December 2012

December 31, 2012 2:48PM

Hugo Chávez’s Last Days

Venezuela’s Vice President Nicolás Maduro announced last night from Havana that Hugo Chávez suffered new complications from his fourth cancer surgery. Rumors abound on the true condition of the president, but it now looks certain that Chávez won’t be able to return to Venezuela by January 10th to be sworn in for a new six‐​year term. 

Unfortunately, Hugo Chávez has been the defining figure of Latin American politics in the last decade. His authoritarian populism doesn’t differ much from other Latin American leaders, but his influence on regional politics, buoyed by almost one trillion dollars in oil revenue, has been unparalleled. His permanent absence will have immediate ramifications not only for Venezuela, but for all Latin America.

Let’s start with Venezuela: the Constitution stipulates that if the president‐​elect is permanently incapacitated before being sworn in, the speaker of the National Assembly will assume power and a new election must be held within 30 days. This is currently the most likely scenario, under which the temporary president will be Diosdado Cabello, a powerful figure within Chávez’s PSUV party with a strong military background. However, Nicolás Maduro, the current Vice President and Minister of Foreign Affairs, has been anointed by Chávez as his successor and the candidate of his PSUV party in the case of a new election. Maduro is considered to be Cuba’s pick for the top job.

The first question is how united the PSUV will be without Chávez. Some people fear a fratricidal struggle within the ranks of chavismo for the control of government power. Cabello commands the loyalty of top military officials. Maduro counts on the support of Havana and the powerful Cuban intelligence apparatus that controls Venezuela’s security services. So far Cabello and Maduro have displayed a united front, but that could change once Chávez is permanently gone. Another question swirls around the 25,000-strong Bolivarian militia, which consists of die‐​hard chavistas that have been well armed with Russian rifles and trained by the government to “defend the revolution.” Neither Cabello nor Maduro seems to enjoy their full support. 

Then we have the snap vote. Thirty days is an incredibly short time to organize a new election. It’s very likely that Henrique Capriles will once again be the candidate of the opposition. Prior to the October 7th election when Chávez defeated Capriles, polls showed that the opposition candidate would defeat any other figure of the PSUV, including Maduro, in an election without Chávez. However, chavismo proved that it can win without its leader when it trounced the opposition in state elections on December 16th. An election just 30 days after Chávez death will probably be all about him and his legacy. I’d expect the PSUV candidate to benefit tremendously from a sympathy vote for the recently‐​deceased Chávez. Capriles would have a tough fight ahead under these circumstances.

Regionally speaking, Chávez’s death will have an important effect on Venezuela’s satellite countries. Cuba is certainly the most vulnerable. The Cuban economy would probably implode without the massive oil subsidy it receives from Venezuela. This would jeopardize the continuity of the Castro regime. This is why Havana is playing such an active role in deciding who will replace Chávez and how the succession should play out. Other regional allies such as Nicaragua, Ecuador and Bolivia would also face cutbacks in economic assistance but not big enough to threaten their leaders’ hold on power.

It has long become clear that Chávez‐​style populism doesn’t work. Venezuela is in ruins. There are shortages of basic goods. Its infrastructure is literally falling apart. It’s the most corrupt country in the region. It has one of the world’s highest crime rates. Meanwhile, countries that have chosen democratic capitalism such as Chile and Peru are faring much better and represent a far more attractive model. Chávez’s death will only accelerate the demise of his so called “Socialism of the 21st Century.”

December 31, 2012 2:39PM

Warmest Year on Record in the U.S.

Global Science Report is a weekly feature from the Center for the Study of Science, where we highlight one or two important new items in the scientific literature or the popular media. For broader and more technical perspectives, consult our monthly “Current Wisdom.”

When the book closes on the year 2012, it will go down as the warmest year in the National Climatic Data Center’s (NCDC) history for the contiguous U.S.—a history that goes back to 1895.

And quite a warm year it was, topping the old record held by 1998 by about 1°F—a sizeable margin of victory. In the chart below (Figure 1), I have plotted the entire 118 year record, including the overall average (solid red line) and the 95% confidence range about that mean (+/- two times the detrended standard deviation; dotted red lines). I have also included the linear trend over the 118 years—a value of 0.13°F/decade.

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Figure 1. U.S. annual average temperatures, 1895–2012 (data source NCDC, 2012 estimated). 

Notice that the linear is not a great measure of what has been going on climatologically. There have been several multi‐​decadal periods when the average U.S. temperature has been generally above (1920s‐​1930s; mid‐​1990s‐​present) or below (1890s‐​1910s; 1960s‐​1970s) the linear trend term—an indication that larger‐​scale (quasi‐​cyclical?) variability plays a defining role in the character of the temperature history.

The role that anthropogenic “global warming” from the emissions of greenhouse gases from the combustion of fossil fuels plays is debatable—both in timing and magnitude. Almost certainly its influence is present and detectable in the U.S. annual average temperature record, but beyond that simple statement, not a whole lot more can be added with scientific certainty.

Shown below (Figure 2) is the relationship between mean annual global temperature departures from the long‐​term average and U.S. temperature anomalies. Statistically, the correspondence between the two is 35%, which means that there are a lot of other things influencing our temperature.

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Figure 2. Relationship between global and U.S. annual average temperature anomalies, 1895–2011 (data source: NCDC). 


Further, as I have pointed out, there is little we could do to alter the climate influence of anthropogenic emissions even if we wanted to. So, probably the best thing to do when planning for the future is to be aware of the more or less capricious nature of our nation’s climate and keep in mind that humans are supplying an ever‐​growing warming pressure on top of that. The Boys Scouts got at least one thing right.

December 31, 2012 10:55AM

Class Warfare Tax Policy Causes Portugal to Crash on the Laffer Curve, but Will Obama Learn from this Mistake?

Back in mid-2010, I wrote that Portugal was going to exacerbate its fiscal problems by raising taxes.

Needless to say, I was right. Not that this required any special insight. After all, no nation has ever taxed its way to prosperity.

We’re now at the end of 2012 and Portugal is still saddled with a weak economy. And the higher taxes haven’t resulted in less red ink. Indeed, according to the Economist Intelligence Unit, government debt has jumped from 93 percent of GDP in 2010 to 124 percent of GDP this year.

Why did higher taxes backfire in Portugal? For the same reasons that higher taxes have failed in GreeceSpainBulgariaFranceItaly, the United Kingdom, and so many other nations.

  • Higher taxes undermine incentives for productive behavior, thus reducing an economy’s potential for growth. This means less economic output, which also means a smaller tax base. This Laffer Curve effect doesn’t necessarily mean less revenue, but it certainly means that tax increases rarely raise as much money as initially projected.
  • Higher taxes usually are a substitute for the real solution of spending restraint (i.e., Mitchell’s Golden Rule). Politicians oftentimes refuse to reduce the burden of government spending because of an expectation of additional tax revenue. Heck, in many cases, higher taxes trigger an increase in the size and scope of the public sector.

So did Portugal learn any lessons from this failed experiment in Obamanomics?

Hardly. Indeed, the government plans to double down on this approach – even though it’s increasingly apparent that higher tax burdens won’t translate into much – if any – additional tax revenue. Here are some excerpts from a report in the Financial Times.

Lisbon plans to lift income tax revenue by more than 30 per cent, raising the effective average rate by more than a third from 9.8 to 13.2 per cent. Anyone receiving more than the minimum wage of €485 a month, including pensioners, will also pay an extraordinary tax of 3.5 per cent on their income. …the steep tax increases facing many families have made the outlook for 2013 – the third consecutive year of austerity, recession and rising unemployment – the grimmest yet. Total tax revenue has fallen considerably below target this year, forcing the government to implement additional austerity measures… The coalition will be relying on increased state revenue to account for about 80 per cent of the fiscal adjustment required in 2013 – a reversal of the original bailout plan, in which consolidation was to be achieved mainly through spending cuts.

Amazing. The government imposes huge tax hikes, which don’t generate any positive results. Yet even though “tax revenue has fallen considerably below target,” confirming that there are significant Laffer Curve issues, the government chooses to repeat the snake-oil fiscal therapy of higher taxes.

Anybody want to guess what’s going to happen? The answer, of course, is that this will further dampen incentives to generate income and comply with the government’s fiscal demands.

The latest increases have stretched the tax system to the limit, says Carlos Loureiro, a tax partner at Deloitte. “The current model is exhausted. We need to do something different,” he says. “Any further increase in tax rates is unlikely to result in increased revenue.” Income from value added tax, the government’s biggest source of tax revenue representing about 36 per cent of the total, has been falling since 2008, despite a sharp increase in the rate – the main rate is now 23 per cent. Both the government and the European Commission have acknowledged the risks of depending on increased tax revenue, which is more growth sensitive, to meet fiscal targets and contingency spending cuts amounting to 0.5 per cent of national output have prepared in case of another tax shortfall.

I almost want to laugh at the part of the excerpt which notes that tax revenue “has been falling…despite a sharp increase in the rate.”

Maybe it’s time for these fiscal pyromaniacs to realize that revenues might be falling because rates are higher. In other words, Portugal not only isn’t at the ideal point on the Laffer Curve(collecting the amount of revenue needed to finance legitimate activities of government), it may even be past the revenue-maximizing part of the curve.

To be fair, there are lots of factors that determine economic performance, so higher tax burdens are just one possible explanation for why the tax base is shrinking or stagnant.

The one thing we can state with certainty, though, is that Portugal’s fiscal problem is too much government spending. The failure to address this problem then leads to very unpleasant symptoms, such as lots of red ink and self-destructive class-warfare tax policy.

If all that sounds familiar, that’s because it’s also a description of what President Obama is proposing for the United States.

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Ummm…shouldn’t they be targeting politicians?  

P.S. I don’t want to imply that Portugal is a total basket case. True, I’m not optimistic about the country’s future, but at least some lawmakers now acknowledge that Keynesian spending was a big mistake. And there are even signs that Portuguese officials are beginning to realize that lower tax rates should be part of the solution. But good policy may be impossible since so many people now have a moocher mentality.

P.P.S. At the risk of bearing bad news to close the year, research from both the Bank for International Settlements and the Organization for Economic Cooperation and Development shows the United States actually faces a bigger long-run fiscal challenge than Portugal.

December 31, 2012 9:12AM

Happy New Year, Washington

Rep. Gerald E. Connolly, a Democrat representing the federal workforce, frets over the impact of sequestration or any alternative on his Fairfax County district: “Undoubtedly, we will take a hit....It’s going to result in a steady retrenchment in government investment in both the civilian and defense sectors. That’s going to affect employment and the robustness of our economic growth in this region.”

Of course, this is a "hit" -- or more likely a nick -- that comes after a doubling of the federal budget in a decade. And in the past weeks, the Washington Post has done a good job of reporting the impact of all that taxed and borrowed money on the Washington area. For instance:

The Washington region has emerged from the recession looking even more affluent compared with the rest of the country, boasting seven of the 10 counties with the highest household incomes in the nation, new census numbers show.

With a median household income surpassing $119,000, Loudoun County heads the list. Fairfax County, at nearly $106,000, is second. Both have held the same positions for several years running....

The rankings in the 2011 American Community Survey released Thursday expand Washington’s dominance among high-income households, reflecting a regional economy that was largely cushioned as the recession yanked down income levels elsewhere. Household incomes rose in most counties around Washington last year, even as they continued to sink around the country.

The stability of an economy built on the pillars of the federal government, its legions of contractors and a flourishing high-tech sector is evident in the income rankings.

In 2007, before the recession began, five counties in suburban Washington made it into the top 10. By 2010, there were six. The seven in the latest ranking is an all-time high.

And where does that money go? To housing, certainly (thanks, America!), as the Post noted in an article on the "red-hot real estate market":

It didn’t look like a house anyone would pay $400,000 extra for.

Several walls inside the gray townhouse with blue trim were streaked with water stains. The first floor was noticeably uneven. And termites had dined in front.

The big pluses: It was 2,850 square feet, had off-street parking, and was in walking distance of Union Station [and thus of Capitol Hill]....

Two weeks and 168 bids later, the house — in the 800 block of Fourth Street NE — was sold this month for $760,951 to an unidentified buyer....

While much of the nation is still struggling to emerge from a historic housing-market meltdown, the District is reliving its boom days. High rents, low interest rates, low inventory, and a flood of new residents in their 20s and 30s are making parts of the city feel like it’s 2005 again.

The median home sale price in the District is up 14 percent from last year, according to RealEstate Business Intelligence (RBI)....

Bullish real estate agents say it is only a matter of time until those areas catch up as well. There is no talk of “bubbles” or fallout from a dive off the “fiscal cliff.” People are still moving to the Washington area, where the population grew by 122,000 from 2010 to 2011, Census Bureau data show.

And for those with money left over after paying Washington real estate prices, there are the finer things in life, the things that used to be for hedge fund managers in New York and tech innovators in Silicon Valley:

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December 28, 2012 5:09PM

Government Can’t Silence Speech Criticizing Its Actions, Even If That Speech Is ‘Commercial’

By Ilya Shapiro and Sophie Cole

It is axiomatic that the freedom of speech is vitally important to our democratic society and that being able to criticize the government is at the core of this freedom. Yet government officials are constantly inventing new ways to limit such criticism, particularly with respect to regulatory and tax burdens.

Case in point: In April 2011, the Department of Transportation imposed several new pricing regulations on the airline industry, most burdensome of which is that airline advertisements must now “prominently” feature the “total price” of the advertised fare, inclusive of all taxes and fees. Any information highlighting the part of the price constituting the government’s cut “may not be presented in the same or larger size as the total price.” This font regulation (!) means that the tax‐​and‐​fees portion often can’t be displayed whatsoever or, at most, is relegated to a small and non‐​obvious size and placing.

Three low‐​cost carriers, Spirit, Allegiant, and Southwest, have challenged the regulations because they’re now largely unable to prominently identify, and thus criticize, the excessive and ever‐​growing portion of fares attributable to taxes, fees, and airport facility charges. The airlines contend that the regulations violate the First Amendment and also raise broader questions regarding the treatment of commercial speech.

Under current jurisprudence, courts afford “commercial” speech far less protection than other kinds—this despite the inherent difficulties in categorizing speech and that most commercial speech is intertwined with other forms of speech (political, artistic, etc.). No reasoning has ever been truly accepted for the distinction in protection. Indeed, truthful commercial speech can be just as important as fully “political” speech in drawing attention to the government’s missteps: The DOT regulation at issue in the lawsuit described here restricts speech that is both truthful and critical of the government.

And it’s no excuse to suggest that airlines can complain elsewhere because making the tax burden obvious to consumers at the exact moment they care most about the issue—when buying the affected airline tickets—is the most effective speech possible under the circumstances. Nevertheless, a divided U.S. Court of Appeals for the D.C. Circuit ruled against the airlines.

Cato, joined by the National Federation of Independent Business, has now filed an amicus brief urging the Supreme Court to hear this case, which is also important because it involves an executive agency’s effort to obscure the true extent of the government’s tax burden and to effectively re‐​regulate an industry that Congress deregulated decades ago.

In the 1941 case of Milk Wagon Drivers Union v. Meadowmoor Dairies, the Supreme Court said: “The First Amendment is often inconvenient. But that’s beside the point. Inconvenience doesn’t absolve the government of its obligation to tolerate speech.”

Spirit Airlines v. DOT presents the Court with an opportunity to clarify the law on commercial speech by ending the distinction between commercial and noncommercial speech and granting truthful commercial speech full First Amendment protection.

December 28, 2012 12:52PM

The Fiscal Cliff and Congress’s Dysfunction

The words “default” and “dysfunction” are again showing up on the front pages as the debt ceiling suddenly looms along with the Taxmageddon deadline. Treasury Secretary Tim Geithner's letter to Congress, raising the specter of "default" and "extraordinary measures," set off much of the new hand-wringing. Journalists and pundits lecture Congress about its "dysfunctional" failure to raise taxes and promise to cut spending.

But as I told a journalist who was very concerned about dysfunction the last time the debt ceiling began to bite, the real problem is not the dysfunctional process that’s getting all the headlines, but the dysfunctional substance of governance. The real dysfunction is a federal budget that has doubled in 10 years, an annual deficit of some $1.5 trillion, and a national debt bursting through its statutory limit of $14.3 trillion and approaching 70 percent of GDP.

We’ve become so used to these unfathomable levels of deficits and debt—and to the once-rare concept of trillions of dollars—that we forget how new all this debt is. In 1981, after 190 years of federal spending, the national debt was “only” $1 trillion. Now, just 30 years later, it’s more than $16 trillion -- and all that debt rung up during a period without a major war or Great Depression. Here’s a graphic representation of dysfunction (through mid-2011; now you can visualize the blue line bursting through the $16 trillion level at the top of the chart):

National Debt

Those are the kinds of numbers that caused the rise of the Tea Party and the election of members of Congress who vowed to stop out-of-control spending and debt. It's too bad that Congress hasn't been able to rein in spending without the pressure of a debt ceiling or a "fiscal cliff." But it hasn't. And so if fiscal conservatives in Congress can use those deadlines to put some caps on the money-shoveling, more power to them. 

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December 27, 2012 4:42PM

The Stephen Glass Problem in Intelligence Oversight

In today's debate over reauthorization of the FISA Amendments Act, Sen. Saxby Chambliss deployed a familiar rhetorical move popular with supporters of broad surveillance powers. Chambliss acknowledged that there have been "a few instances" in which the law has not operated as intended, permitting "overcollection" of entirely domestic communications. But this only goes to show that the oversight mechanisms embedded in the law are working so very well! Moreover, echoing Sen. Dianne Feinstein, he asserted (though of course we can't check the claim) that the violations that have been discovered have been the result of error, not deliberate abuse.

The first thing to say about this argument is that it's something of a tautology: Violations of the law (or its spirit) that we've identified have been successfully identified! If safeguards and oversight measures discover no such violations, we're supposed to assume that everything is working great. If they do uncover violations, it's proof that current oversight is robust and no further safeguards are needed. Catch 22!

A more subtle problem, however, is that oversight of large-scale secret surveillance programs are most likely to uncover inadvertent (and so relatively benign) violations rather than deliberate ones. I think of this as the Stephen Glass Problem, after the infamous fabulist who managed to publish dozens of wholly fabricated articles in The New Republic despite the magazine's legendarily rigorous fact-checking process—a story wonderfully chronicled in the film Shattered Glass and a Vanity Fair article of the same name. The problem, as editors later realized, was that the fact checking process was very good at catching accidental errors, but not equipped to deal with a journalist who was deliberately fabricating stories, and then exploiting his knowledge of how the fact checkers worked to ensure that his fabrications would pass muster, creating phony web-sites, voice mail accounts, and e-mail addresses to "confirm" his bogus facts. Accidental violations are always easier to catch, because accidental violators are not taking steps to conceal their violations.

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