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Saturday, July 08, 2006

MIRON'S SECOND PRINCIPLE   Another back-to-basics libertarian bedrock from Harvard's Jeff Miron, in his series on the negative consequences of government intervention:
Negative Consequence #2: Preventing Mutually Beneficial Exchange

An inevitable consequence of government intervention is interfering with voluntary exchange. In some instances this is an unavoidable side effect, but it is still a cost that must be recognized in evaluating interventions.

Consider as an example minimum wage laws. These prevent employers from hiring employees at wages below the minimum even though some employees prefer working for low wages to not working at all. A minimum wage does raise the income of some workers, but only by preventing mutually beneficial interactions between other workers and employers.

Much regulation has this characteristic. Occupational safety and health regulation prevents an employer from hiring someone to do a risky job, even if that worker is aware of the risks and wishes to accept them. Collective bargaining laws prevent employers from hiring replacement workers who are willing to work at wages below the union demands. Price controls keep consumers from voluntarily paying “excessive” prices. Antitrust laws forbid mergers between mutually agreeable companies. Child labor laws mean an ice cream store cannot hire a 13 year old even if the teenager and the parents agree. And so on.

Prohibitions against the purchase and sale of drugs, sex, or gambling also prevent trades that both sides want to consummate. Some people argue that buyers of such goods are not acting "voluntarily” due to addiction; that is hardly true in all cases, however. And even if “vice” generates externalities, the trade still benefits the buyer and seller.

The mere fact that a policy prevents mutually beneficial exchange is not by itself decisive, since policy may have other goals. But at a minimum such policies are not unambiguously good. Thus any benefit must be sufficient to offset the losses to those whose voluntary trades are prevented by policy.

Posted by Donald L. Luskin at 12:06 PM | link  

IT'S NOT ENOUGH TO SAY GLOBAL WARMING IS IMPORTANT   To take some amount of action (with some cost, including the cost of turning away from other issues), we have to ask how important, and conclude that it's very important. Fortunatley, most people when presented with the facts don't find that it competes very well against other priorities. From a Wall Street Journal piece today on skeptic Bjorn Lomborg:
In 2004, he [Lomborg] invited eight of the world's top economists--including four Nobel Laureates--to Copenhagen, where they were asked to evaluate the world's problems, think of the costs and efficiencies attached to solving each, and then produce a prioritized list of those most deserving of money... While the economists were from varying political stripes, they largely agreed. The numbers were just so compelling: $1 spent preventing HIV/AIDS would result in about $40 of social benefits, so the economists put it at the top of the list (followed by malnutrition, free trade and malaria). In contrast, $1 spent to abate global warming would result in only about two cents to 25 cents worth of good; so that project dropped to the bottom.

"Most people, average people, when faced with these clear choices, would pick the $40-of-good project over others--that's rational," says Mr. Lomborg. "The problem is that most people are simply presented with a menu of projects, with no prices and no quantities. What the Copenhagen Consensus was trying to do was put the slices and prices on a menu. And then require people to make choices."

...the Copenhagen Consensus Center, held a new version of the exercise in Georgetown. In attendance were eight U.N. ambassadors, including John Bolton. (China and India signed on, though no Europeans.) They were presented with global projects, the merits of each of which were passionately argued by experts in those fields. Then they were asked: If you had an extra $50 billion, how would you prioritize your spending?

Mr. Lomborg grins and says that before the event he briefed the ambassadors: "Several of them looked down the list and said 'Wait, I want to put a No. 1 by each of these projects, they are all so important.' And I had to say, 'Yeah, uh, that's exactly the point of this exercise--to make you not do that.'" So rank they did. And perhaps no surprise, their final list looked very similar to that of the wise economists. At the top were better health care, cleaner water, more schools and improved nutrition. At the bottom was . . . global warming.

Posted by Donald L. Luskin at 8:53 AM | link  

Friday, July 07, 2006

CRYSTAL BALL ON CONNECTICUT   Will Joe Lieberman end up running for senator as an independent? Will he win in November if he does? The Tradesports contract on the "field" candidate for Connecticut -- i.e., anyone who is not a Democrat or a Republican -- is currently bid 15 and offered at 29, meaning there's at least a 15% probability of those events occurring jointly.

Posted by Donald L. Luskin at 2:45 PM | link  

THE WORLD WAS A BETTER PLACE   ...when it was the world reflected in the "cartoon modern" style. Hard to believe fifty years from now anyone will look back nostalgically on Ren and Stimpy.

Buy the book. And visit the blog.

Posted by Donald L. Luskin at 2:37 PM | link  

MIRON'S PRINCIPLES   Harvard's lone libertarian, economist Jeff Miron, promises to blog nine commentaries on "Negative Consequences of Government Intervention." The first is posted. It's not an earth-shattering revelation, but it's useful to have this extremely fundamental and clear-headed statement of the underlying principles:
Negative Consequence #1: Taxation and the Costs of Raising Funds

A general consequence of government intervention is the distortion in economic decision-making caused by the taxation that pays for the intervention. Taxes on specific goods make consumers substitute to other goods for reasons other than the relative enjoyment they receive. Taxes on income cause individuals to work and save less. Taxes on corporations cause investment decisions based on tax consequences rather than profit maximization.

In principle governments can avoid these distortions by using what economists call lump-sum taxes. These are “levies” that do not depend on taxpayer behavior. For example, a head tax might require payment of $1,000 per person. Since the amount owed is unrelated to anything the taxpayer does, this kind of taxation does not distort behavior.

In practice lump-sum taxation is not politically viable due to equity considerations. Thus, real world tax systems do distort behavior. In addition, taxation generates compliance costs. Individuals spend time and money filling out tax forms. Businesses expend resources collecting and processing sales and employment taxes. Corporations spend effort computing and complying with the corporate income tax. And all these entities expend considerable effort avoiding or evading taxation. Economists disagree over the exact magnitude of tax distortions and compliance costs, but no one doubts these are substantial.

The overall point is that government expenditure of a dollar costs more than a dollar given the necessity of paying for the expenditure. So, even if an intervention generates benefits in excess of direct costs, that is not enough to make it desirable; the benefits must also outweigh the tax distortions and compliance costs that will result from the intervention.

By the way, can you see a version of the Laffer Curve hanging upside-down in the shadows of Miron's construction? If a dollar of taxation, by its very nature, costs more than a dollar -- then a dollar of tax-cutting will cost less than a dollar.

Update... Taxes take many forms, as reader Ray Futrell reminds us:

In the 1980s I was working on a government operations and maintenance contract and we needed new electric motors to refurbish some equipment. The motors we wanted cost about $2,500 each from company X, but the government was supplying the material for the job. The government contracting office informed us that they would have to seek competitive bids. Now, this meant we would have to write a motor specification, the contracting office would then add about 50 pages of boiler plate, advertise in Commerce and Business Daily for bidders, wait for bids, evaluate them and finally let a contract to the lowest bidder. This normally takes 9-12 months, so we were saying "oh crap" or words to that effect. There goes the schedule down the toilet. Well, they put out the request for bids and got no bidders. They asked company X why they didn’t bid and were informed there was no way company X could produce all the paper work required by the solicitation. We thought they would now just order the motors sole source from company X. Alas, not so, the contracting office went hunting for bidders and found motor company Y that produced motors for the Defense Department, and they provided a bid of about $5,000 for each motor. Well, there goes the budget down the toilet. When the motors finally arrived one engineer exclaimed "Wow, those motors cost $5,000 each?" and we explained each motor actually only cost $2,500 but the government paper work for the motor cost an additional $2,500.

Posted by Donald L. Luskin at 8:41 AM | link  

Thursday, July 06, 2006

THE COMPETITIVE EDGE   Here's my column for tomorrow.
As you think about diversifying your investments in stock markets around the world, you should be asking yourself one key question: what makes some economies grow, while other economies fail?

For economic success, is it necessary that a country be a democracy? Must it have an educated and hard-working labor force? Good tax policies? A stable currency?

These things are all to the good. But they aren't necessarily the most important things. According to the research of William Lewis, a partner at business consultant McKinsey & Company, the most important element is: competition.

For a nation's economy to succeed, competition among domestic companies, and between domestic companies and foreign rivals, must be both fierce and fair. Lewis thinks that from the bloody battlefield of competition comes productivity and growth.

Lewis's book The Power of Productivity documents over a decade of painstakingly detailed country-by-country and sector-by-sector research by McKinsey's business analysts. The work proves definitively that, when a nation exposes itself to the rigors and risks of competition, it forces itself to adopt world-class business practices and achieve world-class productivity. It's simple, then: to compete is to grow.

Let's look at an example from the United States. We all know that our country has undergone a productivity revolution. Our ability to produce more output with less labor input has grown so rapidly that gross domestic product has nearly doubled over the last decade. The standard explanation for this miracle is technology -- the wonders of personal computers and the Internet. But Lewis's work gives a different answer.

According to Lewis's research, about half the gains in productivity in the last half of the 1990s -- the "new economy" era when investors could think of nothing but technology -- came from two non-tech sectors: retailing and wholesaling.

That's right. Microsoft didn't do it. Either did Intel. It was Wal-Mart.

We tend to forget just how important pedestrian sectors like retailing and wholesaling are for any economy. Lewis notes that in the US, retailing is responsible for 11% of all jobs, and wholesaling 6%. "When almost 20% of the U. S. employment has a productivity growth jump…the national productivity statistics take notice."

Tech die-hards will argue that automation and networking are what made modern US retailing possible. Lewis disagrees: "Wal-Mart invented the big box store back in the 1960s, when information technology was too primitive to be a major factor in the innovation."

For Lewis, the key factor was competition. Faced with Wal-Mart's innovations, he says "its competitors faced the choice of either becoming about as good as Wal-Mart or going out of business."

Thus economic growth is not a matter of some new technology that suddenly shows up on the scene. Nor is it a matter of some new government program that gets invented by over-eager politicians. It's a matter of people competing -- with some winning, and some losing, but the whole nation gaining from the resulting wide-spread adoption of innovation.

From the losers' perspective, competition can be a difficult thing to accept. In the case of Wal-Mart, we're all familiar with the complaints of pre-existing smaller businesses that are crushed when a new Wal-Mart store gets built. But if somehow those pre-existing businesses could be protected from Wal-Mart, then there would be no innovation in retailing, and no productivity growth.

Nations that grow are willing to deal with the temporary pain of those who are dislocated by innovation -- having faith that they can find new work in a larger and more rapidly growing economy. Nations that can't bear that pain don't grow, or at least not as fast.

Lewis points to Japan as an example. Japan's automotive and consumer electronics sectors -- led by Toyota and Sony -- are the most productive in the world. They got that way because, from the beginning, they had to compete fiercely with Japanese rivals within Japan, and with well-established competitors around the world.

Toyota is so good that Lewis thinks the best way for a nation to enhance its automotive sector is not to protect it from competition with Toyota's imports. Instead, a country should invite Toyota to come and build a factory right there on its own soil -- just as Toyota and other Japanese automakers have done in the US.

Yet Japan is a stagnating economy. That's because autos and consumer electronics make up only a small part of the economy -- and all the other parts are stagnating, precisely because they aren't exposed to any competition.

In Japan, the workaday sectors that make up the bulk of the economy -- retailing, wholesaling, food processing, and so on -- are protected from competition by thousands of laws and regulations that enshrine the status quo. And the status quo is millions of tiny mom-and-pop stores, businesses and workshops that are no more productive today than they were forty years ago.

Lewis notes that there are other ways that nations can grow, other than through the productivity that comes from competition. He points to the example of South Korea, which has built itself from an impoverished nation to a middle-income nation by virtue of sheer hard work. Korean workers typically put in many more work-hours per year than their American counterparts, or anyone else.

Yet Koreans are not rich. Why? Because working hard isn't the same thing as working smart. There are only 24 hours in a day, and once you have worked them all, there's just no more you can do. The only path to sustainable growth is productivity -- innovation that allows you to achieve more while working less. And to get innovation, you have to expose yourself to the competition that forces you to innovate. Korea hasn't been willing to do that.

The lesson for investors is this: if you want to bet on long-term growth, bet on countries that are slugging it out in the competitive arena of globalization. Bet on countries that aren't afraid to let Toyota open factories there, or Wal-Mart to open superstores.

In fact, here's an investment idea for the week of the Fourth of July. Why not invest in the United States? When it comes to competition, we have no competition.

Posted by Donald L. Luskin at 10:23 PM | link  

FOR $100 MILLION, I'LL GET OUT AND PUSH   Our DC lawyer/lobbyist correspondent (anonymous, as always), has a suggestion for how conservatives can spin the debate on global warming:
One allegation made by conservatives against the global warming "consensus among scientists" is that the availability of research funding is biased towards "proving the problem." The more research, the more headlines, the more Gore. Perhaps there is some truth to this but it's a loser's whine.

Conservatives won't win this particular debate, because we have to prove a negative. There is a possibility that some warming is caused by human activity. We like to solve problems; so we need a smarter, more practical approach.

If there is a consensus, it isn't on the problem but rather on the notion that we should move away from fossil fuels for national security and other reasons, including environmental ones. Credit Bush will having nudged us towards more nuclear electricity. The real challenge is to find an alternate technology for the transportation sector.

Why not a national science contest with a huge prize? Say, $100 million.

I'm sure others could fill in the many other necessary details, but it sure would put research, and the political debate, on topics which might be productive, however slight.

This idea is better than most. But from my standpoint, it is purely political and not at all optimal economically. I think we should just keep burning fossil fuels like crazy. That's the way to maximize growth. Growth is a universal solvent that eventually answers all questions and resolves all issues.

Update... Reader Matthew Cowie goes me one better:

I've thought that was a good idea. Take the $15 billion NASA has, and privatize NASA. Spend all $15 billion a year on prizes, like $2 billion to go to the moon, $20 billion to land a man on Mars, $500 million to land a rover on Mars, etc. Instead of funding a government agency with way too much bureaucracy, fund private industry. I'm sure they can achieve the Department's objectives at higher quality and lower cost.

Dept. of Energy? $24 billion. Abolish it and spend the $24 billion on alternative fuel research, infrastructure upgrades, and energy research.Put the Dems on the defensive. Fund $24 billion on energy research? Keep a useless bunch of bureacrats employed pushing papers? Your choice.

Fund the $88 billion Dept of Education? Or offer every kid over 10 (when their international scores start falling off a cliff) in America a $1,500 (more if less than 100% of children go to private school) school voucher?

For global warming, why doesn't someone make the Simon/Ehrlich bet: $10,000 says it's not manmade. There's got to be plenty of airheaded Hollywood types that you could clean up with. Actually, you could probably bet some of them that the air is cleaner today than it was 10 years ago.

Posted by Donald L. Luskin at 11:30 AM | link  

Wednesday, July 05, 2006

SOMEHOW HE JUST FORGOT TO MENTION IT...   Yes, so busy was Bruce Bartlett in his latest column, explaining the lack of public goodwill for the New York Times as the product of its sins of decades past, he plum forgot to mention that he himself has been on the Times's payroll -- most recently, a short-lived stint as a blogger on the Times web-site. I guess you can bite the hand after it stops feeding you. Bruce should consider that the Times' goodwill gap comes not from supporting Soviet Russia a lifetime ago, but from more recent sins -- like cynically promoting turncoats from the conservative movement (like Bruce) who cynically promote themselves by writing sensationalistic Bush-bashing books (like Bruce did).

Thanks to reader Jameson Campaigne for the link.

Posted by Donald L. Luskin at 6:52 PM | link  

Tuesday, July 04, 2006

THIS EXPLAINS IT ALL   From Villainous Company:
[New York Times executive editor] Bill Keller is a Very Smart Man - so smart that he can be trusted to make major national security decisions without any oversight. He has formulated the Theory of the Unitary Editor, which goes something like this. On the first day of the Constitutional Convention, the Founding Fathers created the New York Times. And they looked upon their creation, and they saw that it was good. And they clearly intended for it to have a tremendous amount of power for, as our Democrat brethren-in-Christ are always reminding us, Thomas Jefferson said it would be better to have a press and no government, didn't he? So the second day the Framers, via the First Amendment, explicitly created a Fourth Branch of government which operates completely independently of the other three branches. Furthermore, unlike the other three branches, this fourth branch was to be able to violate laws passed by our elected representatives at any time with impunity, since the First Amendment would operate as a virtual trump or "get out of jail free" card. Now this may alarm some of you somewhat, but you should not worry. We the Little People should simply trust that the Times would never abuse this tremendous power, because although the press are not subject to any external oversight or checks and balances, the Founders did provide for an entirely sufficient internal oversight system in the form of Executive Editors. This is where the Theory of the Unitary Editor comes in.

According to the Theory of the Unitary Editor, whenever a Times reporter is given unauthorized classified information, Bill Keller's editorial conscience allows him to unilaterally declassify national secrets, bypass Congress, and violate the law in the interest of keeping the nation safe from a popularly elected President who he fears may be bypassing Congress and breaking the law.

Thanks to reader Dave Duval for the link.

Posted by Donald L. Luskin at 12:51 PM | link  

RIGHT WING TRASH   To mark Independence Day, our "public editor" Irwin Chusid sends us for a visit to the brand new RightWingTrash blog.
RightWingTrash is written by J.R. Taylor, and is dedicated to celebrating all the great music, film, literature, and television that's gotten past the Leftists in the entertainment industry.

Each weekday features some kind of fine entertainment that doesn't try to alienate conservatives.

"Fine"? Well, maybe not... this is definitely pop-culture stuff. But it's useful to be reminded that conservative values (e.g. individualism, self-reliance, and so on) actually do underlie many cultural expressions, if you just know how to look for them.

Posted by Donald L. Luskin at 11:35 AM | link  

Monday, July 03, 2006


Via PowerLine, thanks to reader Patrick Broderick.

Posted by Donald L. Luskin at 10:52 AM | link  

TUBES? PIPES? WHAT'S THE BIG DIFFERENCE?   If unscrupulous political opponents can't attack what you stand for, they'll attack the way you express yourself. Here Senator Ted Stevens, speaking out against the left-wing regulatory horror called "net neutrality" -- is speaking extemporaneously, and he makes lots of stupid mistakes (says "internet" when he means "email", he gets the techspeak slang wrong when he says "tubes" instead of "pipes", and so on). So he is held up to ridicule by the left, even though everything he says is basically correct. Actually, he is held up to ridicule because everything he says is basically correct.

Posted by Donald L. Luskin at 12:22 AM | link  

Sunday, July 02, 2006

CONGRESS VERSUS THOSE EVIL HEDGE FUNDS   Our Washington lawyer/lobbyist friend (anonymous as always) offers some new observations on the theatre of the absurd that is Congress in the process of reviewing securities regulation:
The only thing Senators on the Judiciary Committee seem to know is that a small public company called (with lots of alleged problems) is running a campaign against those mean rich hedge funds from New York. The title of the hearing gave away their ignorance: "Hedge Funds and Independent Analysts: How Independent are Their Relationships?"

Independent Research is called independent because it is not affiliated with investment banking, i.e., the sell-side. Hedge funds are on the buy-side.

No one who understands the markets can justify regulating the free flow of information and analysis when it is unconflicted, i.e., not affiliated with the sell-side..

Click on this link to see an independent researcher wets himself, then pleads guilty while innocent, copping a plea that he (and his peers) be regulated, including a Public Company Accounting Oversight Board-type authority to set "standards" for independent research. This is not a good idea for anyone.

These views are confoundingly foolish and reckless. No need to sound the alarm, though, since they have no chance of becoming real without an amendment to the securities laws by Congress, which just won't happen. However, who knows what could happen if congress changes hands.

A wise man I know once defined a "populist" as someone who doesn't quite understand the theater but does enjoy a good pie-in-the-face.

Posted by Donald L. Luskin at 10:50 PM | link  

HE'S KIDDING, RIGHT?   Our correspondent "Irrational Exuberance" contributes this gem from Fed chair Ben Bernanke -- citing it (correctly) as yet another reason to adopt a gold standard.
"My wife is a literature teacher. She says it's a sign of great literature that a reader can find things in a novel that the author didn't mean to be there."

Posted by Donald L. Luskin at 10:45 PM | link  

QUESTION:   How many angry letters from readers does it take to rouse New York Times "public editor" Byron Calame from his somnolence?

Answer: Concerning the Times' exposure of the government's secret surveillance of international transactions by terrorists, Calame writes today,

Roughly 1,000 e-mails have come to me, about 85 percent of them critical of the decision to publish the story and a large fraction venomous. It was time to take a close look at the handling of the article in search of answers.
Question: What does the "reader's representative" do?

Answer: He rises up, shifts his position on Times management's lap, and goes back to sleep.

My close look convinced me that Bill Keller, the executive editor, was correct in deciding that Times readers deserved to read about the banking-data surveillance program.
Question: How does Calame justify this to his disappointed readers (whom he represents)?

Answer: The secret program wasn't really a secret anyway. At least, Calame argues,

There was a significant question as to how secret the program was after five years.
Question: How does Calame explain that the Times' original story on this, on June 22, called the program "secret" three times (including the headline)? Or that the self-justifying op-ed by editor Bill Keller and the LA Times' Dean Baquet also use the word "secret" -- six times (also including the headline)?

Answer: None.

Posted by Donald L. Luskin at 1:07 PM | link