Newseum Opens April 11th - Will it Keep Up?

The new Newseum opens April 11th, and its an impressive project in many respects.

It’s a striking but tasteful modern building, with the text of the First Amendment inscribed on its front. The location on Pennsylvania Avenue close to the Capitol has a defiant quality that I admire.

As I walked past yesterday, I observed its display along the sidewalk of current front pages from newspapers around the country and world. It’s a tribute to the importance and vibrancy of the newsgathering enterprise and free speech. Tourists were gathered along the front of the building taking in the headlines.

But I don’t read newspapers. I get my news from a wide array of sources almost entirely online. Sooner or later, I thought as I walked, some state is going to punch a hole in the Newseum’s display, as the state will no longer have a newspaper. Soon enough, most people will get their news in new formats - as I do - from sources and in media of all kinds: blogs, email, traditional news outlets’ online editions, and so on.

Will the decline of the newspaper mislead people into thinking that our vibrant tradition of newsgathering and reporting is on the wane? It’s something to think about.

The “founding partners” of the Newseum are some of the oldest of the old-school establishment media figures. (Good for them, by the way, for supporting this worthy venture.) They and the Newseum’s leadership may think that things are changing for the worse when they’re changing for the better - when news is all around us, in dozens of different formats, provided by tens of thousands of subject-matter experts and on-scene reporters with true local knowledge.

The Newseum’s planned exhibits include room for new media, but by and large they lean toward exalting the newsgathering industry. That industry has had an important role, no question, but I think it is a role that will diminish over time. I hope the Newseum will actively pursue reporting on all the news, not just the news that’s fit to print.

The Fed’s “Central Planning” Woes

Given the financial/regulatory system that we have – which is a very important pre-condition – I grant the Fed and Treasury a TEMPORARY “coordinating” role to help tide over the current crisis.  However, the initiatives and actions implemented so far appear unlikely to succeed.

I agree only with its role in the Bear buyout by JPMorgan.  It is, by nature, a one-time action that does not protect Bear’s shareholders and operators but protects the financial system from unraveling further – similar to it’s actions re: LTCM. Even if it is repeated for another investment bank, it does not raise the issue of moral hazard because no such bank wants to end up like Bear.

However, the Fed’s new and almost direct support of mortgage backed securities through its primary dealers introduces another moral-hazard potential – likely to be a huge problem down the road, and especially because of the interest rate policy it is adopting.

Interest rate cuts are being overdone. Large cuts are continuing the Fed’s past mistakes of introducing greater uncertainty in market participants’ expectations. It is using the wrong (inflation fighting) tool to achieve its goal of systemic stability which has arisen from poorer visibility of asset quality. The added uncertainty will prolong the resolution of current credit/liquidity shortages.

The longer that credit/liquidity problems last, the more likely is the introduction of PERMANENT new financial market regulations – which would hinder efficient operation – in the very function that is key to resolving current credit shortage problems – the generation of price information.

Finally, Prof. Cowen’s recent NYT oped (“It’s Hard to Thaw a Frozen Market”) compares market pricing under capitalist and socialist systems.  In brief, the argument is that socialist systems’ poor market pricing abilities appear to be reflected in the current credit-market woes of the American “capitalist” system. This comparison appears misplaced to me. The general U.S. economy may be relatively free and capitalist – but financial and credit markets are not quite so free.

Current credit market problems are not the result of pure and free market operation/competition.  We have a fiat currency whose supply and purchasing power is controlled by Fed interest rate policies. And it appears to have made serious mistakes in the process. This involves larger issues of whether asset prices should be objects for setting Fed policy and whether and how the Fed should respond to supply/oil shocks. Fundamentally, however, financial market participants naturally don’t look to “the free” market to set their expectations about the dollar’s future purchasing power. Those expectations are set by a “central planner” – the Fed.

Stupid Government Tricks

When I go to New York, I often ride the subways up and down Manhattan. Each ride costs $2. Usually I pay $10 for a MetroCard and get a $2 bonus, so you get six rides for the price of five. But on my most recent trip, to give a speech at the Manhattan Institute, I arrived at Penn Station and went to buy my $10 MetroCard–only to discover that the bonus is now $1.50 instead of $2. But what good is that? Now I get five rides for the price of five, and I have a card with $1.50 on it that won’t get me another ride. When I mentioned this discovery to one of the numerate journalists on John Stossel’s team at ABC News, he instantly pointed out that you have to buy four cards before you get your full bonus. After you buy four cards, you can get three bonus rides (instead of the four bonus rides on four cards under the old system). But meanwhile, you have to hold on to each card and trade it in for a new card, unlike the old system where you used the card up and discarded it.

It’s not the price increase that bothered me. I realize that each subway ride is heavily subsidized (less so in New York than in other cities), so I can hardly object to a price increase. It’s just the poke in the eye of promising me a bonus if I spend $10 at once, and then making that bonus extremely difficult to actually realize. And to think that some people want to turn our medical care over to such a system.

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DC’s Apathetic, Complacent Nonproducers ♥ Snow Jobs

I just came across this letter I wrote to the editor of the Washington Post.  Sadly, the editor declined to publish it.  Since the Supreme Court just heard oral arguments about the D.C. gun ban and the meaning of the Second Amendment in District of Columbia v. Heller, it remains relevant:

On January 5, we learned that District officials filed a brief with the Supreme Court [“Gun Law Prevents Harm, D.C. Argues,” Jan. 5] defending the city’s gun ban on the grounds that: the Second Amendment does not protect an individual right to keep and bear arms; the ban “does not deprive the people of reasonable means to defend themselves;” and “less restrictive approaches would not be adequate.”

Fifteen pages later, Colbert I. King [“Outfoxed In the District,” Jan. 5] wrote of the “conditions that threaten the quality of life of all who live in this city: criminals roaming the streets in search of human prey; an apathetic and complacent government workforce; nonproducers ensconced in high places; and elected leaders who fall for snow jobs.”

Draw your own conclusions.

Obama and the Cost of War

Thursday in West Virginia, Barack Obama gave a speech laying out the economic costs of the Iraq War, which he estimated as up to $3 trillion (Linda Bilmes and Joseph Stiglitz’s estimate) and $10 billion a month. He listed the many things that money could have bought. Robert Menendez made similar points in the Democrats’ weekly radio address.

Americans disagree on whether to stay in Iraq and the best use of the money we’d save by leaving, but everyone should acknowledge that this is the way to argue about the war. The questions that consume the media, whether the surge worked, whether we’re making progress, and so on, are important, but they alone cannot determine whether we ought to continue the occupation. That depends primarily on cost-benefit analysis, however uncertain. (Moral questions matter too but are not meaningful when divorced from consideration of costs and benefits.)

Since the cost of staying is enormous, the backers of continuing American participation in the war should enumerate the benefits that justify it (along with the deaths and the shifting of our constitutional design towards unbalanced executive power). War boosters seem to understand the terrible burden of their position, as evidenced by their tendency toward wild, worst-case accounts of the consequences of American departure. In my view, the war wouldn’t be worth continuing even if the surge were working, which it isn’t.

But since we’re talking opportunity costs, what about the rest of the national security budget – you know, the other 80 percent of American security spending, now approaching three quarters of a trillion dollars, which is mostly spent to defend us against a couple weak conventional enemies? Like most other Democrats, Obama not only avoids complaining about regular defense spending, but backs the ongoing plan to expand the ground forces, which will add $15-20 billion in annual defense costs in the name of better executing future occupations like Iraq. I understand the political calculus here, but let’s not give the guy too many medals for political courage.

Democrats like Obama and Menendez also argue that Iraq is a reason that we are shortchanging state-building efforts in Afghanistan. This talking point illustrates the trouble with conventional foreign policy thinking on the so-called left. By saying that Afghanistan needs the medicine Iraq is getting, Democratic foreign policy leaders are rushing to repeat a mistake they rightly condemn. As Harvey Sapolsky, Chris Preble and I have argued, this thinking shows that the hubris that brought us into Iraq is essentially intact.

Defending American interests in Afghanistan requires nothing more than the absence of haven for international terrorists and an example made of those who offer it. The latter is a lesson well taught. Should it fail, a small ground force can target terrorist camps and supporters via raids and air strikes guided by intelligence, even if Taliban militias gain power in some regions. Those missions never required that Afghanistan become a modern nation, democratic, or even stable.

Instead of this realistic approach, the next President will probably expand a second no-end-in-sight war, one meant to assert the control of a statelet in Kabul over an unruly territory offering little historic basis for the word “nation.” Afghanistan is full of arms and grievances. It lacks the basics of statehood: a road network, a national energy grid, widespread patriotism, and tax collection. The notion that a 30 or 50 percent increase of Western forces and investment can transform Afghanistan into a peaceful, centralized state shows idealism of stunning tenacity. Obama talks more sensibility about these matters than John McCain, but he should apply some cost-benefit analysis to that spending too.

USA Today Story on Corporate Tax Blames the Victim

Compared to other nations, the United States has a medium-sized tax burden. Most of Europe has harsher taxes, but there are plenty of place in the world that have lower tax burdens. But there is one area where America is behind almost every other nation, and that is the taxation of corporate income. The combined federal/state corporate rate is nearly 40 percent, exceeded by only Japan. Not only does the U.S. have a high tax rate, but the IRS taxes the “worldwide” income of companies, which means that it is especially hard for American companies to compete in foreign markets - particularly since almost every other nation relies on the common-sense approach of territorial taxation, which means they do not tax the “foreign-source” income earned by their companies. The only silver lining to this dark cloud is that American companies have some ability to postpone when they pay the additional layer of tax on their foreign-source income. In the minds of greedy politicians (and sloppy reporters), however, this “deferral” of a discriminatory tax is a loophole. Here’s what USA Today reported:

Democratic presidential contenders Hillary Rodham Clinton and Barack Obama have cast it as an outrage that should be a key target for the next president: a tax break they say encourages employers to ship American jobs abroad. The charge could be dismissed as typical campaign-trail exaggeration during a Democratic primary season marked by populism, except for one thing. Many analysts say it’s true. “The U.S. tax system does provide an incentive to locate production offshore,” says Martin Sullivan, a contributing editor to Tax Notes, a non-profit publication that tracks tax issues. At issue is the U.S. tax code’s treatment of profits earned by foreign subsidiaries of American corporations. Profits earned in the United States are subject to the 35% corporate tax. But multinational corporations can defer paying U.S. taxes on their overseas profits until they return them to the USA — transfers that often don’t happen for years. …”If you had two companies in Pittsburgh that both were going to expand capacity and create 100 jobs, our tax code puts the company who chooses to put the plant in Pittsburgh at a competitive disadvantage over the company that chooses to move to a tax haven,” says former White House economist Gene Sperling, a Clinton adviser.

But Senators Clinton and Obama, not to mention Martin Sullivan and Gene Sperling, have things backwards. It is America’s high tax rate that creates an incentive for jobs to be overseas. Deferral simply means that American companies are only somewhat disadvantaged in their efforts to earn market share in other nations. The USA Today story does acknowledge that America has a high corporate tax rate, but the reporter is surprised that this high rate means low revenue, even though it is actually a sign of “Laffer Curve” responses to punitive taxation:

The U.S. has one of the highest corporate tax rates in the world, and its corporate tax code has a well-earned reputation for complexity. But despite the high rate, the U.S. takes in less annual revenue from corporate taxes, measured as a percentage of economic output, than almost all other major economies.

The current system is bad for America, but critics have the wrong solution. Instead of making the U.S. tax code even more punitive by ending deferral, America needs a big reduction in the corproate tax rate. So long as America’s rate is far higher than other nations, companies will have an incentive to create jobs abroad. Ending deferral would not alter that incentive. All that would happen is that foreign companies would be creating a larger share of those jobs. The story does quote a couple of economists who have starkly different estimates of employment implications, but both agree the current system causes job losses:

Kimberly Clausing, a professor of economics at Reed College in Portland, Ore., says the corporate tax code may account for up to 3 million jobs being abroad. Gary Hufbauer, an economist who has written a book on international taxation, puts the number at just 200,000. …The Bush administration warned last year that U.S. corporate giants are at a competitive disadvantage in world markets because foreign rivals pay lower taxes in their home countries.

The article also notes that U.S. companies that create jobs abroad also create jobs in America. In other words, successful, growing firms tend to expand in all markets. A lower corprorate tax rates, needless to say, is one of the keys to a pro-growth environment for American companies. Ireland is a good example of a nation that reaps large benefits from a low corporate tax:

Matthew Slaughter, a Dartmouth College economics professor who worked in the Bush administration, says that historically, multinationals that have added jobs at their foreign affiliates also have expanded hiring in the USA. As U.S.-owned foreign units prosper, their corporate parents must add accountants, marketing specialists and other managers at their U.S. headquarters. In 2004, Slaughter released a study, based on employment data for the decade ending in 2001, which concluded that U.S. multinationals created two jobs in the USA for every job they added abroad. That comforting conclusion broke down in more recent years. From 1991 through 2005, multinationals created almost as many jobs abroad (3.6 million) as they added at home (3.8 million). …Evidence of legal tax-shifting can be seen in government statistics. In 2005, U.S. multinationals’ units in Ireland, which levies a corporate tax of just 12.5%, reported profits that were twice as large as the profits of all U.S. affiliates in Germany, France and Italy combined.

“Montana Wins REAL ID Standoff”

So reports the Missoulian on the Department of Homeland Security’s capitulation in the face of Governor Schweitzer’s resolute rejection of REAL ID.

On Friday, Montana Attorney General Mike McGrath notified the Department of Homeland Security that the state will not comply with REAL ID but will pursue the identity security policies it deems appropriate. McGrath urged DHS not to penalize the state for rejecting REAL ID.

DHS Assistant Secretary for Policy Stewart Baker chose to interpret McGrath’s letter as a request for an extension of the REAL ID compliance deadline and granted it.

In other words, DHS has abandoned any pretense that it can tell states what to do. A showdown with recalcitrant states around the May 11 compliance deadline would require the Transportation Security Administration to disrupt the passenger air travel system, something DHS evidently recognizes to be a losing proposition.

Montana wins.

More reporting at the Threat Level blog.