Archives: May, 2012

Stop Using Slippery-Slope Arguments? Where Would that End?

Richard Thaler writes in the New York Times:

Justice Scalia is arguing that if the court lets Congress create a mandate to buy health insurance, nothing could stop Congress from passing laws requiring everyone to buy broccoli and to join a gym…Can anyone imagine Congress passing a broccoli mandate law, much less the court allowing it to take effect?

Yes annnnd…yes. Next question.

Surely, the justices have the conceptual resources to draw a distinction between the health care market and the market for broccoli. And even if they don’t, then all the briefs, the zillions of blog posts and a generation’s worth of economic literature can help them.

If drawing a constitutionally meaningful distinction between the markets for health insurance and broccoli is child’s play for Thaler, he should school all the brief- and blog-post-writers who so far have failed. That would have been a more productive use of his thousand words than his build-up to this thesis:

If you are opposed to a policy, state your case based on the merits — not on the imagined risk of what else might happen down the road. The path of that road is so unpredictable that it may even produce a U-turn.

Good grief. Slippery-slope arguments are about principles. As in, “If you concede this principle because you don’t mind the result here, you will no longer have it to protect you against that bad result there.” Thaler’s thesis would lead, for example, to all manner of civil-liberties violations by the state because there simply isn’t enough political support to protect all the civil liberties of various minorities. But Thaler doesn’t want us to think about things like consequences or the future.

The potential for U-turns makes no more sense as an argument against invoking slippery slopes principles, because principled arguments can help generate the U-turn that opponents of, say, ObamaCare want to see.

I take silly arguments like this to be evidence that ObamaCare supporters are in complete panic mode.

Too Big to Manage

Yesterday I asked: If JPMorgan Chase’s loss of $2 billion shows the need for more bank regulation, what should the federal government’s $1.3 trillion deficit tell us? And Michael Cannon pointed out that in the private sector, people who make big mistakes tend to lose their jobs, unlike the public sector.

Today another theme is being heard, at the Wall Street Journal, on NPR, and many more places including even here at Cato@Liberty: banks like JPMorgan, which has annual revenue of $100 billion, are just “too big to manage.”

And again I have to wonder: if large banks are too big to manage, what should we think about the federal government? The federal government is the largest landowner, the largest insurer, the largest employer, the largest banker in the country. It operates everything from a judiciary to the most complex armed force in history to numerous health insurance programs to a retirement system to a highway system to a peanut subsidy program.

If JPMorgan is too big to manage, can we possibly expect competent management of such a massive operation that doesn’t even face the feedback of profit and loss?

Chris Christie Allows New Jerseyans to Quaff Better Wine

While perhaps more identified with eating than drinking, New Jersey Governor Chris Christie – who headlined Cato’s recent Milton Friedman Prize Dinner – signed a law in January that allowed out-of-state winemakers to sell directly to in-state consumers and retailers.  This wasn’t a spontaneous bit of New Year’s bonhomie – the U.S. Court of Appeals for the Third Circuit had ruled in Freeman v. Corzine that the previous rules benefiting in-state wineries was unconstitutional (that pesky Commerce Clause again) – but still it was a positive sign: even Wine Spectator took note.

More importantly, the district judge in charge of the nine-year lawsuit challenging that earlier law recently approved the consent decree whereby New Jersey’s new law remedied the claims brought by the out-of-state wineries.  The agreement creates an out-of-state plenary winery license (good luck saying that after having consumed too much of the the vintage) under which “foreign” wine can compete on an equal playing field with good ol’ New Jersey stock.  Specifically, the new law grants this license to out-of-state applicants, including those who sell their wares over the internet, who do not produce more than 250,000 gallons of wine per year and are duly licensed in another state.

The upshot is that the new law takes effect as of this month.

This all still seems like a bit too much regulation to me, but at least everyone is now subject to the same rules.  I may have to take advantage of this newfound freedom when I travel up to the Garden State for my college reunion in a few weeks.

For my previous writings on booze and the Commerce Clause, read this and listen to this.

Remarks on Fiction and Surveillance from PEN World Voices

Earlier this month, it was my distinct privilege to moderate a panel of renowned authors and activists from around the globe at the PEN World Voices festival, to discuss “Life in the Panopticon.” The folks at PEN have since posted the prepared version of my opening remarks, which try to get at the special relevance of literature to our understanding of these issues:

When we talk about surveillance and privacy—perhaps more than any other political question—we speak a language borrowed from fiction. When we’re worried about the civil liberties implications of the Patriot Act or wiretapping by the National Security Agency, we may say they are “Orwellian,” or raise the specter of “Big Brother” government. As we slip off our shoes, separate our mini-shampoo bottles, and raise our arms for the friendly agent of the Transportation Security Administration, the word “Kafkaesque” may leap to mind unbidden.

And then, of course, we have the Panopticon. In 1787, when the philosopher Jeremy Bentham first imagined a prison on the model of an “inspection house,” architected to enable total surveillance of its inmates (or patients, or students), he believed himself to be writing non-fiction—a proposal for a real structure. But the modern reader is far more likely to have encountered the Panopticon by way of Michel Foucault, whose seminal Discipline and Punish invoked it as a kind of fable or metaphor to illustrate the principle of control through observation. Though prisons on Bentham’s model were eventually constructed—long after his death—for us it is, above all, a useful fiction.

It is a fiction with increasing relevance, as technology tears down the walls of Bentham’s prison, and embeds panoptic architectures in the camera networks trained on our public streets, the computers in our homes, and the phones in our pockets. If we insist on giving it a physical address, the modern panopticon might be the massive data storage facility being constructed in Salt Lake City Utah by the National Security Agency, which will allow the complete storage of all Internet communications—or the facilities where Chinese censors aided by powerful algorithms strictly enforce the parameters of acceptable online discussion.

As the Slovenian philosopher Miran Bozovic has observed, the Panopticon is actually a fiction within a fiction: it is not the warden’s real monitoring that makes the Panopticon’s discipline effective, but the idea of the observer, hidden from view by the panoptic architecture, that forces the prisoners to always act as though they could be under surveillance. In the most efficient prison, the tower can be empty—the observer a complete fiction—so long as the inmates believe in his presence. If you want to deprive online dissidents of the advantages of Internet communications, the fiction of omniscience may be better than the real thing: the story, unlike the real policeman, can build its outpost in the citizen’s mind.

If the purpose is to gather intelligence rather than exert discipline, of course, the opposite fiction is needed—the fiction of privacy that induces the target to lower his guard and disclose his secrets. When the courts belatedly began to impose limits on the warrantless wiretapping program inaugurated by President Bush, administration officials loudly declared that the intelligence agencies had been struck blind, which we now know was almost certainly another fiction.

For both purposes—intelligence and deterrence—as far as the government is concerned, the less the public knows about the detailed structure and capabilities of the Panopticon, the better. This secrecy is the source of the familiar tension between the imperatives of intelligence and those of liberal democracy under accountable government. It may also be why we so often turn to fiction to understand surveillance—to shine a spotlight on the invisible observer, and hear the dissident voice that, in reality, falls silent under the panoptic gaze.

Our ability to understand the realities and dangers of surveillance, then, depends crucially on the stories we tell. The dystopia of Nineteen-Eighty Four is not that of Brave New World—even if our reality contains the seeds of both. The legal scholar Daniel Solove, in his important book The Digital Person, argues that modern threats to privacy are better understood through the lens of Kafka than Orwell—and that by relying too heavily on Big Brother metaphors, we misunderstand where the most pressing threats lie. If the Panopticon is made of stories, so is the gate that might lead us out of it.

What Would J.P. Morgan Say?

Last week it was revealed that derivatives trades gone bad may cost J.P. Morgan Chase bank over $2 billion. The losses apparently are still accumulating at around $150 million per day. A senior manager has already lost her job and perhaps more heads will roll.

Why do banks keep racking up such losses? The bank claims the losses were incurred on trades designed to hedge the bank’s exposure to events in Europe. They failed because relationships among asset prices (really indices of derivatives) diverged from normal patterns. Surprise! That has been the undoing of many financial bets in recent years, starting at least with the spectacular collapse of Long-Term Capital Management in 1998.

A number of factors are at work, which I examine in more detail in a longer post. The short answer is that bad policy is at least partly to blame. Large banks know from experience that they will get bailed out by taxpayers if they incur major losses (the “too-big-to-fail” policy). There are two recognized consequences of that policy. Banks are larger than they would otherwise be, and they are riskier than they would otherwise be.

There is however a third consequence, less recognized than the other two. With growing size comes growing complexity. The major banks are simply too complex too manage. Senior management cannot control the risks being taken, often because they cannot understand them. That was the case in Citibank in the 2000s and appears to be so again with Morgan.

The problems will not go away until public policy changes.

Krugman Is Wrong about Austerity in Britain – Say the Brits

When, late last month, Great Britain slipped back into recession, New York Times’ Paul Krugman saw it as a vindication of his neo-Keynesian policies. According to Krugman, Britain failed to return to growth, because David Cameron’s government stepped on the fiscal break instead of infusing the British economy with more borrowed funds. My colleagues Juan Carlos Hidalgo from Cato and Veronique De Rugy from the Mercatus Center have already pointed out that austerity in Europe is something of a chimera. Spending cuts have been small, while tax increases have been large (a bad combination, in my view). Not to beat a dead horse, but here is a take on the British situation from, so to speak, the horse’s mouth:

Tullett Prebon, a bond trader, said that “public expenditures have hardly been reduced at all” and that claims of a “big cut in public spending is bare-faced deception”.

Figures highlighted by the firm show that public spending actually rose during 2010-11 and fell by just 1.5 percent last year.

Government spending is more than £22 billion higher than it was in 2008 when the financial crisis erupted.

The majority of extra money required by ministers to fill the black hole in the finances caused by the recession is being raised from extra taxes rather than cuts in Government spending.

Dr. Tim Morgan, the global head of research at Tullett Prebon, said: “It’s high time that this mendacity was exposed for what it is. Government has done very little about its spending, has appropriated three-quarters of all gains in economic output for its own use, has carried on piling up debt – and has tried to pass all this off as ‘responsible austerity’.

“The motivation for government spin is obvious enough. On the one hand, rises in market interest rates could be a disaster, given the extent to which British households are leveraged. On the other, implementing the real cuts required to back up a genuine austerity package have proved politically unpalatable.”

Dr. Morgan warned that it seemed “improbable” that the bond markets would “continue to fall for this spin-job” and would “sooner rather than later” call the Government to account.

Classification Follies

An amusing anecdote about the absurd excesses of our system for classifying “sensitive” documents comes by way of the Federation of American Scientists’ Project on Government Secrecy. It seems a researcher had been trying to get access to a 1993 article published in a classified NSA journal, discussing the “SIGINT” (or signals intelligence) surrounding the Soviet downing of U.S. reconnaissance aircraft. The agency had already released a heavily redacted version of the article, and was in the process of considering a request to release a more complete version when—oops!—they seem to have mistakenly published a completely unredacted version, in which sections that were supposed to be excised had been highlighted rather than obscured. This version was quickly removed—but only after FAS researchers (and presumably others) had downloaded a copy.

This seemed to put the agency in an awkward position, since the NSA’s claim that any of the article remained properly classified required it to maintain that its disclosure threatened “serious damage” to the security of the United States. Would they admit to having made such a grave error in posting the unredacted document? Or would they acknowledge—as the FAS researchers concluded from their review of the document—that there had been no real grounds after all for continuing to keep the article secret two decades later?

The NSA seems to have picked an ingenious third option:They invoked an obscure provision of a 2009 executive order permitting the declassification and release of material that would otherwise be properly classified in “exceptional cases” where the national security interest in protecting the information was “outweighed by the public interest in disclosure of the information.” So what, exactly, was so exceptional about “Maybe You Had to Be There: The SIGINT on Thirteen Soviet Shootdowns of U.S. Reconnaissance Aircraft”? Readers are welcome to scan the article and draw their own conclusions, but it’s hard to disagree with the FAS analysts’ suspicion that the agency simply decided it wasn’t in the “public interest” to admit how much information the government unnecessarily hides from the citizens who fund it.