Federal Prosecutors

Today, Cato is publishing an article about some disturbing trends that have emerged in federal criminal law. Washington, D.C. attorney Richard Janis explains that business executives saw what happened to Arthur Andersen when that firm tried to defend itself by going to trial. To avoid the potential catastrophe of a full-blown trial and a criminal conviction, firms will now do almost anything to placate federal prosecutors and avoid an indictment, including waiving the attorney-client privilege and firing employees at the direction of the government — even if the firm concludes that such employees were just following directions and are otherwise innocent of any wrongdoing.

Janis observes that federal prosecutors have so much leverage over business firms these days that the very nature of our adversary system of justice is in jeopardy. Companies must too often cough up millions of dollars for “settlements” that are wildly out of proportion to any perceived wrongdoing.

Janis’s paper is short but potent. To check it out, go here.

Tony Snow’s Sunny Conservatism

Whether you agreed with him or not, former presidential press secretary Tony Snow was a class act. During his time as President Bush’s chief spokesman, from April 2006 to September 2007, Snow sparred with gusto with the White House press corps but always remained cheerful and collegial. News stories about his death over the weekend report that he was unfailingly upbeat even in the final months of his battle with cancer.

I only met Tony Snow once, and that was in June 2007 at a White House briefing on immigration reform. Also speaking at the briefing were two cabinet secretaries, but we all knew who was the star attraction that day. Snow did not bring a particular expertise to the briefing, but he did express a passion for the president’s commitment to expanding opportunities for legal immigration.

In conversation after the meeting, Snow told a small group of us that it was the president’s views on immigration more than anything else that convinced him that he wanted to be part of the administration.

None of this is a big revelation if you read Tony Snow’s pre-White House writings on the subject, but it is worth remembering that this conservatives’ conservative, sometime Bush critic, and former editorial page editor of the Washington Times embraced a pro-immigration view that was at odds with much of the rest of the movement and most Republican members of Congress. One more reason to mourn his passing.

McDonald’s CEO on Globalization and Eating Your Vegetables

In an age when most corporate CEOs shun controversy, it was refreshing to read a recent interview with McDonald’s Corp. CEO Jim Skinner.

In the August 2008 issue of the Wall Street Journal magazine Smart Money [sorry, the interview has yet to be posted online], Skinner was asked what responsibility his fast-food company has for combating the national “obesity epidemic.” Skinner replied: “We are not going to solve society’s problems. People have to do that on their own …[I]f you can’t get your kids to eat vegetables, why is it my job?”

Exactly. Why should parental responsibility be treated as such a radical idea?

Skinner does note that the restaurant chain has expanded its menu to meet demand for healthier foods beyond burgers and fries. For example, McDonald’s now buys 39 million pounds of apples a year, more than any other buyer in the country.

In the same interview, Skinner credited globalization as one of the reasons the company’s stock has roughly doubled in the past three years while the economy and the rest of the stock market have struggled.

You look at the proliferation of restaurants outside the U.S. since the last big recession, in 1990 to 1991. It’s an enormous offset. Half our sales come from abroad. And we are as well positioned today as at any other time in our opportunity to serve customers and not nick their pocketbook.

Which is just the point I made a few months ago in a Cato Free Trade Bulletin on how globalization and free trade have helped U.S. companies and the economy to better weather domestic downturns.

Turning Socialism Upside Down

Raúl Castro addressed the Cuban National Assembly this weekend for the first time since officially becoming head of state. There, he gave us this rhetorical jewel:

Socialism means social justice and equality, but equality of rights, of opportunities, not of income. Equality is not egalitarianism.

This is certainly not the brand of socialism I was taught by my college professors in Costa Rica. Otherwise, I might’ve ended up being a “socialist.”

However, I’m sure Raúl’s statement raised some eyebrows among the Communist Party officials gathered in the Assembly. So, in order to diffuse any misunderstanding, Raúl quickly added that he has “learned everything” from his brother Fidel.

Then, he received a standing ovation.

Barack Obama Walks the Walk

After telling a gathering of the American Federation of Teachers that he opposes school voucher programs over the weekend, Senator Obama added that: “We need to focus on fixing and improving our public schools; not throwing our hands up and walking away from them.”

Senator Obama sends his own two daughters to the private “Lab School” founded by John Dewey in 1896, which charged $20,000 in tuition at the middle school level last year. Though he says “we” should not be “throwing up our hands and walking away” from public schools, he has done precisely that.

That is his right, and, as a wealthy man, it is his prerogative under the current system of American education, which allows only the wealthy to easily choose between private and government schools. But instead of offering to extend that same choice to all families, Senator Obama wants the poor to wait for the public school system to be “fixed.”

I could editorialize about this, but I really don’t see the need. Readers of this blog are perfectly capable of drawing the obvious conclusions.

Dionne’s April Fool’s Column

Anybody can play an April Fool’s Joke in April, but E.J. Dionne deserves credit for pulling a fast one on gullible readers in July. And I’m brave enough to admit that I was briefly fooled by his column asserting that even conservatives now recognize that free markets don’t work. It was only after thinking about his column that I realized he surely must be engaging in some leg pulling if the first person he quotes is one of the most collectivist-minded members of Congress, Barney Frank. Dionne tries to trick readers by then citing the Chairman of the Federal Reserve, who (gee, what a surprise) is in favor of more regulatory power for the Federal Reserve, but he neatly avoids any explanation for why this is evidence that conservatives are abandoning markets (perhaps he is assuming that Bernanke is a conservative because he was appointed by Bush, but surely Dionne is not so naive):

Since the Reagan years, free-market cliches have passed for sophisticated economic analysis. But in the current crisis, these ideas are falling, one by one, as even conservatives recognize that capitalism is ailing. …The old script is in rewrite. “We are in a worldwide crisis now because of excessive deregulation,” Rep. Barney Frank (D-Mass.), the chairman of the House Financial Services Committee, said in an interview. …While Frank is a liberal, the same cannot be said of Ben Bernanke, the chairman of the Federal Reserve. …Bernanke sounded like a born-again New Dealer in calling for “a more robust framework for the prudential supervision of investment banks and other large securities dealers.”

Wait a minute. Perhaps Dionne is writing a serious column. He quotes Irwin Stelzer of the Hudson Institute, who reasonably can be considered a conservative:

What’s striking is that conservatives who revere capitalism are offering their own criticisms of the way the system is working. Irwin Stelzer, director of the Center for Economic Policy Studies at the Hudson Institute, says the subprime crisis arose in part because lenders quickly sold their mortgages to others and bore no risk if the loans went bad. “You have to have the person who’s writing the risk bearing the risk,” he says. “That means a whole host of regulations. There’s no way around that.”

Dionne seems impressed that Stelzer says that markets don’t work perfectly. But that is a reflection of Dionne’s unfamiliarity with economics. After all, failure, like success, is a part of the market process. Dionne does note, however, that Stelzer is endorsing more regulation, so there is a tiny shred of evidence for his hypothesis that conservatives want more government intervention. But if this is the evidentiary bar that has to be cleared for such assertions, I’m going to write a column saying that all socialists now support a flat tax. And I won’t even have to find one left-leaning writer to “prove” my point. I can just point to the various socialist-led governments in Eastern Europe that have adopted single-rate tax systems.

Before signing off, I feel compelled to point out that Stelzer has a fair diagnosis but a misguided prescription. Yes, hindsight shows that lenders were cavalier about loans since they knew other investors would be the ones bearing the risk. But after absorbing billions of dollars in losses, investors obviously have a huge incentive to avoid the same mistake. Indeed, that is why failure plays a crucial role in a market economy; people learn from mistakes. Additional government regulation, by contrast, is at best a case of closing the barn door after the horse has escaped. In the vast majority of cases, however, regulations throw sand in the gears and/or distort incentives for the efficient allocation of resources.

Gasoline Affordability Index: Sliding Back to the 1960s

For some time now, the real price of gasoline has exceeded the heights it reached during the 1980s. But what about its affordability?

The following figure, which assumes a current price of regular gasoline of $4.10 a gallon, plots trends in the U.S. gasoline price from 1949 through mid-2008, using three different measures: (a) nominal (or current) dollars, (b) real (i.e., inflation-adjusted) dollars, and (c) a “gasoline affordability index” (GAI) which is the ratio of the real disposable personal income per capita to the real gasoline price, indexed to 1960 (that is, 1960 affordability =1). [See Notes 1-3 for data sources.] The higher the Index, the more affordable the gasoline.

This figure shows that:

  1. Both the real and nominal price of regular gasoline are the highest they’ve been since at least 1949.
  2. Gasoline affordability peaked in 1998 at 3.32, relative to 1960 (=1).
  3. Today the gasoline affordability index is at 1.35, lowest since 1982 when it was 1.31.
  4. Today gasoline affordability is down to levels of the mid- to late-1960s.
  5. Relative to 1998, the price of regular gasoline increased by 287 percent in nominal terms and 208 percent in real terms. However the affordability index declined 59 percent.

The disposable personal income per capita between 2007 (average) and May 2008 increased by $1,627 (in real 2000 $) according to the BEA, while the average person’s real expenditures on gasoline increased by $493 (or less). See Note 4.

Unfortunately, gasoline prices aren’t the only ones to have gone up. Energy prices are all up, as is food. So it won’t be surprising if these increases more than eat up any advance in disposal personal income. I’ll check this out one of these days.

Notes

  1. The figure uses the price of regular leaded gasoline from 1949-1975, the arithmetical average of average of regular leaded and regular unleaded gasoline for 1976-1990, and regular unleaded for 1991-2008. For 2008, I have assumed a gasoline price of $4.10 per gallon. Gasoline price data are from the Department of Energy (DOE), Motor Gasoline Retail Prices, U.S. City Average, available at http://www.eia.doe.gov/emeu/mer/prices.html.
  2. For estimating the real price, I used the implicit price deflator for GDP from the Bureau of Economic Affairs (BEA), available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Table 1.1.9 (for 1949-2007) and Table 2.6 (for May 2008).
  3. Data on real disposable income per capita are also from BEA, available at http://www.bea.gov/bea/dn/nipaweb/SelectTable.asp, Tables 2.1 (for 1949-2007) and Table 2.6 (for May 2008).
  4. Average annual motor gasoline consumption was 475 gallons per year in 2007, and the real gasoline price over this period increased $1.04 (in real 2000 $). Average consumption has probably declined somewhat from last year.