Archives: February, 2008

The Fear Factory

Via Hit and Run, the article from the February 7 Rolling Stone that Ben Friedman blogged about recently is now online. “The Fear Factory” discusses multiple cases where the FBI’s Joint Terrorism Task Forces have brought cases against defendants who “posed little if any demonstrable threat to anyone or anything.” Crucially, the story illustrates how information about the JTTFs’ activities are shrouded behind claims of secrecy.

This is no way to do law enforcement - or to secure a free country.

Bush’s Dismal Fiscal Record

Kevin Hassett of the American Enterprise Institute crunches a few numbers to estimate what would have happened to government spending if George Bush had simply maintained Bill Clinton’s non-defense budget. The sad answer is that the federal government would be about $400 billion smaller. The implications, particularly for tax policy, are staggering:

Bush has outspent Clinton by a mile. …If we now had the lower spending levels that Bush inherited, we could extend his tax cuts, repeal the alternative minimum tax, enact the current stimulus package, and still have a 10-year budget surplus of $1.9 trillion. And, remember, that allows spending to be adjusted up for the Iraq war and the war against terrorists. …It makes you sick to think about it. All that money wasted on ethanol and bridges to nowhere has accumulated into a pile that massive. Uncle Sam ate a whopping helping of apple pie every day for seven years, and now he is obese. This is important to bear in mind as we move forward to the general election. We don’t have a deficit because of Iraq, or the tax cuts, or the drug benefit. We have a deficit because the government grew fat. We can’t fix that with tax increases. Uncle Sam must go on a diet.

Nuclear Terror: How Big a Threat?

Steve Chapman has a typically smart piece describing John Mueller’s provocative “who’s afraid of nuclear terror?” argument. (.pdf)

The events required [for nuclear terror to] happen include a multitude of herculean tasks. First, a terrorist group has to get a bomb or fissile material, perhaps from Russia’s inventory of decommissioned warheads. If that were easy, one would have already gone missing.

Besides, those devices are probably no longer a danger, since weapons that are not scrupulously maintained (as those have not been) quickly become what one expert calls “radioactive scrap metal.” If terrorists were able to steal a Pakistani bomb, they would still have to defeat the arming codes and other safeguards designed to prevent unauthorized use. As for Iran, no nuclear state has ever given a bomb to an ally—for reasons even the Iranians can grasp. Stealing some 100 pounds of bomb fuel would require help from rogue individuals inside some government who are prepared to jeopardize their own lives. The terrorists, notes Mueller, would then have to spirit it “hundreds of miles out of the country over unfamiliar terrain, and probably while being pursued by security forces.”

Then comes the task of building a bomb. It’s not something you can gin up with spare parts and power tools in your garage. It requires millions of dollars, a safe haven and advanced equipment—plus people with specialized skills, lots of time and a willingness to die for the cause. And if Al Qaeda could make a prototype, another obstacle would emerge: There is no guarantee it would work, and there is no way to test it…

Chapman concludes:

None of this means we should stop trying to minimize the risk by securing nuclear stockpiles, monitoring terrorist communications and improving port screening. But it offers good reason to think that in this war, it appears, the worst eventuality is one that will never happen.

My eyebrows went up an inch or three the first time I heard this argument at the APSA convention last year, but as with so much of John Mueller’s work, when you stop to think about his arguments, it’s hard to find a genuinely weak link in his logic. In any event, it’s a discussion that deserves to be had.

Puncturing the Two-Americas Myth

John Edwards has dropped out of the presidential race, but the left continues to trumpet his class-warfare arguments. The two-Americas theme is endlessly regurgitated, particularly the notion that the rich are getting richer and poor are getting poorer (with the obvious implication that the rich are somehow causing greater poverty). These assertions have been repeatedly discredited (most recently by a Treasury Department study), but practitioners of the politics-of-envy seem impervious to factual arguments. So it highly unlikely that they will bother to read – much less understand – a powerful op-ed in the New York Times by Michael Cox and Richard Alm of the Dallas Federal Reserve Bank. Cox and Alm look at consumption data rather than income data and they find that there is only a modest difference in the living standards of the rich and poor:

…renewed attention is being given to the gap between the haves and have-nots in America. Most of this debate, however, is focused on the wrong measurement of financial well-being. …Looking at a far more direct measure of American families’ economic status — household consumption — indicates that the gap between rich and poor is far less than most assume, and that the abstract, income-based way in which we measure the so-called poverty rate no longer applies to our society. The top fifth of American households earned an average of $149,963 a year in 2006. …they spent $69,863 on food, clothing, shelter, utilities, transportation, health care and other categories of consumption. The rest of their income went largely to taxes and savings. The bottom fifth earned just $9,974, but spent nearly twice that — an average of $18,153 a year. How is that possible? …those lower-income families have access to various sources of spending money that doesn’t fall under taxable income. These sources include portions of sales of property like homes and cars and securities that are not subject to capital gains taxes, insurance policies redeemed, or the drawing down of bank accounts. While some of these families are mired in poverty, many (the exact proportion is unclear) are headed by retirees and those temporarily between jobs, and thus their low income total doesn’t accurately reflect their long-term financial status. So, bearing this in mind, if we compare the incomes of the top and bottom fifths, we see a ratio of 15 to 1. If we turn to consumption, the gap declines to around 4 to 1. …Let’s take the adjustments one step further. Richer households are larger — an average of 3.1 people in the top fifth, compared with 2.5 people in the middle fifth and 1.7 in the bottom fifth. If we look at consumption per person, the difference between the richest and poorest households falls to just 2.1 to 1.

Judicial Oversight vs. Unchecked Presidential Power

The Wall Street Journal has an editorial today that makes some blatantly misleading assertions about the FISA debate:

By far the worst threat is an amendment from Senator Chris Dodd (D., Conn.) to deny legal immunity to telephone companies that cooperated with the government on these wiretaps after 9/11. The companies face multiple lawsuits, so a denial of even retrospective immunity would certainly lead to less such cooperation in the future.

This is precisely the goal of the left, which has failed to get Congress to ban such wiretaps directly but wants to use lawsuits to do so via the backdoor. We’re told that Hillary Clinton and Barack Obama are co-sponsoring the Dodd amendment, no doubt for political reasons as they compete for left-wing votes in their nomination fight. But they had better hope the effort fails, because as President they’d surely want the same telecom cooperation.

In fact, “the left” got Congress to “ban such wiretaps directly” thirty years ago, when Congress passed FISA in the first place. Glenn Greenwald cites chapter and verse here, but the Journal’s position doesn’t even make sense on its own terms. If warrantless domestic eavesdropping isn’t illegal, then why is the White House pushing so hard for immunity? If the White House or the telecom companies believe that they haven’t violated FISA, or that FISA is unconstitutional, they have every opportunity to make that argument to the courts. If the Ninth Circuit doesn’t give them a fair hearing, the Supreme Court—which now includes two Bush appointees and seven Republican appointees—certainly will. AT&T and Verizon haven’t advanced the argument that warrantless domestic wiretapping legal under FISA because they know perfectly well that it’s not.

The idea that Pres. Obama or Pres. Clinton will be unable to get the “cooperation” of the telecom companies in the future is equally misguided. FISA requires telecom companies to cooperate with the government after the government gets a warrant. What’s at issue in this debate isn’t whether companies should “cooperate”; everyone agrees that they should. The issue is whether the “cooperation” should occur with or without judicial supervision. Some of us believe that judicial supervision of domestic eavesdropping is an important safeguard for Americans’ privacy. Others, apparently including the Wall Street Journal’s editorial board, want to return us to the pre-FISA days when the NSA routinely rifled through innocent Americans’ international communications. Strangely enough, they never seem to phrase it that way.

Rev. Huckabee at CPAC

A Feb 8 memo from Mike Huckabee’s campaign chairman and manger, Ed Rollins and Chip Saltsman, explained how the Governor expected to win the Republican nomination. “Governor Huckabee has done best among hardcore Republicans, the activist base. That’s one reason why we are looking forward to Governor Huckabee.s speech to the legendary CPAC, the Conservative Political Action Conference, in DC … You’d better believe that the folks gathered at the OmniShoreham hotel are the go-getters who make or break primary elections. Just wait till they get a load of Mike Huckabee! … And now, with the endorsement of Dr. James Dobson, who is the ‘gold standard’ of social conservatism, we fully expect that Movement Conservatives – those who fight the good fight on Life, on Marriage, on the Second Amendment – will increasingly rally to our cause.”

Gov. Huckabee, exuding all the charm of a southern preacher, told CPAC that he wasn’t schooled in math (or economics), he was schooled in miracles. But even miracles did not produce good math, even with that crowd. A straw poll of presidential favorites among 1705 attendees showed Mitt Romney first with 21% of the vote, followed by Rudy Giuliani at (17%), Sam Brownback (15%) and New Gingrich (14%). Huckabee was an also-ran among “go-getter conservatives who make or break primary elections,” even though he’s the only one running.

Stirring so much religion into politics seems to make even conservative activist nervous. Let the radical Islamists combine church and state –we prefer ours separate, thanks.

Or perhaps the CPAC activists were not persuaded that government agents trying to collect a 30% sales tax would be any gentler or less intrusive than IRS agents. Abolishing the IRS may sound great until you realize that collecting a huge sales tax at the retail level means the government would have to snoop into everything you buy or sell. And, no, the constitution does not grant feds the police power to force state tax collectors to do such dirty work.

There have been some excellent op eds questioning the Fair Tax in The Wall Street Journal by Bruce Bartlett last August 25 and Jerry Bower  on January 8.  Bartlett, a top Treasury tax official from 1988 to 1992, also wrote a solid longer paper on the topic. Disagree with them if you can, but don’t just shout them down. Logic and evidence tend to be more reliable than miracles.

I wrote to Bartlett and Bower saying they had courage to even mention the FairTax, since doing so always brings a flood of cultish email lecturing about the fairness of being fair and how unfair it is to say otherwise. Don’t bother sending such complaints to me, by the way – it now goes straight to my spam folder. Chances are, I’ve read a bit more about taxes than you have, and don’t really welcome any amateur lectures on the subject.

I just added the following comments about a explanation of “Huckanomics” (written by filmmaker Donovan Quinn) on the mikehuckabee.com site. I post it here on the off-chance that it might get, well, misplaced :

No economist would say, as such FairTax fans do, “With businesses no longer passing on the costs of payroll taxes and other imbedded [embedded] costs to their customers, retail prices will drop.” [although one implied that could happen if and only if wages fell too]

If that were true, then everything would be cheaper in states with no income tax, because all tax savings are assumed to be passed on to consumers. Yet the economists’ “Law of One Price” explains why the same good cannot sell for greatly different prices in two places, aside from shipping costs.

If businesses could simply pass on their income and payroll taxes by raising prices, why don’t we buy everything from tax havens which impose little or no direct taxes?

Why do we import anything from Germany and Japan, where income and payroll taxes are much higher than ours? Aren’t their higher income and payroll taxes embedded in higher prices? No, of course not. Business can’t just set prices wherever they like. Prices are set on global markets by supply and demand, not by average cost.

All taxes (including sales taxes) are borne by people in their capacity as suppliers of labor and capital – they can’t just be shifted at will by changing prices.

Experiments with sales taxes above 10% have always failed because intermediate (wholesale) transactions must be exempt to avoid multiple layers of taxation. With a high tax at the retail level, those with access to tax-free wholesale prices would have a huge incentive to sell on the black market. That is very easy with eBay and Pay Pal, and sellers do not have to be in the USA.

Taking a leap of faith is fine, but not when it comes to learning economics. That takes some work.

My 1991 Critique of Extended Unemployment Benefits

Some things never change. Another President Bush was ambushed with extended unemployment benefits shortly before another presidential campaign. Some data in this oldie are dated (though not wildly different from today), but the arguments seem worth another look:

The Cure for Unemployment
Alan Reynolds
The Wall Street Journal , October 3, 1991

Democratic Congressmen hope to make George Bush look like a hard-hearted villain because of his reluctance to spend an extra $6 billion to extend unemployment benefits beyond the usual six months. Yet the current job situation is scarcely an emergency. Unemployment was higher than it is today in all but two of the dozen years from 1975 through 1986. Today, the average spell of unemployment — 14 weeks — is still lower than it was even as recently as 1987. Half of the unemployed find new jobs in fewer than seven weeks.

The congressional push to extend unemployment benefits aims to help a relatively elite minority of the unemployed. Last year, only 39% of the unemployed collected any benefits at all. This was largely because about half of those unemployed did not lose their jobs. They either quit their jobs, were reentering the labor force after a prolonged absence or were young people who had not held jobs before. Another reason many unemployed do not qualify for benefits is that they already have another job lined up, and are just taking some extra time off between employers. Or, they find a new job within three weeks — the waiting period to qualify. And, of course, unemployed illegal immigrants are less than eager to register with government agencies.

Those who are not eligible for unemployment benefits rarely take six months or more to find a job. Conversely, those unemployed for long periods are usually among those who do receive benefits, and often receive supplemental union benefits that can approximate their usual after-tax wages (particularly with some casual labor “off the books”). Moreover, cyclical layoffs account for most of the long-term unemployed, who, because of their seniority, have good reason to wait to be recalled.

Robert Topel of the University of Chicago figures that unemployment benefits could be extended to an entire year without spending another dime. How is that possible? Simply make people wait four weeks rather than three before they qualify for their first check. There are so many more people who collect benefits for a few weeks than for a few months that the savings from that one week would cover the costs.

Regardless of how extended benefits are financed, though, the unemployment rate would surely be significantly higher than otherwise, simply because more people would be subsidized to remain unemployed for longer periods. Studies in the Monthly Labor Review have shown that those who have supposedly been “unable to find a job” in 26 weeks miraculously find one within a few weeks after their benefits run out. They either quit waiting to be rehired in cyclical industries, or accepted second-best jobs that required, for example, moving to a new city.

Giving people almost a year to search for the “right” job could nonetheless be justified, in theory, because it is not in society’s interest to have many people working below their ability. But too long a period of subsidized job search is likely to reduce the intensity with which people look for work, and to delay economically desirable relocation of workers away from areas of high unemployment to areas where they are needed.

Another negative effect of prolonged benefits is that it would further subsidize employers that frequently lay off workers at the expense of those that do not. The tax employers pay for unemployment benefits is already too high, in an actuarial sense, on firms that provide stable employment, and too low on firms that do not. If layoff-prone employers had to bear more of the cost of the dole, they would adopt less volatile strategies of hiring and firing.

Over the longer haul, the more serious problem is not a shortage of jobs, but a shortage of people willing to work at the after-tax wages offered. From 1980 to 1989, the percentage of working-age people who were either working or looking for work rose from 63.7% to 66.5%, as marginal tax rates fell. But labor force participation rates began to dip at the start of 1990, and have now fallen back to 66.2%.

Many wives with working husbands, young people living with parents, and people of early retirement age have simply dropped out of the job market since the 1990–91 increases in Social Security taxes and in marginal federal and state income tax rates. They are indeed “discouraged workers,” but they are discouraged because their added work brings little added after-tax income, not because they couldn’t find jobs if they tried. Leaving the labor force means not trying.

Considering that the economy emerged from recession only a few months ago, the percentage of the unemployed who have quit their jobs is quite high — over 12%, compared with fewer than 8% in 1982–83. And new jobseekers (graduates) account for an unusually small share of the unemployed — 8.4% at mid-year, compared with 13% in 1984. Like the decline in labor force participation, this suggests the problem is not simply a shortage of jobs, but insufficient incentive, after taxes, to accept job offers and stay on the job. Congress should be less concerned about subsidizing lengthy periods between jobs, and far more concerned about tax policies that are shrinking the labor force and the tax base.