Coyote Blog

Bruce McQuain tells some stories of bureaucratic frustration in the Gulf, as local governors trying to protect their state from the spill fights against a myriad of mindless bureaucracies.

The governor said the problem is there's still no single person giving a "yes" or "no." While the Gulf Coast governors have developed plans with the Coast Guard's command center in the Gulf, things begin to shift when other agencies start weighing in, like the Environmental Protection Agency and the U.S. Fish and Wildlife Service. "It's like this huge committee down there," Riley said, "and every decision that we try to implement, any one person on that committee has absolute veto power."

I would state the problem differently.  In the Federal bureaucracy, seemingly everyone has the power to say "no," and absolutely no one is willing to risk their career or even a minor bureaucratic sanction to over-rule when someone else in the room says "no."  I have seen it a hundred times in my business -- we will be close to doing something for the public, building a new shower building in a campground for example, and some government employee in the room will say that their sister's gynecologist's barber's housekeeper once overheard a conversation in a bar that some guy who may have visited a university once said he had heard a rumor that there might have been a Native American settlement somewhere within 100 miles of that spot 10,000 years ago -- and suddenly the work on the shower has to stop for 6 months while we all run around calling in archeologists and taking this concern seriously.

The problem  in a government discussion, particularly a multi-agency discussion, is that EVERYONE can say "no," and worse, since their incentives are loaded towards risk avoidance (they get punished for violating procedure, but never punished for missing an opportunity), they have a tendency to say "no" a lot, in fact to say "no" by default.  In the Gulf you have a thousand federal employees from 20 agencies whose entire incentive system, whose entire career, whose every lesson from every bureaucratic battle in a sort of long-term aversion therapy, prompts them to say "no" by reflex.

What is missing is someone who can say "yes," and make it stick against all the no's.  That does not have to be Obama -- but it probably does have to be someone very senior who knows (and who everyone else knows) is backed to the hilt by the President and has an incentive system where the only measure of success is more or less oil damage, and thus for whom aggrieved bureaucrats (even senior ones) and petty procedure are irrelevant.  It does not appear such a person has been appointed.

Postscript: By the way, I don't want folks to fall into the trap of thinking that these government folks are necessarily bad people.  I think that is a mistake both conservatives and liberals make -- conservatives vilify government employees, while liberals want to believe that government would work right if we just had the right people in it.   I work with a lot of very bright, very good people in government.  The problem is that their incentives and information are awful.  How would you behave if for 20 years your main feedback was to be criticized for violating minor procedures or trying new things?  How would you have any understanding of business if you grew up in the bizarro world of government budgeting and accounting?   This is the problem with government - not that it is full of bad stupid people, but it takes good smart people and incentivizes them do counter-productive things.

Update: Here is a great example, from Kevin Drum, who is a smart guy but can't do anything but dither in a decision among multiple risks:

It's pretty hard to take the other side of this argument [ie defending the Coast Guard's decision to hold up the GUlf cleanup barges for minor rules violations]. But I wonder. We are, after all, talking about barges that are sucking up oil, and the last time I checked oil was pretty damn flammable. Everyone wants the cleanup operation to proceed with breakneck speed, but that's exactly when people get tired and sloppy. And I wonder what everyone would think of the Coast Guard's ridiculous rules if they waived them and then some boat went up in a huge fireball because a spark caught somewhere and no one had a fire extinguisher handy?

I will say again - I have been in many rooms of bureaucrats, both federal and private, and they all think this way.  These rooms are full of Kevin Drum's wondering out loud, "I don't know, what happens if..."  This is such a common phrase in these meetings I wish I had a dollar for every time I heard it.  Then everyone in the room defers to this hypothetical risk.   Bureaucrats are always more worried about sins of commission  (e.g. knowingly allowing a barge to go out without enough fire extinguishers in violation of guidelines) than the sin of omission (e.g. delay will allow the spill to get worse).  Even when the omission is 100% certainty and the danger from the act of commission is vaguely hypothetical.  It takes a leader to say "send the damn barges out now."

From JM Berstein in the NY Times, via Kevin Drum, this is about Tea Partiers, but since it addresses the Tea Party distrust and disdain for government, I suppose it applies equally well to we libertarians:

My hypothesis is that what all the events precipitating the Tea Party movement share is that they demonstrated, emphatically and unconditionally, the depths of the absolute dependence of us all on government action, and in so doing they undermined the deeply held fiction of individual autonomy and self-sufficiency that are intrinsic parts of Americans' collective self-understanding.

....This is the rage and anger I hear in the Tea Party movement; it is the sound of jilted lovers furious that the other "” the anonymous blob called simply "government" "” has suddenly let them down, suddenly made clear that they are dependent and limited beings, suddenly revealed them as vulnerable.

Do you get that - we oppose the overwhelming size of government not for any rational reason, but out of a psychological need to deny that the government is inevitably going to grow larger and increase its control over our lives.   This is so absurd it is freaking hilarious.  This is what Louis the XVI's sycophants were telling him to make him feel better in 1789.  I mean, after 200 years of only limited government interference in health care, how is it that a law passed over majority opposition for government takeover of healthcare somehow "demonstrates the absolute dependence of us all on government action?"  Why doesn't it reasonably demonstrate the depth of risk we all face from a minority who have constantly through history been bent on wielding power over us.

Kevin Drum, sort of to his credit, rejects this thesis in favor of his own

So then: why have tea partiers gone off the rails about the federal deficit? It's not because of something unique in their psyches. And it's not because they're suddenly worried that America is going to go the way of Greece. (The polls I linked to above show that tea partiers care more about cutting taxes than reducing the size of government.) It's because they're the usual reactionary crowd that goes nuts whenever there's a Democrat in the White House and they're looking for something to be outraged about

So while he rejects the goofy psychobabble, he accepts the underlying premise, that any opposition to expansion of government and its power of coercion over individuals is irrational.

So take your pick -- libertarians are either a) advocating limited government only as a psychological crutch to hide from ourselves that Obama is really our daddy or b) scheming reactionary nuts.  Whichever the case, remember that there can be no principled opposition to Big Brother.

I already wrote on the egregious FTC proposals to begin the government takeover of journalism.  But I missed this part, via South Bend Seven, which caught my eye in their post:

Tax on broadcast spectrum. They argue "commercial radio and television broadcasters are given monopoly rights to extremely lucrative spectrum at no charge," and this is a massive public subsidy. They therefore suggest the revenues generated by that spectrum be taxed at a rate of 7 percent, which should result in a fund of between $3 and $6 billion. In exchange, commercial broadcasters would be relieved of any obligations to engage in "public-interest programming," which the broadcasters claim costs them $10 billion annually.

Much of the TV and radio spectrum was indeed "given away," in exactly the same process that the Homestead Act (and I believe the Northwest Ordinance before that) "gave away" land to Americans who were willing to develop it.  These acts gave land away to pioneers who were willing to take the risk and effort to develop what was essentially value-less land into a productive asset  (the land had potential value, but until someone tilled it and put up structures and built rail and road to it, it was worthless).  When TV and Radio broadcasters first started using the spectrum, it was worthless -- and we were even less confident in its potential value than we were of the land in the Homestead Act.  The spectrum did not have value until private broadcasters demonstrated it had value through their investment, development, and experimentation.

So is Congress next going to tell everyone who lives on homesteaded land that they received a massive public subsidy and that their land is now going to be taxed?  The current landowner would likely argue that they didn't get the land for free - they bought it for a substantial price from the previous owners, who bought if from someone else, who bought it from the original homesteader.  But the situation is no different in the broadcast spectrum.  Clear Channel did not get the spectrum for free -- it did not even exist for decades after the spectrum was homesteaded -- it paid a full market price for the spectrum it controls.

Postscript: However, I am happy to see even the leftish Obama Administration admit that public-interest programming is a questionable requirement.  Because broadcasters only make money if they broadcast things people want to see or hear, everything they do is "public-interest."  What is meant in practice by the term "public-interest" should actually be called "political-interest" programming, because this programming tends to be uninteresting to the great majority of the public (have you ever listened to the garbage at 5am on Sunday morning on radio?) but is supported by small niche groups that have disproportionate political influence.  Let's remove these requirements as stupid without holding up broadcasters for more taxes in exchange.

One point I have been making for a long time on health care is that all the studies showing waste and unproductive spending in health care are irrelevant to government policy because at the end of the day, the Federal government does not know how to capture these savings.  The CBO says basically the same thing in a chart from a recent presentation.  The chart is titled "Reducing Growth in Federal Health Spending"

On the upside:

• There is considerable agreement that a substantial share of current spending on health care contributes little if anything to people's health.
• Providers and health analysts are making significant efforts to make the health system more efficient.

On the downside:

• It is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system. That is, it is not clear what specific policies would translate the potentialfor significant cost savings into reality.
• Efforts to reduce costs increase the risk that people would not get some health care they need or would like to receive.

I am pretty confident from my experience with a high-deductible health care plan that the only way to start capturing savings is for individuals who recieve care to have the incentives and decision-making power to make cost-benefit tradeoffs in their own health care procurement.  This, however, is the absolute last thing this administration and Congress would ever allow, with the latest bill actually forcibly removing what small incentives that remained for individuals to make these tradeoffs.  All we are going to get are command and control care cuts  (based on the political power of the particular service or drug provider rather than medical efficacy) and price controls.

More at South Bend Seven

It sure looks like the Feds are bending over backwards to make sure R. Allen Stanford, accused of massive investment fraud, is not allowed to defend himself.  The Feds are running the whole playbook at him, from onerous pre-trial detention requirements to asset forfeiture (the latter to the point that the Feds are working to make sure the insurance policy he had to pay for his defense in such actions is not allowed to pay him.)  I understand that a guy who has substantial interest in offshore banking centers might be a flight risk, but this is absurd:

Mr. Stanford has been incarcerated since June 18, 2009 and was moved to the [Federal Detention Center] on September 29, 2009. Immediately upon his arrival at the FDC, he underwent general anesthesia surgery due to injuries that were inflicted upon him at the Joe Corley Detention Facility. He was then immediately taken from surgery and placed in the Maximum Security Section "” known as the "Special Housing Unit" (SHU) "” in a 7' x 6 1/2' solitary cell. He was kept there, 24 hours a day, unless visited by his lawyers. No other visitors were permitted, nor was he permitted to make or receive telephone calls. He had virtually no contact with other human beings, except for guards or his lawyers.

When he was taken from his cell, even for legal visits, he was forced to put his hands behind his back and place them through a small opening in the door. He then was handcuffed, with his arms behind his back, and removed from his cell. After being searched, he was escorted to the attorney visiting room down the hall from his cell; he was placed in the room and then the guards locked the heavy steel door. He was required, again, to back up to the door and place his shackled hands through the opening, so that the handcuffs could be removed. At the conclusion of his legal visits, he was handcuffed through the steel door, again, and then taken to a different cell where he was once again required to back up to the cell door to have his handcuffs removed and then forced to remove all of his clothing. Once he was nude, the guards then conducted a complete, external and internal search of his body, including his anus and genitalia. He was then shackled and returned to his cell. In his cell there was neither a television nor a radio and only minimal reading material  was made available to him. He remained there in complete solitude and isolation until the next time his lawyers returned for a visit.

In short, Mr. Stanford was confined under the same maximum security conditions as a convicted death row prisoner, even though the allegations against him are for white collar, non-violent offenses. He is certainly not viewed as someone who poses a threat to other persons or the community, nevertheless, he has been deprived of human contact, communication with family and friends, and was incarcerated under conditions reserved for the most violent of convicted criminals. Officials at the FDC informed counsel that this was for Mr. Stanford's "own protection" and to minimize their liability.  .  .  .

Remember, he has not been convicted -- this is pre-trial detention.  The sole goal, legally, is supposed to be to keep him from fleeing before his trial.

I am sensitive to this from my climate work.  My gut feel is that people who are truly confident in their case do not work overtime to make sure their opposition is not allowed to make their case.

There is an anti-immigrant playbook in this country that goes back at least to the 1840's and the first wave of Irish immigrants.  Typical arguments applied to nearly every wave of immigrants to this country have been 1.  They are lazy; 2. They are going to take our jobs (funny in conjunction with #1); 3.  They increase crime and 4. They bring disease.

To date in Arizona, we have seen all three of the first arguments in spades, but until recently I had not seen #4.  But trust Sheriff Joe to be out front on this, issuing a press release stating:

Sheriff Joe Arpaio says that he has long argued the point that illegal immigration is not just a law enforcement problem but is a potential health hazard as well.

"This is a risk to our community and to my deputies," Arpaio says. "Deputies never know what they may face in the course of enforcing human smuggling laws."

Arpaio says that in the last two months, four inmates, all illegal aliens from the country of Mexico, were confirmed with having chicken pox, placing 160 inmates into immediate medical quarantine.

Earlier Apraio had this to say to GQ magazine (but he's not a racist!)

All these people that come over, they could come with disease. There's no control, no health checks or anything. They check fruits and vegetables, how come they don't check people? No one talks about that! They're all dirty.

Of course, like many of Arpaio's fulminations, this release fell somewhere between a grand exaggeration and an outright lie.

Maricopa County health officials denied reports by the Sheriff's Office that 160 jail inmates had been quarantined two months ago because of four illegal immigrants with chicken pox.

Officials also downplayed a news release issued by Sheriff Joe Arpaio's office last night about chicken pox found in immigrants busted yesterday, noting that such minor outbreaks don't normally make the news.

After our inquiries, MCSO Lieutenant Brian Lee said that Arpaio had, in fact, misspoken when he stated for the news release that a large-scale "quarantine" had taken place.

This is one of the better simple explanations of both the appeal and hidden risk of CDO's. The example, which is short and is worth working through, ends this way:

Suppose that we misspecified the underlying probability of mortgage default and we later discover the true probability is not .05 but .06.  In terms of our original mortgages the true default rate is 20 percent higher than we thought--not good but not deadly either.  However, with this small error, the probability of default in the 10 tranche jumps from p=.0282 to p=.0775, a 175% increase.  Moreover, the probability of default of the CDO jumps from p=.0005 to p=.247, a 45,000% increase!

The dark magic of structured finance conjured many low-risk securities out of many risky securities.  Like all dark magic, however, the conjuring came at a price because if you didn't get the spell exactly correct it was easy to create something much more risky and dangerous than you were likely to have ever imagined.

As an ex-engineer who used to do a lot of operations analysis as well as post-disaster failure analysis, this shares a central theme that I have found in many such failures -- people tend to overestimate their own knowledge.

Coming in to a class at HBS, the professor had us all do a 20 question survey.  It asked us questions like "what is the population of Argentina" and then asked us to give the lowest and highest number we thought it would be such that the answer had a 95% chance of being in that range.  Based on this, only one of our 20 answers should have been out of my limits.  About eight of the answers were out of my ranges.  It was a really good lesson in overestimating one's knowledge.

Which leaves me with a thought -- if we define a large part of the problem as overestimating our understanding of a certain phenomenon, from your observation of the Obama administration and its personalities, what gives you any confidence that a new lager of government regulators will solve this problem?

WTF is this designed to accomplish, except to give Obama something to crow about in one or two news cycles while doubling down on the same kind of practices that got the housing market and banks into the current mess?  This reminds me so much of the final days of the government in Atlas Shrugged.  Fannie and Freddie are bankrupt?  Well, lets do the same thing to the FHA, just to save our sorry government jobs for a few weeks longer.

The Federal Housing Administration is heading toward a taxpayer bailout, yet the president's latest mortgage modification plan would further increase the agency's exposure to risky mortgages. Mark Calabria calls it a "Backdoor Bank Bailout."The administration's plan would encourage borrowers who owe more than their house is worth to refinance into FHA-insured mortgages. Therefore, the risk of a future foreclosure on these mortgages would fall to the government and taxpayers instead of private lenders.

A recent study from economists at New York University found that the FHA is underestimating its risk exposure. One of the problems is that the FHA isn't properly accounting for the risk to underwater FHA mortgages that have been refinanced into new FHA mortgages. So it's hard to see how the president's plan to refinance private underwater mortgages into FHA mortgages won't further exacerbate the situation.

The CBO, which Democrats frequently tell us to pay close attention to only when it is giving them the answers they want, is not particularly sanguine about the US budget deficit:

President Obama's fiscal 2011 budget will generate nearly $10 trillion in cumulative budget deficits over the next 10 years, $1.2 trillion more than the administration projected, and raise the federal debt to 90 percent of the nation's economic output by 2020, the Congressional Budget Office reported Thursday.

In its 2011 budget, which the White House Office of Management and Budget (OMB) released Feb. 1, the administration projected a 10-year deficit total of $8.53 trillion. After looking it over, CBO said in its final analysis, released Thursday, that the president's budget would generate a combined $9.75 trillion in deficits over the next decade.

Bruce McQuain, as always, has some good analysis.

States, apparently, are not in much better shape:

Pension plans for state government employees today report they are underfunded by $450 billion, according to a recent report from the Pew Charitable Trusts. But this vastly underestimates the true shortfall, because public pension accounting wrongly assumes that plans can earn high investment returns without risk. My research indicates that overall underfunding tops $3 trillion.

The problem is fundamental: According to accounting rules adopted by the states, a public sector pension plan may call itself "fully funded" even if there is a better-than-even chance it will be unable to meet its obligations. When that happens, the taxpayer is on the hook. Yet public pension plans ignore market risk even as they shift into risky foreign investments, hedge funds and private equity....

In a recent AEI working paper I've shown that the typical state employee public pension plan has only a 16% chance of solvency. More public pensions have a zero probability of solvency than have a probability in excess of 50%. When public pension assets fall short, taxpayers are legally obligated to make up the difference. The market value of this contingent liability exceeds $3 trillion.

Productive people in this country are about to get plastered with huge new taxes.  Hang on.

Cross-posted from Park Privatization

Len Gilroy of the Reason Foundation links my Glenn Beck interview and then goes deep on park privatization issues.  Check it out.  Potentially the biggest benefit to the public:

Appropriation risk: State parks operating under a concession no longer bear the appropriation risk that we're seeing play out in real life across the country, as parks get axed from state budgets amid rampant state fiscal crises (some examples include California, New York and Louisiana). Really, this is more of a risk that's eliminated, rather than transferred to the concessionaire (see revenue risk discussion above), so revenue/demand risk and appropriations risk are really two sides of the same coin.

If Obama really wanted to get small businesses to start investing again, he could announce that both cap-and-trade and the health care bill are dead-dead and will not be disinterred this year.   These two bills affect nearly 2/3 of our company's cost structure.  Since we have single digit margins, small changes in the wage and fuel cost lines can completely wipe out our profits.  Not knowing what 2/3 of our costs were going to look like into the future, we have been sitting on our hands.

Unfortunately, this may not be enough.  The third leg of the uncertainty stool is income taxes, and its seems likely that some huge increase almost has to be forthcoming given Congress's predilection for taxes and marked unwillingness to cut spending in any meaningful way.

Here is a very specific example.  We have an opportunity to invest about a half million dollars in a new operation in Texas.  Financing is available.  But in my evaluation spreadsheet, small changes in income tax rates combine with a potential 8% health care tax on wages and an unknown fuel tax increase to move the net present value by enormous amounts.  I am not going to risk a half million dollars on a 20-year investment when the government is considering so much legislation that will arbitrarily move the value of this investment.

This is why Obama's offer of small business financing is meaningless.   In the last decade, government sponsored cheap money lured people into housing "investments" that eventually went upside down.   Are they now luring small businesses into a new trap, encouraging them to take on debt, only to slam the door on them with future increases to their operating costs and taxes?

Previously, I have criticized the proposed California high speed rail line (from San Diego to San Francisco) as grossly underestimating potential costs.  Brian Doherty has an article this week reality-checking its projected ridership, after the California legislative analysts' office questioned the contingency analysis in the high-speed rail plan.

Eric Thronson, a fiscal and policy analyst for the office, called a risk assessment in the business plan "incomplete and inappropriate for a project of this magnitude.''

Thronson warned that there is no backup plan to keep the rail system solvent if it fails to draw 41 million people yearly. A bond measure approved by voters to help pay for the train network prohibits public funds from being spent on operating costs.

Doherty provides this reality check:

The future: where all of California's fiscal messes wait to be addressed! By the way, that ridership figure of 41 million averages to over 112,000 train riders every single day of the year. The average daily usage of I-5--the entire road--is around 71,000, according to the Federal Highway Administration.

Here are a couple of other reality checks

• The entire passenger traffic from LAX to and from every other city in the country is 44 million a year (excludes international passengers)
• The current air passenger traffic between LAX and SFO is 2.7 million a year
• The passenger traffic of Amtrak in its entire national network is 28.7 million (including local commuter operations)

The Senate health care bill relies for much of its funding on a tax on so-called "Cadillac" health care plans.  But what happens when employees and employers inevitably change their behavior in the face of different incentives?

History teaches us that tax policy has a huge effect on behavior.  Witness the fact in health care the non-nonsensical fact so many people rely on their employer for health care.  As we see today, this is a really bad idea, but it was hatched because tax law provided incentives for paying compensation in the form of health insurance premiums, since these are not subject to either income or payroll taxes.

Already, employers are offering employees what are effectively buy-outs of health care -- higher pay in return for reduced health care benefits.  For employers, the upside risk on health care costs now outweigh the tax advantages of health insurance as a compensation tool.  Given this trend, what do you think will happen when employees suddenly have the same incentive, to roll back health care coverage to get under whatever bar is set for an insurance package Congress thinks is too rich (hint:  wherever the bar is set, it will be below the health insurance Congress provides itself).  Employers and employees are now going to have a shared incentive to back off on health care benefits in exchange for more cash.  Think of the sharp minds on both sides of a UAW contract negotiation - does anyone really think that these guys won't figure out a win-win to avoid paying the surtax?

Three to five years from now, even before the system goes bankrupt from inevitably expanding costs  (you didn't really buy that stuff about the operator of Amtrak and the Post Office improving the industry's efficiency, did you?), we are going to be talking about the gross shortfall in tax revenues to support these programs, all because people change their behavior in the face of changing incentives.

Consider the incentives for a bank trying to set the risk profile of its investments.  Should it go for higher returns at higher risk, or dial back the risk at a cost to near-term profits?  Now consider this decision in the context of two actions from the past year:

• Large banks that took on too much risk are bailed out and management mostly preserved
• Banks that eschewed higher profits by avoiding bad risks are now forced to pay for the bailout of those that went wild:

Obama administration officials and lawmakers are scrambling to find a way to funnel some of the financial industry's record earnings back to the taxpayers who helped rescue the industry from looming disaster.The White House is considering a fee on banks and other financial companies

as one approach, with revenues earmarked to help recoup any losses from the government's $700 billion bailout fund, a senior administration official said.

Some in Congress want to add a new tax on bonuses or assess a small fee on all stock transactions, which would hit large banking companies the hardest.

Note that there is no attempt here to only charge banks who received bailout money, but all banks will be charged equally.  To each according to his need, from each according to his ability.  This is moral hazard in spades.

On any number of occasions from October through February, I predicted that this recession would top out at perhaps 9% unemployment at the most, and would probably not be as bad as the recession of the early 1980's.  My logic was that we had a mortgage-driven banking crisis, but that the crisis was perhaps not as bad as that of the late 1980's and that many fundamentals (e.g. interest rates) were looking way better in this recession than in the early 1980's.  I honestly thought that Bush and Obama Treasury and Fed officials were declaring the sky was falling more from the danger to their beloved former employers on Wall Street than due to any economic fundamentals.

Well, obviously I was wrong.  Unemployment has topped 10% and could be headed higher.

So the question is, do I accept that others saw something I did not, or do I crack open the self-serving excuses.  Well, at the danger that this will fall into the latter category (I will leave that to readers to decide) I do think some things have changed since late last year that have contributed to worsening the economy.

Businesses are reluctant to invest when the returns on their investment are wildly unpredictable, particularly when future income changes are more driven by changing acts of Congress rather than fluctuations in the market.   Over the last year the Congress and Administration have:

• Printed trillions of dollars of new money, raising the risk of future inflation
• Borrowed trillions of dollars, sucking capital out of private lending markets
• Run up deficits that pretty much guarantee future tax increases
• Toyed with health care bills that will substantially increase the cost of labor
• Toyed with climate bills that will substantially increase the cost of fuel and electricity
• Demagogued industries with average to below-average profitability for making obscene profits that must be reduced (e.g. health insurance companies who make 3-4% of sales)
• Taken over whole industries (autos, banks) and run them to the benefit of favored political constituencies, even when it violates the law (e.g. trashing for secured creditors of auto companies in favor of the UAW).
• Demonstrated a disdain for money-making by imposing populist compensation limits on executives of out-of-favor companies and industries.
• Spent money in the stimulus mainly to add government jobs, every one of which is generally focused on making my life running a business harder.  If you do not understand or believe this, you have not run a business that employs people.
• Shown a general philosophic hostility towards markets and capitalism

I am sure this is just a subset (Louis Woodhill has more in this vein here), but these all have negative effects on investment.  My company for one has backed out of several planned expansions this winter for four reasons:

1. Half of my costs are labor, and I don't know how much Congress is going to increase my labor costs.  Current health care bills will increase it at least 8% -- given that my typical margin in 5-8% of sales, a government action that increases half my costs by 8% is worrisome.  Worse, my smaller competitors will not bear this expense under certain versions of the legislation.
2. My second highest expense is fuel and electricity.  I have no idea right now how much Congress may raise these expenses.
3. Capital for small businesses is gone.  I can get secured equipment financing, but that is it.
4. Assuming I make any money from these investments, I have no idea how much I will be able to keep.  I would not be surprised at all if Obama pushes my marginal rates over 50% -- and investments in my business are just too much work and risk to keep less than half if I make any money.

I used to work as for several years in St. Louis as VP of Planning for Emerson Electric.  I worked for a guy named Chuck Knight, who could be a real pain in the *ss to work for, but was a) brilliant and b) always willing to speak his mind without the typical filters a lot of other executives apply.  It appears that his successor Dave Farr, who I also knew at Emerson, is following in this tradition:

Emerson Electric Co. Chief Executive Officer David Farr said the U.S. government is hurting manufacturers with regulation and taxes and his company will continue to focus on growth overseas."Washington is doing everything in their manpower, capability, to destroy U.S. manufacturing," Farr said today in Chicago at a Baird Industrial Outlook conference. "Cap and trade, medical reform, labor rules."...

Companies will create jobs in India and China, "places where people want the products and where the governments welcome you to actually do something," Farr said.

The unemployment rate in the U.S. jumped to 10.2 percent in October, the highest level since 1983. Emerson, which Farr said employs about 125,000 people worldwide, has eliminated more than 20,000 jobs since the end of 2008 to lower expenses.

"What do you think I am going to do?" Farr asked. "I'm not going to hire anybody in the United States. I'm moving. They are doing everything possible to destroy jobs."

Politicians in both parties are generally clueless about this kind of thing, because very few of them have ever run a business or even even been in a real business position other than as lawyer or lobbyist.  Just look at how George McGovern feels now that he has run a business.

But the Obama administration is almost scary clueless.  In defending their promotion of a good business environment, they cite the most hostile item on their agenda:

"This administration has made a significant commitment to U.S. manufacturing, including reforming the country's health insurance system to bring down costs and make American companies more competitive globally," Griffis said.

Not. One. Single. Clue.

Actually, I think the Obama administration may believe this, which just accentuates their preference for a corporate state wherein "business friendly" means support for the top 20-30 corporations in the country.   In the context of a few old-line corporations with politically powerful unions, health care reform is helpful in that it dumps a bunch of the corporation's commitments to present and past workers onto the taxpayers.  But these are not the companies that grow the economy -- they are just the ones with out-sized power in political elections.

Don Boudreaux has a nice summary of the problems with a lot of product safety problems.

You write as if "safe" is an objectively determinable and unique fact, such as whether or not your newspaper's paid circulation exceeds 500,000 or whether or not your sister is pregnant.  But "safe" is not objective in this way.  Because no product is 100 percent certain never to cause even the slightest harm (or 100 percent certain to cause harm), the question "Is this product safe?" has no correct single answer.  It has correct answers as varied as the number of that product's potential users.  No product is "safe" or "unsafe" in the abstract.

Perhaps your tolerance for risk is higher than mine.  Perhaps the pleasure I get from using a product is less than yours.  If so, should I be permitted to prevent you from using that product because, for me, the product is insufficiently safe?  My evaluation of the product's safety is correct only for me, not for you.  And matters don't change if I'm a government official.

I have given a number of presentations on climate change around the country and have taken the skeptic side in a number of debates, but I have never done anything in my home city of Phoenix.

Therefore, I will be making a presentation in Phoenix on November 10 at 7PM in the auditorium of the Phoenix Country Day School, on 40th Street just north of Camelback.  Admission is free.  My presentation is about an hour and I will have an additional hour for questions, criticism, and rebuttals from the audience.

I will be posting more detail later, but the presentation will include background on global warming theory, a discussion of why climate models are likely exaggerating future warming, and an evaluation of various policy alternatives.  The presentation will be heavy on science and data, but is meant to be accessible without a science background.  I will post more details of the agenda as we get closer to the event.

I am taking something of a risk with this presentation.  I am paying for the auditorium and promotion myself -- I am not doing this under the auspices of any group.  However, I would like to get good attendance, in part because I would like the media representatives attending to see the local community demonstrating interest in at least giving the skeptic side of the debate a hearing.  If you are a member of a group that might like to attend, please email me directly at the email link at the top of this page and I can help get more information and updates to your group.

Finally, I have created a mailing list for folks who would like more information about this presentation - just click on the link below.  All I need is your name and email address.

It is pretty amazing to me that 500 years after the Spanish Inquisition it is somehow a revelation that people who are being tortured will say about anything to make the torture (or the threats thereof) stop:

On Friday the government declassified an opinion in which U.S. District Judge Colleen Kollar-Kotelly ordered the release of a Kuwaiti held at Guantanamo since 2002, saying he was imprisoned based on coerced confessions that even his interrogators did not believe. Fouad Al Rabiah, a 50-year-old aviation engineer and father of four, was captured as he tried to leave Afghanistan in December 2001. He said he came to Afghanistan that October to help refugees, an explanation the judge found credible....

Later four Guantanamo inmates made several implausible accusations against Al Rabiah"”claiming, among other things, that the engineer, who had worked at Kuwait Airlines for 20 years, suddenly became a leader of the fight against U.S. forces in Tora Bora. Kollar-Kotelly noted that the charges were either inconsistent or demonstrably false. The Pentagon eventually stopped relying on these wild claims to justify Al Rabiah's detention, but by then interrogators had used the charges, along with sleep deprivation and threats of rendition to countries where he would be tortured or killed, to extract confessions from him. In the end, the interrogators concluded that Al Rabiah was making up a story to please them. "Incredibly," Kollar-Kotelly wrote, "these are the confessions that the government has asked the Court to accept as truthful in this case."

I have argued for years that indefinite detention of anyone, citizen or not, is an affront to the principles on which this country was founded.  Just to make my position entirely clear, I am willing to risk letting 40 dangerous people go free (assuming we can't actually prosecute them) to avoid having one person detained wrongly.  If you think this is naive or wrong, then you need to ask yourself what you think about our entire legal system, which is predicated on a similar presumption, that we would prefer some guilty or dangerous people go free rather than tilt the system such that innocent people rot in jail.

Other posts from this topic here and here

From Daniel Griswold in the Washington Times:

President Obama and the other Group of 20 leaders delivered their obligatory warning against protectionism at last week's summit in Pittsburgh. But at home the U.S. president continues to conduct his own trade war, not only against imports from China and other developing countries, but against the most vulnerable of American consumers.

America's highest remaining trade barriers are aimed at products mostly grown and made by poor people abroad and disproportionately consumed by poor people at home. While industrial goods and luxury products typically enter under low or zero tariffs, the U.S. government imposes duties of 30 percent or more on food and lower-end clothing and shoes - staple goods that loom large in the budgets of poor families....

The tariff the president imposed on Chinese tires earlier this month was heavily biased against low-income American families. The affected tires typically cost $50 to $60 each, as compared with the unaffected tires that sell for $200 each. The result of the tariff will be an increase in lower-end tire prices of 20 percent to 30 percent. Low-income families struggling to keep their cars on the road will be forced to postpone replacing old and worn tires, putting their families at greater risk....

A few liberal Democrats still care, too. Edward Gresser of the Democratic Leadership Council has done more than anyone to expose the unfair, anti-poor bias of the U.S. tariff code.

In his 2007 book "Freedom From Want: American Liberalism and the Global Economy," he calculated that a single mother earning $15,000 a year as a maid in a hotel will forfeit about a week's worth of her annual pay to the U.S. tariff system, while the hotel's $100,000-a-year manager will give up only two or three hours of pay.

A Cafe Hayek Reader asks:

Imagine we had entirely private health insurance market "“ no Medicare or Medicaid.  If I live to be sixty-five, I will probably have a personal and/or family history that indicates a strong probability of developing an expensive chronic condition. I would wager that is true of almost all sixty-five year olds.

So here is my question: which insurer in their right mind would take on my risk?

I suspect none. Once philanthropy and savings were exhausted, I would surely risk a painful life and preventable death.

Do I want this? Does anyone? Isn't "socialized" medicine for older people an unpleasant moral necessity for our wealthy society? Please note I am deeply suspicious of most arguments cast in moral terms in discussions of politics and economics. I ask these questions guardedly.

I answer in the comments:

Imagine we had entirely private life insurance market "“ no government options at all. If I live to be sixty-five, I will probably have a pretty high probability of dieing in the next 15 years or so. I would wager that is true of almost all sixty-five year olds.

So why would anyone insure me?

Because the life insurance market has developed a very reasonable solution to this -- you negotiate a term life rate for X number of years. Your rate might be Y a year for 10 years, or 1.5Y a year for 20 years, or 2Y a year for 30 years. The longer the rate guarantee, the higher the rate. You are explicitly paying higher rates than you might have in younger, less risky years to make sure you get a coverage guarantee at an affordable rate in later, risky years.

Of course, if you play the grasshopper and never buy insurance until you are 65, your price is going to be awful. But I don't think it is a reasonable role for government to do all kinds of individual-liberty-defying and costly things just because you did not take responsibility for your old age earlier in life. However, saying that, I of course know that this is EXACTLY what the government does with Social Security.

I have a high deductible individual insurance plan from Assurant who specializes in insuring individuals, and they have been evolving to a pricing model sort of similar to the term life model I listed above, though they are not quite there yet.

To the folks that say this is no solace for folks already 65, that is an implementation transition issue, not an argument against the market's ability to deal with this. Certainly a lot of folks have paid Medicare taxes for years and are counting on it. Some kind of phase out, possibly where the government redirects Medicare funds to make up the difference in policy prices for having not started locking in earlier, is possible. But the question was not an implementation question - it was a question of whether the market inherently fails for 65-year olds, and I think the answer is that it does not. We have a perfectly serviceable analog in life insurance to prove it

I call this the "failure of imagination" argument against free markets.  Some sector of the economy (such as education) has been dominated by government for so long that folks can't imagine a private model.  For example, when I argue for private grade school education, I can't tell you how often people say "private schools are all really expensive, no one could afford them."  Private schools are expensive because in the current government model, the only market niche for private schools is for families that can afford to pay the government for education they don't use and then pay a second time for a private school.

Via Overlawyered, from here:

Lisa jumped out of the plane with Robin Rohemo, her tandem partner, and that's when it got really thrilling - the main parachute failed to deploy and Lisa hurtled toward the ground, somersaulting in the air, terrified of imminent and certain death when she'd smash into the [ground] at 100 miles per hour.

Luckily for Lisa, Mr. Rohemo knew exactly what to do during this mid-air free fall. First, he tried to cut the failed main chute off. Failing that, he told Lisa he needed her to stand on his knees and hold on. Lisa's words: "So I am holding as tight as I possibly could standing on his knees as we are falling to our death and I just felt this tremendous pressure pull on my hand ... and I figured we were going to die ...." Rohemo was able to free up the back-up chute, he and Lisa floated down to safety and no one died that day.

Whew, what a thrill. Maybe Lisa should've paid extra for the additional thrill. Instead, because her third and fourth fingers were fractured during the fall, she lawyered up and sued SkyDive claiming that Rohemo - her savior - had wrongfully told her to hold tight to a dangerous area of the parachute he was trying to cut away and then never told her to let go at an appropriate time. This, she and her lawyer claimed, presented Lisa with an enhanced risk not assumed or inherent in a tandem jump.

I don't know enough about parachuting to understand if she should be ticked off her main chute was packed wrong or something, but since that is not the basis of the suit, I assume that was not the issue.  Nevertheless, I would be sending Mr. Rohemo a case of scotch every Christmas for the rest of his life.  Lisa is suing him.

I don't have a clue if Professor Gates was arrested primarily because he was black.  But I can certainly say that it is not just blacks who are arrested every day for what is being called "comptempt of cop."  Police officers have developped a theory, which is not backed up by any actual written law, that they are the dictators of the immediate area that they occupy, and that citizens owe them absolute obedience to their commands and complete deference to their majesty, or else risk arrest.  While blacks may fall victim to such arrests at a higher rate, this is not just an issue of racism.  It is an issue of abuse of power as well.

Update: Carlos Miller has many of the same thoughts, and a lot more detail.  Having been arrested himself for "comtempt of cop," he should know.

Kevin Drum, echoing Paul Krugman, looks at rising interest rates on Treasuries and decides that there is nothing to see here, move along.   You will all be relieved to know that these rising interest rates have nothing to do with a couple of trillion dollars in new government borrowing, and the effect that this borrowing (and wild money printing) might have on

• Inflation
• Sovereign risk
• Supply and demand for credit

Boy, do I feel better.

PS - And remember, if interest rates do start exceeding historical norms, Krugman will discover that it is Bush's fault.

Moral hazard is the term for what occurs when one shelters an entity from the full cost or downside of taking risks.   The result is that the entity will tend to take on more risk than it would have had it had to bear the full costs.  For example, if a company knows that the government will make up the shortfall if its pension investments suffer, it will tend to invest in high-risk, high-return investments that reduce the company's need to contribute funds in the good years.   This is sometimes called privitizing profits and socializing losses.

One of the problems with demonstrating moral hazard is that the hazard often occurs years after the action (usually a government action) that creates the hazard.   But this week we have an amazing opportunity to see moral hazard operating within days of a government bailout:

Immediately after GMAC became eligible for TARP money, GM reduced to zero the interest rate"¦ on certain models. This, of course, penalizes GM competitors, including Toyota, Honda and other "transplants" whose cars are made in America by Americans for Americans, and Ford, which does not have the freedom of maneuver conferred by TARP money because Ford is not taking any"¦

GMAC has begun making loans to borrowers with credit scores as low as 621, a significant relaxation of the 700 minimum score the company adopted just three months ago as it struggled to survive. America's median credit score is 723"¦

If you pay people trillions of dollars in response to a bad behavior (in this case, credit lenience) then you will just encourage more of that behavior, even if everyone achnowleges it to be a bad behavior.

I posted some data this morning showing the current jobs report ranked not on absolute job losses but as a percentage of the total work force.  I have now pulled the whole data set from the BLS, which goes back to about 1939, and this is what the entire monthly series looks like of employment changes as a percentage of total employment (the purple line is a 3-month moving average).

Folks familiar with this data base may know of reasons the data has become less volatile (perhaps improved seasonal adjustments?) but never-the-less, I have a hard time reconciling this with the popular leftish notion that the decline of traditional American manufacturers (e.g. autos) and unions have led to increasing risk and job/income volatility.  I played around with a couple of ways to summarize the trends.  Here is the number of substantially negative (monthly losses greater than 0.25% of the workforce) jobs reports per decade:

And here is a metric of the volatility of the jobs number.  Since most folks don't really buy the classic economic argument that "risk" equates to volatility up or down, but feel that risk is only to the downside, I have looked at what is sometimes called the downside standard deviation of the jobs change numbers, in which all monthly data greater than zero are set to zero, and then a normal standard deviation is taken on the data.