Archives: 05/2011

Ben Bernanke: Central Planner

There’s a great piece in the spring issue of The Independent Review on Federal Reserve Chairman Ben Bernanke by San Jose State Professor Jeffrey Rogers Hummel.  Although a bit long, its well worth the read for anyone wanting to understand both Bernanke’s thinking and his actions during and since the financial crisis.

First, Prof. Hummel discusses the differences between Bernanke’s and Milton Friedman’s explanations for the Great Depression.  Those that debate whether Bernanke’s actions, especially the quantitative easings, would be approved of by Friedman will get a lot out of this discussion.  From this comparison, you get the point that Friedman was concerned about overall credit conditions and liquidity, whereas Bernanke is less focused on the monetary factors than on the impairment of credit intermediation, which explains his support of selective bailouts.

Hummel’s comparison of Greenspan and Bernanke is also insightful, particularly since many (myself included) often lump the two’s policies together.  From the analysis, it is clear that Greenspan falls into the Friedman camp, his “rescues” were of the financial system in general, and not of specific firms.

One might say a bailout is a bailout, so what’s the difference between rescuing the system and rescuing individual firms within the system?  Certainly that’s a view I have some sympathy for.  The “Greenspan put” was as much a contributor to reckless risk-taking as anything else.  Hummel, however, discuses why this difference ultimately matters, and why it shows Bernanke to fit the role of economic central planner.  In short, the facts are presented that during the financial crisis, Bernanke did not actually increase overall liquidity by much, he re-directed it to those firms he deemed most important.  This process of reducing liquidity to some sectors while re-directing it to others, arguably less efficient sectors, goes a considerable distance in explaining some of the decline in both aggregate demand and consumption in 2008.

Again, the piece is one of the more accessible and insightful I’ve read on Bernanke in quite a while.

Tuesday Links

  • “Vouchers and tax credits differ from one another in important ways, and Pennsylvanians deserve to have their representatives consider them one at a time.”
  • “So, if the Supreme Court’s precedents defer to Congress’ assessments of its powers, but Congress is relying for ‘constitutional authority’ on the Supreme Court’s precedents, then NO ONE is actually looking at the Constitution itself to see if a bill is within Congress’ enumerated powers.”
  • “Carbon dioxide, thought to be a significant cause of the warming of surface temperature since the mid-1970s, is currently the respiration of the world’s economic civilization. Getting rid of it isn’t as simple as banning CFCs and switching to another refrigerant.”
  • “As Arthur Schlesinger Jr. explained in his book of that name, the presidency’s transformation from limited, constitutional office to Supreme Warlord of the Earth has been ‘as much a matter of congressional abdication as of presidential usurpation.’”
  • It’s the expenditures, stupid:

New Paper Explains Why Low-Tax Jurisdictions Should Resist OECD Attacks against Tax Competition and Fiscal Sovereignty

One of the biggest threats against global prosperity is the anti-tax competition project of a Paris-based international bureaucracy known as the Organization for Economic Cooperation and Development. The OECD, acting at the behest of the European welfare states that dominate its membership, wants the power to tell nations (including the United States!) what is acceptable tax policy.

I’ve previously explained why the OECD is a problematic institution - especially since American taxpayers are forced to squander about $100 million per year to support the parasitic bureaucracy.

For all intents and purposes, high-tax nations want to create a global tax cartel, sort of an “OPEC for politicians.” This issue is increasingly important since politicians from those countries realize that all their overspending has created a fiscal crisis and they are desperate to figure out new ways of imposing higher tax rates. I don’t exaggerate when I say that stopping this sinister scheme is absolutely necessary for the future of liberty.

Along with Brian Garst of the Center for Freedom and Prosperity, I just wrote a paper about these issues. The timing is especially important because of an upcoming “Global Forum” where the OECD will try to advance its mission to prop up uncompetitive welfare states. Here’s the executive summary, but I encourage you to peruse the entire paper for lots of additional important info.

The Paris-based Organization for Economic Cooperation and Development has an ongoing anti-tax competition project. This effort is designed to prop up inefficient welfare states in the industrialized world, thus enabling those governments to impose heavier tax burdens without having to fear that labor and capital will migrate to jurisdictions with better tax law. This project received a boost a few years ago when the Obama Administration joined forces with countries such as France and Germany, which resulted in all low-tax jurisdictions agreeing to erode their human rights policies regarding financial privacy. The tide is now turning against high-tax nations – particularly as more people understand that ever-increasing fiscal burdens inevitably lead to Greek-style fiscal collapse. Political changes in the United States further complicate the OECD’s ability to impose bad policy. Because of these developments, low-tax jurisdictions should be especially resistant to new anti-tax competition initiatives at the Bermuda Global Forum.

To understand why this issue is so important, here’s a video I narrated for the Center for Freedom and Prosperity.

 

And here’s a shorter video on the same subject, narrated by Natasha Montague from Americans for Tax Reform.

Last but not least, here’s a video where I explain why the OECD is a big waste of money for American taxpayers.

Once More Into the Obamacare Breach

Today we filed Cato’s sixth brief supporting the various legal challenges to Obamacare, this time in the D.C. Circuit.  Like Tom Joad, wherever the fight has been, we’ve been there, and now it’s in our backyard.

In February, Judge Gladys Kessler of the D.C. district court granted Congress the power to regulate “mental activity” in a decision that flippantly disregarded the core distinction between action and inaction: “Making a choice is an affirmative action, whether one decides to do something or not do something.”  The frightening scope of that opinion has proven more harmful than helpful to the government, which has shifted its focus away from Kessler’s sweeping language by describing the mandate as merely a requirement that people pre-pay for the health care they will inevitably use.

Our latest brief deals more directly with that added nuance—even more so than the brief Cato filed two weeks ago.  Due to a local circuit rule requiring amici with similar arguments to file jointly, Cato coordinated a brief involving six other organizations—Mountain States Legal Foundation, Pacific Legal Foundation, Competitive Enterprise Institute, Goldwater Institute, Revere America, and Idaho Freedom Foundation—as well as Prof. Randy Barnett.  

Using Cato’s previous brief as a starting point, amici worked together to adjust our arguments in light of new ideas coming from both the government and academia.  The core argument, however, remains the same: regardless of any linguistic contortions, the non-purchase of health care is fundamentally a non-economic inactivity that Congress cannot reach under the Commerce and Necessary and Proper Clauses.  

Allowing Congress the power to conscript citizens into economic transactions not only goes beyond current precedent, but would give Congress a general and limitless police power to do whatever it thinks best, checked only by politics.  

In addition to the doctrinal arguments we presented in previous briefs, here we remind the court that limiting Congress’s power is the explicit purpose of Article I of the Constitution and address the relationship of the individual mandate to United States v. Comstock, the most recent interpretation of the limits on federal power under the Necessary and Proper Clause (a case in which Cato also filed a brief, that Ilya Somin covered in our Supreme Court Review, and about Trevor Burrus and I recently published a law review article).  

The D.C. Circuit will hear the case of Seven-Sky v. Holder in September.  Given the state of litigation around the country, we will likely not be filing another Obamacare brief before the action reaches the Supreme Court—which it’s expected to later this year, after the first few circuit courts issue their rulings.

Transportation: Top Down or Bottom Up?

America’s transportation system needs more centralized, top-down planning. At least, that’s what the Brookings Institution’s Robert Puentes advocates in a 2,350-word article in the May 23 Wall Street Journal.

If that seems like an unlikely message from America’s leading business daily, perhaps it is because Puentes couched it in terms such as “spending money wisely,” solving congestion, and “adhering to market forces.” But not-so-hidden behind these soothing phrases is Puentes real argument: “America needs to start directing traffic” by developing “a clear-cut vision for transportation.” Such a vision “must coordinate the efforts of the public and private sectors.”

“The big question,” Puentes says, “is how much it will all cost.” This is a diversion from the real big question, which is: who will do this coordination? In Puentes view, the answer is smart people in Washington DC who can best determine where to make “critical new investments on a merit basis” using such tools as an infrastructure bank.

One of the results of that system, Puentes makes clear, will be more spending on transit so that commuters have “more transportation choices.” He specifically mentions the ridiculous Subway-to-the-Sea being planned in Los Angeles. Never mind that, as the Antiplanner has previously noted, Puentes’ goal of extending transit to more jobs is both extremely expensive and will have little impact on actual transit ridership.

The real problem with America’s transportation system is not a lack of vision but too many people with visions trying to impose them on everyone else through lengthy and expensive planning processes. A bridge or road that once might have taken five years to plan and build now takes twenty or more, if it ever gets built at all, thanks to all these visions. (Of course, when it comes to expensive rail transit projects, Puentes thinks Congress should waive environmental impact statements and other expensive planning processes.)

The real solution is not more top-down planning but a bottom-up system that responds to actual user needs rather than to inside-the-beltway visions. That means funding transportation out of user fees and not out of infrastructure banks, which–no matter how “merit-based” in intent–will alway end up being politically driven.

In a bottom-up system, individual transit and highway agencies (or better yet transit and highway companies) would be funded by their users, so they would have incentives to provide and expand service where needed by those users. Such a system would be far more likely to relieve congestion, save energy, and meet Puentes’ other goals.

Thanks to our heavily planned and heavily subsidized transit industry, the average urban transit bus uses 80 percent more energy per passenger mile than Amtrak. But that’s not because Amtrak is energy-efficient: the average Amtrak train uses 60 percent more energy per passenger mile than intercity buses. Unlike both Amtrak and urban transit buses, private intercity buses aim to meet market demand, not political demand, so they tend to fill about two-thirds of their seats while Amtrak fills only half and transit buses less than a quarter.

Achieving a bottom-up transportation system means getting the federal government out of transportation decision-making. One way would be to have states take over federal gas taxes as proposed by New Jersey Representative Scott Garrett.

To the extent that the federal government distributes any transportation funds to states at all, they should be distributed using formulas, not grants, because formulas are much harder to politically manipulate. Ideally, the formulas should give heavy weight to the user fees collected by each state to reinforce, rather than distract from, the bottom-up process.

Puentes’ top-down vision will waste hundreds of billions of dollars on little-needed transportation projects while it does little to relieve congestion, save energy, or reduce auto emissions. A bottom-up process will save taxpayers money and increase mobility, which should be the real goals of any transportation policy.

The Supreme Court and the California Prison System

This morning the Supreme Court issued a remarkable ruling [pdf] concerning California’s prison system.   Because of years of pervasive overcrowding, there have been systemic violations of the Constitution’s ban on Cruel and Unusual Punishments.  To remedy those violations, the Court affirmed a lower court order to reduce the prison population.  I was not surprised to learn that Justice Anthony Kennedy authored the majority opinion in this case, Brown v. Plata. In a 2003 speech to the American Bar Association (reprinted in my book In the Name of Justice), Kennedy tried to raise more awareness about America’s prison system.  He made the point that every citizen ought to take an interest in the prison system–it is not just the realm of correctional personnel.  Here’s an excerpt from Kennedy’s speech:

The subject [of prisons] is the concern and responsibility of every member of [the legal] profession and of every citizen.  This is your justice system; these are your prisons. … [W]e should know what happens after the prisoner is taken away.  To be sure, the prisoner has violated the social contract; to be sure he must be punished to vindicate the law, to acknowledge the suffering of the victim, and to deter future crimes.  Still, the prisoner is a person; still, he or she is part of the family of humankind.

Were we to enter the hidden world of punishment, we should be startled by what we see. Consider its remarkable scale.  The nationwide inmate population today is about 2.1 million people.  In California … this state alone keeps over 160,000 persons behind bars.  In countries such as England, Italy, France, and Germany, the incarceration rate is about 1 in 1,000 persons.  In the United States it is about 1 in 143.

The numbers are only the beginning of the story.  Do not assume that the government has the facilities to house the prisoners that are sentenced.  California is housing far beyond the design capacity of its prisons–double. That is, it has designed a system for 80,000 but has stuffed 160,000 into the buildings.  The sheer number of inmates has overwhelmed the facilities and staff. Kennedy’s opinion details the abysmal conditions, but I will mention a few:

  • In one prison, 54 men share one toilet
  • medical staff sometimes use closets and storage rooms for ill patients-rooms without adequate ventalition.
  • exam tables are not disinfected after use by prisoners with communicable diseases
  • men held for hours and hours in telephone booth sized cages with no toilet
  • California’s prison system averages one suicide a week (80% higher than the national average)
  • Men with medical problems go untreated and die.  These are not cancer patients.  These are preventable deaths.  For example, a man with stomach pain goes five weeks without medical treatment and dies.

A corrections official from Texas toured California’s facilities and he testified that he has been in the field 35 years and was just appalled.  He’d “seen nothing like it.”

Four conservative justices–Scalia, Thomas, Roberts and Alito–dissented from the ruling.  Scalia said the outcome was “absurd” – “perhaps the most radical injunction issued by a court in our Nation’s history.”  Justice Alito said the Constitution “imposes an important–but limited–restraint on state authority in [the prison] field.  The Eighth Amendment prohibits prison officials from depriving inmates of ‘the minimal civilized measure of life’s necessities.’”  The conservatives concede, as they must, that the California prison system is really bad, but they argue that it is not yet so awful so as to warrant judicial intervention and a population reduction order.  Kennedy and the liberals in the majority (Breyer, Ginsburg, Sotomayor, and Kagan) make a persuasive case that California’s elected officials have had ample opportunity to address the systemic problems, but have let them fester year after year.

For related Cato work, go here and here.

Don’t Let the Aphorism Be the Enemy of Thought

I am often told that pointing out the serious shortcomings of government-funded school vouchers and the relative superiority of education tax credits is a case of “making the perfect the enemy of the good.”

It’s isn’t.

That is a misapplication of Voltaire’s famous aphorism. What the aphorism exhorts is that we not pursue an unattainable perfection when a good alternative is within reach. Education tax credits are not only attainable, they are usually easier to obtain than vouchers. Consider a recent example: Pennsylvania’s state House has voted 190 to 7 to expand its existing EITC tax credit program while the state Senate has been deadlocked for weeks looking for the bare minimum of votes to pass a voucher bill.

On top of that, it is dubious to cast vouchers as “the good” when they will expand the scope of compulsion of taxpayers to funding many new types of schooling to which they might well object, impose heavy new regulations on private schools (homogenizing the available “choices”), and more pervasively curtail direct payment by consumers in favor of third party government payment.

Even those who may not be fully convinced that vouchers are inferior should pause before trying to enact them in states that already have education tax credit programs with good growth prospects. Why make the dubious the enemy of the pretty darned good?