Archive for October, 2009
Congress Shall Make No Law . . . But Regulators Act Anyway
Lovers of free speech should feel their stomachs turn when they look at the actions of the Federal Trade Commission and Federal Communications Commission these days.
Not that they took a sharp turn with the Obama administration, or with the chairmanships of Jon Leibowitz or Jules Genachowski. These are run-of-the-mill bureaucracies, constantly reaching for new powers, nevermind even constitutional limits on the federal government’s authority.
Item 1: Blogger, You’re an Advertiser Now
Via the L.A. Times blog, the FTC issued a guidance document yesterday requiring bloggers who write testimonials about products to disclose large gifts or payments, or they will run afoul of the FTC’s regulations on advertising.
Is that the right thing to do? Yep. Is that an appropriate thing to require in federal law? Absolutely not.
The FTC is putting itself in the business of guaranteeing the veracity of speech and the honesty and straightforwardness of bloggers. “No” means no law abridging the freedom of speech or of the press.
The “protection” in this regulatory scheme encourages consumers to be supine and irresponsible. State law should deal with frauds as they occur. There should be no law barring or limiting paid endorsements — certainly not a federal law.
Item 2: An Establishment of the Press?
Via the Examiner, it probably didn’t occur to the framers of the constitution to bar the government from establishing its own press, so they didn’t do that in the First Amendment. But we’re heading down that road, and the FTC wants to take us there.
In early December, it will hold a “workshop” called ”From Town Criers to Bloggers: How Will Journalism Survive the Internet Age?”
Here’s an idea for a “workshop”: Taking the Budget of the Federal Trade Commission and Giving it Back to Taxpayers.
Item 3: Just a Modest Takeover of the Communications Infrastructure
As discussed here several times before, FCC Chairman Genachowski has proposed to regulate the terms on which Internet service providers supply broadband services to the public. It’s pretty much the same thing as regulating how printing presses work, or the delivery decisions of newspapers.
The federal government is specifically disabled from regulating speech and the press in the constitution. But in various ways the regulators at the FCC and FTC have talked themselves into the role of censor.
Enough of this unconstitutional consumer coddling. It’s time to shut these agencies down and restore the funds that support them to American taxpayers. Now that would be a consumer protection!
An early version of this post collapsed the FTC and FCC together. Author Jim Harper swears he knows the difference and claims he was briefly blinded with rage at unconstitutional government. Jim thanks the Cato@Liberty reader who slapped him around, getting him focused once again on *happily* railing against unconstitutional government.
Hawks and Havens
The Washington Post‘s oped page is a safe haven for hawks. Today we have Michael O’Hanlon and Richard Cohen fighting for the war in Afghanistan.
O’Hanlon is for generals respecting the president’s policy decisions, except when he isn’t — cases where the general is obviously right, in that he agrees with O’Hanlon. (To me, this McChrystal incident shows the robustness of civilian control. McChrystal spoke too freely and got rebuked. The Republic seems OK. So does the Army.)
O’Hanlon’s other goal is to attack those who want to limit the objectives in Afghanistan to counter-terrorism. To do so, he imputes his nation-building goals to the less ambitious strategy. He says we tried the narrow mission under Bush and it failed.
A. Not really. Does this, for example, sound like counter-terrorism?
B. It only failed to achieve the counterinsurgency strategy’s (maybe impossible) objectives of a stable, centralized state in Afghanistan. A counter-terrorism (or go small) strategy sacrifices some probability of heightened stability for less cost in blood and dollars. We have been doing fine at counter-terrorism all along, largely because al Qaeda is overrated. Afghanistan is not a terrorist haven anymore.
O’Hanlon also says that we won’t collect as much intelligence without a full-scale counterinsurgency. Again, this is true, but insufficient. A smaller footprint provides benefits (less radicalization, less cost) that we exchange, in a sense, for lost intelligence-gathering opportunities. In any case, intelligence needed to target airstrikes can come from allies on the ground, intercepts, and overhead surveillance, as in Pakistan. Progress in surveillance and strike capability and the will to use it means that a rerun of the 1990s, where al Qaeda was safe in Afghan camps, is a phony nightmare. O’Hanlon also claims that absent a large U.S. ground force, we would have to offshore all UAV bases that range western Pakistan. This is a pessimistic assessment; we could defend most of our airfields with a limited force in Afghanistan, and we have at least one UAV base in Pakistan.
Limitations of Bank Capital Regulation
Politicians and bank regulators across the world have come to the conclusion that excessive leverage, that is too much debt relative to equity, contributed to the depth of our recent financial crisis. Their solution: require banks to have more capital. If only it were so easy.
As Raghuram Rajan points out in a recent piece for the Financial Times, “banks will not be passive in the face of regulatory change.” Indeed, they will not. For instance, if you simply double a bank’s minimum required capital, the bank could respond by doubling the risk of loans on its portfolio. You move capital 8% to 16%, the bank can makes loans that default with expected losses at 16% and you haven’t done anything to reduce the risk in the system.
The problem with excessive leverage in our financial system was not that there was too much debt, but that debt-holders believed they would be bailed-out and hence provided little to no monitoring of bank activities. Reducing leverage does not increase the incentives of debt-holders to monitor, in fact it may reduce it, because debt-holders will now believe there is an even bigger cushion before they take any losses.
Why is it important for debt-holders to monitor the behavior of banks anyway? Because they are the largest piece of a bank’s capital structure. With an 8% equity stake, debt makes up 92% of the capital structure; with even a 16% equity stake, debt is still 84% of the capital structure. If there is no market discipline on debt-holders, then we essentially have no market discipline.
So how then to give debt-holders the appropriate incentives to monitor bank behavior? Quite simple, put them on the hook for losses. Rajan suggests we create “contingent capital” – debt that would convert to equity if capital levels fell below a certain level. While the devil is in the details, providing some system to impose losses on debt-holders is essential if we ever want to have functioning financial markets. Simply raising capital requirements does not solve that problem.
Throwdown with Charles Murray
In a response to my post this morning, Charles Murray remains unconvinced that changes to our school system could result in dramatic improvements in educational outcomes.
He asks to see the scholarly study showing that a school has miraculously boosted achievement above the norm. In one way, this hurdle is too low, and in another it’s too high.
If we could only point to a single study of a single school, it wouldn’t instill much confidence in the generalizability of the phenomenon. A consistent pattern of scholarly results is necessary for that. On the other hand, asking for “miraculous” improvement is a needlessly high standard. My disagreement is with Murray’s earlier, lower threshold claim that: ”reforms of the schools can never do more than produce score improvements at the margin.”
Let’s call a marginal improvement an increase of less than .15 standard deviations above the current mean (typically considered a “small” effect in the social sciences). Taking that as our litmus test, is there a consistent pattern of scholarly evidence that better school system design can boost achievement by more than .15 standard deviations? Yes.
That pattern is presented in the figure above, drawn from my recent review of the global econometric literature comparing educational outcomes across different types of school systems. The figure relates the number of statistically significant findings favoring free education markets over state school monopolies (in white), significant findings of the reverse (in light grey), and insignificant findings (in dark grey). Markets beat monopolies by a ratio of 15 significant findings to 1, across the seven educational measures for which data are available.
Why Is For-Profit Education So Difficult in the U.S.?
Matt Yglesias has a post up looking at the PISA scores, and he seems to imply that for-profit schooling has been tried and found wanting in Sweden and the U.S.:
The big difference is that many Swedish charters are run by for-profit firms. We’ve had some experiments with that in the U.S. and it hasn’t worked very well. Nobody’s really found a great way of making consistent profits running K-12 schools in America.
Of course even he notes that Sweden’s schools are highly regulated by the state.
And in the U.S., the difficulty of succeeding in for-profit education just might have something to do with that government monopoly on k-12 education and the $560 billion or so in tax revenues that fund it. Maybe.
Political Prisoners in Venezuela: Where Is the Organization of American States?
The Washington Post has a great story today on the swelling number of political prisoners in Venezuela. As the story points out, the government of Hugo Chávez is increasingly targeting university students who have been active in the opposition movement. They are jailed under bogus charges of “destabilizing the government,” or “inciting civil war.”
Unfortunately, despite stories and numerous reports from international media outlets and human rights groups, the Organization of American States—which has been very active in trying to reinstall Manuel Zelaya to the Honduran presidency—has remained silent on this issue. Last week, dozens of students went on a hunger strike in front of the OAS headquarters in Caracas, but no official from that organization came out to meet them. After several days some students were allowed to talk with the OAS ambassador in Caracas, who put them in touch with the director of the Inter-American Commission on Human Rights (IACHR). Jose Manuel Insulza, secretary general of the OAS, then asked the Venezuelan government to authorize the visit of a delegation of the IACHR, a request that hasn’t been granted. Judging by the lack of follow up efforts, the OAS, made up of a majority of countries that receive Venezuelan largesse of some form, seems mostly uninterested in pressing this issue.
The OAS seems ready to help deposed would-be autocrats in Latin America. Where is it when it comes to defending the rights of political prisoners in Venezuela?
The Czar Will Rule
President Obama’s real czar, “pay czar” Ken Feinberg, who has real power, brushes aside such claims even as he prepares to issue his Gosplan-style edicts on future and even past pay agreements:
The Obama administration’s pay czar says negotiations over executive compensation with the seven companies that received the biggest federal bailouts have been “a consensual process’’ – not a matter of forcing decisions on them.
“I’m hoping I won’t be required to simply make a determination over company objections,’’ veteran Washington attorney Kenneth Feinberg told the Chicago Bar Association in a speech.
But note: he’s “hoping” he won’t have to impose his own view. He’s hoping the companies will accede to his power without complaining. But the fact remains, he doesn’t have to get their consent. He “has sole discretion to set compensation for the top 25 employees of each of those companies,” and his decisions “won’t be subject to appeal.” Or, as Feinberg himself puts it,
The statute provides these guideposts, but the statute ultimately says I have discretion to decide what it is that these people should make and that my determination will be final. The officials can’t run to the Secretary of Treasury. The officials can’t run to the court house or a local court. My decision is final on those individuals.
That’s power. So where is Doonesbury? We need him to update his classic 1970s “energy czar” strips.
Cato Launches New Web Site Exposing Wasteful Government Spending
Did you know that the average American family spends $1,000 each year on the U.S. Department of Agriculture, whether or not it consumes that agency’s services? Or that the federal government annually spends $1,500 per household on net interest costs alone?
In an ongoing effort to shed light on runaway government spending and expose wasteful government programs, Cato launched a new Web site today that examines the federal budget department-by-department to see which agencies can be reformed or terminated. DownsizingGovernment.org describes which programs are wasteful, damaging and obsolete in an era of trillion-dollar deficits.
The research exposes that many public outlays—though vigorously defended by the politicians who created them and the constituencies they purport to help—are remarkably ineffective at achieving their core aims.
Here are just a few examples:
- Though the Department of Education’s annual budget has more than tripled in real dollars since 1970, that period has not been marked by any tangible improvement in student performance.
- The Department of Housing and Urban Development operates a rural subsidies program even though hundreds of other federal programs benefiting rural constituencies already exist.
- HUD has been characterized by scandalous graft and cronyism under both Republican and Democratic presidents for three decades. The rate at which senior HUD officials have been investigated or prosecuted is chilling, and government watchdogs have found dozens of instances where officials’ private-sector contacts were showered with public money for projects.
Appearing on CNBC Monday, DownsizingGovernment.com editor Chris Edwards explained more about the site:
Plus, keep track of where your tax dollars are going by following DownsizingGovernment.com on Twitter (@DownsizeTheFeds) and Facebook.
NYT Columnist, Meet NYT Reporter
In the New York Times this weekend, columnist Thomas Friedman wrote, “[W]e may be tired of this ‘war on terrorism,’ but the bad guys are not. They are getting even more ‘creative.’”
On September 26th, the New York Times reported in a story by Scott Shane:
Many students of terrorism believe that in important ways, Al Qaeda and its ideology of global jihad are in a pronounced decline — with its central leadership thrown off balance as operatives are increasingly picked off by missiles and manhunts and, more important, with its tactics discredited in public opinion across the Muslim world.
Who’s right? Should we be more concerned or less?
Well, the statements are not inconsistent. But unlike the analysts cited in the news story, columnist Friedman uses loaded terms and broad generalizations like “war on terror”, “bad guys”, and “creative” to misconstrue the nature of the terrorist threat.
Friedman says “war” a dizzying seventeen times in his short column, misdescribing the many different efforts that go into suppressing terrorism, dissuading terrorist recruits, and capturing or killing terrorists.
He lumps all terrorists together as “bad guys” despite expert counsel against assuming they have similar aims and motives, or that they collaborate.
And “creative”?—well, putting a bomb in your keister is creative, but it is not an effective way to harm anyone other than yourself.
But don’t jump to the wrong conclusion. The point is not to dismiss terrorism as a threat. It’s to know that terrorists are fallible, al Qaeda is on the wane, and law enforcement is on the case. In terrorism, we are not confronted by anything close to an existential threat.
Friedman’s column is a reach, and it does a distinctly bad job of working with any of these subtleties. (The only reason I feel compelled to call them “subtleties,” I suppose, is because they seem to remain beyond the grasp of an otherwise intelligent and thoughtful New York Times columnist.)
Revenge of the Laffer Curve, Part II
An earlier post revealed that higher tax rates in Maryland were backfiring, leading to less revenue from upper-income taxpayers. It seems New York politicians are running into a similar problem. According to an AP report, the state’s 100 richest taxpayers have paid $1 billion less than expected following a big tax hike. The story notes that several rich people have left the state, and all three examples are about people who have redomiciled in Florida, which has no state income tax. For more background information on why higher taxes on the rich do not necessarily raise revenue, see this three-part Laffer Curve video series (here, here, and here):
Early data from New York show the higher tax rates for the wealthy have yielded lower-than-expected state wealth.
…[New York Governor David] Paterson said last week that revenues from the income tax increases and other taxes enacted in April are running about 20 percent less than anticipated.
…So far this year, half of about $1 billion in expected revenue from New York’s 100 richest taxpayers is missing.
…State officials say they don’t know how much of the missing revenue is because any wealthy New Yorkers simply left. But at least two high-profile defectors have sounded off on the tax changes: Buffalo Sabres owner Tom Golisano, the billionaire who ran for governor three times and who was paying $13,000 a day in New York income taxes, and radio talk-show host Rush Limbaugh.
…Donald Trump told Fox News earlier this year that several of his millionaire friends were talking about leaving the state over the latest taxes.
Carper: We Trust Our Staff So You Can Trust Us
A deep fissure between federal lawmaking practices and the Internet-fueled expectations of the people is just starting to open.
Here’s a fascinating interview with Senator Tom Carper (D-DE), in which he justifies not reading the legislation that he votes on.
He’s right that the bills Congress passes are almost incomprehensible, but he draws the wrong conclusion from it. It’s not OK to pass bills that you can’t read and literally don’t understand.
Congress and the bureaucracy will come to learn a lesson that other parts of our society have learned: The Internet changes things.
Because it is now possible to see legislation before Congress passes it, Americans now expect to see legislation before it passes. And they will come to expect that their representative understand it—in detail.
A machine has grown up in Washington over the past two hundred years where representatives rely on colleagues who rely on staff to write bills. This has not produced a desirable body of federal law, and it is not a process that the public will accept for much longer.
A New Court Term: Big Cases, Questions About the New Justice
Today is the first Monday in October, and so is First Monday, the traditional start of the Supreme Court term. The Court already heard one argument – in the Citizens United campaign finance case — but it had been carried over from last year, so it doesn’t really count.
In any event, continuing its trend from last term, the Court has further front-loaded its caseload — with nearly 60 arguments on its docket already. Fortunately, unlike last year, we’ll see many blockbuster cases, including:
- the application of the Second Amendment to state gun regulations;
- First Amendment challenges to national park monuments and a statute criminalizing the depiction of animal cruelty;
- an Eighth Amendment challenge to life sentences for juveniles; a potential revisiting of Miranda rights;
- federalism concerns over legislation regarding the civil commitment of “sexually dangerous” persons;
- a separation-of-powers dispute concerning the agency enforcing Sarbanes-Oxley;
- judicial takings of beachfront property; and
- notably in these times of increasing government control over the economy, the “reasonableness” of mutual fund managers’ compensation.
Cato has filed amicus briefs in many of these cases, so I will be paying extra-close attention.
Perhaps more importantly, we also have a new justice — and, as Justice White often said, a new justice makes a new Court. While Sonia Sotomayor’s confirmation was never in any serious doubt, she faced strong criticism on issues ranging from property rights and the use of foreign law in constitutional interpretation to the Ricci firefighters case and the “wise Latina” speeches that led people to question her commitment to judicial objectivity. Only time will tell what kind of justice Sotomayor will be now that she is unfettered from higher court precedent — and the first term is not necessarily indicative.
Key questions for the new Court’s dynamics are whether Sotomayor will challenge Justice Scalia intellectually and whether she will antagonize Justice Kennedy and thus push him to the right. We’ve already seen her make waves at the Citizens United reargument — questioning the scope of corporations’ constitutional rights — so it could be that she will decline to follow Justice Alito’s example and jump right into the Court’s rhetorical battles.
In short, it’s the first day of school and I’m excited.
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