Archives: 10/2010

What Privacy Invasion Looks Like

The details of Tyler Clementi’s case are slowly revealing themselves. He was the Rutgers University freshman whose sex life was exposed on the Internet when fellow students Dharun Ravi and Molly Wei placed a webcam in his dorm room, transmitting the images that it captured in real time on the Internet. Shortly thereafter, Clementi committed suicide.

Whether Ravi and Wei acted out of anti-gay animus, titillation about Clementi’s sexual orientation, or simply titillation about sex, their actions were utterly outrageous, offensive, and outside of the bounds of decency. Moreover, according to Middlesex County, New Jersey prosecutors, they were illegal. Ravi and Wei have been charged with invasion of privacy.

This is what invasion of privacy looks like. It’s the outrageous, offensive, truly galling revelation of private facts like what happened in this case. Over the last 120 years, common law tort doctrine has evolved to find that people have a right not to suffer such invasions. New Jersey has apparently enshrined that right in a criminal statute.

The story illustrates how quaint are some of the privacy “invasions” we often discuss, such as the tracking of people’s web surfing by advertising networks. That information is not generally revealed in any meaningful way. It is simply being used to serve tailored ads.

This event also illustrates how privacy law is functioning in our society. It’s functioning fairly well. Law, of course, is supposed to reflect deeply held norms. Privacy norms—like the norm against exposing someone’s sexual activity without consent—are widely shared, so that the laws backing up those norms are rarely violated.

It is probably a common error to believe that law is “working” when it is exercised fairly often, fines and penalties being doled it with some routine. Holders of this view see law—more accurately, legislation—as a tool for shaping society, of course. Many of them would like to end the societal debate about online privacy, establishing a “uniform national privacy standard.” But nobody knows what that standard should be. The more often legal actions are brought against online service providers, the stronger is the signal that online privacy norms are unsettled. That privacy debate continues, and it should.

It is not debatable that what Ravi and Wei did to Tyler Clementi was profoundly wrong. That was a privacy invasion.

Comparative Political Economy

Free-marketers often point to the varying success of pairs of countries – the United States vs. the Soviet Union, West vs. East Germany, Hong Kong and Taiwan vs. China – to illustrate the benefits of markets over planning, regulation, and socialism. Some even point out the closer but real differences in GDP per capita between the United States and Western Europe. In his 1984 book Endless Enemies (p. 380) Jonathan Kwitny added the less familiar pairs “Morocco versus Algeria, Malaysia versus Indonesia, Thailand versus Burma, Kenya versus Tanzania.” Now Rama Lakshmi reports in the Washington Post that we can see the results of two systems of political economy in one country:

It didn’t take long for the first athletes arriving in New Delhi last week for the upcoming Commonwealth Games to catch a glimpse of modern India’s two faces.

Their gateway to the country was the capital’s gleaming new international airport terminal, built by a privately led consortium and opened in June four months ahead of schedule.

But the official wristbands that the visitors were handed at the airport turned out to be an emblem of India’s famous red tape and government inefficiency. When the teams reached the athletes’ village, the police guarding the facility refused to recognize the IDs, saying that the Games Organizing Committee had not sent the required authorization order.

The jet-lagged athletes stood about under a tree for hours with their luggage, calling their embassies for help, and the problem was not finally resolved for four more days.

To observers, the incident illustrated more than just the well-documented sloppiness that has marked India’s preparations for the Games. It also underscored the gap that has emerged between a government rooted in a slower-moving, socialist era and a private entrepreneurial class that is busy building global IT companies, the world’s largest oil refineries and spectacular structures such as the $2.8 billion airport terminal.

“It is about two aspects of the India story,” said Rajeev Chandrasekhar, an entrepreneur and member of Parliament. “India’s private sector has been exposed to competition and therefore has developed capability. Accountability is firmly built into the entrepreneurial mind-set. But the government structure is a relic of the colonial past and continues to plod along.”…

For the Delhi [airport] project, [Grandhi Mallikarjuna]Rao said, his company worked with 58 government agencies.

“Our nation is in the process of transition from a command-and-control economic system to a more efficient market-driven structure,” he said. “It will take some time till this transition is complete.”

Given all this history, the interesting question is why some people in the United States want to continually transfer such vital functions as energy and health care from the competitive, accountable, capable entrepreneurial sector to the slower-moving, plodding, command-and-control bureaucratic sector. (Of course, the already-government-influenced health care and energy industries are not the most entrepreneurial sectors of the economy. But as the examples above demonstrate, even imperfect markets work better than government direction. Nor are the government-run local schools very competitive or accountable, but they are more so than they will be under tighter federal control.)

School House Pork

The trendy thinking might be that you’re loopy if you call for ending the U.S. Department of Education, or if you think the Constitution should actually have some bearing on federal education policy. Reality, however, strongly suggests that you’d be crazy not to think that way. If you have doubts, I urge you to read Pork 101: How Education Earmarks School Taxpayers, a new report on federal education “help” from the office of Sen. Tom Coburn (R-OK).   

To start things off, the report succinctly summarizes the role the Constitution gives the feds in education: “The U.S. Constitution provides no role to the federal government in education.”

That’s not entirely accurate—the 14th Amendment empowers Washington to prohibit state and local discrimination in the provision of  schooling, and the feds can control education in DC—but otherwise Washington really has zero constitutional authority to meddle in education.

Right after stating this, the report lays out the big ball of nothin’ we’ve gotten from decades of federal meddlin’ and spendin’. Some of the charts might be familiar

Finally, the paper shines a light on the root problem with federal involvement: It ultimately serves the interests of politicians and special interests, not children or the public. Indeed, by focusing on education pork—legislative earmarks that go directly to favored constituencies—the report highlights politicians literally glorifying themselves with “education” dough.

There’s $1 million, for instance, to establish the Howard Baker School of Government at the University of Tennessee. Another $6 million for the William F. Goodling Institute for Research and Family Literacy at Penn State. There’s $5 million for the Daniel Patrick Moynihan Global Affairs Institute at Syracuse University. $1 million for the Paul Simon Public Policy Institute at Southern Illinois University. $2 million to the City College of New York for the now-infamous Charles B. Rangel Center for Public Service. And tens-of-millions for “Harkin Grants,” which are named after Senate Health, Education, Labor, and Pensions Committee chairman Tom Harkin. That’s the same Tom Harkin who has been raking for-profit colleges over the coals for, basically, serving themselves with taxpayer dollars. 

Maybe they learned it by watching you, Senator Harkin.

There are many more examples of taxpayer-funded politician-aggrandizement in the report, as well as lots of other cuts of pig.  Take it all in if you can stand it, then give some thought to who’s really nutty when it comes to federal education policy. The answer should be pretty clear.

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

  • With the release of its “Pledge to America,” House Republicans largely fell back on limited government platitudes.
  • Are subsidized child care services being provided by sex offenders? Apparently, nobody knows.
  • Head Start has a fraud problem. And by the way, the program doesn’t work.
  • The U.S. Postal Service’s latest financial woes are a reminder that Congress should start focusing its attention on getting the government out of the mail business once and for all.
  • Liberals and libertarians agree: it’s nonsense to suggest that a little belt-tightening and reductions in wasteful government spending will solve our fiscal problems.

‘Trial of the Century’ Hits 15-Year Mark

Earlier today I saw a CNN report about the O.J. Simpson case—15 years ago the verdict was announced and the entire country was tuning in to hear the result.   The case was all over the news for a year—first the shocking news of the murder of Simpson’s former wife Nicole Brown Simpson and her friend Ronald Goldman, then the televised “white Bronco chase” around Los Angeles, then Simpson’s defense  attorney “Dream Team” and prosecutor Marcia Clark’s life and looks, and then, at last, the verdict. 

White America had a hard time accepting the fact that the police would lie about their actions (at one point early on, the police testified that they invaded Simpson’s estate because they were concerned about his “safety”—instead of admitting that they were tracking a suspect and trying to gather evidence). 

Black America had a hard time explaining away the evidence of Simpson’s guilt.  As I discussed in a 2003 Reason article, here are three examples of the incriminating evidence:

First, after the nationally televised slow-speed chase, the police recovered a “To Whom It May Concern” note written by Simpson’s own hand after he was charged with the murder, but before he was arrested. Defense attorney Robert Shapiro said he had little doubt that it was a suicide note. But an innocent person would very likely be outraged about being charged with a murder and eager to find the real killer. Prosecutors never presented the note to the jury.

Second, after the chase, the police also recovered several key pieces of incriminating evidence, but the prosecutors failed to use them during the trial. Officers found a fake mustache, a fake goatee, and, most damning, a receipt that showed the items were purchased two weeks before the murders — yet the prosecutors never asked jurors to consider why Simpson would need the elements of a disguise just prior to the murder of his wife and Ron Goldman.

Third, detectives tape-recorded an interview with Simpson just a day after the murders. Simpson, asked about a wound on his hand, admitted that he had cut himself the previous night and that instead of immediately applying a bandage, he dripped blood around his estate. When a detective asked him the cause of the cut, Simpson’s reply — again, on audiotape — was, “I have no idea, man.” Unbelievably, the jury never heard this audiotape or his bizarre admission that he was bleeding all over the place right around the time of his wife’s murder. Instead, prosecutors took weeks to present DNA evidence — and then, in response to the defense claim of a police frame-up, offered up a lame, “Yes, racist cops exist in the LAPD, but this case is not a frame-up.”

When the trial was over, the lead defense attorney, the late Johnnie Cochran, was hailed as a miracle worker, but the truth was that the prosecutors did an incredibly lousy job.

The blunders  that are recounted above are just a few those that are set forth in the best book about the case, Outrage, by the legendary trial attorney Vincent Bugliosi, who prosecuted Charles Manson. Bugliosi concludes that a competent prosecution would have very likely secured a conviction.  More here.

Simpson was later sued by Goldman’s family for wrongful death and was found liable by the jury.  The civil attorneys found more evidence of Simpson’s guilt, such as photographs of  Simpson wearing Bruno Magli shoes matching shoe tracks at the crime scene.  Simpson was nonetheless able to avoid paying any money to the Goldmans and is now in prison for other crimes.

A good Frontline documentary about the criminal case can be viewed online.

Dollarization Keeps Ecuador Economically Stable Despite Political Instability

Political chaos and institutional meltdowns are all too common in Ecuador’s recent history. A cynic could even interpret yesterday’s violent police uprising that threatened the continuity of President Rafael Correa’s government as “a return to normalcy” in a nation that has had 10 presidents in the last 15 years.

Yet, despite the chaotic nature of its politics, Ecuador has enjoyed relative economic stability since it adopted the U.S. dollar as its official currency on January 9, 2000.

In a country where presidents are regularly toppled by mob protests or popular uprisings, it can be expected that the economy—and particularly the value of its currency—would go into a tailspin with every crisis. This was precisely what happened in the decade prior to 2000, when inflation averaged 37.5% per annum. However, in the 10 years since dollarization, the yearly inflation rate has averaged 6.8%. This number is itself inflated by the fact that inflation reached a peak of 91% in the first year of dollarization, and remained high the following year too. (That initial high rate is explained by the fact that, at the time of adopting the dollar, the government set a particularly high conversion rate for the sucre, Ecuador’s old currency, forcing a massive devaluation that led to high inertial inflation that year.) However, Ecuador’s inflation rate rapidly went down and has largely converged with that of the United States in recent years.

Of course, there are no silver bullets in economic development. Ecuador’s sound monetary policies have not been matched by similar coherent reforms on taxes and spending, or in the areas of trade policy, or labor and business regulations, for example. Ecuador stands in dismal 109th place (out of 141 economies) on economic liberty, according to the latest Economic Freedom of the World report. However, even as their country’s political and democratic institutions constantly fall apart, Ecuadorians can take satisfaction that the value of their currency is not under threat thanks to dollarization.

Economists Ignore the Facts in Supporting Chinese Currency Legislation

The Chinese currency issue is in full bloom this week, as the House of Representatives passed the Currency Reform for Fair Trade Act of 2010 by a vote of 348-79 on Wednesday.  Though there is so much to criticize about the bill and about the layers upon layers of misinformation, myth, and subterfuge that brought us to this point, this post concerns the dubiousness of the bill’s central premise: that Yuan appreciation will significantly reduce the bilateral trade deficit.

That is the position of the Peterson Institute’s Fred Bergsten and Bill Cline.

The premise seems plausible enough.  At least, the economics textbooks tell us that as a nation’s currency appreciates, its people will consume more imports and foreigners will reduce consumption of that nation’s exports.  Hence, a stronger Yuan vis-à-vis the dollar would mean that the Chinese buy more from the United States and sell less to the United States, reducing the bilateral deficit.

But in March Cato published a short paper of mine titled “Appreciate This: Chinese Currency Rise Will Have a Negligible Effect on the Trade Deficit.”  The central argument of that paper was that our national obsession with the value of the Chinese currency is misplaced—a red herring, in fact.  I presented recent historical data showing that despite a 21 percent increase in the value of the Yuan between July 2005 and July 2008, the U.S. deficit with China increased from $202 billion to $268 billion, or by 33 percent.  U.S. exports to China increased (as would be expected) by $28 billion, but U.S. imports from China increased, as well (contrary to expectations based on the old textbooks), and by $94 billion, or 38.7 percent. 

In other words, in the face of a 21 percent increase in the Yuan’s value, the U.S. bilateral trade deficit with China increased by 33 percent—a fact that raises serious questions about the integrity of the testimony, discussion, and “debate” that preceded the House vote on Wednesday. 

How can the premise that Yuan appreciation will reduce the bilateral deficit still hold?  Why is so much credence given to economists with fancy models who project with certainty that an X% increase in the value of the Yuan will generate a Y% increase in economic growth, which will produce Z number of new jobs in the economy, when recent evidence plainly refutes those claims?  What is the value in holding hearings when conjecture matters more than fact?

Bergsten and Cline (in testimony and podcast, respectively) dismiss the counterintuitive relationship between currency and the trade deficit during 2005-2008 by suggesting that there is a long lag period to consider—two to three years, according to Bergsten; two years, according to Cline.  In other words, the impact on the trade deficit of Yuan appreciation in the period 2005-2008 would not be fully manifest until the period 2007-2010.  While lags are expected (economists speak of a J-curve effect that accounts for the process of adjustment to the new prices in both countries), a two- or three-year lag in an era of instant communications, cyberspace transactions, transnational production, and airtight supply chains is simply not credible.  It took only a matter of months for the financial meltdown in 2008 to spread to the real economy, which prompted an overnight crash in international trade volumes, as production orders were terminated, shutting down operations throughout supply chains across the globe.

The two- to three-year lag theory is convenient merely because it puts in play the data for 2009, when international trade tanked worldwide, and the Chinese global trade surplus and the U.S. deficit with China were cut in half.  If the two- to three-year lag theory were plausible, the U.S. trade deficit with China would be falling in 2010, not rising, as the steepest appreciation in the Yuan occurred in 2008.

There’s a more plausible theory than that.

In my paper, I went on to examine whether the increase in imports was attributable to American demand for Chinese goods being price inelastic.  In other words, if the price of Chinese goods to American consumers increased by 21 percent (on average) and Americans reduced their consumption of Chinese goods by less than 21 percent, then demand would be considered inelastic, the price effect would dominate, and total import value would rise (adding to the trade deficit).  There are plenty of reasons that American demand for Chinese goods is price inelastic including, most importantly, that there are limited substitutes for those goods.  Much of what Americans consume from China is not made in the United States anymore.  So facing limited alternatives, Americans are forced to absorb the higher prices (a fact that currency legislation supporters are undoubtedly unwilling to share with their constituents).  Of course, eventually American consumers might adjust their consumption habits (which speaks to the lag factor).

But closer examination of the data revealed something else.

The fact that a 21 percent increase in the value of the Yuan was met with a 38.7 percent increase in import value means that the quantity of Chinese imports demanded increased by nearly 15 percent after the price change.  Increased!  Higher prices being met with greater quantity demanded would seem to defy the law of demand.

So what happened?  Chinese exporters must have lowered their Yuan-denominated prices to keep their export prices steady. That would have been a completely rational response, enabled by the fact that Yuan appreciation reduces the cost of production for Chinese exporters—particularly those who rely on imported raw materials and components. According to a growing body of research, somewhere between one-third and one-half of the value of U.S. imports from China is actually Chinese value-added.  The other half to two-thirds reflects costs of material, labor, and overhead from other countries. China’s value-added operations still tend to be low-value manufacturing and assembly operations, thus most of the final value of Chinese exports was first imported into China.

Yuan appreciation not only bolsters the buying power of Chinese consumers, but it makes Chinese-based producers and assemblers more competitive because the relative prices of their imported inputs fall, reducing their costs of production. That reduction in cost can be passed on to foreign consumers in the form of lower export prices, which could mitigate entirely the intended effect of the currency adjustment, which is to reduce U.S. imports from China.

That process might very well explain what happened between 2005 and 2008, and is probably a reasonable indication of what to expect going forward.  Yet this elephant in the room continues to be wantonly ignored in the anlayses that push us toward provocative legislation.

It seems that the textbook discussion of currency and the trade account needs to be updated to account for the compelling facts of globalization.