Supermodels and Monetary Policy

I’m not sure she qualifies as a leading economic indicator, but Gisele Bundchen’s demand to be paid in euros is the latest sign that the dollar may be losing its position as the world’s reserve currency. A supermodel’s currency choice may not be as important as the dollar’s slide against the euro, and it may not mean much compared to the rise in gold prices, but if these other factors aren’t convincing the Fed to protect the value of the dollar, maybe a visit from Gisele would do the trick. Bloomberg reports:

Gisele Bundchen wants to remain the world’s richest model and is insisting that she be paid in almost any currency but the U.S. dollar. …”Contracts starting now are more attractive in euros because we don’t know what will happen to the dollar,” Patricia Bundchen, the model’s twin sister and manager in Brazil, said in a telephone interview in September from Sao Paulo. She declined to discuss details of the arrangements last week, as did Anne Nelson, Bundchen’s agent in New York at IMG Models. …Wealthy clients at San Francisco-based Union Bank of California have doubled their deposits in foreign currencies to $60 million the past two months as a hedge against a decline, said Bradley Shairson, head of currency and derivatives at the bank. …That’s the same strategy as sovereign wealth funds run by the largest exporters and oil producers, including China, Singapore and Qatar, said Stephen Jen, head of currency research at New York-based Morgan Stanley. The funds may grow to $17.5 trillion by 2017 from $2.5 trillion now and shift more than $500 billion out of the dollar in the next three years in search of better returns, he said. “We’re all thinking about diversifying out of the dollar,” said Jen, who is based in London. “It’s a very logical thing.”

New at Cato Unbound: James Flynn on IQ

If you think you’re so smart, then why don’t you know what intelligence is? Because no one does! Is intelligence a unitary, general factor — the psychometrician’s famed g — or is it more plural and fragmented? What role do genes play in determining IQ? The environment? If intelligence is in the genes, then why do IQ scores continue to rise generation after generation all over the world? Are we actually getting smarter, or are we just getting better at taking tests? While these questions may seem recondite and academic, they are in fact central to ongoing, extremely heated controversies pertaining to education, welfare, and immigration policy. Which is why we have assembled a stellar panel of intelligence experts to delve into “The IQ Conundrum,” the topic of this month’s Cato Unbound.

This month’s lead essay by James R. Flynn, the discoverer of the famed “Flynn effect” and author of the new book What Is Intelligence? Beyond the Flynn Effect, argues that “the brain is much more like our muscles than we had thought” and that the genetic component of IQ is weaker than many have supposed. Commenting on Flynn’s rich essay over the next week we will have Linda Gottfredson, co-director of the Delaware-Johns Hopkins Project for the Study of Intelligence and Society; Stephen J. Ceci, the Helen L. Carr Professor of Developmental Psychology at Cornell University; and Eric Turkheimer, associate professor of psychology at the University of Virginia. They may not get to the bottom of the IQ conundrum, but readers will no doubt come away smarter. Check it out.

What the Utah Vote Is About: Public Education by Other Means

Utah voters are going to the polls on Tuesday to accept or reject what would be the nation’s first state-wide school voucher program. According to Utah’s biggest media outlets and the nation’s largest public school employee union, this program would undermine public education. That view, while understandable coming from an organization that lives off the current system, is mistaken.

The purpose of public education is not to perpetuate a particular management structure, or employ a certain set of bureaucrats or union officials. The purpose of public education is to see that every child has access to good schools, and is prepared both for success in private life and participation in public life. Anyone who genuinely believes in those ideals of public education should support whatever system best fulfills them.

Correctly understood, school choice programs are not a threat to public education, they are simply public education by other means. They ensure that every family has access to the schools they deem best for their kids, whether operated by public officials or independent educators.

Some people worry that  a system of unfettered parental choice would fail to promote social cohesion – something that our public schools are widely believed to do. That view is precisely backward. There are numerous studies comparing the tolerance and civic engagement of public and private school students and graduates, and this research either favors the private schools or finds no significant differences between the sectors.

And as for Balkanizing communities, that is sadly something that our traditional district-based public schools have been doing since their inception. In fact, my Cato associate Neal McCluskey has documented nearly 150 battles over the content of public schooling from all over the country – in the 2005-2006 school year alone. From sex education to the singing of Christmas carols, our single official system of schools forces us into unnecessary conflict. A true system of school choice would eliminate these conflicts, allowing parents to get the sort of education they value for their own children without compelling them to force their preferences on their neighbors, as our existing school system has done for more than a century.

The voucher program before Utah’s voters may not be without its imperfections, but to portray it as a threat to public education completely misses the point. School choice is simply public education by other means, and, in many ways, a better means than the district-based system we inherited from the 19th century.

Health Care Podcast

I am interviewed by Russ Roberts.  The topic is health care economics, based on my book Crisis of Abundance.

The interview was slightly censored.  In trying to explain how we ended up with third-party payments for health care, I suggested this analogy:

Suppose we were 20-year-old guys who hung out together, and one of our friends was down on his luck with women.  He’s really depressed about it.  We decide–not necessarily the brightest idea–to hire him a prostitute.  We don’t want him to know she’s a prostitute, so we all chip in and pay her, tell her to meet our friend at a bar, and make him feel better about himself.

Next morning, we ask him how it went.  He says, “Great.  I really feel better about myself.  In fact, I’m going to see her again tonight.”

As friends of the guy, we look at each other and realize that he will be devastated if he learns the truth.  So we chip in again and pay the prostitute to make our friend feel better about himself.  This keeps happening day after day, and eventually maintaining our friend’s illusion about his love life gets to be really expensive.

Similarly, free health care is an attractive illusion.  It’s just gotten to be really expensive to maintain the illusion.

Even though that analogy was cut, I hope the podcast is interesting.

How Cheap Are Politicians?

Dan Morgan has another excellent Washington Post report on our tangled web of farm subsidies, tariffs, government purchases, and so on. This time he examines the sugar industry’s political contributions–“more than 900 separate contributions totaling nearly $1.5 million to candidates, parties and political funds” in 2007 alone. Most of the money went to Democrats, apparently, which might explain why Democrats opposed more strongly than Republicans an amendment to strike the sugar subsidy provisions from the bill. Morgan delights in pointing out members of Congress such as Rep. Carolyn Maloney of Queens and Manhattan and Rep. Steven Rothman of bucolic Hackensack and Fort Lee, New Jersey, who received funds from the sugar magnates and voted to protect their subsidies despite the fact that they would seem to have more sugar consumers than sugar growers in their districts.

One wants to be careful here. The assumption that contributions drive congressional votes is often exaggerated. Party, ideology, region, religion, and other factors may have much more influence on how a member votes than contributions, and contributions often reflect a member’s votes rather than the other way around. Nevertheless, the sugar subsidy is so manifestly a bad policy, and support for it seems so obviously an odd position for urban northeastern Democrats, that it is hard to resist the suspicion that contributions play a role in getting 282 members of the House of Representatives to support it.

So $1.5 million is a lot of money, and it seems to have done the trick. But … is it really so much money? According to Morgan, the sugar provisions in the farm bill are worth $1 billion over 10 years. That’s a huge return on investment. In what other way could a business invest $1.5 million to reap $1 billion? And look at the contributions–“more than 900 separate contributions totaling nearly $1.5 million.” That is, the average contribution was less than $1700. Morgan writes that a fundraiser for Maloney raised $9,500, and she also received $5,000 from a union that represented sugar workers. Rep. Maurice Hinchey (D-NY) received $5,500 from sugar interests. That’s not very much money.

So the really interesting question is why we don’t see more such investments. If indeed, as Morgan’s article would lead us to believe, an investment of $1.5 million in political contributions can ensure a payoff of $1 billion, why doesn’t everyone do it? Congress hands out some $2.8 trillion a year. There aren’t many pots of money in our society bigger than that. Getting one percent of that, or one-hundredth of one percent of that, would be worth a lot. Maybe we shouldn’t talk about this, lest politicians start raising their prices and lobbyists persuade even more industries to invest in Washington.

Quiggin Says “libertarian,” Reynolds Said “Libertarian”

As Justin notes below, Aussie social democrat blogger John Quiggin recently wrote that Instapundit Glenn Reynolds has renounced being “a libertarian.” Quiggin then launches into a bizarre spleen-venting about libertarians, including the charge that Cato’s opposition to the Iraq war is sotto voce. (If you listen carefully, you can still hear the echoes from Justin’s shriek of frustration. And rightly so.)

Justin’s not the only one who should be frustrated; Quiggin completely misunderstands what Reynolds wrote. (I thought Australians knew English?)

Here’s the Instapundit post that Quiggin cites as showing Reynolds’ change in philosophy:

CONFESSIONS OF A former card-carrying Libertarian. I’m one of those, myself. Takeaway line: “From here, it looks as if the Republicans have become wrong and corrupt, the Democrats are stupid and corrupt, and the Libertarians have gone plain crazy.”

UPDATE: Bill Quick: “Do I ever understand where Steve is coming from, because I live in the same damned place.”

Get it? Reynolds isn’t talking about libertarianism, but about the LP. And the GOP. And the Dems. That is, it’s a (critical) comment about political parties adrift from sound political philosophy, not about Reynolds changing his political philosophy.

Quiggin apparently spent less time reading and understanding Reynolds’ point than he did skimming Cato’s website.

Excellent Story Shows Benefits of Tax Havens

Reporting from London, The Business notes that so-called tax havens are among the world’s richest jurisdictions. But rather than emulating success, high-tax nations attack these free-market outposts — with the Paris-based Organization for Economic Cooperation and Development leading the charge:

Of the 20 wealthiest nations, 13 of them are low-tax territories. …In the past few years, politicians from the developed world have led a determined assault on tax havens. …The Paris-based Organisation for Economic Co-operation and Development has led a series of attacks on the world’s tax havens, accusing them of complicity in money laundering and of lacking transparency. At one point the French government advocated an international boycott of tax havens, arguing that EU banks should refuse to deal with them. …Even the Vatican has joined the campaign. Pope Benedict XVI was reported last month to be working on a doctrinal pronouncement that will condemn tax evasion as “socially unjust”, while the planned encyclical — the most authoritative statement a pope can issue — will denounce the use of tax havens and offshore bank accounts by wealthy individuals, on the grounds that they reduce the tax revenues raised for the benefit of society as a whole (although curiously the Vatican hasn’t reacted so well to proposals by the Italian government to curb the Catholic church’s own tax break). But instead of attacking tax havens, other countries should be trying to learn from them. The way they lead the global wealth rankings is testament to the power of lower taxes to raise overall living standards. 

The story explains that the demagoguery against low-tax jurisdictions — particularly regarding charges of money laundering — is false (something that is confirmed by both international bureaucracies and U.S. government sources):

[T]hough money laundering through the Cayman Islands may be a staple of popular fiction, there isn’t much evidence for it in the real world. Most criminals launder the proceeds of the crimes domestically, since they are well aware that moving their money across borders only increases the chances of detection. Terrorists use traditional networks of money changers — not banks in Jersey.

The article closes with an excellent summary of the key issues. Tax competition constrains politicians and it encourages policies that make ordinary people richer, and tax havens play a key role in this process:

Low-tax territories provide an alternative to the high-tax world. They impose some discipline on governments elsewhere, restricting the amount they can raise in taxes by providing an escape route. But more importantly, they demonstrate the ability of lower taxes to consistently raise living standards, even in the most unpromising locations. Maybe it is time to stop hammering the tax havens — and start trying to learn from them instead.