Classical Liberal International Hootenanny

Several hundred friends of liberty have gathered in Guatemala City for the 2006 international meeting of the Mont Pelerin Society.  The Cato Institute is well represented, with numerous Cato authors, adjunct fellows and scholars, officers, board members, and sponsors in attendance.  Right now we’re being treated to a great talk on “Latin American Populism” by the brilliant and insightful Alvaro Vargas Llosa.  The papers are really of a high order and represent a serious intellectual effort by advocates of freedom and limited government to address new and emerging challenges to classical liberalism.  It won’t do just to repeat the same old themes; advocates of individual rights, toleration, free markets, free trade, and limited government have to address new issues and to engage our critics fairly and squarely.  I’m really pleased to see that happening here in Guatemala, among participants who have come from throughout the world, from Mexico and Mongolia, Germany and Ghana, India and Ireland, Jordan and Japan.  (I’ll post a few times on some of the papers and presentations, at least those that strike me as the most interesting.)

CAN-SPAM Didn’t - Not By a Long Shot

Every once in a while, it’s useful to go back and look at how Congress has done with past regulatory efforts.  The exercise might help determine whether to embrace, or be skeptical about, future efforts.

Congress passed the CAN-SPAM Act in late 2003, and it became effective January 1, 2004.  Here’s the Federal Trade Commission’s summary of the law, which tells us that CAN-SPAM bans false or misleading header information, prohibits deceptive subject lines, requires that commercial e-mails give recipients an opt-out method, makes it illegal for commercial e-mailers to sell or transfer the email addresses of people who choose not to receive their e-mails, and requires that commercial e-mail be identified as an advertisement and include the sender’s valid physical postal address.

And here’s the result:  3 out of 4 e-mails are spam, and 0.27 percent of e-mails comply with CAN-SPAM.  That’s 27 in every 10,000 e-mails.

The regulation is a failure.  It provided consumers with zero benefit.  Most people are seeing less spam in their Inboxes because of improved filtering technology, a product of commercial ISPs working to serve their customers.

Should Congress or the FTC ramp up enforcement?  Increase penalties to bring spammers to heel?  No.  They should abandon the enterprise entirely and confess their incompetence to regulate the Internet and technology.

Despite its failure, consumers continue to bear the costs of the tedious regulations CAN-SPAM imposed on legitimate businesses.  They pay just a little more taxes, a little more for everything they buy online, and they forgo the benefits of that tiny margin of innovation lost as businesses divert their efforts to compliance. 

(Hat tip: TechDirt)

Taking Labor Markets Seriously

Perplexity over economic statistics – in particular, the decades-long trends of flat median real wages and increasing income inequality, combined with a recent disconnect between productivity growth and wage increases – is provoking serious, sober-minded people on the center-left to worry whether there might be something badly wrong with America’s economic system.

In a well-written piece (subscription required) for The New Republic, Jonathan Chait chronicles how the economic numbers are undermining confidence among Democrats in Clinton-style, pro-growth economic policies. The bottom line: what good is economic growth if it only benefits those at the very top?

Ezra Klein of The American Prospect is among the anxious. He’s written frequently on this point, but here’s a typical formulation of the perceived problem as he sees it: 

What worries me about inequality isn’t what it does, but what’s doing it, namely, a decades-long decline in worker bargaining power and the resultant redirection of productivity increases and corporate profits away from compensation and salaries. 

And here’s another:

[T]hrough mechanisms we’re not entirely sure of, the very richest are siphoning off the economic growth before it flows through the middle and lower classes.  

And here’s yet another that suggests what needs to be done: 

The right has tried to explain this accelerating inequality as an unstoppable structural feature of the new economy: It’s the meritocracy, or computers, or benefits, or global trade. Unfortunately, those explanations are largely bull****. Europe also has computers, and trade, and mobility, and benefits, and has easily avoided the widening chasm we’ve seen. So what makes us different?

In a word, power. Or the distribution of it. Europe has strong unions and active governments; countervailing powers that wrest a portion of the pie for their constituencies. We don’t.  

It’s one thing to be concerned generally about inequality: to hope that all people can participate in the blessings and opportunities that modern capitalism affords, and to look for policies that help those who are lagging. It’s quite another when that concern curdles into a belief that the capitalist system is fundamentally unfair – that workers are failing to get their fair share of the value they create because people at the top are hogging the gains from growth. It’s the difference between being an egalitarian liberal and being a collectivist. Or, in other words, between being a progressive and being a reactionary.

Here’s my question for Ezra et al.: is there something wrong with labor markets? Is there some market failure that is resulting in the systematic exploitation of workers?

I can’t imagine what that market failure would be. Labor markets are pretty vanilla, with lots of buyers (firms) and lots of sellers (workers). Local monopsony problems (e.g., the company town scenario) are unlikely to be significant in a diversified, modern economy with a highly mobile work force. I don’t know of any basis for thinking that firms’ competition for workers is less than robust. Accordingly, there are very strong reasons for thinking that wages and salaries are generally bid into line with the value of the various uses to which labor at a given skill level can be put.

As University of Chicago law professor Richard Epstein puts it:

The single most important thing to understand about the operation of a standard labour market in the world today is that it is immensely boring. It should be thought of in terms of the traditional intersection of supply and demand. It does not present any difficult transactional problems or generate negative externalities that require government control. 

In particular, there is no good reason to think that high earnings for managers and professionals at the top of the pay scale are coming at the expense of everybody else. Firms need workers at various skill levels. Exactly the same incentives guide firms when they are hiring highly skilled workers and when they are hiring less skilled workers. On the one hand, competition will cause them to bid up the price of labor to attract workers away from other job openings; on the other hand, concern with profitability will deter them from overpaying. There isn’t some pot of money in the company safe that’s dedicated to wages and salaries, so that more for some means less for others. Hiring and pay decisions are made at the margin: does adding this worker at this price improve our bottom line? For every new hire, whatever the job description or skill level, firms face strong pressures against either underpaying or overpaying.

(Note: I’m leaving aside for now the question of compensation for top executives, which raises complex issues of corporate governance. For now, it suffices to say that, even if CEOs are being overpaid, the problem affects only a tiny portion of the overall labor market.)

So I just don’t see those “mechanisms we’re not entirely sure of” that Ezra talks about. And just asserting they exist, without providing any theory or evidence of how they might work, won’t cut it as serious analysis.

But what about the decline of private-sector unions? Hasn’t that reduced workers’ bargaining power to their detriment?

Yes, it is true that, through collective bargaining, workers can obtain above-market prices for their labor – just as it is possible for price-fixing cartels to obtain above-market prices for their products. But it is also true that, over the long term, unionization has proved a disaster for affected U.S. industries. By cutting into profits, unions have deterred investment and R&D; the rigid work rules they imposed have hampered innovation and competitiveness; and the unsustainable pension and health care commitments they extracted have turned out to be financially ruinous in the long run.

A resurgence in union power wouldn’t improve the system. Union power distorted the system, ultimately with dismal consequences. Yes, some people came out ahead, but many others have suffered from the effects of underinvestment, inefficiency, and burdensome legacy costs.

Contrary to the fears of Ezra and the rest, America’s labor markets are working fine. Strong incentives are in place for companies to pay people what they’re worth. The system isn’t broken.

Of course you can be disappointed that more people aren’t doing better. In which case, you have a couple of options. Option one is to try to supplement the competitive market system. Let the system work, and accept that the prices it’s generating are offering reasonably accurate information about the economic value of different kinds of work. Then try to find policies that will (a) help people increase their value in the marketplace and (b) mitigate hardships for people with relatively low human capital.

Option two is to try to supplant the system by ignoring market signals and squelching competition. In other words, go against everything we know about how best to encourage innovation and wealth creation. Sure, a lucky minority may get windfalls, but everybody else will suffer from the reduction in economic growth.

Option one is egalitarian liberalism; option two is reactionary collectivism. As a libertarian, I am obliged to point out that perverse incentive effects and political dynamics make it very difficult for option one to work well. But option two is flat out doomed to make matters worse.

The 2006 Elections and the War in Iraq

In last Friday’s Washington Post, columnist Charles Krauthammer tried to argue that tomorrow’s mid-term elections would not deliver a historic and decisive blow to President Bush’s agenda, particularly his agenda in Iraq.

Krauthammer’s argument is based on his reading of the history of mid-year elections. He noted that the anticipated “anti-Republican wave” – a net pick up of perhaps 20-25 House seats, and 4-6 Senate seats, by the Democrats – is relatively modest by historical standards. Reagan lost more in the 6th year of his presidency; so too FDR. One of the greatest mid-term election disasters (not noted by Krauthammer) occurred in Dwight Eisenhower’s 6th year, 1958. At a time when Eisenhower was personally quite popular, the Democrats added nearly 50 members in the House, and another 16 in the Senate, building upon their already commanding majorities in both chambers. 

I’m all for studying history. But recent history paints a decidedly different picture than what Krauthammer suggests. The GOP was embarrassed by the results of the 1998 mid-term elections, a failure to capitalize on the 6th year itch that Krauthammer attributes to “Republican overreaching on the Monica Lewinsky scandal.” Given low unemployment, modest inflation, and continued strong economic growth, it is not inconceivable that the Bush administration might have been poised to avoid a 6th year setback (if so, would Harold Meyerson be lamenting “Democratic overreaching on the Mark Foley scandal”?).

Instead, the GOP is playing defense, and Iraq war advocates such as Krauthammer are scrambling to avoid blame for any of the ill-effects of their ill-conceived war. (See also the VanityFair.com article highlighting neoconservative criticisms of the Bush administration’s execution of the war).

The Iraq war is the decisive issue for the vast majority of Americans, exceeding taxes, immigration, health care, and other presumed drivers of voting behavior. Further, the war is unpopular, the costs have far exceeded the benefits, and there is no end in sight. As David Boaz and David Kirby note in a recent Cato Policy Analysis, the Iraq war was a factor – along with “Republican overspending, social intolerance, [and] civil liberties infringements” – in driving many libertarian voters away from George Bush in 2004. “If that trend continues into 2006 and 2008,” they write, “Republicans will lose elections they would otherwise win.” 

On the whole, voters are frustrated, impatient, and angry. If the GOP staves off disaster, they will do so in spite of, not because of, the disastrous war in Iraq.

And Maybe That’s Just Not a Problem…

Earlier, Michael Cannon blogged about a recent discussion between him and Harvard’s David Cutler on the health outcome effects of increasing consumers’ price sensitivity for the costs of their care. (Translation: Have consumers deal directly with some of the costs of their care, using such mechanisms as co-pays, HSAs, etc.)

Cutler worries that increasing consumers’ price sensitivity will worsen Americans’ overall health. Though heightened price sensitivity has the positive effect of reducing the use of expensive health care of dubious value, it also reduces consumer use of health care that is of value — an outcome supported by the landmark Rand Health Insurance Experiment. The undesirable result, Cutler says, is worse health outcomes.

Cannon responds that a broader use of price-sensitivity mechanisms would invoke supply-side market responses such as lower prices. The undesirable result of worse health outcomes may thus be avoided (and, perhaps, better outcomes might result).

In following this discussion, I have a question: Is worse health outcomes necessarily undesirable, especially in this circumstance?

The value of having consumers deal directly with some of the costs of their care is not simply because doing so will reduce the use of dubious health care. The real value is that it increases consumers’ appreciation of the costs and benefits of their care and allows them to decide the tradeoffs between those costs and benefits.

Suppose an extremely expensive treatment would provide a consumer with a modest, but very real, positive health outcome. Some consumers may quite rationally choose to put their money toward other uses (ranging from necessities to a “Last Holiday”). On the “health outcome” measure, that decision would be a negative one, but on the “overall welfare” measure, that would be a positive.

Under a zero-price-sensitivity health care model, consumers wouldn’t have that choice. They would have already paid for their health care through their insurance premium (or worse, elected to forgo insurance because the premium was too expensive), and so any health care benefit they could receive under their health plan would be “use it or lose it.” So why not take the expensive treatment that yields modest results? Whereas, in a sensitivity model, consumers could quite rationally elect to keep their co-payments and HSA money in some situations.

This is not to say that people are wrong to worry about worse health outcomes, or about consumers making questionable choices. But the worriers do have an intellectual IOU outstanding: Do worse health outcomes necessarily mean worse welfare, if consumers can put their health care money toward other uses?

Better health outcomes are preferable to worse outcomes ceteris paribus. But, with price sensitivity mechanisms like co-pays and HSAs, the ceteris isn’t paribus. (My apologies to Latinists).

Global Warming Costs & Benefits

A few days ago, the British government released the Stern report, a voluminous study arguing that the costs associated with stabilizing carbon dioxide concentrations at 550 parts per million were far less than the costs associated with doing nothing. Although the study acknowledged rather large bounds of uncertainty, the median estimates therein suggested that business as usual (that is, we do nothing) would mean a loss of 5–10% of global GDP every year forever. Most of those harms, however, could be avoided if we spent 1% of global GDP to cut back on greenhouse gas emissions.

There are very good reasons to suspect that Stern’s estimates regarding the cost of cutting back on greenhouse gas emissions are too low and that the damages forecast by Stern are too high. The underlying assumptions of the analysis producing Stern’s estimates have been well dissected by statistician Bjorn Lomborg, climate scientist Roger Pielke, Jr., and economist Richard Tol. But for the moment, let’s put those complaints aside.

My colleague Peter Van Doren and I have done three present value calculations assuming that business as usual (BAU) will reduce global GDP by 2%, 5%, and 10% beginning in 2056 and then in each and every year through the end of time. Don’t worry about the silliness of such a proposition. Oddly enough, once you try calculating beyond 200 years, the numbers don’t really change much given the need to discount future costs and benefits by 5%.

First, we calculated the cost of using 1% of GDP every year through the end of time to reduce greenhouse gas emissions. The net present value of that cost is $15,541 per person in the United States.

Then, we calculated the benefits for U.S. citizens (global GDP figures are pretty dodgy, so we stuck with U.S. GDP figures for the purposes of this exercise). They amount to $36,447 is you accept -10% GDP as your BAU scenario, $18,239 if you accept -5% GDP as your BAU scenario, and $7,295 if you accept -2% GDP as your BAU scenario.

In other words, Stern’s investment advice makes sense only if you think that warming will hammer GDP by 10% a year. You don’t gain much at all from emission cuts, however, if you think GDP will only drop by 5% a year if we do nothing. And if you think warming will only cost the global economy 2% of GDP every year (the “concensus” belief among economists, which comes from a widely cited analysis from Yale economist William Nordhaus), then Stern’s investment advice is shere lunacy.

And that’s not even taking into consideration the fact that reducing greenhouse gas emissions might produce no benefits at all. The latest IPCC report — as all other reports before it — acknowledge that the evidence that anthropogenic emissions are primarily driving the warming we’ve detected is strong but circumstantial. Scientists disagree about how large the chances are that we’re wasting our time cutting greenhouse gas emissions, but there’s no disagreement within the latest IPCC report that there’s a chance that anthropogenic emissions are not particularly important factors in climate at present.

Is global warming insurance a good buy? Probably not. And that’s particularly true given the fact that the relative poor (us) will pay the premium so that the relatively rich (our children and grandchildren) will get the benefits if there are any. For example, since 1950 real GDP per capita has increased by about 2% per year. Given that growth rate, U.S. GDP per capita in 100 years would be $321,684 in current dollars, or more than seven times higher than it is at present ($44,403). If global warming cuts GDP by even 10%, then GDP per capita will be $289,515 in 2106 rather than $321,684. Would anyone, let alone liberals, ever propose a 1% tax on those who make $44,000 to create benefits for those who make $289,000?