Archives: 01/2010

Thursday Links

  • How Obama’s plan for health care will affect medical innovation in America: “Imposing price controls on drugs and treatments–or indirectly forcing their prices down by means of a ‘public option’ or expanded public insurance programs–would reduce the incentive for innovators to develop new treatments.”
  • Register now for the upcoming Cato forum featuring author Tim Carney and his new book, Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. Buy the book, here.

Karl Rove’s Hypocritical Call for Fiscal Rectitude

Karl RoveEven though I’ve been in Washington for almost 25 years, I still get shocked by the deceit and double-talk that characterizes this town. A perfect example can be found in today’s Wall Street Journal, which features a column by Karl Rove attacking President Obama for fiscal incontinence. I’m a big fan of condemning Obama’s big-government schemes, but Rove is the last person in the world who should be complaining about too much wasteful spending. After all, he was the top adviser to President Bush and the federal budget exploded during Bush’s eight years, climbing from $1.8 trillion to more than $3.5 trillion. More specifically, Rove was a leading proponent of the proposals that dramatically expanded the size and scope of the federal government, including the no-bureaucrat-left-behind education bill, the two corrupt farm bills, the two pork-filled transportation bills, and the grossly irresponsible new Medicare entitlement program.

Not surprisingly, Rove even tries to blame Obama for some of Bush’s overspending, writing that “…discretionary domestic spending now stands at $536 billion, up nearly 24% from President George W. Bush’s last full year budget in fiscal 2008 of $433.6 billion. That’s a huge spending surge, even for a profligate liberal like Mr. Obama.” This passage leads the reader to assume that Obama should be blamed for what happened in fiscal years 2009 and 2010, but as I’ve already explained, the 2009 fiscal year started about four months before Obama took office and 96 percent of the spending can be attributed to Bush’s fiscal profligacy. Yes, Obama is now making a bad situation worse by further increasing spending, but he should be criticized for continuing Bush’s mistakes.

Rove then has the gall to complain that Obama is “…growing the federal government’s share of GDP from its historic post-World War II average of roughly 20% to the target Mr. Obama laid out in his budget blueprint last February of 24%.” Yet a quick look at the budget data shows that the burden of federal spending jumped from 18.4 percent of GDP when Bush took office to more than 25 percent of economic output when he left office. Even if the (hopefully) temporary bailout costs are not counted, Bush and Rove are the ones who deserve most of the blame for today’s much larger burden of government. It should be noted, by the way, that none of the new spending under Bush was imposed over his objection. He did not veto any legislation because of excessive spending.

Finally, Rove concludes by writing that, “After a year of living in his fiscal fantasy world, Americans realize they have a record deficit-setting, budget-busting spender on their hands.” I’m almost at a loss for words after reading this sentence. All during the Bush years, I would complain to people in the Administration about wasteful spending. It didn’t matter whether I was talking to people at the Office of Management and Budget, the Council of Economic Advisers, the Treasury Department, or the National Economic Council. They almost always expressed sympathy for what I was saying, and then complained that the decisions were being made by the “White House political people.”

There’s an old joke about chutzpah and it features a guy who murders his parents and then asks the court for mercy because he’s an orphan. Karl Rove has taken the joke to the next level, but there’s nothing funny about the consequences for America.

What Is Seen and What Is Not Seen

Two items in Tuesday’s newspapers remind us of the often unseen costs of regulation and also of the often unseen benefits of market processes. In the Wall Street Journal, Prof. Todd Zywicki examines the likely consequences of a law to limit credit card interest rates and the fees they charge to merchants:

Card issuers might also reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.

Those are the kinds of unseen costs that most of us wouldn’t anticipate (that’s why economists talk about “unanticipated [or unintended] consequences” of action). Only after the fact were economists able to identify the specific costs of the regulation. It seemed like a good idea – limit the cost of something that consumers (voters) want. Did anyone predict the consequences? People probably predicted that annual fees would rise to compensate for the lost revenue from interchange fees. But did they anticipate a slowdown in innovation in security and identity-theft protection? Did they anticipate that card issuers would work harder to get higher-risk customers? Such regulation always impedes the optimal working of market processes, and thus inevitably delivers sub-optimal results. 

Meanwhile, we often observe conditions in the marketplace that don’t seem to make sense to us. So we assume something is wrong, maybe even corrupt. An article in the Washington Post written in a sober yet hysterical style raised the problem of “medical salesmen in the operating room.” Then, in a letter to the Post, Dr. Mark Domanski explains why it makes sense to have medical salesmen in the operating room. A Post article on the topic had been full of anecdotes about a salesman who “began his career selling hot dogs” hanging out in operating rooms and doctors who expressed outrage. If only they had thought to ask a surgeon in distant Arlington, Virginia:

I found David S. Hilzenrath’s Dec. 27 Business article, “The salesman in the operating room,” to be one-sided.

Of course, medical sales representatives work along doctors in operating rooms. As a surgeon, I always want a company rep in the operating room.

So, if you were having surgery that involved a complicated piece of equipment, wouldn’t you like somebody from the manufacturer to be there? I know I would.

Here’s why:

Remember when you tried to assemble that desk you bought from a furniture store? We all know how to use a screwdriver, but when something is off, it’s nice to know there is a number to call. What if you needed to put that desk together quickly because you needed it for something important? It would be nice if the company sent someone to make sure all the parts were there and in good order. That’s what a good rep does.

As the surgeon, I make the diagnosis and decide the treatment. No company representative tells me how to use a knife. But many products in the operating room are complex and change almost every year; they are getting better that fast.

When I am using a complex product, such as a plating system for fixing a jaw fracture, having the rep in the room ensures that the system is functional. I know all the parts will be there. I know that the right screw and plate will be handed to me at the right time.

Sometimes we call in the rep for an operation, and it turns out that the fracture does not need to be plated. No rep has ever suggested that I plate a fracture that didn’t need to be plated.

Members of Congress and activists are constantly reading articles about apparent problems and rushing off to propose legislation. These examples and countless more should remind us to think carefully before we coercively interfere in the decisions that millions, billions, of people make every day.

Technology Clarifies Debate About Whole-Body Imaging Technology

I was dismayed today to listen to a recorded radio program in which James Carafano of the Heritage Foundation debated Michael German of the ACLU about the whole-body imaging systems being considered for airports after the Christmas attempt to light a bomb on a flight into Detroit.

Carafano, who I like personally, is a careless debater. He misstated the law, insulted a caller to the radio program, and misstated people’s names as he mischaracterized their views—in particular, my name and my views.

The segment was recorded, so we can capture exactly what Carafano said:

When the Transportation Security Administration rolled out this technology, they went through a very long and detailed consultation period with privacy and civil liberties groups including Jim Lindsey at Cato. I remember Jim Lindsey, when we had a session on privacy and civil liberties, stood up and complimented Secretary Chertoff, and said, “Look, this is something that you’ve actually done right. You’ve gone out to the stakeholder community, and you’ve gone over the procedures with us and we’ve come up with procedures that we’re very, very comfortable with.” So I think the privacy issue is really a non-issue.

At a Heritage event in June, 2008, I rose to rebut how Secretary Chertoff dismissed privacy advocates. He said privacy advocates prefer “no-security” airlines and that they want people to use fraudulent documents. As I gently chastised him for that, I did compliment the work of one TSA official to minimize privacy consequences of millimeter wave, which does provide a margin of security.

The event was recorded, so we can capture exactly what I said: “Frankly, I think millimeter wave is not a bad technology. Peter Pietra at TSA has done a good job, I think, of getting the agency to design the system well.”

That’s it. I made no reference to a ”long and detailed consultation period,” and I don’t know of any such thing happening. I didn’t compliment Secretary Chertoff, but a deputy who—despite Chertoff, most likely—managed to instill some privacy protections in TSA’s use of whole-body imaging systems. As to my comfort, I’ll take “less uncomfortable than I would have been” over “very, very comfortable,” which is inaccurate.

As I’ve written elsewhere, ”I think [TSA privacy officer Peter Pietra has] done a creditable job of trying to build privacy protections into this system… . But maybe it’s not enough. We’re talking about trying to maintain privacy with a technology that’s fundamentally intrusive.”

Perhaps I’ve taken too subtle a position on millimeter wave: It provides a small margin of security at a high cost to privacy. With that, I’ll let the country make its decision, while I seek to moot this as a public policy issue: Airline security should be provided by airlines and airports, not the government.

I don’t think it’s appropriate to speak of me—by any name—as an endorser of this technology or the process of its adoption. Thanks to sound and video recording technology, the record can be clear.

Credit Card Dementia and Boundary Cases

credit cardsThe most interesting libertarian-related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:

I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:

- 1) What is your age?
- 2) What day of the week are you taking this survey?
- 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
- 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
- 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
- 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
- 7) Write a sentence you’d like us to hear about anything, good or bad!
- 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?

Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here…

I smell money – it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.

Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:

I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible – I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.

But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able-minded adults like children.

The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.

I’d add two responses of my own.

First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people – those who slightly overspend, then have to make it up later – those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)

Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases – How old before you can vote? How demented before a contract doesn’t bind? – are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in-group and the outliers before we have a polity in the first place.

What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth – with annoying boundary issues at every stop along the way – libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.

The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.

Global Markets Keep U.S. Economy Afloat

Three items in the news this week remind us why we should be glad we live in a more global economy. While American consumers remain cautious, American companies and workers are finding increasing opportunities in markets abroad:

  • Sales of General Motors vehicles continue to slump in the United States, but they are surging in China. The company announced this week that sales in China of GM-branded cars and trucks were up 67 percent in 2009, to 1.8 million vehicles. If current trends continue, within a year or two GM will be selling more vehicles in China than in the United States.
  • James Cameron’s 3-D movie spectacular “Avatar” just surpassed $1 billion in global box-office sales. Two-thirds of its revenue has come from abroad, with France, Germany, and Russia the leading markets. This has been a growing pattern for U.S. films. Hollywood—which loves to skewer business and capitalism—is thriving in a global market.
  • Since 2003, the middle class in Brazil has grown by 32 million. As the Washington Post reports, “Once hobbled with high inflation and perennially susceptible to worldwide crises, Brazil now has a vibrant consumer market …” Brazil’s overall economy is bigger than either India or Russia, and its per-capita GDP is nearly double that of China.

As I note in my Cato book Mad about Trade, American companies and workers will find their best opportunities in the future by selling to the emerging global middle class in Brazil, China, India and elsewhere. Without access to more robust markets abroad, the Great Recession of 2008-09 would have been more like the Great Depression.

Has HHS Buried Reports on ‘Head Start’?

According to sources within HHS cited by Heritages’ Dan Lips, a congressionally mandated report on the persistence of academic effects from the federal Head Start program was completed in draft form in 2008, but, nearly two years later, has not seen the light of day. A further follow-up report, to have been released in 2009 and covering persistence of effects through the 3rd grade, has also failed to materialized. Lips’ sources say the draft they saw in ‘08 showed no lasting effects.

This timeline meshes with what I was told in a July, 2008 e-mail exchange with a researcher familiar with the studies. The 1st grade report was indeed expected to be completed that summer – one and a half years ago. So where is it?

Could it be, as Lips’ sources seem to imply, that its results were not flattering to the very expensive federal preschool program and that this is not something HHS officials want the public to know? There’s one way to find out:  HHS, release the studies.

This is all rather important, what with the Obama administration seeking to lavish many additional billions on large-scale government pre-K, despite the paucity of results we’ve seen from such programs to date.