Author Archive for Randall Holcombe

Obama Appointee Supports Individual Rights

I’ve been critical of the Obama administration in the past, so it’s nice to find something positive to say. This article says that President Obama’s new acting head of the Justice Department’s Civil Rights Division, Vanita Gupta “supports decriminalizing cocaine, heroin, LSD, methamphetamine, ecstasy and all dangerous drugs, including marijuana.” It’s nice to see that someone in government supports individuals’ rights to make their own choices, rather than having the government tell them how they have to live their lives.

My personal view is that it is a bad idea to take any of these drugs, but just because that’s what I think, or that’s what some politicians think, doesn’t mean it should be illegal for you to do things other people think are bad for you. “Freedom” is meaningless if you only have the freedom to make choices that your government thinks are good choices.

The article says Ms. Gupta has argued that the misnamed war on drugs “is an atrocity and that it must be stopped.” The article goes on to say that she objects to what she perceives as draconian mass incarceration, which has resulted in a bloated prison population, and the war on drugs that she perceives as a failure.

I don’t know anything about Ms. Gupta beyond what is in that article, and the article focuses on her supporting freedom for individuals to make their own choices with regard to drug use, rather than have government dictate those choices for them.

Based on that article, everything I know about her is positive, and I’m happy to see the president appointing people who stand up for individual rights.

The article I linked to came from The Daily Signal, an internet publication of The Heritage Foundation. One would expect the conservative Heritage Foundation to be at odds with the Obama administration on most issues, but I admit that I am disappointed in this case that The Heritage Foundation, which claims on its website to support public policies based on limited government and individual freedom, is taking a stand against individual rights, and in favor of more government oversight and interference in our lives.

People are not free if they are prohibited from making what those in government perceive are bad choices. In this case I am happy to see the Obama administration standing up for individual rights, and disappointed that a prominent conservative organization supports the nanny state.

Long-Term Unemployment Benefits Expire; Long-Term Unemployment Falls

250px-Unemployed_men_queued_outside_a_depression_soup_kitchen_opened_in_Chicago_by_Al_Capone,_02-1931_-_NARA_-_541927The unemployment rate has fallen from 6.7% at the end of 2013 to 6.1% in August 2014. That decline is primarily the result of the expiration of long-term unemployment benefits.

Unemployment compensation usually expires at the end of 26 weeks of unemployment, but during the last recession Congress extended that period, and many states paid benefits for well over a year. If we pay people to be unemployed, we should expect more unemployment, and that’s what we got. The long-term unemployment rate skyrocketed during the recession because we paid people to be unemployed longer.

In August 2013, when people were eligible for extended unemployment benefits, people unemployed for 27 weeks or more made up 38% of total unemployment. In August 2014, after extended unemployment benefits had been eliminated, only 31.2% of the unemployed had been unemployed that long.

Looking at this table from the Bureau of Labor Statistics, we see that the number of people unemployed for less than five weeks has actually risen from August 2013 to August 2014, while the number unemployed 27 weeks or more has declined by more than 30%.

The decline in the unemployment rate isn’t due to fewer people who are newly-unemployed, it is due to the shorter duration of unemployment for those who are unemployed. And people have shorter durations of unemployment now because we are no longer paying them to be unemployed for longer periods.

Many government policies have prolonged the recovery from the 2008 recession, and one was the extension of unemployment benefits. In hindsight, it is easy to look at the data and see that once long-term unemployment benefits were eliminated, long-term unemployment fell, and because of the shorter duration of average unemployment, the unemployment rate has fallen.

Politics and Inequality

inequalityThe Federal Reserve has just released a survey indicating that income and wealth inequality has been growing in the United States since 2007. Meanwhile, President Obama has called for government action to reduce inequality. So, it is worth a remark that the growth in inequality reported by the Fed pretty much coincides with the Obama presidency.

One can debate how much government can actually do to affect inequality, but because the president has called for government action to reduce it, that is an indication that President Obama believes government policy has an effect. If so, Obama’s government would have to be responsible for at least a part of the growing inequality the Fed has reported.

Imagine if this news on growing inequality had been announced during the Bush administration. Much of the reporting would have been on how much inequality has grown because of President Bush’s policies. Nobody is saying this today, about President Obama’s policies.

Is the recent increase in inequality really a result of the president’s policies?

The president’s own statements indicate he thinks inequality is enough a product of government policy that those policies could be changed to reduce it. Using the president’s own words, we could find him responsible.

If the president’s policies have had any effect on inequality, there are good arguments to suggest that they have increased it. The president’s regulatory policies, the huge budget deficits, and his low interest rate policies, have slowed economic growth, which disproportionately affects those at the bottom, and clearly, small savers, who tend to rely on interest income more than on appreciation of financial assets, have been hurt by the president’s policies even as upper-income investors have been helped by the stock market boom fueled by the Fed’s policies.

So, I’ll agree with the president part-way on this. Not only can government have some effect on inequality, as the president suggests, the policies he has supported have increased inequality. Despite the president’s rhetoric, his policies have not been good for those at the bottom end of the income distribution.

Imposing Costs on Russia: How About a Food Embargo?

PutinPresident Obama has threatened to impose costs on Russia for their intervention in Ukraine, but so far, his involvement has been high on rhetoric but low on action. Here’s a proposal that ought to hit Russia where it hurts: impose a food embargo on them.

Americans and Europeans of a certain age can remember the costs they felt due to the OPEC oil embargo of 1973. People need food more than they need energy. Think of how much more we could pressure Russia with a food embargo.

Of course, there would be objections to a food embargo, because it would impose costs and hunger on ordinary Russians, penalizing them for the actions of their political leader. It does sound potentially inhumane.

But, in this case, Putin has beaten us to it, and imposed an embargo of food from the US and EU on his own people!

Putin seems to be saying, if you keep up this pressure on us, we will deprive ourselves of food. Is this really a sensible tactic? Apparently, Putin thinks so, and is threatening not only to deprive Russians of food but also automobiles.

Embargoes have been used against adversaries throughout history. The US has maintained an embargo on Cuba for more than half a century and is pressuring Iran the same way. But it makes little sense for a country to impose an embargo on itself.

If the US and EU had imposed a food embargo on Russia, many would view it as a cruel and inhumane hostile act. For Putin to impose this embargo on his own people appears to be an act of stupidity. No wonder there has been barely any reaction to it in the West.

Putin has heard our empty threats, and appears to be saying that if we won’t follow through and impose costs on Russia, Putin will do it for us.

Orwellian Language: Peace Abroad; War at Home

CaptureGovernments often misuse language to build emotional and patriotic support for their policies. This Orwellian use of language is clearly evident in the way that US government policy uses the words “war” and “peace.”

Everyone is well aware of the US military invasions in Iraq and Afghanistan. Initiated during the Bush administration and continued through the administration of Nobel Peace Prize winner Obama, the US enlisted the assistance of other countries (but both invasions were mainly undertaken by the US military) to bomb those countries, occupy them with ground troops, and overthrow their governments. There was no declaration of war in either case. Those invasions of Iraq and Afghanistan, and the subsequent occupation by American troops, were called peacekeeping operations.

When we bomb other countries, invade them with our troops, and topple their governments, that is what we call peace.

Meanwhile, we refer to many of our domestic policies as wars. We have a war on drugs, a war on poverty, a war on terror, and lesser wars like the war on obesity, the war on smoking, and the war on coal. The list could go on.

In the post-Cold War era, everyone knows the US is the World’s policeman, or the World’s bully, depending on one’s point of view. But when we impose our preferences on people in other countries through the use of military force, we call that peace. In war, one side fights another, and linguistically, our peacekeeping missions are telling people that we are helping them out by destabilizing their governments and killing their countrymen.

At home, the language of war invokes images of a patriotic effort to fight an enemy, whether the enemy is poverty or obesity or coal, and invokes images of treason for those who dare to speak out against the nation’s efforts to fight its enemies. Offering support to the opposition in one of our wars is unpatriotic and treasonous.

By misusing language in this way, words lose precision in their meanings. When bombing people is peace and providing food to poor people is war, those words that are misused for their emotional connotations no longer refer to clear concepts. In both cases, the Orwellian language does serve a clear purpose. It builds support for the state, and facilitates its foreign and domestic policies.

The War on Poverty and the War on Drugs

111031.ICE.HSI.OperationPipelineExpress.herb_08As an apparently war-minded people, Americans (or at least, our American political leaders) have been comfortable framing parts of the domestic policy agenda as wars for decades. Two of the most prominent have been the War on Poverty and the War on Drugs.

Despite the similarity in their names, there is an important difference between the two. The War on Poverty is not a real war. The War on Drugs is.

The War on Poverty is not a real war because there is no enemy that we are attacking to fight poverty. Quite the opposite. The War on Poverty identifies poor people and them gives them stuff. Sometimes it is income. Other times it is food, or health care, or education.

If some analogy to war is made, the War on Poverty is more like the Marshall Plan that provided aid to the victims of war regardless of any fault in causing the war. If people are victims of poverty, the War on Poverty gives them stuff, perhaps with the idea that the stuff can help them escape poverty.

The official poverty rate in the United States has not fallen since the late 1960s, so if the idea of the War on Poverty was to reduce poverty, then according to the government’s own statistics, it hasn’t worked. But that’s a different issue. The point here is that the War on Poverty is not actually a war.

The War on Drugs is a real war. It’s name obscures the people who are the combatants. It is actually a war on the buyers and sellers of drugs. The police are arming themselves with military-style weapons and using military tactics to attack the enemy—drug buyers and sellers—and the members of the declared enemy are also taking up arms to defend themselves and their property, partly against the police, but also partly against other citizens. Obviously, the police will not protect the people with whom they are at war, or their property.

Indeed, with civil forfeiture laws, the police will not only seize the property they have declared war against,but all property associated with those they treat as enemy combatants.

For the most part, laws in the United States are written and enforced to protect minorities of any type, whether defined by race, gender, age, sexual preferences, or religion, but the one big exception to protection of minorities is that the War on Drugs has singled out people for persecution based on substances they choose to buy and sell.

Not too long ago, the legal system went after people who engaged in homosexual activity, or interracial marriage, but we’ve moved beyond that and the laws now protect people’s choices they make in their private lives, even if many people don’t approve. (One exception is same-sex marriage, that is still subject to debate.) Freedom is meaningless if people are only granted the freedom to make choices that political leaders approve.

Despite progress in some areas protecting minorities, the War on Drugs is a glaring exception. I’m not talking about the fact that racial minorities are more likely to be targeted in the War on Drugs (although that is true). The minority I refer to is drug buyers and sellers, regardless of their other characteristics. Why do we persecute that minority as we extend legal protections to so many others?

The government is not content to merely attack actual drug buyers and sellers: it sets up stings to lure people into agreeing to drug transactions even when it has no other evidence against them.

A USA Today article describing these sting operations says, “The ATF’s stash-house investigations already face a legal backlash. Two federal judges in California ruled this year that agents violated the Constitution by setting people up for ‘fictitous crime’ they would not otherwise commit; a federal appeals court in Chicago is weighing whether an operation there amounted to entrapment.”

How are people targeted for sting operations? The article goes on to say, “In one case in San Diego, a government informant… testified that he sometimes approached people on the street to see if they wanted to commit a drug robbery. … In another case, a federal appeals court judge said the ATF dispatched an informant to randomly recruit bad guys in a bad part of town.”

“There’s something very wrong going on here,” said University of Chicago law professor Alison Siegler, part of a team of lawyers challenging the ATF’s tactics in an Illinois federal court. “The government is creating these crimes and then choosing who it’s going to target.”

Justifying its actions, in the same article the ATF says “…its agents rely on criminal records, police intelligence files and confidential information to identify people already responsible for violent robberies.”

Notwithstanding the contradictions in the preceding paragraphs, one reason people who are targeted in the War on Drugs have criminal records is that the government has declared war on them. Further, if they are really targeting people responsible for violent robberies, they should arrest them for robbery rather than try to entrap them in a drug sting operation.

The War on Drugs is a real war in which the government has singled out a minority population—drug buyers and sellers—for attack. It comes after them with military-style weapons and tactics so it can confiscate their property and incarcerate them.

The War on Poverty is not a war. It is a peace-keeping operation that provides goods, services, and money to the poor, much like the Marshall Plan did in Europe after World War II.

In neither case are these programs accomplishing their stated goals. The poverty rate is not declining, and people continue to buy and sell drugs. But then, you knew that before you started reading this.

Ralph Nader Cites Mises, Hayek, and Rothbard

download (2)Ralph Nader argues in his new book, Unstoppable, that the left and right are coming together in their opposition of corporatism: those government policies that favor the economically powerful over the general public interest.  This convergence of the left and right presents an opportunity for people to drop their political labels and unite to overturn the nation’s corporatist economic policies.

He wants to eliminate corporate welfare and bailouts, but is short on details about how this can be done.  I’m not objecting here.  The first step is recognizing a commonality of interests that could organize to limit government in this area.  But because I don’t see a clear mechanism here that will be sufficient to overturn entrenched and powerful special interests, it is not apparent that this commonality of interests really is unstoppable.

One interesting thing about Nader’s book is his favorable references to prominent Austrian school economists, including Mises, Hayek, and Rothbard.  References like this from a beacon of the political left are a good sign for the visibility and credibility of the Austrian school.

Political Spam

OLYMPUS DIGITAL CAMERAI don’t know if you are as popular with the political insiders as I am, but already today I have received emails from Joe Biden, Nancy Pelosi, and Debbie Wasserman Schultz. In fact, I’ve received more than a dozen emails today alone from either the Democratic Party, Democrats involved in election campaigns, or Democratic interest groups.

The Democrats aren’t the only ones who email me. I’ve also received emails today from Republicans and Libertarians, though not as many.

I am somewhat interested in getting the emails just because I’m curious about what they are saying (besides “Send Me Money’), but the Democrats are trying my patience with their huge volume of daily spam. I think it’s amusing, for example, to get an email that says I should donate because “We have to defeat the Koch brothers.” I didn’t know the Koch brothers were running for anything.

But really, how effective can these emails be when more than a dozen arrive every day. Today’s volume of political spam is not unusual for me; it’s just the day I decided to blog about it.

I have no idea where any of these parties got my email address. I assure you I did not provide it to them. Also, I have never donated any money to any political party. I have, on occasion, given money to individual candidates, but I do have a rule about candidate contributions that I’ve never violated: I only give money to candidates who I actually know in person. I’ve never given money to any candidate I’ve never met, or to any political party.

So, it’s not like they’ve found a sucker who will respond to these emails by giving them money. I’ve never done that. But I keep getting this political spam anyway. Of course, once they have your email address, it costs them nothing to send me an email along with the rest of their email list.

The Economics of Offensive Trademarks

RMMS-LogoReflecting on the Patent and Trademark Office’s decision to rescind protection of the Washington Redskins’ name, whether some people view a trademark as offensive should not be a criterion for determining whether it should be protected.

If a large number of people are offended by a trademark, then it will be a liability rather than an asset to whomever uses it, and economic forces will limit its use. People of a certain vintage will recall Sambo’s Restaurants, which were forced into a name change (and perhaps bankruptcy) because people were offended by the name.

The purpose of a trademark is to identify a firm’s products. If people like the firm and its products, the trademark will attract customers. If people are offended by the firm and its products, the trademark will alert customers to avoid that firm. The market system works to weed out offensive trademarks, and the U.S. government should not be in the business of determining whether trademarks are offensive.

Ironically, if Redskins really is an offensive term, then denying the team trademark protection will allow others to use the term, and the offensive term could see even more widespread use.

But while I’m discussing the subject, I will admit to being a bit sensitive to the issue myself, because my own heritage is being demeaned by being used as a team mascot by a different team.

I’ve lived in the South most of my life, and am proud to be on the faculty at Florida State University (home of the Seminoles), but (and I rarely share this bit of my background with others), I was born in the North, in Bridgeport, Connecticut. Yes, I am a Yankee. I didn’t have any say in the matter; I was born a Yankee. But I admit to being sensitive to this part of my background, and find it demeaning to have a sports team mocking my heritage.

If the Redskins lose their trademark protection, the Yankees should too.

Taxpayers Are Shocked to Discover That When They Vote for Government Services, They Have to Pay for Them

4122172006_0c704ae171_zTaxpayers in Austin, Texas, are upset that their property tax bills are rising. This article reports that taxpayer Gretchen Gardner is “at the breaking point” because of her increasing property taxes.

Gardner says, “I have voted for every park, every library, all the school improvements, for light rail, for anything that will make this city better. But now I can’t afford to live here anymore.” It appears that Gardner strongly supports more government spending, as long as someone else pays the cost.

She is going to protest her tax assessment.

She goes on to say, “Someone needs to step in and address the big picture.” As I see it, the big picture is that our country has too many voters like Gardner who keep asking for more government spending without thinking that somebody has to pay for it.

How Valuable Is a Federal Grant?

5265260921_199021dabf_zSometimes, a federal grant is worthless. The federal government has the ability to attach enough costly provisions to its grants that the net value is less than zero.

A recent case in my home town of Tallahassee illustrates this. The Tallahassee Democrat, May 21, page A1 (sorry, no link because a subscription is required) reports that project organizers who plan to build a $1.5 million homeless shelter have turned down $500,000 in funding because the money was to come from a federal grant. The article said, “…stringent reporting requirements, mandates to exceed prevailing wages and required environmental assessments would have increased the cost and delayed the completion time of the project significantly.”

The bottom line: the project’s developers believed that the costs associated with accepting the federal grant would have exceeded the $500,000 the grant would have given them.

The good news in this case is that the grant wasn’t accepted, so the money wasn’t wasted. But what if the project’s organizers had decided that accepting the grant would have imposed costs of only $400,000 on them? They would take the $500,000, which would have only been worth a net of $100,000 when accounting for all the costs and benefits. In this hypothetical case, the federal government would have taken $500,000 in tax revenues and produced a net value of $100,000 with it.

In this particular case in Tallahassee, the conditions lowered the value of the grant to below zero and it was refused, but in other cases grants are accepted even if they on net provide only a minimal value to recipients. Federal grants forcibly take money from taxpayers to give to grant recipients who value them considerably less than the value of the revenues that finance the grants. Federal grants destroy value. Sometimes they destroy so much value that recipients who are offered grants refuse to take them.


Piketty on Inequality

6736The ultimate thesis in Thomas Piketty’s best-selling Capitalism in the Twenty-First Century is that the return on capital is higher than the growth in output and wages, so the owners of capital will see their wealth, and therefore, incomes, rise faster than those who earn the bulk of their incomes through labor. The distribution of wealth and income will become increasingly skewed to the benefit of the owners of capital.

Piketty recommends progressive taxes on income and capital as the remedy to the growing inequality he forecasts. He says (p. 471), “…the ideal policy for avoiding an endless inegalitarian spiral and regaining control over the dynamics of accumulation would be a global tax on capital.” The tax (p. 516) “…ought to be a progressive annual tax on individual wealth.”

Piketty makes clear that the purpose of the progressive taxes he recommends is not to provide funds to raise the incomes of those at the bottom, but rather to lower inequality by reducing the incomes of those at the top.

Recommending a progressive income tax with rates of 50-60% on incomes over $200,000 and a top marginal rate of 80% on incomes above $500,000-$1 million, he says (p. 513), “A rate of 80 percent applied to incomes above $500,000 or $1 million a year would not bring the government much in the way of revenue, because it would quickly fulfill its objective: to drastically reduce remuneration at this level…” Recommending a progressive tax on capital, Piketty (p. 518) says, “The primary purpose of the capital tax is not to finance the social state but to regulate capitalism.”

Piketty freely admits that the policies he recommends to reduce inequality would not do so by bringing up those at the bottom end but rather by bringing down those at the top.

When one looks at the remarkable accomplishments of capitalism, an economic system that is roughly 250 years old, among its top accomplishments is how much it has done to improve the standards of living of average citizens and the working class. The rich have always been very comfortable, and capitalism has brought a level of comfort to working-class people today that would have been unimaginable to even the most well-off people a century and a half ago.

Why should average citizens be concerned about the wealth of the very well-off if the system that makes them well-off produces prosperity for everyone? Evidence suggests that most people are not that concerned. In big government countries ranging from Canada to Sweden, the government sector has shrunk with public support, and in the United States, lower taxes and smaller government remain politically popular (even as the government increases its involvement in health care and energy).

Piketty promotes the politics of envy, in which greater equality is a goal in itself — as opposed to the goal of helping out those at the bottom of the income distribution — and Piketty plainly states that the policies he recommends to reduce inequality would do so by pulling down those at the top rather than bringing up those at the bottom.

Piketty’s Capital and Actual Capital

piketty_0Thomas Piketty’s book, Capital in the Twenty-First Century, has received lots of press and been reviewed dozens of times, so I’m not going to write a general review, but I do want to comment on his depiction of capital, contrasting it with a more Austrian approach.

Piketty’s main conclusion is that the return on capital is greater then the overall growth in income, so owners of capital will see their incomes and wealth rising faster than the general population, causing rising inequality over time.  He has an impressive data set, and his analysis shows fairly convincingly that inequality has been rising since 1980.

There are a number of issues one could raise regarding Piketty’s analysis, but I will just raise one here: the way he identifies the relationship between the stock of capital and the income that is generated by it.

Piketty identifies what he calls “the first fundamental law of capitalism” as α=rxβ, where α is the income derived from capital, r is the return on capital, and β is the value of the capital stock.  (As Piketty defines them, both are divided by income, but we can safely ignore this by multiplying both sides of the equation by income, which simplifies the discussion that follows.)

As Piketty sees it, the return paid on capital is determined by the value of the capital times the rate of return, as the equation shows.  Piketty confirms that this is his view in examples he gives in the book.  But this is backwards.  The return on capital isn’t determined by the value of capital; the value of capital is determined by the return it produces.  The correct view on this is clearly stated in Carl Menger’s Principles of Economics.

While Piketty measures capital by the value of the capital stock, in fact capital is a collection of heterogeneous inputs into production processes, and capital only earns a return if it is employed productively.  The value of capital is determined by the return it earns, and the return it earns depends on the value it adds to the economy.

If capital is productive and earns a high return, it will have a high value.  If it is used unproductively and earns little or no return, its value may be low, and may go to zero.  The capital employed by Wal-Mart has been productive, giving the company value, while the capital used by Circuit City was not, and its value fell to zero.

Capital does not just earn a rate of return, its return comes from the decisions its owners make as they employ it in various uses.  A better statement of Piketty’s first fundamental law is β=α/r, which is equivalent to Piketty’s law in a mathematical sense, but more correct in an economic sense because it says the value of capital is a function of the income it produces, rather than that the income it produces is a function of its value.

Does this make a difference?  Piketty argues for a global tax on capital as a mechanism for lowering inequality, and the economic impact might be minimal if people own capital and it just earns a return based on ownership as Piketty implies.  But if the owners of capital have to make decisions about how to allocate their heterogeneous assets to get the best return on them — or even to get a positive return — a tax on capital can have a devastating effect on economic growth and productivity.

Piketty’s law amounts to an accounting identity as he defines it, and in that sense it is not wrong.  But giving some thought to the components in the aggregate variables in that identity, we can see that it does not give a clear picture of the individual components that are being measured, nor the causal relationships among them.

My Book on the Austrian School of Economics

781955734I’ve just published a short book, Advanced Introduction to the Austrian School of Economics, which is designed to give people with some knowledge of economics an explanation of what ideas distinguish the Austrian school from mainstream economic thought. The paperback is relatively affordable ($22.36 if ordered on-line). The book is much slimmer in person (144 pages) than it appears in the graphic on the web site.

The book is written for readers who have some knowledge of economics, but are curious about the ideas that distinguish the Austrian school from mainstream economics.  It is not an introduction to economics from the point of view of the Austrian school.

The publisher is hoping that the book will be used as a textbook for courses in Austrian economics.  I don’t think there are many.  If you are at a university that subscribes to Elgaronline, you should be able to read the e-version of the book for free.

Readers on this website are probably already familiar with the ideas of the Austrian school, but it may be handy to see them presented as an overview this way, and also may be a way to introduce your acquaintances to the school’s ideas.  Should they ask you, “What are the distinguishing ideas of the Austrian school?” this book is intended to answer that question.

Exaggerating the Damage Caused by Climate Change

2398383691_78085614c6_zHere is a link to the abstract of a peer-reviewed article in the American Journal of Agricultural Economics. (You may be able to download the full article. I could, from my university computer.)

The abstract says, “It appears that news media and some pro-environmental organizations have the tendency to accentuate or even exaggerate the damage caused by climate change. … We find that the information manipulation… induces more countries to participate in an IEA [International Environmental Agreement], which will eventually enhance global welfare.”

The article argues that by exaggerating the harmful effects of climate change, advocates can gain more support for government climate change policies.

The article says, “Linking climate change to extreme weather may be a powerful way to motivate people.” Referring to the Intergovernmental Panel on Climate Change, it says, “The IPCC has tended to over-generalize its research results and accentuate the negative side of climate change. Following its lead, the mainstream media has gone even further.”

Later, “…it may be better for the countries to hold a pessimistic view of the climate problem, as it will induce more countries to participate in the IEA…” The paper then goes on to develop a mathematical model to demonstrate why this is the case.

The paper’s conclusion begins, “This article offers a rationale for the phenomenon of climate damage accentuation or exaggeration on the part of the international mainstream media or other pro-environmental organizations.” And then to show the bias of the authors, “Forming a binding IEA to curb climate change is a matter of urgency… When the media or pro-environmental organizations have private information on the damage caused by climate change, in equilibrium they may manipulate the information to increase pessimism regarding climate damage, even though the damage may not be that great. Consequently, more countries (with overpessimistic beliefs about climate damage) will be induced to participate in an IEA in this state, thereby leading to greater global welfare…”

The paper concludes, “This article further explores how the mass media may manipulate the information it privately has to influence behavior related to the environment … this article introduces a novel mechanism, ‘information manipulation.’”

This article is noteworthy because it is published in a peer-reviewed academic journal. This is not right-wing political propaganda, and it is apparent from reading the article that the authors are sympathetic to the idea that more global action needs to be taken to combat what they believe are the negative effects of climate change.

The article is written by advocates of international environmental agreements who plainly state that climate scientists and the media exaggerate the negative effects of climate change, and explain why doing so helps further their goals.

Joseph Stiglitz on Crony Capitalism

download (2)Although Joseph Stiglitz has a reputation as one of the most prominent defenders of big government, I found much to agree with in his book, The Price of Inequality. It does appear to me that throughout the political spectrum, from left to right, there is a substantial consensus that government is the cause of many of the problems people perceive. The disagreement is over how to solve those problems.

Stiglitz sees many negative consequences from income and wealth inequality, and while I would question whether these negative consequences are as substantial as Stiglitz says, we both agree on the negative impact that government policy has in our society. Stiglitz, a critic on the political left, is in surprising agreement with David Stockman, a critic on the political right, that many of today’s economic and political problems are caused by government.

Both Stiglitz and Stockman argue that cronyism is damaging both our economic system and our democratic political system.

Criticizing the cronyism between business and government, Stiglitz (p. 59) says, “It’s one thing to win a ‘fair’ game. It’s quite another to be able to write the rules of the game–and to write them in ways that enhance one’s prospects of winning. And it’s even worse if you can choose your own referees.”

Stiglitz (p. 62) says, “It doesn’t have to be this way, but powerful interests ensure that it is.”

In a chapter titled “Why It Matters,” Stiglitz (pp. 104-105) says, “When one interest group holds too much power, it succeeds in getting policies that benefit itself, rather than policies that would benefit society as a whole. When the wealthiest use their political power to benefit excessively the corporations they control, much-needed revenues are diverted into the pockets of a few instead of benefiting society at large.”

In another chapter titled “Democracy in Peril,” Stiglitz (p. 167) says, “In this chapter we have described the construction of a political system that, though nominally based on the principle of one person one vote, has turned out to serve the interests of those at the top.” Why can’t we reform the system? Stiglitz (p. 170) says “moneyed interests have the incentives and resources to ensure that the system continues to serve their interests.”

Stiglitz has explained how the rich gain control of the political process and use it for their benefit, so the idea that more government can solve these problems that are created by government in the first place seems to be nothing more than wishful thinking. Stiglitz’s insights on the way that the 1% controls thepolitical process should lead him to the conclusion that less government means less control by the economic and political elite.

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Civic Engagement

3457967_28818ce3e9_bMy local newspaper, The Tallahassee Democrat, ran a story on March 19 reporting on a talk given by former Florida Governor and former US Senator Bob Graham. In his talk, Graham calls for more civic engagement. His talk was a part of a larger program titled “Choosing to Participate: The Power of Civic Engagement.”

For most citizens, civic engagement is futile. I’m speaking from my own experience. The few times I have attempted to speak at city commission meetings or county commission meetings, I’ve been met with indifference. I’ve been given a three minute time limit to speak (I can understand why they do that), and then when I’m speaking I’ve watched commissioners get up and leave in the middle of my three minutes, or talk among themselves as I’ve been talking to them. For people like me, civic engagement is nothing but frustration. Most people realize this, which is why they would rather use their time in other ways rather than waste it on civic engagement.

But what happens when people who really can make a difference choose to participate? Two of those individuals are Charles and David Koch, who Senate Majority Leader Harry Reid called “un-American” for their civic engagement. Reid said, “The Koch brothers and other moneyed interests are influencing the politics in a way not seen for generations. … Not only have Senate Republicans come to the floor to defend the Koch brothers personally, they have again and again defended the Koch brothers’ radical agenda – and it is radical, at least from the middle-class perspective.”

It is interesting that Senator Reid says, on the one hand, that the Koch brothers have a radical agenda, and on the other hand, that many of his colleagues in the Senate support that agenda.

I don’t want to draw a connection between the ideas of former Senator Graham and Senator Reid, who are two different individuals. But it is worth a remark that while some politicians call for more civic engagement, others castigate people for their civic engagement, when those people (1) have ideas different from their own, and (2) are actually able to participate in a way that makes a difference.

President Obama’s Investment Skills

Philippine-stock-market-boardAfter the Obama administration bailed out General Motors by purchasing a 60.8% ownership share in the company for $49.5 billion, President Obama said, “We expect taxpayers will get back all the money my administration has invested in GM.” (I do like the way the president takes responsibility for the investment.) Now, the president’s administration has sold all of its ownership in GM and taken a $10 billion loss.

It is worth noting that what the president called an investment on behalf of the taxpayers lost 20% of its value, and that the president’s expectations on the investment his administration made did not pan out.

I don’t know whether the president actually believed the GM bailout would yield a profit or whether that was just political rhetoric he hoped people would forget over the years. Either way, it turned out not to be true.

The loss on the GM investment did not attract much notice, especially compared to other investments the president has made on behalf of the taxpayers, such as the $500 million it lost on the Solyndra loan guarantees. Interesting, considering that the GM loss was 20 times larger.

Intergenerational Transfers and Political Support for the Welfare State

Walletssn2Supporters of the welfare state might see it as a mechanism for transferring income from rich to poor with the idea of helping those at the bottom end of the income distribution, but in the United States, the welfare state is increasingly transferring income from the young to the old, regardless of the wealth or income of the transfer recipients.

Obviously, this is the case with Social Security and Medicare, the federal government’s two biggest expenditure programs, because only old people are eligible, and there is no means test to determine eligibility for the transfer. And, not only are the old wealthier than the young, the wealth gap between the old and young is growing.

These programs transfer resources from the young to the old, but also, on average, from the poor to the rich.

Add to these long-standing programs Obamacare, which charges the young rates above what it costs to insure them so that the old can pay rates below what it costs to insure them. The program’s designers made no secret of the fact that the program was intended to impose costs on young Americans to transfer benefits to the old.

Obamacare makes the intergenerational transfer even greater. Thus, it is somewhat paradoxical that young voters have increased their support for the welfare state even as old voters have decreased theirs.

The transfer recipients, who are older and wealthier than average, and who will be dead when the true cost of the current welfare state must be paid, increasingly oppose the transfers. Meanwhile, young voters increasingly support these programs that cannot possibly provide them with the same level of benefits they now approve paying to their elders.

The young and old are, on average, both moving away from supporting policies that are in their narrow interests.

The most paradoxical part of this paradox is that the policies the young support not only work against their current interests, but also against everyone’s interests in the future because the high cost of funding these programs will slow economic growth. Today the old benefit from those transfer programs; in the future, everyone, both young and old, will be worse off because of them.

The President’s Foreign Policy: Speak Loudly and Carry a Small Stick

-Getting_em_up-_at_U.S.Naval_Training_Camp,_Seattle,_Washington._Webster_&_Stevens._-_NARA_-_533698.tifAt the beginning of the twentieth century, President Teddy Roosevelt’s foreign policy was, “Speak softly and carry a big stick.” At the beginning of the twenty-first, President Obama’s policy appears to the the opposite: “Speak loudly and carry a small stick.”

President Obama threatened Syria not to step over a “red line” by using chemical weapons or they would face serious repercussions, but they did, without the serious repercussions. He threatened Iran if they continued their nuclear enrichment programs, but they continue as we ease sanctions on them. More recently, he warned Putin “there would be costs for any military intervention in Ukraine,” but realistically, what could he do? Everybody can see it’s big talk with no stick to back it up.

Meanwhile, Putin has indicated a retreat in Ukraine, not because of the big talk from Obama, but because Russia’s hand was slapped by the response of markets. Russian stocks fell by 12% after Russian military forces moved into the Ukraine, and the ruble took a serious hit as well. The reaction of the market had a bigger effect on Putin’s aggression than Obama’s small stick.

The discipline of the market in international affairs is not new to Russia. The Berlin Wall fell, and the Soviet Union dissolved, not because of the military might of the Cold War nations, but because of the economic strength of capitalism compared to socialism.

Because our Cold War adversaries are increasingly a part of the global economy, markets generate repercussions to belligerent actions beyond those of any prudent political responses.

I don’t expect the Russians to pull out of the Ukraine. They are still occupying a part of the Republic of Georgia after having invaded there in 2008. What I’m saying is that any moderation of Russian policy there is more directed by the market’s response rather than any international political response.

I am not too concerned about President Obama’s actual policy responses. The small stick is OK with me, and we can see in Iraq and Afghanistan what can go wrong when we try to play the role of the world’s policeman. The problem is the “speaking loudly” part, because it costs our president, and our country, some credibility when people know the president won’t follow through on his big talk.