Coyote Blog

From Kevin Drum, it's good when progressives make it clear to everyone what they want:  Control!

[emphasis added]  It's just that, left to their own devices, both humans and corporations
tend to act solely in their own self-interest. That's why we have laws
to control human behavior, and it's why we need laws and regulations to
control corporate behavior. I prefer a society in which people don't
gun each other down in the streets, and I also prefer a society in
which middle class workers prosper when the economy grows. I support
laws that encourage both.

Woah!  Can't let all those damn individuals do whatever they please of
their own voluntary self-interest.  Don't they know they are supposed
to do what we intellectuals think best for them?  I want to repeat
this line:

That's why we have laws
to control human behavior

Actually, in governments with a strong grounding in individual rights,
we have laws to prevent people from acting using force or fraud on
other individuals.  So yes, we do have laws to stop people from
shooting each other, but these laws are philosophically a long step away from
laws that tell people what wage they can and cannot legally accept.   Preventing someone from using force against another is waaaaaaay different than using government force to prevent one or more individuals from acting voluntarily in their own self-interest.  The whole point of government in a free society is to prevent people
from trying to control each other by force, not, as Drum wants, for the
government to be the very agent of this control and coersion. 

People who root for more government control need to learn their lesson.  Both parties tend to set up mechanisms of control as if their own guys are going to run this machinery forever, only to freak out when the opposition party takes over and uses this machinery of control for its own purposes.  Thus Democrats lament that the machinery they built to control the drug market gets taken over by Republicans to ban the morning after pill, and that the public education system Democrats so love is co-opted by ID curriculum.  As I wrote here:

Again we hear the lament that the game was great until these
conservative yahoos took over.  No, it wasn't.  It was unjust to scheme
to control other people's lives, and just plain stupid to expect that
the machinery of control you created would never fall into your
political enemy's hands.

Drum makes these statements in the context of arguing that moderate Democrats should be irate about Wal-Mart and should be seeking to have the government sit on Wal-Mart in some way:

And one of the things that's changed is that Wal-Mart has gotten a lot
bigger, unions have continued shrinking, working class wages have
stagnated, and corporate power has grown tremendously. It's perfectly
rational for even moderate, pro-business Dems to look at the record of
the past couple of decades and conclude that things have gotten pretty
far out of whack and that Wal-Mart is a good symbol of this imbalance

One problem with this meme beyond the others I have pointed out in the past is that Wal-Mart is generally not supplanting (with one exception) unionized retailers.  In fact, the implication that Wal-Mart is somehow setting back unionization is actually a complete reversal of how Wal-Mart used to be hammered by critics.  Traditionally, Wal-Mart has been blamed for replacing small stores and family businesses which certainly aren't unionized, usually don't have health plans, and often pay lower wage scales than Wal-Mart does.  Now they are trying to reverse history, and claim instead that Wal-Mart has somehow been supplanting high-paid union jobs.  The only place where this could be argued to occur is in the supermarket business, where strong unions have dominated.  But these old-line unionized supermarkets were falling to competition from other supermarkets even before Wal-Mart came along.  And as to all those Chinese imports, well, I would LOVE to see a liberal try to twist themselves into a pretzel to make a progressive argument for why an impoverished person in China counts for less than a middle class person in the US.

The only real change in employee's fortunes is that employees who work for Wal-Mart are now more visible than they were when they worked for thousands of tiny local retailers, but are they really worse off and more powerless, or just a better target for populist rhetoric?  In fact, even if pay and benefits are the same as in a small store (and I think Wal-marts are probably better), Wal-Mart also offers opportunities for advancement and training far, far beyond the ma and pa store.

By the way, you know its election time when you hear this:

The American economy has changed for the worse over the past couple of decades if you're part of the working or middle class

Ahh, it reminds me of those heady days when Clinton was able to portray a modestly growing economy under Bush 1 the "worst economy since the great Depression."   Election rule to remember:  Republicans try to get elected by running down the morality of Americans, Democrats do so by running down their economic success.

Postscript:  I will admit there is one group who sometimes must accept wages that are not the result of pure voluntary agreement with an employer: Illegal immigrants.  Those who read this blog a lot will know I am very pro-immigration, and would like to see full, open immigration and there be no such thing as an "illegal" immigrant, except in narrow cases of convicted criminals, etc.  Illegal immigrants in many ways have the same problem as prostitutes, in that they have only limited legal redress when they are victims of force or fraud in their work.  Making currently illegal immigrants legal would do more to help disenfranchised workers than any slate of goofy government legislation to try to reinvigorate unions.

Update:  My past response to charges of widening income distribution was:  So what?  Also alot more links here.

At least one homebuilder is predicting doom and gloom:

"It would be difficult to characterize the position of
home builders as other than in a hard landing," says Robert Toll, chief
executive of luxury home builder Toll Brothers Inc., which reported yesterday that net income fell 19% in the third quarter ended July 31. (See related article.)

In his 40 years as a home builder, Mr. Toll says, he
has never seen a slump unfold like the current one. "I've never seen a
downturn in housing without a downturn in employment or... some
macroeconomic nasty condition that took housing down along with other
elements of the economy," he says. "This time, you've got low
unemployment, you've got job creation, you've got a stable stock market
and relatively low interest rates."...

In much of the country, property markets began cooling
rapidly in the second half of last year. Home builders were still
turning out houses at a rapid clip, and the surge of new and previously
occupied homes on the market convinced buyers there was no need to
hurry. Over the past year, the number of previously occupied homes
listed for sale nationwide has risen nearly 40%. In some metropolitan
areas, including Orlando and Phoenix, the supply has quadrupled.

I never got that excited about the run-up in the price of my home, so I won't worry too much if it falls again.   For the average homeowner, the paper-price run-up of housing prices doesn't really have much meaning unless they are considering moving soon to a lower-home-price area or they are going to retire and downsize.  My house supposedly doubled in value in the last four years.  We went out shopping for a home in the area, and you know what?  All the other prices doubled too.  I could trade my current house for about the same house I could trade it for four years ago.  The only really beneficial effect was that the increase in home equity made for useful collateral in a business loan I took out.

Of course, the home speculators may take a bath - there are several latecomers to the speculation / spec home business in my neighborhood who are holding houses that won't sell for the huge prices they are asking.  I posted that this was coming over a year ago, using a model for contrarian investing I learned at the Harvard Business School:  Do the opposite of what doctors and dentists are doing.

The following is from our Chinese sister publication called Panda Blog:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

Panda Blog goes on to ask that their government end these distorting policies, for the sake of China's future.  I for one kindof hope that they keep subsidizing the stuff I buy over at Wal-mart...

The media is just longing to make current gas prices into a crisis.  And you can already see them gearing up to bash oil companies for "record" profits (by the way, when reading the profit announcements, pay attention not to just total dollars but to profit margins, then read this).

Glenn Reynolds links this gas price chart this morning at Random Useless Data, showing that in real terms, gas prices are still below their peaks, and not at "all-time highs."

I took this one step further, based on the assumption that it isn't the price per gallon that matters for gas, but the price to drive a fixed mileage, say 100 miles.  Since average automobile fuel economy has continued to improve, in real terms we are far below the peak cost of gasoline.  Using this and this MPG data (for passenger cars) and the inflation adjusted gas prices here, I got this chart (1979 dollars)

By the way, just so you know my personal incentives, there are very few people out there who run a business whose fortunes are more sensitive to gas prices than my recreation business.  This will not be a very good summer for me, but if we leave the market alone to do its work, things will likely be better in 2007.  Intervention by Congress will pretty much assure that things will get worse.

After reading this article on the earth running out of resources,  I discovered another article from the archives of the Coyote Broadsheet, a predecessor of this blog written by one of my distant relatives, dated April 17, 1870:

As the US Population reaches toward the astronomical total of 40 million persons, we are reaching the limits of the number of people this earth can support.    If one were to extrapolate current population growth rates, this country in a hundred years could have over 250 million people in it!  Now of course, that figure is impossible - the farmland of this country couldn't possibly support even half this number.  But it is interesting to consider the environmental consequences.

Take the issue of transportation.  Currently there are over 11 million horses in this country, the feeding and care of which constitute a significant part of our economy.  A population of 250 million would imply the need for nearly 70 million horses in this country, and this is even before one considers the fact that "horse intensity", or the average number of horses per family, has been increasing steadily over the last several decades.  It is not unreasonable, therefore, to assume that so many people might need 100 million horses to fulfill all their transportation needs.  There is just no way this admittedly bountiful nation could support 100 million horses.  The disposal of their manure alone would create an environmental problem of unprecedented magnitude.

Or, take the case of illuminant.  As the population grows, the demand for illuminant should grow at least as quickly.  However, whale catches and therefore whale oil supply has leveled off of late, such that many are talking about the "peak whale" phenomena, which refers to the theory that whale oil production may have already passed its peak.  250 million people would use up the entire supply of the world's whales four or five times over, leaving none for poorer nations of the world.

Too bad Julian Simon wasn't around to make a bet on whale oil prices.

A pair of news stories has me spooked tonight.  This first is via Instapundit, and is a story of human pettiness that would be funny if the stakes were not so high:

President Chirac and three of his ministers walked out of the room
when Ernest-Antoine Seillière, the leader of the European business
lobby UNICE, punctured Gallic pride by insisting on speaking the
language of Shakespeare rather than that of Molière.

When M Seillière, who is an English-educated steel baron,
started a presentation to all 25 EU leaders, President Chirac
interrupted to ask why he was speaking in English. M Seillière
explained: "I'm going to speak in English because that is the language
of business."

Without saying another word, President Chirac, who lived in
the US as a student and speaks fluent English, walked out, followed by
his Foreign, Finance and Europe ministers, leaving the 24 other
European leaders stunned. They returned only after M Seilière had
finished speaking.

That's the silly part, but the underlying issue that was being discussed is not so silly:

In the absence of his President, M Seillière gave warning about the
dangers of the "economic nationalism" being pursued by the French
Government. The summit, aimed at restoring confidence in the future of
the EU, has been overshadowed by a row over the tide of protectionism
sweeping the continent, with Tony Blair and Angela Merkel, the German
Chancellor, cautioning about the danger of raising barriers to foreign
competition.

What has me really worried is that the US, the only vaguely consistent defender of free trade in the world for the last 60 years, is having the same discussion, initiated not so much by the economic problems in Europe but by security issues.  As I warned earlier, Congress seems ready to use the events of the Dubai ports mess and the fear of 9/11 to clamp down on foreign investment (sorry, $ required I think):

Building on their win in the Dubai ports deal, U.S.
lawmakers are moving to gain leverage over a swath of foreign
investments in the U.S., an effort that business leaders and President
Bush's aides warn could harm the U.S. economy.

In the first serious legislative move, Senate Banking
Chairman Richard Shelby (R., Ala.) released the summary of a bill
Friday that would greatly expand the array of foreign acquisitions
subject to automatic scrutiny and would require the administration to
notify lawmakers as soon as it begins to review any foreign
transaction. The bill also would require the administration to rank all
countries according to their relations with the U.S. and their support
for weapons-control deals. Approvals would then depend in part on the
ranking of a company's home country.

The administration would have to report to Congress on
why it approved or rejected any transaction, but the bill wouldn't give
lawmakers the power to veto a deal, as many critics feared.

Business groups and Bush administration officials
expressed immediate alarm over several provisions in the bill, which
Shelby aides claim has the support of other members of the Banking
Committee. In a letter to Sen. Shelby this week, seven groups
representing the nation's top banks and finance companies warned that
legislative proposals making the rounds of Congress "would threaten
job-creation prospects for the U.S. economy" and "reduce U.S. economic
growth."

Building on their win in the Dubai ports deal, U.S.
lawmakers are moving to gain leverage over a swath of foreign
investments in the U.S., an effort that business leaders and President
Bush's aides warn could harm the U.S. economy.

In the first serious legislative move, Senate Banking
Chairman Richard Shelby (R., Ala.) released the summary of a bill
Friday that would greatly expand the array of foreign acquisitions
subject to automatic scrutiny and would require the administration to
notify lawmakers as soon as it begins to review any foreign
transaction. The bill also would require the administration to rank all
countries according to their relations with the U.S. and their support
for weapons-control deals. Approvals would then depend in part on the
ranking of a company's home country....

The administration would have to report to Congress on
why it approved or rejected any transaction, but the bill wouldn't give
lawmakers the power to veto a deal, as many critics feared.

Business groups and Bush administration officials
expressed immediate alarm over several provisions in the bill, which
Shelby aides claim has the support of other members of the Banking
Committee. In a letter to Sen. Shelby this week, seven groups
representing the nation's top banks and finance companies warned that
legislative proposals making the rounds of Congress "would threaten
job-creation prospects for the U.S. economy" and "reduce U.S. economic
growth."

This sucks, particularly in the light of a president who has at best been only a luke-warm defender of free trade and who seems to have entirely misplaced his veto pen.  It is an interesting statement on how far this president has wandered from his party's traditional roots that I would greatly prefer to have his predecessor Bill Clinton in office for this fight.  Clinton was certainly a mixed blessing for us anarcho-capitalists, but he was always a strong and articulate defender of free trade, even to the extent of opposing the strong protectionist wing of his party.

In addition to the security issues involved, I have also tackled the overblown fears about trade deficits here, among other places.  For those of you in Arizona concerned about free trade, I know that Congressman Jeff Flake, one of the few remaining folks in Congress who understands free markets and small governments, shares some of these same concerns about rising protectionism.  I hope those of you in his district will continue to send him to Washington to serve us, and I would like to see where our other AZ Congresspersons stand on free trade.  I don't want to pre-judge, but this is one of those issues where I have no trust that McCain (for example) will land on the correct side of the issue.  I fear that conservatives are going to feel the need to flog the security horse right through the November elections, no matter what other principles get trampled in the process.

As a final note, I could add the current backlash against immigrants as
the third leg of this story on rising economic nationalism.  One of the
things that has surprised me the most in getting comments to this blog
is how many people who accept global free trade as right and beneficial
in turn support strong restrictions on immigration (Cafe Hayek comments on economist Robert Samuelson as one such person).
I see free trade and free immigration as having exactly the same
philosophic roots, based in the fact that our rights to trade,
associate, etc. stem from our humanity, not our citizenship.  I won't repeat my argument but you can read it here;
if you are pro-free-trade but anti-immigration, I ask that you give me
five minutes to make the case that no one else seems to want to make
today.  And even if you don't accept the philosophic similarities,
economicly open immigration and free trade are nearly identical issues,
each involving the free flow of labor, capital, and goods across
borders.  If you still can't see the similarity, here is a quick
example:  If I decide that my best sourcing decision is to subcontract
my tech support to Claude in France, I can do this equally well by
either straight outsourcing to Claude where he lives today (global
trade) or by encouraging Claude to move to the US to do the work for me
here (immigration).

As a followup to this post on security as a Trojan horse for protectionism, I wanted to link this article in the WSJ($) called The Perils of Protectionism:

Fifty-six percent of the economists polled in the latest WSJ.com
forecasting survey -- conducted in the aftermath of a flap over foreign
management of U.S. ports -- say protectionism will lead to some
slowdown in U.S. growth over the next several years, and 8% predict
that the slowdown will be significant....

The ports controversy came at a time of growing concern about
protectionism around the world. It followed the blocked bid by China's
Cnooc Ltd. to acquire Unocal Corp. last year and emerged as European
governments angle to prevent high-profile utility deals within their
borders. The fear is that if governments take steps to shield their
countries' businesses, international trade and investment flows could
be reduced. Corporations will find it more difficult to reach new
markets.

Protectionism is unambiguously bad," said David Berson, chief economist
at Fannie Mae. Indeed, the free flow of capital across national borders
is conventionally looked upon by economists as a long-term good, and
69% of those surveyed say foreign ownership of U.S. assets is positive
for the economy in the long run.

One example of why the protectionist arguments are short-sighted is demonstrated by this passage from the same WSJ article:

While the ports row has receded, the U.S.'s large bilateral trade
deficit with China, which was $17.91 billion in January, remains a
flashpoint. Some lawmakers complain the imbalance has been inflamed by
an artifically low exchange rate for China's yuan against the dollar.
Though Beijing modestly revalued the yuan last summer, allowing it to
float in a narrow range against a basket of foreign currencies, critics
have continued to lash China's currency policy and call for further
revaluation.

So the Chinese government is artificially subsidizing the US economy through reduced prices of Chinese goods via a low valuation for the yuan vs. the dollar.  And that's a bad thing?  If the Chinese government is holding down the exchange rate, then they are in fact taking their money and the money of their citizens and pumping it into lower prices for US consumers and lower interest rates on US government debt.  Ooooh, color me really concerned.

As far as the "well, we're going into debt to pay for our consumerism" argument, I and others have tried and tried to educate the world that the trade deficit is not a debt, and running a trade deficit is not bad.

The other day, I saw Coyote Blog grouped into a category of "conservative blogs".  I know a lot of folks tend to immediately shorthand free market economics to "conservative", but I bristle at the tag, particularly given the knife sticking out of the free economy's back right now with Republican finger prints all over it.  Therefore, I have decided that it is time to take one of those wildly unpopular libertarian stands that will help ensure that I don't get lumped in with Pat Robertson any more, while simultaneously guaranteeing I will never be able to hold elective office or survive a Senate confirmation.

For some reason, perhaps because of the recent Hollywood movie on the topic, there seems to be a lot of talk and concern in the press about white slavery and forced prostitution.  To which the general legislative response is "Let's crack down on prostitution".

The reason women get used and abused in the prostitution trade is because the trade is illegal, not because we aren't tough enough on it.  If a woman working at Wal-mart has part of her pay stolen by her boss, or is required to pay sexual favors to hold her job, she has legal recourse, both to the police and to civil court.  In fact, walking into an attorney's office and declaring "I work at Wal-mart and my boss forced me to have sex and stole my pay" would likely result in her becoming a millionaire some day.  On the other hand, a prostitute today who walked into a police station and declared "I work as a prostitute and my boss stole my pay" would likely result in her arrest.  Women get abused precisely because their trade is illegal, giving them no real recourse to the legal system.  Making prostitution legal would give thousands of abused women their first chance ever at freedom from their tormentors.

I think the time is right to revisit the subject of legalized prostitution.  America, for all the talk of a Republican-led theocratic state, has continued to relax itself on enforcing moral norms between consenting adults.  Forty years ago, the majority of Americans opposed legal homosexuality, legalized gambling, and even interracial marriage.  In many states, even tattooing was illegal.  Today, though we still suffer through some tortured ethical logic (e.g. gambling is moral as long as it is on a boat but not on land) these practices are legal in many parts of the country.  Its time to recognize that consensual sex between adults should be legal in all its forms, including those forms where money is exchanged.  By the way, speaking of bizarre ethical logic, today, in most states, exchanging money for sex is illegal EXCEPT if the act is filmed and the film is distributed widely.  Then the sex act for money is no longer prostitution but is pornography, which while frowned upon by many is generally legal.

Interestingly, feminists tend to be split on this issue, in part because feminists tend to split into at least two camps.  The first camp is the libertarian-feminist, who honestly want to empower women, and who try to be consistent to the "women should be able to make decisions for her own body" argument used in abortion and which leads them to support legalized prostitution as well. I can imagine these feminists saying "Hey women out there, if men could
make $500 an hour having sex, does anyone doubt that it would be legal?"

The second camp is the sort of uber-gender feminists, whose agenda is more about molding all women into their idealized female.  These feminists, who seem to control many women's organizations today, have created a whole new kind of morality that women must follow, a morality that seeks to ban breast implants since they are a trivial pandering to male aesthetic norms and to keep prostitution illegal because they see it as degrading to women.   These women use the language of choice in their abortion politics, but they are more about a new form of master-gender (rather than master-race) fascism.

By the way, when I say "free the hookers", I really mean free them.  Several countries in Europe have partially liberalized prostitution, but have reported there is still a lot of sex industry underground.  The reasons is that these countries have applied typical European economic policy to the fledgling industry, meaning they regulated the crap out of it.  Specifically, they tend to put extreme licensing requirements that artificially limit the number of people who can perform the trade legally, much like New York artificially limits the number of cab medallions.  And they get the same result as with cabs in New York - a large gray market is created, and the benefits of bringing the industry out in the open are thwarted.  More on the problems with licensing here and here and here.

After you finish this post, I have an updated post on the same topic here.

Well, the US trade deficit is up again, and you can be sure the news was accompanied by a lot of moaning and groaning and soul-searching.  The main reason that all the media and the majority of Americans freak out over large trade deficit numbers is that they look at the American economy as a large bank vault with a fixed supply of money on the shelves.  They reason that if more money is going out of the vault to buy things than is going back in from sales, then eventually the vault will go empty and we will be bankrupt.  Either implicitly or explicitly, those who fear trade deficits perceive the trade imbalance to be red ink, something bleeding out of a fixed supply.

This view of the trade deficit as a being a growing and unsustainable debt is wrong.  I will try to explain in a couple of ways.

The micro view

Lets first look at it from the perspective on one individual.  Lets say Fred made $50,000 this year, and lives in a US where, before he makes his spending decisions, trade is exactly in balance with China.  Fred spends some of his income on rent, and invests some in some nice US equities.  And he takes $1000 of what he just made that he might have saved and buys himself a nice Chinese-made plasma TV so he can really enjoy the Superbowl next year.

So, where's the debt?  One can argue that net savings is lower (perhaps - we haven't gotten yet to where the Chinese are spending their extra US dollars), but Fred seems to have increased the trade deficit without incurring any debt.  In fact, Fred is actually better off, since in a free society no one engages in a transaction that doesn't return more value than one spends.  In this case, the plasma TV provides more than $1000 of value back to Fred, or else he would not have engaged in the transaction. 

Yes, many people are buying Chinese TV's with consumer debt, but these same people are buying much more American stuff with consumer debt as well.  To the extent that there is or is not a "problem" with people taking on too much consumer debt, this problem is absolutely unrelated to the country of origin of the goods they are buying.  You can max out your Visa card on American stuff just as easily as on Chinese stuff.

But wait, you say.  The reason the debt is not obvious is from the way I structured the problem.  I assumed the rest of the economy was static while Fred was making his decision.  But if Fred had bought American, somewhere in the US economy there must have been less debt.  So we will tackle this next.

The Economy is Not Zero Sum

Repeat please:  The economy is not zero-sum.  Never has it been so hard to convince people of a concept that should be so obvious.  I used up bushels of electrons explaining why the economy is not zero sum here, but the short proof is easy:  Look at the world in 1900.  Look at it today.  The world as a whole and most every individual is far richer.  The fact is that economies create wealth every day, and free economies create a LOT of wealth.

At the heart of every argument that the trade deficit is bad is the mercantilist notion that the US economy is a bank vault leaking funds.  But this analogy that seems to be in everyone's head is flawed.  The supply of money or wealth in the US, in the vault, is constantly growing.  If you really have to think of it as a vault, then think of what's inside as rabbits rather than gold bars.  Does anyone doubt that if you start with a hundred rabbits and every year sent a few to China that you might still have more rabbits than you started with in the vault?  A free economy is like a group of rabbits on Viagra.  Even if the Chinese took billions of dollars they got from selling goods to the US each year and burned the money in a big bonfire, the US still would be growing in wealth.

Of course, the vault analogy sucks for a larger reason, that the US economy is deeply integrated with that of the rest of the world.  In fact, much of the wealth creation comes from this very integration, providing a more robust division of labor and a deeper well of creativity and entrepreneurship than any one country could achieve on its own.  And the dollars we send overseas don't stay there, they come back.  But we will address this next.

So What do the Chinese do with Those Dollars?

OK, so we are all short-sitedly (at least according the the "progressive" intelligentsia) sending dollars to China to satisfy our consumerism.  So what do those Chinese do with those dollars?  They can't spend them domestically, because stores and vendors in China don't accept dollars any more than the Wal-mart down the street from me accepts Yuan.

Most all the dollars have to come back to the US, or the person in China holding them gets no value.  You could say, well that person can take them to the bank and exchange them for Yuan, and that is true.  But that bank would not accept the dollars for exchange unless it knew it could get them back to the US, or had another client that needed them to make a purchase in the US.  So, the dollars will have to come back to the US to purchase something.

Some of the dollars come back to purchase US goods and raw materials, but of course this is less than the total dollars the Chinese have to spend, or else there would be no trade deficit.  In fact, this all that the words "trade deficit" really means.  It means that of the dollars the Chinese receive from sales to the US, only a portion is used to buy American goods that are shipped back to China.  The rest goes to buy American .. something else.

What?

Well, some of it goes to purchase American goods that stay in the US.  Lets shamelessly steal an analogy from Don Beadreaux and Jack Wenders.  If Chinese companies buy American steel and lumber and ship it to China, it shows up in the trade balance.  If they buy the same products and build a factory in the US, it does not.  The Chinese use a lot of their dollars to invest in buildings, real estate, capital assets, factories, production facilities, etc. in the US.  And this is bad, how?  I know that since the Japanese investment boom of the eighties, there are lots of folks who call themselves "liberal" who suddenly got very upset about foreigners owning US-based assets.  It is impossible for me to see this concern as anything but xenophobia and racism, since hundreds of years of Dutch, Canadian, and British investment never worried a soul but Japanese and Chinese investment has everyone in a lather. 

By the way, if you worry about China as a security threat, wouldn't you rather see them invested in the US economy, and therefore have a strong interest in our continued prosperity?  One could easily wonder why Saudi Arabia does not use their power over oil reserves to screw with the US like they tried to do in the early 70's.  The reason is that all of their wealth is invested in dollar and euro-denomitated assets.   People worry about the power the Saudis may have to mess with our economy, but their reinvestment of dollars back in our economy has made this a game of mutual assured destruction.  The same thing is occuring with China.

The other thing the Chinese do with the money is invest in dollar-denominated financial assets, which in many ways is just an indirect way of investing in the same capital assets listed above.  They will invest dollars in equities and, yes, debt securities.  But the fact that the Chinese choose to spend their dollars on debt securities does not mean that the trade deficit is causing the debt.  If the Chinese had a predilection for debt securities, more so than say an American holder of dollars, one might argue that this predilection drives down interest rates a bit and therefore might increase total debt, but this is a fairly tenuous chain of causation and not, I think, what seems to be bothering folks who panic over the trade deficit.  In fact, one can argue that the causation runs more strongly the other direction, that the large US budget deficit keeps the dollar higher than it might otherwise be, increasing the trade deficit.

So when people lament that "we now consume much more than we produce", they are making a meaningless statement because the we in the first part are not the same as the we in the second part.  The US and the Chinese are sending equal amounts of money back and forth - its has to be, over the medium to long term, or exchange rates would crash.  All the trade deficit means is that there is a difference in WHERE Chinese and Americans consume the goods.  Americans consume Chinese goods in the US.  The Chinese consume some of the US goods it buys in China, and then consumes the rest in the US.  The trade deficit represents the net amount of American goods and services the Chinese buy in the US and choose not to haul back to China.  Instead, they take ownership of the American goods here, in the form of capital assets or financial securities that represent ownership or calls on the cash flow of these capital assets. 

Anyway, you can find more here at Cafe Hayek.

Postscript:  By the way, the US has run a trade deficit of a magnitude that panics people for over two decades.  If this is bad, surely we would be able to find the damage somewhere.  But the US over the last two decades has had the strongest economy in the world.  I suspect that a lot of people would answer "we have run up a huge debt".  But any increase in total debt in the US is not relevant to the trade deficit, or only tangentially related as discussed above.  The Federal debt is run up because the politicians are all spending whores who support their reelection with "good works" paid for with our money.  Consumer debt, which may or may not be "too high", is based on individual spending and saving choices, and is unaffected by whether a person buys an American or Chinese TV.

I run a recreation business that tends to be seasonal.  Many of the campgrounds we run are at high altitudes, and are closed most of the winter because they are snowed in.  We tend to open them in the spring and close them in fall, meaning we hire people in April or May and their job ends in September or October.  Everyone we hire knows from the time they get their job offer that the job is just seasonal, and they will not have a job past some date.

This arrangement is fine with most of my workers, since they tend to be semi-retired already and work during the summer and take winter off. 

The only state where we have a problem is California.  In California, we have an incredibly large number of employees who register for and get unemployment benefits over the winter, even when they have no intention of working.  Most states require that unemployment seekers be actively looking for work.  I don't know if California checks less or if California employees are more adept at gaming the system, but the state unemployment system there seems to be paying for a lot of my employees' vacations.  I know of several who are getting unemployment and are not even in the country - they are down in Mexico fishing all winter.

As a result, I am in the worst California unemployment category, cleverly labeled "F+".  In New Mexico I pay .03%, in Florida I pay 1.3%.  In California, I pay a whopping 6.2% of wages into the system.  Which leads me to another thought - even if no one was cheating the system, why should I be punished with the worst rating in the state?  The nature of my business is that I can only offer jobs April to September.  The only alternative is not full-time work, but no job at all.  The unemployment system was created for the GM guy who has worked the line for years and gets laid off when the economy goes bad.  But my employees know from the moment I offer the job that they are not going to have a job in November.  Unlike the guy at GM, they get exactly what was promised to them.  If this was unacceptable, if they needed full time work, they should have sought out another job.  Why am I punished with higher taxes because I only have seasonal work to give?  Why, when I only have seasonal work, do I have to fund full-time income?

Give credit where it is due, California has done a pretty good job over the last couple of years cleaning up its workers comp. system.  I would like to see them do something similar with unemployment.

Frequent readers of this blog know that I have a particular disdain for technocrats and the damage they do via government coercion.  Just to make sure that I am not subject to the Princess Bride accusation of "You keep using that word -- I do not think it means what you think it does", I will define my terms.

In my parlance, a technocrat is someone who believes that individuals, either acting alone or in groups, are making the wrong decisions and that a few very smart people can make things better for everyone by overriding everyone else's decision-making. 

Technocrats sometimes have a "macro" flavor, focusing on the broad sweep of the economy, seeing market failures everywhere that they feel they could override if only someone would follow their "plan".  This hubris was of course one of the foundations for that juggernaut Soviet Russian economy, and was in fact the thinking behind America's closest brush with fascism, Roosevelt's NRA, which was modeled on Mussolini's economic work.  My college roommate Brink Lindsey has a lot of background on the early 20th century roots of technocratic opposition to capitalism in his book Against the Dead Hand: The Uncertain Struggle for Global Capitalism.

Technocrats also can have a "micro" flavor, focusing on individuals who they feel are making bad decisions for their own selves.  Classic examples are helmet and seat belt laws, where "smarter" people use government coercion for your own good.  We typically call these micro technocrats nannies.  I discussed governments overriding individual decision-making here.

Just the other day I mentioned in this post that I had had a conversation with a technocrat who was:

lamenting that allowing a company like GM to die is dumb, and that a
little bit of intelligent management would save all those GM jobs and
assets.  Though we did not discuss specifics, I presume in his model
the government would have some role in this new intelligent design (I
guess like it had in Amtrak?)

I went on to describe why it was OK to let GM fail.  In particular I noted that it was bad for everyone to artificially force quality assets (people and facilities) to remain in an under-performing corporate structure, which is what the government in effect does when it tries to override the market's decision that a corporation needs to die.

I bring this all up because I saw this classic example of technocratic statism from David Ignatius in the Washington Post. 

Economist Philip Verleger was traveling in Asia last month when the news
broke that General Motors was slashing 30,000 jobs to try to reverse its death
spiral. A Japanese economist he had known for many years asked him a stark
question: "What great nation will allow its major manufacturing company to
fail?"

The convulsions wracking GM are scary, but they're getting surprisingly
little attention amid America's sea of other troubles. Certainly, we've heard
barely a peep out of the Bush administration, which evidently worries more about
keeping energy companies happy than Rust Belt manufacturers. Commentators have
blamed GM management for being too shortsighted and its workers for being too
greedy. But few people seem to appreciate that the nation as a whole has a stake
in maintaining a dynamic industrial base, or that government policies could help
reverse our industrial decline....

But suppose we took GM's near-death experience as a national wake-up call and
decided to get serious about reviving the long-term health of the U.S.
manufacturing sector. What if political leaders treated this as a fundamental
national mission, equivalent to President John F. Kennedy's call to put a man on
the moon? Could government make any difference?

Try this thought exercise: Suppose a government plan could revitalize the
automobile industry and the rest of the transportation sector, encouraging it to
leapfrog several generations of technology; suppose this same plan could cut
U.S. dependence on foreign oil to zero; and suppose, finally, that the plan
could develop new technologies that would bump our economy to a higher growth
path and foster U.S. economic leadership in the 21st century. Would that idea be
worth exploring?

Yes, good idea, lets hand over the automobile industry to the same folks who built and maintained the levees in New Orleans.  It is interesting he quotes a Japanese economist chiding the US for letting its major companies fail.  The author is basically advocating the Japanese MITI approach, making technology choices and managing industries and preventing large organizations in which national pride is somehow tied up from failing.  Which, of course, has resulted in a 15 year recession in Japan.  And Europe.  Don Boudreaux at Cafe Hayek responds further:

I'm tempted to do a long riff here on all the details that Ignatius misses "“
such as, for example, the fact that it's simply not true that as goes GM so goes
America; such as the fact that there is
nothing at all special or inherently better about manufacturing and
manufacturing jobs over service-sector production; such as the fact that
infecting decisions about investment and production with politics will reward
political appeal at the expense of genuinely economically sound uses of
resources.

But it's late, so I'll just point you to Ignatius's closing paragraph:

I'm no technologist, so I can't evaluate the technical details of Lovins's
proposal. What I like is that it's big, bold and visionary. It would shake an
America that is sitting on its duff as foreign competitors clobber our
industrial giants, and it would send a new message: Get moving, start
innovating, turn this ship around before it really hits the
rocks.

This paragraph reflects an attitude that is rich soil for totalitarianism to
take root. It ignores individual freedom; it ignores the possibility that the
admired Big Plan might be flawed, either technologically or economically or
both. Ignatius is all orgasmic simply because The Plan is centralized and Big
and (allegedly) will compel or inspire the masses once again to behave in ways
that promote national greatness.

Heaven help us.

If you think he is exaggerating, as many people do, by invoking the threat of fascism, go back and read what the fascists of the 1930's were writing.  It is nearly identical to Ignatius's words.

There are two lessons technocrats never learn:  1) Their grand plans never work and 2) The statist machinery they create via their grand plans is always taken over from the well-meaning by the power-hungry and corrupt.  As I stated before:

Technocratic idealists ALWAYS lose control of the game.  It may feel
good at first when the trains start running on time, but the
technocrats are soon swept away by the thugs, and the patina of
idealism is swept away, and only fascism is left.  Interestingly, the
technocrats always cry "our only mistake was letting those other guys
take control".  No, the mistake was accepting the right to use force on
another man.  Everything after that was inevitable

And, in fact, you are seeing just this today, as technocrats on the left lament that the machinery of state control they created, from the FDA to public schools, is being taken over by their political enemies.  Unfortunately, they lament the loss of control, not creating the all-powerful state in the first place.  Much more on this topic here and here.

Postscript:  I tossed off the statement above about letting the same organization that built the New Orleans levees fix the automobile industry.  That quick joke makes a valid point, but I should mention that Ignatious does try to preempt this argument:

But then, who can expect individuals to act responsibly when we have an
administration that asserts, in apparent sincerity, that the proper response to
our massive deficits is more tax cuts that plunge us even deeper into debt?
We've become so inured to public-sector mismanagement that the idea of
government solving problems is almost laughable.

In effect, he is arguing that yes, the government has mismanaged things, but this is only because they did not let the really smart people run things.  This is a particularly seductive argument for the left, where most technocrats reside, since it lets them say that government is inefficient only because that idiot Bush is in charge. 

But this ignores the fact that the stupid and corrupt always take over the machinery of state.  Technocrats love railroads, and think America is stupid for not riding the train, like those brilliant Europeans are.  Many supposedly smart people, both Democrats and Republicans, have had their shot at Amtrak, and it still sucks and loses money.  One reason among many for this failure is that incentives matter.  The government has the incentive to patronize powerful voting blocks, not to run an efficient operation or serve customers well.  That's why we get half-billion dollar bridges in Alaska to islands with populations of fifty people.  That's why scientific decisions at the FDA get politicized.  That is why have the government backing a technology ostensibly to reduce fossil fuel use (ethanol) that has been proven to actually increase fossil fuel use.  In effect, government always turns smart people stupid.  More on the specific dangers of government industry building here.

Another Postscript: By the way, people smarter than me do change industries all the time.  The are called "entrepeneurs" and they raise capital from people voluntarily and they succeed or fail only if individuals choose to do business with them.  I find it fascinating to compare Sam Walton with Mr. Ignatius.  Sam Walton raised money voluntarily to support a different vision of retailing, and was successful because many, many people have chosen voluntarily to shop at his stores.  Mr. Ignatius wants to change the automobile industry at the point of a gun, using government's coercive power to force companies to adopt certain technologies and build cars in certain ways, funding the effort with tax dollars taken unwillingly from productive Americans.  Isn't it amazing that "progressives" will want to rally around Mr. Ignatius's vision while excoriating Wal-mart at every turn? 

OK, another Postscript:  At the heart of many of Mr. Ignatius's concerns, and of many people on the left, is that America is "losing" to other countries.  Could someone on the planet please provide maybe just one single fact to support what they mean by this.  I mean, I hear this all the time, but what is it referring to?  Other than, of course, the lamentable fact that 43-year-old Ivy League educated men still can't stop ending sentences with a preposition.

Since 1990, the US economic growth rate has dusted that in most of Europe and Japan.  Only developing nations like China have growth rates that outpace us, and I guess that is what these folks are worried about.  But this is what is never said:  If you don't want countries like China to "catch up" with the US in technology and economy, then you have to be willing to consign billions of people to eternal poverty.  It is amazing to me that "progressives"  who ostensibly care about the poor get so upset when countries like China develop real capabilities that can finally pull themselves out of poverty.  Inevitably, as they do this, they will do some things better than we do.  Over time, our economies will shift, as we do the things we are good at and vice versa.  I know this is kind of novel for some - its an idea that has only been around for 200 years or so.  Having other people get wealthier is only a threat if you believe economics are zero-sum, another urban legend popular on the left that can be demolished with about 5 seconds thought.

One of the virtues of being a bit older is that you can start personally observing history repeating itself.  In the late 80's and early 90's everyone was running around screaming that we were "losing" to Japan and we had to imitate their statist technocratic approach.  Fortunately we did not.  Only in politics could you hear people like Mr. Ignatius being taken seriously when they scream "our economy is losing - lets go out and imitate the people losing even worse"

Update: Sorry this is getting so long, but I can't ignore Virginia Postrel on the same topic of technocrats:

Competition provides not only useful criticism but a continuous
source of experiments. It gives people...the ideas with which to create still
more progress and encourages them, too, to come up with incremental
improvements. By picking winners, stasist protectionism eliminates this learning
process, which includes learning what does not work.

"Premature choice," warns the physicist Freeman Dyson, "means betting all
your money on one horse before you have found out whether she is lame."
Protecting established interests from new challengers is one form of premature
choice. But technocratic planners also sometimes kill existing alternatives to
force their new ideas to "succeed." To protect the space shuttle, NASA not only
blocked competition from private space launch companies, it also eliminated its
own expendable launchers. Such pre-emptive verdicts often mark public works
projects. Planners pick an all-purpose winner, squeeze out alternatives, and
eliminate any real chance of experiment and learning.

Consider the infamous Denver International Airport. Aviation officials touted
the $4.9 billion project as essential to keep up with the region's growth. They
promised it would be a vast improvement over the old Stapleton Airport, which
was often socked in by bad weather. But its sponsors foisted DIA on unwilling
customers. The airport is 25 miles outside Denver, pretty much in the middle of
nowhere, while Stapleton was just 15 minutes from downtown. To make matters
worse, there are no hotels near DIA. And the new airport's cost per passenger is
somewhere between $11.75 and $18.14, depending on how you count--substantially
more than either the $4.59 at Stapleton or the $9.91 promised by former Mayor
Federico Pena. Frequent travelers resent the inconvenience and the generally
higher ticket prices. "I liked Stapleton better," one told The Denver Post. "You
could literally leave about 45 minutes before your plane departed. With DIA, you
have to leave an hour and a half before." A flight attendant expressed a common
sentiment: "It's a beautiful airport. But we hate it."

On the airport's first anniversary, journalists had trouble reaching a simple
verdict on DIA. There were complaints all right--lots of them. But some
passengers liked the spiffy new airport, with its marble floors and inviting
shops. And flight delays had in fact dropped dramatically. The first-anniversary
stories were confused, lacking a central theme.

The reporters had missed the main problem: The city had eliminated the most
obvious source of feedback--competition from the old airport. It had made DIA a
protected monopoly rather than an experiment subject to competitive trial. By
shutting down Stapleton, DIA's political sponsors had made it impossible to rule
the new airport a definite error. No matter how many complaints passengers
lodge, officials can always point to other advantages. At the same time,
however, DIA's monopoly keeps it from becoming an accepted success. Without a
genuine trial, we simply have no way to tell whether travelers (or airlines)
would rather trade a convenient location for fewer weather-related delays. One
airport must fit all: Love it or hate it, if you're flying from Denver you don't
have a choice.

Technocrats often decry competition as wasteful, and always use examples of failed companies and poor private technology choices (e.g. dot com bust companies) as an example of inefficiency of a competitive marketplace that technocrats could avoid.  As Postrel points out, though, these individual failures are not failures of the system, but rather are triumphs.  In the immortal words of the Microsoft tech center, they are a feature, not a bug, and a critical feature at that.

I think maybe its time for me to stop reading the news.  What else can a good libertarian do when Republicans oppose free trade, support government intervention in the economy, and spend tax money like drunken sailors while Democrats vote for new restrictions on free speech?

The latter occurred yesterday, as the House failed to get the 2/3 majority necessary to pass the Online Freedom of Speech Act, mostly on the strength on opposition from Democrats (you know, those principled supporters of civil liberties).  Politicians have again shown themselves ready to trash the Constitution in order to limit the speech of those potentially critical to themselves.  Apparently, there is reason to hope, since bill sponsors are trying to bring the bill to the floor in a more routine process that would require only a majority vote for passage (which the bill appears to be able to garner).

My only problem with this initiative is that it falls far short of the mark of protecting all Americans.  Right now, only the major media outlets have full free-speech rights in an election.  This bill would extend free speech to the Internet.  Here's an idea:  Why don't we give everyone back their first amendment rights, as I wrote here:

These past few weeks, we have been debating whether this media
exemption from speech restrictions should be extended to bloggers.  At
first, I was in favor.  Then I was torn.
Now, I am pissed.  The more I think of it, it is insane that we are
creating a 2-tiered system of first amendment rights at all, and I
really don't care any more who is in which tier.  Given the wording of
the Constitution, how do I decide who gets speech and who doesn't - it
sounds like everyone is supposed to:

Congress shall make no law respecting an establishment of religion, or
prohibiting the free exercise thereof; or abridging the freedom of
speech, or of the press; or the right of the people peaceably to
assemble, and to petition the government for a redress of grievances.

I
have come to the conclusion that arguing over who gets the media
exemption is like arguing about whether a Native American in 1960's
Alabama should use the white or the colored-only bathroom:  It is an
obscene discussion and is missing the whole point, that the facilities
shouldn't be segregated in the first place.

By the way, I don't want to ever hear from the NY Times again about some company that is being monopolistic.  The NY Times has opposed the Online Free Speech Initiative from the very beginning in a transparent attempt to quash a competitive media that is stealing readers from it at a very fast clip.  I'm sure they hate having this type stuff on the Internet.  And this is the same NY Times that was one of the very few supporters of the Kelo decision because they were in the midst of getting a new HQ via an eminent domain landgrab.  Reason number 635 I don't agree with giving the press more rights than the rest of us have.

From the Mises Blog:

For those who maintain that the government "failed" its "mission," I must say
that they are wrong. True, the government with its ham-fisted policies of
blocking relief missions, imposing price controls, and acting in a dictatorial,
but incompetent style, seems to have "failed" in making things better,
especially in the days directly after the storm passed. But, if you understand
that government is a mechanism by which some people impose their will by force
over others, then you would have to admit that the government succeeded and
succeeded beyond its own expectations.

Thus, I leave readers with this question: If you believe that the government
"failed" in the aftermath of Katrina, will the government then have less or more
"authority" when the next disaster strikes? I think all of us know the
answer.

You can always expect government to behave exactly like government. When you
consider your political position, consider whether this institution ought to be
put in charge or disaster relief at all, or the economy, or society, foreign
policy, health care, education, courts, the environment or anything at all.
Katrina and its aftermath is only the latest exhibit in the ongoing historical
documentary in favor of a government-free society

I had similar thoughts here and here.

I have never been a Richard Branson groupie, but I must say for once I am appreciative of his efforts.  Branson has helped to make crystal clear the process by which governments take control of the economy.  The story comes to us via the Mises Economics blog, and starts this way:  According to Branson:

"The big oil companies are making extortionate profits out of the current oil
price," he announced, in his most calculating, populist style.

How anyone who runs the Virgin Megastores can complain about someone else's high pricing is beyond me, but lets let him run a little further:

"The biggest problem with the oil price is the lack of refinery capacity. There
is enough oil for everyone in the world, but the refineries are just not there."

And they are not there because...governments do not allow oil companies to build new refineries.  The government having created the problem, the solution would seem to be for the government to repeal the offending restrictions that caused the problem.  But here is where we get to the great tool of statism:  The problem created by the government is blamed on private enterprise and "market failure" and portrayed as necessitating... more government intervention:

"There has been talk of a windfall tax on big oil companies. Perhaps the
Government should use that money to invest in refinery infrastructure."

Of course, the big oil companies would invest those windfall profits in refining capacity on their own had they been allowed by government, but lets ignore that messy detail.  Ahh, but here is the best part.  Not only does the government now get to invest in refineries, but it gets to do it by channeling the money to the political supporters (i.e. Branson) of those in power, thus cementing their power and control.

According to the paper, Britain's favourite "entrepreneur" aims to put $100
million behind his latest scheme to build an oil refinery for airline fuel. Yes,
the Bearded Wonder is said to be about to launch a new company called - you
guessed it! - "Virgin Oil" within four or five months and is "seeking to attract
funding from other airlines and the Government...."

But, not content with this, our man from the tropical paradise has scented an
easier mark, for Sir Richard has seemingly exploited the crass celebrity-worship
of our New Labour masters, while also playing up to our ineffable Chancellor's
ever present desire to meddle in the markets.

For those of you who have held up Branson as some archetype of entrepreneurship: Stop it.  Here you see a man who is attempting to finance his entry into an industry by getting the government to take money by force from the current competitors in that industry and to give it to him to finance his startup.  I have always suspected Branson of being from the Orrin Boyle school of business and this just proves it.

Technorati Tags:   Economics

Does this make any sense:  It costs us a lot more, for small transactions, to process an ATM / debit card with the pin pad than a credit card.  Bank of America charges a flat 60 cents per ATM card / PIN pad transaction in our stores but charges 10 cents plus 2% on credit cards.  So, on a typical $5 convenience store purchase, BofA charges $0.60 or 12% to process a ATM / debit card but $0.20 or 4% for the credit card.

I understand the difference between value- and cost-based pricing, but in an economy of scale transaction processing business with a lot of competitors, I would think debit would be cheaper to process, even without the credit risk issues. 

Customers give me feedback that I am a neanderthal for not accepting ATM cards with a pin pad at the registers.  This is the reason.  Its cheaper for me to provide an ATM and then have them pay cash - that way they pay the fee, not me.  Also, their fee is lower.  Even if they only take out $20 and pay a $1.50 fee, they are still only paying 7.5% vs. the 12% typical I would be paying.  If anyone knows a company that offers a better deal, the comment section is wide open!

Update:  A couple of notes based on the comments.  First, I do indeed understand that prices are not cost-based.  The notion that pricing should be cost-based is one of the worst economic misconceptions held by the average person (behind the commerce is zero-sum myth).  When prices don't make sense to me, I don't run to the government asking for Senate hearings so corporations can "justify" their pricing, I just don't buy from them. 

Second, to another commenter's point, most card processing agreements and some state laws prevent merchants from passing card processing fees onto consumers in a discriminatory way - ie they can be built into the general pricing but you can't charge one person one price and another a different price for the same item based on what kind of payment they use.

Now that Hurricane Katrina has moved inland, it's time for the next stage of preparation - preparing for the onslaught of global warming activists ready to use New Orleans' devastation to justify government intervention in the economy.  Heck, some global warming activists tried to blame the earthquake induced SE Asian Tsunami on global warming.

For the last couple of years, the meme has circulated that hurricanes are getting worse, and that this is a predictable result of global warming.  More destructive hurricanes may or may not be a result of global warming -- I don't know, and I challenge any climatologist who thinks they can make a definitive prediction on hurricane forces based on a half degree change in global temperatures. 

What is fairly clear is that hurricanes are not actually getting worse.  Damage from them is getting worse, but that is more of a function of building a lot of expensive structures close to the water over the last 30 years.  And it is particularly true in New Orleans, which relies on massive pumps operating 24 hours a day to keep the city above water on a good day.  Patrick Michaels has more on the hurricane meme here, including a disturbing tale of the religion of global warming trumping good science.  Where I am on global warming here.  More on global warming activism overcoming the scientific method here.  I will never forget this quote from Steve Schneider of the NOAA:

We have to offer up scary scenarios, make simplified, dramatic
statements, and make little mention of any doubts we have. Each of us
has to decide what the right balance is between being effective and
being honest.

Well, our most socialist state is attempting to repeal the laws of supply and demand:

Hawaii issued a list of wholesale price caps for gasoline, the
state Public Utilities Commission said, amid this month's
record-breaking run up in retail gas that saw island residents paying
some of the highest prices in the nation.

This marks the first state cap on gasoline prices since the 1970s
energy crisis, when the average inflation-adjusted price of a gallon of
regular unleaded hit $3.

Hawaii's recently enacted gas cap law goes into effect on September 1, with the pre-tax wholesale cap in Honolulu set at $2.1578

Gee, I bet this will work out really well.  Either the price cap will be set high, such that it is meaningless, or it will be set low, such that Hawaii will likely get this:

update:  given the structure of the price caps, the result could actually be higher rather than lower prices at the pump -- see update #2 below.

It's good to know that Hawaii is looking to China for economics ideas.

The Chinese government and its state-owned oil companies are locked
in battle over artificially low gasoline prices at the pump that has
caused a massive shortage in the southern manufacturing province of
Guangdong....

The crisis
highlights the persistent problems Beijing faces as the economy is
transformed to a more market-based system but that is often retarded by
authorities who fear loosing political control in the face of
full-fledged capitalist rules.

Beyond the obvious run-up in world-wide oil prices and Hawaii's logistical isolation that raises all of the prices on the island, the article on CNN identified one other possible culprit for high prices: the state government

Higher-than-average taxes on gasoline in Hawaii contribute to those
high prices. The state levies a 16 cent per gallon tax, and various
local authorities add on other taxes.

In Honolulu, for example, total state, federal and local gas taxes
amount to about 53 cents per gallon, one of the highest rates in the
United States. The national average, according to the American
Petroleum Institute, is about 42 cents per gallon

It seems like only a few days ago I was pointing how governments have a hard time resisting meddling in oil markets, and that this meddling never works out well.

Even in the US, which is typically more comfortable with the operation
of the laws of supply and demand than other nations, the government has
been loathe to actually allow these laws to operate on oil.  During the
70's, the government maintained price controls that limited demand side
incentives to conserve, thus creating gas lines like the ones we are
seeing in China today for the same reason.  When these controls were
finally removed, a "windfall profits tax" was put in place to make sure
that producers would get none of the benefit of the price increases,
and therefore would have no financial incentive to seek out new oil
supplies or substitutes.  Within a few years of the repeal of these
dumb laws, oil prices fell back to historical levels and stayed there
for 20 years.

Like the gas rationing and price controls in the 1970's, this occurs in a Republican administration (Hawaiian Governor Lingle).  It continue to be difficult to take the Republican Party's professed support for free markets seriously.

Hawaii's Star Bulletin reported that Governor Linda
Lingle (R) is an opponent of the caps. The newspaper said Lingle
believes it would be better to force oil companies to open their books
and show consumers how much money they make at each stage of business.

If she is so opposed to it, why didn't she veto the bill?  And is having government officials marching into private offices to confiscate accounting data really her preferred "free market" alternative?

Update:  Apparently the cap in Hawaii was passed pre-Lingle, and she fought to reverse it, so I will cut her some slack. Lynne Kiesling has more details on the plan, which includes how the cap will be calculated week to week.  Politicians there are calling it a "market-based price cap".  LOL.  Next we will see freedom-based speech limitations and privacy-based telephone taps.  Note that how the cap is calculated does not change the statement I made before:  Either the price cap will be set high, such that it is meaningless, or
it will be set low, such that Hawaii gets gas lines.

PS- Lynn is the economic goddess of energy markets, so if energy and power markets and regulation interest you, I recommend her blog.

Update #2:  Jane Galt makes the good point that the Hawaiian price caps are on wholesale gasoline prices, so while there may be gas shortages at the wholesale level, retail prices may be able to float higher to close the supply gap.  This would ironically lead to higher, not lower prices at the pump, and large profits for gasoline retailers.  Since wholesale sources of gas tend to be out-of-state corporations, and gasoline retailers tend to be smaller, locally owned businesses, I wonder if this is a case of rent-seeking by gas station owners.

Nicholas Kristof reported in the NY Times (via Reason)that Portland had found the secret to eternal motion, cutting CO2 emisions while paying no price and growing the economy:

Officials in Portland insist that the campaign to cut emissions has entailed no
significant economic price, and on the contrary has brought the city huge
benefits: less tax money spent on energy, more convenient transportation, a
greener city and expertise in energy efficiency that is helping local businesses
win contracts worldwide.... Portland's experience is so crucial. It confirms the
suggestions of some economists that we can take initial steps against global
warming without economic disruptions. Then in a decade or two, we can decide
whether to proceed with other, costlier steps....

Here's his big conclusion:

Perhaps eventually we will face hard trade-offs. But for now Portland shows we
can help our planet without "wrecking" our economy--indeed, at no significant
cost at all.

No one, particularly the science-challenged press who oh-so-wanted this to be true, asked themselves if this made any freaking sense at all.  Apparently, it doesn't:

In response to data requests from the Cascade Policy Institute, a Portland-based
think tank, the [Office of Sustainable Development] admitted that a math error
resulted in a 2004 carbon dioxide calculation that was 74,561 tons too low. The
re-stated total puts Multnomah County above the 1990 levels by more than 68,000
tons.

The implication?

What's more, Cascade's prez, John Charles, argues that, beyond bad math, there
are more basic methodological flaws that lead to an undercounting of
transportation-related emissions. "Portland's claim of painlessly reducing
carbon dioxide has been repeated over and over by journalists, bloggers, and
even some scientists for the past month, without any attempt to verify the
accuracy of the OSD's report," he writes. "In fact, actual carbon emissions have
been well above the level claimed by Portland, and any regulatory program
imposed by the government to lower emissions to pre-1990 levels is going to be
costly to consumers, something elected officials apparently don't understand."

A few days ago, I spilled a lot of electrons discussing the sources of wealth and poverty. This week, Arnold Kling has a great article applying many of the same concepts to give advice to Live8 and others who want to eliminate poverty.  While I droned on for about 30 inches of computer monitor space, Robert Lucas's quote in Kling's article gets to the heart of the issue in just a few lines:

"of the vast increase in the well-being of hundreds
of millions of people that has occurred in the 200-year course of the industrial
revolution to date, virtually none of it can be attributed to the direct
redistribution of resources from rich to poor. The potential for improving the
lives of poor people by finding different ways of distributing current
production is nothing compared to the apparently limitless potential of
increasing production."

He concludes with some advice for protestors:

1. The world is a complex place. The farther you are
removed from a situation, the less likely that your intervention there will do
good and the greater risk that it will cause harm. No matter how thoughtfully it
is administered, long-distance aid will tend to be
ineffective.

2. The easiest poverty to prevent is poverty that is
close by. By developing useful skills and remaining employed, you can help keep
yourself and your family out of poverty. That makes you less of a burden on the
world than if you fly half way around the world to stage
confrontations.

3. Learn to distinguish motives from consequences. A
well-meaning policy can backfire. The seemingly cold-hearted impersonal market
is enormously beneficial.

4. Poverty is not a simple problem. See What Causes
Prosperity?

5. Remember that unlike the Folk Song Army of Tom
Lehrer's song, you have no monopoly on good intentions. A morality play in which
those who care crusade against those who are square makes for great theater.
However, it is not a realistic basis for economic policy.

As a parting shot, I noted previously the odd contradiction that is inherent in many G8 and similar protestors who purport to want to eliminate poverty:

In a nutshell, they want to fix poverty in the third world by
disavowing everything -- private property rights, individual
enterprise, free commerce, entrepreneurship, individual freedoms, etc.
-- that made the G8 not impoverished.  Rich nations, you have to help
the poor nations, but whatever you do, don't allow they to emulate what
you did to get rich. 

This is so nutty its unbelievable.  If they were camping outside of
the G8's door and saying that we want you to drop trade barriers on our
goods and help us foster entrepreneurship and we want your help
promoting private investment in our economy and infrastructure, I could
understand perfectly.  This is like activists camping outside of Jack
Welch's door looking for him to help the poor by funding programs to
teach children to drop out of school and avoid getting a jobs.

As a note, I had this post ready last Thursday, but with the terrorist attacks in London, the regular G-8 protesters sort of dropped off the radar screen.

For years now, I have struggled trying to categorize what philosophy motivates the brick-throwing protesters that seem a regular part of G-8 summits ever since they ripped up Seattle several years ago.   To say they are against Globalization does not answer the question, since what exactly does that mean, given that the protest movement itself is global and multinational in nature. 

To some extent, the protests of course just Marxism returning under a different guise.  However, even when compared to socialist reality avoidance, the arguments of the protesters seemed really hard to follow.  Part of the problem is that many of the protesters are violent anarchists and out-and-out criminals who want nothing more than violence and destruction.  However, there are people and groups who seem to be trying to accomplish something, and who resent being associated with these criminals.  After reading a number of different web sites of the protesters (many are really, really hard to parse logically), I have come up with the following basic argument shared by the core of the protesters.

1. They want to help the poor and outright poverty-stricken nations of the world
2. Many want the wealthiest nations (G8) to help these poverty-stricken nations, both because they blame the wealthy nations for this poverty, and because the wealthy nations are seen as the ones with the means to do something
3. They want to help these nations by encouraging the poorer nations to avoid any of the techniques or economic models the G8 used to get wealthy and successful in the first place

There is nothing particularly new about arguments 1 and 2; however, it was recognizing part 3 of the argument that helped me realize why I could never understand what they wanted.  In a nutshell, they want to fix poverty in the third world by disavowing everything -- private property rights, individual enterprise, free commerce, entrepreneurship, individual freedoms, etc. -- that made the G8 not impoverished.  Rich nations, you have to help the poor nations, but whatever you do, don't allow they to emulate what you did to get rich. 

This is so nutty its unbelievable.  If they were camping outside of the G8's door and saying that we want you to drop trade barriers on our goods and help us foster entrepreneurship and we want your help promoting private investment in our economy and infrastructure, I could understand perfectly.  This is like activists camping outside of Jack Welch's door looking for him to help the poor by funding programs to teach children to drop out of school and avoid getting a jobs.

I discussed suggestion on providing aid to Africa here and here.  A good companion article to this piece is this one on why progressives are too conservative to like capitalism.  Here is the part that is relevant to development:

However, when we move to fields such as commerce, progressives stop
trusting individual decision-making.  Progressives who support the
right to a person making unfettered choices in sexual partners don't
trust people to make their own choice on seat belt use.  Progressives
who support the right of fifteen year old girls to make decisions about
abortion without parental notification do not trust these same girls
later in life to make their own investment choices with their Social
Security funds.  And, Progressives who support the right of third
worlders to strap on a backpack of TNT and explode themselves in the
public market don't trust these same third worlders to make the right
decision in choosing to work in the local Nike shoe plant.

Beyond just the concept of individual decision-making, progressives
are hugely uncomfortable with capitalism.  Ironically, though
progressives want to posture as being "dynamic", the fact is that
capitalism is in fact too dynamic for them.  Industries rise and fall,
jobs are won and lost, recessions give way to booms.  Progressives want
comfort and certainty.  They want to lock things down the way they are.
They want to know that such and such job will be there tomorrow and
next decade, and will always pay at least X amount.  That is why, in
the end, progressives are all statists, because, to paraphrase Hayek,
only a government with totalitarian powers can bring the order and
certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze
commerce, to lock this country's economy down in its then-current
patterns.  Progressives in the late 19th century were terrified the
American economy was shifting from agriculture to industry.  They
wanted to stop this, to cement in place patterns where 80-90% of
Americans worked on farms.  I, for one, am glad they failed, since for
all of the soft glow we have in this country around our description of
the family farmer, farming was and can still be a brutal, dawn to dusk
endeavor that never really rewards the work people put into it....

More recently, progressives have turned their economic attention to
lesser developed nations.  Progressives go nuts on the topic of
Globalization.  Without tight security, G7 and IMF conferences have and
would devolve into riots and destruction at the hands of progressives,
as happened famously in Seattle.  Analyzing the Globalization movement
is a bit hard, as rational discourse is not always a huge part of the
"scene", and what is said is not always logical or internally
consistent.  The one thing I can make of this is that progressives
intensely dislike the change that is occurring rapidly in
third world economies, particularly since these changes are often
driven by commerce and capitalists.

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what globalization is all about - a deep seated conservatism
that distrusts the decision-making of individuals and fears change,
change that ironically might finally pull people out of untold
generations of utter poverty.

Scratch a progressive, you will find a totalitarian.  That is why progressives support totalitarians like Chavez in Venezuela and why you find "progressives" supporting brutal Muslim totalitarian apartheid states.  That is why you will hear a lot from protesters about Nike wages being too low, but nothing about the impact totalitarians like Robert Mugabe have on creating poverty.  By the way, I am willing to offer them some help spotting dictatorships if they need it.

To their point that poor nations got that way because of rich nations, their argument relies on a zero-sum mercantilist view of economics that I deconstruct here.  Their other argument is that western colonialism ruined the poor nations, but if that is true, why do they attack the US the most, which had the fewest colonies of any of the G8, instead of France, which made the worst mess of its colonies?

Living for many years in Dallas, including the three-Superbowl period in the mid-eighties, it was nearly impossible not to jump on the Dallas Cowboy bandwagon.  And, part and parcel (Parcell?) of being a Cowboys fan was hating those NFL east franchises the Giants, Redskins, and the Eagles (the Cardinals were also in the division, but were such a joke that they were not even worth hating, which is ironic since they are now my team here in Phoenix).

When we were driving up to Princeton reunions from Washington DC, my old roommate Brink Lindsey pointed out to me, as we passed the new Philadelphia stadium, that the Eagles were named in the 1930's after the blue eagle of the National Recovery Administration, or NRA.

I found this hard to believe, that anyone would name a sports franchise after one of the worst pieces of legislation in American history, but it seems to be true.  Apparently, naming the team the eagles was part of a larger soviet-style propaganda program:

For a while, there was no escaping the bird. Towns all over the country got on the Blue Eagle bandwagon. A hundred thousand schoolchildren clustered on Boston Common and were led in an oath administered by Mayor James Michael Curley: "I promise as a good American citizen to do my part for the NRA. I will buy only where the Blue Eagle flies." In San Francisco, 8,000 schoolchildren were dragooned into showing their
allegiance by forming themselves into a human Blue Eagle on the outfield in Seals Stadium. In Cleveland, 35,000 enthusiasts gathered in the public square to cheer the unveiling of the Blue Eagle flag while city officials proclaimed the "end of the depression." In Memphis, 125,000 people watched another 50,000 march in the city's traditional Christmas parade; on the final float Santa Claus sat resplendent upon a big Blue Eagle, from which perch he threw candy to children. In a New
Orleans park, NRA celebrants erected an enormous pyramid on which were inscribed the names of more than 7,000 people and businesses who had taken the pledge; on top of the pyramid was a nine-foot eagle made of blue lights, while red and white bulbs spelled out "We Do Our Part." In Philadelphia, citizens were soon cheering for a new professional football team whose name was inspired by the general's icon: the Philadelphia Eagles. In Roanoke, North Carolina, "Shanghai Mickey" offered Blue Eagle tattoos for a mere 50 cents. In Atlantic City, beauty contestants had the Blue Eagle stamped on their thighs.

What's next?  Should we rename the Red Sox the Boston Alien and Sedition Acts?  How about having the Chicago Smoot-Hawley Tariffs?

By the way, for those who are not familiar, the National Industrial Recovery Act of 1933 that formed the NRA was the centerpiece of Roosevelt's New Deal, and was modeled on Mussolini's fascism in Italy (via Sheldon Richman of the Concise Encyclopedia of Economics):

The image of a strong leader taking direct charge of an economy during hard times fascinated observers abroad. Italy was one of the places that Franklin Roosevelt looked to for ideas in 1933. Roosevelt's National Recovery Act (NRA) attempted to cartelize the American economy just as Mussolini had cartelized Italy's. Under the NRA Roosevelt established industry-wide boards with the power to set and enforce prices, wages, and other terms of employment, production, and distribution for all companies in an industry. Through the Agricultural Adjustment Act the government exercised similar control over farmers. Interestingly, Mussolini viewed Roosevelt's New Deal as "boldly... interventionist in the field of economics." Hitler's nazism also shared many features with Italian fascism, including the syndicalist front. Nazism, too, featured complete government control of industry, agriculture, finance, and investment.

And further, from John Flynn's The Roosevelt Myth via Anthony Gregory:

[Mussolini] organized each trade or industrial group or professional group into a state-supervised trade association. He called it a corporative. These corporatives operated under state supervision and could plan production, quality, prices, distribution, labor standards, etc. The NRA provided that in America each industry should be organized into a federally supervised trade association. It was not called a corporative. It was called a Code Authority. But it was essentially the same thing. These code authorities could regulate production, quantities, qualities, prices, distribution methods, etc., under the supervision of the NRA. This was fascism. The anti-trust laws forbade such organizations. Roosevelt had denounced Hoover for not enforcing these laws sufficiently. Now he suspended them and compelled men to combine.

If you are not familiar with the NRA, you need to be if you are going to come to a conclusion about the New Deal and just how statist FDR's aspirations were.  Henry Hazlitt has a long evaluation here. In the end, the NRA was struck down by the Supreme Court, and never revived in large part because it was a disaster for the economy.  Many blame the NRA for strangling the recovery that began in 1933-34 and thus extending the depression. Parts of the law (collective bargaining, minimum wage) were incorporated in other later legislation, but the core concept of organizing industrial cartels with government backing to run industries and set prices, wages, and production levels died, fortunately.

By the way, the countries today that I know of that most closely adhere to the assumptions of the NRA are France and Germany, who expelled the fascists in the forties only to eventually adopt most of their corporatist economics.

Well, it worked for Johnny Carson, why not for me?  Instead of
leaving you with dead air (photons?) while I am knocking the rust off
my beer pong skills back at Princeton, I will share with you a few of
my favorite posts from my early days of blogging.  Since most of these
posts were viewed by about 5 people, there is a certain temptation to
just recycle them without attribution, given the unlikelihood of
getting caught.  Instead, though, I will share them as my best of
Coyote...

This
post was also from early December, and was my first step in writing about the roots of modern statism.  The post is called "progressives are too conservative to like capitalism".

Many in the left to far-left eschew the liberal title nowadays
(since they consider liberals now to be wimps and too moderate, like
that Clinton guy) in favor of the term "progressive".  This term has
gone in and out of favor for over a century, from the populists of the
early 1900's to the socialists of the more modern era.

Most "progressives" (meaning those on the left to far left who
prefer that term) would freak if they were called conservative, but
what I mean by conservative in this context is not
donate-to-Jesse-Helms capital-C Conservative but fearful of change and
uncomfortable with uncertainty conservative. 

OK, most of you are looking at this askance - aren't progressives
always trying to overthrow the government or something?  Aren't they
out starting riots at G7 talks?  The answer is yes, sure, but what
motivates many of them, at least where it comes to capitalism, is a
deep-seated conservatism. 

Before I continue to support this argument, I must say that on a
number of issues, particularly related to civil liberties and social
issues, I call progressives my allies.  On social issues, progressives,
like I do, generally support an individual's right to make decisions
for themselves, as long as those decisions don't harm others. 

However, when we move to fields such as commerce, progressives stop
trusting individual decision-making.  Progressives who support the
right to a person making unfettered choices in sexual partners don't
trust people to make their own choice on seat belt use.  Progressives
who support the right of fifteen year old girls to make decisions about
abortion without parental notification do not trust these same girls
later in life to make their own investment choices with their Social
Security funds.  And, Progressives who support the right of third
worlders to strap on a backpack of TNT and explode themselves in the
public market don't trust these same third worlders to make the right
decision in choosing to work in the local Nike shoe plant.

Beyond just the concept of individual decision-making, progressives
are hugely uncomfortable with capitalism.  Ironically, though
progressives want to posture as being "dynamic", the fact is that
capitalism is in fact too dynamic for them.  Industries rise and fall,
jobs are won and lost, recessions give way to booms.  Progressives want
comfort and certainty.  They want to lock things down the way they are.
They want to know that such and such job will be there tomorrow and
next decade, and will always pay at least X amount.  That is why, in
the end, progressives are all statists, because, to paraphrase Hayek,
only a government with totalitarian powers can bring the order and
certainty and control of individual decision-making that they crave.

Progressive elements in this country have always tried to freeze
commerce, to lock this country's economy down in its then-current
patterns.  Progressives in the late 19th century were terrified the
American economy was shifting from agriculture to industry.  They
wanted to stop this, to cement in place patterns where 80-90% of
Americans worked on farms.  I, for one, am glad they failed, since for
all of the soft glow we have in this country around our description of
the family farmer, farming was and can still be a brutal, dawn to dusk
endeavor that never really rewards the work people put into it. 

This story of progressives trying to stop history has continued to
repeat itself through the generations.  In the seventies and eighties,
progressives tried to maintain the traditional dominance of heavy
industry like steel and automotive, and to prevent the shift of these
industries overseas in favor of more service-oriented industries.  Just
like the passing of agriculture to industry a century ago inflamed
progressives, so too does the current passing of heavy industry to
services.

In fact, here is a sure fire test for a progressive.  If given a choice between two worlds:

1. A capitalist society where the overall levels of wealth and
   technology continue to increase, though in a pattern that is dynamic,
   chaotic, generally unpredictable, and whose rewards are unevenly
   distributed, or...
2. A "progressive" society where everyone is poorer, but income is
   generally more evenly distributed.  In this society, jobs and pay and
   industries change only very slowly, and people have good assurances
   that they will continue to have what they have today, with little
   downside but also with very little upside.

Progressives will choose #2.  Even if it means everyone is poorer.
Even if it cuts off any future improvements we might gain in technology
or wealth or lifespan or whatever.  They want to take what we have
today, divide it up more equally, and then live to eternity with just
that.   Progressives want #2 today, and they wanted it just as much in
1900 (just think about if they had been successful -- as just one
example, if you are over 44, you would have a 50/50 chance of being
dead now). 

Don't believe that this is what they would answer?  Well, first,
this question has been asked and answered a number of times in surveys,
and it always comes out this way.  Second, just look at any policy
issue today.  Take prescription drugs in the US - isn't it pretty clear
that the progressive position is that they would be willing to pretty
much gut incentives for any future drug innovations in trade for having
a system in place that guaranteed everyone minimum access to what
exists today?  Or take the welfare state in Continental Europe -- isn't
it clear that a generation of workers/voters chose certainty over
growth and improvement?  That workers 30 years ago voted themselves
jobs for life, but at the cost of tremendous unemployment amongst the
succeeding generations?

More recently, progressives have turned their economic attention to
lesser developed nations.  Progressives go nuts on the topic of
Globalization.  Without tight security, G7 and IMF conferences have and
would devolve into riots and destruction at the hands of progressives,
as happened famously in Seattle.  Analyzing the Globalization movement
is a bit hard, as rational discourse is not always a huge part of the
"scene", and what is said is not always logical or internally
consistent.  The one thing I can make of this is that progressives
intensely dislike the change that is occurring rapidly in
third world economies, particularly since these changes are often
driven by commerce and capitalists.

Progressives do not like American factories appearing in third world
countries, paying locals wages progressives feel are too low, and
disrupting agrarian economies with which progressives were more
comfortable.  But these changes are all the sum of actions by
individuals, so it is illustrative to think about what is going on in
these countries at the individual level. 

One morning, a rice farmer in southeast Asia might faces a choice.
He can continue a life of brutal, back-breaking labor from dawn to dusk
for what is essentially subsistence earnings.  He can continue to see a
large number of his children die young from malnutrition and disease.
He can continue a lifestyle so static, so devoid of opportunity for
advancement, that it is nearly identical to the life led by his
ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but
certainly no longer than he worked in the field) for low pay (but
certainly more than he was making subsistence farming) and take a shot
at changing his life.  And you know what, many men (and women) in his
position choose the Nike factory.  And progressives hate this.  They
distrust this choice.  They distrust the change.  And, at its heart,
that is what globalization is all about - a deep seated conservatism
that distrusts the decision-making of individuals and fears change,
change that ironically might finally pull people out of untold
generations of utter poverty.

In fact, over the last 20 or so years, progressives have become
surprisingly mute on repression and totalitarianism the world over.  In
the 1970's, progressives criticized the US (rightly, I think) for not
doing more to challenge the totalitarian impulses of its allies (the
Shah of Iran comes to mind in particular) and not doing enough to end
totalitarianism and repression in other nations (e.g. South Africa,
Guatemala, El Salvador, etc etc) 

Today, progressives have become oddly conservative about challenging
totalitarian nations.  By embracing the "peace at any cost" mantra,
they have essentially said that they can live with anything, reconcile
anything, as long as things remain nominally peaceful (ie, no battles
show up on the network news).  Beyond just a strong anti-Americanism,
the peace movement today reflects a strong conservatism -- they want to
just leave everyone alone, no matter how horrible or repressive, and
hope that they will in turn leave us alone.  They fear any change that
would stir things up.

There are any number of other examples of the strong conservative
streak in the progressive movement.  Here are a few more that come to
mind:

• Despite at least 40 years of failure in the public schools,
  progressives vociferously oppose any radical changes to the public
  education system.  In particular, they resist any program involving
  school choice, as they are totally condescending in their utter lack of
  faith in the average parent's ability to make the right choice for
  their family.
• Progressives refuse to even consider the possibility that
  individuals should be trusted to make their own decisions regarding
  some portion of their Social Security retirement funds.  They can couch
  their opposition in a lot of fear talk about benefit cuts, but at the
  end of the day (and take this from someone who has had this argument
  with numerous liberals and progressives)  the argument always boils
  down to "we don't trust people to make investment decisions that are as
  good as the ones we would make for them".

Well, I have again written too long, and I'm tired.  If you are not
ready to rush to defend the barricades of capitalism, you might read my
post from last week called "60 Second Refutation of Socialism, while Sitting at the Beach".  Most of what I have written here has been said far more eloquently by others.  Of recent writers, Virginia Postrel, in the Future and its Enemies,
has written a whole book on not just capitalism but dynamism and
progress in general, and why people of all political persuasions tend
to be scared by it.  Brink Lindsey addressed many of these same issues
as well in his book Against the Dead Hand.  Of course, the Godfather of individual choice and societal dynamism is Friedrich Hayek.

As a final note, my ultimate statement on this topic is here, called Respecting Individual Decision-Making.

Sticking with the Cinco de Mayo theme, immigration has been a big issue of late down here in the Southwest.  Last election cycle Arizona passed a law limiting benefits to illegal immigrants.  This last few months have seen the "minuteman project", ostensibly to have private citizens help "defend the borders" and which got surprising support from America's most famous immigrant Arnold Schwarzenegger.

I have a number of friends who passionately support these efforts.  I am forced to say that not only do I disagree with them, I am actually embarrassed by the Minuteman project.  Michelle Malkin makes the argument that these are good people and not crazed racist KKK crazies.  OK, I am willing to accept this (for most of them) but this just makes it worse, wasting the patriotism and labor and time of people to such a wrong-headed end. (Matt Welch is less willing to believe they are just happy misguided soles).

At the end of the day, the vast, vast majority of people crossing the border are looking for a job.  That's it.  They are not terrorists or foreign spies or criminals -- they are ordinary people looking for a job, often to support their family.  This is why I find it an incredible waste that we have Arizona's private citizens, many of whom probably lament the slacker mentality of recent American generations of kids, standing around along the border making sure that people who are looking for a job in this country don't find one.

Of course, these Minuteman folks won't say that is what they are doing.  They are saying that they are:

• Defending the borders.   A Government's job is NOT (repeat NOT) "defending its border".  A government's job is to defend its citizens.
  In 1939, if a country was next door to Nazi Germany, defending its
  citizens probably meant defending the borders.  Today, though, next to
  Canada and the Mexico with whom we have been at peace for 150 years and
  with whom we share a common market, its harder to argue that defending
  our citizens requires having a Maginot Line at the border.

I am sure that our southern border is vulnerable to terrorists crossing, but I am equally sure that the minutemen did not find a single one.  Here is the real problem:  Because we force Mexican immigration to cross illegally across the open borders, terrorists trying to use the same approach are masked by thousands of others crossing the border.  By making free passage of Mexicans across the border illegal, we shift them out of monitored border crossings and onto the frontier, where they mask true criminals and terrorists.  Think of it this way - would you rather try to find a single terrorist who is alone in an empty stadium or one of 60,000 people at a football game?

• Enforcing the rule of law.  Maybe, but why not start with sitting beside the highway and writing down license plates of speeders too?  At the end of the day, enforcing current immigration law is as hopeless as was prohibition, the war on drugs, and enforcing the 55 mile-an-hour speed limit.

• Protecting American jobs.  I would not be at all surprised to find a high degree of overlap between the Minuteman supporters and the anti-NAFTA crowd.  The fear that "immigrants might be willing to do your job for less than you are willing to do your job for" has always been a strong part of anti-immigration movements.  The fact of the matter, though, is that this takes a very static view of the world.  The economy is not a zero sum game with competition for a fixed number of jobs.  New sources of labor can spur economic growth that creates new jobs.  The best example of this was in the last three decades, where a totally new, sometimes unskilled, work force of 40 million people showed up at industry's door suddenly looking for work:  women.  I told the story here (towards the bottom of the post), but the bottom line is that these new workers made the economy stronger, and now, with a generation or two behind them in the work force, women are really the backbone of entrepreneurship today in this country.  Besides, if we don't allow companies to legally hire immigrant workers, businesses in this global economy will just pick up and move to Mexico.

• Reducing cost of government services.  As a libertarian, I am very sympathetic to the argument that you don't want immigrants coming in and being able to immediately live off our safety net at taxpayers expense.  In my mind, though, this has historically been a problem of poorly crafted law rather than immigration per se.  It certainly would be possible to craft an intelligent immigration policy that allowed access to social services in steps.  By the way, shifting illegals into legal guest worker programs would likely increase tax revenues by bringing these folks into the system.

• Preventing Hispanics from becoming the dominant ethnic group in the Southwest.  Yes, I am positive this is a concern of many of these folks, just as the Italians in Boston at one time were worried about being overrun by the Irish.  It barely dignifies a response, except to say that if you are really concerned with the number of permanent Hispanic residents, then a guest worker program might actually reduce the number.  The reason is that many Mexicans still love their country but want work.  If they were allowed to freely move back and forth, they would do so.  But, since the border is the riskiest point for them, once they get in the US, they are reluctant to ever leave again.

We have got to have an intelligent immigration policy that

• Allows for free movement of guest workers across the border, with few limits on total numbers allowed. 
• A clear and fair system for guest workers to move up over time towards full citizenship
• A clear and fair system of tiered access to social services as immigrants progress from worker to citizen (e.g. emergency services access to all, but welfare/social security require full citizenship).
• Includes a taxation system on guest worker labor that causes these workers to help pay for the services they use.

Kudos to Professor Bainbridge for breaking with the conservative ranks to support an intelligent guest worker program.  More here from Steven Taylor.

Postscript:  I want to propose a thought experiment.  Most everyone considered the Berlin Wall a travesty.  Now, keeping all the facts about East and West the same, make one change:  suppose the wall was built instead by the West to stem the flood of immigrants from the oppressive east.  Would the wall suddenly become OK?  Even if the reality on the ground for an East Berliner (ie they can't escape) remained unchanged?

Border walls in Nogales, AZ and Berlin, Germany:

Oh, and from this site, here is the Montana-Canada border "wall" and a "checkpoint"

 
But its not about race.

I have not really had the time to do the research to form an opinion about Bush's judicial nominees, and the MSM is not very helpful in its coverage on the issue.  I wrote here that the judiciary has started to overreach of late, legislating from the bench to advance an agenda generally supported by the Democrats.  I don't know the candidates well enough to decide if these proposed judges are conservative activists who want to legislate from the bench but for conservative ends, or if they represent a first shot at reversing extra-constitutional judicial activism (which I would support).

However, I may have started to develop an favorable opinion on a couple of judges, based on what I have learned from their detractors.

Take this example, from a NY Times editorial, March 6, 2005.  In disparaging how extremist Bush judge nominees are, they use the example of:

Janice
Rogers Brown, who has disparaged the New Deal as ''our socialist
revolution.''

Woe is me, I must be an extremist.  First, the New Deal was clearly a "revolution", in that it was one of two events (the other being the Civil War) in the last 200 years that fundamentally changed the role of the federal government in what was a massive reinterpretation of the Constitution.  But was it socialist?  We can argue about whether the New Deal legacy that reaches us today is socialist or not- many quite normal non-extremist folks would argue yes and many similarly rational folks would argue no.

However, arguing the nature of the New Deal from what programs reach us today leaves out a lot of the picture.  Much of the New Deal was voided by the Supreme Court.  While some was re-passed later once FDR had a chance to remold the court with his own (for the time) extremist ideologues, some of the most socialist-statist-fascist legislation never was reinstituted.

The most dramatic of these institutions that fortunately were left on the cutting room floor was the National Industrial Recovery Act, or NRA.  Roosevelt actually modeled the NRA on Mussolini's fascism in Italy, so I guess it might be more correct to call it fascist rather than socialist but in practice, I can't ever tell those two apart.*

The image of a strong
leader taking direct charge of an economy during hard times fascinated
observers abroad. Italy was one of the places that Franklin Roosevelt
looked to for ideas in 1933. Roosevelt's National Recovery Act (NRA)
attempted to cartelize the American economy just as Mussolini had
cartelized Italy's. Under the NRA Roosevelt established industry-wide
boards with the power to set and enforce prices, wages, and other terms
of employment, production, and distribution for all companies in an
industry. Through the Agricultural Adjustment Act the government
exercised similar control over farmers. Interestingly, Mussolini viewed
Roosevelt's New Deal as "boldly... interventionist in the field of
economics." Hitler's nazism also shared many features with Italian
fascism, including the syndicalist front. Nazism, too, featured
complete government control of industry, agriculture, finance, and
investment.

If you are not familiar with the NRA, you need to be if you are going to come to a conclusion about the New Deal and just how statist FDR's aspirations were.  The actual text of the act is here.  Henry Hazlitt has a long evaluation here.  In the end, the NRA was scrapped in large part because it was a disaster for the economy.  Many blame the NRA for strangling the recovery that began in 1933-34 and thus extending the depression.  Parts of the law (collective bargaining, minimum wage) were incorporated in other later legislation, but the core concept of organizing industrial cartels with government backing to run industries and set prices, wages, and production levels died, fortunately.

Update:  More here.  Mr. Gregory quotes John Flynn's The Roosevelt Myth:

[Mussolini] organized each trade or industrial group or professional group into a state-supervised trade association. He called it a corporative. These corporatives operated under state supervision and
could plan production, quality, prices, distribution, labor standards,
etc. The NRA provided that in America each industry should be organized
into a federally supervised trade association. It was not called a
corporative. It was called a Code Authority. But it was essentially the
same thing. These code authorities could regulate production,
quantities, qualities, prices, distribution methods, etc., under the
supervision of the NRA. This was fascism. The anti-trust laws forbade
such organizations. Roosevelt had denounced Hoover for not enforcing
these laws sufficiently. Now he suspended them and compelled men to
combine.

*  I disagree with people who want to argue that socialism is freedom but without property rights while fascism is property rights without other freedoms.  Neither of these conditions are stable, and both converge to the same destination of suffocating statism, just with different starting points and different people in charge.  One of the things that drive libertarians nuts is being presented with a grade school civics book that has a linear political spectrum with fascism on one end and communism on the other.  Are those really my only two choices? 

Socialists and "progressives" of various stripes always want to argue that the distribution of wealth among nations is basically due to luck, in large part related to the distribution of natural resources.

This is disprovable in about 2 seconds:  Russia (via Cafe Hayek) and the Netherlands.   Russia, resource-wise, is perhaps the richest country in the world.  It is, our could be, among the largest producers of any number of natural resources, from diamonds and gold to oil and uranium.  But its economy is a disaster.  The Netherlands, resource wise, has about nothing.  There are few third world economic hell-holes that don't begin with infinitely more resources than the Dutch, but the Dutch are among the richest nations in the world. 

Wealth comes not from labor or capital or resources - wealth comes from the mind, and as such requires a rule of law where the mind is free not only to imagine new ideas but to pursue and reap the fruits of these ideas.  As I said in this article:

From the year 1000 to the year 1700, the world's wealth, measured as GDP per capita, was virtually unchanged.
Since 1700, the GDP per capita in places like the US has risen, in real
terms, over 40 fold.  This is a real increase in total wealth - it is
not money stolen or looted or exploited.  Wealthy nations like the US
didn't "take" the wealth from somewhere else - it never even existed
before.  It was created by the minds of human beings.

How?  What changed? 

1. There was a philosophical and intellectual
   change where questioning established beliefs and social patterns went
   from being heresy and unthinkable to being acceptable, and even in
   vogue.  In other words, men, at first just the elite but soon everyone,
   were urged to use their mind rather than just relying on established
   beliefs
2. There were social and political changes that greatly increased
   the number of people capable of entrepreneurship.  Before this time,
   the vast vast majority of people were locked into social positions that
   allowed them no flexibility to act on a good idea, even if they had
   one.  By starting to create a large and free middle class, first in the
   Netherlands and England and then in the US, more people had the ability
   to use their mind to create new wealth.  Whereas before, perhaps 1% or
   less of any population really had the freedom to truly act on their
   ideas, after 1700 many more people began to have this freedom. 

So today's wealth, and everything that goes with it (from shorter
work hours to longer life spans) is the result of more people using
their minds more freely.