Nobel Prize for Economics and Tax Cuts

This years Nobel Prize for Economics went to Edward Prescott and Finn Kydland "for their contributions to dynamic macroeconomics: the time consistency of economic policy and the driving forces behind business cycles." These are two economists who have specialized in the area of how economic policy such as tax cuts affect the business cycle. Here's what Edward Prescott has to say about tax cuts:

Edward Prescott, who picked up the Nobel Prize for Economics, said President George W. Bush tax rate cuts were "pretty small" and should have been bigger.

"What Bush has done has been not very big, it's pretty small," Prescott told CNBC financial news television.

"Tax rates were not cut enough," he said.

Lower tax rates provided an incentive to work, Prescott said.

Prescott and Norwegian Finn Kydland won the 2004 Nobel Economics Prize for research into the forces behind business cycles.

The American analyst, who is a professor at Arizona State University and a researcher at the Federal Reserve Bank of Minneapolis, said a large tax cut in 1986 had lowered rates while collecting the same revenue.

But "in the early '90s the economy was depressed by the tax increase in '93 by about four percent, and it's right at that level now," Prescott said.

Bush, who is fighting to get re-elected November 2, has cut taxes by about 1.7 trillion dollars during his term.

The US leader accuses his Democratic rival John Kerry (news - web sites) of favoring tax increases, despite Kerry's promise to cut taxes for everyone earning less than 200,000 dollars a year.

So now we have an economist, who specializes in economic policy and won the Nobel Prize, who says that Bush's tax cuts were too small. There is now nobody with equal stature and specialization who takes the other side.

Bad News for Kerry

John Howard easily won re-election in Australia, even picking up a few seats. I think this makes life harder for Kerry for two reasons. First, Howard is a devoted ally in the War on Terror and a close ally of Bush. His re-election, as one of the groups described by Kerry as the alliance of the coerced and the bribed, makes it harder for Kerry to argue that Bush has no allies. Or, conversely, if Howard had lost, it would have provided a golden opportunity for Kerry to show that Bush had alienated even the Australians, our most loyal ally for the past 150 years. Kerry will now be unable to utilize that argument.

The second reason that Howard's re-election is bad news for Kerry is that the polls and media in Australia were predicting a very close race, with several of the them predicting a Howard loss. Instead, it was a strong Howard win.

The bloggers at Polipundit.com do extensive poll analysis and have shown numerous examples of polls and media predictions favoring democrats only to have the republicans do far better in the actual election. I've always taken their analysis with a grain of salt since they want Bush to win. However, in the light of seeing something similar occur in Australia, I'm begining to wonder. I'm not sure why this phenomenon exists, if it does, but it may be that the Left does better in polls and the media than they do in actual elections. That would imply that Bush is doing better than the polls are telling us.

The Bush futures contract on Tradesports rallied yesterday and today, perhaps reflecting the Australian election news. Of course, the elections in Afghanistan also occured yesterday and seem to me to be moderately successful, though it will take months before the full impact is known.

Good News for Kerry

Weak employment numbers in this mornings payroll survey as described by an Associated Press release:

Employment rises by 96,000 in September as jobless rate holds at 5.4 percent

WASHINGTON (AP) Companies added 96,000 jobs to their payrolls in September, fewer than economists forecast for the last employment report before Election Day. The figures underscored the modest hiring pace that has become an issue in President Bush's re-election bid.

The four hurricanes striking Florida and other coastal states the past two months appear ''to have held down employment growth, but not enough to change materially'' the overall jobs picture in September, the Labor Department said Friday.

The nation's civilian unemployment rate remained at 5.4 percent.

Job growth was weighed down by losses in manufacturing, retail and information services. September's net increase of 96,000 payroll jobs was less than August's rise, which was revised down in Friday's report from 144,000 to 128,000.

''I wouldn't want to be in President Bush's shoes. He had better prepare himself for an onslaught,'' said private economist Ken Mayland of ClearView Economics, noting Friday night's second presidential debate. ''The reality is that a 96,000 increase in a work force of a 131 million base is an anemic rise, and is in no way a satisfactory increase.''

The economy should be creating 250,000 jobs or more per month by now, he said. Economists predicted that about 150,000 new jobs would be added in September.

On Wall Street, the lackluster report pushed stocks lower. The Dow Jones industrial average was down 19 points in late morning trading, and the Nasdaq dropped almost 13 points.

With the new report, Bush heads into next month's election with a jobs deficit. Though 1.8 million jobs have been added to business payrolls in the past year, there are 821,000 fewer nonfarm jobs in the country than when Bush took office in January 2001. [...]

While very few people change their vote based on government statistics (and I personally view these particular statistics as practically meaningless), these statistics provide an opportunity for Kerry to hammer Bush in tonight's debate.

Perhaps that's why Tradesports' Bush presidential futures contract is trading down today, dropping below 60% chance of Bush winning. That's ironic because Donald Luskin has a column in the Nation Review Online that states:

Here's the record. From 1884 to 1940 -- the heyday of organized election betting -- there were 13 elections. In nine of them, the betting markets strongly favored one candidate by setting the odds at a 60% or greater probability a month before the election -- the favorite won in nine out of ten elections. Also, there were three very close elections, and the betting odds correctly put all three near fifty/fifty. For the remaining election, 1908, regulatory issues kept the betting markets from functioning until just before election day -- but the odds did call the winner correctly. [...]

Right now the election betting market makes George Bush the favorite to win re-election, with a probability of about 62%. That's above the threshold at which, a month out from the election, betting markets have only been wrong once in 116 years.

Today the dominant election betting market is Tradesports.com, a Dublin, Ireland-based web site where you can bet on all manner of sporting, political and current events. Presidential bets at Tradesports.com take the form of online futures contracts.

Now, of course the contract is below that threshold of 60% on the futures market, making it not such a sure thing that Bush is re-elected. In other words, Kerry's chances look better than they have in months. Bush is still favored, but maybe Kerry really is the strong closer everybody says he is. We'll see.

Environmental Extremism and Global Warming

"All radicalisms are variations on the story of Babel. They are people trying to reach heaven (or build a heaven on earth) by human means. That is why they end in such misery and horror. Leftism is a form of idolatry in which human beings worship themselves as though they were gods and saviors. I am an agnostic. I don't know whether God exists or not, but I do know that man is not God and that makes me a conservative." David Horowitz (FYI Horowitz uses the label "conservative" but most of his views are libertarian)

Socialism/Communism, Facism and nowadays an unbalanced environmental extremism are examples of radicalisms.

When I was a consultant inside EPA in the early 1980's there were some real "true believers" (Eric Hoffer). My understanding is that they have now overrun the place. An administration that challenges the bureaucracy and provokes them into finding some balance is doing a good thing, even if they are clumsy.

When it comes to environmental issues, global warming being an example, intellectuals are often in bed with leftist extremists. Everything is presented as a crisis that they will save us from...

As Thomas Sowell reminds us:

Sowell: There's something Eric Hoffer said: "Intellectuals cannot operate at room temperature." There always has to be a crisis--some terrible reason why their superior wisdom and virtue must be imposed on the unthinking masses. It doesn't matter what the crisis is. A hundred years ago it was eugenics. At the time of the first Earth Day a generation ago, the big scare was global cooling, a big ice age. They go from one to the other. It meets their psychological needs and gives them a reason for exercising their power. Many intellectuals' preoccupation with the poor is very much the same thing. The thing that gives it all away is that after they say, "We must have this program because the poor can't afford medicine, or can't afford housing," they will splutter if you say, "OK, let's have a means test so it really goes to the poor." If they were really concerned primarily about the poor, they would agree to it. But they are bitterly opposed to that, because the poor are a lever to reach other, political, goals.

Ironically, many of these intellectuals reject traditional religion and mock the blind faith of such little people but they adopt a blind faith of non-traditional beliefs related to the environment! Who knew that were actually so religious?

Here is an excerpt from a memo at the margin.

The reason I write to you about Dixy Lee Ray, who I would guess you never heard about, is that Mother Nature reminded me about her when it decided to stir up the volcano at Mt. Helens in the state of Washington. Dixy Lee, who died in 1994, happened to be governor of that state in 1980 when Mt. Helens erupted. Governor Lee, a marine biologist by professional training, had been chairman of the Atomic Energy Commission before she decided to go into elective politics and had a firm grounding in the physical sciences. What I remember about her now is a book she wrote, "Trashing the Planet," which debunked a number of myths about the environment. In it she had the following line: "The eruption of Mt. St. Helens in 1980 dumped more greenhouse gases into the atmosphere than all that has been released since the industrial revolution. Volcanoes have been erupting for millions of years with the same result. If this really effected climate, don't you think it would have happened by now?"

Here are more excerpts from another memo at the margin showing that our science was very corrupted long before GWB took office and why this is so!

I submit that if you took a fresh look with a fresh team, you would find the science is settled. Mankind does not contribute to global warming and the billions of dollars being spent by governments and the private sectors around the planet can be saved by admitting as much. Why? For well over a decade the global-warming computer models have been predicting higher temperatures and the satellites that measure the upper atmosphere find zero change. Revkin never brings this up, but instead points to temperature changes at ground level.

I've been so mystified about why this hoax is not buried for once and for all that I called Pat Michaels of the University of Virginia, who has been in the forefront of those scientists debunking global warming over the years. For goodness sakes, I asked, how is this possible? It's like we know the earth revolves around the sun, but there are still scientists, politicians, businessmen and serious journalists who are insisting it is the other way around. Dr. Michaels said: "I'm glad you asked. I've just written a new book, 'Meltdown,' that covers all the science and adds a chapter at the end to explain what's going on." Here are pages 237-241, which explain a lot. Please at least note the last paragraph:

The Predictable Distortion of Global Warming by Scientists, Politicians, and the Media

Chapter 12. Breaking the Cycle

This book details a natural process. As explained in Chapter 11, scientific paradigms compete with each other for a finite outlay of taxpayer funding. Paradigms, resistant to change to begin with, become even more calcified by the support structure that has evolved for science, largely a consequence of the federalization of science created by Vannevar Bush's Science: The Endless Frontier published in 1946. In this environment, scientists are rewarded and promoted in the academy largely on the basis of research productivity that must be funded from within existing paradigms. Those who do not support the existing paradigm are therefore not likely to be funded sufficiently for promotion. [...]

How do we stop this spiral of exaggeration?

1. Break the Government Monopoly
...
There is no way that science will ever be pure. Steven Schneider is right. Scientists are "human beings as well," and the way to take advantage of our humanity is simply to offer a wider choice of bias. That approach may not be pretty, but it is realistic.

As even a child would know and say, "well, duhhh!!!"

2. Change the Peer-Review Structure
...
Here's the modest proposal. Drop secrecy from peer review. Rather, at the end of each article, the reviewer names and institutions should be prominently featured, as well as highlights (just a few sentences) from the reviews. Right now the opposite situation persists. Not only are reviewssecret, but also some academic journals are so bold that they will allow an author to submit a list of reviewers that he or she would not want the article sent to, although editors are not bound to abide by their wishes.

3. Abolish Academic Tenure
...
Given the nature of modem science and its attendant biases, a person might be tempted to argue for strengthening the tenure system to protect individuals who may call attention to these issues. But that paradigm, too, has changed. The fact of the matter is that the academic world has increasingly evolved in a diverse fashion, with the proliferation of a large number of university-like environments of various philosophical hues. These include the plethora of think tanks that pride themselves on academic research, ranging in Washington from very liberal to very conservative, as well as "neither," which is to say libertarian (such as the Cato Institute, the publisher of this book). The scholar is now much freer to choose than he once was.More important, however, is that the tenure process in fact stifles dissent. Promotion and tenure are largely determined by academic publications that require massive research support, which mires the young scientist in the paradigm-political process. As long as the primary funding source remains a necessarily politicized federal monopoly, a lack of scientific diversity anda biasing in the lurid direction become predictable and unavoidable.

And the concluding paragraph in this chapter of the Patrick Michaels book:

The costs of inaction will be dear. Vannevar Bush's legacy is that science issues tend to be distorted by competition for a single federal source of funds. The resultant exaggerations become tiresome, and life goes on. Decades of doomsaying about global warming collide with decades of prosperity. People notice and increasingly disregard science and scientists, a process that has already invaded several aspects of our lives. That is the ultimate tragedy that this predictable distortion of global warming causes: A society that can no longer rely on the wisdom of science can only be governed by irrationality and fear.

Images

I think I finally have the capability to add images such as photos, drawings, and graphs to post. I'll store them at flickr (see new link on the sidebar) and link to them from here. I've wanted this capability for several other posts in the past and I'm sure I'll want it again in the future.

As a test, here is a virtual reality orange grove (actually a lemon grove with orange lemons):

Correction Regarding "Time to Dismount Your High Horses"

Oops. I definitely blew the math on that one. The data trends do show the effects of progressive taxation.

Total Terrorist Effectiveness

The doves claim that the Afghanistan war and especially the Iraq war are counterproductive. The concept is that these wars have greatly increased Arab humiliation and anger, and as a result, for every terrorist we've killed or captured, ten more take his place.

The hawks claim just the opposite. Arabs may be angered, they say, but the Islamic extremists attacked us because they thought we were weak and decadent. Like anyone else, Arabs prefer to bet on the "strong horse" so it's imperative that we show we're stronger than the terrorists.

Unfortunately, this is the wrong debate. It doesn't really matter how many terrorists there are. It only matters how effective they are cumulatively. For example, if our foreign policy causes ten times as many terrorists, but each terrorist is only a hundredth as effective, then that foreign policy is a resounding success. On the other hand, if our approach gets rid of all the terrorists but one, but that terrorist has a nuke and sets it off in New York or some other densely populated area, then that approach was a total disaster.

So, don't worry about how many terrorists there are. Think instead about the total damage that can be inflicted by the set of all terrorists as a result of our foreign policy. It's a much harder analysis, but at least it's a more useful question.

The Snooze Button

The Belmont Club writes:

Herbert Lottman, describing the last days of Paris before it fell to Germans in 1940 describes the strange mixture of urgency and lassitude, of obsession with long term schemes counterpointed by an indifference to the immediate in a nation that had just weeks to live. It was the perfect portrait of a country which did not know it was at war. Not really. The French Communists continued to call for "Peace Government" to mollify a Germany wronged by defeat in the First War. Parisian authorities forbade the private purchase of firearms by citizens anxious to protect themselves. Bread was rationed to 30 grams per meal at de luxe restaurants though 100 grams could be obtained at a bistro meal. The French cabinet pinned its hopes on more aircraft from neutral America as if they had any prospect of receiving any future shipments. Nero fiddled. Rome burned. When the Nazi columns finally marched into Paris, there was a widespread feeling of betrayal and a search for a scapegoat. But they had betrayed themselves.

9/11 was the wakeup call, we know we should probably get up and go to work, but it's so, so tempting to hit that snooze button. Yaawwwn! John Kerry is the snooze button. Oh, can't we just go back to sleep for four more years or so. Until the alarm goes off again - then we'll get up. We'll still make it to work on time, won't we?

I really like most of the Belmont Club's posts, but I think this one is a little too pessimistic. I think we're more lazy than divided. I think much of the intense mudslinging between republicans and democrats during the last ten years is more of a function of the democrats realizing they're soon to lose power forever and the republicans smell blood - they're so close to having a filibuster proof majority. You got more bipartisanship in the past when a party (in this case the republicans) were stuck as the minority party. Since they weren't going to win power and everybody knew it, they might as well be mostly cooperative. Once the democrats are the permanent minority party, cooperation will increase once again.

Hate Fatigue

Patrick Hynes writes in the American Spectator:

I believe I have stumbled upon one underpinning phenomenon driving this trend. I call it "Hate Fatigue." The theory is this: the Democrats wasted their hate for George W. Bush on movies, books, blogs, meet-ups, commission hearings, and protests over the last three years and they have just about run out of steam. And now that the election is upon us, their potent venom has run dry. [...]

If some voters are still undecided after learning that George W. Bush is actually Adolf Hitler, knew about 911 before it happened, and alternately has Osama bin Laden in secret custody and has no interest in apprehending him at all, what more information could John Kerry possibly give them to push them over the edge?

I wrote a tongue in cheek post about this earlier. But I've found this to be a really serious problem when I've talked to people who I've tried to convince to vote for Kerry. In fact, I've found it to be a far more serious problem than the blunders of the Kerry campaign. Each of the above claims has innoculated Bush and provided powerful protection against other, potentially more persuasive criticism.

Whereas I don't personally agree that Bush is worse than Hitler, I've followed the thought processes of those that do believe that, and I find that those thought processes are rational, given their underlying beliefs and assumptions about the world. However, the thread of logic leading to the Bush worse than Hitler conclusion starts from a different set of assumptions and beliefs about the world than those I hold, so I personally don't end up with the same conclusion. The majority of Americans don't hate Bush (his approval rating is greater than 50%) and also would not arrive at the conclusion that Bush is worse than Hitler based on their beliefs about the world and the information available to them.

That's not a problem in and of itself. People disagree on things all the time, yet remain open to persuasion in other areas. The problem with many of the meme's that the Bush hating left put forward is that they are so unbelievable and/or unpalatable to everybody else that they discredit other criticisms of Bush in the eyes of those who don't hate him. Even this wouldn't be devastating except for the sheer volume of such memes. People have been pelted by so many criticisms of Bush which they will not or can not believe, or which have been at least put into serious doubt (e.g., Dan Rather and his forged National Guard memos). At this point, everybody except the Bush hating left assumes that all criticisms of Bush coming from democrats and the left are suspect.

This situation has been compounded by the fact that many from the left consider anyone who disagrees with their conclusions as stupid and are very vocal in their insults. Even worse, many on the left are so frustrated with the rest of the "stupid" people that they are not even willing to engage in conversation with them.

So we have the left putting forth non-credible criticisms, calling everybody stupid for not believing them, and then refusing to continue the conversation about topics that might persuade voters to vote for Kerry. As a result, Bush has been successfully innoculated from criticism from the very people who most want to unseat him.

Re: Lets' get fiscal

I nearly completely agree with article posted by Howie. Indeed, I've posted similar articles to this very blog. Nonetheless, I've gotten questions from others regarding this subject matter that I haven't been able to adequately address.

Deficit spending stimulates the economy. There's little argument about that. So the fact the Bush's fiscal policies have been followed by robust economic growth is not surprising. It's also not surprising that during previous eras, when the debt has been "paid down", economic growth has been relatively anemic.

But the counter argument is that if we run high enough deficits for long enough, eventually we have to pay the piper, which means reducing (or at least not increasing) the debt as a percentage of GDP. This will require lower deficit spending, and therefore less stimulus, and therefore lower GDP growth rates. Thus, everything Mr. Verjee says is true, yet leaves this whole in his argument for deficit spending.

Howie, I was wondering if you had any comments, arguments, or observations regarding this counter argument.

Let's get fiscal!

If you hear someone bitching about the current budget deficit, look them straight in the eye and tell them that they don't know what they are talking about!! This fine article by Aman Verjee covers material already presented on this blog. It does more than excuse the deficits, it solidly defends them.

September 21, 2004, 7:49 a.m.Defending the Bush DeficitsIt’s not hard to do if you look at the data. By Aman Verjee

Since President Bush took office in 2000, the economy has gone through at least three major shocks that were not of his making: a major terrorist attack that damped consumer confidence; the depression in business spending that followed the bursting of the stock market bubble; and a series of accounting scandals that afflicted some of the largest and most visible corporations in the United States.

Yet, the U.S. economy has outperformed that of every other G7 country since 2001. Today, the unemployment rate is at 5.4 percent, where it was in 1996 when Bill Clinton was re-elected. Clinton proclaimed in his State of the Union speech that year that the "economy is the healthiest it has been in three decades." In the last three quarters, since the 2003 tax cuts were enacted, the U.S. economy has been growing at a 5.4 percent annualized pace, which is the fastest clip we’ve experienced since 1984.

This remarkable record on the economy owes much to the pro-growth policies of the Bush administration. By reducing the tax code’s inherent penalties on work, saving, investment, and entrepreneurship, the administration has kept us out of a prolonged recession. Yet, critics of President Bush’s fiscal policies have argued that today’s record federal deficit, which will reach $445 billion in 2004, will cause long-term economic growth to flounder by pushing interest rates higher.

Like Chicken Little, who caviled because she mistook a tumbling acorn for a crashing sky, President Bush’s critics are unjustified when they foretell of an impending economic doom. Alarmists who worry about the historical heights to which deficits have climbed need to review the historical data for some context.

At the end of 2001, the federal debt held by the public of the United States stood at 33 percent of U.S. gross domestic product. That was the lowest it had been in 18 years. At the end of 2003, federal debt stood at 36 percent of GDP. It is currently projected by the Congressional Budget Office to reach 40 percent of GDP by 2005 before it begins to decline again.By historical and international standards, these levels of debt are very modest. For instance, the debt burdens of Germany and France are over 60 percent of GDP; in Japan, debt is almost 150 percent of GDP. In the United States, there have been 24 years since 1939 when the federal debt was below 36 percent of GDP. In 41 years, the debt has been higher. The president’s critics might suggest that economic growth should have been better in the low-debt years than in the high-debt years, but in fact, real GDP growth averaged 4.44 percent in the high-debt years and just 3.14 percent in the low-debt years.

To some extent, this divergence in growth rates can be tied to whether or not the country was at war. During war years, debt piled up quickly and economic growth was relatively robust. But the story is the same over a more restricted time horizon.

Indeed, we can look only at the years since 1963, which is when the debt fell to present-day levels for the first time since WWII. Since then, public debt fell to a low of 24 percent in 1974, rose to a high of 50 percent in 1993, and fell back to 33 percent in 2001. Economic growth during this period was higher in the relatively high-debt years, averaging 3.47 percent versus 2.59 percent. Unemployment was also lower in the high-debt years, averaging 5.65 percent as opposed to 6.43 percent in the low-debt years. And consumer price inflation was almost three-times higher in the low-debt years than in the high-debt years — 7.6 percent to 3.0 percent.

Looking back at American history, it is apparent that economic prosperity can continue even if the federal government maintains a debt burden that is much higher than it is today as a percentage of GDP.

Moreover, large budget deficits have never been a cause of — nor have they even been correlated with — the high interest rates or slow economic growth that deficit hawks predict. For instance, in the late 1940s and 1950s, the Truman and Eisenhower administrations practiced fiscal restraint, keeping taxes high (the top rate was over 90 percent) and paying down the federal debt. The result: four recessions between 1948 and 1961. Contrary to the expectations set by President Bush’s critics, real interest rates actually rose slightly during this period of fiscal restraint; the real, inflation-adjusted 10-year government bond yield edged up from 170 basis points in 1953 (when the 10-year was first issued) to 280 basis points in 1961.

In the 1960s, the federal government ran modest deficits while cutting taxes. In the 1980s, the federal government ran much larger deficits, while cutting taxes sharply and increasing spending. In both periods, economic growth was robust. In the 1960s, interest rates fell slightly; throughout the 1980s, they dropped dramatically, which is exactly the opposite of what the deficit Chicken Littles would predict.

The lesson is clear: Economic prosperity can continue even if the federal government never balances its budget. The greater threats to prosperity are high levels of taxation and regulatory barriers to growth. President Bush deserves our gratitude for having steered a fiscal course that has kept the economy on track.

— Aman Verjee, CFA, is editor of Thank You, President Bush, a new anthology from World Ahead Publishing. A Muslim raised in Canada, Mr. Verjee has taught economics at Harvard and is the co-founder of American Thunder, a NASCAR magazine.

Time to Dismount Your High Horses

Update: I've thought about this some more and worked with the numbers and have concluded that there are minor errors in my methodology. I don't think those errors will have a substantial effect on the results, but at this point, I'm not sure. I'll post a new entry with an update when I figure it out. The main problem is that I assumed an intercept at (0,0) for Adjusted Federal Expenditures versus GSP per capita which may not be correct. I guess I should get off my high horse too!

Update 2: I definitely need to get off my high horse. The data does show the effects of progressive taxation. Thus the rest of this post below is incorrect and should be ignored.

Andrew Sullivan links to a post on TaxProf Blog titled "Red States Feed at Federal Trough, Blue States Supply the Feed." It shows two tables which follow:

States Receiving Most in Federal Spending Per Dollar of Federal Taxes Paid:

1. D.C. ($6.17)
2. North Dakota ($2.03)
3. New Mexico ($1.89)
4. Mississippi ($1.84)
5. Alaska ($1.82)
6. West Virginia ($1.74)
7. Montana ($1.64)
8. Alabama ($1.61)
9. South Dakota ($1.59)
10. Arkansas ($1.53)

States Receiving Least in Federal Spending Per Dollar of Federal Taxes Paid:

1. New Jersey ($0.62)
2. Connecticut ($0.64)
3. New Hampshire ($0.68)
4. Nevada ($0.73)
5. Illinois ($0.77)
6. Minnesota ($0.77)
7. Colorado ($0.79)
8. Massachusetts ($0.79)
9. California ($0.81)
10. New York ($0.81)

The States in bold letters in the top table tend to vote Republican and the States in bold letters in the bottom table tend to vote for Democrats. The general idea is that the top ten states in terms of federal spending per federal tax dollar are being subsidized by the bottom 10 states.

There are many possible implications, almost all of them negative towards middle America and Republicans. Indeed, Andrew Sullivan writes "A new study reveals just how welfarist much of Middle America is" regarding TaxProf's post. Sullivan's post with this derogatory comment can be found in the entry "Bush's Conservatism".

But before we get carried away about welfare queens in middle America and evil Republicans screwing states that vote Democrat, we should consider if maybe there is a perfectly straightforward explanation for the data. It turns out that there is.

First, let's imagine what a perfectly fair system of federal expenditures and taxation might look like. In such a system, each state would receive identical per capita federal expenditures, including government contracts, entitlements, etc. In other words, if a state had twice as many people as another, it would get twice as much federal spending as the other.

On the tax side, it's a little tricker. In some sense, for perfect "fairness", if a state has twice as many residents, those residents should pay twice as much federal tax. Under this scenario, every man, woman, and child would pay about $5,000 in taxes per year, regardless of income or wealth. However, this would require that the poor (and children) pay a far, far higher percentage of their income and wealth in taxes, in some cases greater than 100%. This is extremely regressive and very few people would consider that to be fair.

A less regressive structure would be a flat tax and/or consumption tax. Then everybody pays the same percent of what they make or consume. In this case, the total federal income tax paid by the residents and businesses within that state would be very close to a constant percentage of the State's total income (or of a closely related measure called Gross State Product). That's still much more regressive than our current tax system. Nonetheless, it seems quite fair for each state to pay an equal percentage of it's Gross State Product.

In the following table, I've shown by State, the Gross State Product Per Capita and Adjusted Federal Expenditures Per Dollar of Taxes. After the table comes my analysis.

State	2001 Gross State Product ($ millions)	2000 Population	Gross State Product Per Capita ($)	Adjusted Federal Expenditures Per Dollar of Taxes by State
Alabama	121490	4447100	27319	1.61
Alaska	28581	626932	45589	1.82
Arizona	160687	5130632	31319	1.20
Arkansas	67913	2673400	25403	1.53
California	1359265	33871648	40130	0.81
Colorado	173772	4301261	40400	0.79
Connecticut	166165	3405565	48792	0.64
Delaware	40509	783600	51696	0.85
Florida	491488	15982378	30752	1.00
Georgia	299874	8186453	36631	1.01
Hawaii	43710	1211537	36078	1.52
Idaho	36905	1293953	28521	1.34
Illinois	475541	12419293	38291	0.77
Indiana	189919	6080485	31234	0.99
Iowa	90942	2926324	31077	1.22
Kansas	87196	2688418	32434	1.14
Kentucky	120266	4041769	29756	1.46
Louisiana	148697	4468976	33273	1.44
Maine	37449	1274923	29374	1.31
Maryland	195007	5296486	36818	1.20
Massachusetts	287802	6349097	45330	0.79
Michigan	320470	9938444	32245	0.90
Minnesota	188050	4919479	38226	0.77
Mississippi	67125	2844658	23597	1.84
Missouri	181493	5595211	32437	1.32
Montana	22635	902195	25089	1.64
Nebraska	56967	1711263	33289	1.19
Nevada	79220	1998257	39645	0.73
New Hampshire	47183	1235786	38181	0.68
New Jersey	365388	8414350	43424	0.62
New Mexico	55426	1819046	30470	1.89
New York	826488	18976457	43553	0.81
North Carolina	275615	8049313	34241	1.07
North Dakota	19005	642200	29594	2.03
Ohio	373708	11353140	32917	1.02
Oklahoma	93855	3450654	27199	1.47
Oregon	120055	3421399	35089	1.00
Pennsylvania	408373	12281054	33252	1.08
Rhode Island	36939	1048319	35236	1.06
South Carolina	115204	4012012	28715	1.32
South Dakota	24251	754844	32127	1.59
Tennessee	182515	5689283	32080	1.24
Texas	763874	20851820	36633	0.92
Utah	70409	2233169	31529	1.14
Vermont	19149	608827	31452	1.12
Virginia	273070	7078515	38577	1.47
Washington	222950	5894121	37826	0.91
West Virginia	42368	1808344	23429	1.74
Wisconsin	177354	5363675	33066	0.87
Wyoming	20418	493782	41350	1.05

Assuming you agree that fairness would require each State get the same per capita federal expenditure and each State should pay an equal portion of it's Gross State Product in federal taxes, then we might expect some sort of relationship in the data between Gross State Product per Capita and Adjusted Federal Expenditures. In particular, we might expect poor States with low GDP to pay a lower per capita amount in taxes (even though taxed at the same flat rate), yet receive the same federal expenditures per Capita. This would cause the Adjusted Federal Expenditures measure higher for such states. Indeed, this is exactly what happens. The following table shows the correlation between the two last columns in the previous table:

Correlation Between Gross State Product per Capita and Adjusted Federal Expenditures

	Correlation Coefficient	Correlation Coefficient Squared
All States	-0.62	0.38
Excluding Outliers (Alaska, Maryland, Virginia)	-0.76	0.58

The square of the correlation coefficient corresponds to the fraction of the variation of one column that is explained by (or correlates with) the other column. The sign of the correlation coefficient (not squared) tells us if it us a positive or negative relationship.

Sure enough, excluding outliers, 58% of the differences of Adjusted Federal Expenditures can be explained by the differences in per capita income between the States. I've excluded Virginia and Maryland because they border D.C., and do get more federal expenditures than would be expected using the Gross State Product model. I've excluded Alaska because it is an extreme outlier and it has low population and Gross State Product. To leave it in would allow it to substantially skew the results even though it represents a minscule amount of federal expentitures and taxation. That same argument could be made to exclude other small population states such as North Dakota and Hawaii, which would also, it turns out, increase the correlation. But I left the rest of the small States in.

Gross State Product (column 2) comes from the Bureau of Economic Analysis, State Population comes from the census bureau, and Adjusted Federal Expenditures comes from The Tax Foundation (this is what TaxProf linked to). Unfortunately, the data for the various columns are for slightly different years. However, all of this data varies slowly so it is unlikely to have materially changed the result.

So if 58% of the differences in Adjusted Federal Expenditures is explained by Gross State Product per Capita, what about the other 42%? Well, The Tax Foundation lists other possibilities and I'll comment on each.

One factor affecting rankings is that federal spending on defense and other procurement dollars are often funneled to the states of powerful members of congress. Also, state governments can grab more federal grant money by manipulating their spending to comply with federal regulations.

Well, maybe so, but they don't happen to mention which states those might be so I have no way of checking. Funny that the list these first when clearly they are a minor effect at best.

Another factor is demography. States with more residents on Social Security, Medicare and other federal entitlements tend to rank high.

Once again, maybe, but if you look at the data, states you might think likely candidates for this effect such as Florida and Arizona, don't seem to be out of line.

Similarly, high spending levels in Virginia, Maryland and the District of Columbia are explained by the predominance of federal employees.

This one is clear and that is why I eliminated Maryland and Virginia from the mix.

Finally, states with higher incomes per capita%G—%@such as Connecticut%G—%@pay higher federal taxes per capita thanks to the income tax's progressive structure, which increases federal taxes per dollar of federal spending received in return.

But as I've shown, even if the taxes were flat instead of progressive, most of the differences are explained anyway. It's not clear to me that the "progressive" portion of the taxation makes much difference at all.

The Tax Foundation doesn't mention randomness. Sheer chance is going to introduce some differences in Adjusted Federal Expenditures. In other words, the chance that every state has identical Federal Income per capita is zero. In fact, chance could possibly explain all of the rest of the differences.

Anyway, for those on their high horses who see vast republican conspiracies to bleed the blue states for the benefit of the welfarist red states, I think it's time to dismount.

Never Mind

I've given up trying to convince people to vote for Kerry. His campaign has, in my opinion, been poorly run, and I'm not interested in investing energy in something that's not reasonably well done. In addition, the Bush hating left has made it even worse as David Frum explains:

In politics as in retailing, you never argue with the customer. If the polls are accurate, the American people perceive George W. Bush as a upright and honorable man. On the other hand, they don't much like his economic policies, and they worry that he may be too much of a risk-taker in foreign affairs.

A smart political operation would work on those pre-existing weaknesses. It wouldn't waste time trying to convince an incredulous public that the genial likeable man they see on television is in reality the reincarnation of Adolph Hitler.

This is exactly the problem. I've heard so many people on the left exclaim how stupid everyone is who doesn't realize that Bush is worse than Hitler. Maybe, but it's at least as stupid not to focus your efforts on exploiting Bush's existing weaknesses instead of berating swing voters for not hating him. The Bush hating left has now set the stage to make it very, very difficult for Kerry to come back.

Fact Checking the Denver Post

In an article titled "Taking stock of GOP's revolution" the author writes:

The party of business has presided over less-than-stellar growth, even with Republican Alan Greenspan chairing the Federal Reserve Board. Thanks mainly to the recession of 2001, the growth in gross domestic product since 1994 (an average of 5.16 percent) has not matched that of the preceding 10 years (6.9 percent) or the 10 years before that (10.2 percent).

Looking at the growth rates, they looked like nominal, not real, GDP growth rates. So I emailed the author:

Dear Sir:

I have some questions regarding your article "Taking stock of GOP's revolution" from the September 26, 2004 issue of The Denver Post. In it you write:

"the growth in gross domestic product since 1994 (an average of 5.16 percent) has not matched that of the preceding 10 years (6.9 percent) or the 10 years before that (10.2 percent)."

If I'm interpreting this correctly, the following table is equivalent:

Period GDP Growth
------ ----------
1974-1983 10.20%
1984-1993 6.90%
1994-2004 5.16%

Yet when I look at the Bureau of Economic Analysis' (www.bea.gov) "Historical Gross Domestic Product estimates." (http://www.bea.gov/bea/dn/gdpchg.xls) the numbers in the above table seem to correspond to NOMINAL growth, not REAL growth. The REAL growth averages for the periods would be:

Period GDP Growth
------ ----------
1974-1983 2.26%
1984-1993 3.33%
1994-2003 3.27%

Were you using nominal growth and, if so, don't you think that using that measure instead of real growth significantly distorts the picture because nominal growth is boosted tremendously by inflation which was very high in the 1970s and has been much lower the past ten years?

Thanks,
Bret

The author did respond with what I consider to be a rather lame response:

A very good point Bret. Thanks for writing. jack

Clearly not much interest in fixing the article. At least he admitted the error. Not that the admission of error will do anyone any good who has read the article. They'll remain mislead by this incorrect factoid.

It's getting to the point where I won't even read the main stream media (MSM) anymore. Too many errors, most of which go uncorrected.

Afghanistan Revisited

Here's a report from a NY Times reporter (Peter Bergen):

Based on what Americans have been seeing in the news media about Afghanistan lately, there may not be many who believed President Bush on Tuesday when he told the United Nations that the "Afghan people are on the path to democracy and freedom." But then again, not many Americans know what Afghanistan was like before the American-led invasion. Let me offer some perspective.

This summer I visited Kandahar, the former Taliban stronghold in southern Afghanistan, for the first time since the winter of 1999. Five years ago, the Taliban and its Al Qaeda allies were at the height of their power. They had turned Afghanistan into a terrorist state, with more than a dozen training camps churning out thousands of jihadist graduates every year.

The scene was very different this time around. The Kandahar airport, where I had once seen Taliban soldiers showing off their antiaircraft missiles, is now a vast American base with thousands of soldiers, as well as a 24-hour coffee shop, a North Face clothing store, a day spa and a PX the size of a Wal-Mart. Next door, what was once a base for Osama bin Laden is now an American shooting range. In downtown Kandahar, the gaudy compound of the Taliban leader, Mullah Muhammad Omar, now houses United States Special Forces units.

As I toured other parts of the country, the image that I was prepared for - that of a nation wracked by competing warlords and in danger of degenerating into a Colombia-style narcostate - never materialized. ...

The last paragraph is most interesting to me and introduces the rest of the article. I think things are going better there than the main stream media has generally led us to believe. And I think that time is the single element that allows such countries to move toward modernity. Every day that Afghanistan doesn't collapse into chaos is a day of tiny incremental progress.

I think the same is true of Iraq as well. We may need to be involved in helping them with secuity and other issues for years or even decades. But every day they avoid civil war is a day closer to stability and prosperity.

Why Kerry?

The primary reason I'm voting for Kerry is that it looks to me like the country is in a solid trend towards becoming more conservative. There are more republican congressmen, senators, and governors than 20 years ago. I'm not sure why. I (and others) have hypothesized that it's due to lower birthrates among liberals, but it could very well be for a totally different reason. No matter what the reason, I'd like to slow that trend down. That's primarily why I'm voting for Kerry.

He could still easily win it as of this writing. Those who put real money on the line (tradesports or the presidential futures markets) show Kerry with about a one in three chance of winning. That's still a pretty close contest. If he stays on message and does reasonably well in the debates, he could win, perhaps even solidly.

Right now Kerry is hammering on the Iraq war issue. I think that's an excellent move. That's the one issue that I've found has the most potential to sway swing voters. Clearly, a vote for Bush is a vote for more invasions and more war. Relentlessly pointing that out is Kerry's best tactic. It's also honest and forthright - after all Bush proudly states that he will continue taking the war to the terrorists. Conveniently for Kerry, not everybody thinks that's such a great idea.

Other than staying on message, I think one other thing the Kerry campaign ought to do is muzzle Ms. Heinz-Kerry. I've heard many people say that they think she's awful. Keeping her out of the media can only help.

Bad Keyboard

The damn double-u key is sticking on my keyboard. That means I'll have to vote for Kerry because I 'on't be able to refer to the other guy! Unfortunately, that's one of the best reasons I've come up 'ith so far to vote for him. But it'll do.

I'll post some better reasons tomorro'.

Democrats Are Dying Off

The United States is becoming more conservative. This trend has perhaps started decades ago and it seems to me that it has accelerated in the last four years. We're near a threshold where the Democrats may never again hold a majority in Congress and may rarely, if ever, hold the presidency.

I believe the country is becoming more conservative primarily because of changes in populations and because of the ideologies that lead to those changes in populations. The bottom line is that Democrats don't have as many children as Republicans. Also, the concept that teenagers rebel and do the opposite of their parents is a mostly a myth. Thus, every year, more Republicans are born than Democrats. For example, consider the following:

I think a lot of the answer can be found in birth-rate differentials -- demography is destiny. To put it bluntly, in the name of "empowerment," the Left has birth-controlled, aborted, and maybe also gay-libbed itself into a smaller role in American society. Yes, it was their personal-is-political choice, but others will benefit politically. We might consider, as just one example, what's happened to New York City. In 1973, the Big Apple had a population of about eight million; the population of the United States overall was 211 million. In 2004, the Apple was still at around eight million, but the country's population, in the meantime, had increased by nearly two-fifths. It's not automatically a bad thing for a population to stay stagnant -- unless, of course, the goal is to wield power through the ballot box.

What's shrinking New York and other yuppoid places is the paradoxical impact of prosperity upon fertility. Nationwide, some 44 percent of women aged 15-44 are childless; but those childlessness numbers skew above average in high-income states such as Massachusetts, Vermont, and Colorado. By contrast, the lowest percentages of childless women are in downscale states such as Alaska, Mississippi, and Wyoming. In other words, those who have the most capital -- financial, but also, often, intellectual and educational -- are the least likely to have children.

This phenomenon -- yuppie singles and couples walking down what is literally a demographic dead end -- is witnessed across the Western world. [...]

One who saw all this coming was Charles Galton Darwin; his 1952 book, The Next Million Years, argued that human history is first and foremost the story of populations. As he wrote, "The fundamental quality pertaining to man is not that he should be good or bad, wise or stupid, but merely that he should be alive and not dead." That is, underneath all the concern about the pursuit of happiness and the promotion of the general welfare is one unyielding bottom line: either the population reproduces itself, or it doesn't. [...]

And so the more recent Darwin offered a grim prediction: the future of the world belongs to illiberal religions. Or, if you prefer, conservative religions, including not only Christianity, but also Islam and Hinduism. How come? Because those faiths that emphasize traditionalism, including traditional sex roles, are more likely to be procreative. In modern countries, feminists are free to be feminists, but if they don't have feminist children -- which is to say, boys and girls who sustain the "free to be . . . you and me" philosophy -- then the politics of the future will be shaped by those hands that do, in fact, rock the cradle -- after putting a baby inside.

And that's what's been happening. The right-to-life movement, and the social conservative movement overall, is more than holding its ground. As The Wall Street Journal observed in an August 30 news story, states that might have once been thought to be solidly Democratic for John Kerry are, instead, "in play." And why is that? Because the population-blossoming parts of the state are Republican. As the Journal explained, "Minnesota's Scott County outside the Twin Cities; St. Croix County outside Eau Claire, Wis.; and Deschutes County around Bend, Ore." are the places where the vote-ducks are to be found.

The idea that the Gopher, Badger, and Beaver states, and their 25 electoral votes, might be in play for a Texas Republican fighting a foreign war would seem absurd to the anti-war liberals and hippies who once dominated state politics. But maybe those lefty folks aren't around any more. Nearly four decades after the sit-ins of the 60s, ex-radicals are more likely to be staging die-offs -- their own. And oh yes, they forgot to have children. The future belongs to the fecund.

A Second article gives further supporting statistics:

In states where Bush won a popular majority in 2000, the average woman bears 2.11 children in her lifetime -- which is enough to replace the population. In states where Gore won a majority of votes in 2000, the average woman bears 1.89 children, which is not enough to avoid population decline. Indeed, if the Gore states seceded from the Bush states and formed a new nation, it would have the same fertility rate, and the same rapidly aging population, as France -- that bastion of "old Europe."

If Gore's America (and presumably John Kerry's) is reproducing at a slower pace than Bush's America, what does this imply for the future? Well, as the comedian Dick Cavett remarked, "If your parents never had children, chances are you won't either." When secular-minded Americans decide to have few if any children, they unwittingly give a strong evolutionary advantage to the other side of the culture divide. Sure, some children who grow up in fundamentalist families will become secularists, and vice versa. But most people, particularly if they have children, wind up with pretty much the same religious and political orientations as their parents. If "Metros" don't start having more children, America's future is "Retro."

Unless these trends change, the United States will become very conservative over the next decades. The rest of the world will follow as more conservative strains of Islam and other religions maintain high birth rates. My primary reason for supporting Kerry is to slow the rapidity of becoming conservative. I think that it's all but inevitable that the trend continues. I guess I should have had more children...

Big Game Voter Hunting - The Hunt for the Elusive Undecided Voter

As the election draws nearer, I'm becoming more and more adamantly pro-Kerry. Though I'm not an independent swing voter by definition, since I'm not a Bush hater, I'm closer to an independent, undecided voter than many other Kerry supporters. Like me, many Kerry supporters are desperate to get people to vote for Kerry. Unfortunately, many Kerry supporters don't seem to have a clue about how to convert voters since they don't understand how anybody could possibly be not voting for Kerry. If this describes you, I've decided to put together a few paragraphs describing how to hunt and bag voters and transform them into Kerry voters.

Concentrate on undecided voters. Just as there is no way in hell that you'd vote for Bush under any circumstance (short of sudden onset dementia), there is no possible way you'll convince a Bush supporter to vote for Kerry. Ain't gonna happen. No way, no how. Don't waste your time on people who have already decided to vote for Bush.

Don't waste your time on voters registered in states that are already decided. In other words, in states where the polling is currently so lopsided that almost nothing can possibly change the outcome. These states are Washington, D.C., Delaware, Illinois, Massachusetts, and New York for Kerry and Alabama, Alaska, Georgia, Idaho, Kansas, Kentucky, Louisiana, Mississippi, Montana, Nebraska, North Dakota, Oklahoma, South Carolina, Texas, Utah, and Wyoming for Bush. One possible exception is New York. There are tens of thousands of "snowbirds" who are registered to vote in both New York and Florida. If you know them, make sure they cast a ballot in Florida. Even if you live in one of the above States, surely you must know friends and family in another state. Find the undecided voters among them.

Identifying the quarry requires some subtlety. Several people have told me that they don't know any undecided voters at all. Everyone they know is voting for Kerry, they tell me. Well, that's great! The funny thing is, I know some of the same people they know and I'm pretty sure some of them are still undecided.

Here's the deal. You probably know undecided voters. But if you interject comments like "Bush is the worse president ever and if I find out anybody's even considering voting for Bush I'm gonna gouge their eyes out with a hot poker" and then ask "by the way, who are voting for?", then perhaps, just perhaps, not everybody around you is going to give you an open and honest answer. I know this is hard to believe, but even if you don't threaten violence, comments like "only a total moron would vote for Bush" tend to incent undecided voters to give you the impression that they are voting for Kerry, even if they are still undecided.

The easiest way to find undecided voters is to pretend to be an undecided voter yourself. Don't want to lie? Politics is about lying, anything is fair game, so get over it. Worried that other friends might gouge your eyes out with a hot poker when they hear you say your considering voting for Bush? Well, that's just a chance you'll have to take - this election is important, the risk is worth it. Unfortunately, if you've regularly been throwing out anti-Bush comments with apoplectic rage, then you've already blown it - nobody's going to believe you when you claim to be undecided. In this case, the best thing you can do is stay out of the way of friends who haven't been quite so blatantly vitriolic with the hope that they may be able to target and convert the elusive undecided voter.

In order to find an undecided voter, lay low and watch people's reactions to political statements. For example, if, at a party, someone comments that anyone who votes for Bush should be thrown in jail for criminally negligent stupidity, look for a listener who laughs nervously and maybe nods in agreement, but says little in response. That might be an undecided voter!

Now, separate him or her from the rest of the herd (I mean group). Try a casual line like "I'm having trouble deciding who to vote for in this election. I don't like Bush's stance on X, but I also have trouble with Kerry's position on Y. What do you think?" Try not to compare Bush to Hitler. Try not to call attention to Bush's lack of intelligence. I know that will be brutally difficult, but trust me, if you use one of those comparisons, the quarry is likely to flee.

With any luck, the quarry will admit to being an undecided voter. You need to refrain from moving too fast. Any sudden movements or strong partisan statements can spook an undecided voter. Remain calm no matter how frustrating your interactions are with this idiot. Don't get preachy, don't start spewing facts. In fact, facts can be your greatest enemy. The bad news is that the quarry has already heard numerous times what a disastrous president Bush has been on both the foreign policy and economic fronts, yet the quarry is still undecided. For some reason, the facts don't seem to make a difference to the quarry. There is no new information that you can provide the quarry that is going to make a difference.

The good news is that the quarry is still undecided. The next step is to listen to the quarry to find out what sorts of things he likes about Kerry and dislikes about Bush. The goal here is to reinforce those things, repetitively and with subtlety. Please note the word subtlety. Once again, that's subtlety. Do not bludgeon the quarry. Patience is everything. Again, the goal is to reinforce those things important to the quarry that will push him to vote for Kerry. You need to reinforce those reasons to vote for Kerry that are important to the quarry even if you think they are the dumbest, most asinine possible reasons.

Sending links to articles is a good way to help reinforce points. Ask the quarry what his favorite news sites are. Restrict yourself to sending him articles from only those sites. He may pick sites that are repulsive to you, but remember, he's undecided, so chances are, if you scan those sites you'll find articles that reinforce those things important to the quarry that will convince him to vote for Kerry. Do not, under any circumstances, send him links to moveon.org or commondreams.org! While those are great sites with terrific information, they are simply too, too much for your average undecided voter.

Follow these simple steps, keep at it, and you may convert some voters. Good luck, the future of the country depends on you!

Grokster Wins!

Grokster, which produces peer-to-peer file sharing software, was sued by MGM (representing the motion picture and recording industries) for enabling infringement of copyright. If the plaintiffs had won, I believe it would have been a tragic blow to the developers of Internet technologies. The Ninth Circuit Court of Appeals ruled in Grokster's favor. According to Grokster's website, the "ruling clarified four important points":

• The Court made clear that, for purposes of the "Betamax defense" announced by the Supreme Court in 1984, the important question is whether a technology is merely capable of a substantial noninfringing use, not the proportion of noninfringing to infringing uses. The opposite rule, urged by the entertainment industry, would kill off new technologies prematurely, as infringing uses tend to be common until the incumbent entertainment industries adjust their business models to take advantage of the new opportunities created by the new technology. (When there were no pre-recorded videocassettes, the VCR was doubtless used for more infringement than it was after there were Blockbusters on every corner.)
• The Court also explained that, in order to trump the Betamax defense, a copyright owner must show that the technology developer had (1) knowledge of specific infringments (2) at a time when it could do something about those infringements. The entertainment industry, in contrast, had argued that it should be enough to simply deliver a pile of "infringement notices" to the technology developer after the fact. Such a rule would have all kinds of companies in peril. (Imagine Xerox receiving a pile of infringement notices about photocopiers that it had sold the year before -- should it be liable for infringing activities at every Kinko's in America?)
• The Court also clarified that copyright law does not require technology developers to design only the technologies that the entertainment industry would approve. The plaintiffs had argued that vicarious liability principles should be interpreted to require that all innovators design their technologies to minimize the possibility of infringing uses. Of course, short of inviting Hollywood lawyers into engineering meetings, such a rule would have left innovators subject to eternal legal harassment for "not doing enough."
• Finally, and perhaps most important, the Court observed that, in the long run, a competive, unfettered market for innovation ends up helping copyright owners (even if it doesn't help today's entertainment industry oligopolists). In fact, today's ruling will likely be remembered as yet another example of the courts rescuing the entertainment industry from its own short-sightedness. In the words of the Court, "Further, as we have observed, we live in a quicksilver technological environment with courts ill-suited to fix the flow of internet innovation. The introduction of new technology is always disruptive to old markets, and particularly to those copyright owners whose works are sold through wellestablished distribution mechanisms. Yet, history has shown that time and market forces often provide equilibrium in balancing interests, whether the new technology be a player piano, a copier, a tape recorder, a video recorder, a personal computer, a karaoke machine, or an MP3 player."

Now, if they only made a Linux client, I could use them...