We Shall Not Be Moved. Unless There’s a Democrat in the White House.

Dana Milbank reports in the Washington Post:

The anti-Obama left was out in force. All 22 of them.

As the president stood on the South Lawn to announce the bombing campaign in Syria, liberal demonstrators gathered on Pennsylvania Avenue on the other side of the White House to protest the man they thought was their ally….

“If George W. Bush were launching wars with Congress out of town, oh, it would be flooded,” longtime liberal activist David Swanson said, looking across mostly empty Pennsylvania Avenue “They would be screaming.”

My thoughts from 2011 on the disappearance of the antiwar movement. Buzzfeed worries that antiwar celebrities may have been kidnapped.

Financial Crisis Lessons From Experimental Economics

Economic scholarship tends to operate in silos. That is, banking scholars don’t talk to macroeconomists, etc. Sadly, this is even more so between finance, monetary and experimental economics.  In his latest book, Rethinking Housing Bubbles, Nobel Prize winner Vernon Smith, the father of experimental economics, offers a number of lessons that could greatly improve the stability of our financial system.

Some of these include:

  • Markets for perishable goods behave generally well and do not tend to display bubbles, whereas asset markets commonly display bubble behavior in experimental settings.
  • Allowing margin buying (leverage) significantly increases bubble size and duration for inexperienced buyers, but not for experienced.
  • Even sophisticated buyers, when inexperienced, display bubble behavior. 
  • Experience helps: repeated play in an experimental game brings price behavior closer to fundamentals.
  • Informed “inside traders” can reduce size of bubbles.
  • Presence of futures markets can stabilize prices in spot markets.
  • Additional liquidity increases size and duration of bubbles.
  • Bubbles can develop even when participants are fully informed as to operation of the market (they know with certainty future incomes streams and how the market functions).

In terms of policy recommendations, the list above suggests a few things to me. First, policymakers should pay close attention to asset markets. Second, higher down-payments, particularly among first-time buyers, are likely to reduce housing bubbles. Policy should be tolerant of informed buyers, such as hedge funds, buying-up foreclosed homes. 

Consumer disclosures, like Truth in Lending, are likely to be useless. Financial literacy should focus less on information and more on experience. Excess central bank liquidity is likely to contribute to asset bubbles.

Perhaps the biggest lesson is that bubbles in experimental asset markets are quite common, especially markets were buyers have little experience and engage in few transactions (sounds like the housing market). 

We will touch upon some of these issues, and others, when Vernon Smith comes to Cato next week to discuss his new book. You can register (or watch streaming) here.

 

Air Traffic Criticism

Canada, Australia, New Zealand, Britain, and Germany appear to be doing a better job than America at embracing new technologies for air traffic control (ATC). Those countries have restructured their ATC systems as self-supporting entities outside of their government bureaucracies while we still run ours as part of the civil service in the Federal Aviation Administration (FAA).

More evidence that Congress should restructure our ATC system comes from today’s Wall Street Journal:

An effort to modernize the U.S. air-traffic-control system is seeing such a bumpy rollout that costs associated with some of the core technology outweigh potential benefits, according to a report soon to be released by a federal watchdog.

An audit report by the Transportation Department’s inspector general, slated to be released in the next few days, raises new questions about the design, deployment and projected benefits of one of the Federal Aviation Administration’s futuristic ways to enhance monitoring and management of aircraft.

The document is sharply critical about early implementation of ground-based radio towers that are part of a proposed $4.5 billion network designed to track the locations of planes more precisely than current radar. The new system, dubbed ADS-B, eventually aims to rely primarily on satellite-based navigation and tracking.

Some of the general criticism mirrors reports and comments by the inspector general and his staff over the past few years directed at the FAA’s overall air-traffic-modernization initiative, which it calls NextGen.

The federal bureaucracy would not be very good at running a high-tech firm, such as Apple, so it is no surprise that FAA has major problems running the high-tech ATC business. Our ATC system needs better management, higher efficiency, and more rapid innovation. We are more likely to achieve those goals if we privatized the system, as Canada did successfully almost two decades ago.

Old Technopanic in New iBottles

Gather around young’uns: Back in the antediluvean early 90s, when the digital world was young, a motley group of technologists and privacy advocates fought what are now, somewhat melodramatically, known as the Crypto Wars. There were many distinct battlefields, but the overarching question over which the Crypto Wars were fought was this: Would ordinary citizens be free to protect their communications and private files using strong, truly secure cryptography, or would governments seek to force programmers and computer makers to build in backdoors that would enable any scheme of encryption to be broken by the authorities?  Happily for both global privacy and the burgeoning digital economy—which depends critically on strong encryption—the American government, at least, ultimately saw the folly of seeking to control this new technology. Today, you are free to lock up your e-mails, chats, or hard drives without providing the government with a spare key.  (The conflict was featured on the front page of Wired Magazine’s second issue, and later detailed in Steven Levy’s lively book Crypto.)

Fast forward to 2014: Apple has announced that the new version of its mobile operating system, iOS, features full disk encryption to protect users’ data, and in contrast to earlier versions of iOS, Apple will not leave itself a backdoor that previously allowed the company to access at least some of the phone owner’s encrypted information.  The announcement has been greeted with alarm by cyberlaw professor Orin Kerr, in a series of  Washington Post blog entries that seem designed to prove Santayana’s hoary dictum about the perils of ignoring history. Apple, Kerr avers, is playing a “dangerous game” by implementing “a policy that only thwarts lawful search warrants.”  Police investigations, he fears, will now be stymied by criminals who refuse to unlock their phones, rendering search warrants to access those devices little more than “a nice piece of paper with a judge’s signature.”

Normally, Kerr’s writing on electronic privacy is marked by an understanding of modern telecommunications technology nearly as impressive as his legal erudition, but in this case, I fear, he has succumbed to an uncharacteristic fit of technopanic.  While he writes as though the corporate anarchists at Apple are brazenly thumbing their noses at police with a radical new policy, the truth is more nearly the opposite: It is Apple’s backdoor access that was the abberation, even for Apple.  If you encrypt your MacBook’s hard drive with Apple’s FileVault, or your Windows computer with Microsoft’s BitLocker, then unless the user chooses to send either company a backup copy of her encryption key, they can no more  unlock those encrypted files than a bookbinder can decipher the private code you employ in your personal diary.  Strong encryption is not even new to smartphones: Google’s Android operating system—the world’s most popular mobile platform, running on twice as many devices as iOS—has featured full-device encryption since 2011, and Google has never had backdoor access to those encrypted files.  And, of course, there have always been a wide array of third-party apps and services offering users the ability to encrypt their sensitive files and messages, with the promise that nobody else would hold the keys.  Does encryption occasionally stymie legitimate law enforcement investigations?  Of course—though way, way less often than you might think. The point to remember here, though, is that criminals have had access to backdoor-free encryption for many, many years before Apple announced its new policy without ushering in a terrifying new age of unstoppable criminals and impotent police.

Still, Kerr is right that encryption will now be far easier and more prevalent: Unbreakable encryption is not novel, but the decision to make iOS and Android devices encrypted by default is.  Previously, at least, criminals had to be savvy enough to make the choice to use encryption consistently—and many weren’t.  Encryption by default, because it protects average crooks as well as sophisticated cybercriminals, is likely to be a practical impediment in many more investigations. Criminals can still be punished for refusing a court order to unlock their devices, but may escape more serious charges that would be provable only with that encrypted evidence.  Does this strengthen the case, as Kerr suggests, for legislation requiring device manufacturers to build in backdoors or retain sensitive data?  It does not, for several reasons.

First, as Kerr belatedly acknowledges in a follow-up post, there are excellent security reasons not to mandate backdoors. Indeed, had he looked to the original Crypto Wars of the 90s, he would have seen that this was one of the primary reasons similar schemes were almost uniformly rejected by technologists and security experts.  More or less by definition, a backdoor for law enforcement is a deliberately introduced security vulnerability, a form of architected breach: It requires a system to be designed to permit access to a user’s data against the user’s wishes, and such a system is necessarily less secure than one designed without such a feature.  As computer scientist Matthew Green explains in a recent Slate column (and, with several eminent colleagues, in a longer 2013 paper) it is damn near impossible to create a security vulnerability that can only be exploited by “the good guys.” Activist Eva Galperin puts the point pithily: “Once you build a back door, you rarely get to decide who walks through it.” Even if your noble intention is only to make criminals more vulnerable to police, the unavoidable cost of doing so in practice is making the overwhelming majority of law-abiding users more vulnerable to criminals.

Second, and at the risk of belaboring the obvious, there are lots of governments out there that no freedom-loving person would classify as “the good guys.” Let’s pretend—for the sake of argument, and despite everything the experts tell us—that somehow it were possible to design a backdoor that would open for Apple or Google without being exploitable by hackers and criminals. Even then, it would be awfully myopic to forget that our own government is not the only one that would predictably come to these companies with legal demands. Yahoo, for instance, was roundly denounced by American legislators for coughing up data the Chinese government used to convict poet and dissident Shi Tao, released just last year after nearly a decade in prison.  Authoritarian governments, of course, will do their best to prevent truly secure digital technolgies from entering their countries, but they’ll be hard pressed to do so when secure devices are being mass-produced for western markets.  An iPhone that Apple can’t unlock when American cops come knocking for good reasons is also an iPhone they can’t unlock when the Chinese govermment comes knocking for bad ones. A backdoor mandate, by contrast, makes life easy for oppressive regimes by guaranteeing that consumer devices are exploitable by default—presenting U.S. companies with a presence in those countries with a horrific choice between enabling repression and endangering their foreign employees.

Obama Lonely at U.N. Climate Fest

People should learn from their mistakes. The last time President Obama took it upon himself to “lead” a U.N. climate fest was at Copenhagen in December, 2009, which, from the point of view of my greener friends, was a notorious failure. 

Today, he’s back, this time at Ban Ki-moon’s U.N. “climate summit,” but not a lot of his global peers are going to be there. Prime Ministers from China, India, Canada, Australia and Germany have all decided to stay home. 

Together, they emit almost three times what the U.S. does, which means we are going it alone in New York.  Any policy we agree to is  meaningless.  According to the EPAs “Model for the Assessment of Greenhouse-gas Induced Climate Change” (yes, it is MAGICC), if we emitted not another molecule of carbon dioxide between tomorrow and January 1, 2100, the amount of warming that would be prevented is a mere 0.14°C, an amount too small to reliably measure. That’s probably an overestimate, too, as the EPA appears to have overestimated 21st century warming.

EPA assumes  that the “sensitivity” of surface temperature to a carbon dioxide doubling is 3°C, an amount very likely far too great, compared to what is being observed.  Or, perhaps, compared to what is not being observed, as global surface temperatures have held constant for 17+ years now (actually 19, according to Cato scholar and eco-statistician Ross McKitrick), according to the surface annual temperature history that climate scientists cite the most. So the “saved” warming from any policy is likely to be even less than what MAGICC says.

You’re not going to hear that from the President. As happened at the 2009 Copenhagen disaster, the President and the Secretary-General will declare a roaring success.

In Copenhagen, that meant that all participants had to submit specific action plans to reduce emissions within two months.  But, a bit more than a month before the deadline, the U.N.’s climate commissioner, Yvo deBoer, announced that they really didn’t have to. Then he resigned.

There’s still no new international agreement to replace the failed Kyoto Protocol. But, last month, the President got people pretty worked up when he proposed a new, U.N.-sponsored agreement (a treaty—or a modification of an existing one—by any other name) on climate change that he didn’t think would require ratification by a two-thirds vote of the Senate, counter to what is explicitly stated in Article II, Section 2, Clause 2 of our constitution:

[The President] shall have Power, by and with Advice and Consent of the Senate, to make Treaties, provided two thirds of the Senators present concur… 

Not only is the president going to be quite lonely at the U.N., he could be setting the country up for a huge constitutional conflagration.

It’s not going to happen on his watch, though. Any agreement that he signs on to won’t likely take effect until at least 2016.  Even under the most rosy Democrat-wave election that year (one is likely to happen, given the demographics of the Senate crowd that is up for re-election), there’s no way 67 are going to vote to ratify a treaty that differentially harms the U.S. while China and India keep increasing their emissions dramatically.

Of course we’re going to hear the rhetoric, repeated again today, that the U.S. has to “lead by example.”  Well, Mr. President, with those big emitters and the developing world saying “no way,” no one is going to follow.  In 2012, the last year for which we have reliable data, the U.S. contributed 14% of global carbon dioxide emissions. Together, the five big no-shows emitted almost three times as much as us, and their fraction can only grow as both China and India are determined to develop their economies.

If we were really going to lead by example we would show the world how our free economy has resulted in investments in clean, big power sources like shale gas. The developing world is currently lacking in large sources of dense energy. If we’re going “lead by example,” maybe that example should be that governments should get out of the way of economic development and cleaner energy will follow. 

Do the Benefits of Mandatory Disclosures Outweigh the Costs?

Current regulations, which require companies that issue stocks and bonds to publicly disclose information to investors, allegedly assist those investors in determining the appropriate price for securities as well as detecting fraud. But mandatory disclosures impose heavy costs on issuers of debt and stock. Do the benefits outweigh the costs?

In the forthcoming issue of Regulation Elisabeth De Fontenay, an associate professor at Duke University Law School, answers that question by examining a natural experiment in corporate debt markets.

Corporate bonds are treated as securities and subject to mandatory information disclosure under SEC regulations. In contrast corporate loans are not subject to SEC disclosure regulations because historically such loans were held to maturity by the issuing bank. But over the last 15 years corporate loans have become functionally equivalent to bonds especially at the “high-risk high-return end of the spectrum.” They are underwritten by many investors and securitized and traded in secondary markets.

If regulation produces net benefits for investors, then they would purchase only corporate bonds rather than syndicated loans. But “the market not subject to mandatory disclosure is not only thriving, it is surging past its regulated counterpart.”  

How is this possible? De Fontenay explains that in secondary loan markets, investors obtain all the information they need through contract. And that information is more relevant to investor needs than the information mandated by regulation.

Travel Card Abuse in the Department of Transportation

Department of Transportation (DOT) employees are abusing their government travel cards, according to a new report from the agency’s Inspector General. The report suggests that DOT officials missed $183,000 in unallowable cash advances and $2.1 million in unauthorized purchases on government travel cards.

The report details numerous examples of abuse such as:

  • A Federal Aviation Administration (FAA) cardholder traveled to Houston, Texas, for 3 days and withdrew a $301 cash advance on the last day of the trip at an automated teller machine located 40 miles from his residence.
  • Between October 2011 and June 2012, an FAA cardholder collected seven cash advances totaling $719 while not on Government travel. On one occasion, this employee obtained a $104 cash advance on a race day at an Alabama Superspeedway…
  • Between February and August 2012, another FAA cardholder collected five cash advances totaling over $1,400 while not on Government travel…
  • An FAA employee who was not on Government travel visited a casino in Shawnee, OK, and collected three cash advances totaling $492 from his Government-issued travel card.
  • A former OIG employee collected two cash advances totaling $488, more than 2 years after separating from the Agency. DOT’s Financial Management Travel Card Management Policy requires that travel card accounts be closed when an employee leaves the department.

DOT is not the only agency with this issue. Last year, the Treasury Department announced misuse of cards within the Internal Revenue Service. Treasury found “more than 1,000” employees who abused their travel cards in fiscal year 2010 and 2011.

These types of employee ripoffs are not limited to travel cards. A 2008 report from the Government Accountability Office (GAO) found 41 percent of transactions on government purchasing cards violated “basic internal control standards.” Agencies were unable to provide appropriate documentation for 48 percent of large purchases that GAO studied. GAO found: “the Department of the Army could not adequately account for 256 items … each of which cost nearly $100,000.” One employee was able to withdraw $642,000 from her purchasing card over six years before being caught and sent to prison.

Purchasing and travel cards can be efficient in reducing overhead and streamlining processes, but agencies should ensure that proper audit controls are met so that more taxpayer funding is not wasted. Our bloated federal government purchases about $570 billion worth of supplies and equipment each year, so reform in this area is essential.