The Hard Road Ahead

I’m starting to believe the only way out of this recession and national deficit is through tough choices that offend the ideologies of every political party:

  • higher taxes for everyone
  • spending cuts, including the military
  • bailouts for state/local safety nets that ease real human suffering, not select industries
  • finding and migrating to foreign aid measures that actually work
  • renegotiating way-above-market public pensions inked during the golden bubble years
  • forcing big banks to cramdown city/county debts that arose due to fraud
  • downsizing the massively expensive and world-leading incarceration industrial complex, perhaps by depoliticizing the CJS
  • reducing barriers to starting up new businesses, especially rent seeking at the local/state level
  • stimulating the wedding industry by ensuring the freedom of everyone to marry

Now who in Congress is up for all that?

Why the Pernice Brothers Don’t Tour

From “Will he/they tour?“:

JP: We make any money if we tour for two weeks?

JL: You mean ten days, if rehearsals are included.

JP: Yes.

JL: No.

JP: Well then why would we do it?

RM: Because Menck wants to rock.

JL: Theoretically, the tour is just one piece of the things you do if you want to sell records.

JP: We don’t sell enough records at shows to justify that. Especially if YOU work the merch table, because people are scared of you.

JL: Theoretically, it’s not just the stuff you sell at the show, it’s the review that you get in the local paper, the placement you get in the local record store, none of which happens if you don’t play a show in that city.

JP: So you think we should tour?

JL: The extent of the fuck I do not give about whether you tour can’t really be measured.

RM: Doesn’t anyone care that Menck just wants to rock?

Reasons to Extend Unemployment Benefits

From the left, Ezra Klein: the Bush tax cuts certainly majorly increased the deficit [CBO], and it’s unfair for the GOP to demand that the unemployment extension be deficit-neutral.

Further, if tax cuts don’t need to be paid for because they generate so much taxable economic activity that they pay for themselves, then neither do unemployment checks. After all, the two work very similarly: A tax cut puts more money in your pocket. Unemployment insurance puts more money in an unemployed person’s pocket. The difference is that the unemployed person is likelier to spend that money, which will generate more taxable economic activity than if that money is saved. That’s why Mark Zandi, an adviser to John McCain’s presidential campaign, estimated (pdf) that a dollar spent extending the Bush tax cuts would generate .32 cents of taxable economic activity, while a dollar spent on unemployment benefits would generate $1.61 of taxable economic activity.

In other words, using the theory under which tax cuts pay for themselves, unemployment benefits are a lot likelier to pay for themselves. …

More reasons to extend them:

  • Ending benefits doesn’t magically create jobs
  • Among those who can’t find work, spending will drop to nothing, depressing local economies
  • Walked away from mortgages and desperately-liquidated assets will destroy tremendous amounts of long term value for short-term needs.

From the right, Megan McArdle:

…in recessions, the length of time for which people need “temporary” assistance stretches out. That means that the government has to respond with temporary benefit extensions. These aren’t just good for the people who are unemployed; it’s also good for us. Unemployment assistance is one of the “automatic fiscal stabilizers” that all but the most hard-nosed conservative economists agree help smooth the business cycle in modern industrial countries. Indeed, it’s one of the most effective forms of stimulus we have.

… [Not extending benefits would be] terrible economic policy–suddenly cutting off the taps would have nasty knock-on effects on the economy. And while it’s a lot of money, it’s one of the few government programs that pretty much unequivocally improve the net welfare of the American people. If Bunning wants to hold up something, how about finding some useless defense appropriations to complain about?

Charter Cities seem better than foreign aid

The Atlantic has a great piece on Paul Romer and his push for “charter cities”. I agree completely with Romer that fair laws with economic liberties is the only way to support economic growth. While probably true in the old world, very few countries remain impoverished simply because of geography. Tyrants plague the people of North Korea; lawlessness, corrupt states, and trade-hostile laws impoverish many others. We should not end foreign aid where it’s needed, but charter cities sound like one of the only ways to make it uneeded.

California’s upcoming Cannabis ballot initiative

In November Californians will see on their ballot the Regulate, Control and Tax Cannabis Act of 2010. The act would basically “legalize” cannabis—all involved in such an industry would remain in violation of the federal Controlled Substances Act, and subject to the whims of the federal DEA and Dept. of Justice—for adults 21 and up, and set up some initial regulations on use, sale, cultivation, and transport. The act is fairly short and readable and seems like a reasonable initial regulatory structure to me.

The Good:

  • Could greatly reduce the prevalence of violent raids on private homes
  • Would keep otherwise-law-abiding adults out of the criminal justice system
  • Would reduce the wasteful use of treatment facilities on individuals just choosing treatment over jail
  • Would restore more respect for law enforcement
  • Home growing might greatly reduce the market value of cannabis, which might keep cannabis selling industries smaller, less able to lobby for looser regulations, and less able to afford expensive advertising campaigns. Ironically this act might make large-scale dispensaries—who funded the signature drive—less likely to exist.
  • The legitimization of cannabis could result in safer usage practices becoming the standard of use.
  • Local governments could add regulations to force sellers to provide safety information (e.g. how long impairment could last, how to recognize signs of trouble, recommending the use of vaporizers, harm research results)
  • Users who medically benefit from the drug (a small but non-zero percentage of CA’s current users) would have less trouble obtaining it.
  • Could significantly shrink black markets, including those that will continue to serve minors. E.g. A teen who can more easily steal pot from adult siblings or friends is less likely to seek out a dealer who may sell other drugs.
  • Could reduce alcohol use and associated violence and overdose deaths.
  • Could nudge Congress toward more reasonable cannabis laws and more federal research of cannabis (not just limited to harms).

The Bad:

  • Commercialization and legitimization will yield increases in the number of users (though in many parts of the state there are plenty of adult users).
  • Would make some law enforcement activities more difficult. E.g. users and sellers of harder drugs are often caught due to possession of marijuana, which is generally harder to conceal.
  • Home growing doesn’t nudge users toward safer delivery methods or place users in contact with someone who could theoretically provide helpful education/intervention. I say “theoretically” because California’s current policy creates too much incentive for doctors to be “pot docs”, who do little more than sell handwritten licenses.
  • Many users will simply combine pot use with alcohol use.
  • Even though it would remain illegal, driving under the influence of pot will probably rise. This is concerning, but the best available research is still pretty weak on the notion that casual usage creates significant danger. Pot users appear to be more aware of their impairment.
  • Will probably not yield of windfall of tax revenue for California
  • More people smoking things. Learning to smoke pot lessons the difficulty and foreignness of trying other smoked substances, which are generally more harmful than pot, including tobacco. If “spliffs”—cannabis with tobacco—became popular, this could lead to more tobacco smoking (which is proven to be carcinogenic) and more complicated addiction.

I still think the good outweighs the bad. Bring on the great democratic experiment!

HealthCare Thought Exercises

I can’t remember where, but I’m fairly certain I saw compelling evidence that nations with universal access to healthcare, contraceptives, and abortions have the lowest rates of abortions. Let’s assume this is true.

Also assume that the U.S. military, as well as foreign militaries aided by the U.S., engage in a perhaps small but non-zero number of actions which cause more human suffering, in lives and in residual physical and emotional scars, than the actions prevent.

Now assume that, ten years from now, ObamaCare will have reduced abortions by millions/year and have produced a net fiscal drain on the federal government, forcing it to reduce some of the aforementioned military actions.

Would it be a “moral” law?

I think the biggest leap here is assuming the federal govt. would cut military spending. More likely we’d see cuts targeting the weakest interests (the poor), and/or tax increases most significantly affecting the middle class.

Assume now that ObamaCare ends up raising significantly the net per capita cost of healthcare (cost of drugs, premiums, copays, taxes, etc.), and this effectively reduces the standard of living, particularly at the lower classes.

Also assume that ObamaCare results in the stifling of drug & medical product innovation, resulting in millions of avoidable deaths and suffering in the future.

Would it be a “moral” law?

What if FDR had successfully lobbied to get a national healthcare system established; and that U.S. medical innovation had progressed at a reduced rate since 1940 or so?

What if Republicans enacted a “free market” healthcare system which turned out to significantly reduce costs, but in doing so also reduced quality and the margin of profit available to go towards innovation? I.e. is a “cheap” healthcare system (which we certainly had before WWI) “better” than a costly one if the margins go towards preventing future suffering?

Is it fair to assume that in our costly system those margins do go towards “societally beneficial” innovation rather than, say, executive pockets and the development of expensive new drugs which are only slightly more effective than existing ones?

Magnetar on This American Life

Today I heard the tail end of a fantastic This American Life episode based on a ProRepublica story on the hedge fund Magnetar. The short version is that, when the housing market started to appear unstable in 2005, Magnetar realized that bad incentives at investment banks would allow it to make money by creating a resurgence of CDO investments in the housing market, prolonging the inflation of the housing bubble.

The bad incentives were that investment bankers were paid immediately in handsome fees for creating and selling these CDOs without the requirement of having “skin the game” when they might later became worthless. When the CDO collapses, the bank (and, through bailouts, the taxpayer) takes the loss, but the banker is long gone.

Magnetar made a name on buying the riskiest layer of CDOs, giving other investors the impression that they were a safe investment and causing the CDO market—and connected investments into the housing market—to take off again (when it could have otherwise returned to Earth slowly and less destructively). What was not made clear to CDO investors—and some say this constituted criminal activity by CDO managers—was the fact that Magnetar was simultaneously placing large bets against the same CDOs and actively encouraging banks to create them from much riskier loans.

I.e. Magnetar’s CDO investments were designed to allow future losses, but to temporarily pay the bills and give false information to the market, allowing Magnetar to later gain tremendously on its eventual downturn. Had the CDO creators and dealers passed on this information (by having incentive to do so), the investors would’ve realized these things were being designed to fail and stayed out of them.

On the FairTax

I’ve not read the original FairTax book, and have only flipped through the follow-up written to answer the critics, but I have spent many hours reading about it online over the years, and back when I listened to Boortz of course he pushed it. At the moment, I don’t see it as workable and I think its rollout could be disastrously disruptive to the economy. Many of the goals and incentives set up by the FT are good, but there are a number of critiques I’ve read more recently that have not been adequately answered IMO.

Primarily, there’s Bruce Bartlett’s excellent piece “Why the FairTax Won’t Work” (pdf). This should be the first stop for those who’ve only read pro-FT literature. It begins with a decent description of the FT, but obviously it shouldn’t be the only thing you read about the FT to make an informed opinion.

Several folks commenting at the Fair Tax Blog make some compelling arguments against the FT, including weighing in on Bartlett’s critique. Many agree with him that a VAT would be a better consumption tax. This post has some lively discussion worth reading.

A lot of the selling points of the FT just seem too good to be true:

  • You keep 100% of your paycheck. This is the most obvious deception—a mechanical truth of the FT system with the emotional appeal of effectively raising your income. Of course, your paycheck would be either be smaller or your expenses larger, too. With the FT’s guarantee of being revenue-neutral, the FT cannot be a win for everyone, and when you start to look at who would greatly benefit from it, it should be obvious who the losers will be. This is not to say that everyone’s current tax level is just, but this particular line of rhetoric seems targeted towards the middle class, who I think would end up paying more under the FT. And retirees living off savings—having already been taxed on earnings—will be taxed again to get by.
  • It’s under 200 pages. Does anyone really believe that suddenly Congress would just have no way of cutting breaks for special interests? The problems of loopholes, unfairness, and the ballooning of the tax code is due to the people who amend it, and the FT won’t replace them. With not even most Republicans willing to touch it, getting a FT through Congress would take a number of sweetheart deals right off the bat and probably provisions making it easier to tamper with going forward. Remember there would be $485B going to citizens yearly in “prebate” checks, and Congress would determine who gets what; more room for deal-cutting.
  • No more IRS! For those who strongly believe federal taxation is out-of-control, the notion of sticking it to the IRS will sound satisfying, but if a national consumption tax became the sole source of revenue for the federal government, you’d better believe it would build a new, huge bureaucracy to ensure compliance. Also, since the FT would no longer allow state and local governments tax-free purchasing, the states would likely need to jack up their income taxes to compensate.

Bartlett’s piece really is well-researched and a must-read, and if you know of a serious critique that takes on his arguments head-on, I’d love to read it.

Questions for Economists

(First of the series “Getting rid of all these draft posts”)

Should we really go back to the Gold Standard?

I gather only Austrian school (Mises, Hayek, et al.) economists really think a return to “sound” money would be possible or beneficial to the economy, and most prominent economists think it would be disastrous. Has anyone even written a practical implementation plan of how this could occur, (and what might go wrong)?

The Mises followers also seem to be infatuated with the harms of inflation inherent with fiat currency. Sean Malone produced a graphic of the rise and fall of the value of the U.S. dollar, which included this nice piece of trickery:

Now try to imagine what your life might be like if every dollar had bought you 20 times as much stuff… This is the cost of inflation.

This does not demonstrate the “cost of inflation”. To imagine a dollar buying 20 times as much stuff, you also have to imagine wages being 1/20th of what they are now. My guess is this was an honest mistake on Sean’s part, but the Mises folks seem to find it immoral to not tie consumer prices to some arbitrary dollar amount over time.

Who does slow, gradual inflation harm in the modern world? I’d guess the primary victims would be people who save large amounts of cash over many years earning no interest. Does anyone do this? So, yes, if you earned all your income before 1915 and stashed it all under your bed, then, yes, inflation has cost  you 95% of your wealth, but if you did nearly anything else with it, much of that value would remain and might have even multiplied. Actually the rarity of your currency might even make up for the loss.

The arguments for slow, steady inflation I find pretty compelling, particularly the stickiness of wages. Since employers and employees generally despise even tiny wage reductions, creeping inflation allows us to lower real wages when they really need to be; if the real value of a worker’s output goes down, not offering a raise is much more palatable for everyone than cutting his wage (even slightly) or, at some point having to fire him. Regular cost-of-living “raises” become required to keep real wages flat, but I don’t see big harm in that; it might even boost morale and real productivity.

Is a systemic collapse due to Fractional Reserve Banking possible?

Rothbard rightly points out that a massive run on the banks could lead to disastrous hyperinflation, but is this occurrence likely? My guess is that, in any scenario including a nationwide bank run, value of the dollar is likely to be the least of our worries.

Wouldn’t economic growth be stifled under full reserve banking?

Maybe I’ll find some of these answers in The Making of Modern Economics, which appears to cover all the major players including Hayek and Mises.