Archives: 05/2006

Enron Execs Go Down

The jury returned guilty verdicts against Ken Lay and Jeff Skilling today. I didn’t follow the case closely, but businesspeople who engage in fraud should obviously be punished. I do fear that the publicity surrounding this case will reinforce the misguided notion that federal prosecutors should be policing the business world. Cato’s new book, Trapped, shows that federal intervention will result in far more harm than good.

For those who would rather listen, than read, Prof. John Hasnas, author of Trapped, delivered an address here at Cato last month.

For still more background, go here.

Boxes, Foreheads, and Price Signals

Russ Roberts at Cafe Hayek has an illuminating post about how to think about jobs:

Some say that a nation should strive to acquire high-paying jobs if it wants a high standard of living. In this view of the world, jobs are boxes that workers jump in and out of. Each box has a bar code that determines how much the job pays. The goal is to get a good box with a high wage attached to it.An alternative view of the world is that the bar code is on the worker’s forehead. The worker gets scanned not the job.The wage depends not on the job title but on the skills of the worker.

Russ goes on to explain why the jobs-as-boxes view leads to error and confusion.

I’d like to add that one of the reasons unions and other forms of subsidy often hurt workers more than they help is because of certain implications of the box view. Unions generally try to get the wages and benefits attached to union boxes as high as feasibly possible.

The first effect is often to limit the number of boxes available for workers to jump into. But a perhaps deeper problem is that heavily subsidized wage and benefit packages can insulate workers from labor market price signals that are trying to tell workers to invest in other forms of human capital – to acquire a more highly valued forehead bar code.

When subsidized boxes disappear, due to mechanization, outsourcing, or plain old business failure, workers are usually dismayed to find that there is a big mismatch between their forehead and their old box, i.e., that the real market value of their skill set is surprisingly and disappointingly small. It can be a harsh blow to your self-esteem to find that the best job you can get pays only half as well as your old one. And you’ll sometimes hear laid-off low-skill workers say, “Why didn’t anybody tell me that I should be learning to do something else?” The answer is that prices were telling them – the signal was out there – but you can’t hear it from inside an insulated box.

If you’ve got to subsidize something, subsidize people’s ability to respond effectively to price signals (e.g., provide them vouchers for job training). Don’t create subsidies, like wage supports, that cut people off from the information they need so that they can invest in themselves wisely and find a good fit in a dynamic market.

Sense and Sensenbrenner

Congressional whining over the FBI raid of Rep. William Jefferson’s office has reached the point of self-parody. Rep. James Sensenbrenner has now called for rare out-of-session hearings on the raid, titled, “Reckless Justice: Did the Saturday Night Raid of Congress Trample the Constitution?”

This would be the same James Sensenbrenner who wants to give federal law enforcement the power to snoop in on your Internet browsing, and who recently introduced a bill that would send parents to prison if they learn of drug activity near their children and fail to report it to authorities within 24 hours.

“Trampling the Constitution,” indeed. Amazing how reverent politicians get for the Constitution and the rights of the accused when one of their own is under the gun.

Little Victories

…in the fight against the Nanny State: in Massachusetts, the state legislature just narrowly rejected ”primary seat belt legislation.”  In English, that’s a law that gives police the power to pull you over simply because someone in your car isn’t wearing their seatbelt (“secondary seat belt laws” allow them to ticket you for not wearing a seatbelt only if they’ve stopped you for some other infraction). 

Last summer, using night-vision equipment on loan from the National Guard, Maryland state troopers scanned passing cars, then swept out and nabbed 111 offenders for the crime of driving without a seatbelt. Scores of people who were driving along, minding their own business, had their evening ruined by an unpleasant encounter with the business end of the law. Law enforcement overreaching caused an outcry in that case, and citizen pressure in Massachusetts seems to have led several lawmakers to back away from the primary seatbelt bill.

It’s good to know that even in Massachusetts there’s still some resistance to the growing crusade to ensure healthy living through coercion. But it’s not coming from the Governor’s office. Mitt Romney, GOP presidential hopeful for 2008, had promised to sign the bill.

Mulling the Big Idea

A few comments on Brink’s post on the discussion I’ll be missing at the Hudson Institute.

1. I think that the background paper for the discussion is more interesting than Brink makes it out to be. I recommend it as a worthwhile read.

2. Having said that, I disagree with the characterization of the left as purely nihilistic. I think that the left is less reverent of intellectual history because, well, its intellectual antecedents are embarrassing. Was Communism really a great hope for mankind? Was the Vietnam war really an imperialist undertaking carried out because of the desperate desires of corporations for markets? Was it a good idea for Britain, India, and other countries in the 1950s to place “strategic” industries under national control? Were wage and price controls the solution to inflation? etc.

But, undaunted, the Left does have its big ideas. I still think that folk Marxism, the idea that certain oppressed classes and those who claim to speak for them have inherent moral authority, is a “foundational” idea in Leftist thought.

I also see an emerging Leftist doctrine of Individual Helplessness. That is, individuals are too ignorant and irrational to make their own decisions. “Happiness research” fits in well with that doctrine.

Finally, there is what I call absolute environmentalism, which is the doctrine that all other considerations pale in comparison to Global Warming. As Deirdre McCloskey pointed out, this is a transcendental philosophy that becomes the Left’s substitute for religion.

3. I do not agree with Brink’s characterization of those who are neither ardent Democrats nor ardent Republicans as a sort of “center.” Consider instead the hypothesis that we are a long tail.

Topics:

Fear Not, Tom Friedman

Yesterday’s New York Times op-ed page had a couple of rather interesting pieces on global warming that merit some thought. The first, by Thomas Friedman, discussed how American capitalists – motivated as much by the hunt for profit as they are by the quest so save the world – are undertaking a “distributed Manhattan project” to develop economically attractive alternatives to fossil fuels. No centralized government program is necessary, thank you very much. The second, by environmental writer Gregg Easterbrook, described why he has switched sides in warming debate, moving from skeptic to cautious activist. Both are far more sensible than the usual screeds on those subjects published by the Gray Lady.

The Friedman piece was spot-on. Thousands of rather brilliant minds and billions of private dollars are being devoted to ambitious alternative energy R&D. While government sprinkles money here and there, the real work is being done by venture capitalists and entrepreneurial visionaries. If anything emerges from that creative soup, it will be primarily due to the fact that capitalism is the most powerful engine of technological change and innovation ever created by man. Waiting for the Congress or the Department of Energy to come up with something would be a triumph of hope over experience.

Friedman worries, however, that it won’t be enough. “If we want to see these alternatives move from little start-ups to large-scale commercial ventures, ‘we need to get the price mechanism right.’ When you’re talking about oil, you can’t just say ‘Let the market work’ because there is no free market in oil: the producers have a cartel, and governments – like ours – subsidize oil so we don’t pay the full cost.” Friedman proposes a price floor for gasoline ($3.50-$4.00 per gallon) and green purchasing practices for the federal government.

Fear not, Tom Friedman. The alternative energy revolution (if one is to come) will indeed be televised. First of all, to say “there is no free market in oil” is to say “I don’t know a damn thing about oil markets.” One would be hard-pressed to find a freer market on this planet than the one that trades in oil. There are a multiplicity of buyers and sellers who are free to sign long term contracts or to buy and sell in futures markets and spot markets with little regulatory interference. Secondary markets are likewise robust. Prices in wholesale markets are established by supply and demand and the only reason they don’t translate directly to the consumer is because governments are fond of taxing the hell out of the product at the retail level.

To the extent that there is governmental interference in those markets, it has been to artificially raise oil prices above what the market would otherwise deliver. Were it not for OPEC price fixing through production quotas, world oil prices would normally float around $5.50 per barrel according to Francisco Parra, a former Secretary-General of OPEC.

Now, you may not buy that number, but the overall point is hard to argue. Production costs in the Persian Gulf are so low – and economically recoverable oil is so plentiful – that only government conspiracy prevents a torrent of this stuff from hitting the market. Subsidies to the oil sector do indeed exist, but they do not affect marginal production costs, which is to say they do not affect consumer prices.

In sum, the claim that oil prices would be higher were it not for governmental favoritism has it exactly backwards. Competitors need no further help.

Gregg Easterbrook’s piece makes the point that there are few credentialed scientists left who publish in the peer-reviewed literature who are willing to argue that industrial emissions aren’t warming the planet. Fair enough. But the bulk of the so-called “skeptics” (like MIT’s Richard Lindzen or UVA’s – and Cato’s – Pat Michaels) never argued that point in the first place. Instead, they have argued that warming will likely be modest and of no particular consequence. Easterbrook acknowledges that this might well be true, but that he would prefer to hedge his bets with some sort of emission control policy.

Again, fair enough. Particularly risk averse people are more inclined towards this sort of thing than those less worried about such things, and there is no “correct” answer to the question of how much one should hedge against risks given that our risk preferences are all different and risk preferences are subjective.

But bear in mind that, over the past several years, the market has essentially slapped a huge tax on hydrocarbons. If environmentalists were asked back in 2002 if they would declare victory and go home with the passage of a $50 per barrel tax on oil as a means to tackle global warming, I’m pretty sure the answer would have been “yes – hell yes!” Well, that’s essentially what has happened. It may well be that the market has already delivered Easterbrook’s greenhouse insurance policy.

It Doesn’t Take a Rocket Scientist to See the Problem Here

Yesterday, the latest science scores on the National Assessment of Educational Progress (NAEP) came out, and the same sad pattern we’ve seen for years repeated itself. Between 1996 and 2005 scores rose in 4th grade, remained stagnant in 8th grade, and dropped for high school seniors. In other words, it’s still the case that the longer children stay in American schools, the worse they do.

Unfortunately, something else also remained the same: the shameless compulsion among people in Washington, despite decades of failure, to claim credit for good news and to have the solutions for bad. Case in point, Secretary of Education Margaret Spellings’s reaction to the NAEP report, in which she not only dubbed the federal No Child Left Behind Act a cure for failure in subjects the law directly addresses, but even those it doesn’t:

The Science 2005 Report….provides further evidence that accountability and assessments are working to raise achievement levels, even in subjects not directly tested under the No Child Left Behind Act [NCLB]. Fourth-graders made significant improvements in science over 1996 and 2000 levels, with the lowest-performing students making the largest gains and achievement gaps narrowing. However, eighth-graders showed no significant gains. And among 12th-graders, scores declined….The results illustrate the need to introduce NCLB’s accountability principles to our nation’s high schools.

So when the same sorry pattern repeats itself, the adults in charge of American education proclaim that they must be doing something right. In light of this, is it any wonder that our children do worse and worse the longer they stay in school?