Archives: August, 2011

Hurricane Irene as Economic Stimulus

Oh, dear. Oh, dear. No matter how many times economists debunk the broken window fallacy, not a natural disaster goes by that journalists don’t try to cheer us up by saying “at least it will stimulate economic growth.” This time it’s Josh Boak (no relation!), the economics reporter (!) at Politico, who was “educated at Princeton and Columbia.” And Sunday afternoon he posted this story:

Irene: An economic blow or boost?

The power outages and shuttered airports may stop the engines of commerce for several days, but Hurricane Irene might have provided some short-term economic stimulus as billions of dollars will likely be spent to repair the damage to the East Coast over the weekend.

Cumberland Advisors Chairman David Kotok saw the storm as likely jolting employment in construction, an industry paralyzed by the bursting of the real estate bubble in 2008.

“We are now upping our estimate of fourth-quarter GDP in the U.S. economy,” he said in an email Sunday. “Billions will be spent on rebuilding and recovery. That will put some people back to work, at least temporarily.”

Kotok expects GDP growth — which limped along at less than a percentage point for the first half of the year — to exceed 2 percent in the last three months of the year and potentially reach 3 percent.

Mark Merritt, president of crisis-management consulting firm Witt Associates, said the hurricane should provide a bump in economic activity over the next few months.

“After a disaster, there’s always a definite short-term increase,” Merritt said. “There will be furniture bought, homes repaired, new carpet, new flooring, all the things affected by flooding.”

The story quotes no economist, who might have pointed out that the destruction of homes, businesses, and other property cannot actually be good for the economy. As economist Sandy Ikeda summed it up last year, the argument is that “paying $100 to replace a broken window somehow creates more prosperity than having an intact window and spending that $100 on something else.” He goes on to ask, as many economists have: If destruction is so good for an economy, why wait for a hurricane or a bombing raid? Why not just bomb your own cities?

As Frederic Bastiat explained the “broken window fallacy,” a boy breaks a shop window. Villagers gather around and deplore the boy’s vandalism. But then one of the more sophisticated townspeople, perhaps one who has been to college and read Keynes, says, “Maybe the boy isn’t so destructive after all. Now the shopkeeper will have to buy a new window. The glassmaker will then have money to buy a table. The furniture maker will be able to hire an assistant or buy a new suit. And so on. The boy has actually benefited our town!”

But as Bastiat noted, “Your theory stops at what is seen. It does not take account of what is not seen.” If the shopkeeper has to buy a new window, then he can’t hire a delivery boy or buy a new suit. Money is shuffled around, but it isn’t created. And indeed, wealth has been destroyed. The village now has one less window than it did, and it must spend resources to get back to the position it was in before the window broke. As Bastiat said, “Society loses the value of objects unnecessarily destroyed.”

In the comic strip “Pearls Before Swine,” the nefarious Rat used the destruction-as-stimulus argument to defend his client’s blowing up downtown:

But that’s a comic strip. Journalists should do better. Please, call one of these economists. They can tell you that destruction is destructive. When property is destroyed, people have less wealth. The money they had been saving for a new business or a new computer or a college education, now they have to spend it on rebuilding what they had. That is not “a bump in economic activity.”

First Circuit Affirms Right to Record the Police

Right to Record, a website devoted to the legal aspects of recording police officers, has the scoop. A panel of the First Circuit Court of Appeals affirmed the right of citizens to openly record police officers.

Gathering information about government officials in a form that can readily be disseminated to others serves a cardinal First Amendment interest in protecting and promoting “the free discussion of governmental affairs.” Moreover, as the Court has noted, “[f]reedom of expression has particular significance with respect to government because ‘[i]t is here that the state has a special incentive to repress opposition and often wields a more effective power of suppression.’” This is particularly true of law enforcement officials, who are granted substantial discretion that may be misused to deprive individuals of their liberties. Ensuring the public’s right to gather information about their officials not only aids in the uncovering of abuses, but also may have a salutary effect on the functioning of government more generally.

Read the whole thing. It provides a great discussion of the developing legal landscape, as well as some juicy details — like the fact that the attorney defending the statute for Massachusetts wrote her student note about how the Massachusetts wiretapping law is unconstitutional.

This decision is a big deal. The case comes from Massachusetts, one of two states (the other being Illinois) that continues to criminalize recording audio in public. It’s the latest in a string of victories against the Massachusetts wiretapping law that has become a useful tool for police who want to shield their actions from public scrutiny. A Massachusetts District Attorney recently refused to proceed with charges against a woman who recorded a vicious police beating, the D.A. declaring that police officers have no reasonable expectation of privacy while on duty and in public. Cop Block founders Pete Eyre and Adam Mueller were just acquitted on felony wiretapping charges for openly recording their encounter with police officers Massachusetts.

Moving on to the other holdout, Illinois, a woman who surreptitiously recorded Chicago Police Internal Affairs officers trying to persuade her not to file a sexual harassment complaint against police officers was acquitted of felony wiretapping charges. All of this sets the stage for the ACLU v. Alvarez, a lawsuit seeking to prevent future wiretapping charges against citizens who record on-duty police in public.

For more Cato work on the right to record police, take a look at this video and this post on Anthony Graber’s victory over abuse of the Maryland wiretapping statute. Speaking of which, Right to Record provides a page on the Maryland wiretapping statute, supplying the decision in Graber’s case for anyone who faces similar charges in the future.

Why Stop at $20 Billion, Senator?

Congressional Quarterly reported on Monday [subscription required] that Sen. Dianne Feinstein (D, Calif.) has called for $20 billion worth of increased lending to U.S. manufacturers through a new targeted program of the Export-Import Bank of the United States (“the Ex-Im Bank”).

Sen. Dianne Feinstein called Monday for a new initiative to promote lending to U.S. manufacturers in an effort to spur job creation and shrink the U.S. trade deficit.

The California Democrat proposed authorizing the U.S. Export-Import Bank to use $20 billion of unobligated authority to lend directly to domestic manufacturing companies that are competing with foreign competitors subsidized by their own governments…

Feinstein said her proposal would not be costly because of the offsetting collections priced in to the structure of the bank’s transactions.

To be eligible for the lending program, companies would be required to demonstrate the number of jobs that would be created; that they are competing directly with subsidized, foreign firms; that the project would contribute to the expansion of the domestic workforce and manufacturing capability; and that it would have a net positive impact on the U.S.trade balance.

“In today’s global economy, the federal government must more actively partner with the business community,” Feinstein wrote. “Manufacturing is a proven source of well-paying jobs for those of all educational levels and we must have a thriving manufacturing sector in order to address our chronic trade imbalance and return our economy to sustainable growth.” [emphases added]

Where to begin? First, there is no earthly reason why “we must have a thriving manufacturing sector in order to address our chronic trade imbalance.” We could bring our trade account into balance through services or agricultural exports if “addressing our chronic trade imbalance” is what keeps you awake at night. (Here’s more on the trade deficit from my colleague Dan Griswold.)

But let me turn to Senator Feinstein’s rosy view of the Ex-Im Bank. My recent trade policy analysis, “Time to X Out the Ex-Im Bank,” addressed many of the rationalizations that the bank’s supporters routinely trot out to justify the use and redirection of resources toward corporate welfare. I question why taxpayer dollars should be put at risk supporting some of America’s most profitable countries (does Boeing really need your money?) and draw attention to the inefficiencies and distortions caused by export credit programs. Senator Feinstein shows a narrow understanding about the “cost” of things when she suggests that because Ex-Im is “self-financing” (i.e., its activities are funded out of fees and collections from its previous loans) it is not costly. In theory the government could take 100% of the economy’s production and give all of it away again at “no net cost to the taxpayer” (just like the sugar program!). Could one seriously argue that such an approach would not be enormously costly in terms of economic prosperity  (not to mention, you know, personal freedom and stuff)?

I should point out here that Senator Feinstein is not alone in wishing to direct the activities of the bank toward ends that she deems worthy: the bank operates under various congressional mandates that have little if anything to do with strict financial criteria — for example, requirements that a certain percentages of the bank’s resources go to small- and medium-sized businesses, or toward exports of renewable energy products. Even the bank’s supporters will occasionally argue that the conditions Congress attaches to the bank’s activities sometimes run counter to the bank’s core mission of promoting exports and jobs (now there’s a surprise). I’ll have more on the Ex-Im Bank soon.

Whose Axe Made Your Axe? You Better Find Out

For the second time in two years, federal agents from the U.S. Fish and Wildlife Service have raided two Tennessee factories that make iconic Gibson guitars. The government alleges that Gibson imported woods in violation of the Lacey Act, a century-old law that makes it a federal crime to trade in plants, wildlife, or timber that have been harvested in violation of “any foreign law.”

While this seems simple enough, and the anti-poaching/conservation impulses behind the law are certainly commendable, the Lacey Act has become one of many federal statutes that create invisible minefields of federal regulations into which anyone can stumble unknowingly.

A Gibson Les Paul

In the Wall Street Journal today, Eric Felten discusses the Gibson raid and points out just how dangerous and overblown the Lacey Act has become. Since plants and timber were added to the act in 2008, even individual owners of vintage guitars can run afoul of the act. Felten writes:

If you are the lucky owner of a 1920s Martin guitar, it may well be made, in part, of Brazilian rosewood. Cross an international border with an instrument made of that now-restricted wood, and you better have correct and complete documentation proving the age of the instrument. Otherwise, you could lose it to a zealous customs agent—not to mention face fines and prosecution.

In addition, all the confusing forms must be filled out completely and perfectly, or you could face heavy penalties.

As a guitarist with an appreciation for vintage gear, as well as a Gibson fan, I’ve been following these stories with both a personal and professional interest. Perhaps Gibson has committed bona fide violations of the Lacey Act and perhaps not. I would guess, given the incentives the law creates, that Gibson has done its best to comply. But complying with a law that requires interpreting the interaction of vague foreign laws with vague domestic laws is easier said than done. Like a legal Heisenberg Uncertainty Principle, the laws may not exist until federal prosecutors observe them.

One of the most heartbreaking stories of federal prosecutors running amok with the Lacey Act is the story of Abner Schoenwetter, a grandfatherly Miami seafood importer who spent six years in a federal prison for importing lobster tails that violated the laws of Honduras. Except they didn’t. Honduras filed briefs and testified on behalf of Schoenwetter and his co-defendants, pointing out that what federal prosecutors thought to be Honduran law was not actually Honduran law. Federal prosecutors were unperturbed, however, determined to wipe this menace to society from our streets. (You can read the full, sad story of the case here.)

Although I’m not an insider to the Gibson case, it seems something similar may be going on. During the first raid two years ago, the government seized ebony fingerboards that allegedly violated Madagascar’s laws. To date, however, no charges have been filed. According to Gibson’s press release, the company “obtained sworn statements and documents from the Madagascar government” that the fingerboards “seized in 2009 were legally exported under Madagascar law and that no law has been violated.”

On Wednesday, the government apparently seized materials imported from India that, in alleged violation of Indian law, had not been fully finished by Indian workers. And again, according to Gibson’s press release, the searches were predicated on the “Justice Department’s interpretation of a law in India,” and the “action was taken without the support and consent of the government in India.” Also, notice that the Indian law allegedly violated here has little or nothing to do with preventing poaching or promoting conservation. No matter, however, because the Lacey Act prohibits importation in violation of “any foreign law.”

For those of us who want Gibson to continue making world-class guitars, the legal standards for those who import timber need to be clarified and differentiated from those who are subject to other parts of the Lacey Act, that is, fish and game importers. Unlike smaller, more regional markets for lobsters and other animals, the timber market is a vast supply chain. The timber at the Gibson factory has often gone through many intermediaries, making it incredibly difficult to identify its origins.

Without clarifying the standard of care that Gibson must employ, overzealous federal prosecutors enforcing the vague laws of two countries create a legal black hole around which companies like Gibson must take a wide berth lest they get sucked in. As a result, they may inefficiently over-comply by, for example, stopping importation of all timber from any “problem” area of the world. In other words, Gibson guitars of the future may not have signature ebony fingerboards, even when those fingerboards could have been legally imported. To guitarists everywhere, these details make a difference and they help make Gibson a premiere guitar-maker. Hopefully, it stays that way.

This Week in Government Failure

Over at Downsizing the Federal Government, we focused on the following issues this past week:

  • Small Business Administration supporters have cultivated a myth that being against the agency is equivalent to being against small businesses. In reality, the great majority of American small businesses have thrived without government subsidies.
  • Chris Edwards looks at the spending record of Texas governor Rick Perry.
  • Too often local reporters treat the receipt of federal funds as a free lunch to be celebrated. However, like all federal subsidies, HUD’s Community Development Block Grant program does not create economic activity — it merely redirects it according to political and bureaucratic whims.
  • A budget plan promises to cut federal spending by 25 percent per year and has been endorsed by seven Republicans running for president. Too bad it’s the dumbest budget “plan” yet.
  • Pundits like Rachel Maddow never seem to worry about the quality of government “investments.” And they seem blissfully unaware of the history of damage caused by governments that have thought big on infrastructure.

Follow Downsizing the Federal Government on Twitter (@DownsizeTheFeds) and connect with us on Facebook.

Nat Hentoff on Perry, Obama

There has been increasing attention this week on Texas governor and Republican presidential candidate Rick Perry, as well as his book Fed Up! and his record in Texas.  With respect to criminal justice, most of the talk concerns the number of executions on Perry’s watch. 

In a recent column, Cato senior fellow Nat Hentoff notes that Perry has brought  enlightening reforms to the juvenile justice system in that state — the gist being more focus on concentrated rehabilitation instead of prison isolation — and that this aspect of Perry’s  record ought to be part of the conversation.

And where is Nat Hentoff on Mr. Obama and his record? 

I don’t ask President Barack Obama for any change I can believe in, except to clear out his office and make room in the White House for a real president.

That may be too harsh.  Obama has made some mistakes, to be sure, but at least he ended the wars and has the government  on a sound financial footing.

Related posts here and here.

How’s Our ADA Compliance? Dial 1-800-HIRE-SOTS

It seems that Old Dominion Freight Line, Inc., an interstate trucking company, doesn’t want to put drivers with a history of drinking problems behind the wheel. According to a press release issued last week by the federal Equal Employment Opportunity Commission (EEOC) (hat tip: Roger Clegg), that’s a violation of the drivers’ rights under the Americans With Disabilities Act:

[Per the EEOC’s suit] the driver at the Fort Smith location had worked for the company for five years without incident. In late June 2009, the employee reported to the company that he believed he had an alcohol problem. Under U.S. Department of Transportation regulations, the employer suspended the employee from his driving position and referred him for substance abuse counseling. However, the employer also informed the driver that the employer would never return him to a driving position, even upon the successful completion of a counseling program. …

Alcoholism is a recognized disability under the Americans With Disabilities Act (ADA), and disability discrimination violates this federal law. The EEOC said that the company violated both the ADA and the Americans With Disabilities Act Amendment Act of 2008 (ADAAA) by conditioning reassignment to non-driving positions on the enrollment in an alcohol treatment program. In addition, the EEOC argued that Old Dominion’s policy that bans any driver who self-reports alcohol abuse from ever driving again also violates the ADA.

Even well-run alcohol rehab programs are known for having high relapse rates, and Old Dominion would almost certainly face legal liability following a calamitous highway collision caused by a driver’s relapse. But according to the EEOC’s interpretation, requiring the driver to accept permanent reassignment to a less safety-sensitive position (let alone terminating him entirely) is also grounds for liability.

For years the ADA has provided legal muscle to employees terminated for alcohol problems — just the other day, for example, a Florida State University administrator dismissed after frictions with staff sued the university for not accommodating his alcohol abuse. But that’s just the academic setting, where many administrators can glide by in a bit of a haze for years without causing real problems. (UCLA’s Steve Bainbridge quips that the college official’s description of drinking as a “handicap” is off base: “it’s always come in handy for me.”) Are we really required to take chances with 18-wheelers on the highway?