Topic: Government and Politics

Obama the Open?

A coalition of liberal, conservative, and libertarian groups has issued an excellent report encouraging the Obama administration to make reforms to create a more open, transparent, and accountable government. Candidate Obama has made extensive promises to further those principles, so let’s make sure he follows through.

The new report focuses on executive branch openness, but greater openness is needed in Congress as well. For tax wonks, the congressional Joint Committee on Taxation is the epitome of government secrecy. That secrecy causes serious problems, including the greater likelihood of passing bad tax laws. I don’t know how likely JCT reforms are in the new Congress or administration, but you can read more about the problems in this Cato report and this Heritage book.

Pelosi Power

Politico declares Speaker of the House Nancy Pelosi “the most powerful woman in U.S. political history.” I once suggested that White House aide Karen Hughes, “the most powerful shaper of the words and message of a president of the United States whose own command of the language seems weaker than average,” held that position and got altogether too little attention for her accomplishment.

But Politico is probably right these days. And along with the breakthrough campaigns of Hillary Clinton and Sarah Palin, it’s the sign of a new era in American politics. Women are going to be major players. But it remains to be seen whether that will make much substantive difference. Pelosi seems to wield her power in much the same way that male speakers did, on behalf of policy positions that match the center-left of the Democratic party.

P.S. One of the best moments capturing the rise of Clinton and Palin this year was this exchange between Tina Fey (Palin) and Amy Poehler (Clinton) on Saturday Night Live:

Sarah Palin: Just look at how far we’ve come. Hillary Clinton, who came so close to the White House… and me, Sarah Palin, who is even closer. Can you believe it, Hillary?

Hillary Clinton: [ forcing a hard smile ] I cannot!

Diseconomies of Scale vs. Network Effects

I was very interested to read Roderick Long’s opening essay for this month’s Cato Unbound. Long draws a distinction between genuine free markets and policies such as corporate welfare and protectionism that favor the interests of incumbent businesses at the expense of the general public. Almost all libertarians draw this distinction, of course, but Long suggests that many libertarians too readily classify as “free market” policies that are more properly regarded as corporate welfare.

What caught my eye about Long’s article was his claim that in a genuinely free market, businesses would be significantly smaller than they are today. He points out that large, hierarchical businesses are subject to many of the same inefficiencies that plague government bureaucracies. The executives of the largest corporations cannot possibly have enough knowledge to make good decisions about the thousands of different projects various parts of their companies are undertaking, and so it’s inevitable that large companies will suffer from inefficiencies greater than those that afflict smaller firms.

I think this is an important point, and indeed is a theme that runs through my own work. For example, one of the key arguments of my Policy Analysis on network neutrality, which Cato released on Wednesday, is that the Internet’s success depends on the fact that it isn’t owned or managed by any single entity. Back in the 1990s, when the Internet was competing with proprietary online services like AOL and Compuserve, the Internet’s lack of centralized control turned out to be its most important strength. The hierarchical decision-making processes of the AOL and Compuserve companies simply couldn’t keep up with the spontaneous order of millions of Internet users acting without central direction.

Indeed, one of the fun things about writing about technology is that thanks to the rapid pace of change, Silicon Valley is one of the few places where very large and very small companies compete on a roughly equal footing. And I think the experience of Silicon Valley bears out Long’s observations. The most innovative ideas almost never come from large, established firms. Silicon Valley is full of firms like HP, Digital (now part of HP), Microsoft, AOL (now part of Time Warner), Yahoo!, Netscape (now part of Time Warner) that began their lives as nimble startups selling highly innovative, disruptive technologies and wound up as large, bureaucratic companies struggling to keep up with the efforts of smaller competitors with a tiny fraction of their R&D budgets.

Central planning doesn’t work very well. And Long is right to point out that this is true of large companies as much as it is of the federal government. But having found a theoretical hammer he likes, Long seems to see public policy nails everywhere he looks. He puts forward the even stronger claim that large firms are so inefficient that only government interference in the economy could explain their existence. Not only does this conclusion not follow from his premises, it’s not difficult to come up with counterexamples.

Google, for example. Google’s success certainly can’t be attributed to a sweetheart deal from the city of Mountain View. Nor does Google particularly benefit from low wages or government-funded roads. Even if we grant Long’s premise that copyright and patent law are unjustified interference with the free market, these can’t explain Google’s wealth either. Google’s products are available for free, and Google has yet to assert any of its patents against competitors.

The reason Google is so profitable, in a nutshell, is network effects. Google sits at the center of a vast network of users, website operators, and advertisers who are locked in a virtuous circle. More advertisers prompt the creation of new websites, which attracts more users, which in turn attracts more advertisers. As the matchmaker between these parties, Google is able to capture a small fraction of the social surplus created by the virtuous circle.

Now over time, Google will succumb to the same diseconomies of scale that have been dragging Yahoo!, Microsoft, and other companies down. Already, if you talk to people who have worked at Google, they will tell you that the company is slowly losing the freewheeling spirit of its early days. It’s gradually becoming more bureaucratic, risk-averse, and strategically incoherent. But it will take a long, long time for Google’s bureaucracy to become so inefficient that it will cease to be a profitable company in the absence of government favors. If Google simply rests on its laurels, its existing customer base will continue generating a healthy revenue stream for the foreseeable future.

I think the same thing is true in other sectors of the economy. The choice of Wal-Mart as a poster boy strikes me as particularly ill-considered. To be sure, Wal-Mart is far from a paragon of libertarian virtue. I will be (and have been) the first to condemn them for their abuse of protectionist policies such as eminent domain at the local level. But blaming Wal-Mart for policies such as publicly-funded roads and labor market regulations that have nothing in particular to do with it strikes me as grasping at straws. Wal-Mart happens to be extremely good at logistics, and have managed to wring larger economies of scale out of the retail industry than anyone had previously been able to do. Wal-Mart, like Google, benefits from the network effects that come from bringing together tens of millions of consumers with hundreds of manufacturers.

Of course, we don’t know precisely how much of Sam Walton’s profits are attributable to these economic forces and how much are attributable to government favoritism. No doubt, Wal-Mart would be a somewhat less profitable company in a world without eminent domain abuse. But it’s simply not plausible that none of Walton’s profits were attributable to his savvy business decisions. And it’s certainly overstating the case that Hayekian considerations dictate that Walton’s profits must be attributable to government favoritism because a company of Wal-Mart’s size could not exist in a free market.

Wall Street Bailout Promotes More Washington Corruption

Naive and/or deceptive politicians often claim that sleaze is the enemy of good government, but the real truth is that government is the biggest friend of corruption. Simply stated, when politicians redistribute more than $3 trillion (and more indirectly via regulation), lobbyists and interest groups will line up to stick their snouts in the trough. The Wall Street bailout is an excellent example of this distasteful practice. The headline of a recent New York Times story summarizes the problem, noting “Lobbyists Swarm the Treasury for a Helping of the Bailout Pie.” The excerpt below reveals some of the corruption that is so pervasive in Washington. The most absurd part of the story is the quote from a Treasury Department official who says the government shouldn’t pick winners and losers - a rather strange statement since the bailout exists so that government can pick winners and losers:

When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls. in memory, it suddenly looks like a dwindling pool. Many new supplicants are lining up for an infusion of capital as billions of dollars are channeled to other beneficiaries like the American International Group, and possibly soon American Express. …The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers – as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages. …”Unfortunately, I don’t have a lot of good news for them individually,” said Jeb Mason, who as the Treasury’s liaison to the business community is the first port-of-call for lobbyists. “The government shouldn’t be in the business of picking winners and losers among industries.” Mr. Mason, 32, a lanky Texan in black cowboy boots who once worked in the White House for Karl Rove, shook his head over the dozens of phone calls and e-mail messages he gets every week. “I was telling a friend, ‘this must have been how the Politburo felt,’ ” he said. …The first wave of lobbying came in early October when Mr. Paulson announced the plan to buy troubled mortgage-related assets from banks. The Treasury said it would hire several outside firms to handle the purchases, and would dispense with federal contracting rules. Law and lobbying firms that specialize in government contracting fired off dispatches to clients and potential clients explaining opportunities in the new program. Capitalizing on the surge of interest, several large firms, including Patton Boggs; Akin Gump; P & L Gates; Fried, Frank, Harris, Shriver & Jacobson; and Alston & Bird, have set up financial rescue shops. Alston & Bird, for example, highlights its two biggest stars – former Senator Bob Dole and former Senator Tom Daschle. Mr. Dole “knows Hank Paulson very well” and has been “very helpful” with the financial rescue groups, said David E. Brown, an Alston & Bird partner involved in its effort. “And of course, Senator Daschle is national co-chair of the Obama campaign,” Mr. Brown added, noting that because Mr. Daschle is not a registered lobbyist, his involvement is limited to “high level advisory and strategic advice.” Ambac Financial Group, in the relatively obscure bond insurance business, never needed lobbyists before, said Diana Adams, a managing director. But its clients persuaded the company to hire two Washington veterans – Edward Kutler and John T. O’Rourke – who helped arrange a recent meeting with Phillip L. Swagel, an assistant Treasury secretary. “We haven’t really asked for much in the past,” Ms. Adams said. …Some lobbyists, Mr. Mason said, had called him even though they did not have any clients looking to get into the program or worried about its restrictions. They were merely seeking intelligence on which industries would be deemed eligible for assistance. He suspects they were representing hedge funds that wanted to trade on that information.

Helicopter Paulson

Government equity investment or rescue of the broader (non-financial) economy is a mistake.  It will damage economic efficiency in the long-term by diluting the value of private shareholders and reduce incentives for cost cutting and product quality innovations.

Of course, the current focus is not on long-term incentives but on how to shorten and moderate the current economic recession.  The constantly changing mix of initiatives from the Treasury suggest:

1. A lack of knowledge/vision about what to do–so they’re throwing money at everything that moves in the hope that something will work.  These ex-Goldman Sachs personnel that make up the Paulson team are probably not economists–and certainly not good ones.  The majority are probably MBAs with little understanding of how things really work in the economy. They probably have a microeconomic firm-specific orientation and management skills that are unsuited for their current responsibilities. If I’m wrong, I’d be very surprised. If I’m right, it’s showing.

2. An attempt to assuage competing political constituencies and provide benefits to potential future supporters.

3. An attempt to distribute wealth to those people/firms that the next Congress and president won’t support–by tying their hands through government ownership of firms.

4. A deliberate and cynical attempt to damage the economy even more to make life difficult for the Obama administration.

I think # 4 is cynical on my part. But although unlikely, it is not impossible given how polarized the political atmosphere was during the GW Bush presidency.

Broad government involvement in private firms to solve the economic crisis is a dangerous turn.  The shareholders in these firms took risks and should bear the consequences of their decisions. If they sink, the economy may recover faster as other businesses are created over time in non-housing and less energy intensive sectors.  Supporting existing, inefficient firms run by poor decision makers is likely to prolong the recession because keeping those firms and their managers afloat won’t help to restore market confidence.  And, this policy will encourage future investors/managers to take even riskier decisions under expectations of yet another government bailout if they fail. Finally, government debt-financed wealth injections are worsening the nation’s finances–we’re already swimming in huge and unpayable entitlement obligations to a growing number of retirees, disabled, poor, and the sick.

The government purchase of securitized auto loans is probably intended to insure auto company creditors, who would otherwise become bankrupt and prolong the credit-flow freeze.  It’s another source of bad assets on bank and non-bank financial firm portfolios that’s contributing to the market failure in that sector.  I’m more sympathetic to the original TARP idea than government officials seem to be. That way the government’s involvement in the private sector will be limited and it will remove bad assets from their balance sheets–which are responsible for the pervasive uncertainty among financial market players and is causing the credit freeze.  But under TARP, government officials don’t get to choose whom to support–they must buy up assets from whoever is currently holding them–be it domestic or foreign firms, “friends and relatives” or “strangers and enemies.”

Cato Today

Op-Ed: “The Voters’ Message to Republicans,” by Michael D. Tanner on

Given a choice between two “big-government parties,” voters will choose the Democrats every time.

Video: Daniel J. Ikenson discusses an auto industry bailout on CNN

Where is it written in scripture and in stone that we need to have a big three?…If one of them goes down, the industry will be doing much better.

Article: “Worse Than Bush?,” by Ted Galen Carpenter in National Interest Online

Although it is hard to imagine, Obama’s foreign policy could prove even worse than that of the Bush administration.

Article: “Save Parents the Lecture,” by Neal McCluskey in

Are there things that parents could do to improve education? Sure, but they don’t need… Barack Obama lecturing them on getting involved in their kids’ learning. What they need is real power over their kids’ education. What they need is school choice—but that’s something for which Obama refuses to use his bully pulpit.

Podcast: “The New Face of the GOP,” featuring Michael D. Tanner

Obama’s Tax Promises

President-elect Obama has made a slew of tax promises. Some of them are tax increases, some of them are tax cuts, and many of them are actually spending increases. Let’s try to sort them out.

Here I classify tax changes in comparison with the taxes that Americans are paying this year. I am mainly working from this excellent Urban/Brookings study.

Note that many of Obama’s proposed tax breaks are “refundable,” meaning that much of the effect is to increase federal spending, not to cut taxes. Refundable tax breaks involve cash hand-outs to many people who do not pay any federal income taxes. 

With that in mind, here are Obama’s main proposals to change the tax system from its 2008 structure:

Tax Increases

  • Raise the top two personal income tax rates from 33 and 35% to 36 and 39.6%, respectively.
  • Restore the income phase-outs for personal exemptions and itemized deductions, further increasing effective tax rates at the top end.
  • Raise the top capital gains tax rate from 15 to 20%. 
  • Raise the top dividends tax rate from 15 to 20%.
  • Increase taxes on oil and gas companies.
  • Increase taxes on U.S. multinational companies.

Combined Spending Increases / Tax Cuts

  • Making Work Pay. A refundable tax credit of up to $500 for low-income workers.
  • Mortgage Credit. A refundable tax credit of up to $800 for nonitemizers who own homes.
  • Saver’s Credit. A refundable tax credit of up to $500 per family for retirement saving.
  • American Opportunity Credit. A refundable tax credit of up to $4,000 for education expenses.
  • EITC Expansion. Expand the refundable earned income tax credit.
  • Child Care Credit. Turn the current child care credit into a refundable credit.

The Urban/Brookings analysis (pages 22 and 25) found that more than half of the dollar impact of these six tax code changes will be to increase federal spending, not to cut taxes. That’s $648 billion more in federal spending over the next ten years. In addition, Obama is proposing a new refundable tax credit for buying health insurance. 

Tax Cuts

  • Exempt people age 65 and over from federal income tax if they earn less than $50,000.
  • Minor business incentives. These promises were so small and undefined that the Urban/Brookings study didn’t even score them.


As you can see, it was genius of Obama to successfully run for the White House as tax cutter, given that most of his proposed tax code changes are tax or spending increases. Part of the problem is that the media keeps calling Obama’s proposals “middle-class tax cuts,” as on the front of the Washington Post today.

For the economy, for tax code complexity, and for the America ideal of equal treatment under law, Obama’s tax proposals would be a disaster. With Obama’s tax and spending proposals, government as Santa Claus has reached new heights.

For other posts on Obama’s tax plans, see: