Archives: 03/2008

The Wall Street Journal, the Dollar and the Fed

Today’s Wall Street Journal editorial, “The Buck Stops Where?” is the latest in a long series of editorials and articles suggesting the Federal Reserve has been “reckless” to cut interest rates on bank reserves. This story relies heavily on some questionable arguments about the dollar’s exchange rate.

Here are some quotes from the editorial followed by my comments:

  1. “The flight from the dollar has made U.S.-based investments less attractive at a time when the U.S. financial system urgently needs to raise capital.”

    That is almost backwards. It now costs fewer Euros or yen to buy U.S. shares or build U.S. plants than it did a few months ago, which makes U.S. investments more attractive to foreigners, not less attractive. It is true, however, that if the dollar were expected to fall sharply in the future, then risk of exchange rate losses might discourage foreigners from buying dollar-denominated assets and also encourage U.S. investors to buy foreign securities.

  2. “If the dollar had merely retained its value against the euro, oil would be in the neighborhood of $70 a barrel. Dollar weakness explains a large part of the oil price surge.”

    The reason a lower dollar makes oil prices rise is that it makes oil cheaper than it would otherwise be in euro, so Europeans buy more oil than they otherwise would – bidding-up the price (at least in dollars). We can’t be sure what would have happened to oil prices if the Fed had kept interest rates on bank reserves high enough to maintain the dollar’s value against the euro, because higher U.S. interest rates would have had some adverse effects on the world economy (and therefore on industrial demand for energy). If the euro had been stabilized by cutting ECB interest rates, by contrast, the effect on oil prices would have been much different. The oil price is a ratio of barrels to dollars, which means it is partly real and partly monetary.

  3. “Exports in goods are being more than offset by the rising cost of oil imports.”

    Actually, the U.S. current account deficit in fourth quarter was down 12.7% from a year before. Incidentally, purchases of U.S. government securities by foreign central banks were reduced by $148.8 billion last year, while private foreign investments in Treasuries rose by $202.1 billion.

  4. “Import prices have surged nearly 14% in the last year.”

    Import prices were up by 13.6% in the 12 months ending in February only because the price of petroleum imports was up by 60.9%. The price of all other imports was up 4.5%. While it makes some sense to blame rising import prices on dollar weakness, it does not make sense to suggest that petroleum prices are uniquely affected by the dollar, unlike most other imports.

    There is also some reverse causality–with rising oil prices contributing to a lower dollar and not just the other way around. Rising commodity prices lift the exchange rates of commodity-exporting countries like Canada and Australia, which shows up as a drop in the trade-weighted U.S. dollar.

David Malpass of Bear Stearns is an excellent economist who has supported a strong dollar in several Journal op eds. But Malpass does not argue, as the editorial page does, that a weaker exchange rate is necessarily inflationary. Indeed, one of the graphs in David’s December 6 forecast was aptly titled, “Trade-weighted dollar not well-connected to CPI inflation.” Even using 3-year trends, there’s virtually no connection.

On March 14, the Journal’s “Ahead of the Tape” column argued that the Fed is wrong to focus on core inflation, because “inflation is on the rise and energy and food have a lot to do with it.”

Should the Fed raise interest rates when world oil prices go up and lower interest rates when oil prices fall?

That is, after all, what it means to say the Fed should base policy on “headline” inflation, including energy prices (and the impact of ethanol subsidies on food prices).

While he was an academic researcher, Ben Bernanke showed that central bank reactions to oil prices have caused or aggravated virtually every postwar recession.

Recessions eventually cause oil prices to fall and central banks to ease aggressively – years after the recession is over (as in 2003-2004), as I noted in “Interest Rates and Dollar Fundamentals” (WSJ Nov. 15, 2007)

What is different this time is mainly a matter of timing – the Fed easing before recession rather than long after. What also appears different, so far, is that the Fed is acting alone, which largely explains the euro’s recent strength. Yet the ECB has always followed the Fed, after many months, and probably will again.

The Fed may be at risk of overdoing it, but making that case requires looking at some historical variables (or a model, like John Taylor’s) that have a decent track record for predicting inflation.

The trade-weighted dollar has been falling since February 2002, and the price of gold has risen nearly as long. If exchange rates or gold prices could generate reliable forecasts of inflation, then we should have seen escalating inflation for the past six years.

Boiling the Voter-ID Teapot

Last week, former Federal Election Commissioner Hans A. von Spakovsky published a Heritage Foundation Legal Memorandum entitled Stolen Identities, Stolen Votes: A Case Study in Voter Impersonation. Contrary to claims made by prominent newspapers and attorneys, he argues, in-person voting fraud is a real problem.

The evidence he provides is a vote fraud ring that began operating in 1968 and that was broken up more than 25 years ago in 1982. Impersonation fraud can be committed at polling places, and a voter-ID requirement would make it a little harder, but a quarter-century-old case is hardly evidence of a significant problem.

How states secure their voting processes should turn on how they structure their voting processes. States might choose a voter ID requirement if they can do so in a way that balances security against access, convenience, and privacy. Absentee balloting is generally a far greater threat to the security of elections than weak or non-existent ID requirements at polling places.

The thing that matters most is avoiding a uniform national voter ID requirement. I wrote about this in my TechKnowledge piece Voter ID: A Tempest in a Teapot That Could Burn Us All: “To ensure that American voters enjoy their franchise in a free country, clumsy voter ID rules should be avoided. A national voter ID system should be taken off the table entirely.”

Rep. Bachman Misleads Her Constituents

Over the last few weeks, I’ve pointed out a few of the misleading arguments being deployed on behalf of expanding executive power in the wiretapping debate. But I think this op-ed in my home state’s largest newspaper, the Star Tribune, may take the cake. It’s written by Rep. Michelle Bachman (R-MN), and it’s a brazen effort to mislead my fellow Minnesotans about the wiretapping debate without saying anything that’s technically false. Rep. Bachman writes:

One of the critical tools that has allowed us to keep the homeland safe after 9/11 has been the Protect America Act. It updated the Foreign Intelligence Surveillance Act (FISA) to deal with new, deadly challenges in this age of terror – enabling intelligence services to immediately listen to phone calls made between foreign terrorists.

Now, it’s true that the Protect America Act was passed “after 9/11.” It’s also true that the Protect America Act was passed after Pearl Harbor. And the Battle of Hastings, for that matter. The key point is that the Protect America Act was passed in August 2007, six years after 9/11.

This matters because, as Kurt Opsahl at EFF points out, Bachman goes on to imply that “attack after attack,” including the liquid explosives plot in the summer of 2006, was stopped by the Protect America Act. Indeed, she writes, “last year, the Heritage Foundation compiled a list of 19 confirmed terror plots against American targets that had been thwarted.”

Here is the report Bachman is presumably referring to. The 19 attacks range from the Richard Reid shoe bomb attack in December 2001 to the JFK Airport plot in June 2007. In other words, all 19 thwarted attacks occurred before the Protect America Act was enacted in August 2007. Bachman never explicitly says otherwise, but she’s obviously doing her best to give her constituents the impression that the PAA was enacted sometime in 2001 or 2002. Reasonable people could disagree about whether this qualifies as a lie. But I think it’s hard to escape the conclusion that Rep. Bachman has a low opinion of her constituents’ intelligence.

The Remarkable Moral Deafness of Rep. Rohrabacher

Walter Pincus has a writeup today of a House hearing last Tuesday on what we should be doing about Iraqi refugees. Rep. Gary Ackerman (D-N.Y.) remarked on the failure of the administration to help Iraqis who have worked for the Coalition as translators:

“I can’t remember President Bush speaking about this refugee crisis or the need for the United States to respond aggressively to it except in passing,” Rep. Gary L. Ackerman (D-N.Y.) said.

As for the Iraqi translators, some 500 more of whom have signed up to seek visas, Ackerman said, “I don’t understand why the administration isn’t processing them … unless that was never their intention and all along they were willing to talk a good game but leave these people high and dry.”

Then there’s the Republican position, as presented by Rep. Dana Rohrabacher (R-Calif.):

“They’re wonderful people who’d like to live here, especially the ones who have helped us, but the last thing we want to do is to have people who are friendly to democracy … moving here in large numbers at a time when they’re needed to build a new, thriving Iraq.”

So Rep. Rohrabacher knows better than these Arabic-speaking, living-in-Iraq Iraqis what’s best for them. And, as it happens, what’s best for them is to stay in the hellish maelstrom of violence that is Iraq, despite the stated views of these folks themselves. Somehow the foolish idea has gotten into their heads that they’re owed something for having put their lives on the line, day in and day out, to assist the Coalition. In fairness to Rep. Rohrabacher, he’s offering them something: the right to help salvage the grandiose political science theories of men like Rohrabacher. And for that, we should be sure they’ll be eternally grateful.

My colleague Malou Innocent had a piece on the plight of Iraqis who’ve aided the Coalition back in December. Give it a read and see if Rohrabacher’s position doesn’t become all the more uncomfortable.

The Dangers of Warrantless Wiretapping

My friend (and Cato alum) Julian Sanchez has a great op-ed in the Los Angeles Times on the history of wiretapping abuse. Supporters of warrantless wiretapping act as though it’s outrageous to suggest that unchecked surveillance powers might be abused. But history suggests that abuses of wiretapping power was the norm, rather than the exception, in the pre-FISA legal regime:

In 1945, Harry Truman had the FBI wiretap Thomas Corcoran, a member of Franklin D. Roosevelt’s “brain trust” whom Truman despised and whose influence he resented. Following the death of Chief Justice Harlan Stone the next year, the taps picked up Corcoran’s conversations about succession with Justice William O. Douglas. Six weeks later, having reviewed the FBI’s transcripts, Truman passed over Douglas and the other sitting justices to select Secretary of the Treasury (and poker buddy) Fred Vinson for the court’s top spot.

“Foreign intelligence” was often used as a pretext for gathering political intelligence. John F. Kennedy’s attorney general, brother Bobby, authorized wiretaps on lobbyists, Agriculture Department officials and even a congressman’s secretary in hopes of discovering whether the Dominican Republic was paying bribes to influence U.S. sugar policy. The nine-week investigation didn’t turn up evidence of money changing hands, but it did turn up plenty of useful information about the wrangling over the sugar quota in Congress – information that an FBI memo concluded “contributed heavily to the administration’s success” in passing its own preferred legislation.

Julian also describes abuses in the Harding, Johnson, and Nixon administrations. He concludes:

It’s probably true that ordinary citizens uninvolved in political activism have little reason to fear being spied on, just as most Americans seldom need to invoke their 1st Amendment right to freedom of speech. But we understand that the 1st Amendment serves a dual role: It protects the private right to speak your mind, but it serves an even more important structural function, ensuring open debate about matters of public importance. You might not care about that first function if you don’t plan to say anything controversial. But anyone who lives in a democracy, who is subject to its laws and affected by its policies, ought to care about the second.

Harvard University legal scholar William Stuntz has argued that the framers of the Constitution viewed the 4th Amendment as a mechanism for protecting political dissent. In England, agents of the crown had ransacked the homes of pamphleteers critical of the king – something the founders resolved that the American system would not countenance.

In that light, the security-versus-privacy framing of the contemporary FISA debate seems oddly incomplete. Your personal phone calls and e-mails may be of limited interest to the spymasters of Langley and Ft. Meade. But if you think an executive branch unchecked by courts won’t turn its “national security” surveillance powers to political ends – well, it would be a first.

It’s My Way or No Highway

Congressional earmarks have received a lot of media attention lately, despite the fact that they make up only a small percentage of the overall budget.

Even advocates of limited government sometimes bemoan the disproportionate focus on earmarks and the relative lack of attention paid to larger spending items, like entitlement programs.

But the full story on earmarks isn’t simply their direct impact on the budget. Earmarks are also used by Congressional leadership to raise the public profile of incumbents in tough reelection fights, entice members to vote for controversial bills, and enforce party discipline.

The latter was on display yesterday when, as The Hill notes, the chairman of the House Appropriations Committee, Rep. David Obey (D-WI), “canceled meetings with a New Orleans delegation because a Louisiana lawmaker had defied party leadership on a procedural vote the night before.”

In canceling the meeting, Obey was “punishing” Rep. Charlie Melancon (D-La.) by refusing to allow his constituents to make a pitch for their earmark wish list to the House’s chief appropriator. More broadly, Obey sent a clear message to other lawmakers: recalcitrance will jeopardize your earmarks.

Using taxpayer funds to enforce party discipline is a blatant misuse of taxpayer dollars. Further, this practice undercuts a chief argument of earmark defenders who claim that the process is an essential means to fast-track funds to critical local projects, like roads and infrastructure. Unless, of course, truly critical projects exist only in the districts of loyal partisans.

In other earmark news, yesterday the Senate overwhelmingly rejected a one-year moratorium on earmarks. Hardly a surprise.

It Ain’t Necessarily So

Last week I observed that existing hobbled “school choice” programs have yet to transform American education because they fall far short of free markets. NRO’s Carol Iannone responds:

Well, of course! And necessarily so…. public education could never be completely open to a fully free market…. [And even if it were,] the results would not be pretty, because the market cannot ensure quality.

She endeavors to back up these assertions with an analogy to cable television (which apparently includes programming she finds lacking in culture). But, Ms. Iannone, it ain’t necessarily so, and we needn’t resort to analogy to find that out. Free education markets actually exist today, and have existed at various times and places throughout history, all the way back to the classical Athenians (whose cultural contributions were so enduring that they can still be found on cable television, 2,500 years later).

Rather than imagining what we think a free education marketplace might look like; rather than dreaming about how wonderful an idealized set of government standards could be; I suggest that we actually compare real education markets to real government-run and intrusively regulated schools. That is what I have spent the past decade-and-a-half doing. Based on my own and others’ findings, I recommend unfettered markets, coupled with financial assistance to ensure universal access, as the best way of fulfilling the ideals of public education. There are many possible ways of getting there, from the continued gradual expansion of certain existing programs to the passage of stronger ones such as Cato’s own Public Education Tax Credit.

I recently summarized and linked to the huge preponderance of econometric research favoring market over monopoly schooling, so let me just add a further detail here: the evidence does not support the view that government-mandated standards improve upon the operation of true free education markets. On the contrary, it shows that government licensing of teachers has little effect other than to eliminate from the teaching pool many of the most capable applicants and to drive up wages. And in those countries where real market schools can be compared to government schools, the curricula demanded by parents in the education marketplace are generally more in tune with the labor market, and more effectively and efficiently taught, than the curricula handed down by government appointed experts. This echoes the historical pattern I documented in my book Market Education: The Unknown History.

I invite government standards advocates, who claim that support for market education is based on “faith,” to actually look at the research and then to look at themselves in the mirror. Which of us has the better empirical case?