Wednesday, March 28, 2012

How Will The Liberal Justices Spin This?




Randy Barnett, Constitutional legal theorist par excellence, has been a leading force for the last two years in opposing Obamacare. It was from his full page interview in July, 2010, in the Wall St. Journal  where most people first heard the argument that Obamacare constitutes a Constitutionally illegitimate commandeering of the people. Randy, whom I’ve been privileged to know since he was a student at Harvard law in the 1970s, has also made much grist for the anti-Obamacare mill with the argument this healthcare legislation is LITERALLY “unprecedented,” and therefore can by definition have no appropriate precedent in SC case law.
Over the last few days, Barnett has commented on what he sees as pro-active anticipation of Supreme Court failure by members of the Left. Dahlia Lithwick (senior editor at Slate.com, covering the courts) has argued that Scalia is bound to his Raich precedent in ruling in favor of the PPACA, even misquoting Barnett to make that claim--actually making Barnett appear to say the opposite of what he actually said. Meanwhile Linda Greenhouse (who has written for the New York Times and lectures at Yale Law) is arguing the PPACA is “an easy case.” That is, that the Supreme Court has devoted 3 days and 6 hours--something not done in over 50 years--to an easy case; an easy case where multiple federal judges have ruled inconsistently, all generating long, detailed opinions. An easy case where law professors who two years ago were laughing and predicting an 8-1 decision are now fretting and hoping for a 5-4 decision in the favor of their Progressive ideal.
Randy makes quite the argument that this is all maneuvering, similar to what went on post-Citizens United. There is an expectation they will lose--Tuesday, the oral argument on the individual mandate could not make any on the Left sanguine--and the goal has therefore become to lay the groundwork so that, if they lose, they can blame it on politics and conservative judicial activism.
And that leads me to wonder if the shoe might not as easily be put on the other judicial foot.
For the fact of the matter is, there IS a sense in which “this is easy.” Many court cases are complex, filled with technical legal issues that only legal experts can understand. But at root, the individual mandate portion of the PPACA legal challenge is easy. The Constitution creates a federal government of limited and enumerated powers. That must imply there are some things it cannot do. Its powers are not plenary. But IF Obamacare is found Constitutional...if, despite the federal government’s powers being limited to what is listed in Article I, section 8, and added to by the Reconstruction amendments...if nonetheless the PPACA can force every American to purchase a private contract whose content is mandated by the federal government, the easy question, with the very hard answer, is “what can’t the government do.” What is the limiting principle? As Chief Justice Roberts put it “whether or not there are going to be limits on the federal power” is the key issue in this case. As Justice Scalia noted, “The federal government is supposed to be a government of limited powers. And that’s what all this questioning has been about.” 
And that’s my point: If there ARE limits to federal power after Obamacare, they should be easy to list, easy for examples to be presented. And yet despite what must have been extensive prep--it’s not as if this question could not have been predicted--Solicitor General Donald Verrilli had difficulty articulating it, giving even one little example to calm the minds of Scalia, Thomas, Kennedy, Roberts, and Alito.
This IS a defining Constitutional principle. “The government is one of delegated, enumerated, and therefore limited powers” is not some idiosyncratic newly developed doctrine associated only with the members of the Constitution in Exile. So whether they write the main opinion or the dissent on this case, the liberal Justices--Breyer, Sotomayor, Ginsburg, and Kagan--will need to articulate such a limiting principle even if it escaped the abilities of the Solicitor General or else they will themselves appear to be politically motivated, Democratic hacks, rank activists concerned only for results rather than principle. 
Win or lose, the liberal judicial opinion issued this coming June from the Supreme Court will be an amazing document. After (unfairly in my opinion) taking it on the chin for Citizens United, it will be interesting to watch the conservative members of the Court to sit back and observe Republican interest groups use the liberal opinion as fodder to generate “out of control activists” letters to raise funds to oppose Obama. Obama tried to goose the Court at his 2010 State of the Union address when they dared to oppose him on Citizens United. Now we’ll take a gander at what Obama will face in the fall after this decision.

Sunday, March 25, 2012

Obama, CAFE Standards, and Economic Illiteracy…



On the campaign trial, aware of the danger to his Presidency of $4/gallon gasoline, President Obama is telling the bumpkins that in a few years, due to his efforts, mandatory fuel economy standards will have new cars providing us with 55 mi/gallon efficiency.
One wonders why he didn’t simply mandate 100 mi/gallon…
Ignore for the moment the extensive research that rising CAFE standards mean lighter cars, which in turn mean greater risk of injury and death in car crashes. Tanks are safe, but not fuel efficient. 
Instead focus on how the President sells this to the rubes: “55 miles/gal means that over the life-time of the car, you’ll save $8,000! I bet there are some people here that would like an additional $8000 in their pockets! [Applause] Am I right? [Applause.]” 
I mention here that the above paragraph is me in a Michael Daisey moment. Michael Daisey, you’ll recall, is the monologist who lied in his one man show, and lied on public radio’s This American Life, about conditions in the Chinese factories Apple uses to make their iPads, lies he claims capture the dramatic essence of his “The Agony and Ecstasy of Steve Jobs.” So I should admit out front, without waiting for the Ira Glass interview, that what I affirm the President as saying in quotes above may not be exact--I was driving when I heard the President say it on NPR’s All Things Considered this afternoon--but I think it largely captures the dramatic essence of his campaign hokum. It certainly gets a lot closer than Daisey did, and is a mere paraphrase, not a lie. Call it the Agony and Ecstasy of Barack Obama…
Call it as well the economic illiteracy of Barack Obama. He seems to think that if a car now sells at $X, and in the future an otherwise identical car will save you $8000 in gas over its lifetime, that car will still sell for $X. That is, he assumes you, the consumer, get the entire benefit of the gas savings.
Yet he has foisted new light bulbs on us that he claims are not only environmentally safer but WILL LAST LONGER. “Over the course of the light bulb’s lifetime, you’ll save…” Did he not notice they also became more expensive? That’s not ONLY because they are more expensive to make. Any businessman knows you can’t just blithely pass on any increased costs to your customers willy-nilly. One reason the producers can charge more here is that the light bulbs last longer. That is, the producer got a component of the savings associated with the light bulb’s longer life. Does it surprise anyone that if one new light bulb lasts as long as two old ones, the new light bulb price about doubles?
What about new cars with higher CAFE standards? Economists talk about a product’s “elasticity.” This is a measure of the effect a rise or fall in price has on the quantity of a good demanded. 
We know demand curves slope down; that is, that the higher the price, the less is demanded. Elasticity measures the steepness of that slope. Nearly vertical curves--where large changes in price have little effect on quantity demanded--are INelastic. Nearly horizontal curves--where small changes in price have large effects on quantity demanded--are very elastic.
What does this have to do with who gets the $8000 savings from better gas mileage? It turns out--economists can prove this--the more inelastic the demand curve, the greater the share of the benefit goes to the producer, as seen in increased car prices (paid up front); the more elastic, the greater the share of the benefit goes to the consumer (in lower gas charges, a benefit accrued slowly over several years.)
So are cars, and their demand curves, relatively elastic or inelastic? Economists have certain heuristics as to what goods and services are more or less elastic:
  • All else being equal, durable goods tend to have inelastic demand curves. Cars are durable goods.
  • All else being equal, short-run responses to changes tend to be inelastic. Long-run effects, giving people time to plan and react, tend to be more elastic. So rules that take place on a particular model year tend at least initially to be inelastic.
  • To the extent there are close substitutes, demand curves for goods are elastic. If, for example, the CAFE standards applied to Chevys but not GM cars, the quantity demanded for Chevys would be elastic. You could easily substitute a GM. To the extent that all cars and trucks are held to the same CAFE standards, the changes in quantity demanded will be inelastic.
Therefore, all indications point to the car producers generating most of the $8000 from improved gas mileage, which is to say the cars will likely be about $8000 more expensive. Of course, getting back to Kasman’s research that car companies have to trade off car safety for improved fuel standards, the consumer will be taking all the increased risk of injury in car accidents.
So: Consumers take all the increased risk and little of the increased savings associated with higher CAFE standards. And this is what the President considers a big winning argument for him on the campaign trail. And given the average voters’ knowledge of economics is as weak as the President’s, he may just be right...
NOTA BENE: If you’re in the audience when President Obama makes this point, DO NOT ask, “But won’t the car companies just charge $8000 more for the cars?” This will immediately lead to price control legislation...

Friday, March 23, 2012

Elizabeth Warren, Easily Understandable Financial Forms, and Chutzpah... , Part II

Yesterday, arguing against Harvard law professor cum Democratic Massachusetts Senatorial candidate Elizabeth Warren’s concept of using the federal government to simplify financial forms, we noted how incompetent the federal government is at writing simple laws…
But the question remains, why ARE these forms so complex? It turns out this is not a result of market failure--that is, it is not the result of the actions of a competitive marketplace, such that a zealous regulator like Warren must intervene. As one former HUD employee put it, the complexity in the financial forms is mostly driven by government. According to one legal scholar specializing in financial law, these forms became more complex as a result of industry response to the 1968 Truth in Lending Act. Let Wikipedia describe the act’s requirements:
“Subpart C relates to closed-end credit, such as home-purchase loans and motor vehicle loans with a fixed loan term. It contains rules on disclosures, treatment of credit balances, annual percentage rate calculations, right of rescission, non-requirements, and advertising...
“Several appendices contain information such as the procedures for determinations about state laws, state exemptions and issuance of staff interpretations, special rules for certain kinds of credit plans, a list of enforcement agencies, model disclosures which if used properly will ensure compliance with the Act, and the rules for computing annual percentage rates in closed-end credit transactions and total annual loan cost rates for reverse mortgage transactions.”
With all these legal mandates for disclosure, do you think the length of a contract might increase, and the elaborate legal terminology that is Greek to layman might expand?
As with many financial regulations originating in Washington, unintended consequences abound. For example, Warren’s CFPA is responsible for a new form found on your credit card statements--ignore for the moment the increased costs associated with this new requirement, and how that impacts the fees banks charge customers for credit card use. It consists of a prominent black-bordered box that lists the amount you would end up spending if you paid only the minimum required payment each month to pay off your card. The box also lists how many months--typically several years--it would take.
Warren was concerned poor people with credit cards--the sad impecunious dolts--didn’t understand how financially bad it was to not pay off their credit cards quickly. And if all credit card holders made Warren’s high six-figure annual income, paying off one’s credit card quickly would no doubt be reasonable advice. The choice between paying off your credit card debt more quickly versus buying food or paying the rent or repairing the leaking heater--these are more challenging decisions Ms. Warren typically needn’t worry herself about.
Meanwhile, a study was done to determine exactly who a) never pays more than the minimum amount, and b) stops using the card for additional charges until the credit card is paid off. These would be the only people to whom this mandated monthly calculation is pertinent or accurate. Turns out the answer is 4% of people. This is what Warren considers an efficient regulation.
Meanwhile, in the real world of unintended consequences, it turns out that far from preventing people from wasting their money on interest, the newly provided boxed information, prominently displayed, has led MORE people to start paying only the minimum required amount, the exact opposite of Warren’s desires or intentions. It is like the result found by economist and risk expert Kip Viscusi on the dangers of cigarettes. Viscusi analyzed the data and determined that if Americans knew the real risks of cigarette smoking, 6% MORE would begin to smoke. That is, Americans over-estimate the health risk of smoking. Apparently they also over-estimated the costs of credit card interest until Elizabeth Warren made it plain to them…
It has been pointed out by admirers of Warren, that hers is a Horatio Alger story. It is true. Born into relative poverty, into a large family, she worked herself up to the point where her natural intelligence and drive have led her to the pinnacle our meritocracy, our economically mobile society, can offer: a Rutger’s law degree leading to a Harvard law professorship, hobnobbing with the rich and powerful of Washington. She did it on her own. She knows how much she stands out from the crowd of the Oklahoma City working class into which she was born. No wonder she thinks they need her help. She knows how much smarter she is than they. Clearly without her designing regulations to help them, she thinks, they will never be able to help themselves. 
But smart as she is, she has little knowledge or understanding of markets, seems oblivious to unintended consequences of regulations, and her efforts to micromanage financial markets create costly additions that now must be borne by those working class folks she long ago left behind, and whom she never viewed as equals.
Warren thinks that because the working class she knew could never articulate financial trade-offs to the degree she can, that therefore they do not understand them. But knowledge can be functional even if inarticulable. For example, growing up in working class Oklahoma City, Warren (a Methodist) probably knew few Jews. So she likely never learned to articulate the meaning of the word Chutzpah. Clearly it doesn’t follow that she is ignorant of the concept...

Thursday, March 22, 2012

Elizabeth Warren, Easily Understandable Financial Forms, and Chutzpah... , Part I


I wrote a piece several month’s back on Elizabeth Warren, and whimsically entitled it “Elizabeth Warren: Too Liberal for Massachusetts?” Well, it turns out I may have been correct...
A new poll released in early March by the Western New England University Polling Institute in partnership with The Republican newspaper of Springfield found Senator Scott Brown leading Warren, his top Democratic challenger, 49 to 41 percent. That closely reflects several other surveys taken in the last month that also show Brown with a lead well beyond the margin of error.
But that’s not the point of this post. That’s just ironic follow up. And obviously polls can change between now and November. But it IS revealing, given the well-deserved bashing many Republicans have faced suffered on social issues, which clearly can’t play well in Massachusetts.
Anyway, this post involves another irony, one based on Warren’s putative reasons for desiring to set up an agency to protect consumers, especially the poor, from market transactions, especially financial ones. 
One website explained the function of Warren’s brain child, the Consumer Financial Protection Agency: “The proposal to establish a federal Consumer Financial Protection Agency (CFPA) was at the center of the Obama administration’s overall plans to overhaul financial regulations. This agency...would take certain consumer regulatory responsibility of financial products from seven other agencies and centralize it in one office. As originally conceived, it would have the authority and accountability to supervise, examine, and enforce consumer financial protection laws. It would be empowered to make rules, examine balance sheets and issue subpoenas. Any institution that provides consumer financial products such as mortgages, credit cards, student loans, auto loans, payday loans, and other consumer products...would fall under the agency's jurisdiction. The agency would...oversee new consumer financial products.” Ms. Warren has never been accused of humility, or failure of grand vision.
One of Warren’s justifications for such an agency is her view that financial forms are overly complicated: “On May 18, 2011, the CFPB launched its ‘Know Before You Owe’ project...an effort...to combine the Good Faith Estimate...and the Truth in Lending Act disclosure...into a single two page form.  According to Elizabeth Warren, ‘[t]he current forms can be complicated and difficult for consumers to use.  They are also redundant and can be costly for lenders to fill out.  With a clear simple form, consumers will be in a better position to answer two basic questions:  Can I afford this mortgage and can I get a better deal somewhere else?’” 
This leads to two rather obvious questions:
  1. Why are these forms as complex and confusing as Warren notes them to be? If they upset consumers who don’t understand them AND they are costly for the lenders to fill out, isn’t it surprising we had to wait for Elizabeth Warren to save the day? Generally markets are pretty darn efficient at noting win-win scenarios. In other words, why are these forms so complex now?
  1. In searching for an organization dedicated to making forms and rules simpler and more user-friendly, is the federal government really the first place to turn?
How simple, for example, are the laws under which we live? Financial forms are, of course, important, but if you sign a mortgage you didn’t really understand, at worst you and your immediate family suffer; that is, the costs are internalized. If legislators create laws that people can’t understand, that affects all of us, not just the lawmakers; that is, the costs are externalized. 
And if you don’t understand every jot and tittle of your mortgage, at worst you might pay a late fee or maybe even be foreclosed on. If you don’t understand a law and violate it, you might be thrown in prison and have your rights removed, rescinded, or restricted. So it seems reasonable, before giving federal bureaucrats power over how our financial forms should be simplified, to see how well they’re doing at their primary job of writing laws.
In the March 9th Wall St. Journal, reporter Joe Palazzolo , noted, “Federal judges across the country have lashed out against poorly-written, 'tortuous' Medicare and Medicaid text.  ‘Picture a law written by James Joyce and edited by e.e. cummings,’ wrote Chief Judge Royce Lamberth of the U.S. District Court for the District of Columbia, in a January ruling in a Medicare case. Last September, Judge Gilbert S. Merritt Jr. of the Sixth Circuit lamented Medicare's ‘tortuous text.’ ‘An aggravated assault on the English language,’ is how the Supreme Court characterized the Medicaid statute in a 1981 opinion, quoting a federal judge in New York. 
“A typical provision of Medicare, for instance, reads like this: ‘In the case of a plan for which there are average per capita monthly savings described in section 1395w–24 (b)(3)(C) or 1395w–24 (b)(4)(C) of this title, as the case may be, the amount specified in this subparagraph is the amount of the monthly rebate computed under section 1395w–24 (b)(1)(C)(i) of this title for that plan and year (as reduced by the amount of any credit provided under section 1395w–24 (b)(1)(C)(iv) [2] of this title).’ Got that? 
“The Dodd-Frank financial law [which Warren strongly supported] runs a brisk 2,300 pages. President Obama's health-care law is more than 900 pages long. Medicare and Medicaid are just part of a distinguished history of judicial disdain. Other laws have also been criticized for their dense writing. For decades, sharp tongues on the bench have lashed at the stubborn complexity of the tax code.” 
The Economist magazine had a recent article, “Too Big Not to Fail,” (2/18/12), referring to “Dodd Frankenstein.” In part the article says:
“The law that set up America’s banking system in 1864 ran to 29 pages; the Federal Reserve Act of 1913 went to 32 pages; the Banking Act that transformed American finance after the Wall Street Crash, commonly known as the Glass-Steagall act, spread out to 37 pages. Dodd-Frank is 848 pages long. [Foreign lenders] have remarked that the mammoth law, let alone its appended rules, seems to have been fully read by no one... And the size is only the beginning. The scope and structure of Dodd-Frank are fundamentally different to those of its precursor laws, notes Jonathan Macey of Yale Law School: ‘Laws classically provide people with rules. Dodd-Frank is not directed at people. It is an outline directed at bureaucrats and it instructs them to make still more regulations and to create more bureaucracies.’ Like the Hydra of Greek myth, Dodd-Frank can grow new heads as needed.
“Take the transformation of 11 pages of Dodd-Frank into the so-called ‘Volcker rule,’ which is intended to reduce banks’ ability to take excessive risks by restricting proprietary trading and investments in hedge funds and private equity (Paul Volcker, a former chairman of the Federal Reserve, has argued that such activity contributed to the crisis). In November four of the five federal agencies charged with enacting this rule jointly put forward a 298-page proposal which is, in the words of a banker publicly supportive of Dodd-Frank, ‘unintelligible any way you read it’. It includes 383 explicit questions for firms which, if read closely, break down into 1,420 subquestions, according to Davis Polk, a law firm. The interactive Volcker ‘rule map’ Davis Polk has produced for its clients has 355 distinct steps.” [bold added]
Well, that sounds much simpler…
And we haven’t even mentioned yet the tax code…
The idea that one should turn to the government to SIMPLIFY forms and rules is really a striking absurdity. One would as reasonably have Girl Scout behavior rules written by registered sex offenders.
Tomorrow: Why ARE Those Forms So Complex?

Wednesday, March 21, 2012

Sgt. Bales, Major Hasan, Consistency, and Decency…

[Note: This reflection owes much to the excellent reporting of Mike Riggs at Reason.com]


A recent article in USA Today noted a commonality between science and libertarianism...both make a big deal of logical consistency and reason. Libertarians, it seems, score higher than liberals and conservatives on cognition, but score lower on empathy. I suspect the test of empathy is somehow weighted toward empathy with a tinge of nationalism...how else to explain the empathy David Brooks shows mass murderer, ahem...tragic soldier, Sgt. Robert Bales…
Mike Riggs of Reason.com tells the disturbing story. Bales, of course, is the guy who slaughtered nine Afghan women, three Afghan children, and four Afghan men, subsequently burning many of the corpses. David Brooks’ New York Times column on Bales is titled “When the Good Do Bad,” a title perhaps more appropriate for a pastor who dips into the communion wine or the tithing funds than a man who commits mass murder. Brooks’ excuse for Bales’ actions goes like this: 
Robert Bales, like all of us, is a mixture of virtue and depravity. His job is to struggle daily to strengthen the good and resist the evil, policing small transgressions to prevent larger ones. If he didn’t do that, and if he was swept up in a whirlwind, then even a formerly good man is capable of monstrous acts that shock the soul and sear the brain.
Brooks never mentions--it’s not as if he’s a journalist--that Bales’ “daily struggles” predate his military stint. You need to read the New York Times  Bales profile to learn about the woman he was arrested for assaulting before signing up for “haec protegimus.” To catch it, be sure to read down to paragraph eight, beyond the encomiums filling the first seven paragraphs. You have to go to ABC News to learn that at the time of Bales was enlisting he was under investigation for swindling an elderly Ohio couple out of their life savings.
Bad as it is, we “cognitive” libertarians are perhaps more disturbed by the double standard. As Riggs of Reason notes, Brooks didn’t talk about the “mixture of virtue and depravity” making up Major Nidal M. Hasan when he wrote about the Ft. Hood massacre in 2009. He never suggested Hasan was “swept up in a whirlwind” when he killed 13 American soldiers in Texas. Brooks, writing at the time, noted that many were claiming Hasan fell victim to PTSD, much as many claim that of Bales now. But Brooks would have none of it in 2009.
Of Hasan, Brooks said:
He didn’t have the choice to be lonely or unhappy. But he did have a choice over what story to build out of those circumstances. And evidence is now mounting to suggest he chose the extremist War on Islam narrative that so often leads to murderous results.
Riggs sums up the libertarian view of double standards perfectly: He says:
To recap: The white man who killed brown people after seeing brown people kill white people “was swept up in a whirlwind”; the brown man who killed white people after hearing about white people killing brown people “chose the extremist War on Islam narrative that so often leads to murderous results.”
There is another aspect of double standard in the Bales case: how the victims are treated. Riggs notes that nowhere in the New York Time’s “all the news that’s fit to print,” was it deemed fitting to print the names of the Afghan victims. To find that, you had to read the story in Al Jazeera:
Many mainstream media outlets channelled a significant amount of energy into uncovering the slightest detail about the accused soldier – now identified as Staff Sergeant Robert Bales. We even know where his wife wanted to go for vacation, or what she said on her personal blog.But the victims became a footnote, an anonymous footnote. Just the number 16. No one bothered to ask their ages, their hobbies, their aspirations. Worst of all, no one bothered to ask their names.
There is no question that war is Hell. The question is whether it excuses mass murder. After all the talk of PTSD, of traumatic brain injury (TBI), of the horrors of war that make “good” men commit atrocities, there are in reality only 4 options for someone in Sgt. Bales’ situation (a situation that, for all we might commiserate, he chose, in this All-Volunteer Military era, himself): He could…
  1. Tough it out.
  2. Kill himself
  3. Kill his commanders
  4. Kill innocent people
Choices 1 and 2 are honorable. Choice 3, known as fragging, has a long tradition in war, and sends a powerful message. Only choice 4, the choice Bales actually made, is utterly contemptible. But it is not, sadly, uniquely contemptible...
As recently as 2010, the Maywand District killings in Afghanistan led to the conviction of a dozen American soldiers for the crime of “killing Afghan civilians for sport.” I don’t know if Al Jazeera got around to it, so it only seems fair to list their names:
Staff Sergeant David Bram
Staff Sergeant Calvin Gibbs
Pfc. Andrew Holmes
Sgt. Darren Jones
Spc. Adam Kelly
Pfc Ashton A. Moore
Spc. Corey Moore
Spc. Jeremy N. Morlock
Spc. Emmitt Quintal
Staff Sergeant Robert Stevens
Spc. Adam Winfield
Spc. Michael Wagnon
Of course, it happens in war zones beyond Afghanistan. The Haditha killings in November, 2005 in Iraq consisted of 24 unarmed Iraqi men, women, and children killed by US Marines...children and elderly shot multiple times at close range, all civilians. Three US officers were reprimanded. 8 Marines were charged. Six charges were dropped. One was found not guilty.
In January, 2012, seven years after the fact, one Marine, Staff Sgt. Frank Wuterich, went to court martial, and was found guilty of “dereliction of duty,” receiving a pay cut and rank reduction, but no jail time. Iraqis expressed disbelief that 24 civilians could be murdered and no one go to jail. I can’t imagine why...Anger and resentment, sure. Disbelief? That’s just not paying attention...
Last January, the Washington Post had a column titled Why do we ignore the civilians killed in American wars? It included the following datum:
The major wars the United States has fought since the surrender of Japan in 1945 — in Korea, Indochina, Iraq and Afghanistan — have produced colossal carnage. For most of them, we do not have an accurate sense of how many people died, but a conservative estimate is at least 6 million civilians and soldiers.

I seem to recall another nation responsible for the death of 6 million innocent civilians. I recall they were not viewed kindly for it. I’d elaborate, but I wouldn’t want to be accused of inflammatory statements...or double standards.


Friday, March 9, 2012

Is the Pool of Liberty Drying Up?


David Boaz, Executive Vice President of the libertarian Cato Institute, is one of the smartest people I know. I hate to disagree with him, not merely as a matter of comity, but because the odds are that when I disagree with David I’m wrong. But a few years ago he made a well received but, I think, incomplete analysis of liberty. I was not really in a position to argue with him at the time, but I wanted to say a few words now about why I disagree.
Boaz’s thoughts were well articulated in a 2010 piece, found here on Reason.com: Up From Slavery: There’s No Such Thing As A Golden Age of Lost Liberty
In this thoughtful analysis, Boaz notes Cato pamphlets used to include as the Institute’s raison d’ĂȘtre, "Since [the American] revolution, civil and economic liberties have been eroded." And then, Boaz notes, a visiting Clarence Thomas, prior to his ascension to the Supreme Court, pointed out black people didn’t look at matters quite that way.
And not only black people, of course, though the awfulness of slavery is hard to trump. But the political liberties, or lack thereof, of Jews, gays, and women were also not proud applications of individual liberty in America’s past.
Then there’s Brink Lindsey’s argument, quoted by Boaz, from Lindsey’s The Age of Abundance (2007): Looking at liberty’s gains in the last half-century, Lindsey writes: “Compare conditions now to how they were at the outset of the 1960s. Official governmental discrimination against blacks no longer exists. Censorship has beaten a wholesale retreat. The rights of the accused enjoy much better protection. Abortion, birth control, interracial marriage, and gay sex are legal. Divorce laws have been liberalized and rape laws strengthened. Pervasive price and entry controls in the transportation, energy, communications, and financial sectors are gone. Top income tax rates have been slashed. The pretensions of macroeconomic fine-tuning have been abandoned. Barriers to international trade are much lower. Unionization of the private sector work force has collapsed. ...cultural expression, personal lifestyle choices, entrepreneurship, and the play of market forces all now enjoy much wider freedom of maneuver.”
Lindsey’s is a hopeful message, and makes points similar to those made by Nick Gillespie and Matt Welch in their 2011 book The Declaration of Independents. Gillespie and Welch note that in all areas of life not touched by the mailed fist of government, things have improved dramatically in much less than a century. Save for the areas government controls--our educational system, our health care, our retirement plans--things are quite rosy.
But of course our educational system, health care, and retirement needs are not de minimis aspects of our lives. And, contra Lindsey, calls for censorship in the guise of opposition to the Citizens United decision are growing; the rights of the accused, while perhaps nominally better protected now, are swamped by the growth of arbitrary and capricious laws that fill our prisons to overflowing, leading more and more innocent people to accept plea bargains to avoid being financially crushed and incarcerated for life by zealous and politically motivated prosecutors (see Harvey Silverglate’s Three Felonies A Day). The financial sector has undergone massive re-regulation since Lindsey wrote, and there is a resurgence of opposition to both international free trade and simple rules to limit the political power of public-sector unions. Finally, “the pretensions of macroeconomic fine tuning” have hardly, in the days of Obama, been “abandoned,” and Gingrich, Santorum, and Romney disagree only with Obama’s choices, not the principle of fine-tuning the economy from Washington.
Ironically, the idea there was no golden age for libertarians is meant as an optimistic one. Things are better for blacks, for women, for a diverse and important subset of Americans. But this captures only part of the dynamic. We now, all of us, have our rights recognized equally. And we now, all of us, equally, have less rights than some of us did before. Is this a gain from a libertarian perspective?
Liberty is like the water in a swimming pool. You can dive in, and be surrounded by freedom. In the past, the pool was large and deep. Those who could dive in were engulfed in liberty. It was everywhere. There was so much liberty you could drown in it if you were not careful, but people exposed to liberty were buoyant, and liberty lifted you.
And entry into the pool, for many, was their birthright. It could not be taken away. The lifeguard at the pool was like a night watchman, seldom needed, helpful in emergencies.
Sadly, though, and wrongly, the pool was restricted. No blacks allowed, with only token exceptions. No Jews. No gays. No women. Property owners preferred. Yet despite all this, the pool and the opportunity to dive into it attracted millions from all over the world.
Over time, two things happened, one good, one bad. Rules were changed to allow more people to enter the pool. Over time first blacks, then Asians, Jews, women--now, though not yet fully, even gays--have been allowed to join the club and enter the pool. Sadly, at the same time, the pool has been shrinking. Once the pool was gigantic in size. As James Wilson might have said, “Measure the size of the pool? I am sure, sirs, that no gentleman in the late Convention would have attempted such a thing.”
Slowly the pool shrank, first to mere Olympic size, then to that of a school gymnasium’s offering. Then to a backyard pool. Then to a kiddie pool. Now it is somewhat less than a wading pool. Perhaps in future it will merely be a small sliver of water in a desert, which only the EPA would call a pool.
To be clear, my analogy does not depend on the application of Archimedean displacement. There is NOT less water in the pool because more people are in the pool. The pool is actually shrinking in size, but it didn’t have to be that way. There is no Conservation of Liberty principle that requires the total amount of liberty be fixed...that requires freedom, when spread among more people, be diluted in its coverage.
Blacks can now enter the pool. Women can now get their toes wet. Gays are now free to wear the most outrageous swimsuits poolside. But no one--white or black; gay or straight; male or female; young or old--NO ONE can now do high dives into the deep end. It is too shallow. It would be dangerous. It is prohibited for our own safety. The waters of liberty now engulf no one, equally.
Meanwhile, there is a sandbox by the pool. It is a sandbox enclosed in iron bars, chain-link, and barbed wire. Once placed in the sandbox, it takes years to get out. Many die in the sandbox. And even once released, you are no longer really allowed fully to enter the pool again. And the sandbox is growing. Once small and defined, the sandbox is now massive--the largest sandbox in the world--and overcrowded. Ironically, while blacks are now more than ever allowed into the shrinking pool, they are also thrown disproportionately into the burgeoning sandbox. It is different from the old days, when they were not allowed in the pool to begin with. But it shares many similarities.
Boaz, in his article, was by no means Panglossian. But it is clear he meant an optimistic slant on his message: If there was never really a golden age of liberty, we can see many improvements in comparing liberties today with yesteryear, even while noting there is much left yet to do. And there is yet much left to do.
Boaz noted, writing two years ago, “Many who talk about limited government still support the Iraq war, an aggressive foreign policy, the war on drugs and federal moves to discourage gay marriage, which is hardly consistent with limiting government,...And those who want to end those incursions on liberty tend to support a nanny state in other areas of our lives.” He concluded, “The consistent concern for liberty that motivated our founders still has too small a place in modern American political discourse." 
We do, clearly, today have more liberty in the sense it is available to more people. More people are allowed into the pool. But it is hard to appreciate how much the pool has shrunk. The shrinkage takes place over time, and on any given day the shrinkage may be difficult to notice. But it adds up. Liberties some of our ancestors once had--in travel, in business, in property, in contract--are not missed because it is notoriously challenging to appreciate the loss of something you never had, like young people today cannot imagine what it was like to run unobstructed for your plane when you were late for your flight, like we can’t imagine what it was like in the 1960s to store your rifle in the overhead bin. 
When we watch a race where some runners are shackled, we recognize it as unfair. We see the liberty of the shackled runners restricted if they are weighted down by the force of law. When we call out for greater equality, should we be satisfied if the laws are changed so as to shackle all runners equally, or should we remain unsatisfied until shackles are removed, and no one is weighted down? 
On the March 8th episode of his eponymous Fox Business Network (FBN) show, John Stossel provided the second in a series on the huge expansion of laws under which we suffer in America, “Is Everything Illegal in America Today?” He noted in the last year alone the Federal government has generated 160,000 pages of NEW laws and regulations, restrictions on freedom, excuses to imprison citizens. These are not further descriptions and elaborations of rape and murder, robbery and home invasion. Stossel tells of the man who was imprisoned for SIX YEARS because he sold seafood in the wrong containers, lobsters that, while not mislabeled to consumers, were nonetheless smaller than the legal salable size. Opening a lemonade stand in your front yard requires, in NYC, preliminary attendance at a 15 hour Food Protection class, and filling out many legal forms. No one knows the content of the all the laws, and several legal requirements contradict one another. These are basic violations of the principles the late Harvard law professor Lon Fuller detailed in his The Morality of Law, principles that flesh out the “rule of law.”
These laws are not uniformly enforced, of course. They are necessarily selectively enforced, and that typically means against politically unfavored groups, which in some cases means against blacks, or gays, or gypsies...different but similar to days of yore.
We are now, in the words of Proudhon, watched, inspected, spied upon, directed, law-driven, numbered, regulated, enrolled, indoctrinated, preached at, controlled, checked, estimated, valued, censured, commanded. We are all in the pool now. And our feet are all equally barely wet. And while there was no Golden Age of Liberty, Americans today seem oblivious to a real and tragic loss, seem unaware they can no longer immerse themselves in liberty, can no longer swim unimpeded. Can no longer be everywhere surrounded by freedom.

Wednesday, March 7, 2012

Speculators!!


I recently spoke with a less than economically literate physician who began attributing gas price rises to “speculation.” I asked him how to account for the low prices in 2009, when gas was under $2/gal.? Were speculators banned back then, or simply less greedy as a group? The proffered response, when it came, was less than edifying. 
Now physicians are smart people, as a rule. Yet I know this physician is not alone in being clueless as to what speculation is and what speculators do. So I thought I’d do a quick post on speculators--what is their function--in a market economy.
Keep in mind, as Adam Smith pointed out long ago, there is a difference between the motivation an individual has for acting, and the social effect that act has. Clearly, like doctors going to hospitals, a large motivation for what speculators do, from the speculators’ perspective, is to make money. But how does speculation make money? Doctors, of course, make money by providing a value to society. Is this true of speculators as well?
The future is unknown, but let’s pretend for a moment we know it. We have a certain reserve of oil. With that supply, the price of oil is $X/barrel. We know--omnisciently, let us assume for a moment--that next week there will be a war in the Middle East that will drastically reduce the supply of oil. If we were omnibenevolent as well as omniscient, what would we want to happen? We’d want the price of oil to go up. That would both reduce the demand of oil and stimulate search to increase the supply of oil, both of which are good in the context of a lower supply suddenly thrust upon us.
And if, to modify the assumptions slightly, we all knew the supply of oil would suddenly decrease next week, the price of oil would change NOW. If we all know we have to conserve because of a supply drop next week, we don’t wait until next week to react. And this, too, is a good thing.
Now let’s assume we don’t know what’s going to happen next week. We blithely continue to buy and use oil like its supply at today’s level is going to continue. Next week, when the supply suddenly drops, we look back on our actions and think, “Damn! I wish I hadn’t been so profligate in my use of oil. If only there had been some clue I could have relied on..”
Speculators are the people providing that clue. They, no more than any of us, are effortlessly omniscient regarding the future. But they know if they estimate the future correctly, they can make a profit, so they have every incentive to work hard to use all the clues available: are politicians ruminating about war? Has Saudi Arabia just accepted a large unexpected order of tanks? Are talks breaking down? Are troops being shifted? Or even absent signs of war, is less being pulled from certain wells, suggesting they may be drying up? Is there less drilling? So many little clues...how to best interpret them? 
And different speculators interpret them differently, and act differently as a result. But the ones who do best--who most correctly predict future market conditions get the biggest profit. If they predict a drop in oil supplies next week, they buy oil now--raising the price now--when oil prices are relatively cheap, and sell it next week--lowering the price next week--when oil prices are relatively high. They smooth market prices over time. Without speculators, there are sudden and dramatic price changes in response to real changes in market conditions. With speculators, there are more smooth and less dramatic changes in prices in response to real changes in market conditions. To make a profit, the speculator has to guess correctly and has to buy low and sell high, which amounts socially to marginally raising the price when supply is plentiful and marginally lowering the price when supply is restricted. This is exactly what an omniscient, omnibenevolent person would choose to do himself.
Speculators can guess wrongly, of course. Then they would be causing a price rise that was not socially beneficial. But they would also be losing money, not making a profit. Such speculators are weeded out of the market over time. Such speculators are no more evil than you are if you buy a stock expecting its price to rise and the stock tanks instead.
Of course, prices don’t have to go up for successful speculators to make money. If a speculator correctly predicts the supply will increase next week, he will sell oil now, when it is relatively scarce, lowering the higher price, and buy it next week when it is relatively plentiful, raising a relatively lower price. As before, the speculator’s actions smooth market prices over time.
The fact that speculators can make a profit when the price of oil is dropping shows that speculators should not be blamed for rising oil prices. They don’t need rising oil prices to make a profit. Blaming a speculator for rising oil prices is like blaming Cassandra for the destruction of Troy. There is a difference between correctly predicting the future and causing the future to be as predicted.
Now, like the car industry, or the energy business, or farmers, or even physicians, speculators can try to make a profit not solely by the free market means described above, but by political cronyism. Billionaire money speculators, like George Soros, might buy Euros and sell dollars, not due to an educated guess about relative supply and demand of the different currencies, but because lobbying (paying off) US and European governments to act in ways guarantees such actions profitable. This is not morally defensible and I don’t defend it. But that’s not what most speculators do.
Without speculators, strawberries would be cheaper in season and dramatically more expensive out of season. With speculators, the price change over time is moderated. That’s a good thing. So be grateful for speculators. Not because they act altruistically. But because their pursuit of profit benefits you.
The physician who motivated me to jot this post had it completely backwards. If the price of gas is high now, the speculator would be making a profit by SELLING gas. If he hadn’t gas to sell, then the supply of gas would be even smaller. And the price would be even higher. The speculator was buying gas when the gas price was low. If I ever saw someone cursing a speculator when gas prices are low, on the grounds that without the speculator they’d have been even lower, I’d disagree with the curse, but at least I’d be grateful they had the economics down…