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Saturday, February 28, 2004

Do You Believe This?

I thought this one would be especially good for Howie. Of course, there's not much point in dwelling on this issue since it doesn't look like anybody's going to jail - unfortunately. Still, the video is pretty slick.

Thursday, February 26, 2004

Even when they get it, they don't get it!

In this Thomas Friedman column he pays some homage to free trade and outsourcing. Don Luskin is not so easily fooled by this "seeing of the light." Here he points to the real implication of some of the views voiced by Friedman.


Oh, I suppose he gets to the right answer. But it's based on the moral premise that a business practice should be permitted or forbidden based on someone's judgment about whether it helps America -- rather than on the first principle that the owner of capital should be able to deploy that capital to hire anyone he wants anywhere he wants for whatever reason. So it rings hollow when Friedman congratulates himself in the column's first paragraphs:
I've been in India for only a few days and I am already thinking about reincarnation. In my next life, I want to be a demagogue.
Yes, I want to be able to huff and puff about complex issues like outsourcing of jobs to India without any reference to reality.

Unfortunately, in this life, I'm stuck in the body of a reporter/columnist.

Which is all just a tricky way of saying that business activity should be regulated by smart people in positions of authority, and that Tom Friedman thinks he's the smartest guy in the room. He should decide. And fortunately, this time, his decision happens to coincident with free market. Next time maybe it won't be.

Tuesday, February 24, 2004

Interesting Piece on Media Perspective

A Tale of Two Fences by Gal Luft:
The I's and the P's have been at war for over half a century. Over the past several years the level of suspicion, hostility and paranoia between the two has been unprecedented. I has been the target of a terror campaign by Islamic terrorists who infiltrated its territory and conducted horrific attacks against both soldiers and innocent civilians. I accuses P of training and arming these militants and not lifting a finger to stop them. After a long series of failed attempts to reach a peace deal or even a temporary cease fire, the government of I decided it must erect a fence as a security barrier separating it from P. I's fence project infuriates the P's. Their uniformed leader called the government of I to immediately halt the construction. But despite strong international pressure I does not seem to bend and its white haired prime minister recently called to expedite the project and finish the fence by the end of 2004.

If you thought the above 160 words describe the controversial fence currently being erected in the West Bank between Israel and the Palestinians you are in good company. Look again. I is not Israel and P is not Palestine. The story above describes another fence, three time zones away from the Middle East in the disputed area of Kashmir between India and Pakistan. Indeed, since Pakistani militants tried to storm the Indian Parliament in December 2001, India has embarked on an ambitious project aimed to seal its border with its enemy. The fence is only part of a multi-tiered system that includes mines, sensors, trenches and, in some parts, a high mud wall.

Now, ask yourself why you associated the above story with the Middle East and not with South Asia. Why does the action of a nation of six million people loom larger in your consciousness than that of one billion people? ...
Good question, read the whole thing to find out her opinion. It's a remarkable coincidence that the countries share first initials.

Update: The above link was broken. It should work now.

Light at the End of the Iraq Tunnel?

There were some interesting events over the last few weeks in Iraq. As this USA Today states:
Fallujah, 30 miles west of Baghad, is in the heart of the so-called Sunni Triangle, an area that remains a hotbed of armed resistance to the American presence.
However, even there, they seem to be progressing toward self-sufficiency in terms of security:
Officers from the 82nd Airborne Division stationed a 10-minute drive away could hear the battle clearly. They offered help but the Hammad said it wasn't needed. The Americans did provide additional ammunition and weapons, including light machine guns.

After the battle, soldiers at the civil defense base proudly displayed a light machine gun and a pair of rocket propelled grenade launchers they had captured from the attackers.
As the Belmont Club comments in response to the USA Today article:
That when dying and bleeding, beset by the flower of terrorism, with pistol to set against automatic rifle and grenade, the Iraqi police did not ask for help from 82nd Airborne. They asked for ammunition.
In related news:
Now U.S. intelligence in Iraq has snagged a compact disc containing a strategic assessment possibly penned by Jordanian Al Qaeda operative Abu Musab al-Zarqawi. Zarqawi may have served as a contact point for Al Qaeda, Baathist intelligence and Ansar Al Islam (the Islamist cadre based in north Iraq).

The New York Times saw and summarized the document. Its text asserts radicals "are failing to enlist support" inside Iraq and "have been unable to scare the Americans into leaving." It "laments Iraq's lack of mountains in which to take refuge." Perhaps that lament echoes its author's experience in Afghanistan or north Iraq. Members of Ansar al Islam holed up in mountains near Iran, until the Kurds destroyed their base.

The Times reported this could well be an "inside account of the insurgency and its frustrations ... it also charts out a battle to come."

The document asserts one strategic solution to Al Qaeda's failure is to attack Iraqi Shias and start a "sectarian war" that will "rally the Sunni Arabs" to Al Qaeda. This war against Shiites "must start soon -- at "zero hour" -- before the Americans hand over sovereignty to the Iraqis."

This document's desperation argues for its authenticity; in certain hothouse sectors, however, the fact that it suggests the coalition's strategy is successful demonstrates it's a phony. The Times' summary indicates Al Qaeda once again seeks an Arab uprising. In Mesopotamia, the Iranian, Kurd, Arab and Turk worlds collide. (Note these groups are predominantly Muslim.) The demographic tectonics get dicier. For eight decades Iraq's Sunni minority put a vicious boot to Iraq's Shiite Muslim majority. Hence Al Qaeda's plan: Provoke the Shias into attacking the Sunnis, who then ally with Al Qaeda.

And the Americans lose, QED?

Not quite. Al Qaeda senses defeat unless it spills lots of blood very quickly. After Iraqis run their own government, U.S. troops will remain, the document says, "but the sons of this land will be the authority ... This is the democracy. We will have no pretexts." Iraq's new army and police will link with the people "by lineage, blood and appearance." Al Qaeda fears an American and Iraqi strategic victory -- a democracy defending itself against terrorists.
While the country could obviously still descend into civil war and/or chaos, I see enough glimmers of hope like this that I remain hopeful (though certainly not confident).

Saturday, February 21, 2004

Nader = Nadir for Democrats?

Ralph Nader plans on running for president as an independent. I find that hugely annoying in that I think the presence of fringe candidates distorts the dialogue created by the Presidential election. He can't possibly win - so what's the point?

Friday, February 20, 2004

The Power of Vision

The beginnings of remaking one of the most troubled regions of the world... see this Thomas Friedman column.


One major criticism of the Iraq war is that by invading Iraq, the U.S. actually created more enemies in the Arab-Muslim world. I don't happen to believe that, but maybe it's true. What the critics miss, though, is that the U.S. ouster of Saddam Hussein has also triggered the first real "conversation" about political reform in the Arab world in a long, long time. It's still mostly in private, but more is now erupting in public. For this conversation to be translated into broad political change requires a decent political outcome in Iraq. But even without that, something is stirring.

Thursday, February 19, 2004

Take Sweden - Please!!!

Jim writes:
Take Sweden, for example. Very high tax rates -- among the highest. Pretty decent economic growth. Good healthcare. Viewed favorably as a country in nearly any dimension you want to survey. Care to explain why?
Sure. Sweden has long been put forth as the shining jewel of socialism, with the implication that if only we adopted their approach, we too could have a wonderfully utopian society. There are a few impediments, however.

First, Sweden is Sweden because, well, the Swedish live there. This obvious and snarky truism has three important aspects: culture, homogeneity, and population. As far as culture goes, the stereotypical Swede has been and is thought of as skilled and industrious and I think that the stereotype is well earned in this case (don't tell Johann I wrote this, I'll never hear the end of it). What this means is that even if the Swedes were subjected to a marginal government, they would still do relatively well. Therefore, I think it's difficult to conclude that Sweden is prosperous because of the socialistic government. It may well be that they're prosperous in spite of the government.

If a welfare state is going to be relatively successful, it turns out that homogeneity is critically important. Consider the following excerpts from a typical study of success and socialism:
But multiculturalism may bring an even broader transformation of political life and policy regimes. In particular, it may call the welfare state in question. New forms of social diversity spark debates about traditional conceptions of identity and community, and the rights and mutual obligations embedded in citizenship. [...]

For example, analysts have pointed to different levels of social diversity in explaining differences between US and European social welfare programmes (eg, Gould and Palmer 1988; Alesina, Glaeser and Sacerdote 2001). Studies comparing social expenditures across US cities and states find that ethnically heterogeneous states tend to spend less on redistributive programmes (Alesina, Baqir and Easterly 1997; Hero and Talbert 1996; Plotnick and Winters 1985). And development economists have found similar patterns across a wide range of countries, including the richest and poorest nations in the world: spending on private education tends to be higher in countries with considerable religious and ethnic diversity, and income transfer paymentstend to be lower in such countries (James 1987, 1993; Easterly and Levine 1997). It is difficult, these studies suggest, to sustain strong social welfare programmes in the face of comparatively high ethnic diversity.
While not everybody agrees with the above excerpts, I do find it striking that the world's most successful socialist country is also one of the world's most homogeneous countries.

The importance of the population is partially illustrated by the following table:
CountryGDP Per Capita (PPP) US$Population (millions)
1. Luxembourg44,0000.45
2. United States37,600290
3. Bermuda35,2000.06
4. Cayman Islands35,0000.04
5. San Marino34,6000.03
6. Norway31,8004.6
7. Switzerland31,7007.3
8. Ireland30,5003.9
9. Canada29,40032
10. Belgium29,00010
...
22. Sweden25,4008.9

In the top ten countries ranked by US$ GDP per capita (using Purchasing Power Parity to normalize the numbers), four of the countries have a population less than one-million and all but two of the countries have a population of approximately 10 million people or less.

I think there are several reasons that small countries tend to be at the top of their class. They are more likely to be homogeneous which has the benefit discussed above. They have more of a feel of being a community than an artificial state, which I think is both motivational and less likely to foster endemic corruption. It's also simply easier to govern a smaller state. Lastly, sheer luck means that out of lots of small countries, some will do better than others, and it could be that things just happened to work out well for Sweden, and it might not mean that the Swedish experiment can be duplicated (even in Sweden).

Unfortunately, the above factors also means that we can't be Sweden because we're not Swedish. We are the most diverse nation on earth, and in my opinion we're way, way too big to consider many of the policies that work for Sweden, at least at the national level.

Also, there is some question as to how well Sweden is really doing. For example, consider this excerpt from Front Page Magazine:
Sweden, for example, was with its socialist welfare state supposed to inspire a "Third Way" for the world midway between capitalism and communism. But last month a new study by the Swedish Research Institute of Trade (HUI) revealed that the typical middle-class Swede, even before paying his nation's highest-in-the-world taxes, earns less money and enjoys fewer material goods than the average African-American in the United States.

The median income of African-American households is about 70 percent that of overall U.S. median income. This means, wrote HUI study authors Fredrik Bergstrom and economist Robert Gidehag, that Swedes are "below groups which in the Swedish debate are usually regarded as poor and losers in the American economy."

If present Swedish trends continue, they wrote, then "things that are commonplace in the United States will be regarded as the utmost luxury in Sweden."

"If Sweden were a U.S. state, it would be the poorest measured by household gross income before taxes," the HUI study reported. Sweden is poorer than Arkansas, Alabama, or Mississippi.

Prior to its plunge into welfare statism during the 1960s and 1970s, Sweden had one of the world's fastest-growing, most prosperous economies, writes Swedish historian Johan Norberg. Socialism dragged it down from being the 4th richest among OECD nations to the 17th. Confiscatory taxes that could reach 104 percent of income destroyed the incentive to work, become educated, or invest.
Comparing Sweden with Mississippi or Swedes with African-Americans is like comparing apples to oranges since Sweden is a socialist state and we're not. However, it still makes it difficult for me to consider the Swedish experiment an unqualified success, especially given that our GDP per capita is half again as large as theirs, and they did much better on the growth front prior to their "plunge into welfare statism." In addition, according to this article based on the same study:
Poor Swedes also experienced less income growth than African-Americans. Between 1980 and 1999, the gross income of Sweden's poorest households increased by only 6 percent while the poorest households in the U.S. enjoyed an increase in income that was three times higher.
In summary, I don't think that the Swedish approach would work nearly as well here, at least at the national level, and I'm not completely convinced that the Swedish approach works optimally for Swedes either.

Update: Lory, who lived in Sweden for a year as an exchange student, and who has a career in health care administration, questions the "Good healthcare" in Sweden assumption. She says its good for a country with socialized medicine, but not necessarily good. For example, it has severe queueing problems. She also says that the Swedes are very health conscious and take very good care of themselves, which enables their healthcare system to survive. She also strongly agrees with the homogeneity points above.

Regarding Surprised but Undaunted

Bret, I enjoyed the article about the student who went to Beijing to lecture PhD's on economics when he had no idea what he was talking about. This suggests to me that nobody really knows what they're talking about when it comes to economics. One guy says Krugman is not an economist, another says Greenspan doesn't know his ass from his elbow. I suspect that other than knowing that communism doesn't work, nobody has the slightest idea what actually does work. Take Sweden, for example. Very high tax rates -- among the highest. Pretty decent economic growth. Good healthcare. Viewed favorably as a country in nearly any dimension you want to survey. Care to explain why?

Now, imagine an untrained student trying to lecture a group of PhD physicists about physics. I'm guessing he wouldn't get very far. The sham would quickly become apparent. Economics is not a science; it only pretends to be so analytical people who don't know how to build anything have something to talk about.

Mises Institute Author Looks at How We're Living Beyond Our Means

Howie, thanks for the article from the Mises Institute. It caused me to start poking around in the web site.

Here's an article that presents all the data (neatly and seemingly accurately) that I've been referring to. He clearly does not think that the economy is healthy -- in fact, it is overleveraged in almost every way imaginable.

Surprised but Undaunted

This looks like it should be in the Onion, but it's in the Telegraph, and is hysterically funny. It begins:
An Oxford engineering student was surprised but undaunted when he was approached to deliver a series of lectures in Beijing on global economics.

Matthew Richardson knew "next to nothing" about the subject but, believing he would be addressing a sixth-form audience, he felt he could "carry it off".
Read the whole thing and laugh.

Still a whipping boy!

This William Anderson article mentions some swipes he has taken at the Bush administration but he really sets upon Krugman as a non-economist.

I admit to being a regular reader of Krugman's columns, and I suspect that many of my fellow economists on all sides of the ideological divide read him as well, which is one reason the Times has made him a featured star. Of course, being of the Austrian School of Economics, I find very little in Krugman's statements on economics with which I can agree. (I think that some of his criticisms of the Bush Administration's policies are correct—and especially the war in Iraq—although the policy alternatives that he presents usually are as bad or even worse.) In fact, whenever I email Krugman's columns to my friends—which I do often—I also send the accompanying message, "Krugman is evil."

Yet, it does no good simply to accuse one of the nation's most "elite" economists—most likely a future Nobel Prize winner—of being "evil." He may be a right decent fellow, for all I know. What I consider to be evil is not his personality nor his Massachusetts Institute of Technology pedigree nor his wealth and fame. Rather, I consider that the policies he recommends are evil because, in the end, they constitute fraud. That's right, fraud.

Before deconstructing Krugman's economic views, let me also say that at least when it comes to his columns, he is more of a political operative than he is an economist. (That being said, many "public intellectuals" also are little more than shills for political parties, both left and right.)



However, let me say that since my own writings have been extremely critical of the Bush Administration and both political parties, it does not bother me to read Krugman's anti-Republican rants. What does bother me is that the man pretends to be something he clearly is not: an economist.

Wednesday, February 18, 2004

Herd Mentality

Some of you may have heard this before, but it's just too good to miss documenting here:

"In 1998, CFO Magazine gave an Excellence award to Scott Sullivan, the chief financial executive of WorldCom. In 1999 it gave one to Andrew Fastow of Enron. And in 2000, it gave one to Mark Swartz of Tyco. All three have since been indicted."

This quote comes from an article by Paul Krugman. All Krugman's articles are regularly updated in this website. I realize that Krugman has taken a beating in this blog. Even I have found that with his increase in popularity, he has become somewhat more populist -- seemingly more interested in bashing Bush than addressing policy. Nonetheless, the guy still makes some intelligent observations...

Tuesday, February 17, 2004

Those Stupid Conservatives

I'm sure glad I've re-registered as a democrat. I've apparently gained many IQ points just by doing so. At first blush, the evidence is overwhelming. For example, wondering why anybody would vote for conservatives (such as Bush), Neal Starkman writes in the Seattle Pi:
The answer, I'm afraid, is the factor that dare not speak its name. It's the factor that no one talks about. The pollsters don't ask it, the media don't report it, the voters don't discuss it.

I, however, will blare out its name so that at last people can address the issue and perhaps adopt strategies to overcome it.

It's the "Stupid factor," the S factor: Some people -- sometimes through no fault of their own -- are just not very bright.
And his "modest suggestions" for fixing the problem (of voting for conservatives):
But I do have some modest suggestions that might provide a start for discussion: an intelligence test to earn the right to vote; a three-significantly-stupid-behaviors-and-you're-out law; fines for politicians who pander to the lowest common denominator and deportation of media representatives who perpetuate such actions.
Now that I'm a Democrat I'd probably pass the intelligence test. However, I've certainly done more than three stupid things in my life so I guess I'd lose out there. Of course, it might still be worth it since we'd get huge amounts of money back from virtually every politician for pandering and we'd get rid of the vast majority of the media as well.

But it's not only random columnists who understand the conservatives are dumber than liberals. Recently, several faculty members from Duke University put forth snippets that also support the stupid conservative assertion. For example, in response to an article by John Leo from the conservative American Enterprise Institute, Lawrence Evans, a Duke University Professor wrote:
So John Leo and the (oh so diverse!) American Enterprise Institute think there is insufficient diversity of political affiliation among university faculty. Their poll numbers show that Republicans are a small minority of the professoriate. True, and rightly so.

In seeking faculty, universities look for people who can analyze and discuss matters of some complexity, who are unafraid to challenge the wisdom of simple solutions, and who have a sense of social responsibility toward those who cannot buy influence. Such people tend to be put off by a political party dominated by those who believe dogmatically in the infallibility of the marketplace as a solution to all economic problems, or else in the infallibility of scripture as a guide to morality.

In short, universities want people of some depth, subtlety and intelligence. People like that usually vote for the Democrats. So what?"
And this agrees with Robert Brandon, another Duke Professor, who wrote:
Some argued that the political imbalance within the humanities departments is to be expected, and in no way reflects the University's lack of commitment to true intellectual diversity.

We try to hire the best, smartest people available," Brandon said of his philosophy hires. "If, as John Stuart Mill said, stupid people are generally conservative, then there are lots of conservatives we will never hire.

Mill's analysis may go some way towards explaining the power of the Republican party in our society and the relative scarcity of Republicans in academia. Players in the NBA tend to be taller than average. There is a good reason for this. Members of academia tend to be a bit smarter than average. There is a good reason for this too.
Brandon took some heat for his statements (he claimed that he was just trying to be humorous), and later defended his statement by questioning:
The serious and interesting issue is how do we explain the surplus of liberals in academia...it seems to me that the only viable hypothesis left is something like the following: There is a statistical association between the qualities that make for good academics and those that lead to left-leaning political views...stated this way the hypothesis still remains incredibly vague. What qualities, what traits are we talking about? What causal relations underlie these statistical associations? These questions are worth exploring, but I think the hypothesis is right headed."
Clearly, the faculty at Duke are going to be more intelligent than average and it might possibly seem that being intelligent would lead one to be a Democrat. But, according to Professor Jim Lindgren, the statistics don't support that "causal relation:"
Yet Republicans in the general public tend to be better educated than Democrats. In the 1994-2002 General Social Surveys (GSS), Republicans have over 6/10ths of a year more education on average than Democrats. Republicans also have a higher final mean educational degree. Further, Republicans scored better than Democrats on two word tests in the GSS--a short vocabulary test and a modified analogies test.

If one breaks down the data by party affiliation and political orientation, the most highly educated group is conservative Republicans, who also score highest on the vocabulary and analogical reasoning tests. Liberal Democrats score only insignificantly lower than conservative Republicans. The least educated subgroups are moderate and conservative Democrats, who also score at the bottom (or very near the bottom) on vocabulary and analogy tests.
Okay, great. I'm now a Democrat, and clearly a moderate or conservative one. I guess I just got dumber instead of smarter by re-registering as a Democrat.

So if raw intellect isn't the "trait" which causes faculty members at Duke to be both academics and Democrats, what are some other hypotheses? Arnold Kling, an economist (Ph.D. from MIT), has an alternate explanation:
Another way of describing political alignment is in terms of freedom and responsibility. How much freedom should people have to pursue their own interests and desires? How much responsibility should they have for their own well-being?

The conservative ideology favors individual responsibility. However, conservatives see a need to protect the culture from behavior that runs counter to conventional morals. In that sense, conservatives are willing to restrict freedom.

The left takes the opposite point of view. Modern liberals see no reason to restrict individual freedom. However, they view people with inadequate health care or education as victims who should not be held responsible for their condition. [...]

People with certain traits tend to choose particular occupations. Someone who is afraid of heights is unlikely to become a firefighter. Someone who is repelled by the sight of blood is unlikely to become a doctor. Someone who is impatient with details is unlikely to become a bookkeeper.

A fancy term for this is "self-selection." We say that people select activities and occupations that are suited to their temperaments.

If your temperament favors freedom without responsibility, then there are certain occupations that are a good fit. Academic life is one of them, as I pointed out in Real World 101. A professor has very little of what most of us would consider responsibility. Teaching, which is the most responsible activity that a professor must perform, is considered a minor part of the academic's life. Almost all professors seek to lower these modest responsibilities even further by seeking reduced teaching loads. [...]

When we see leftist ideology statistically predominant among college professors, news reporters, or open-source software advocates, what we are seeing is self selection. What Richard Florida dubbed The Creative Class is a self-selected group that seeks freedom without responsibility in their professional lives. Thus, we should not be surprised that their ideological bent is toward modern liberalism, which translates this personal preference into a political platform.
While I don't buy Kling's concept as the one and only explanation for leftist bias in the academic world, it is certainly interesting and may be part of the explanation. I'm wondering what Tom Drake, our token Great Guy/Academic thinks of this explanation?

Friday, February 13, 2004

My Only Platform Is This Blog, Low Though It May Be

So, I came up with a good idea for Saturday Night Live, and I checked out SNL's website to see if I could send my idea to them. But, the site specifically says for me to shove my idea up my ass, 'cause the kind folks at NBC don't want it. Check it out! Paragraph that begins with "Finally."

I guess they figure their high-paid writers are cleverer than all the rest of the people in the world combined.

So, I'm stuck with telling the routine to you guys, and hoping you can imagine it being performed on Saturday Night Live. Eddie Murphy plays the part of the defendant, "Ed." Dan "Dan" Akroyd is the prosecution lawyer, cross-examining Eddie.

Dan: Ed, the records I'm holding in my hand show that you accessed the Internet multiple times during the month of December. Is this true?

Ed: Yes.

Dan: They also show that on nearly every one of these occasions that you accessed the Internet, you surfed primarily within a site called Sublime Directory dot com. Is this correct, Ed?

Ed: Yes.

Dan: And, can you please tell the jury, Ed, what the content of this web site is?

Ed: It contains sexually graphic photographs.

Dan: Ah. Pornography. Is that what you would call it, Ed?

Ed: Yes.

Dan: Ed, I believe that there are different pornographic specialties. What kind of pornography is it that you like?

Ed: I just like pictures of beautiful naked women.

Dan: Hmm huh. (Dan flips through the records he holds.) It shows here, Ed, that you stayed for quite a long time on one particular site entitled Anal Gals. It shows here that this site contained several clips from movies showing a woman having anal sex. (Pause.) Ed, what were you doing during the 9 minutes and 52 seconds you were in this site?

Ed: (A little hesitant) I believe the correct terminology is "on this site." Not "in this site."

Dan: What?

Ed: The terminology. The word. You said, "What were you doing in this site?" When I think you meant to say, "What were you doing on this site?"

Dan: In, on. What difference does it really make?

Ed: (Shocked) It makes a big difference whether you're in something or on something!

Dan: Whatever! What were you doing on this website, this Anal Gals web site?

Ed: (Ed looks up at the judge, played by Jane Curtain, and says...) But, Your Honor, do I have to answer these questions?

Jane: Yes, I'm afraid you do (she says kindly, sounding something like the good witch of the North).

Ed: (clearly distraught) Well, if this lawyer can ask such embarrassing questions that have nothing to do with this case, then at least I should get to ask him some questions in return.

Jane: (Ponders for a moment) I'll allow it.

Dan: But, Your Honor! (Dan is flabbergasted.)

Jane: Counselor! You will submit to this man's sexual questioning! (She looks at him sexually.)

Dan: (Shocked, then confused) But,.... your.... honor....

Jane: Go ahead, Ed. (She turns to Dan to watch his reaction. He mostly looks dumbfounded, and moves his eyes back and forth between Ed and Jane.)

Ed: So, Dan...., have you ever smelled ladies' underwear after it had been worn?

Dan: (staring at Ed) No. No. (He moves his stare to Jane, and sees her pout her lips.) I mean, yes. Yes, I have smelled women's underwear.

Ed: After they've been worn?

Dan: Yes, after they'd been worn. (He seems resigned, now. Jane begins to squirm.)

Ed: (Not knowing when he'd scored a point) Was she a skank?

Dan: What?!

Ed: The woman who wore the smelly underpants, was she a skank?

Dan: She most assuredly was not a skank! (Regaining his dignity) Your Honor, please!

Jane: Go on, Ed. Let's find out what a naughty boy our counselor has been. (She begins to writhes in her chair.)

Ed: (confused, but basically willing to carry on) So, besides this filthy underwear episode, what other things have you gotten into?

Dan: Nothing! Nothing.

Ed: Hmm huh...(he ponders Dan's face for the first time; Dan can't hold his gaze) Dan. I bet you like some wild booty, you dirty s.o.b.!

Dan: Do not! (Jane lets out a slight whimper, and everyone stares at her for a moment, she just flicks her head with a wave of her hair)

Ed: (Beginning a new thrust) When were you last in Vegas, Dan?

Dan: April. No! November!

Ed: And, did you meet some women, there? (Dan is nodding, now, and Jane is getting more and more bothered) Dan, did you meet some prostitutes?!

Dan: Yes, I did it all!

Ed: Tell us, Dan, tell us what did you do when you were in Vegas last April?

Dan: (Puzzled) You mean, November? (Jane suddenly stops her increasing sexual frenzy, and looks up at Ed.)

Ed: Yeah, November. (Jane resumes.)

Dan: We did it to them.

Ed: What did you do, Dan? (Jane is about to climax.)

Dan: We... (he pauses)

Ed: Did you have sex with them, Dan?

Dan: No. (Jane comes to a grinding halt.)

Ed: No?!

Dan: No. They asked us if we wanted to have sex with them. But we told them that all we wanted to do was talk about politics and economics with them.

Ed: (truly appalled) Oh! My! God!

Jane: How disgusting!

Ed: Those poor women.

Jane: (immediately straightens up and primps into propriety) Bailiff, remove counsel to a cell, I'll tend to him later. (Dan, in disbelief, is removed. Jane turns to Ed.) So, Mr. Murphy, it looks like we'll need to find us a new lawyer to prosecute you. What do you say we knock off early today, and you and I go get a bite to eat. I know this little place with a marguerita happy hour that'll knock your socks off.

Ed: That sounds great! But, Your Honor, why are you being so nice to me? (They both get up to begin walking toward the dooring)

Jane: Let's just say that if a man who's slid by so much shit in his life can be elected President of the United States, then I'm sure a little shit can float right by my life, too.

Ed: You can say that again, sister.

Jane: Besides, the mere mention of economics makes me horny. (They depart)

More Unreality

As I've mentioned several times on this blog, many statements appearing in the financial press and in public discourse simply do not hold up to a reality check. The many excerpts from a fine Alan Reynolds column demonstrate the point.

Whenever Fed Chairman Alan Greenspan testifies before Congress, as he did on Wednesday, legislators are fascinated with what they can get him to say about fiscal policy -- budget deficits.

Why do investors pay no attention to Greenspan's warnings about budget deficits? Because they know these warnings are based on archaic theoretical conventions that have recently been well tested and found false.

Greenspan described deficits, for example, as making "demands on national savings." The idea is that government borrowing must be subtracted from an otherwise fixed amount of saving. Proponents of this idea imagine that if tax collectors would simply take more money from the private sector and give it to the government, the sum of both public and private budgets would be magically improved. It is on the basis of this sort of imaginative bookkeeping that Greenspan and others once predicted that moving from deficits to surpluses would greatly increase the "national savings rate" (public and private saving as a percent of GDP).

Comparing net savings to gross product is a common but disreputable statistical gimmick. It would be more honest to express net savings as a percentage of net national product. But doing that would add nearly a percentage point to the net savings rate during the Reagan years. The only purpose of comparing net savings to gross product is to minimize measured savings and exaggerate its decline. What looks like a secular slide in net savings is largely a secular acceleration in estimated depreciation. Besides, even an honest estimate of net savings would be inappropriate for the most infamous prediction of conventional theory -- twin deficits.

The only theory that proved even more bogus than twin deficits was the theory that predicted long-term interest rates must have gone up in 2001-2003 when surpluses turned into deficits.

Projected federal spending is indeed a huge threat to future prosperity, particularly the unpayable future promises of Social Security and Medicare. But the essence of that threat -- which Greenspan described very well -- is "debilitating increases in tax rates."

Politicians and their advisors who promise to "fix" some future budget forecast by imposing debilitating tax rates as soon as they can are just threatening to turn a possible future risk into an immediate and debilitating economic infirmity.

Thursday, February 12, 2004

Surprising Answers

I had a hunch that Jim might be surprised to my answers to his poll. I'm sure that anyone reading my posts here who doesn't know me well would assume that I'm quite pro-Bush, pro-Iraq war, and anti-government. Turns out they'd be wrong. I don't particularly like Bush - it's just that I don't hate him either. I wasn't all that gung-ho regarding the Iraq invasion - but I wasn't adamantly against it either and, here we are, so it seems pointless to me to undermine our government as they attempt to reap some benefit for ourselves and the Iraqi people. I'm not anti-government either - I've simply been putting forth views on the subject in a very narrow realm which could mislead readers as to my big picture view.

For example, I've been arguing that the Anarchist/Libertarian view is that government Means are often immoral. I find their argument persuasive and I haven't yet seen anything that convincingly (to me) refutes that logic. That doesn't mean that I don't think government should continue to use those Means, even if immoral. In my opinion, real life is simply too complicated and messy to worry too much about government morality. That's not to say I don't think we should be concerned with morality at all. If we can achieve important Ends using only moral Means and the extra cost required to do so aren't exorbitant, then that's definitely preferable. And if immoral Means are required, the Ends need to be very carefully scrutinized. But I wouldn't advocate bailing on important agendas just because the only way to achieve them was to use immoral Means such as taking things from people without their consent (i.e., taxation). That would be like throwing the baby out with the bathwater, and really, the bathwater's not so bad. Just a little stinky.

Also, I'm an incrementalist. I think that the effects of any change in government policy involves enormous uncertainty and should be changed incrementally. If the Government is involved in something today, it should continue to be involved in it for a while, even if it's phased out over time. Even if, for example, I thought that tax rates should be made flatter, I wouldn't propose changing the tax code to a completely flat tax instantaneously. I'd want it to move towards that structure over many years. I have a general idea of direction for many issues, but because of the impossibility of predicting the end result, I have extremely low confidence that new policies will have the desired effect and minimal unintended consequences. Thus my caveat in Jim's poll that my answers regarding "significant government involvement" were only valid for "today thru at least the next few years." Perhaps eventually the government's involvement should be eliminated, or in some cases added.

Wednesday, February 11, 2004

GLOBAL COOLING

"The Cooling World" - by Peter Gwynne

April 28, 1975 Newsweek


There are ominous signs that the Earth’s weather patterns have begun to change dramatically and that these changes may portend a drastic decline in food production – with serious political implications for just about every nation on Earth. The drop in food output could begin quite soon, perhaps only 10 years from now.

The regions destined to feel its impact are the great wheat-producing lands of Canada and the U.S.S.R. in the North, along with a number of marginally self-sufficient tropical areas – parts of India, Pakistan, Bangladesh, Indochina and Indonesia – where the growing season is dependent upon the rains brought by the monsoon.



The evidence in support of these predictions has now begun to accumulate so massively that meteorologists are hard-pressed to keep up with it. In England, farmers have seen their growing season decline by about two weeks since 1950, with a resultant overall loss in grain production estimated at up to 100,000 tons annually. During the same time, the average temperature around the equator has risen by a fraction of a degree – a fraction that in some areas can mean drought and desolation. Last April, in the most devastating outbreak of tornadoes ever recorded, 148 twisters killed more than 300 people and caused half a billion dollars' worth of damage in 13 U.S. states.

To scientists, these seemingly disparate incidents represent the advance signs of fundamental changes in the world's weather. Meteorologists disagree about the cause and extent of the trend, as well as over its specific impact on local weather conditions. But they are almost unanimous in the view that the trend will reduce agricultural productivity for the rest of the century. If the climatic change is as profound as some of the pessimists fear, the resulting famines could be catastrophic. “A major climatic change would force economic and social adjustments on a worldwide scale,” warns a recent report by the National Academy of Sciences, “because the global patterns of food production and population that have evolved are implicitly dependent on the climate of the pres! ent century.”

A survey completed last year by Dr. Murray Mitchell of the National Oceanic and Atmospheric Administration reveals a drop of half a degree in average ground temperatures in the Northern Hemisphere between 1945 and 1968. According to George Kukla of Columbia University, satellite photos indicated a sudden, large increase in Northern Hemisphere snow cover in the winter of 1971-72. And a study released last month by two NOAA scientists notes that the amount of sunshine reaching the ground in the continental U.S. diminished by 1.3% between 1964 and 1972.







To the layman, the relatively small changes in temperature and sunshine can be highly misleading. Reid Bryson of the University of Wisconsin points out that the Earth’s average temperature during the great Ice Ages was only about seven degrees lower than during its warmest eras – and that the present decline has taken the planet about a sixth of the way toward the Ice Age average.

Others regard the cooling as a reversion to the “little ice age” conditions that brought bitter winters to much of Europe and northern America between 1600 and 1900 – years when the Thames used to freeze so solidly that Londoners roasted oxen on the ice and when iceboats sailed the Hudson River almost as far south as New York City.

Just what causes the onset of major and minor ice ages remains a mystery. “Our knowledge of the mechanisms of climatic change is at least as fragmentary as our data,” concedes the National Academy of Sciences report. “Not only are the basic scientific questions largely unanswered, but in many cases we do not yet know enough to pose the key questions.”

Meteorologists think that they can forecast the short-term results of the return to the norm of the last century. They begin by noting the slight drop in overall temperature that produces large numbers of pressure centers in the upper atmosphere. These break up the smooth flow of westerly winds over temperate areas. The stagnant air produced in this way causes an increase in extremes of local weather such as droughts, floods, extended dry spells, long freezes, delayed monsoons and even local temperature increases – all of which have a direct impact on food supplies. “The world’s food-producing system,” warns Dr. James D. McQuigg of NOAA’s Center for Climatic and Environmental Assessment, “is much more sensitive to the weather variable than it was even five years ago.” Furthermore, the growth of world population and creation of new national boundaries make it impossible for starving peoples to migrate from their devastated fields, as they did during past famines.

Climatologists are pessimistic that political leaders will take any positive action to compensate for the climatic change, or even to allay its effects. They concede that some of the more spectacular solutions proposed, such as melting the Arctic ice cap by covering it with black soot or diverting arctic rivers, might create problems far greater than those they solve. But the scientists see few signs that government leaders anywhere are even prepared to take the simple measures of stockpiling food or of introducing the variables of climatic uncertainty into economic projections of future food supplies. The longer the planners delay, the more difficult will they find it to cope with climatic change once the results become grim reality.


See the Original Column...

(Newsweek: The Cooling World -04.28.75)

http://www.rushlimbaugh.com/coolingworld.pdf

Tuesday, February 10, 2004

Thanks

Bret, thanks for taking the poll in the blog below. I was a little surprised at your willingness to have so much government involvement, e.g., in pensioning. But, I'm sure you have interesting rationales which I'll look forward to hearing about.

I encourage others to log their opinions as well within the original blog.

Monday, February 09, 2004

Limiting Government

A boost to the productivity of the great economies of the world has been due to unleashing the beneficent forces of free trade through privatization and deregulation of services that were once controlled by the government. Telecoms, transportation, information services (including the internet), energy, water, and garbage services are among the services now provided privately that were once much more controlled by the government. Let’s debate whether various other services, funded through tax collection, should be performed or strongly controlled by government personnel, or should be cut-off from the federal teat.

Here’s a list of services candidates for inclusion or exclusion from significant government involvement, some of which might be summarily dismissed by us all. Note that including an item in your list does not mean that the government would play the same role as it does now with regard to the service in question; a “Yes” answer may mean that the government’s role differs significantly in the system you’d propose compared with its current role. For example, with regard to the government’s role in Education, it may still play a significant role, but one that is quite different than its current one. Such a situation would constitute a “Yes,” on the list. It will be up to you later, if you wish, (perhaps at the San Diego GG IV), to defend your inclusions and exclusions. For the moment, just take the poll below by using the Edit function and putting your initials next to your answer for each service below. If you’re not sure, “Undecided” is an acceptable answer. Brief comments with your vote are allowed. My votes (and some comments) are already revealed.

•Healthcare JRB-Yes (This is an issue I’d really like to study more. It seems that many countries with a more nationalized approach are providing more satisfactory benefit-to-cost outcomes. Are there paragons of free market healthcare for us to learn from?); BAW-Yes
•Education JRB-Yes (but only to provide $10,000/yr – indexed to inflation – per school age child who attends lessons regularly; and to legislate access to equitable, but not necessarily similar, learning by all child residents in every district who wish to attend lessons); BAW-Yes
•National defense JRB-Yes (but with a plan to decrease annual budgets); BAW-Yes
•Unemployment insurance JRB-No (except to require that workers devote a percentage of income sufficient to buy insurance and/or interest-bearing conditional annuities that ensure 6 or 12 months of buffer income in the event of unemployement); BAW-Yes
•Retraining services JRB-Yes (but privatized with clear and open performance metrics regarding client satisfaction and results); BAW-Not Sure
•Welfare funds (e.g., money, food stamps, rent) for the poor JRB-Yes; BAW-Yes
•Welfare services for invalids and addicts JRB-Yes; BAW-Yes
•Old age pensioning (Social Security) JRB-No (except to require that workers devote a percentage of income to a savings account offered by private companies with investment options of a dozen or so stock, bond, money market, and REIT index funds); BAW-Yes
•Immigration law enforcement JRB-Yes (but an innovative idea might convince me otherwise); BAW-Yes
•Illegal drug interdiction and enforcement JRB-No (except to regulate sales and use similarly as alcohol); BAW-Yes
•Other police services JRB-Yes (but incarceration capabilities could be outsourced with oversight); BAW-Yes
•Agricultural subsidization JRB-No; BAW-No
•Energy industry subsidization – JRB-No; BAW-No
•NASA (besides landing men on the moon, the smartest thing this service ever did was give itself a good name) JRB-No; BAW-No
•Amtrak JRB-No; BAW-No
•Transportation infrastructure (including highways, airports, ports, bridges) JRB-Yes (but I’m interested in the idea of funding primarily through bond-based referenda that are paid off with local collection of wage taxes, sales taxes, property taxes, and/or user fees); BAW-Yes
•Arts subsidization JRB-Undecided; BAW-No
•Science funding (e.g., IHS, NSF) JRB-Undecided (but probably No); BAW-Yes
•Museums and libraries services JRB-Yes; BAW-No for Museums, Yes for Libraries
•National parks services JRB-Yes; Baw-Not sure
•Small business services and/or subsidization JRB-Undecided; BAW-No
•Environmental protection JRB-Yes; BAW-Yes
•Other regulatory services JRB-Yes (but with an emphasis on creating market-based incentives that reduce the need for regulatory oversight); BAW-Yes
•Foreign aid, development, and exchange JRB-Yes (and increasing as defense decreases, though probably less than dollar for dollar); BAW-Yes
•Tax collection JRB-No; BAW-Yes

Update (BAW): I've added mine. A couple comments: first, I've assumed that the time frame for the answers is today thru at least the next few years; second, that "government" means federal, state, or local government, whichever is best.

Sunday, February 08, 2004

Doctrines of Implied Consent

Even "pure" Libertarians will agree that any group of individuals can enter into contracts or pacts with each other specifying virtually any set financial and behavioral relationships within that group of individuals. Any transaction or behavior that can be done in private can be specified. People can buy land in an area and create a "face-to-face" community using such pacts which contractually specify laws and taxes in addition to ones imposed by the Government in which the community reside. These could even be lifetime contracts and could probably even specify how the property of the deceased should be disposed of. Other examples of what such contracts or pacts might include paternalistic intervention into people's lives, restrictions on the range of books which may circulate in the community, limitations on the kinds of sexual behavior, and so on.

What isn't okay, either for the Libertarian or most others, is to permanently impose the contractual set of obligations on future generations. When a child comes of age, clearly they can't be forced to accept the contractual obligations of others. However, neither does the new adult have any rights to the property or other benefits in the pact. By mutual consent, the new adult and the community may choose to explicitly add the new adult to the community's pact. Or, the new adult may leave and seek to continue his or her life elsewhere.

To explicitly keep track of the paperwork to add a new member to a community is cumbersome. I would think that instead of requiring an explicit addition of the new member, if the new adult simply stayed (and was allowed to stay) in the community, then it would signify the acceptance by the community of the new member and the acceptance by the new member of the contractual obligations of the community. It doesn't necessarily need to be a child coming of age. It could also be any person moving or immigrating to the community.

The next step is to consider the entire United States as one big happy community (1)(though not a face-to-face community). Since income tax, government regulation, and even government deception and lies have been part of the social and political landscape for decades, it follows that by staying in the United States, we give our implicit consent to those governmental behaviors. Since our explicit or implicit consent to the behaviors of a community make the actions of that community (that are acceptable within the realm of the community's pact) regarding ourselves perfectly acceptable and moral, then it follows that the same would hold true for the community of the United States as a whole. Thus, we could conclude that it is not the case that taxation is "individuals having something taken from them without their consent by the government."

It looks to me like this line of reason, which I call "the doctrine of implied consent through residence", is logical. However, I think there are some serious holes around the edges which make me question whether or not this seemingly straightforward logic is really valid.

As a first example, let's say that at some future time, everybody in the whole world adopted some new religion that required human sacrifice. And let's say that all separation of church and state had been erased so that the governments enforced or even conducted the sacrifices. Let's also assume that the person to be sacrificed was chosen by lottery. If you didn't believe in this worldwide religion, you might choose to go to the country where they sacrificed the lowest percent of the population. After you've moved there, does your residence imply consent to be sacrificed if your number comes up in the lottery?

It seems to me that this logic applies to taxes as well. If every country in the world (that lets anybody immigrate) taxes its population beyond that required to maintain the minimal state, does your residence in a given state imply consent to being taxes? Or how about deception and lying? If every country in the world lies to its citizens from time to time, does living in a given State imply consent to being lied to by that State? Because of these questions, I'm currently thinking that you can only fully give implied consent to a government behavior by residing in that country if there is a country somewhere in the world that would allow anybody to immigrate to it, and that you accept as having only completely moral laws and behaviors. Otherwise, it seems to me that being forced to choose between evils reduces the validity of the consent.

There's also the issue of changing the implicit contract of the community. Given that my living somewhere implies consent to the current laws and behaviors of that country (which I think is questionable because of the examples above), does it also imply consent to all future laws and behaviors of that country? After all, the United States Constitution can be amended to be virtually anything and thus any set of laws and behaviors are attainable. A related question is that if the social contract is changed, how long should an individual have to move before consent to the new contract is implied?

These are important questions. At the beginning of last century, Germany was considered to be one of the best places for Jews to live. The Jews had immigrated to Germany and that would seem to imply some kind of active consent to German laws and behaviors. The Nazis came to power more or less legitimately within the existing German constitution. The Nazis then decided to implement the Holocaust. Would it follow that the German Jews consented to being sent to Auschwitz? If Jews choose to stay after they knew there was a significant probability that the Nazis where going to kill them (many had an inkling that it was the case), would that have meant they consented to their fate? And if they did consent, did that make that genocide morally okay? Or does the consent only apply to the current set of rules and regulations and not any changes to them? If so, what are the moral implications of changes to the law that adversely affect given individuals?

Each person benefits from the beneficence of their country's economy (well, at least in some countries). But the opposite is true as well. The economy, and thus other people benefit from the efforts of each individual. Would an individual who has invested a great deal in a country have additional rights regarding changes to the laws? If an individual works for 20 years in a country with an initial set of laws and behaviors, is it moral to force him to choose between acquiescing to a new set of laws (which affect him adversely) and leaving his investment (tangible and intangible) and starting anew somewhere else, even though he knew it was possible that one day the laws might change (though he couldn't necessarily predict how)?

Is there any limit to the cost of leaving that would nullify the doctrine of implied consent? For example, leaving one small community to join a second one could be accomplished on foot (people run away from home all of the time), but it's substantially more expensive to leave the United States (though I could conceivable walk to Mexico from here). If the whole world were one big country (community), then you would have to leave the planet, which pretty much nobody could afford (except for maybe Bill Gates).

There are many, many more questions like these regarding the doctrine of implied consent due to residence. Where do the questions regarding the doctrine come from?

I think that the main issue is that it's possible to choose not to live in any face-to-face community if you can't find one whose implicit contract you find acceptable. You can live by yourself, or you can start your own if you can attract others to join you. However, you can't feasibly not live in a country. I know the South Pole is open, but I don't think that being able to go live by yourself at the South Pole is a meaningful exception to the fact that every other square inch of land is claimed to be under the control of some country or other. So you can opt out of communities, but you can't opt out of nations.

So I'm finding the doctrine of implied consent via residence of minimal value in showing the morality of any government laws or behaviors, including taxes. It better shows that the resident accepts the legality of government laws (by definition) and behaviors, but not morality. I could be convinced otherwise, however, if solid answers appear to the above questions.

I'd like to also briefly consider a (vaguely) related concept regarding the moral justification of taxation. The concept is this: if you don't want to pay taxes, you don't have to make any money; therefore by making money you're giving consent to paying taxes.

Let's say that one day someone named Guido who's six-foot four, 260 pounds, and heavily armed tells you that you need to start paying him half of your income. If you don't make any money, you don't need to pay him. Does that imply that if you do make money, you've consented to Guido's demand and that Guido's demand is moral? I would think not and that the same line of reasoning applies to the government collecting taxes.

A second problem is that the government also collects sales tax. So not only would I have to not make any money, but I'd also have to not spend any money. And though food is exempted, clothing and shelter are not (at least here in San Diego), so survival would be an issue.

I have yet to see a really convincing argument showing that government actions (Means) beyond the Minimal State (the "Night Watchman State") are moral. However, I have no desire for us to strive toward a Minimal State. The reason I keep harping on this stuff is that in discussing our government, I feel that it's important to accept that many of its desirable actions (Means) are inherently immoral (or at best amoral), and to move on to focusing on the Ends that can be achieved, including the Means in the equation only by considering all side effects, short term and long term, besides the desired Ends that results from those Means. I think that the cost of limiting ourselves to moral Means is too great a burden, in that it seems to push us back toward a Minimal State, which I think is a bad thing (which I'll eventually get to in other posts).

Notes:
(1) For some reason, Libertarians have an inherent problem with this step. I'm apparently a little too dense to grasp it, but the following is a quote from "Anarchy, State, Utopia" that describes some reasoning related to this:
In a nation, one knows that there are nonconforming individuals, but one need not be directly confronted by there individuals or by the fact of their nonconformity. Even if one finds it offensive that others do not conform, even if the knowledge that there exist nonconformists rankles and makes one very unhappy, this does not constitute being harmed by the others or having one's rights violated. Whereas in a face-to-face community one cannot avoid being directly confronted with what one finds to be offensive. How one lives in one's immediate environment is affected.

This distinction between a face-to-face community and one that is not generally runs parallel to another distinction. A face-to-face community can exist on land jointly owned by its members, whereas the land of a nation is not so held. The community will be entitled then, as a body, to determine what regulations are to be obeyed on its land; whereas the citizens of a nation do not jointly own its land and so cannot in this way regulate its use.

Thursday, February 05, 2004

Thought-Provoking Article by Rahn

Howie, I enjoyed the article you included by Richard Rahn. Before I go too far in praising it, however, I'd like to make note of a couple of points I found a bit troubling:

(1) Rahn presents statistics about growth, unemployment, and inflation in high-debt and low-debt years as if this year's total debt is highly correlated to these stats. I find this dubious. There are major lags between federal debt-financing and the potential negative repercussions of it. It should not be surprising at all that when debt is created, there is a fairly quick stimulus. This is easy to perceive on a personal level -- if I go borrow and spend $100,000 from the bank this year, I could buy a lot of nice things from my local merchants. A serious statistical analysis would look at lags and lots of other variables. I'm guessing that the overall direction or acceleration of the debt (i.e., the first or second derivative) might provide some additional insight.

(2) I'm also skeptical about the CBO projection. I'm guessing that he's quoting the projection widely cited in the news lately which does not include "extraordinary" spending on Iraq or Afghanistan. Ignoring these special costs might be tempting (since, theoretically, they should not be structural), but they are pretty darn big right now and may be for a few more years, adding a percent or two each year to the total debt. Further, I believe the CBO projection is based on the budget submitted by the administration. But, Bush has shown no inclination to curb spending (Rahn's own Cato Institute blasts him for increasing the NEA budget), and his enthusiasm for everything (trips to Mars!) seems endless. Are we to expect the Democrats to restrain spending?

All that said, Rahn's basic premise that our current federal debt levels are manageable is reasonable. However, other factors should not be ignored. Lack of leadership that actually wants to shrink government is a big problem. Highly leveraged U.S. citizens -- uncomfortably dependent on low interest rates -- are another concern. Finally, I haven't seen a good analysis of the impact of the upcoming demographic shift wherein a lot of baby boomers will go from savings mode to consumption mode. What will happen then?

As we've discussed previously, I do agree that more aggressive consumption taxes would be preferable to high income taxes. I do, however, believe that rich people should pay a higher percent of their incomes in taxes than poor people -- primarily achieved by having a very high exemption -- e.g., $50,000 for a married couple.

Maybe I'm too simplistic when it comes to debt, but running a 5% of GDP deficit in an economy that really is not all that bad seems unwise. What if we do experience another recession -- whether because of a Democratic president raising income taxes or some other reason? Will 8 or 10% deficits be OK?

The one point you, I, and the Cato Institute do agree upon is that federal spending is too high, and the federal government is too intrusive. I have little confidence that either Bush or Kerry will move in the right direction on these issues.

Thanks for the article. I'll look forward to your more extensive thoughts on this issue.

Deficit Obsession Disorder Redux

I could and eventually will go several levels deeper on this subject, but for now see this excellent piece by a very fine economist, Richard Rahn. Here it is in its entirety.



February 5, 2004


COMMENTARY


The Deficit Bugaboo

By RICHARD W. RAHN

Are we better off having lower taxes on interest, dividends and capital gains (and other taxes on capital) or having a lower deficit? Obscure as it may seem, this is the central economic debate being fought in the political arena.

To fund any given level of government spending, our political leaders have to choose how much of the spending should be funded by taxing and how much by borrowing. Historically, Republicans tended to argue more than Democrats for a balanced budget or lower debt financing. Now, the parties have reversed themselves. Republicans have slowly accepted the supply-side argument that high marginal tax rates and the double tax on capital income is more damaging to the economy than modest increases in the deficit. Democrats have bought into the argument of former Treasury Secretary Robert Rubin and his allies that deficits are destructive and should be reduced through tax increases and, at the same time, they believe "fairness" requires the rich to pay a much larger share of the tax bill.

How damaging is the deficit and at what level does it become dangerous? Within limits, economists are not concerned about the deficit in a particular year. Their concern, correctly, is with the amount of government debt held by the public in relation to GDP. As long as individuals or businesses have a yearly rise in income, they can take on more debt without getting into trouble, provided the cost of the additional debt service does not rise faster than the rise in income. The same is true for government. Forty years ago, in 1962, federal government debt as a percentage of GDP was 43.6%. It fell to a low of 23.8% in 1974, rose to a high of 49.5% in 1993, and then dropped back to 33.1% in 2001. Currently, it is about 35% of GDP, and the CBO projects it to fall back to 30.7% in 2013.

Those who argue for lower levels of debt usually claim that higher debt crowds out new investment, leading to lower economic growth, more unemployment, higher inflation and higher interest rates, and is unfair to future generations, etc. At some level of debt, the arguments against it are undoubtedly true. But again, looking at the data for the last 40 years, there is no evidence that federal government debt levels up to at least 50% of GDP have been a problem. Surprisingly, real economic growth averaged almost 1% higher (3.47%) in the years where debt was more than 33% of GDP than in the years when it was less than 33% (2.59%.) Unemployment averaged 6.43% in the low-debt years, and only 5.65% in the high-debt years, and inflation averaged 7.6% in the low-debt years, and 2.9% in the high-debt years.

At the end of World War II, U.S. government debt was more than 100% of GDP. That level of debt was borne by the generations that came after the war, but clearly we are all better off because the war was won with debt financing. We are also better off because the Reagan administration engaged in a military buildup, financed partly through increased debt, to win the Cold War. Placing a debt burden on future generations is not wrong if it is done to help secure their liberty and prosperity.


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Those who argue for a tax increase to bring down the deficit, such as Mr. Rubin and his allies, have so far failed to distinguish the differing impact various types of tax increases would have on the economy. The deficit hawks argue that an additional dollar of tax revenue received by the government, if it is used to pay down the deficit, will result in one more dollar in the private sector available for productive investment. This is true if the dollar would otherwise be spent on consumption. However, if the dollar comes from individual or corporate saving, there would be no increase in capital available for private investment and, as a result, the economy would be no better off despite a lower deficit.

Tax economists have long known that consumption taxes, for each dollar raised, are far less damaging to the economy than taxes on capital. Yet all of the Democratic candidates for president are proposing tax increases that would fall largely on capital rather than on consumption. When they advocate increasing "taxes on the rich" -- such as higher marginal tax rates on upper-income people, and higher tax rates on capital gains, dividends and corporations -- they are, in fact, calling for higher taxes on productive saving and investment. These higher taxes would depress investment, productivity and wage growth, making workers bear the ultimate cost.

The cost of tax collection is considerable, both for the government and the taxpayer. Also, as tax rates rise, the increase in revenue diminishes as people have a greater incentive to find legal and illegal ways to avoid paying the tax (i.e., the Laffer curve effect). For instance, the repeated increases and decreases in the tax rate on capital gains have clearly demonstrated that the revenue-maximizing rate is under 20%. High tax rates, particularly on capital, misallocate resources, resulting in lower economic growth. This fact had become so obvious (both from rigorous economic analysis and from casual empirical observation) that during the last two decades it caused governments around the world to sharply lower their corporate and personal marginal rates, and spurred the movement toward flat taxes. The U.S. now has the fourth-highest corporate tax rate in the OECD (35%) -- higher than even Sweden, Germany and France and almost triple Ireland's 12.5% rate.

There are costs involved whether the government obtains its funds from taxing or from borrowing. Yet the extraction costs of borrowing are far less costly than taxing. This is because the capital markets are very efficient. It only costs the government a few cents on the dollar to issue notes or bonds, and the effect of additional government borrowing on interest rates tends to be small (provided, of course, federal debt remains below 50% of GDP).

The failure of the Rubin deficit hawks to understand that high taxes on capital were more damaging to the economy than a modest deficit led them to embrace a budget surplus. While they received almost universal acclaim for this action, in effect, what they were doing was a costly drain on high-value, private-sector capital for the sake of reducing low-cost government debt. If in 2000, instead of running a surplus, the Clinton administration had enacted a tax cut to reduce the highest marginal tax rates, the corporate income tax and the double taxation of dividends, we probably would have avoided the most recent recession and all the misery, unemployment and hardship it caused.

Reducing the growth in government spending has many benefits, including less misallocation of resources and less need for both borrowing and taxes to keep the deficit within manageable range. Over the last three decades, federal government spending as a percentage of GDP has ranged from a low of 18.4% in 2000 to a high of 23.5% in 1983. This year it will be about 20.5% of GDP (or roughly the average of the last 30 years). Missing from the deficit debate, however, are serious proposals to substantially reduce the growth in spending.

To date, each of the Democratic candidates seems to have an economic plan that would repeat the mistakes of the deficit hawks. They would all increase rather than cut the taxes on capital, which would likely lead to another recession. President Ford made this mistake in 1974, as did President Carter in 1980 and the first President Bush in 1990.

The Bush team has put forth a realistic program for ensuring that the debt-to-GDP ratio will not increase over the long run, and that the deficit will decline to under 2% of GDP in the latter part of the decade. The challenge now for the president is to show that he will hit his budget targets by vetoing spending bills when necessary, and continue to reduce taxes on productive saving and investment to keep the economy growing.

Mr. Rahn, a senior fellow of the Discovery Institute, is an adjunct scholar at Cato.

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Updated February 5, 2004



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Wednesday, February 04, 2004

Consistency

Bret, I agree with statements 1, 3, and 4. I disagree with statement 2. However, I'd point out that taxation is not taking something without consent. As a citizen of the country, you are giving consent to be taxed to maintain and improve the country from which you benefit. Further, taxes are not arbitrary. Tax laws are well-known, and taxes are levied according to these laws. You can choose to withhold your "consent" to taxation by emigrating, or by not benefitting from the beneficence of our country's economy by not making any money.

I don't believe that governments can morally take things without consent or arguably just compensation.

One point about the lying statements. There is some grey area here. Some lies are small and insignificant, and hardly constitute immorality. Although, even small, seemingly harmless lies can result in bad, unexpected results, as can truths that are spoken to people who are not prepared to handle them. So, there is judgment about the significance of a situation in determining if a lie constitutes immorality.

Feel free to ask me as many questions as you want. I won't claim that there are no holes in my logic.

Spending Limitation Amendment

Here's an interesting idea. Require a supermajority of Congress for new spending laws.

Tuesday, February 03, 2004

Looking for Consistency

Jim, I'm trying to find a consistent framework from which to consider your statements. I think I can do it if you agree the following four statements are representative of your beliefs:
If individuals have something taken from them without their consent by other individuals, the act of taking is immoral and wrong.

If individuals have something taken from them without their consent by the government, the act of taking is not immoral and not wrong.

If individuals are lied to by other individuals, the act of lying is immoral and wrong.

If individuals are lied to by the government, the act of lying is also immoral and wrong.
Would you say that these four statements are an accurate characterization of your beliefs?

Definitional Issues

Bret, I'm not sure I have much more energy for this discussion, but I'll attempt to make one or two more points about the Ends and Means issues. I think you missed my point that the rules and regulations of economic activity are not in the realm of morality. In my opinion, it's not an issue of morality whether the State should tax or how much it should tax. It's an issue of effectiveness. Clearly, the 100% taxation (Soviet) model was ineffective. Between the year 2000 and the year 2004, net taxes collected by the U.S. federal government will have dropped from 20.9% of GDP to a projected 15.7% of GDP (which will be the lowest level since 1950 - if my source is accurate). I don't see this as a moral issue one way or another. The question is whether it is effective. To actually address that question, it may require some more data -- such as what the overall debt level and the annual deficit are. In my opinion, they're too big and will cause other problems down the road, therefore, tax revenues are either too low or expenditures are too high. Although I think we underspend on a few things (i.e., third world economic development and democracy incenting), I think the main problem is we spend too much on a bunch of things. If it were me making the decisions, I'd quickly phase out all spending on energy ($20+ billion), agriculture ($80+ billion), and NASA (over $15 billion). I'd also begin reducing defense spending -- which I realize would make me virtually unelectable today. On the revenue side, which probably must be worked as well, reversal of Bush's tax cuts for those making over $100K would close the budget gap by another $180 billion or so. (Of course, complete taxation restructuring, as we've discussed, is preferable, but probably not practical without a fairly long transition period.) Obviously, it would be nice to reform Social Security and Healthcare as well, but I think it would be awfully hard to start that process with an expectation that huge savings would result.

Now, let's compare this Ends and Means debate (which, especially within the relatively narrow percentage differences of U.S. taxation policy, has no morality associated with it) with an issue that is quite a bit about morality -- i.e., deposing/killing rulers we deem unsavory whether or not they are causing harm to us or threatening egregious levels of harm. Let's also stack on the side of the attackers these judgments: the people of the country in question are requesting intervention, the military campaign can be conducted with a near guarantee of success, and the desired endgame is one of democracy and freedom for the country. What are the means that would be justified to achieve the desired end? In my opinion, there still should be constraints on the means despite the envisioned virtuous ends. There's an important word: envisioned. Because the ends do not always come to pass -- in fact, they rarely come to pass -- as envisioned. But, the means -- if they contain untruth or indiscriminate punishment of the innocent -- have a funny way of being even worse than envisioned -- and this corrupts the ends before they ever get a chance to take root.

So, yes, I stick by my statement: Ends do not justify Means. Don't get me wrong -- this is not to say that just Means can never be brutal. The American Revolution was won with bravery and brutality. But, the brutal Means were based on premises and principles that were explained openly and honestly. There also could have been just Means to remove Saddam (whether brutal or otherwise), but they were not vigorously pursued.

Finally, I do hope, despite the corrupt minds of our administration who seem to think that these issues are too complex to trust to the American people to decide, that Iraq somehow emerges free and democratic. This would be a tribute to the attractiveness of democracy and freedom, not to our poor example of how they are to be exercised. The form of global shaping that we have embarked on is not sustainable, and I believe it has planted the seeds of hatred and distrust of America around the world and has reinforced the principles of winning through mafia-like brutality. Clear, just, and effective principles attract followers; dishonest plots breed more dishonesty and fear.

More on Ends and Means

Jim wrote some responses to my post Ends, Means, and the Modern State. First with regard to the Tragedy of the Commons:
It is this type of situation where regulation is often applied (i.e., in this case, fines for littering) because it is hard (although maybe not impossible) to create incentives for the individual. This can be generalized to many environmental issues.
The libertarian framework described by Nozick quite easily deals with the tragedy of the commons. People are only free to "order their actions and dispose of their possessions and persons as they think fit" as long as they don't "harm another in his life, health, liberty, or possessions". Since each possesses a share of the commons, anyone who trashes it is doing other owners of the Commons harm and that would be prohibited and enforced by the minimal state. The same holds for all environmental considerations.
The collective superstructure, which contains the economy and the economic activities of all individuals, has its own special set of rules and requirements that don't really have any relationship to morality...
If we stop this quote here (there's more, which changes the meaning), this would be exactly my point. The rules (Means) of the Modern State are often not moral. However, they are often justifiable because they benefit the collective whole. In other words, the Ends justify the Means!

As an example, consider taxation (beyond what's required for the Minimal State). Taxation is the act of taking possessions from someone. An individual would not have this right. However, let's assume for a moment that all taxation by the State is moral (because of some special collective rights that we have yet to discover the basis for). What if you take a twenty dollar bill out of your pocket which you have obtained legitimately and you burn it (and it doesn't cause too much pollution)? Certainly utilizing your own property (the $20 bill) in this way is within your rights. What if the government takes that $20 bill from you via taxation? Our assumption is that this is moral. An agent of the government then burns the $20 bill as directed by the rules and regulations of the government. (Unfortunately, this is a good metaphor for what happens with a lot of government revenues). Given that the Means of taxation is moral (our assumption for this paragraph), and the Ends of disposing of property obtained by legitimate Means is also moral, then the taxation and burning of money by the government is completely within the moral realm. In fact, taking all possessions and burning them would also be morally acceptable using this logic. Yet I don't think we would agree that it is okay for the government to take our money and burn it.

What if, instead of burning the money, it was used to build lavish palaces for government officials to live and work in? We would probably agree that that would be better but still not legitimate. What if, instead of building palaces, the money was used to educate poor children? We would certainly agree that that would be better and most of us would agree that that was legitimate.

The Means for each of these examples remained the same (taxation). Only the Ends changed. Thus, the Modern State is inherently Ends based as far as determining what is legitimate and what isn't. We are willing to allow the State to utilize evil Means as long as they are justified by the Ends. Virtually every non-Minimal State function falls in this category.
Kevin Phillips pointed out that it doesn't matter how much his taxes are cut, nor how much anyone else's are cut, this will not address the challenges that we face. No matter how much money he saves in taxes, Kevin Phillips will not be able to do anything about the environment, national defense, or the healthcare system.
Does this make sense to you? I think this is probably too simplistic. On the one hand, virtually every time taxes have been cut significantly (Kennedy, Reagan, possibly Bush II, Ireland, Chile, etc.), economic growth has greatly increased. On the other hand, most times that taxes have increased (Hoover/Roosevelt, Bush I, Argentina, etc.), economic growth has slowed. The extreme cases, where taxation was essentially 100 percent, such as the communist Soviet Union, economic growth become non-existent or even went backwards. An increase in real growth of 2% per year translates into a doubling of the real GDP in a mere 36 years. That means that in 36 years you have twice the resources to address the problems! So ironically, in the long run, Kevin Phillips might actually help the environment and the like more in the long run by paying less taxes now! Especially the environment, which is a very long term game.

Monday, February 02, 2004

Syzygy Too

Bret, I like your idea of starting with something mundane and optimizing it. Perhaps the first place to start would be to identify potential businesses that are (1) high margin and/or (2) generally inefficient. Then we could use our substantial brains and diminishing (but still respectable) physical energy to beat competitors. Residential contracting (including roofing) is one potential area. Here are a couple more off the top of my head: wedding supplies and services, and funeral supplies and services. Neither one of those two businesses get me very excited, though, unless of course we manage lewd bachelorette parties as well (for either the brides-to-be or the newly widowed). Another possibility in this category is fitness clubs. I've noticed that not many of them seem to go out of business, yet there often seems to be quite a bit of unexploited revenue potential in many of them. For example, why not combine dry cleaning services with a fitness club? One less stop for the consumer to make, and the club already has to have pretty substantial laundry facilities. And another area: services for buying and selling housing. The fees are ridiculously high for very little work by real estate agents and title companies. Can we come up with a new model that would supplant the current Multiple Listing Service one?

Another idea is to find some niche in healthcare since there will have to be some "solutions" that help mitigate the rising costs. One idea I've thought about, but don't have a clue how to make it happen, is to be a middleman between doctors and patients (but not like an HMO). My thinking is that patients want doctors who have experience treating their problems and who are compatible with their preferences (e.g., high touch, high tech, high efficiency/low cost). They also want to know the success rates of doctors for various treatments. And, doctors want patients that match their specialties so they can treat them successfully and efficiently. So, what I'm getting at is a kind of matching service between doctors and patients that improves efficiency and effectiveness. There also seems to be quite a bit of unexploited potential for collaboration between doctors that doesn't now exist. Sure, doctors ask other doctors they know for opinions, but do they access a national or global network of fellow professionals who can give opinions on demand? Finally, I think the benefits of personal biological knowledge will eventually outweight privacy concerns. Linking physical data from millions of patients and performing statistical analysis already may be happening to some degree, but I don't think we're anywhere close to what it could be. Is there a piece of that action we could get? Anyway, I doubt that I've identified anything viable, but maybe this will give someone else an interesting idea.

Finally, there are always strip clubs. The high end ones seem to do a pretty steady business. Plus, we could get in for free!

It's About Time

Looks like we're going to a least try to do something regarding our intelligence failures (from the Washington Times):
The executive order the president will sign this week will direct the commission to take a "broad look at our intelligence, particularly related to weapons of mass destruction," the official said. "It will look at Iraq, but it will be more broad than that.

"There are outlaw regimes and closed societies that seek to conceal their conduct through deception and denial, and the president believes that it is important for our country to have a bipartisan review, because the global intelligence challenges that we face are new, are more complex and are more difficult," the official said.

The probe will look back ˜ possibly as far as previous administrations ˜ but will also be "forward looking," with an eye toward coming up with solutions for what appear to be major intelligence failures leading up to the Iraq war.
Whether or not you think Bush intentionally lied regarding WMDs in Iraq, this is still a good thing.

Syzygy

I was hoping by now that one or more of us would have had a huge success in the entrepreneurial realm such that we could attract hundreds of millions of dollars like the Segway inventor did. That would've enabled us to start something really huge that would justify our myriad talents. I was thinking of something along the lines of cars that drive themselves or even commercial ventures into outer space.

But, that hasn't happened (yet).

So a second line of thought I had was to start with something incredibly mundane and optimize the business model since you can now get business method patents. As an example, consider roofing. George Kraynak almost didn't return to MIT for his senior year because he worked for a roofing company during the summer between his junior and senior years and helped that company so much that they begged him to become a partner. That was because he was able to calculate the area of a roof so their bids were more accurate. Otherwise, they'd bid too high on some jobs and not get the work or too low on others and lose their shirts.

The idea would be to go into something like roofing, optimize the business, apply for business method patents, open up branches nationwide, then use the combined purchasing power to further enhance profit margins.

We could start by forming a partnership to study the problem and creating a plan. Whoever is currently available to work it could be incentivized to start now and the rest of us could join in and start franchises in other cities as we become available. Nobody has to move if they don't want to.

I'm not saying that roofing is the choice, but it could be something like that.

Just a thought...

On Snowboarding

After a recent weekend snowboarding (my third time to do so), I decided I will permanently go back to skiing. Not that I'm all that good at skiing, mind you, but snowboarding is just too damn hard on the body. And all that up and down for strapping in and unstrapping becomes wearisome as the skiers glide off the lift and down the hill. If that's caving in to age, so be it...