Archives: October, 2010

Bootleggers & Baptists, Sugary Soda Edition

Here’s a poor, unsuccessful letter that impressed the relevant New York Times reporters, but not their editorial overlords:

It may seem counter-intuitive that bleeding-heart anti-hunger groups and “Big Food and Big Beverage” would ally to oppose Mayor Bloomberg’s request to prevent New Yorkers from using food stamps to purchase sugary sodas [“Unlikely Allies in Food Stamp Debate,” October 16].  Yet the “bootleggers and Baptists” theory of regulation explains that this “strange bedfellows” phenomenon is actually the norm, rather than the exception.

Most laws have two types of supporters: the true believers and those who benefit financially.  Baptists don’t want you drinking on the Lord ’s Day, for example, while bootleggers profit from the above-market prices that Blue Laws enable them to charge on Sundays.  Consequently, both groups support politicians who support Blue Laws.

Baptists-and-bootleggers coalitions underlie almost all government activities. Defense spending: (neo)conservatives and defense contractors.  President Obama’s new health care law: the political left and the health care and insurance industries. Ethanol subsidies: environmentalists and agribusiness. Education: egalitarians and teachers’ unions. The list goes on.

It’s easier to illustrate the theory (and sexier) when the bootleggers are non-believers who cynically manipulate government solely for their own gain.  Yet one can be both a Baptist and a bootlegger. The Coca-Cola Company may sincerely believe that society benefits when the government subsidizes sugary sodas for poor people.  Even so, a bootlegger-cum-Baptist can still rip off taxpayers.

This morning, NPR reported on another bootleggers-and-Baptists coalition: anti-immigration zealots and the prison industry.

The Libertarian Trend

There’s been lots of talk lately about a turn to the right in American politics. President Obama’s declining poll numbers, the sharp rise in opposition to his health-care plan during 2009, the growth of the grass-roots Tea Party movement, and the polls predicting a Republican takeover of the House of Representatives all point to a resurgence of conservatism in the electorate. But as I noted last year, there are also trends in the direction of social tolerance these days. Some indeed have described current political trends as a libertarian resurgence.

California voters are getting ready to vote on a marijuana legalization initiative, and polls show rising support. The New York Times points to other signs of change on the marijuana front: Pot has already become essentially legal for anyone in California who can tell a medical marijuana clinic that it would make him feel better. Attorney General Eric Holder has said that the federal government would back off its attempt to enforce the federal laws against medical marijuana in the 13 states that have legalized medical use. The threats to prosecute Michael Phelps for a bong hit were widely ridiculed. Those developments have led Andrew Sullivan, Jacob Weisberg, and CBS News to speculate about a “tipping point” for change — at last — in marijuana prohibition.

Meanwhile, TPM and AOL’s PoliticsDaily also see a tipping point for marriage equality. A majority of New Yorkers now join Gov. David Paterson in supporting same-sex marriage. That same ABC News/Washington Post poll finds that “in 2004, just 32 percent of Americans favored gay marriage, with 62 percent opposed. Now 49 percent support it versus 46 percent opposed — the first time in ABC/Post polls that supporters have outnumbered opponents.” Since the passage of California’s Proposition 8 in 2008, several states and the District of Columbia have granted marriage rights to same-sex couples.

This chart, prepared for me by Garrett Reim, shows recent trends in public opinion polls on several issues – support for smaller government, marriage equality, and marijuana legalization along with opposition to President Obama’s health care plan and to the job the president is doing. The latter two have moved more sharply, but all five lines move at least marginally in a libertarian direction:

Longer-term charts would show more of a trend on marijuana and marriage. See Nate Silver’s chart on rising support for marijuana legalization over the past 20 years. And here are three depictions of rising support for marriage equality over the past 15 to 20 years.

As some analysts have noticed, what’s going on in American politics is a shift in a libertarian direction. This chart provides some more evidence.

The Correct Perspective on Social Security Privatization

In today’s WSJ, William Shipman and Peter Ferrara have a column criticizing President Obama’s recent and vehement rejection of Social Security private accounts. I agree with Shipman and Ferrara — it’s rather shabby logic from a president of all Americans.

Shipman and Ferrara correctly note that Social Security privatization options provide participants with a choice — opt for private accounts or stay with the traditional system. In other words, people can choose their preferred risk set — political or market.  The lesson here is that there’s no avoiding risk.

Shipman and Ferrara suggest that all investments in private Social Security accounts do not have to be in stocks; people can choose bonds as well.  Better yet, they can hold the market basket of all stocks and bonds through low-cost index funds and hold some cash.  They can select the mix between these elements to optimize the risk-return trade-off given their abilities/preferences on the two. This investment strategy is transparent and easy to learn; it requires only a modicum of financial literacy.

However, I find their ”Joe the Plumber” example unpersuasive. Who cares if investing on the planet Mars yields 50 percent annual returns if we cannot do it unconditionally — that is, without incurring costs that would neutralize its higher-than-Social Security returns?  Those additional costs arise from having to borrow to pay existing Social Security beneficiaries their “promised” benefits, and from carrying market risks on personal account portfolios of Martian investments. 

Market risk represents a real cost, even if investments are for the long term.  The Shipman/Ferrara calculations take account of the recent financial crisis.  But they don’t take account of the potential for fat tails in the distribution of financial crises going forward.  The recent crisis could have been less severe.  But what if it had been more severe and had wiped out all savings for many more people?  Is there zero risk of such an outcome? A generalization on the basis of just one 40-year record of investment returns is inappropriate and insufficient for ruling out the importance of market risk.

In the authors’ defense, however, is the fact that the historical evidence of market returns is conditional on the existence of Social Security (and Medicare and the rest of the government’s panoply of welfare programs, regulations, etc.).  Without such broad and deep government interference in markets, the history of capital returns may have been different: returns may have been smaller (because the economy may have been better capitalized) but also more stable. And correlations between worker average wage growth and capital market returns may also have been smaller, yielding important diversification benefits from a privatized system of retirement saving.  But the bottom line is that we just don’t have adequate data of the correct type to make the “analytical” arguments that the authors attempt in their op-ed.  

Shipman and Ferrara (jointly and individually) have never explicated this latter argument clearly. They persist with their “higher-and-sexy-market-returns” argument in support of private Social Security accounts.  As such, I’m compelled to say that their argument continues to exhibit a real and serious deficiency.

On balance, however, when faced with two extremes — 1) political risk that the government will muck things up so badly that we and our children will suffer considerably reduced living standards, and 2) market risks that could devastate retirement savings because a recession/depression wipes out the value of lifetime savings — I would recommend an “interior solution” that straddles both worlds.  That is, continue a strictly limited government-run Social Security system and supplement it with a privatized element as many other countries have done, the UK and Australia being important examples. 

Some would say that we have such a system already, in the form of 401k, IRA and other tax-qualified saving plans. However, not all workers have access to 401k plans.  And the evidence is that despite those plans, national saving has declined considerably over the last three decades.  My analysis suggests that the reason for the decline in saving is the very existence of (supposedly) government-guaranteed Social Security (and Medicare) benefits that lull us into a false sense of security.  The key shortcoming is the lack of a system of universal Social Security personal accounts wherein a minimum amount of saving is mandatory (despite government mandates being bad in general). Such a system would provide a vehicle for the rich and the poor alike to partake of the wealth creation process that capital markets can and do provide. 

We’re not there today, and the correct direction from where we are is toward, not away, from Social Security personal accounts.

Topics:

It Ain’t So, Joe

Vice President Joe Biden is an affable fellow, which sometimes makes his tendency to exaggerate the truth somewhat amusing. However, Biden’s latest tall tale is as unamusing as it is wrong.

From the New York Daily News:

“Every single great idea that has marked the 21st century, the 20th century and the 19th century has required government vision and government incentive,” he said. “In the middle of the Civil War you had a guy named Lincoln paying people $16,000 for every 40 miles of track they laid across the continental United States. … No private enterprise would have done that for another 35 years.”

I’ll go straight to the 19th century railroads issue by referencing the work of two Cato scholars who probably know a little bit more about the topic than Joe Biden.

First, Randal O’Toole discusses railroads and land grants in his book Gridlock: Why We’re Stuck in Traffic and What to Do About It:

Early American railroads were built almost entirely with private funds. These railroads provided such superior transportation that by 1850 they had put most toll roads and canals out of business. Individual states still competed with one another for business—and may have offered various favors to the railroads serving those states…. For the most part, however, no federal and few state subsidies went to railroads in the eastern United States.

The Pacific Railway Act provided land grants and low-interest loans to the companies completing the railroad from Council Bluffs, Iowa to California. Later laws provided land grants (but no low-interest loans) for railroads from St. Paul to the Puget Sound, Los Angeles to New Orleans, Los Angeles to St. Louis, and Portland to San Francisco. In total, about 170 million acres were granted to the railroads, but Congress eventually took back about 45 million acres for nonperformance, leaving the railroads a maximum of about 125 million acres.

Congress expected that the railroads would sell the land to help pay for construction. In many instances, there was no immediate market for the land. Much of it was not farmable, and the United States had a surplus of wood so there was little market for timberland. In the latter half of the 20th century, the energy and timber resources on lands granted to the Northern Pacific, Southern Pacific, Sante Fe, and Union Pacific railroads proved very profitable. But this did not help them build the railroads in the first place.

In January 1893, the Great Northern Railway completed its route from St. Paul to Seattle without any land grants (except a small grant to a predecessor railroad) or other federal or state subsidies. The railway competed directly with the Northern Pacific, and to some extent with the Union Pacific, which served some of the same territory. The Great Northern’s builder, James J. Hill, knew that the other railroads had been built primarily for the subsidies, and as a result, they were poorly engineered and often followed circuitous routes. Hill built the Great Northern along the most direct route his engineers could find, so his operating costs were far lower than competitors’.

When the economic crash of 1893 took place a few months later, the Northern Pacific, Union Pacific, and almost all other western railroads went into receivership…Many people predicted that the Great Northern would not be able to compete and would follow the others into bankruptcy. But Hill managed to stay out of receivership, and the Great Northern remained the only transcontinental built in North America without government subsidies that never went bankrupt.

By 1930, American railroad mileage peaked at about 260,000 miles…only 18,700 of these miles were built with land grants or other federal subsidies.

Second, Jim Powell writes about government corruption and 19th century railroad subsidies in his book on Teddy Roosevelt, Bully Boy: The Truth About Theodore Roosevelt’s Legacy:

Whenever politicians interfered in the railroad business, however, corruption and inefficiency inevitably occurred. The most dramatic case involved construction of the first intercontinental railroad. Railroad lawyer Abraham Lincoln supported the project, and he made it a priority after he became president in 1861…

Stephen Ambrose and other historians have faulted private markets for lacking the capital or the imagination to build the transcontinental railroad. Certainly it was true that private entrepreneurs and financiers did not see the point or risking huge sums to build a railroad across a vast, empty, and sometimes mountainous terrain. Private entrepreneurs and financiers added value by developing the rail network bit by bit, supporting the expanding freight business. The process was gradual. Grandiose schemes like the transcontinental railroad drained resources from some regions to benefit special interests.

There was no money to be made from operating a railroad through a desolate wasteland, yet the federal government rewarded railroad contractors with big subsidies: a thirty-year loan at below market interest rates; twenty sections (12,800 acres) of government-owned land for every mile of track; and an additional subsidy of $48,000 for every mile of track laid in mountainous regions.

Thomas Durant, Oakes Ames, and other officers of the Union Pacific Railroad, which went a thousand miles west from Council Bluffs, Iowa, started the Credit Mobilier company in 1867 and retained it to do the construction. Credit Mobilier distributed to shareholders profits estimated at between $7 million and $23 million, depleting the Union Pacific’s resources. In an effort to stop congressional investigations, the officers bribed Speaker of the House James G. Blaine and other congressmen with Credit Mobilier stock. Seldom modest about their thievery, congressmen voted themselves a 50 percent pay raise. The Union Pacific Railroad fell deep into debt, without enough revenue from passengers or shippers, and went bankrupt in 1893.

It is not surprising that Joe Biden, an individual who has spent his entire career in government, possesses a child-like devotion to the federal government’s capabilities. Biden is a major proponent behind the Obama administration’s misbegotten plan to build a national system of high-speed rail. That Biden stands to achieve historic notoriety for helping facilitate this latest government boondoggle is only fitting.

See Cato essays on federal transportation subsidies and the Department of Transportation timeline, which notes the Credit Mobilier scandal:

1872: The New York Sun exposes the Credit Mobilier scandal, perhaps the largest business subsidy scandal of the 19th century. Credit Mobilier is a construction company financially controlled by the leaders of the Union Pacific Railroad that makes huge profits at taxpayer expense. Congressman Oakes Ames (R-MA), who is an agent of Credit Mobilier and part-owner, distributes shares of the firm’s stock to members of Congress at a discounted value. In return, those members treat Credit Mobilier favorably in a variety of ways, such as by voting to appropriate funds for the firm. The scandal illustrates the corruption that usually results when the government intervenes in the economy and subsidizes businesses.

Campaign Finance: Don’t Confuse Me with the Evidence

Today POLITICO Arena asks:

Is it worrisome that Americans spend on political advocacy – determining who should make and administer the laws – much less than they spend on potato chips, $7.1 billion a year?

My response:

For decades among modern liberals it has been an article of faith – devoid of evidence – that money corrupts politics and that there is too much money in politics – “unconscionable” amounts, we’ve been told, repeatedly. Thus the crusade to restrict and regulate in exquisite detail every aspect of campaign finance, beginning in earnest with the Federal Election Campaign Act of 1971 and culminating with the Bipartisan Campaign Reform Act of 2002 (McCain-Feingold). Yet after every new restriction along that tortuous course, ever more money has flowed into our political campaigns. But for all that, they’re no more corrupt than they’ve ever been. In fact, the best evidence of the fool’s errand that campaign finance “reform” has been all along is found in comparisons between states with little and states with extensive campaign finance regulations: When it comes to corruption, there’s not a dime’s worth of difference between the regulated and the unregulated states.

But all those regulations have accomplished two things that should give liberals pause. First, by virtue of their sheer complexity and cost, they pose a serious impediment to those who would challenge incumbents, who already have a major leg up on reelection. And second, because we cannot limit private campaign contributions and expenditures altogether, thanks to the First Amendment, the regulations have led to money being diverted away from candidates and parties and into other, often unknown, hands, over which the candidates and parties have no control – by design. As a result, we see candidates today having to disavow messages underwritten by people who would otherwise, but for the regulations, have given directly to the candidate or the party. But that outcome was absolutely predictable – and was predicted. Two good reasons to end this campaign finance regulation folly and let individuals and organizations contribute and spend as they wish. What are we afraid of, freedom?

Eminent Domain Shenanigans

Five years ago, in the landmark property rights case of Kelo v. New London, the Supreme Court upheld the forced transfer of land from various homeowners by finding that “economic development” qualifies as a public purpose for purposes of satisfying the Fifth Amendment’s Takings Clause.  In doing so, however, the Court reaffirmed that the government may not “take property under the mere pretext of a public purpose, when its actual purpose was to bestow a private benefit.”

State and federal courts have since applied that pretext standard in widely differing ways while identifying four factors as indicators of pretext: evidence of pretextual intent, benefits that flow predominantly to a private party, haphazard planning, and a readily identifiable beneficiary.  Moreover, since Kelo, 43 states have passed eminent domain reform laws that constrain or forbid “economic development” condemnations.

While many of these laws are strong enough to curtail abuse, in at least 19 states the restrictions are undercut by nearly unlimited definitions of “blight.”  The state of New York has seen perhaps the most egregious examples of eminent-domain abuse in the post-Kelo era, and now provides the example of Columbia University’s collusion with several government agencies to have large swaths of Manhattan declared blighted and literally pave the way for the university’s expansion project.  In this brazen example of eminent-domain abuse, the New York Court of Appeals (the highest state court) reversed a decision of the New York Appellate Division that relied extensively on Kelo’s pretext analysis and thus favored the small business owners challenging the Columbia-driven condemnations.  The Court of Appeals failed even to cite Kelo and ignored all four pretext considerations, instead defining pretext so narrowly that even the most abusive forms of favoritism will escape judicial scrutiny.

Cato joined the Institute for Justice and the Becket Fund for Religious Liberty in a brief supporting the condemnees’ request that the Supreme Court review the case and address the widespread confusion about Kelo’s meaning in the context of pretextual takings.  Our brief highlights the need for the Court to establish and enforce safeguards to protect citizens from takings effected for private purposes.  We argue that this case is an excellent vehicle for the Court to define what qualifies a taking as “pretextual” and consider the weight to be accorded to each of the four criteria developed by the lower and state courts.

The Supreme Court will decide whether to hear the case later this fall. The name of the case is Tuck-It-Away, Inc. v. New York State Urban Development Corp and you can read the full brief here (pdf).  You can read more from Cato on property rights here.

The Bogus Charge of ‘Shipping Jobs Overseas’

In the final push before Election Day, President Obama has been traveling the country criticizing Republicans for favoring tax breaks for U.S. companies that supposedly ship U.S. jobs overseas. It’s a bogus charge that I dismantle in an op-ed in this morning’s New York Post:

The charge sounds logical: Under the US corporate tax code, US-based companies aren’t taxed on profits that their affiliates abroad earn until those profits are returned here. Supposedly, this “tax break” gives firms an incentive to create jobs overseas rather than at home, so any candidate who doesn’t want to impose higher taxes on those foreign operations is guilty of “shipping jobs overseas.”

In fact, American companies have quite valid reasons beyond any tax advantage to establish overseas affiliates: That’s how they reach foreign customers with US-branded goods and services.

Those affiliates allow US companies to sell services that can only be delivered where the customer lives (such as fast food and retail) or to customize their products, such as automobiles, to better reflect the taste of customers in foreign markets.

I go on to point out that close to 90 percent of what U.S.-owned affiliates produce abroad is sold abroad; that those foreign affiliates are now the primary way U.S. companies reach global consumers with U.S.-branded goods and services; and that the more jobs they create in their affiliates abroad, the more they create in their parent operations in the United States. If Congress raises taxes on those foreign operations, it will only force U.S. companies to cede market share to their German and Japanese (and French and Korean) competitors.

I unpack the issue at greater length in a Free Trade Bulletin published last year, and on pages 99-104 of my recent Cato book, Mad about Trade: Why Main Street America Should Embrace Globalization.