Blinded by Ideology

A letter writer in the Washington Post complains about this Post editorial, which criticized the repression in Cuba, particularly the lack of freedom of expression and the right to emigrate. The writer declares,

Cuba is managing its economy and is making incremental changes and reforms within its socialist and human-needs-oriented system. The U.S. government and The Post shouldn’t lecture Cuba when we have our own problems with the economy, the budget, health care, infrastructure and our moral standing in the world.

I’ve just published a book, most of whose 300 pages are devoted to criticisms of the U.S. government on a far wider range of issues than that, so I’m no knee-jerk defender of any government, much less of the Bush administration. But let’s take a closer look at the writer’s claims:

Cuba is managing its economy…

Well, every country manages its economy in some sense. The Cuban government has managed to turn a beautiful country of tropical beaches 90 miles from North America into one of the poorest countries in the world.

…and is making incremental changes and reforms…

Yes, as the Post editorial noted:

In the past few weeks, Cuban President Raúl Castro has introduced a handful of micro-reforms to the oppressive and bankrupt regime left behind by his brother. Cubans are now officially allowed to buy cellphones, computers and microwave ovens; state workers may get deeds to apartments they have been renting for decades; and farmers may be able to sell part of what they grow at market prices. The measures won’t have much impact (though they have evidently annoyed the officially retired Fidel Castro): The vast majority of Cubans can’t afford to buy electronic goods, and the agricultural reforms fall short of steps taken years ago by North Korea.

So reforms are good. Wake me when they reform more than North Korea.

…within its socialist and human-needs-oriented system.

You’d think socialists would have stopped claiming Cuba. If Cuba is socialist, then socialism is a disaster. While the rest of the Americas grow, Cuba declines. Cubans keep their 1950s American cars shiny and clean because that’s what they have. Socialism’s great accomplishment is to try to freeze the economy at the level to which capitalism (in this case, a corrupt and crony capitalism) had brought it.

As for “human-needs-oriented,” millions of Cubans express their human needs by getting on rickety boats to try to sail to America. One might say that Cuba is like a vast open-air prison, except that American prisoners get better food and more choices in books, newspapers, and television than Cuban citizens do. It’s a rule of thumb around the world: the more a government proclaims its orientation to “human needs,” the less well it actually serves human needs.

The U.S. government and The Post shouldn’t lecture Cuba when we have our own problems with the economy…

Yes, our economy is growing only slightly these days, and we have looming fiscal disasters because our own government has introduced socialism into health care and retirement savings. But Americans don’t flee to Cuba, and our GDP per capita is estimated at something like 10 times that of Cuba. 

…the budget…

Yes, our federal budget is a disaster. But it hasn’t — yet — destroyed our standard of living, and I doubt that the adoption of Fidel Castro’s budgeting methods would help.

…health care…

Yes, we have the best and the most expensive health care in the world. If we had less socialism in health care, we could bring down our costs. But more drugs are created here, more medical advances are made here, and people come to American hospitals from all over the world, especially from the often-touted Canadian system.

…infrastructure and our moral standing in the world.

My colleagues and I have written very critically about the Bush administration’s war in Iraq, its treatment of the accused, its accumulation of executive power, and other actions that have harmed America’s standing in the world. (Not to mention President Clinton’s unauthorized uses of military force in Europe, Africa, and the Middle East.) But if America’s moral standing in the world is less than that of the totalitarian Castro-Castro regime, then that is an embarrassment to the world, not to the United States.

As Human Rights Watch reports, “Cuba remains the one country in Latin America that represses nearly all forms of political dissent. There have been no significant policy changes since Fidel Castro relinquished direct control of the government to his brother Raul Castro in August 2006. The government continues to enforce political conformity using criminal prosecutions, long-term and short-term detentions, mob harassment, police warnings, surveillance, house arrests, travel restrictions, and politically-motivated dismissals from employment. The end result is that Cubans are systematically denied basic rights to free expression, association, assembly, privacy, movement, and due process of law.” And Human Rights Watch doesn’t even take note of the economic liberties that are systematically suppressed.

The Post’s “lecture” concluded this way:

Let Mr. Castro respect the International Covenant on Civil and Political Rights his government recently signed, which guarantees not only freedom of assembly but the right to freely leave the country. Cuban officials recently hinted that the current ban on foreign travel by average citizens might be changed; let it be removed. Then Mr. Castro can discover just how many of Cuba’s 11 million people are willing to go on enduring a regime whose idea of reform is permitting the sale of microwave ovens.

The letter-writer might encourage the Castro regime to follow this advice, and then perhaps Cuba would have some small measure of moral standing in the world.

Not as Good as It Seems

Today, Cuba officially lifted its ban on the sale of computers to the general public. Some other prohibitions have also been scrapped in recent weeks: Cubans can now buy cell phones, stay in hotels previously reserved for tourists, and buy appliances like microwaves and TV sets.

Is this a sign of openness from Cuba’s geriatric regime? Not so.

A Cuban dissident I met in Havana last year sent me today an article he wrote about the real motive behind relaxing these bans. It has been reported in the state-controlled media that people purchasing these goods are later being investigated by the authorities who want to know the real sources of their income. As it’s widely known, the average Cuban salary is less than $20 a month, while the cost of most of these goods ranges in the hundreds of dollars. Many Cubans get their extra money from relatives in the United States, but many others run independent (and illicit) small businesses.

My friend tells the story of the first person to purchase an electric bicycle, which cost the equivalent of $1,070. This man had a small butter factory that apparently was very profitable, since he was selling the butter at a lower price than the government. After buying his electric bicycle, the authorities investigated him and discovered his factory. They proceeded to confiscate everything they found in his home, including the bike.

Let’s not forget that, after all, there is still a Castro brother running the show on the island. As my Cuban friend says about the so-called “reforms,” the fact that something is no longer prohibited doesn’t mean that you can do it.

Deborah Jeane Palfrey, Hounded to Death

Faced with the prospect of years in prison, Deborah Jeane Palfrey, known as the “D.C. Madam,” committed suicide on Thursday. Her pursuers and prosecutors should be ashamed of themselves.

Running a house of prostitution is not a distinction most of us would wish for our daughters. But it’s a vice, not a crime. That’s a crucial distinction in a free society. So far as we know, she never murdered, raped, assaulted, robbed, or defrauded anyone. Like any broker, she brought together willing buyers and willing sellers. And for doing so, she was convicted–not actually of prostitution but of “racketeering” and money laundering — and faced up to 55 years in prison, though prosecutors estimated that her sentence would likely be “only” four to six years.

Palfrey was indicted after a three-year joint investigation by the Internal Revenue Service and the U.S. Postal Service. Apparently they couldn’t catch her cheating on her taxes, but her employees mailed her cut of the proceeds in money orders, which led to racketeering and money laundering charges. As with former New York governor Eliot Spitzer, apparently a fishing expedition into money matters turned up something far more headline-worthy.

But really — a three-year investigation of a prostitution service? Are there no real criminals? Are there no terrorists? Before, during, and after 9/11, the Justice Department ran a 13-month investigation of a brothel in New Orleans. At least 10 FBI agents were involved. As Jonathan Turley noted, “Only the FBI could go to the French Quarter and find only a dozen prostitutes after a year of investigation. Given the roughly one-to-one ratio between agents and prostitutes, the FBI could have produced a hundred times this number by simply having agents walk down Bourbon Street.” What a ridiculous waste of money and manpower.

But the waste is not the worst aspect of this outrage. Even if there were no criminals and no terrorists to hunt down, it would be wrong to harass, arrest, prosecute, imprison — and hound to death — people who are violating no one’s rights.

There’s a nightmarish intersection of old prostitution laws and modern financial regulations. Palfrey was investigated on suspicion of tax evasion and then convicted of “racketeering” and “money laundering.” But she was no racketeer; she was one woman with some employees or contract workers. Spitzer’s bank accounts were being monitored, as apparently all our bank accounts are, under post-9/11 laws allegedly designed to turn up evidence of terrorist financing or other nefarious activity. And boy, did they find something sinister — a married man having sex with prostitutes.

In many ways we are more free today than we were in previous decades. But new regulations and new technology are making it much easier to monitor our activities and to actually enforce both old and new laws. It’s like a silent police state that we only realize when we’re suddenly served with papers. 

Palfrey told journalist Dan Moldea, “I’m not going back to jail. I’ll kill myself first.” A woman who had worked for her had also committed suicide after being charged with prostitution in 2007.

It’s time to repeal these antiquated laws against prostitution and to take a close look at the use and abuse of racketeering, money laundering, bank monitoring, and other intrusive laws. Someone needs to step forward and start that debate. Perhaps Governor Spitzer and Sen. David Vitter would be good candidates.

In the meantime, may Deborah Jeane Palfrey rest in peace. And may her persecutors have many sleepless nights.

Real Budget Reform

Senator John McCain and other budget reformers are right to rail against the institutionized corruption of federal “earmarking.” Earmarks are, however, just a small part of the massive bloat in the federal budget. Earmark reform is needed, but presidential candidate McCain needs to propose more fundamental budget reforms in the coming months.

Representatives John Campbell (R-CA) and Jeb Hensarling (R-TX) have just introduced an idea that McCain could champion: A constitutional cap on the overall federal budget. You can read the proposed amendment here, but essentially these House budget experts propose that annual federal spending growth should not exceed the long-run average growth in the U.S. economy, except with a two-thirds vote or a declared war.

I’ve proposed a similar budget cap that would be statutory, not constitutional, and thus easier to implement. See here and here.

Either way, the point for Mr. McCain (or Mr. Obama, if he is so inclined) is to promote some sort of overall cap on the budget to drive home that the government’s budget should not grow any faster than the average family’s budget. 

Re: Wall Street Journal Editorials — The Fed Caused the Rise in Food and Oil Prices?

In numerous unsigned editorials, The Wall Street Journal has argued that cutting the federal funds rate to 2% from 5 1/4% last September has been the main reason prices of crude oil and food commodities have soared in recent months. Such commodities are priced in dollars and the dollar was generally falling through February, though not in the past two months (even though the funds rate was reduced by one percentage point).

An April 28 editorial, “The Fed’s Bender,” notes that “since 2003 the dollar price of oil has climbed far more rapidly than the euro price — 273% in dollars, compared to 146% in euros.” It is not likely that the whole 2003-2008 picture reflects “the European Central Bank’s sounder monetary management,” as the editorial implies. The euro had dropped to below parity with dollar until late 2002. And the fed funds rate was repeatedly increased from 1% in 2003 to 5 ¼% in mid-2006 (well above the ECB’s equivalent 4% rate). The euro rose partly because it had first fallen, but also for reasons other than central bank interest rates (economists have no reliable model for forecasting floating exchange rates).

The editorial boldly concludes that “had the dollar merely retained the same purchasing power as the euro, today’s price of oil would be below $70 a barrel.” That is a counterfactual exercise that makes little sense.

Even if we accept the half-true premise that the dollar-euro exchange rate is sensitive to relative short-term interest rates, the dollar might have “retained the same purchasing power as the euro” by having the ECB lower interest rates to 3% and the Fed to keep ours at 3%. Or the Fed might have kept the funds rate at 5% and the ECB at 4%. Although either option might have stabilized that particular exchange rate, they would not have had the same effect on global economic growth and therefore on the world demand for oil.

If oil had been priced in dollars and the euro had not appreciated against the dollar, then the euro area would not have been as insulated as it was against the rising cost of oil. Because demand is responsive to price (particularly business demand), Europe would have bought less oil than it did. Or, to use the editorial version, if the U.S. still faced $70 oil then we would try to buy more. Either way, the price in dollars would not have remained the same.

The Economist index covers the prices of 25 commodities, excluding oil and gold, with food accounting for 56% of the index. By April 22 it was up 31% for the year and 3.7% for the month, when measured in dollars.

That was mostly because of food. Industrial commodities were up only 1.6% for the year.

If we are going to blame the rising price of oil and food commodities on the dollar, do we need a different theory to explain why industrial commodities have barely risen?

Here’s another anomaly: Measured in British pounds, the commodity index was up about the same as it was in dollars—31.6% for the year and 4% for the month. That can’t be because Britain has a weak currency—the pound buys 8.9% more dollars than it did a year ago. It can’t be because the Bank of England cut interest rates too much, since 3-month interest rates are 5.86% in Britain, compared with 1.97% in the U.S.

I happen to agree that the Fed (and ECB) have paid too little attention to the impact of exchange rates on prices of internationally traded commodities. And I suspect the Fed has already gone too far with rate cuts and will have to put rates back up shortly after the election. But to single-out a few sensitive commodity prices that have risen the most (in dollars or pounds) and blame just those prices on the Fed is going too far.

I Have a Dream …

… that one day, corporate executives will tire of being bullied by demagogic politicians. I was reminded of that dream by a press release issued yesterday by Sen. Pete Domenici, ranking member of the Senate Energy and Natural Resources Committee and long-time Republican major-domo on energy policy. Sen. Domenici asked the heads of the five largest oil and gas companies in America (BP America, Chevron, ConocoPhillips, ExxonMobil, and Shell America) to promptly send reports to his office “explaining” their individual corporate investment strategies with particular attention to their work in the “clean energy” sector.

In my dream, Senator Domenici would get a reply like this:

Dear Sen. Domenici:

We appreciate your interest in our corporate operations, but we are too busy at the moment to expedite your request as outlined in your letter dated April 30. You write in that letter that you are interested in a compilation of all previously released, publicly available data on this matter. Accordingly, we suggest that you put some staffers on the job and compile those reports for yourself. To help you on your way, you will find enclosed our 2007 Annual Report.

That having been said, Senator, we answer to our stockholders, not to you. Our investment strategy is our business, not yours. While we are happy to discuss our perspective on the energy market and the merits of existing and proposed public policy, we are not interested in encouraging the idea that our investment strategy is a legitimate matter of interest to the United States Senate.

Cordially,
Big Oil CEO

Alas, it is only a dream.