Archives: 02/2010

Google Execs Convicted in Italy

Google executives who had nothing to do with the creation, uploading, review, or display of a video have been criminally convicted in Italy for its brief appearance on a Google site.

The video, which showed Italian children taunting an autistic schoolmate, was promptly taken down after Italian authorities notified Google. The company assisted the authorities in locating the girl who uploaded it, according to Google’s account. (Her subsequent conviction makes it safe to assume that Google was cooperating with a criminal investigation as required by Italian law.) But four Google employees were charged with criminal defamation and failure to comply with the Italian privacy code.

That can’t happen here—unless we let it happen here.

This is a good time to review and extoll the Communications Decency Act—not because it attempted to censor Internet speech (that part was overturned), but because it protected providers of interactive services (like Web sites) from having to become gatekeepers over Internet content.  The law shielded them from liability for what users of their services do.

I believe common law would have eventually reached that result had the statute not been passed, but without protections like that in the CDA’s section 230, the wide-open, rollicking, soapbox-for-all Internet we know would not exist—it would be just a plussed-up television because everything uploaded would have to get a professional’s review for potential liability.

That’s what Italy stands to end up with if it allows liability against providers of interactive services. It’s what we stand to end up with if the many threats to CDA section 230 get traction.

Ban on Short Sales Benefits Banks and Hurts Investors

Today, in what seems like an endless string of 3-2 votes, the SEC moved to restrict the ability of investors to short stocks, claiming that such restrictions would restore stability and protect our financial system.  The truth couldn’t be more different.  Short sellers have long been the first, and often only, voice raising questions about corporate fraud and mismanagement.  For instance, shorts exposed the fraud at Enron, WorldCom and other companies while the SEC largely slept.

Bush’s SEC, lead by former Congressman Chris Cox banned the shorting of various financial industry stocks during the crisis.  The SEC then, as now, would have us believe that Bear, Lehman, AIG, Fannie, Freddie and others were not the victims of their own mismanagement, but rather victims of bear raids by short sellers.  In another instance of Obama and his appointees reading from the Bush playbook, SEC Chair Mary Shapiro finds ever creative ways to expand Cox’s misguided policies.

Short sellers only profit if they end up being correct.  Sadly Washington instead believes in punishing market mechanisms that work and throwing increasingly more money at failed agencies, like the SEC.  Rather than attacking short sellers we should applaud them for doing the SEC’s job.  But then if we had more short selling, providing greater incentives for investors to root out fraud, we might start to question why we even have the SEC.

We Can’t Lose If We Don’t Leave

On last Sunday’s Defense News TV, I suggested that although we are officially supposed to have zero troops in Iraq by the end of next year, there was a real prospect that we might have a harder time getting out than most analysts are suggesting.  This suggestion was roundly pooh-poohed, and I’m aware that it’s a minority view.  An extreme minority view.

Monday, though, Gen. Odierno remarked that the withdrawal could be slowed.  Although we’re supposed to be down under 50K troops by the end of this summer,

“I have contingency plans that I’ve briefed to the chain of command this week that we could execute if we run into problems,” Gen. Odierno said. “We’re prepared to execute those.”

The commander said he would consider slowing the withdrawal “if something happens” in Iraq over the next two to three months.

This is nothing like a knockout punch for my position, but it’s interesting.  So is Tom Ricks’ column in the New York Times today, which says, as best I can tell, that we should stay in Iraq basically forever:

All the existential questions that plagued Iraq before the surge remain unanswered. How will oil revenue be shared among the country’s major groups? What is to be the fundamental relationship between Shiites, Sunnis and Kurds? Will Iraq have a strong central government or be a loose confederation? And what will be the role of Iran (for my money, the biggest winner in the Iraq war thus far)?

[…]

Extending the American military presence will be even more politically controversial in Iraq, and for that reason, it would be best to let Iraqi leaders make the first public move to re-open the status of forces agreement of 2008, which calls for American troops to be out of the country by the end of next year. But I think leaders in both countries may come to recognize that the best way to deter a return to civil war is to find a way to keep 30,000 to 50,000 United States service members in Iraq for many years to come.

This, too, is far from a knockout punch for my view that we might be in Iraq well beyond 2011.  But keep an eye out for more pieces like this from analysts like Ricks, who is well-connected to the counterinsurgency gurus here in DC and to Odierno himself.

Symbols, Security, and Collectivism

The state of Nevada is one of few that is tripping over itself to comply with the REAL ID Act, the U.S. national ID law.

It’s worth taking a look at the sample license displayed in this news report, especially the gold star used on the license to indicate that it is federally approved.

The reasons for “improving” drivers’ licenses this way are complex. The nominal reason for REAL ID was to secure the country against terrorism. The presence of a gold star signals that this the card bears a correct identity and that watch-list checking has ensured the person is not a threat.

Don’t be too thrilled, though. The weakness of watch-listing was demonstrated again by the Christmas-day attempt on a Northwest airlines flight. The underpants bomber wasn’t listed, so checking his name against a watch-list didn’t do anything.

The real reason for REAL ID, though, was anti-immigrant fervor. If the driver licensing system distinguished between citizens and non-citizens, the theory goes, possession of a driver’s license can be used to regulate access not just to driving, but to working, financial services, health care, and anything else the government wants. Illegal presence in the country could be made unpleasant enough that illegal immigrants would leave.

Alas, human behavior isn’t that simple. If ‘driven’ to it—(I had to…)—people will get behind the wheel without licenses—and without the training that comes with licensing. Then they’ll crash. When the governor of New York briefly de-linked driver licensing and immigration status in 2007, he cited public safety and the likelihood that insurance rates would fall, to the benefit of New Yorkers. (When the state of New Mexico de-linked driver licensing and immigration status, uninsured vehicle rates in the state dropped from 33 percent to 17 percent.) But the governor suffered withering criticism from anti-immigrant groups and quickly reversed course.

Like linking immigration status and driving, linking immigration status and work through an ID system imposes costs on the law-abiding citizen. Complications and counterattacks raise costs on workers and employers while reducing the already small benefits of such programs. I articulated those in my paper on employment eligibility verification.

REAL ID transfers well-being and wealth from individuals to the state.

But let’s return to this gold star…

The article says that the Nevada ID is becoming one of the hardest in the country to forge. But it’s hard to be sure. The gold star may undermine the anti-forgery goal.

Forgery is the making or altering of a document with the intent to defraud or deceive. The question is not whether the whole document can be made—I’m sure the new Nevada license is bristling with security doodads—it’s whether a document can be made to deceive.

Watch for the people who check licenses to fall into the habit of checking the gold star and taking that as evidence that the document is “good.” By a small but relevant margin, ID checkers will forget to compare the picture on the license to the face of the person presenting it. (Gold star? Go.) Putting a gold star on the license may make forgery easier. It’s not about the technical feasibility of creating the card; it’s how to fool people.

But this gold star. It will be taken as a shorthand for “citizen.” There are examples from the past in which governments used symbols to assign status to populations. It’s easy to go overboard with such comparisons, but the Nevada license, with this gold star, takes a dramatic step toward carving the population into groups—groups that can be divided. Maybe soon two stars will be for military veterans, or people licensed to own firearms. Three stars could be for elected officials.

With this gold star system, a Nevada license-holder is a little less of a free, independent person with rights and privileges based on individual merit. A Nevadan becomes an undifferentiated status-holding subject. We’re a long way from the day when the “gold star” people are assigned to better rail cars, but the idea is that it should never happen. We should reject entirely the tools that could allow the government to do that.

Son of the Stimulus

Like the sequel to a horror film, the politicians in Washington just passed another stimulus proposal. Only this time, they’re calling it a “jobs bill” in hopes that a different name will yield a better result.

But if past performance is any indicator of future results, this is bad news for taxpayers. By every possible measure, the first stimulus was a flop. But don’t take my word for it. Instead, look at what the White House said would happen.

The Administration early last year said that doing nothing would mean an unemployment rate of nine percent. Spending $787 billion, they said, was necessary to keep the unemployment rate at eight percent instead.

So what happened? As millions of Americans can painfully attest, the jobless rate actually climbed to 10 percent, a full percentage point higher than Obama claimed it would be if no bill was passed.

The President and his people also are arguing that the so-called stimulus is responsible for two million jobs. Yet according to the Department of Labor, total employment has dropped significantly – by more than three million – since the so-called stimulus was adopted. The White House wants us to believe this sow’s ear is really a silk purse by claiming that the economy actually would have lost more than five million jobs without all the new pork-barrel spending. This is the infamous “jobs saved or created” number. The advantage of this approach is that there are no objective benchmarks. Unemployment could climb to 15 percent, but Obama’s people can always say there would be two million fewer jobs without all the added government spending.

To be fair, this does not mean that Obama’s supposed stimulus caused unemployment to jump to 10 percent. In all likelihood, a big jump in unemployment was probably going to occur regardless of whether politicians squandered another $787 billion. The White House was foolish to make specific predictions that now can be used to discredit the stimulus, but it’s also true that Obama inherited a mess – and that mess seems to be worse than most people thought.

Moreover, it takes time for an Administration to implement changes and impact the economy’s performance. Reagan took office in early 1981 during an economic crisis, for instance, and it took about two years for his policies to rejuvenate the economy. It certainly seems fair to also give Obama time to get the economy moving again.

That being said, there is little reason to expect good results for Obama in the future. Reagan reversed the big-government policies of his predecessor. Obama, by contrast, is continuing Bush’s big-government approach. Heck, the only real difference in their economic policies is that Bush was a borrow-and-spender and Obama is a borrow-and-tax-and-spender.

This raises an interesting question: Since last year’s stimulus was a flop, isn’t the Administration making a big mistake by doing the same thing all over again?

The President’s people actually are being very clever. Recessions don’t last forever. Indeed, the average downturn lasts only about one year. And since the recession began back in late 2007, it’s quite likely that the economic recovery already has begun (the National Bureau of Economic Research is the organization that eventually will announce when the recession officially ended).

So let’s consider the political incentives for the Administration. Last year’s stimulus is seen as a flop. So as the economy recovers this year, it will be difficult for Obama to claim that this was because of a pork-filled spending bill adopted early last year. But with the passing of a supposed jobs bill, that puts them in a position to take credit for a recovery that was already happening anyway.

That may be smart politics, but it’s not good economics. The issue has never been whether the economy would climb out of recession. The real challenge is whether the economy will enjoy good growth once the recovery begins. Unfortunately, the Obama Administration policies of bigger government – combined with the Bush Administration policies of bigger government – will permanently lower the baseline growth of the United States.

If America becomes a big-government welfare state like France, then it’s quite likely that we will suffer from French-style stagnation and lower living standards.

Businesses Cite Government as the Problem

According to the latest Small Business Economic Trends survey conducted by the National Federation of Independent Businesses, 31 percent of respondents said the single most important problem facing small businesses is “poor sales.” “Taxes” and “Government Regulations and Red Tape” came in second and third place at 22 percent and 13 percent respectively. Combining the two, the biggest problem facing small businesses according to respondents is government.

Unfortunately, when the media discusses the NFIB survey, it conveniently ignores this fact. Take for example this February 11th post from The Economist’s Free Exchange blog:

What’s the biggest problem?

‘Small business owners entered 2010 the same way they left 2009, depressed,’ said William Dunkelberg, NFIB chief economist. ‘The biggest problem continues to be a shortage of customers.’

That will tend to make life hard on a businessman. Of course, that biggest of problems won’t be going away until the economy begins adding more jobs than it’s destroying, and obviously small businesses aren’t there yet. The Obama administration is betting that by creating an incentive to hire, it will change the math—firms will move from cutting jobs on net to adding jobs on net, which will increase the number of customers out there, which will, in turn, feed more hiring. Hopefully, that will be enough, but the proposed $33 billion looks awfully small given the 15 million unemployed.

Free Exchange, which cheerleads almost daily for more government spending, somehow sees in the NFIB survey a need for more government. But in the survey’s write-up, the NFIB makes it perfectly clear that its membership doesn’t view more government spending as part of the solution:

Instead, Congress is focusing on a health care bill that features crippling taxes and mandates for small firms, fully expecting to have it in place and implemented (10 years of taxes, seven years of “reform”) this year with unemployment at 10 percent and expected by many to rise. Lawmakers also allowed the minimum wage to rise by nearly 11 percent in July 2009, catapulting teen job loss to over 500,000 and an unemployment rate of 27 percent in the second half even though the economy started growing. This was double the loss in the first half when GDP growth was plummeting. If the administration wants to count “jobs created and saved” it should also be accountable for “jobs destroyed or prevented.

On top of all that bad news, small business owners fear Washington will then feel the need to “stimulate” us with even more spending and larger government (and taxes), the death knell for private sector vitality…The loss of a lock on 60 Senate votes for the Democrats may be encouraging to some owners, but the President and Congressional leaders still sound like they plan to press on with their agenda, not good news for small business owners.

The NFIB released a new report yesterday that surveyed small businesses on their ability to obtain credit. 51 percent of respondents cited slow or declining sales as their principle problem. Only 8 percent cited access to credit. Although taxes and regulations weren’t choices, the second largest problem (21 percent) cited by respondents was “the unpredictability of business conditions.”

From the report:

The second most cited immediate problem (21%) is the unpredictability of business conditions. Virtually the same level (23%) of concern with predictability was expressed one year ago. Data produced elsewhere suggest that the nature of unpredictability (certainty) may be shifting somewhat from economic to political concerns, such as new taxes. Regardless of its cause however, the risk to investment rises during periods of unpredictability, making investment less likely to occur at that time. Confidence matters. Small Business Economic Trends, for example, shows capital investment over the last several months bouncing around record low levels and staying there.

Thus, we have more evidence that “regime uncertainty” is contributing to the economic downturn. But reading the Washington Post’s write-up on the NFIB report, one will find zero mention of the concern small businesses have with government fiscal policies. The Post article merely says this:

William J. Dennis Jr., the NFIB senior research fellow who headed the survey, said recent administration proposals, including $30 billion in new federal aid for community banks, were not likely to help. But he also said the NFIB was at a rare loss for ideas on what the government should do instead. ‘We’re really in a quandary right now,’ Dennis said.

Speaking of that $30 billion in federal TARP subsidies to community banks, the Washington Post also reports that Treasury officials are considering excluding the small business-lending initiative from oversight by Neil M. Barofsky, the special inspector general for the TARP bailout. Gee, might that have anything to do with the unflattering reports on TARP from Barofsky’s office?

Alas, Washington doesn’t appear to be listening to what small businesses and the American people are saying they want: less taxes, spending, and regulations. Instead, in a vain effort to end a recession that government policies helped foster, policymakers continue to throw trillions of taxpayer dollars off the wall in the hopes that something sticks.

Note: See Chris Edwards’ recent testimony before the Senate Finance Committee on taxes and small business job creation.

A New Fed-Treasury Accord

Charles Plosser, President of the Federal Reserve Bank of Philadelphia, gave an important speech last week.  He mounted a strong defense of what is known as Fed independence. “Central bank independence means the central bank can make monetary policy decisions without fear of direct political interference.”

Toward the end of the speech, Plosser admitted the Fed had brought criticism down on itself by blurring the line between monetary and fiscal policy.  In the process, the central bank greatly expanded its balance sheet and substituted “less liquid, long-term assets, such as securities backed by mortgages guaranteed by Fannie Mae and Freddie Mac, for the short-term securities it typically held before the crisis.”

To extricate itself from conducting fiscal policy and get back to doing conventional monetary policy, Plosser called for a new Fed-Treasury Accord.  (He harkened back to the Accord of 1951, which ended the Fed’s wartime obligation to support the prices of Treasury bonds.)  Under the proposal, the Fed would swap out its illiquid assets for Treasury obligations.  Responsibility for public support of housing would revert to Treasury and be subject to Congressional appropriations.

Additionally, and very importantly, Plosser recommended ending or severely curtailing the Fed’s expanded lending authority, which enabled it to balloon its balance sheet and conduct fiscal policy. (That is the section 13(3) authority.) “Never again” is the message of Plosser’s speech.

It was a landmark speech by a high Fed official.