read Melissa Thomasson's "The Importance of Group Coverage: How Tax Policy Shaped U.S. Health Insurance," American Economic Review, Vol. 93, No. 4, 2003.  I picked out two quotes from the article.  The first deals with the emergence of employer provided health care.

The development...employment-based insurance in the United States can be traced to several factors: a provision in the 1942 Stabilization Act that allowed employers to use fringe benefits to attract labor during World War II; the ability of insurance companies to counter adverse selection by selling to employee groups; and perhaps most importantly, a tax policy first introduced in 1943 and codified in 1954 that exempts employer contributions to employee health plans from taxable employee income.

Adverse selection is the idea that those that have the greatest health care needs will be the first to try to buy insurance, imposing their higher than average costs on others that buy insurance.  As costs rise, the health may abandon the market.  The cost can be lowered in several ways including screening applicants for preexisting conditions.  Some people oppose screening on normative grounds.

Thomasson attempts to measure the impact of a 1954 revision of the Internal Revenue Code that codified the tax exempt status of wages paid to purchase health care through company plans. 

Overall, the results suggest that by increasing the incentive to purchase insurance through the workplace,  the tax subsidy both increased the amount of insurance purchased and increased the probability that households would buy coverage. 

If the Congress desires something closer to universal coverage and wishes to increase incentives of people to buy insurance through markets, it should extend the tax subsidy received by employees with employer provided health insurance to those without it.  This amounts to extension of the tax subsidy for all buyers.  Subsidies to buyers increase demand. 

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Property Forfeitures

People in markets and institutional settings respond to incentives.  Many states passed laws allowing enforcement agencies to fund themselves by seizing and selling property of citizens who may have a connections to a crime creating a financial incentive to enforce law. In "Police for Profit," a Wall Street Journal writer describes the case.

With states and cities struggling with deficits, one fertile source of revenue has been money or property seized by police in possible connection with crimes. Not to be left behind, Illinois has pursued this tactic aggressively, using a law which encourages both police departments and prosecutors to take property for forfeiture, long before the accused ever get their day in court.

Under Illinois law, the state has 187 days after property is seized to file forfeiture proceedings. Meanwhile, of forfeited funds seized, 25% lands in the lap of the prosecutor's office. Another 65% goes to the department that seized the property, giving police added incentive to take the property to pad their budgets. Justice Sonia Sotomayor noted this police incentive with concern.

The article provides a couple of possible examples of excessive zeal and legal issues that have been raised.

This practice [seizing and selling property] was challenged at the Supreme Court recently in Alvarez v. Smith, where six people allege that police use of the Illinois Drug Asset Forfeiture Procedure Act violated their right to due process under the Fourteenth Amendment. Though forfeiture laws are designed to strip criminals of ill-gotten gains, three of the six were never charged with a crime. All six had their property or money taken without a warrant and had to wait for months or years without a hearing on the legitimacy of the forfeiture...

The case comes from the Seventh Circuit Court of Appeals, which vindicated the citizens when it ruled that the time between forfeiture and judicial hearing presented an unconstitutional delay. The court required the state to provide property owners with an informal hearing to establish whether there is probable cause to continue to keep the property in custody...

The question for the Supreme Court is whether to uphold what's known as the "Mathews standard," a well-worn method by which courts determine how individuals may challenge government "takings." The standard requires courts to take into account the individual harm caused by a property seizure as well as the risk of mistakes and the cost of additional hearings or other procedures. Illinois prefers a looser standard, allowing the state to continue to delay due process./p>

The size of the problem may be significant.

The numbers can be hefty. In 2008, the Chicago Police Department bragged it took in some $13.5 million in asset forfeitures, nearly double what it had seized the previous year. Golly. Inquiring minds will wonder if there were actually double the situations that called for asset forfeiture last year, or if the Chicago PD is simply more assertive about detaining property when the city is short of money.

I conclude with the article's conclusion that nobody wants crooks to hold onto their ill-gotten gain, but isn't there a better way?  My solution is to more strongly protect the rights of the accused through the Fourteenth Amendment and the Mathews standard.  I would also allow local agencies to recoup 110% of costs.  The remainder would go into the state's general fund.  Does anyone have a better solution to realign law with social interests?
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Saturday, October 24, 2009

Macey: Government Policy and Executive Compensation

Jonathan Macey is a law professor at Yale and a member of the Task Force on Property Rights at Stanford University's Hoover Institution. In, "Washington's Plans May Result in Even Higher Executive Pay," (Wall Street Journal, October 23, 2009) he writes
Executive pay has emerged, once again, as a major issue in Washington. This week Treasury and the Federal Reserve announced new regulations designed to oversee and limit executive pay at thousands of financial institutions. This is deeply ironic, because today's pay woes are the direct result of prior government intervention.

In 1992, Congress decided it would use the tax code to "improve" (i.e., reduce) executive compensation in publicly traded companies. Its vehicle was the Budget Reconciliation Act, a key provision of which became Section 162(m) of the Internal Revenue Code.

Noting that executive compensation levels had received negative "scrutiny and criticism" from the public, the new law targeted what it called "excessive employee remuneration." It did so by limiting the ability of public companies to deduct executive compensation for its top employees unless the compensation was paid out in a form that Congress found acceptable. Salary was bad. Stock options were tax favored.

Specifically, corporations were barred by law from deducting as a normal business expense any salary payments of over $1 million. Stock options, however, qualified for the corporate tax deduction without limitation. Much maligned today, stock options then were said to be "performance based" and therefore exempt from the new tax rules.

The new tax law immediately led to a tectonic shift in the way CEOs and other top U.S. executives were paid. Stock and stock options became the dominant feature of executive compensation packages.

In 1992, the government thought that managers were too risk averse. Stock options were seen as the magic bullet for making managers act more aggressively in the shareholders' interests. Today, many in Congress are blaming U.S. executives for causing the financial crisis precisely by engaging in "excessive" risk-taking. What they fail to mention is that it was Congress's own tinkering with the tax code that led to the very compensation packages that incentivized the risk-taking.

Fed Chairman Ben Bernanke asserted this week that "compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability." Mr. Bernanke promised that the government "is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system."

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Thursday, October 22, 2009

Freedom to Joke in East Germany?

(HT Wall Street Journal) I quote from "East German Jokes Collected by West German Spies," written by Hans-Ulrich Stoldt and Klaus Wiegrefe for Spiegel Online.
"Telling jokes was playing with fire," says Kleemann [a former official from the Birthler Authority, which was set up after German unification to manage the archives of the East German secret police, or Stasi]. The Stasi had 91,000 employees and a network of around 189,000 civilian informants to spy on the East German population of 17 million. It regarded every political joke as a potential threat. Anyone who poked fun at the representatives of the organs of state and society was subject to prosecution.

"There were cases of people who were jailed, it was particularly bad in the 1950s and 1960s," says Kleemann.

Here's one example about how that risk was lampooned: "There are people who tell jokes. There are people who collect jokes and tell jokes. And there are people who collect people who tell jokes."...
The other jokes, stripped of commentary are
Did East Germans originate from apes? Impossible. Apes could never have survived on just two bananas a year."

"What would happen if the desert became communist? Nothing for a while, and then there would be a sand shortage."

"Why does West Germany have a higher standard of living than we do? Because communists can't get work permits there."

"A new Trabi [a car made in East Germany] has been launched with two exhaust pipes -- so you can use it as a wheelbarrow."

The Chernobyl nuclear accident in 1986 spawned a new proverb, for example: If the farmer falls off his tractor, he must be close to a reactor.

Chernobyl, incidentally, wasn't an accident, another joke went. It was just a Soviet program to X-ray its population.

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Carden and the Minimum Wage

(HT Cafe Hayek) Art Carden (, "Repeal the Minimum Wage,") presents the plurality opinion of economists when he calls for a repeal of the minimum wage; in a survey, 46.8% of economists favored repealing the minimum age, 1.3% favored lowering it, and 14.3% favored letting it die on the vine but not changing it (see my post).  Students seem surprised to learn that most economists don't like the minimum wage, but a little economic analysis demonstrates its shortcomings.  I have inserted references to the graph, "The Minimum Wage and Unemployment" into Carden's article. 
In July, the federal minimum wage rose from $6.55 per hour to $7.25 per hour(I assume that $6.55 was the equilibrium wage)...

This is a standard application of basic economic principles. Demand curves slope downward (Demand), which means that people wish to buy more of something as it gets cheaper and less of something as it gets more expensive. Supply curves slope upward (supply), meaning people are willing to do more of something as the rewards increase and less of something as the rewards decrease. In competitive markets, minimum wages create unemployment: While they draw more people into the labor market ( point A), they reduce the amount of labor companies wish to hire (point B).

In the complex American labor market, these effects may be difficult to identify, but a comprehensive survey research on minimum wages by David Neumark and William Wascher finds that minimum wages do, in fact, reduce employment. As Neumark argues in a Wall Street Journal article, the best estimates suggest that this past summer's minimum wage increase will likely destroy approximately 300,000 jobs that would otherwise be filled by teenagers and young adults (the distance between points A and B). For example, summer camps cut back on hiring in response to the weakening economy but also in response to the coming increase in the price of labor.
The price mechanism is an impersonal method of hiring.  Once the supply of labor exceeds the demand, some other mechanism must be employed.  To often this it involves prejudice. 
Under-employment among young black males and low earnings among older black males are perennial problems explained in part by the minimum wage. Minimum wages and other regulations on the labor market lock a lot of younger black males out of the labor market, which means they do not acquire as many skills as they would if they were employed. When they are older, therefore, they earn less. In the 1960s, Milton Friedman said that the minimum wage is a crime against black Americans.

There is some evidence that this is the case in the most recent Employment Situation Summary released by the Bureau of Labor Statistics. The change in the unemployment rate for all workers between July and August was 0.3 percentage points (from 9.4% to 9.7%) while the change in the unemployment rate for "Black or African American" workers was double that--0.6 points (from 14.5% to 15.1%).

For workers classified as "Hispanic or Latino Ethnicity," there was a 0.7 percentage point increase in the unemployment rate (from 12.3% to 13%). Between August and September, the Hispanic/Latino unemployment rate recovered slightly, while the unemployment rate for black workers increased again, from 15.1% to 15.4%. Workers in these categories might be disproportionately affected by the economic downturn, but they are also disproportionately affected by the minimum wage increase.

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News from the Pay Czar

Unless the Obama administration's plan is to subtly shrink or close down the seven firms receiving the largest TARP bailouts to the tune of hundreds of billions of dollars, the announced plan to cut executive compensation earns a nine on a scale of one to ten for stupid.  The best executive talent will find employment elsewhere, leaving the companies with insufficient expertise to guide them back to profitability.  At best, the move will lengthen the time needed to repay taxpayers.  At worst, it will increase taxpayer losses. 

Sadly, ABC News reported that 71% of respondents to a survey supported the policy.  Is revenge the motive?  If it is, taxpayers would have been better served by forcing the firms through bankruptcy.  Those interested in punishing executives that made bad decisions probably miss the mark as well.  They cleared out before the dust settled.  As a taxpayer, I don't want to get even; I want taxpayer money repaid. 

I believe that the administration's motives are pure.  They want to do what is best for the country, and in today's environment, that means speeding the recovery but the administration consistently seems to miss the strength of the profit motive to spontaneously order economic activity.  Instead, they rely on central organization.  Any single person like pay czar Kenneth Feinberg lacks the information needed to set salaries across industries and positions. 

Deborah Solomon of the Wall Street Journal reports on known details in, "Pay Czar to Slash Compensation at Seven Firms."
The U.S. pay czar will slash compensation for the 25 highest-paid employees at seven firms receiving large sums of government aid and demand a host of corporate-governance changes at those firms, according to people familiar with the matter.

Kenneth Feinberg, the Treasury Department's special master for compensation, will lower total compensation for 175 employees by an average of 50%, these people said. As expected, the biggest cut will be to salaries, which will drop 90% on average.
The administration also is attempting change the rules of corporate governance for these firms.  This is a better use of government resources if new rules are guided by good research.  Deborah Solomon continues with her description of the administration's plans.
At the same time, Mr. Feinberg will demand a series of corporate-governance changes at the firms, including splitting the positions of chairman and chief executive officer; requiring boards of directors to create a committee to assess risk, and eliminating staggered boards...

The Obama administration gave Mr. Feinberg the job of more closely tying compensation to long-term performance, something the White House believes will help prevent employees from taking unnecessary risks for short-term gains. The administration has made the case that skewed compensation incentives were one cause of the financial crisis.
I do not agree with the assumption provided below that employees of these firms were taking "unnecessary risks for short-term gains."  It is more likely that they miscalculated risk rather than ignored it.  They securitized mortgages, which economists, financial analysts, and regulators believed reduced risk.  Following Basel rules for capitalization, banks wishing to increase leverage could have purchased AAA or higher earning but riskier AA rated asset backed securities without increasing capital requirements.  Eighty one percent of securities purchased were AAA and only nineteen percent were AA (Friedman, Jeffrey, "A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure," Critical Review, 21(2-3)).  They mismeasured risk not ignored it.

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Tuesday, October 20, 2009

Obama and Medical Marijuana

(HT Drudge)  The Obama administration will wisely no longer enforce federal laws against patients who have prescriptions to smoke medical nor their sanctioned suppliers in states that legalized the sale and use of medical marijuana.  The policy is a reversal of Bush administration policy.  Fourteen states have legalized some use of marijuana for Medical purposes (Devlin Barrett, MyWay,"Feds to issue new medical marijuana policy."

The consumption and production of marijuana should be legalized despite the stupidity of marijuana consumption.  If you wish to be watching Sponge Bob at 30, and appear on Jerry Springer at 40, toke up.  But people should be free to decide what they consume so long as the externalities remain reasonably small. 

People respond to incentives.  Legalization of marijuana for medical purposes will increase the number of people claiming false pain (possible example).  As an aside, taxpayers, may not want to subsidize the medical costs of these false claims or the medical needs of marijuana users.  Something tells me that people who smoke medical marijuana will not buy health insurance.  Some doctors will write prescriptions on demand.  Overall use will increase.  Current law in most states limit suppliers to non-profit cooperatives; is their any better evidence that writers of this legislation do not understand economics.  Smoking dope is fine, but not selling it for a profit. We would be better off legalizing the consumption for adults and creating laws that increase punishment for sales to minors.   
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Education and Unemployment (Repost)

Edward Glaeser notes that New York City has experienced a relatively small increases in unemployment compared to the rest of the country and provides various hypotheses to explain the circumstance in "Why Is New York’s Unemployment Rate (Relatively) Low?," for the New York Times. The hypotheses are interesting and should be read, but I linked to the article because Glaeser highlights the role of education as insurance against unemployment. I hope his observation inspires and motivates students to extend their educations beyond high school.

Despite the abundance of front-page stories with headlines like “Ivy League financier is now unemployed and homeless,” unemployment is remarkably concentrated among the least-educated Americans. Today, the seasonally unadjusted numbers show that 15.1 percent of high school dropouts are unemployed; the comparable number for college graduates is 4.2 percent.

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The Employee Free Choice Act (Repost)

Labor Unions are cartels like OPEC that have been granted legal privileges by the government. They are free from taxation and antitrust law. They can compel their employers to provide property for union use and nonmembers to pay dues.

Union workers earn higher wages by limiting employment at unionized facilities, forcing others with skills similar to union workers into nonunionized jobs. The increased supply of workers in the nonunionized facilities suppresses wages. Because the union wage is above the equilibrium, there are surplus laborers, and the unions must decide who is employed and who is not. Often race was used to exclude workers from unions.

Noncompetitive markets allow unions to thrive and often governments protect them from both domestic and foreign competition. If the protection disappears, the higher wage paid to union workers also disappears, or the industries that hire them fade away.

For generations, unions have supported Democrats over Republicans. Now that the Democrats hold the White House and large majorities in both chambers of Congress, the unions are expecting advantageous legislation. The Employee Free Choice Act (EFCA) is an example.

The "card-check" provisions of the EFCA have been widely debated. George McGovern appearing in a YouTube video for explains that he opposes the bill because it takes away the rights of workers to express their preferences for representation through a secret ballot, permitting union organizers to sign-up workers through forms authorizing union representation, the "card-check."

Groups like American Rights At Work, in "Lies and Distortion on the Secret Ballot," claim that charges made by McGovern and others about taking away the secret ballot are false.
Business special interest groups have launched a $120 million campaign to derail reform of the nation's broken labor law system by lying about the Employee Free Choice Act. Their only line of attack - that the bill somehow takes away so-called "secret ballot" elections for joining a union - is blatantly false.

The Employee Free Choice Act not only strengthens the current process for workers forming unions, but also provides for a more fair and democratic method for men and women to join unions.
By clicking the link, "more fair and democratic method," in the quote above the American Rights At Work explains their differences with groups complaining of the loss of a secret ballot.
Careful Democratic majority sign-up procedures are the most effective way to determine the wishes of a majority of employees. Under majority sign-up procedures, employers are only allowed to recognize a union if a majority of employees has signed valid written forms authorizing union representation. Any employee who does not sign an authorization form is presumed not to support union representation.
They believe that the card-check is more democratic than a secret ballot and go on a length explaining why.

For the curious, I have included wording from the Employee Free Choice Act of 2007 (Engrossed as Agreed to or Passed by House), which is presumably similar to the bill that will soon be introduced in Congress. The key paragraph of section 9 dealing with card-check supplanting secret ballots reads,
(6) Notwithstanding any other provision of this section, whenever a petition shall have been filed by an employee or group of employees or any individual or labor organization acting in their behalf alleging that a majority of employees in a unit appropriate for the purposes of collective bargaining wish to be represented by an individual or labor organization for such purposes, the Board shall investigate the petition. If the Board finds that a majority of the employees in a unit appropriate for bargaining has signed valid authorizations designating the individual or labor organization specified in the petition as their bargaining representative and that no other individual or labor organization is currently certified or recognized as the exclusive representative of any of the employees in the unit, the Board shall not direct an election but shall certify the individual or labor organization as the representative described in subsection (a).
The Congressional Research Service describes this portion of the EFCA.
Employee Free Choice Act of 2007 - Amends the National Labor Relations Act to require the National Labor Relations Board to certify a bargaining representative without directing an election if a majority of the bargaining unit employees have authorized designation of the representative (card-check) and there is no other individual or labor organization currently certified or recognized as the exclusive representative of any of the employees in the unit.
There are several reasons I don't like the bill. It supports cartels, who will demand higher wages that consumers will pay for through higher prices or lower quality goods. It supplants a secret ballot with a procedure that opens union formation to intimidation, and can anybody doubt that unions would fail to utilize that tool? It takes from entrepreneurs the management of labor, and how it will interact with capital and other resources, with scant empirical support for the notion that labor is somehow disadvantaged compared to management in wage negotiation. Does anyone doubt that research and development, innovation and product quality will decline? Finally, it places the federal government at the wage negotiating table. I do not want to see a presidential or senatorial campaign centered discussing the appropriate wage that should be granted by the National Labor Relations Board. Both Democrats and Republicans would bid up union wages to win votes. Wages would be based on political power and not productivity. Does anyone really want to see the politicization of wage negotiation?

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Economic Systems (Repost)

Radio talk show hosts, blogs, and other forms of news dissemination, noting the growth of government in the first two months of the Obama administration have been calling President Obama a socialist. I even heard one talk show host refer to his supporters as Obamunists. Such complaints made their way through a New York Times reporter to the president, who gave a dismissive answer. Joe Curl writing for the Washington Post in "Obama makes Oval Office call to reporters," explains that President Obama has become concerned that his answer was inadequate.
President Obama was so concerned that he had appeared to dismiss a question from New York Times reporters about whether he was a socialist that he called the newspaper from the Oval Office to clarify his policies. "It was hard for me to believe that you were entirely serious about that socialist question," he told reporters, who had interviewed the president aboard Air Force One on Friday.
Below I have provided definitions of several economic systems and a little information about the economists providing the definitions.You can decide which system best describes the collection of policies thus far expressed by the Obama administration.

From the Concise Encyclopedia of Economics, in an article titled "Socialism," Robert Heilbroner defines socialism.
Socialism—defined as a centrally planned economy in which the government controls all means of production—was the tragic failure of the twentieth century. Born of a commitment to remedy the economic and moral defects of capitalism, it has far surpassed capitalism in both economic malfunction and moral cruelty.
The "About the Author" section of the article states,
Robert Heilbroner, a socialist for most of his adult life, was the Norman Thomas Professor of Economics (emeritus) at the New School for Social Research and author of the best-seller The Worldly Philosophers. He died in 2005.
Milton Friedman the Nobel Prize Laureate in Economics who supported capitalism in the popular press in Capitalism and Freedom (The University of Chicago Press, 1962, pg. 5.) writes,
As it developed in the late eighteenth and early nineteenth centuries, the intellectual movement that went under the name of liberalism emphasized freedom as the ultimate goal and the individual as the ultimate entity in society. The kind of economic organization that provides economic freedom directly, namely competitive capitalism, also promotes political freedom because it separates economic power from political power and in this way enables the one to offset the other. History suggests only that capitalism is a necessary condition for political freedom. Clearly it is not a sufficient condition.
Robert Hessen, who writes on business and economic history, and is a senior research fellow at Stanford University’s Hoover Institution writes in the Concise Encyclopedia of Economics ("Capitalism") that
Capitalism,” a term of disparagement coined by socialists in the mid-nineteenth century, is a misnomer for “economic individualism,” which Adam Smith earlier called “the obvious and simple system of natural liberty” (Wealth of Nations).
Sheldon Richman, the editor of The Freeman: Ideas on Liberty at the Foundation for Economic Education, writes for the Concise Encyclopedia of Economics ("Fascism")
As an economic system, fascism is socialism with a capitalist veneer.

Where socialism sought totalitarian control of a society’s economic processes through direct state operation of the means of production, fascism sought that control indirectly, through domination of nominally private owners. Where socialism nationalized property explicitly, fascism did so implicitly, by requiring owners to use their property in the “national interest”—that is, as the autocratic authority conceived it.
George Reisman, writing for the Mises Daily in "What is Interventionism?," describes interventionism,
Interventionism is any act of government that both represents the initiation of physical force and, at the same time, stops short of imposing an all-round socialist economic system, in which production takes place entirely, or at least characteristically, at the initiative of the government. In contrast to socialism, interventionism is a system in which production continues to take place characteristically, at the initiative of private individuals, including private corporations, and is motivated by the desire to earn private profit. Interventionism exists in the framework of a market economy, though, as von Mises puts it, such a market economy is a hampered market economy.

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Sunday, October 18, 2009

Conrad and Dodd: Ethics?

Senator Kent Conrad (ND) and Christopher Dodd (CT) took sweetheart VIP loans offered by Countrywide through its "Friends of Angelo" loan program.  The senators were found innocent of wrongdoing by the Senate Ethics Committee.  I doubt that the senators were guilty of a crime.  They are both intelligent men with years of experience in Washington.  Any legislator with as much experience should be able to successfully navigate the shoals of illegality, but why are they sailing in dangerous waters?  Too often it is to claim legal but unethical privilege.  When Countrywide offered VIP loans, Conrad and Dodd should have behaved like Joseph who when when tempted by the seductress, left his robe and fled.  Instead, they took the loans.  Let me offer a rule of thumb for legislators and voters.  Anytime that a legislator feels that they deserve VIP treatment they have served too long. 

Mother Jone's Andy Kroll described the Senate Ethics Committee findings in "Countrywide VIP Loans, The Sequel."
On Friday came the less-than-shocking news that the Senate Ethics Committee had let...senators Kent Conrad and Chris Dodd off the hook for their controversial VIP loans from fallen mortgage giant Countrywide Financial's "Friends of Angelo" program. A few hours later, in a quintessentially Washington move, two of their colleagues introduced legislation to "increase transparency and strengthen mortgage disclosure for Members of Congress," as a press release put it on the site of Sen. Barbara Boxer (Calif.), who authored the bill along with Sen. Johnny Isakson (Ga.).

This wasn't a move by two disgruntled renegade senators outside the ethics committee, angry about its dubious decision to give Dodd and Conrad a pass. No, Boxer chairs the panel, and Isakson is its vice chairman. Their legislation is basically a symbolic move to whitewash the Ethics Committee's leniency.

The saga continues as the House picks up where the Senate left off.  A Wall Street Journal  "Review and Outlook" column titled, "The Countrywide Vote," describes the House Ethics Committee investigations and why they are likely to provide cover for the senators and others.
Senators Chris Dodd and Kent Conrad lawyered up when the Senate ethics committee asked about their VIP loans from Countrywide Financial. But the sweetheart Senators may not be able to stop another look at their dealings with the subprime mortgage factory. A ###### on the House oversight committee, Illinois freshman Mike Quigley, tells us that he supports a subpoena to obtain documents on the "Friends of Angelo" loan program.

Named for former Countrywide CEO Angelo Mozilo, the program was used to curry influence with government officials. Bank of America, which bought the failed lender last year, has said it's ready to turn over the files as soon as it receives a subpoena.

We're told that, at a closed Thursday meeting of ###### on the House oversight committee, several Members urged Chairman Edolphus Towns (N.Y.) to allow a vote on California ###### Darrell Issa's proposal to issue the subpoena. Mr. Towns received two mortgage loans from the Countrywide unit that processed VIP loans but claims he received no special favors.
I have deleted reference to political party. Power affects officials of both parties equally; it corrupts. One way to limit abuse of power is to increase oversight, the stated purpose of the Boxer-Isakson bill.  A second way to limit abuse is  to lessen legislator's ability to interact with economic agents through legislation.  This would give elected officials less to sell. 

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Friday, October 16, 2009

Good Morning American and JPMorgan Chase

I watched ten minutes of Good Morning America yesterday and was disappointed in news story about profits earned JPMorgan Chase.  It seemed a blatant case of agenda setting.  The agenda is that private corporations, particularly financial corporations, are dangerous and must be more carefully regulated by the government.  They, and I think they was Diane Sawyer, reported on profits.  It was similar to Stephen Bernard's article, "JPMorgan Earns $3.6B, but Loan Losses Remain High," which was linked to the show's web page. 
JPMorgan Chase & Co. reported strong third-quarter earnings Wednesday as its thriving investment banking business more than offset rising loan losses that the bank warned would continue for the foreseeable future.

JPMorgan, the first of the big banks to report earnings for the July-September period, reported a $3.59 billion profit but also said it roughly doubled the amount of money it set aside for failed home and credit card loans in the quarter.
Hard on the heels of the report on JPMorgan's profits, Sawyer introduced Claire Shipman's report on the dangers of high compensation to financial institutions bailed out by the government stating,
Some good news from some of the banks, but what about these other banks that had billions in profits now after all the taxpayer bailouts.
Rather than report on JPMorgan prudent actions during the housing boom that saved them from the fate of their less prudent competitors, ABC News switched focus to imprudent banks that required government bailouts.  JPMorgan was a well managed investment bank that bucked many of the practices followed by the institutions that the government rescued.  Jeffery Friedman describes JPMorgan's business strategy during the go-go years of the housing boom in Critical Review, "A Crisis of Politics, Not Economics: Complexity, Ignorance, and Policy Failure," 21(2-3):127-183.
J. P. Morgan Chase, which single-handedly accounted for about 44 percent of the world’s derivatives exposure (Slater 2009).18 Moreover, even when it was making very low profits relative to other commercial banks, J. P. Morgan raised the pay of its risk-monitoring personnel (Tett 2009a, 115–17), and after considering the possibility of engaging in subprime securitization to boost the bank’s profits, its CEO, Jamie Dimon, decided that the risk was too great (ibid., 124–28). Earlier on, the J. P. Morgan employees who developed CDO tranching had had the opportunity to apply this technology to mortgage-backed securities.  But they realized that even though “the last time house prices had fallen significantly” across the United States as a whole “was way back in the 1930s,” a similar event might make all the losses within a mortgage-backed CDO “correlate” with each other, which “might be catastrophically dangerous.”

Therefore, "to cope with the uncertainties the team stipulated that a bigger-than normal funding cushion be raised, which made the deal less lucrative for J. P. Morgan. The bank also hedged its risk. That was the only prudent thing to do. . . . Mortgage risk was just too uncharted."

"The team at J. P. Morgan did only one more [such] deal with mortgage debt, a few months later, worth $10 billion. Then, as other banks ramped up their mortgage-backed business, J. P. Morgan largely dropped out. (Tett 2009b)"

Finally, J. P. Morgan “did not unduly leverage [its] capital, nor did [it] rely on low-quality forms of capital.” Instead of targeting a high leverage ratio, as in the examples Jablecki and Machaj use to illustrate the behavior of SIVs—of which it had none—J. P. Morgan aimed for an 8-8.5 percent “tier-1” capital ratio—twice the level required by the Basel rules (Dimon 2009, 16)—despite the higher costs of tier-1 capital.19

By taking all of these prudent actions, J. P. Morgan emerged from the crisis as the strongest of the nationwide American commercial banks.

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Thursday, October 15, 2009

Aplia and Your Grade

I propose the following hypothesis: careful use of Aplia is the best method of improving your grade in class. I must acknowledge a measurement problem before proceeding. I cannot measure hours reading or otherwise studying economics nor the intensity of effort. I can measure grades on exams, points earned on Aplia chapter assignments, basic math skills, and Aplia news analysis assignments.

Using ordinary least squared regression, a simple method of estimating a line of best fit, I measured the influence that points earned in Aplia, basic math skills, and news analysis had on exam scores. The only statistically significant explanatory variable was points earned on Aplia assignments and it was significant at the 1% level. Each question answered correctly improved exam scores by .18 points. The graph visualizes this result. The line is the graph is the line of best fit. Students who answered few Aplia questions correctly earned lower grades on the exam than those who earned many points.

Replace this text with...
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Tuesday, October 13, 2009

Violence and Economic Growth (Repost)

Douglas North, John Wallis, and Barry Weingast believe that economists do not properly include controlling violence in models that explain economic growth. Barry Weingast explains their theory on the EconTalk podcast, “Weingast on Violence, Power and a Theory of Nearly Everything.”

They divide countries into three types of societies or orders. The first is the hunter-gatherer or primitive order. It has very little specialization, an engine of economic growth, and a great deal of violence. Primitive orders are poor, producing less than $400 per capita GDP.

The next order is the limited access order and it solves the problem of violence by trading economic favors to specialists in violence for foregoing violence. The size of the payoff is directly related to the ability of commit violence. The government creates monopoly rents and uses the power of the state to quell competition. Per capital GDP in these orders ranges between $400 and $8,000. The limited access order is similar to Hernando DeSoto’s mercantilist society. North, Wallis and Weingast include countries as diverse as Bolivia, India and Russia as limited access orders.

The final order is the open access order. Economic competition is over price and quality, not violence. In an open access order, Schumpeterian competition through creative destruction permits new groups to spontaneously form to exploit new ideas, products and organizational forms. Open access orders are maintained by open access to a plethora of organizations including economic, political, social and religious. Normative beliefs in these societies promote the inclusion of new groups, and equality before the law. Constitutions that limit government power are also important. Open access societies begin at $8,000 per capita GDP, and goes up from there. In fact, the average per capita GDP exceeds $20,000.

Why don’t the limited access orders reform, adopting rules that will make them more like open access orders? Attempts to reform invite violence from previously favored groups that might be losing privilege. Reform would bring greater wealth over time if violence was avoided. But avoidance is not a given. The government might attempt to buy out the privileged, but this is also a difficult policy to implement. Can you promise the privileged a bigger payoff than they already realize? Furthermore, other groups may demand reform without payoffs, escalating the probability of violence.

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Pirates (Repost)

Many games, books and movies have themes of good guys versus bad guys. Pirates were the bad guys. Why then are they often romanticized? Why did Disney build a ride, and an E ticket one at that, honoring villainous pirates? Could someone really be a "good man and a pirate" as Captain Jack Sparrow suggests in "Pirates of the Caribbean"?

Peter Leeson, an economist at George Mason University, has written extensively about 18 century pirates. In an article entitled, "In Defense of Pirates (The Old Time Ones)," (NPR, April 10, 2009) he reminds us why pirates are bad but continue to hold our interest.
All pirates are thugs, and the world would be better off without them. But not all pirates are equal. Unlike their Somali successors, early 18th century pirates, men like Blackbeard, "Black Bart" Roberts, and "Calico" Jack Rackam, weren't only thieves. They were also early experimenters with some of the modern world's most cherished values, such as liberty, democracy, and equality.
The 16th and 17th centuries saw an increase in exploration, colonization and trade. Merchants did not man their ships; they hired a captain and a crew. This organization created a principle-agent problem. The captain and crew did not have incentives to care for the ship nor its cargo. Merchants overcame this problem by selling or granting a captain shares in the ship. Unfortunately for the crew, the captain then had incentives to impose harsh discipline, docked wages, and cut food rations. It increased his profit.

Seaman came from the lowest socioeconomic elements of society, and were often abused by merchant captains. Piracy was an alternative career choice that gave some protection from predation and a chance at wealth. Pirates owned their ships and operated them as a floating stock company. They behaved democratically as shared owners.

Pirates still needed captains to find prey and make decisions in battle. Experience made them wary of predation by their captains, and they limited it using several techniques common in today's governments. The first was to democratically elect captains. Leeson observes ("An-arrgh-chy: The Law and Economics of Pirate Organizations, Journal of Political, vol. 115, no. 6, 2007),
...pirates could and did democratically elect their captains without problem. Since the pirates sailing a particular ship were both the principals and the agents, democracy did not threaten to lead to captains who served the agents at the principals’ expense. On the contrary, pirate democracy ensured that pirates got precisely the kind of captain they desired. Because pirates could popularly depose any captain who did not suit them and elect another in his place, pirate captains’ ability to prey on crew members was greatly constrained compared to that of merchant ship captains.
Pirates further limited the captains power through divided authority, much as we do with separation of powers in a modern democracy.
The primary “other officer” pirates “constituted” for this purpose was the quartermaster. The way this office worked is straightforward. Captains retained absolute authority in times of battle, enabling pirates to realize the benefits of autocratic control required for success in conflict. However, pirate crews transferred power to allocate provisions, select and distribute loot (there was rarely room aboard pirate ships to take all they seized from a prize), and adjudicate crew member conflicts/administer discipline to the quartermaster, whom they democratically elected...
To limit abuse by the quartermaster, pirates instituted articles of agreement or constitutions defining the rights and punishments of crews.
Articles of agreement required unanimous consent. Consequently, pirates democratically formed them in advance of launching pirating expeditions. “All [pirates] swore to ’em,” sometimes on a Bible or, for one pirate crew, “upon a Hatchet for want of a Bible.” The crew forged its articles alongside the election of a captain, quartermaster, and occasionally other smaller officers. Pirates sought agreement on their articles (ex ante “to prevent Disputes and Ranglings afterwards” (Johnson 1726–28, 342). In the event a pirate disagreed with their conditions, he was free to search elsewhere for more satisfactory terms.
Finally, pirate crews were often more racially tolerant than government operating contemporaneously.
Some historical pirates even embraced racial tolerance before their legitimate counterparts. England didn't abolish slavery until 1772. In the United States slavery persisted until 1865, and blacks didn't enjoy equal rights as citizens, politically or in the workplace, until even later than this. Some historical pirates, however, extended suffrage to their black crewmembers and subscribed to the practice of "equal pay for equal work," or rather, "equal pay for equal prey," in the early 1700s.
Democratic social innovations by pirates does not make them good guys, but it does make them interesting. Leeson has interested me enough in pirates that I am placing his book, "The Invisible Hook," on my summer reading list.

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Leeson and Dean: The Democratic Domino Theory

The Bush administration believed that establishing democracy in Iraq might embolden reformers in other lands seeking to spread freedom.  In remarks to the national Endowment for Democracy at the United States Chamber of Commerce on November 6, 2003, President Bush said
Iraqi democracy will succeed -- and that success will send forth the news, from Damascus to Teheran -- that freedom can be the future of every nation. The establishment of a free Iraq at the heart of the Middle East will be a watershed event in the global democratic revolution.
Peter Leeson and Andrea Dean refer to the idea that establishing a democratic government in one country increases the probability of neighboring countries adopting more democratic institutions as the democratic domino theory.  They attempted to measure the size of the domino effect in "The Democratic Domino Theory: An Empirical Investigation."  The abstract of the paper reads
According to the democratic domino theory, increases or decreases in democracy in one country spread and “infect” neighboring countries, increasing or decreasing their democracy in turn. Using spatial econometrics and panel data that cover over 130 countries between 1850 and 2000, this article empirically investigates the democratic domino theory. We find that democratic dominoes do in fact fall as the theory contends. However, these dominoes fall significantly “lighter” than the importance of this model suggests. Countries “catch” only about 11% of the increases or decreases in their average geographic neighbors’ increases or decreases in democracy. This finding has potentially important foreign policy implications. The “lightness” with which democratic dominoes fall suggests that even if foreign military intervention aimed at promoting democracy in undemocratic countries succeeds in democratizing these nations, intervention is likely to have only a small effect on democracy in their broader regions.
Like beauty, the "lightness" impact is in the eye of the beholder.  If we are successful at establishing more democratic institutions in Iraq and Afghanistan, is an 11% increase in surrounding countries significant?

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Monday, October 12, 2009

Global Warming and Measuring GDP

GDP is a statistic and is subject to measurement error.  Economists have long recognized that pollution harms resources and economic activity and that the lost value should be subtracted from GDP, but this is a difficult and costly practice.  Anthropogenic global warming offers an example of the problems researchers would encounter measuring pollution cost.  The first problem is to measure the portion of the recent increase in temperatures due to nature and man.  Paul Hudson of  BBCNews describes the fight in the scientific community over the causes of climate change in "What happened to global warming?
This headline may come as a bit of a surprise, so too might that fact that the warmest year recorded globally was not in 2008 or 2007, but in 1998.

But it is true. For the last 11 years we have not observed any increase in global temperatures.

And our climate models did not forecast it, even though man-made carbon dioxide, the gas thought to be responsible for warming our planet, has continued to rise...
Note the error in the next quote which refers to "climate change skeptics."  As the author notes in the ensuing paragraphs, some skeptics believe that climate change is predictable by measuring solar output and presumably, not carbon emissions.  The quote should begin, "anthropogenic climate change skeptics." 
Climate change sceptics, who passionately and consistently argue that man's influence on our climate is overstated, say they saw it coming.

They argue that there are natural cycles, over which we have no control, that dictate how warm the planet is. But what is the evidence for this?

During the last few decades of the 20th Century, our planet did warm quickly.

Sceptics argue that the warming we observed was down to the energy from the Sun increasing. After all 98% of the Earth's warmth comes from the Sun...
Other sceptics look to the oceans as drivers of climate change.
The oceans, he [Professor Easterbrook] says, have a cycle in which they warm and cool cyclically. The most important one is the Pacific decadal oscillation (PDO).

For much of the 1980s and 1990s, it was in a positive cycle, that means warmer than average. And observations have revealed that global temperatures were warm too.

But in the last few years it has been losing its warmth and has recently started to cool down.

These cycles in the past have lasted for nearly 30 years.

So could global temperatures follow? The global cooling from 1945 to 1977 coincided with one of these cold Pacific cycles.

Professor Easterbrook says: "The PDO cool mode has replaced the warm mode in the Pacific Ocean, virtually assuring us of about 30 years of global cooling."
Scientists that support theories of anthropogenic global warming caused by carbon emissions don't agree with the theories that the sun or oceans are driving recent climate change.
The UK Met Office's Hadley Centre, responsible for future climate predictions, says it incorporates solar variation and ocean cycles into its climate models, and that they are nothing new.

In fact, the centre says they are just two of the whole host of known factors that influence global temperatures - all of which are accounted for by its models.

In addition, say Met Office scientists, temperatures have never increased in a straight line, and there will always be periods of slower warming, or even temporary cooling.

What is crucial, they say, is the long-term trend in global temperatures. And that, according to the Met office data, is clearly up.
After deciding if the earth is warming or cooling and man's contribution to the change, scientists must determine if the change is good or bad for economic activity.  The answer is clear that small increases in temperature have aided human development.  Henrik Svensmark gives a one paragraph summary of 1,000 years of climate variation on economic activity in "While the sun sleeps by Henrik Svensmark."
Solar activity has always varied. Around the year 1000, we had a period of very high solar activity, which coincided with the medieval warmth. It was a period when frosts in May was an almost unknown phenomenon and of great importance for a good harvest. Vikings settled in Greenland and explored the coast of North America. For example, China’s population doubled over this period. But after about 1300, the earth began to get colder and it was the beginning of the period we now call the Little Ice Age. In this cold period all the Viking settlements in Greenland disappeared. Swedes [were surprised to see Denmark to freeze over in ice], and the Thames in London froze repeatedly. But more serious was the long periods of crop failure, which resulted in a poorly nourished population, because of disease and hunger [population was reduced] by about 30 per cent in Europe.
Without reference, other scientists believe that anthropogenic climate change from carbon emissions will cause more warming than experienced in the past and that it will lead to large declines in economic activity. 

Economists would have difficulty measuring the impact of anthropogenic climate change on the economy.  I understand why it is not attempted.

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The 4 Week Moving Average of Initial Unemployment Claims and the Unemployment Rate

Robert J. Gordon did research looking at the relationship between the 4 week moving averages of initial unemployment claims and found that recessions often bottom out shortly after the 4-week moving average of initial unemployment claims peaks. Barring a deep double dip recession, the average peaked at 658,750 for the week ended April 4, 2009.  On October 8, 2009 the Department of Labor released the most recent data on initial unemployment claims for the week ended September 19, 2009 in "Unemployment Insurance Weekly Claims Report."  Seasonally adjusted initial claims was 521,000, down 33,000 from a revised estimate of initial claims of 554,000 for the week ended September 26, 2009. The 4 week moving average decreased 9,000 to 539,750. The average is down 119,000 from its peak, signaling a probable peak for this business cycle.

Using National Bureau of Economic Research estimates on the beginning and ending dates of recessions, I have  included graphs that compare the recessions that began in March 2001, July 1990, and July 1981 with the current recession which began in December 2007.  Each compares the 4 week moving average of unemployment claims and the unemployment rate of the recession beginning in 2007 to those of the previous recessions.  I have not attempted to adjust the initial claims data for changes in the size of labor market or the unemployment rate for changes in the natural rate of unemployment. The plots are measured over 108 weeks, beginning eight weeks before the recessions began. The horizontal axis begins in October 2007, the date the current recession began, and the data for the other recessions are superimposed on this date. The graphs gives some insight into why economists, politicians and others have expressed so much concern about the current recession.

The current recession seems to have the depth of the 1981 recession but the 4 week moving average has fallen more slowly now than in the 1981 recession.  Unemployment peaked at 10.8% and began to fall in January of 1983, but by May, the unemployment rate of 10.4% was still higher than the current unemployment rate of 9.8%.

The 1990 recession was shallower than the current recession both in terms of length, and depth.  It lasted eight months from peak to trough; the current recession has not officially ended.  The 4 week moving average hitting 501,250 forty-two weeks after the 1990 recession began compared to 658,750 seventy-four weeks after the current recession began.  The recovery from the 1990 recession was slow.  Unemployment was still rising two years after the recession began and would peak at 7.8% in June 1992, two months later than the time frame pictured in the graph.  Still 7.8% is two percentage points lower than the current recession and we do not know when it will peak.

The recession which began in 2000 was similar in length, and depth to the 1990 recession.  It lasted eight months from peak to trough, with the 4 week moving average topping at 517,00 thirty-four weeks after the recession began.  Unemployment peaked at 6.0% one-hundred weeks after the recession began.  Again, the current recession will last at least as long, experience higher levels of initial unemployment claims and unemployment.       

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Thursday, October 8, 2009

Drouillard Defends the California Coastal Commission

Frank Drouillard, made an interesting response to my post, "The California Coastal Commission and Property Rights."  He is a resident of the California coast and a design engineer for a San Francisco based company that has built bridges along the California coast, implying that professionally and personally he has knowledge of the California Coastal Commission.  He blogs at "MendonomaBlogspot."  Drouillard wrties

Norris and Gilder built a road on their property without the necessary permits. Instead of working with the Coastal Commission to resolve the violation, they took the advice of an attorney that sees everything through the lens of Nollan v. CCC and sued the Commission and their neighbors instead. That suit was thrown out of court last month. Nowhere in California can you build roads without a permit, especially in mountainous zones. Why should it be any different in Topanga Canyon? 

As for the filming, CCC staff initially agreed to the filming on the condition that they too be allowed to film. Norris and Gilder refused to reciprocate, which tells me their intend all along was to mischaracterize the CCC's enforcement efforts. 

Kathleen Kenney (and her estate) also failed to obtain the necessary coastal development permit for her 741 sf building.

A fair and uniform enforcement of the Coastal Act requires that all development activity within the Coastal Zone be subjected to review for conformance to the Coastal Act. The Kenney estate is subject to daily fines until Coastal Act violations are corrected, which the estate (Starz) has chosen not to do.

There's nothing arbitrary about the Commission taking enforcement action against Wildcrew's Playground or Kenney's old chicken coop.

Richard Oshen is attempting to make heroes out of scofflaws. He's also unjustly blaming the CCC for everything from wildfires to bad hair days.

It doesn't take that much of a journalist effort to get the other side of the story and get the facts straight. (Unless you're an attorney that relies on ignorance of the Coastal Act to make a living, in which case you may want to spread that ignorance around.)
BTW, the Coastal Zone has shrunk since the passage of Prop 20 and the subsequent Coastal Act of 1976. A quick review of any of the Coastal Zone maps readily available from local governments with certified LCPs or the Commission's website will show that the Coastal Zone extends inland far less that 5 miles for most of the California coast.

The purpose of the Coastal Commission is to make sure that development within the Coastal Zone is consistent with the Coastal Act. Unless your intent is to destroy ESHA or to block access to the coast, it isn't that difficult to develop in a manner that suits the site and is in full compliance with the Coastal Act.
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Wednesday, October 7, 2009

David Brooks on Foundational Rules and Spontaneous Order

Mankiw refers to, "Bentham vs. Hume," as "David Brooks at his best." Jeremy Bentham was a contemporary of Adam Smith who believed that an activist government could improve societal well being. He believed that government should actively order resources. David Hume was also a contemporary of Adam Smith who greatly influenced Smith's thoughts. He believed the spontaneous order of markets best organized economic activity. As Acemoglu reminds us, all markets are constrained by law and conducted valuable historical research establishing foundational rules to maximize wealth created by spontaneous interactions. Too many rules might result in what von Mises called a hampered market economy.

David Brooks places the two philosophers in a modern setting.

Mr. Bentham knows everything. He went to Stanford, then to the Kennedy school before getting a business degree. He’s got multivariate regressions coming out of his ears, and he sprinkles C.B.O. reports on his corn flakes for added fiber.

Mr. Hume is very smart, too, but he doesn’t seem to make much use of his intelligence. He worked on Wall Street for a little while, but he never could accurately predict how the market was going to move tomorrow or the day after that.

He describes how they would approach government.
If you put Mr. Bentham in charge of the government, he’d proceed with confidence. If you told him to solve a complicated issue like the global-warming problem, he’d gather the smartest people in the country and he’d figure out how to expand wind, biomass, solar and geothermal sources to reduce CO2 emissions. He’d require utilities to contribute $1 billion a year to a Carbon Storage Research Consortium. He’d draw up regulations determining how much power plants would be allowed to pollute.

Mr. Hume, I’m afraid, wouldn’t be so impressive. If you asked him to take on global warming, he’d pile up reports on the problem. But if you walked into his office after a few days, you’d find papers strewn in great piles on the floor and him at his desk with his head in his hands.

“I don’t know the best way to generate clean energy,” he’d whine, “and I don’t know how technology will advance in the next 20 years. Why don’t we just raise the price on carbon and let everybody else figure out how to innovate our way toward a solution? Or at worst, why don’t we just set up a simple cap-and-trade system — with no special-interest favorites — and let entrepreneurs figure out how to bring down emissions?”
I would hope that, if elected, Hume would undue a few of Bentham's overzealous programs.  The original Hume did after all fight against mercantilist fetters on markets in the 18th century.  David Brooks ends on a depressing note for free marketers.
So let’s have the debate [spontaneous order vs government order]. But before we do, let’s understand that Mr. Bentham is going to win. The lobbyists love Bentham’s intricacies and his stacks of spending proposals, which they need in order to advance their agendas. If you want to pass anything through Congress, Bentham’s your man.

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Tuesday, October 6, 2009

William Saleten contributed a fun and provocative article for Slate titled, "Liquid Candy: The new addiction is taxing addictions." His cynicism about the motivation of politicians seems justifiable. Recognizing the political desire to tax, he sees improving health by taxing soda as a positive externality of closing budget deficits, an afterthought.
Now a new class of addictive products has been devised. They're ingeniously easy to produce. Just take any addictive substance already on the market and invite politicians to tax it. The new addiction is taxing addictions...

The quickest way to a politician's heart is to dangle money...
The latest sign of this trend is a report issued last week by the Center for Science in the Public Interest, which lobbies for regulation of harmful products. The press release announcing the report is headlined, "Taxing Soda Could Trim State Deficits (and Waistlines), Says Report."...

The release goes on to talk about the public health benefits of reduced soda consumption. But that rationale, which used to be primary, has now been reduced to a parenthetical afterthought. The CSPI report itself is broken down into three sections. The first section header says, "State Budgets Are in Trouble." The second says, "Taxing Soft Drinks Would Reduce Budget Woes." The third says, "Obesity, Soft-Drink Taxes and Health."

Come on, Senator. You need the money. If you leave it on the table, somebody else will take it. Just visit our calculator and try a sample. It's like taking candy from a baby. In fact, it is taking candy from a baby. And (parenthetically) that's a good thing.
Taxing soda to improve health is yet another nanny state activity. The state does not need to regulate its citizens' diets. We are perfectly able to make choices to maximize our well being, which may not always mean lengthening our years on earth. Riding a Motorcycle is more dangerous than driving a car, but many find the pleasure/danger tradeoff acceptable. Driving an SUV is certainly safer than driving a smart car, but at the margin, some place fuel economy or protecting the environment above safety.

Nor do I believe that taxing soda will do much to increase health like raising taxes on cigarettes because soda has closer substitutes than cigarettes. Rather than buying a soda, consumers might buy a sugary fruit drink, sweet tea, a candy bar or chocolate chip cookie. They are unlikely to buy carrots.

Because sodas have reasonable substitutes, a new tax might not raise as much money in the long run as anticipated. Consumers may adapted by switching purchases to less taxed goods. Even if it increases tax revenues, I prefer fewer taxes with larger bases.

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Sunday, October 4, 2009

Riddle Me This

What is worse than Congress voting on bills that they have not read?

Proposing bills that cannot be understood if read.

Nicholas Ballasy of CNSNews reports in "Finance Committee Democrat Won’t Read Text of Health Bill, Says Anyone Who Claims They’ll Understand It ‘Is Trying to Pull the Wool Over Our Eyes’," that
Sen. Thomas Carper (Del.), a member of the Senate Finance Committee, told that he does not “expect” to read the actual legislative language of the committee’s health care bill because it is “confusing” and that anyone who claims they are going to read it and understand it is fooling people.

“I don’t expect to actually read the legislative language because reading the legislative language is among the more confusing things I’ve ever read in my life,” Carper told Carper described the type of language the actual text of the bill would finally be drafted in as "arcane," "confusing," "hard stuff to understand," and "incomprehensible." He likened it to the "gibberish" used in credit card disclosure forms.
How is Senator Carper, and if he is correct, and member of the Senate able to determine how he or she will vote if they cannot understand the language?  As an aside, don't members of Congress frequently complain about and periodically pass laws to limit arcane gibberish used in credit card disclosure forms?  Who is interpreting the bill for those who have not read it?  The article actually provides an answer to the first question.
Senator Jeff Bingaman (N.M.), who sits on the committee, told on Thursday that the panel was just following its standard practice in working with a “plain language description” of the bill rather than an actual legislative text.

“It’s not just conceptual, it’s a plain language description of the various provisions of the bill is what the Senate Finance Committee has always done when it passes legislation and that is turned into legislative language which is what is presented to the full Senate for consideration,” said Bingaman.
Some Senators believe that they should have access to the actual legislation.
...Sen. John Cornyn (Texas), who also serves on the committee, said the descriptive language the committee is working with is not good enough because things can get slipped into the legislation unseen.

“The conceptual language is not good enough,” said Cornyn. “We’ve seen that there are side deals that have been cut, for example, with some special interest groups like the hospital association to hold them harmless from certain cuts that would impact how the CBO scores the bill or determines cost. So we need to know not only the conceptual language, we need to know the detailed legislative language, and we need to know what kind of secret deals have been cut on the side which would have an impact on how much this bill is going to cost and how it will affect health care in America.”

When will the bill be made available so that I can read it?  Well, at least there is an answer to the last question too.
Last week, the Finance Committee considered an amendment offered by Sen. Jim Bunning (R-Ky.) that would have required the committee to post the full actual language of the proposed legislation online for at least 72 hours before holding a final committee vote on it. The committee defeated the amendment 13-10.

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Friday, October 2, 2009

The California Coastal Commission and Property Rights

Property rights define the rights individuals have to use, transform and transfer the property they own.  Transforming to the rights that owners have to combine resources to improve a product, or make a new product.  For example, consumers have the right to put spinners on wheels, transform a tree into a table, or undeveloped property into low income housing.  Glenn Hubbard and Anthony O'Brien, the authors of "Economics" write,
We have seen that a market system cannot work well unless property rights are enforced. Entrepreneurs are unlikely to risk their own funds, and investors are unlikely to lend their funds to entrepreneurs, unless property is safe from being arbitrarily seized. 
The California Coastal Commission (CCC) regulates the use of property within five miles of the California coast.  Many people, including filmmaker Richard Oshen (and me) think that the CCC has too much power in defining property rights and that it uses those powers arbitrarily.  In "The California Coastal Commission vs. Its Critics," Brian Doherty of Reason Magazine describes sections of Oshen's film "Sins of Commission," which documents CCC power and its abuses of property rights.  How much power does the CCC have?
As CCC Executive Director Douglas humbly told Oshen on-camera in the film (along with describing himself as a "radical pagan"), his unelected commission (whose members are appointed by the governor and leaders of the two state houses) doesn't have the power of eminent domain. All it has is the power to regulate, plan, and enforce restrictions on pretty much any action involving land within five miles of the coast, which means it doesn't really need the power of eminent domain at all. It can largely control the land anyway.
The CCC has a record of abuse of power regarding its right to define property rights losing ain Nollan v. California Coastal Commission before the Supreme Court in 1987.  Doherty continues his description of CCC power.
The CCC's authority has decidedly grown since its beginnings as a temporary outfit with jurisdiction over 1,000 yards of coastline to an established agency with five miles of nearly absolute power, overriding local decisions and slapping multi-million dollar fines on people building small houses on existing concrete pads that could only be seen from the coast by a Superman with telescopic and X-ray vision.
Doherty describes two cases of abuse by the CCC.  Worse than the abuse, is the CCC's ability to use the power of the state to enforce its capricious actions.  The first involves Dan Norris and Peggy Gilder, and it is the case involes Oshen directly involved and got him started on his documentary.
Oshen's project started in October 2005 when he was called by a pair of friends, Dan Norris and Peggy Gilder, who were involved in a legal bind with the CCC. They wanted Oshen to film a CCC inspection of their property. Norris and Gilder insist that the inspection came about because nosy neighbors and a CCC agent trespassed on their posted private property, looking for complaints to trigger an inspection.

The inspection was accompanied by a court order that explicitly forbade Norris and Gilder from filming the proceedings-though at least one of the sheriff's deputies brought along by the CCC inspectors (who were also accompanied by a deputy attorney general) was filming, as can be seen in the footage Oshen did shoot. That footage appears in the rough cut of his documentary.

As Oshen told me, that October day on the 40-acre Norris/Gilder property on Old Topanga Canyon Road in the Santa Monica Mountains was the first time Oshen had even really heard of the CCC. Oshen was amazed to discover a government land use agency with the power, and the desire, to prevent citizens from making an independent record of what happened during an official inspection-thus putting that citizen at a decided disadvantage in any later court proceedings where their version of events diverges from that of a government official.
The second involves Kathleen Kenny.  The link in the quote is to a Los Angles Times article detailing legal proceedings against Kenny.  The article is a good read.
See, for an example, the story of Kathleen Kenny, one of the stars of Oshen's documentary, now deceased. Kenny beat back local inspectors' assaults on her for building on her own property. She even in 1997 won an unprecedented RICO suit against local government officials for harassing her, a case where she acted as her own lawyer. Despite this, she was never able to shake off the CCC from coming after her for more or less the same offense. It has levied multi-million dollar fines that still hang over the head of her living partner, Arthur Starz.

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Thursday, October 1, 2009

Barro and Redlick on Multipliers

The financial crisis that deepened in September 2008 re-ignited a debate about the efficacy of fiscal stimulus.  Robert Barro, a professor of economics at Harvard, and Charles Redlick, a graduate of Harvard add to our knowledge that they describe as "thin" in their Wall Street Journal article, "Stimulus Spending Doesn't Work."  The article summarizes their recently completed research published by the National Bureau of Economic Research.  They divided fiscal policy into three types: war induced spending, peacetime spending, and tax cuts.  On war spending, they write 
For annual data that start in 1939 or earlier (and, thereby, include World War II), the defense-spending multiplier that applies at the average unemployment rate of 5.6% is in a range of 0.6-0.7. A multiplier less than one means that, overall, other components of GDP fell when defense spending rose. Empirically, our research shows that most of the fall was in private investment, with personal consumer expenditure changing little.

Our research also shows that greater weakness in the economy raises the estimated multiplier: It increases by around 0.1 for each two percentage points by which the unemployment rate exceeds its long-run median of 5.6%. Thus the estimated multiplier reaches 1.0 when the unemployment rate gets to about 12%.
In a weak economy, with unemployment exceeding 12%, war spending might help the economy if you don't suffer high casualties and a country's physical capital remains intact.  For my students, that reads like something that I wrote here.  Thankfully, our economy was not quite that weak, but that means that the stimulus hurt a little.Barro and Redlick assert that economists have reversed causality of the impact of peacetime spending on GDP.  Spending does not increase GDP, but GDP growth does increase spending. 
To evaluate typical fiscal-stimulus packages, however, nondefense government spending multipliers are more important. Estimating these multipliers convincingly from U.S. time series is problematical, however, because the movements in nondefense government purchases (dominated since the 1960s by state and local outlays) are closely intertwined with the business cycle. Thus the explanation for much of the positive association between nondefense spending and GDP is that government spending increased in response to growing GDP, rather than the reverse.
The authors find that tax cuts are good, but the results may not be robust.
The effects of tax rates on GDP growth can be analyzed from a time series we've constructed on average marginal income-tax rates from federal and state income taxes and the Social Security payroll tax. Since 1950, the largest declines in the average marginal rate from the federal individual income tax occurred under Ronald Reagan (to 21.8% in 1988 from 25.9% in 1986 and to 25.6% in 1983 from 29.4% in 1981), George W. Bush (to 21.1% in 2003 from 24.7% in 2000), and Kennedy-Johnson (to 21.2% in 1965 from 24.7% in 1963). Tax rates rose particularly during the Korean War, the 1970s and the 1990s. The average marginal tax rate from Social Security (including payments from employees, employers and the self-employed) expanded to 10.8% in 1991 from 2.2% in 1971 and then remained reasonably stable.

For data that start in 1950, we estimate that a one-percentage-point cut in the average marginal tax rate raises the following year's GDP growth rate by around 0.6% per year. However, this effect is harder to pin down over longer periods that include the world wars and the Great Depression.
Barro and Redlick conclude,
The bottom line is this: The available empirical evidence does not support the idea that spending multipliers typically exceed one, and thus spending stimulus programs will likely raise GDP by less than the increase in government spending. Defense-spending multipliers exceeding one likely apply only at very high unemployment rates, and nondefense multipliers are probably smaller. However, there is empirical support for the proposition that tax rate reductions will increase real GDP.

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