Victory for “Laissez Faire”

I just talked to Brad Stevens, who runs the customized card programs and much else at Starbucks, about how the company came to reject customers’ request for customized cards featuring the call to arms “Laissez Faire.” In my Wall Street Journal article on Monday, I noted that customers had had requests for “Laissez Faire” rejected, while “People Not Profits” and “Si Se Puede” were approved. I wondered “just what the company’s standards were. If ‘laissez-faire’ is unacceptably political, how could the socialist slogan ‘people not profits’ be acceptable?”

Stevens assures me that the company has no intention of approving or rejecting personal messages on the basis of ideology. Only a very small number of requests are rejected by the review team at the contractor who actually fulfills the orders, mostly because they are obscene, are insulting to the company or to a specific person, infringe on trademarks, are overtly political, or in some other way associate the Starbucks brand with images the company doesn’t want. Thus, for instance, they have rejected such messages as “Democrats Suck, Republicans Blow,” “Vote Democratic for a Change,” “Impeach Bush, Vote Hillary,” and “I Love GWBush and Cheney.” They also, according to their records, rejected “Fair Trade,” odd since the company boasts that it is “North America’s largest purchaser of Fair Trade Certified coffee.” It may be a sensitive term, though, since “fair trade” campaigners continue to criticize the company.

Stevens says the rejection of “Laissez Faire” was just an unintended outcome of the instructions that the company gave its supplier. And indeed, Jonathan Adler reports today on the Volokh Conspiracy that a VC reader inspired by my op-ed has received his Starbucks Customized Card proudly carrying the message “Laissez Faire.”

And by the way, just in case anybody is confused, of course I think a company has the right to set any rules it wants to for its customized cards. If a company wants to allow “Obama for President” and reject “McCain for President,” it has every right to do so. That’s what laissez-faire means! But customers annoyed by the policy have a right to expose it, complain about it, or take their business elsewhere.

In this case the market worked, “Laissez Faire” cards are fully acceptable, and my Starbucks-addicted colleagues can breathe easy again.

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The Folly of Dismissing the Effects of Entitlements on Fertility

Steve Entin recently wrote in the Wall Street Journal (“The Folly of ‘Family Friendly’ Tax Policy,” April 9, 2008; Page A15): “…proponents of greater family tax credits also claim that society owes families a big child credit because the children will face huge payroll taxes to support childless retirees who never paid to rear the next generation. Another claim is that payroll taxes make it hard for families to afford children, and we need families to have more children to pay for Social Security and Medicare. These arguments don’t wash. Most people have children because they want them, not because the state needs future taxpayers to fund social programs.”

On the 1st claim of the child tax credit proponents: Higher child tax credits today would strengthen the defense against cuts in future benefits by everyone, and especially by childless retirees.  But that goes in the wrong direction relative to what’s required–cutting future benefits because they’re not payable, even under today’s high payroll taxes.

On their 2nd claim: If payroll taxes are a hurdle to procreation by young adults, the correct remedy should be to lower them rather than introduce yet another entitlement for young adults in their children’s names – which they would use to extract resources from those children in the future by way of retirement benefits. But today’s high payroll taxes on parents are not for saving and investing for their own future retirements.  Those taxes are for paying benefits to today’s retirees under our pay-as-you-go Social Security system.  Cutting payroll taxes, therefore, would require today’s retirees, in turn, to accept smaller benefits—which is, of course, a big no-no for proponents of child-tax credits.

According to Mr. Entin, however, both of these claims don’t wash because of the rather tepid idea that people have kids because they want them, not because they (or the state) wants more future taxpayers.

However, according to studies on the potential links between fertility and entitlement spending, (for example, Michele Boldrin’s) it appears that fertility rates correlate negatively with generous government entitlement expenditures across countries.  They also correlate negatively with better access to financial markets which enables people to securely transfer purchasing power to old age. So positive fertility seems to reflect, however indirectly, a desire to “save/invest” for the future in the absence of other public and private vehicles of achieving economic security during old age.

The bottom line: Along with its well-established negative impacts on saving/investing and labor supply, unfunded entitlement promises potentially erode yet another pro-growth factor–fertility.  An estimate of net benefit promises to current adults under current entitlement policies – compiled from various tables of the latest Social Security and Medicare Trustees’ reports – shows that such underfunding amounts to $44 trillion in present discounted value!  That’s a promise of almost $200,000 in today’s dollars of future Social Security and Medicare benefits for each person aged 15 and older today.  Why would you, then, work, save, and have children to safeguard your future?

Is There an Oil Price Bubble?

I’m not sure exactly what a “bubble” is. The popular view is that a “bubble” exists when the fundamental value of an asset (the present value of the stream of cash flows that one might expect to receive in the future) deviates significantly from the market price of that asset. But future cash flows are by definition uncertain. Because market fundamentals are based on expectations regarding future events, I don’t know how one can know a priori when a bubble exists unless one has access to a time machine or crystal ball. There are plenty of citations I could offer (like this paper from the Federal Reserve Bank of New York and this paper from Brookings) from very credible economists arguing that the rise in housing prices was perfectly consistent with “non-bubble” economic fundamentals.

Moreover, “bubbles” (that is, market expectations regarding future returns that turn out to be incorrect) can last a long time. Economist Robert Shiller, for instance, analyzed approximately 400 years worth of housing data and concluded that, over time, housing prices track increases in income. But housing markets can – and have – deviated markedly from that fundamental price trajectory for as many as 50 years before reversion to the mean.

Two questions naturally arise. First, is a 50-year bubble really a bubble? Second, are investors irrational (or engaged in irrational speculation) if they invest based on solid data regarding returns from a multi-decadal economic trend? It may be perfectly rational to invest in an over-valued asset if one has good reason to think that one can take the profits and run before the bubble bursts. And it may be perfectly rational to believe that market fundamentals have changed so much that 50 year-old data is no longer relevant to the market at present or future.

I am unsure whether we’re witnessing a bubble in oil markets today. Two “non-bubble” explanations for the price run, after all, are perfectly plausible. First, it may very well be that low-cost crude is running low and/or that demand will continue to surge to such an extent that prices have nowhere to go but up. Second, OPEC member states may continue to invest modestly in upstream capacity in order to maximize revenues, so even if there is plenty of low-cost oil still available in the world, the cartel will prevent new supply from reaching the market. For the record, I am skeptical of both propositions, but I do not dismiss them out of hand.

The initial driver for the oil price increases we’ve seen since 2003 appears clear to me. A combination of tight production capacity and a surge in demand provided the foundation for the current price run. The oil market moves in rather predictable boom and bust cycles, and historic market patterns foretold the timing of this event if anyone was paying attention. For that trend data, see chapter 3 in this book by my colleague Peter VanDoren.

The best argument against “speculation” in the subsequent price spiral is offered by oil economist Phil Verleger, a fellow I think quite highly of. Verleger believes that, whatever truth there might be to the simple “supply-and-demand” story I offered above, those price increases were greatly exacerbated by a huge move of dollars into commodity futures. That influx of cash was not driven by speculation (classically defined). According to Verleger, it was driven instead by the market recognition of the fact that, historically speaking, (i) commodities provided better returns over long periods of time than provided by equities, and (ii) returns on commodity investments are negatively correlated with returns on equities.

Hence, market actors thought they found an investment vehicle that provided a hedge against volatility in stock markets while also promising excellent long-term returns to boot. Even more interesting for our purposes, however, is the fact that this huge flow of cash into commodity futures (with a very large share of that investment going to oil and gas) came primarily from large institutional investors such as pension funds, university endowments, and the like. Those investments tended to be fully collateralized (that is, institutional investors were not borrowing to invest) and they are buy-and-hold investments for the long term. Neither of those two investment strategies is consistent with the popular vision of what constitutes “speculation.”

The most recent Fed actions to combat the deteriorating state of the macroeconomy added even more fuel to the oil price fire. With market actors increasingly convinced that the Fed is willing to entertain inflation in the course of injecting liquidity into the market, investors are looking for investments to hedge against inflation. And what do you know? Returns on commodities have historically been better during inflationary periods than during non-inflationary periods. Ben Bernanke thus sent another strong infusion of cash into commodity futures – again, largely into oil and gas futures.

The increased demand for oil futures drives spot prices because it diverts oil from immediate use into inventories. The stepped-up infusion of oil into public inventories (the Strategic Petroleum Reserve and the emerging state inventory maintained by the Chinese government, for instance) has also contributed to the diversion of oil from immediate use and thus, has further increased prices. Federal mandates for low-sulfur fuel hasn’t helped either.

For what it’s worth, Verleger does not believe that this infusion of cash into oil futures is sustainable. Returns have been modest and there are simply not enough profits available to support these investments over the long haul. “Speculators” – classically understood – have reacted and will continue to react by leaving the market when returns prove disappointing.

Large institutional investors, however, are less sensitive to changing price signals given their “buy-and-hold” strategy and relative lack of market sophistication. But sooner or later, Verleger thinks that they, too, will take much of their cash out of the commodity markets. Historically correct observations about past returns in commodity markets will not hold. They reflect observations about a market that was absolutely tiny compared to the size of the present commodity market (inflated as it is with institutional cash) and profits have and will be dissipated.

Verleger goes so far as to put the “bubble” tag on oil markets, but again, he does not attribute that bubble to simple speculation. Nevertheless, he predicts a (big-time) crash, but does not predict when that crash will occur. I am less certain about the “bubble” tag (see my introductory paragraph), but I wouldn’t bet against it. I think Verleger’s narrative regarding the root causes of the oil price boom is better than any other I’ve run across.

Mandates: a Tool for Shaping Your Values

Prof. Sherry Glied is chair of the Department of Health Policy and Management at Columbia University’s Mailman School of Public Health.  In this week’s New England Journal of Medicine, she gives a fair account of the difficulties of forcing people to purchase health insurance via an “individual mandate.”  Glied writes that an individual mandate “may require a degree of intrusiveness and bureaucracy that some will find unpalatable,” and, “The risks associated with individual mandates suggest that they are no panacea.”

Her closing observation, though, is novel and particularly noteworthy:

Perhaps the most important benefit of mandates is symbolic. By mandating the purchase of health insurance, governments signal to their citizens that coverage is critical. For many uninsured people as well as their families, communities, and elected representatives, this public commitment to coverage may lead to a reassessment of priorities. Although making mandates functional will be demanding, just passing a mandate may serve an important purpose by moving health insurance higher on the agendas of all these constituencies.

This illuminates a driving force behind mandates.  Advocates do not merely want to improve health and longevity.  They want to change other people’s values.  They want to make the uninsured value health and longevity more than the things that must be sacrificed to comply with the mandate – things like barhopping, education, starting their own business, etc.  And they are willing to use coercion (or the threat of coercion) to do so.  The debate over mandates is not just about how to reform health care.  It is also about who shapes your values.

No wonder there are so many people in the health care industry who support mandates.

Memo to the New York Times: John McCain Is a Neocon

One of the funnier press tics of this campaign is when reporters rend themselves in two, agonizing over completely contrived complexity that they imagine exists inside John McCain. Today’s NYT has the latest example, a 1,600 word thumbsucker about how McCain is buffeted between two discrete factions of his foreign policy advisers. It’s complete, unadulterated nonsense.

The narrative Elisabeth Bumiller and Larry Rohter are advancing is that Senator McCain has two different factions within his foreign policy advisory: dyed-in-the-wool war-loving neocons like Max Boot and Robert Kagan on the one hand, and on the other hand, “pragmatists” who are later described in the article as “realists,” best characterized by people like Henry Kissinger, Lawrence Eagleburger, and Richard Armitage. According to Bumiller and Rohter, there are big differences between the two camps.

There are degrees of difference among these advisers, to be sure, but to imply that they represent fundamentally different camps is completely inaccurate. First off, there’s a big difference between academic realists, who overwhelmingly opposed the war in Iraq before it started, and most people who gallivant around the Beltway proclaiming themselves realists. (Beware, in particular, anyone who uses realist with a modifier, as in “idealistic realist.” Only accept the genuine article.) A huge majority of the Beltway foreign policy establishment–including every member except one of the “pragmatist” faction in the Times story–promoted the war and still have failed to grasp the reasons for its failure.

Bumiller and Rohter then roll out the one prominent figure within the DC foreign policy establishment who did oppose the war, Brent Scowcroft, Bush père’s national security adviser. They describe his opposition to the war and list him as a member of the realist camp within McCain’s advisory. But here’s the thing: If Bumiller and Rohter had dug around a bit, they could have discovered that McCain consigliere Randy Scheunemann, famous for his stalwart promotion of Iraqi charlatan Ahmed Chalabi (a topic that goes totally unexplored in the piece) told the New York Sun in 2006 that “I don’t think, given where John has been for the last four or five years on the Iraq war and foreign policy issues, anyone would mistake Scowcroft for a close adviser.”

Reading the Times piece, you’d believe that there are the war-crazed neocons on the one hand, and the prudent anti-war realists on the other hand. In reality, you have the war-crazed neocons on the one hand, and pro-war realists like Henry Kissinger (who is pro-war first and a realist second) on the other. They present Scowcroft, the one opponent of the war, in order to create the impression that there’s a difference of views on the question, but then fail to mention that he’s been dismissed as a peripheral figure by McCain’s closest foreign policy adviser.

I don’t know whether the Times is trying to make up for the Vicki Iseman story with this, but it makes John McCain look a lot less wedded to perpetual war than anybody who’s been paying attention could easily tell you.

OECD Tax Bureaucrat Admits Tax Competition Leads to Better Tax Policy

The Organization for Economic Cooperation and Development is infamous for its anti-tax competition campaign. Acting on behalf of uncompetitive nations such as France and Germany, the Paris-based bureaucracy even has a blacklist of low-tax jurisdictions and wants those “tax havens” to be subjected to financial protectionism. Yet a top OECD tax official just confessed that tax competition is driving tax policy in the right direction by pressuring governments to lower tax rates, as noted in this Thomson Financial News report on the Forbes website:

Chistopher Heady, head of the OECD’s centre for tax policy and administration said…whilst corporate tax rates have fallen in Europe, revenues have not. ‘It is likely that corporate tax revenue will eventually start falling,’ he said at the Brussels Tax Forum. He said that combined with decreasing tax income from high earners…this could lead to a combination of taxes which would be more beneficial for GDP growth. ‘The pressures of tax competition may lead to a tax mix that is better for growth,’ he said.

The OECD logic is remarkable. The bureaucrats admit that tax competition is producing positive results. Heck, an earlier OECD report admitted that “the ability to choose the location of economic activity offsets shortcomings in government budgeting processes, limiting a tendency to spend and tax excessively.” Yet rather than celebrate tax competition as a liberalizing force, the bureaucracy wants to sanction and penalize jurisdictions with pro-growth tax systems.

Dispatch from the ASIL Annual Conference

Wednesday afternoon marked the beginning of the 102nd meeting of the American Society of International Law (ASIL).  ASIL is a venerable organization that takes international law seriously, inviting vigorous discussion and rigorous study of a panoply of issues.  Which is not to say that its members don’t skew in a particular way on many issues of the day.  Generally speaking, cosmopolitans and those who study and promote international law – especially in academia – are toward the left side of the political spectrum.  A left-wing bias in this field means a favorable disposition toward universal norms, global jurisdiction by a world court, and otherwise the imposition of elite consensus on domestic courts and polities.  Still, the ASIL membership is not nearly as bad in those tendencies as, say, the ABA’s international law practice group – and, as I said, it invites speakers and writers from a variety of perspectives.  Moreover, a fair bit of ASIL’s activities relate to private and commercial international law, with which libertarians should have little beef.

In any event, this year’s conference kicked off with the tenth annual Grotius Lecture, given by Jordan’s ambassador to the United States, Prince Zeid Ra’ad Zeid Al-Hussein.  Prince Zeid, educated exclusively in the West, has had a truly distinguished career, and seems to be a voice of enlightenment from a dark part of the world.  His remarks, however, on the topic “For Love of Country and International Criminal Law,” skewed both technocratic and rhetorical: He implored the world community to overcome legal obstacles to helping the victims of genocide and war crimes while at the same time recognizing that international courts are not welfare agencies.  And of course, somehow, yes somehow, we have to reconcile somewhat outmoded notions of sovereignty with a brave new world of globalized crime.  I don’t pretend to give his lofty discourse justice, but in the end it was both intellectual and bland.

What was not bland was the commentary of the good prince’s discussant, David Scheffer of Mayer Brown and Northwestern University Law School.  Prof. Scheffer, a high-ranking official in the Albright State Department, first drew a round of applause by announcing that the previous speaker was, without doubt “a future Secretary-General of the United Nations.”  (Sounds about right.)  Then he crescendoed into an excoriation of pretty much every lawyer in the Bush administration for ignoring international law and making the United States into the red-headed stepchild of the community of nations.  Again, it would take more time than it’s worth to fisk his entire approach but suffice it to say the learned professor seems to have a hard time distinguishing law from policy and politics.  There is much for which to criticize the Bush administration, but violating international law wouldn’t make my top 100 list.

And that is where the rubber hits the rubber on so many of these issues: Much, if not most, if not all, of international law comes down to diplomacy – the willingness of countries to adhere to their obligations and convince others to do so.  As described by Jack Goldsmith and Eric Posner in their brilliant book The Limits of International Law, the behavior of nation-states cannot be predicted, and should not be judged, based on whether they sign this piece of paper or that one.  For example, states have interests and there is no international mechanism to force states to comply with treaties that at any given time contravene those interests.  Period.  (It is often in their interest to comply with their international or binational obligations, of course, because few states want to become, literally, pariahs.)  There is so much to say on this, and I will certainly be writing about it in future.

And when it comes to the International Criminal Court (ICC) – the chief bone of contention that many of the attendees to this week’s conference have with the American practice of public international law – what’s important is that U.S. troops treat people much better than their Congolese or Indonesian or Venezuelan counterparts, regardless of which countries submit to the jurisdiction of the ICC.  That’s some reality-based law for you.

In sum, an eyebrow-raising start to the conference – and a reminder of the strange position of those of us interested and educated in international legal and political issues but skeptical of public international law.