In the New Yorker, Nicholas Lemann frets over Ron Paul’s “hostility to government” in an article titled “Enemy of the State.” I wonder if Lemann, who is both a long-time writer at a great magazine and the dean of a great school of journalism, would think “Enemy of the State” was red-baiting or otherwise inappropriate language if it was applied to some other candidate.

But I was especially struck by this comment in Lemann’s lament about all the government programs Paul would repeal:

As for the financial crisis, Paul would have countenanced no regulation that might have prevented it, no government stabilization of the financial system after it happened, and no special help for working people hurt by it. This is where the logic of government-shrinking leads.

The famous New Yorker editing process seems to have broken down here. Here’s how the paragraph should have read:

As for the financial crisis, Paul would have countenanced none of the regulation that helped to cause it, no government creation of cheap money that created the unsustainable boom, and no special help for Wall Street banks when the bubble collapsed. He would have seen that that was where the logic of government-expanding leads.

The New Yorker Misunderstands Ron Paul (Again) is a post from Cato @ Liberty - Cato Institute Blog

I’ve yet to encounter a technically clueful person who believes the Stop Online Piracy Act will actually do anything to meaningfully reduce—let alone “stop”—online piracy, and so I haven’t bothered writing much about the absurd numbers the bill’s supporters routinely bandy about in hopes of persuading lawmakers that SOPA will be an economic boon and create zillions of jobs. If the proposed solution just won’t work, after all, why bother quibbling about the magnitude of the problem? But then I saw the very astute David Carr’s otherwise excellent column on SOPA’s pitfalls, which took those inflated numbers more or less as gospel. If only because I’m offended to see bad data invoked so routinely and brazenly, on general principle, it’s important to try to set the record straight. The movie and music recording industry have gotten away with using statistics that don’t stand up to the most minimal scrutiny, over and over, for years, to hoodwink both Congress and the general public. Wherever you come down on any particular piece of legislation, this is not how policy should get made in a democracy, and it’s high time they were shamed into cutting it out.

The bogus numbers Carr cites—which I’ll get to in a moment—actually represent a substantial retreat from even more ludicrous statistics the copyright industries long peddled. In my previous life as the Washington editor for the technology news site Ars Technica, I became curious about two implausible sounding claims I kept seeing made over and over—and repeated by prominent U.S. Senators!—in support of more aggressive antipiracy efforts.  Intellectual property infringement was supposedly costing the U.S. economy $200–250 billion per year, and had killed 750,000 American jobs. That certainly sounded dire, but those numbers looked suspiciously high, and I was having trouble figuring out exactly where they had originated. I did finally run them down, and wrote up the results of my investigation in a long piece for Ars. Read the whole thing for the full, farcical story, but here’s the upshot: The $200–250 billion number had originated in a 1991 sidebar in Forbes, but it was not a measurement of the cost of “piracy” to the U.S. economy. It was an unsourced estimate of the total size of the global market in counterfeit goods. Beyond the obvious fact that these numbers are decades old, counterfeiting of physical goods imported in bulk and sold by domestic retail distributors is, rather obviously, a totally different phenomenon with different policy implications from the problem of illicit individual consumer downloads of movies, music, and software. The 750,000 jobs number had originated in a 1986 speech (yes, 1986) by the secretary of commerce estimating that counterfeiting could cost the United States “anywhere from 130,000 to 750,000″ jobs. Nobody in the Commerce Department was able to identify where those figures had come from.

These are the numbers that were driving U.S. copyright policy as recently as 2008—and I’m still seeing them repeated in “fact sheets” circulated by SOPA boosters.  Finally, in 2010, the Government Accountability Office released a report noting that these figures “cannot be substantiated or traced back to an underlying data source or methodology.” Now, if a single journalist could discover as much with a few days work, minimal due diligence should have enabled highly paid lobbyists to arrive at the same conclusion. The only way to explain the longevity of these figures, if we charitably rule out deliberate deception, is to infer that the people repeating them simply did not care whether what they were saying was true. If I were a legislator, I would find this more than a little insulting

As Carr’s piece suggests, SOPA’s corporate backers have fallen back on new numbers, but they’re still entirely bogus:

The Motion Picture Association of America cites figures saying that piracy costs the United States $58 billion annually. Mark Elliot, an executive from the U.S. Chamber of Commerce, said in a letter to The New York Times that such piracy threatened 19 million American jobs

Only $58 billion! We’re making progress! So where does that figure come from? The source here is a paper released by the Institute for Policy Innovation, and authored by one Stephen Siwek, an MBA and principal of a consulting firm called Economists Incorporated that produces economic analysis for hire on behalf of (among others) businesses seeking to influence policy makers. That does not, in itself, invalidate the research, but we should at least begin with the recognition that we are not dealing here with impartial academic studies produced by a university or government research agency.

What does invalidate the “research” is the inappropriate use of “multiplier” effects to double—and triple—count loss estimates that were dubious to begin with. As the GAO report notes in its typically understated fashion:

Most of the experts we interviewed were reluctant to use economic multipliers to calculate losses from counterfeiting because this methodology was developed to look at a one-time change in output and employment.

In other words, Siwek is taking a method that’s useful for analyzing where in the economy we will likely see the effects of demand shifts, and pretending that it somehow reflects aggregate economic losses. As my colleague Tim Lee has pointed out, this is Bastiat’s Broken Window Fallacy on steroids:

[I]n IPI-land, when a movie studio makes $10 selling a DVD to a Canadian, and then gives $7 to the company that manufactured the DVD and $2 to the guy who shipped it to Canada, society has benefited by $10+$7+$2=$19. Yet some simple math shows that this is nonsense: the studio is $1 richer, the trucker is $2, and the manufacturer is $7. Shockingly enough, that adds up to $10. What each participant cares about is his profits, not his revenues.

So, to stay focused on movies, Siwek takes an estimate of $6.1 billion in piracy losses to the U.S. movie industry, and through the magic of multipliers gets us to a more impressive sounding $20.5 billion. That original $6.1 billion figure, by the way, was produced by a study commissioned from LEK Consulting by the Motion Picture Association of America. Since even the GAO was unable to get at the underlying research or evaluate its methodology, it’s impossible to know how reliable that figure is, but given that MPAA has already had to admit significant errors in the numbers LEK generated, I’d take it with a grain of salt.

Believe it or not, though, it’s actually even worse than that. SOPA, recall, does not actually shut down foreign sites. It only requires (ineffective) blocking of foreign “rogue sites” for U.S. Internet users. It doesn’t do anything to prevent users in (say) China from downloading illicit content on a Chinese site. If we’re interested in the magnitude of the piracy harm that SOPA is aimed at addressing, then, the only relevant number is the loss attributable specifically to Internet piracy by U.S. users.

Again, we don’t have the full LEK study, but one of Siwek’s early papers does conveniently reproduce some of LEK’s PowerPoint slides, which attempt to break the data down a bit. Of the total $6.1 billion in annual losses LEK estimated to MPAA studios, the amount attributable to online piracy by users in the United States was $446 million—which, by coincidence, is roughly the amount grossed globally by Alvin and the Chipmunks: The Squeakquel.

So in a fantasy world where U.S. movie pirates don’t just circumvent blockage with a browser plugin, and SOPA actually stops all online movie piracy by American users, we get a $446 million economic benefit to the United States in the form of movie revenues, and presumably comparable benefits in music and software revenues? Well, no. Remember our old friend the Broken Window Fallacy. It’s true that some illicit U.S. downloads displace sales of legal products. But what happens to the money the pirates would have otherwise spent on those legal copies? They don’t eat it! As that same GAO report helpfully points out:

(1) in the case that the counterfeit good has similar quality to the original, consumers have extra disposable income from purchasing a less expensive good, and (2) the extra disposable income goes back to the U.S. economy, as consumers can spend it on other goods and services.

As one expert consulted by GAO put it, “effects of piracy within the United States are mainly redistributions within the economy for other purposes and that they should not be considered as a loss to the overall economy.” In many cases—I’ve seen research suggesting it’s about 80 percent for music—a U.S. consumer would not have otherwise purchased an illicitly downloaded song or movie if piracy were not an option. Here, the result is actually pure consumer surplus: The downloader enjoys the benefit, and the producer loses nothing. In the other 20 percent of cases, the result is a loss to the content industry, but not a let loss to the economy, since the money just ends up being spent elsewhere. If you’re concerned about the overall jobs picture, as opposed to the fortunes of a specific industry, there is no good reason to think eliminating piracy by U.S. users would yield any jobs on net, though it might help boost employment in copyright-intensive sectors. (Oh, and that business about 19 million jobs? Also bogus.)

Does that mean online piracy is harmless? Of course not. But the harm is a dynamic loss in allocative efficiency, which is much harder to quantify. That is, in the cases where a consumer would have been willing to buy an illicitly downloaded movie, album, or software program, we want the market to be accurately signalling demand for the products people value, rather than whatever less-valued use that money gets spent on instead. This is, in fact, very important! It’s a good reason to look for appropriately tailored ways to reduce piracy, so that the market devotes resources to production of new creativity and innovation valued by consumers, rather than to other, less efficient purposes. Indeed, it’s a good reason to look for ways of doing this that, unlike SOPA, might actually work.

It is not, however, a good reason to spend $47 million in taxpayer dollars—plus untold millions more in ISP compliance costs—turning the Justice Department into a pro bono litigation service for Hollywood in hopes of generating a jobs and a revenue bonanza for the U.S. economy. Any “research” suggesting we can expect that kind of result from Internet censorship is a fiction more fanciful than singing chipmunks.

How Copyright Industries Con Congress is a post from Cato @ Liberty - Cato Institute Blog

Income inequality is not so much a problem as income opacity.

In the latest issue of Regulation magazine, editor Peter Van Doren reviews two recent studies that find income inequality is not increasing:

While it is true that the cash explicitly paid to employees has become more unequal over the last generation, the implication that labor markets are not working well and that government should alter labor market outcomes does not necessarily follow. A more benign explanation for the change in cash compensation over a generation is the dramatic increase in health insurance costs. Employers may be paying all their employees a more or less equivalent increase on a percentage basis, but for lower-paid workers much of that pay is not showing up in cash. Thus, if this view is correct, inequality in the cash component of compensation has increased while inequality in total compensation has not increased because the fixed costs of health insurance are a much larger percentage of the total compensation of lower-earnings workers…

If one analyzes data on only working-age individuals (age 25–61), inflation-adjusted real pre-tax, post-cash-transfer money income grew 1.9 percent and 10.5 percent respectively for the first (poorest) and 10th (richest) deciles from 1995 to 2008. But if one adds the value of health insurance, the first (poorest) decile grew 12.3 percent while the top decile grew 11.7 percent.

[T]he growth in compensation by earnings decile (from the 30th to the 99th) averages 35 percent [from 1999 to 2006], with 41 percent growth at the 30th percentile (workers earning $10–$14 an hour) and only 35.8 percent growth at the 99th percentile (workers earning $59–$80 an hour).

Because expenditures on health care are increasing so rapidly and because so much of the cost of health care is paid for by employers or government, discussions about rising inequality that only consider cash income provide a misleading view of trends in inequality. When health insurance expenditures are added to household cash income, the increases in inequality from 1995 to 2008 are completely offset.

In brief: government intervenes in labor and health care markets; advocates of those interventions use the resulting income opacity to argue that markets are defective.

Is Income Inequality Increasing? Only If You Don’t Count Health Benefits is a post from Cato @ Liberty - Cato Institute Blog

The folks from the Koch Institute put together a great video a couple of months ago looking at why some nations are rich and others are poor.

That video looked at the relationship between economic freedom and various indices that measure quality of life. Not surprisingly, free markets and small government lead to better results.

Now they have a new video that looks at recent developments in the United States. Unfortunately, you will learn that the U.S. is slipping in the wrong direction.

The entire video is superb, but there are two things that merit special praise, one because of intellectual honesty and the other because of intellectual effectiveness.

1. The refreshingly honest aspect of the video is its non-partisan tone. It explains, in a neutral fashion, that Bush undermined prosperity by making government bigger and that Obama is undermining prosperity by increasing the burden of government.

2. The most important and effective argument in the video, at least from my perspective, is that it shows clearly that a larger government necessarily comes at the expense of the productive sector of the economy. Pay extra-close attention around the 2:00 mark.

It’s also worth pointing out that there are several policies that impact on economic performance. The Koch Institute video focuses primarily on the key issues of fiscal policy and regulation, but trade, monetary policy, property rights, and rule of law are examples of other policies that also are very important.

This video, narrated by yours truly, looks at economic growth from this more comprehensive perspective.

The moral of the story from both videos is very straightforward. If the answer is bigger government, you’ve asked a very strange question.

New Video Has Important Message: Freedom and Prosperity vs. Big Government and Stagnation is a post from Cato @ Liberty - Cato Institute Blog

An op-ed in the Washington Post discusses why federal farm subsidies don’t even make sense from an activist government point of view. Most farm subsidies go for animal-feed crops, which can be viewed as a subsidy for meat production. At the same time, the government propagandizes the public to follow healthy habits and eat lots of fruit and vegetables, but not so much meat.

At www.DownsizingGovernment.org, we’ve come across many federal policies that are contradictory. The government tells the public that X is good, but then it takes actions to do the opposite. Here are some examples:

• Government health experts tell new moms to breastfeed, but the government spends billions of dollars a year on the WIC program, which subsidizes baby formula for moms.
• The government imposes strict rules on property owners to protect wetlands, but the government’s Corps of Engineers and Bureau of Reclamation have destroyed vast amounts of wetlands.
• The government enforces strict anti-pollution laws, but the Department of Energy and other federal agencies have been notorious polluters.
• The Corps of Engineers has spent billions of dollars building levees to protect against flooding, but its own infrastructure has worsened the damage caused by hurricanes.
• The government imposes tight rules to ensure proper funding and to prevent abuse in private pension plans, but its own “pension plan”—Social Security—is a Ponzi scheme.
• The Constitution says that the federal government is created to “insure domestic tranquility,” but the government has spurred violence with alcohol prohibition and now the drug war.

My Cato colleagues are probably aware of many other contradictions, and it seems that the more the government intervenes in society, the more it will work against both the people and itself.

Government at War With Itself is a post from Cato @ Liberty - Cato Institute Blog

A couple of weeks ago I suggested that the person responsible for Ford’s anti-bailout ads was deserving of a raise. Today, I wonder how that extra income will be spent…in Siberia. According to media accounts seemingly originating with the Detroit News, Ford has pulled that ad after learning the Putin Obama White House was none too pleased.

It is unclear from the Detroit News article whether overt threats, implied repercussions, or mild expressions of regret best characterize the communications from the White House to Ford. Regardless, something spooked Ford enough to prompt it to pull the popular ad (no longer available on YouTube), which sought to differentiate the Ford brand over the “bailout” characteristic, which is not insignificant to auto purchasing decisions.

Hopefully, some probing journalists will discover the true nature of what transpired. In the meantime, it’s important to reflect on the fact that—contrary to the views of E.J. Dionne and others who cannot contemplate what is not seen—the auto bailout was not a discrete event, which happened and now resides in our memories. It is an ongoing tipping of the scales of competition—intentionally and inadvertently. Ford’s mere perception that the administration might stir up trouble if it didn’t fall into line is a vestige of the bailout.

To the extent that the administration wants to tout the bailout as evidence of its “successful” economic stewardship, it should know that there are plenty of us willing and able to do the auditing on that claim.

Ongoing Ripples from the Auto Bailout is a post from Cato @ Liberty - Cato Institute Blog

When asked to pick my most frustrating issue, I could list things from my policy field such as class warfare or income redistribution.

But based on all the speeches and media interviews I do, which periodically venture into other areas, I suspect protectionism vs. free trade is the biggest challenge.

So I want to ask the protectionists (though anybody is free to provide feedback) how they would answer these simple questions.

1. Do you think politicians and bureaucrats should be able to tell you what you’re allowed to buy?

As Walter Williams has explained, this is a simple matter of freedom and liberty. If you want to give the political elite the authority to tell you whether you can buy foreign-produced goods, you have opened the door to endless mischief.

2. If trade barriers between nations are good, then shouldn’t we have trade barriers between states? Or cities?

This is a very straightforward challenge. If protectionism is good, then it shouldn’t be limited to national borders.

3. Why is it bad that foreigners use the dollars they obtain to invest in the American economy instead of buying products?

Little green pieces of paper have little value to foreign companies. They only accept those dollars in exchange for products because they intend to use them, either to buy American products or to invest in the U.S. economy. Indeed, a “capital surplus” is the flip side of a “trade deficit.” This generally is a positive sign for the American economy (though I freely admit this argument is weakened if foreigners use dollars to “invest” in federal government debt).

4. Do you think protectionism would be necessary if America did pro-growth reforms such as a lower corporate tax rate, less wasteful spending, and reduced red tape?

There are thousands of hard-working Americans that have lost jobs because of foreign competition. At some level, this is natural in a dynamic economy, much as candle makers lost jobs when the light bulb was invented. But oftentimes American producers can’t meet the challenge of foreign competition because of bad policy from Washington. When I think of ordinary Americans that have lost jobs, I direct my anger at the politicians in DC, not a foreign company or foreign workers.

5. Do you think protectionism would help, in the long run, if we don’t implement pro-growth reforms?

If we travel down the path of protectionism, politicians will use that as an excuse not to implement pro-growth reforms. This condemns America to a toxic combination of two bad policies – big government and trade distortions. This will destroy far more jobs and opportunity that foreign competition.

6. Do you recognize that, by creating the ability to offer special favors to selected industries, protectionism creates enormous opportunities for corruption?

Most protectionism in America is the result of organized interest groups and powerful unions trying to prop up inefficient practices. And they only achieve their goals by getting in bed with the Washington crowd in a process that is good for the corrupt nexus of interest groups-lobbyists-politicians-bureaucrats.

7. If you don’t like taxes, why would you like taxes on imports?

A tariff is nothing but a tax that politicians impose on selected products. This presumably makes protectionism inconsistent with the principles of low taxes and limited government.

8. Can you point to nations that have prospered with protectionism, particularly when compared to similar nations with free trade?

Some people will be tempted to say that the United States was a successful economy in the 1800s when tariffs financed a significant share of the federal government. That’s largely true, but the nation’s rising prosperity surely was due to the fact that we had no income tax, a tiny federal government, and very little regulation. And I can’t resist pointing out that the 1930 Smoot-Hawley tariff didn’t exactly lead to good results.

We also had internal free trade, as explained in this excellent short video on the benefits of free trade, narrated by Don Boudreaux of George Mason University and produced by the Institute for Humane Studies.

My closing argument is that people who generally favor economic freedom should ask themselves whether it’s legitimate or logical to make an exception in the case of foreign trade.

Eight Questions for Protectionists is a post from Cato @ Liberty - Cato Institute Blog

Last week I blogged about Sen. Dianne Feinstein’s (D-CA) proposal to devote $20 billion of the Export-Import Bank’s funds to promoting manufacturing exports, and why that was a bad idea.

But I realize that my recent call to “X Out the Ex-Im Bank” will be facing some very entrenched interests in Washington, and some well-funded lobby groups. The Bank has historically attracted bipartisan support, and a renewal of its charter sailed through the House Committee on Financial Services earlier this year. The Washington establishment loves this program.

My friend and long-time Ex-Im Bank supporter Gary Hufbauer of the Peterson Institute for International Economics published a critique a few weeks ago of my analysis, and calls for a doubling of Ex-Im’s authorization cap (from $100 billion to $200 billion). His piece is a fair characterization of my arguments, and at least Gary tries to counter them with actual facts and analysis (not always a given in an increasingly poisonous trade policy environment).  But it seems to me that Gary focuses his critique on my assessment of the effectiveness of the Bank. That’s fair enough, of course, but I tried in my paper to make the point that the efficiency or efficacy of the Ex-Im Bank’s activities is kind of irrelevant. The important point, which Gary did not address, is that it is simply not the proper role of the federal government to be in this business at all, even if they can operate “efficiently” (which I do not concede in any case). Where in the Constitution is the federal government authorized to be involved in the export credit business (a business, by the way, that benefits mainly large, profitable companies)?

My opposition to the Bank, in other words, is at a more fundamental level.  On an empirical level—and this is where Gary’s critique is focused—can markets work well enough in trade finance, and if not, can government intervention work better? Gary points to the Bank’s low default rate as evidence that private markets are missing good opportunities:

These figures suggest that the Ex-Im Bank plays a large role in facilitating exports to countries that encounter reluctance from private banks but nonetheless are not ‘bad risks.” Judging by its low default rate, the Ex-Im Bank’s risk assessment seems more correct than the private market.

But I would argue that its low default rate suggests the Ex-Im Bank’s backing is unnecessary. We don’t know that private credit wasn’t available to finance those exports. And even if it wasn’t, private credit not always being available on terms that the trading partners would like does not necessarily signify market failure. So a finance company missed an opportunity that may have paid out. So what? Maybe they had even better opportunities available to them that we (and bureaucratic Washington) don’t know about, or they simply wanted to hold on to their capital for future investment or to meet new reserve standards. The would-be exporter might miss out, but government intervention to direct that private capital (either through mandates, or siphoning it through the Ex-Im Bank) would come at another producer’s or bank shareholders’ expense.

Gary argues that:

Ex-Im’s capability should be strengthened so that the United States can respond when official finance offered by other countries violates the principles of fair competition…Successful multilateral negotiations…are certainly a superior option to tit-for-tat retaliation…[but]…without sufficient leverage…it is difficult to see what will bring China and India to the negotiating table.

But will China and India (and others) see higher Ex-Im funding as “leverage” to bring them to the table, or will it be seen as just the next step in the escalating arms race of subsidized export credit? I suspect, and fear, the latter.

Gary rejects my call to dismantle the Ex-Im Bank, and in fact suggests the government increase the scope of Ex-Im financing to cover 5 percent (rather than the current 2 percent) of total U.S.exports. That seems pretty arbitrary to me. Why stop at 5 percent? Heck, with the Ex-Im Bank being “self-financing” and all, why not go for 100 percent?

Lastly, Gary repudiates my “orthodox free-market reasoning” and the suggestion, attributed to me, that “… the dollar exchange rate alone determines the volume of U.S. exports or the size of the U.S. trade deficit.”  Exchange rates do not equilibrate to keep trade balances at zero, but to keep them in line with the savings and investment balance. The United States has been running persistent deficits because savings has fallen short of investment for many years.

Similarly, Gary takes issue with my analysis on the net effect of Ex-Im financing on jobs:

 …nor do we agree that free markets are sufficiently self- regulating to ensure a constant and low rate of unemployment…If [that proposition] described the American economy, the United States [unemployment would not be stuck at 9 percent-plus.

Here Gary seems to ignore the many interventions in labor markets that can keep unemployment high, no matter what the exchange rate. I’m certainly not under any illusions that the U.S. economy would be totally free market were it not for the existence of the Ex-Im Bank, and I don’t think my paper implied that, either.

Gary and I, not to mention others who study the Ex-Im Bank, will no doubt continue to debate these issues as the Ex-Im Bank’s charter expiry date comes closer.

More on the Ex-Im Bank is a post from Cato @ Liberty - Cato Institute Blog

I’ve commented on the failure of Obamanomics, with special focus on how both banks and corporations are sitting on money because the investment climate is so grim. Not exactly flattering to the White House.

Using Minneapolis Federal Reserve data, I’ve compared the current recovery with the expansion of the early 1980s. Once again, not good news for the Obama administration.

And I’ve shared a couple of cartoons — here and here — that use humor to show the impact of bad public policy.

But here’s a Bloomberg story that provides what may be the most damning evidence that the President’s big government agenda is a failure:

U.S. regulators have asked some banks to take more deposits from large investors even if it’s unprofitable, and lenders in return are seeking relief on insurance premiums and leverage ratios, according to six people with knowledge of the talks.

Deposits are flooding into the biggest U.S. banks as customers seek shelter from Europe’s debt crisis and falling stock prices. That forces lenders to raise capital for a growing balance sheet and saddles them with the higher deposit insurance payments. With short-term interest rates so low, it’s hard for financial firms to reinvest the new money profitably.

…At least one firm, Bank of New York Mellon Corp., tried to recoup some of the costs by charging depositors 13 basis points, or 0.13 percent, for holding unusually high balances.

Let’s think about what this article is really saying. Banks normally make money by attracting deposits and then lending that money to people and businesses that have productive uses for the funds.

Yet the economy is so weak that banks are leery of taking more money. The story is complicated by other factors, including capital flight  from Europe, taxes (or premiums) imposed by the Federal Deposit Insurance Corporation, and various regulatory issues. But even with these caveats, it’s still remarkable that banks want to turn down money — or charge people for making deposits. That’s sort of like McDonald’s turning away customers because the firm loses money by selling Big Macs and french fries. Or, better yet, like McDonald’s turning away free goods from suppliers because not enough people want to buy the final product.

An Amazing Indictment of Obamanomics: Banks That Don’t Want Deposits is a post from Cato @ Liberty - Cato Institute Blog

For both political and policy reasons, the left is desperately trying to maneuver Republicans into going along with a tax increase. And they are smart to make this their top goal. After all, it will be very difficult – if not impossible – to increase the burden of government spending without more revenue coming to Washington.

But how to make this happen? President Obama is mostly arguing in favor of class-warfare tax increases, but that’s a non-serious gambit driven by 2012 political considerations. Moreover, there’s presumably zero chance that Republicans would surrender to higher tax rates on work, saving, and investment.

The real threat is back-door hikes resulting from the elimination and/or reduction of so-called tax breaks. The big spenders on the left are being very clever about this effort, appealing to anti-spending and pro-tax reform sentiments by arguing that it is important to get rid of “tax expenditures” and “spending in the tax code.”

I recently warned, however, that GOPers shouldn’t fall for this sophistry, noting that “If legislation is enacted that results in more money coming into Washington, that is a tax increase.” I also explained that tax breaks are not spending, stating that “When politicians tax (or borrow) money from one person and give it to another, that’s government spending. But if politicians allow a person keep more of their own money, that’s a tax cut.”

To be sure, the tax code is riddled with inefficient and corrupt loopholes. But those provisions should be eliminated as part of fundamental tax reform, such as a flat tax. More specifically, every penny of revenue generated by shutting down tax preferences should be used to lower tax rates. This is a win-win situation that would make America more prosperous and competitive.

It’s also important to understand what’s a loophole and what isn’t. Ideally, you determine special tax breaks by first deciding on the right benchmark and then measuring how the current tax system deviates from that ideal. That presumably means all income should be taxed, but only one time.

So what can we say about the internal revenue code using this neutral benchmark? Well, there are lots of genuine loopholes. The government completely exempts compensation in the form of employer-provided health insurance, for instance, and everyone agrees that’s a special tax break. There’s also the standard deduction and personal exemptions, but most people think it’s appropriate to protect poor people from the income tax (though perhaps we’ve gone too far in that direction since only 49 percent of households now pay income tax).

Sometimes the tax code goes overboard in the other direction, however, subjecting some income to double taxation. Indeed, because of the capital gains tax, corporate income tax, personal income tax, and death tax, it’s possible for some types of income to be taxed as many of three or four times.

Double taxation is a special tax penalty, which is the opposite of a special tax break. The good news is that there are some provisions in the tax code, such as IRAs and 401(k)s, that reduce these tax penalties.

The bad news is that these provisions get added to “tax expenditure” lists, and therefore get mixed up with the provisions that provide special tax breaks. This may sound too strange to be true, but here’s a list of the biggest so-called tax expenditures from the Tax Policy Center (which is a left-leaning organization, but their numbers are basically the same as the ones found at the Joint Committee on Taxation).

Since this post already is too long, I’ll close by simply noting that items 2, 4, 7, 8, 11, and 12 are not loopholes. They are not “tax expenditures.” And they are not “spending in the tax code.” Every one of those provisions is designed to mitigate a penalty in the tax code.

So even if lawmakers have good motives (i.e., pursuing real tax reform such as the flat tax) when looking to get rid of special tax breaks, they need to understand what’s actually a loophole.

But since politicians rarely have good motives, there’s a real threat that they will take existing tax penalties and make them even worse. That’s another reason why tax increases should be a non-starter.

The “Tax Expenditure” Con Job is a post from Cato @ Liberty - Cato Institute Blog

I touched a raw nerve with my post about Fidel Castro admitting that the Cuban model is a failure. Matthew Yglesias and Brad DeLong both attacked me. DeLong’s post was nothing more than a link to the Yglesias post with a snarky comment about “why can’t we have better think tanks?” Yglesias, to his credit, tried to explain his objections.

This leads Daniel Mitchell to post the following chart which he deems “a good illustration of the human cost of excessive government.”…this mostly illustrates the difficulty of having a rational conversation with Cato Institute employees about economic policy in the developed world. Cuba is poor, but it’s much richer than Somalia. Is Somalia’s poor performance an illustration of the human costs of inadequate taxation? Or maybe we can act like reasonable people and note that these illustrations of the cost of Communist dictatorship and anarchy have little bearing on the optimal location on the Korea-Sweden axis of mixed economies?

I’m actually not sure what argument Yglesias is making, but I think he assumed I was focusing only on fiscal policy when I commented about Cuba’s failure being “a good illustration of the human cost of excessive government.” At least I think this is what he means, because he then tries to use Somalia as an example of limited government, solely because the government there is so dysfunctional that it is unable to maintain a working tax system.

Regardless of what he’s really trying to say, my post was about the consequences of excessive government, not just the consequences of excessive government spending. I’m not a fan of high taxes and wasteful spending, to be sure, but fiscal policy is only one of many policies that influence economic performance. Indeed, according to both Economic Freedom of the World and Index of Economic Freedom, taxes and spending are only 20 percent of a nation’s grade. So nations such as Sweden and Denmark are ranked very high because the adverse impact of their fiscal policies is more than offset by their very laissez-faire policies in just about all other areas. Likewise, many nations in the developing world have modest fiscal burdens, but their overall scores are low because they get poor grades on variables such as monetary policy, regulation, trade, rule of law, and property rights. This video has more details.

So, yes, Cuba is an example of “the human cost of excessive government.” And so is Somalia.

Sweden and Denmark, meanwhile, are both good and bad examples. Optimists can cite them as great examples of the benefits of laissez-faire markets. Pessimists can cite them as unfortunate examples of bloated public sectors.

P.S. Castro has since tried to recant, claiming he was misquoted. He’s finding out, though, that it’s not easy putting toothpaste back in the tube.

Why Are Statists so Sensitive About Cuba? is a post from Cato @ Liberty - Cato Institute Blog

The “appearance of impropriety” is often considered the Washington standard for corruption and misbehavior. With that in mind, alarm bells began ringing in my head when I read this Washington Times report about Jacob Lew, Obama’s nominee to head the Office of Management and Budget. A snippet:

President Obama’s choice to be the government’s chief budget officer received a bonus of more than $900,000 from Citigroup Inc. last year — after the Wall Street firm for which he worked received a massive taxpayer bailout. The money was paid to Jacob Lew in January 2009, about two weeks before he joined the State Department as deputy secretary of state, according to a newly filed ethics form. The payout came on top of the already hefty $1.1 million Citigroup compensation package for 2008 that he reported last year. Administration officials and members of Congress last year expressed outrage that executives at other bailed-out firms, such as American International Group Inc., awarded bonuses to top executives. State Department officials at the time steadfastly refused to say if Mr. Lew received a post-bailout bonus from Citigroup in response to inquiries from The Washington Times. But Mr. Lew’s latest financial disclosure report, provided by the State Department on Wednesday, makes clear that he did receive a significant windfall. …The records show that Mr. Lew received the $944,578 payment four days after he filed his 2008 ethics disclosure.

Why did Citigroup decide to hire Lew, a career DC political operator, for $1.1 million? As a former political aide, lobbyist, lawyer, and political appointee, what particular talents did he have to justify that salary to manage an investment division? Did the presence of Lew (as well as other Washington insiders such as Robert Rubin) help Citigroup get a big bucket of money from taxpayers as part of the TARP bailout? Did Lew’s big $900K in 2009 have anything to do with the money the bank got from taxpayers? Is it a bit suspicious that he received his big windfall bonus four days after filing a financial disclosure?

See if you can draw any conclusion other than this was a typical example of the sleazy relationship of big government and big business.

Lest anyone think I’m being partisan, let’s now look at another story featuring Senator Richard Shelby. The Alabama Republican and his former aides have a nice relationship that means more campaign cash for him, lucrative fees for them, and lots of our tax dollars being diverted to such recipients as the state’s university system. Here are some of the sordid details:

Since 2008, Alabama Sen. Richard Shelby has steered more than $250 million in earmarks to beneficiaries whose lobbyists used to work in his Senate office — including millions for Alabama universities represented by a former top staffer. In a mix of revolving-door and campaign finance politics, the same organizations that have enjoyed Shelby’s earmarks have seen their lobbyists and employees contribute nearly $1 million to Shelby’s campaign and political action committee since 1999, according to federal records. …Shelby’s earmarking doesn’t appear to run afoul of Senate rules or federal ethics laws. But critics said his tactics are part of a Washington culture in which lawmakers direct money back home to narrow interests, which, in turn, hire well-connected lobbyists — often former congressional aides — who enjoy special access on Capitol Hill.

Some people think the answer to such shenanigans is more ethics laws, corruption laws, and campaign-finance laws, but that’s like putting a band-aid on a compound fracture. Besides, it is quite likely that no laws were broken, either by Lew, Citigroup, Shelby, or his former aides. This is just the way Washington works, and the beneficiaries are the insiders who know how to milk the system. The only way to actually reduce both legal and illegal corruption in Washington is to shrink the size of government. The sleaze will not go away until politicians have less ability to steer our money to special interests — whether they are Wall Street banks or Alabama universities. This video elaborates:

Are These Examples of Washington Corruption? is a post from Cato @ Liberty - Cato Institute Blog

Free markets are characterized by voluntary exchange between buyers and sellers. Mapping that relationship is absurdly simply, as this image indicates.

Indeed, the only reason I even bothered to include that image was for purposes of comparison. Here is a new flowchart prepared for the Joint Economic Committee showing the healthcare system under Obamacare.

It’s worth noting, by the way, that the system already was a disaster even before Obamacare was enacted. In the health care sector, free markets are only allowed to operate in very rare cases, such as cosmetic surgery, laser eye surgery, and (for better or worse) abortion. The rest of the sector was heavily distorted by government intervention. Obamacare simply makes a bad situation worse.

Obamacare Complexity vs Free Market Simplicity is a post from Cato @ Liberty - Cato Institute Blog

Even though the Obama Administration claimed that squandering $800 billion on so-called stimulus would  keep the joblessness rate below 8 percent, the unemployment rate today is almost 10 percent. There are many reasons for the economy’s tepid performance, including a larger burden of government spending and the dampening effect of future tax rate increases (tax rates will jump significantly on January 1, 2011, when the 2003 tax cuts expire).

A closer look at the unemployment data, though , suggests that minimum wage laws also deserve a big share of the blame. In this Center for Freedom and Prosperity video, a former intern of mine (continuing a great tradition) explains that politicians destroyed jobs when they increased the minimum wage by more than 40 percent over a three-year period.

Mr. Divounguy is correct when he says businesses are not charities and that they only create jobs when they think a worker will generate net revenue. Higher minimum wages, needless to say, are especially destructive for people with poor work skills and limited work experience. This is why young people and minorities tend to suffer most – which is exactly what we see in the government data, with the teenage unemployment rates now at an astounding (and depressing) 26 percent level and blacks suffering from a joblessness rate of more than 15 percent.

In a free society, there should be no minimum wage law. From a philosophical perspective, such requirements interfere with the freedom of contract. In the imperfect world of politics, thought, the best we can hope for is that politicians occasionally do the right thing. Sadly, the recent minimum wage increases that have done so much damage were signed into law by President Bush. It’s worth noting that President Obama’s hands also are dirty on this issue, since he supported the job-killing measure when it passed the Senate in 2007. When the stupid party and the evil party both agree on a certain policy, that’s known as bipartisanship. In the real world, however, it’s called unemployment.

Minimum Wage Hikes Deserve Share of Blame for High Unemployment is a post from Cato @ Liberty - Cato Institute Blog

Over at CongressDaily, Julie Rovner has a great piece on the difficulties involved in generating and using comparative-effectiveness research (read: evidence that can improve the quality and reduce the cost of medical care). Rovner cites a recent New England Journal of Medicine article about the obstacles to conducting CER, and a recent article from Health Affairs that finds consumers tend to trust their doctor’s judgment more than evidence-based treatment guidelines.

In a paper titled, “A Better Way to Generate and Use Comparative-Effectiveness Research,” I explain how a string of government interventions — from state licensing of medical professionals and health insurance, to the tax preference for job-based health insurance, to Medicare and Medicaid — have reduced both patients’ demand for evidence about which medical interventions work best, as well as the market’s ability to supply that evidence.  In that paper, I predict that efforts like the CER funding in the “stimulus” bill and ObamaCare’s “Patient-Centered Outcomes Research Institute” will fail, just as all such government efforts have failed in the past.

If you want to generate evidence about which medical interventions work best, and have people use that evidence, then you need to liberalize the U.S. health care sector.

You Say You Want Comparative-Effectiveness Research? is a post from Cato @ Liberty - Cato Institute Blog

Tim Carney has a blog post at the Examiner that’s worth quoting in full:

The U.S. Chamber of Commerce has issued its 2009 congressional scorecard, and once again, Rep. Ron Paul, R-Tex. — certainly one of the two most free-market politicians in Washington — gets the lowest score of any Republican.

Paul was one of a handful of GOP lawmakers not to win the Chamber’s “Spirit of Enterprise Award.” He scored only a 67%, bucking the Chamber on five votes, including:

• Paul opposed the “Solar Technology Roadmap Act,” which boosted subsidies for unprofitable solar energy technology.
• Paul opposed the “Travel Promotion Act,” which subsidizes the tourism industry with a new fee on international visitors.
• Paul opposed the largest spending bill in history, Obama’s $787 billion stimulus bill.

(Rep John Duncan, R-Tenn., tied Ron Paul with 67%. John McHugh, R-N.Y., scored a 40%, but he missed most of the year because he went off to the Obama administration.)

I wrote about this phenomenon last year, when the divergence was even greater between the Chamber’s agenda and the free-market agenda:

Similarly, Texas libertarian GOPer Rep. Ron Paul—the most steadfast congressional opponent of regulation, taxation, and any sort of government intervention in business—scored lower than 90% of Democrats last year on the Chamber’s scorecard.

Sen. Jim DeMint, R-S.C., had the most conservative voting record in 2008 according to the American Conservative Union (ACU), and was a “taxpayer hero” according to the National Taxpayer’s Union (NTU), but the U.S. Chamber of Commerce says his 2008 record was less pro-business than Barack Obama, Joe Biden, and Hillary Clinton.
This year’s picture was less glaring, but it’s still more evidence that “pro-business” is not the same as “pro-freedom.” The U.S. Chamber is the former. Ron Paul, and the libertarian position, is the latter.

I suspect that on issues such as free trade agreements and immigration reform, I might be closer to the Chamber’s position than to Ron Paul’s. But to suggest that Paul is wrong to vote against business subsidies — or that DeMint was wrong to vote against Bush’s 2008 stimulus package and the $700 billion TARP bailout – certainly does illustrate how much difference there can be between “pro-business” and “pro-market.” Instead of “Spirit of Enterprise,” the Chamber should call these the “Spirit of Subsidy Awards.”

Ron Paul, the Chamber of Commerce, and Economic Freedom is a post from Cato @ Liberty - Cato Institute Blog

Recently I wrote an article arguing that there never was a golden age of liberty and that in particular libertarians should not hail 19th-century America as a small-government paradise, at least not without grappling with the massive problem of slavery. Jacob Hornberger, author of an article that I criticized, responded in Reason, and I then responded here. Meanwhile, an interesting discussion took place on a email list of libertarian scholars, and I’m pleased to have gotten the permission of several participants to include some of that discussion here:

Aeon J. Skoble: The ideals of freedom which led to the tangible improvements [Boaz] mentions – I’m concerned that those ideals are eroding/have eroded.  Example: say you have a robust theory of rights, but your society denies rights to women.  That’s a contradiction, and the strength of your rights theory contains the foundation for protesting the injustice and remedying it.  But if you don’t even have a robust rights theory in the first place, there’s no foundation for complaining about lost liberty.  So my concern is that, all the good progress notwithstanding, liberty as an ideal is weaker than it once was.  One thing that’s widespread, e.g., is the constant conflation of positive rights and negative rights.  And at the same time that positive rights are being accorded the status of negative rights, negative rights are increasingly being viewed as encroachable.

David Mayer: In terms of economic liberty and property rights, Americans today are certainly far less free than they were a century ago, or even two centuries ago.  What was once a vast realm of human activity that American law left to individuals’ freedom of contract (the whole realm of business activity as well as personal life, in terms of what substances individuals may choose to ingest in their own bodies, the wages and hours they can work, whom they can hire or fire, to whom they can sell their property or refuse to sell their property, etc., etc.), has now been almost wholly subjected to the dictates of government, thanks to the rise of the 20th century regulatory / welfare state.  Business owners today (to pick one obvious category of Americans – arguably, the most important category, if as I do, you agree with Calvin Cooolidge’s maxim, “The business of America is business”) are certainly far less free today than they were 100 years ago (before the “Progressive” era), or 70 years ago (before the “New Deal revolution”), or 50 years ago (before the “Civil Rights movement” and the various federal anti-discrimination laws), or 20 years ago (before, say, enactment of the Americans with Disabilities Act) – or even a year ago (before enactment of the Democrats’ health insurance nationalization law).

Glenn Reynolds: I think that David’s piece is useful in another way:  If your narrative is one in which freedoms are always shrinking, and government always growing, it may tend to discourage people from working to make things better.  I see a lot of that kind of thing from people on the Right, and it irritates me no end.  I remember when the passage of the assault weapons ban was presented as just another downward ratchet in freedom, and yet now the gun issue is such that even lefty Dems are for the most part unwilling to touch it.  That, it seems to me, is an example of how freedom can expand even in the comparatively short term.

Steve Horwitz: The way I see this is that we’re trying to answer the question “Are we more free?”  To do so, we need to address both the “we” and the “free” pieces.  I read David as making two points:  1) We need to think carefully about the “we” and recognize, as we all have noted, the major gains in freedom for non-white, non-males (and maybe non-Christians too).  2) But he was also saying there are more freedoms in the calculus than the economic.  Even white men are freer along a number of dimensions than they were in the 19th century, when one takes the social realm seriously.  Some folks have noted those.

My own view is that one can look at this in the economist’s old tool:  the 2 x 2 matrix:

economic freedoms        social freedoms

White men           notable losses            good-sized gains

Others                       huge gains                    huge gains

I think by any accounting, the NW quadrant is smaller than the sum of the others.  We can debate over how much smaller, but if we could somehow aggregate these freedoms, I think there’s no question the total amount of freedom per capita is bigger today than “before.”

Mark LeBar: Speaking for myself, I don’t think it’s a matter of economic vs. other freedoms. If I were to put my finger on what I would say seems to me most significant in thinking the losses in NW swamp whatever gains there are elsewhere, I would say it has to do with the loss of respect for contract. That’s not to say there are no gains: as others have pointed out, 2 centuries ago I could not have contracted with women, or Africans, and to the extent non-whites and non-males have been accepted to the relevant moral community, that is indeed an expansion of my liberty as well as theirs. But, as I noted earlier, my authority to bind myself in ways that are not subject to veto by the state is a shadow of what it once was. I won’t enumerate the list again. But not only is that list much smaller, the rightfulness of the state to determine just how much smaller it may be continues to expand virtually without pause, as those on this list will need no reminder. I would say there has been a sea-change from the idea (however imperfectly implemented) that the flow of authority goes from individuals to the state, to just about exactly the opposite. And that is simply a catastrophic loss to liberty, not just for white males, but for everybody. It’s hard for me to see that there can be good reasons for rejecting either the claim that the authority relation is now generally seen as running the other way, or that that amounts to a massive loss of liberty. And I don’t see imminent prospects for broad change in those attitudes. Hence the pessimism.

David Olson: I think that perhaps I am missing something. In reading today’s exchange, I thought that people were working toward a consensus that had largely been reached and summarized by Steven’s email. But now Mark writes that liberty gains to everyone but straight white Christian males are swamped by the liberty losses to white males (and to hypothetical non-whites and females compared to the liberty they might have enjoyed if they’d had full equality 200 + years ago).

I’m very surprised by this statement. The logic of this would seem to lead to the proposition that it would be better if things were still as they were 200 years ago. Would anyone actually make that statement? If not, is there some value in addition to freedom that people are focusing on in deciding the question? (And let’s take medical and dental care advances out of the question to avoid skewing the answer.)

John Hasnas: I suspect that no one on the list would disagree with the assertion that between the time of the adoption of the Constitution and the present, the political and legal commitment to a government of limited, enumerated powers has greatly declined. I also suspect that no one on the list would disagree with the assertion that a vastly greater proportion of the population enjoys freedom from illegitimate political and legal restrictions and disabilities than was the case at the time of the adoption of the Constitution. Out of this universal agreement, we have managed to manufacture disagreement by asking a vague question that equivocates on the meaning of the word freedom; to wit, “Are we more free?”

It seems pretty obvious that to the extent that we are free, that freedom is much more widely distributed than in the past. It also seems pretty obvious that to the extent that there is less legal protection against the interference of the federal government with our activities, there is less freedom. Beyond this, the value of determining whether we are more “free” in some unspecified sense escapes me.

Aeon Skoble: Actually, I wasn’t asking “Are we more free?” – I conceded David’s claim that we were.  I was expressing some concern over whether the trend will continue positively or negatively, given that the positive and negative senses of freedom are so frequently conflated (not by members of this list, but in general, both in the academy and among the general public), and that in many quarters the very concept of freedom is in disfavor, and the idea that all rights are subject to encroachment by the state, which is more and more thought of as having limitless power.

Steve Horwitz: I agree with Aeon’s concerns.  One way to put it is, as I think Mark LeBar did earlier, even if it’s true that we are collectively (per capita) more free, those gains have come at the weakening of the sacredness of certain principles that affect everyone’s freedom, especially in the long run.  I too share the concern that the last two years have accelerated that process in very problematic ways.

Stephen Davies: There’s actually general agreement here with the broad argument David made but some mild disagreement over the (probably unanswerable) question of whether the aggregate of total freedom is greater or larger. That wasn’t the main thrust of David’s piece as I read it though, he was talking about the implications and consequences of the (clearly wrong imho) line that for liberty it’s been downhill all the way since the later 18th century. This is a common line as we all know and I think its really problematic. As David says it means you come over as indifferent to the undoubted gains made in some areas by various groups and so as only concerned with the position of one subgroup. This may well be wrong but impressions matter. This line also shows a deeply conservative sensibility and mindset. If you are libertarian in the sense of not liking large or expansive government but deeply conservative in other ways (e.g on questions of social hierarchy or relations between the sexes or family organisation) then you will feel that it’s been downhill for a long time. …

I think the real problem though with the approach David criticises is the way it leads you to behave with regard to current events. Basically you are going to see yourself as playing defence all the time and probably as fighting a losing battle against an inexorable tide of rising coercive statism. This means you will come over as angry, negative, and despondent, which are not attractive qualities. Also you will let the other side set the agenda and then respond to them rather than taking the initiative. This means you spend all your time criticising and attacking proposals that are liberty hostile instead of spending most of your time advocating positive liberty enhancing changes. …

Finally, if I could put my historian’s hat on for a minute. We need to distinguish between two different measurements – the size of government (as shown by its share of GDP) and it’s extent or range (as shown by the number of activities or areas of life that are considered to be its concern). In the first case there’s a clear growth (we’ve all seen the graph). Even there there’s Tyler Cowen’s argument that a 40% share of a really big GDP is less bad than a 15% share of a much smaller pie. In the second case there’s been considerable gains as well as losses. Religious belief, observance etc was once seen as the central concern of government. Now it’s a private matter. Governments used to concern themselves with things such as dress, diet and public interactions (under sumptuary laws) and intimate details of people’s sexual behaviour (through both church and secular courts). This is no longer true. OTOH there are clearly areas where there’s been a shift in the wrong direction such as mood altering substances and firearms or where there’s a danger of a bad movement (diet for example).

The following comments are prompted by Jacob Hornberger’s response in Reason.

Brad Smith: Hornberger notes that the concept of what it meant to be free was much broader in the 19th century (something Aeon also touched on).  True, some people were not free – but for those who were, the concept had much more meaning.  That’s why I think one can agree with both perspectives, that freedom has both gained and lost ground in important ways.

Implicitly, Hornberger notes the extent to which government was simply not a presence in the lives of most people.  The average free man could go days, weeks, or even months with no direct contact whatsoever with the government. Hornberger might also have noted that a free man didn’t need a passport to travel, or an operator’s license to drive his wagon, or a license plate for his horse.  In most cases, he didn’t need a building permit to add to his home.   Even laws that might be on the books (but were perhaps not so ubiquitous as many think) laid lightly on people – laws against prostitution, sodomy, polygamy and such.  A gay man in the 19th century might fear great social sanction if his predilections or activities became known, but the idea that the government would interfere with his activities was not really an issue at all, whatever the state code might say.  In the 19th century, one certainly didn’t need to license one’s pets, and one was never harangued by government sponsored advertising to properly cook your eggs or spend time with your children.  Today, for white men and for women and minorities, government permeates every aspect of our lives, essentially 24/7/365.

Even as we have expanded the blessings of freedom to more people, society’s concept of freedom seems to have narrowed tremendously, to where even many self described libertarians seem to think a 39% income tax bracket is pretty darn acceptable.  The boundaries of what it means to be free seem to have retreated, and to have retreated enormously.  Thus, even as more people have benefited from freedom, the long term outlook for freedom seems in many ways much more grim.

Keith E. Whittington: The overseer or master exercised lawful, violent coercive force over the slave on a daily basis and did so with the full support and backing, if necessary, of the government.  Moreover, “the government” (such as slave patrols) often consisted precisely of ad hoc groupings of armed civilians operating under the titular direction of a government official.  And the government wasn’t always willing to stand ready protect people from coercive private groups who wanted to enforce social conformity.  So, on the one hand, some prostitutes might be tolerated if they kept to themselves in the wrong part of town, but on the other hand abolitionist newspapers editors could have their houses burned down and Catholics and Protestants could find themselves becoming armed gangs and rioting to secure their respective neighborhoods.  No level of government had an expansive police force in the 19th century, but that just means that social order was generally maintained by other mechanisms.  It doesn’t necessarily mean that people were free from social order.

Mark LeBar: David is certainly right that slavery and the legal subordination of women are blights on the very institutions that were modeling liberty, and especially for those directly affected it is a gross mistake not to recognize what those changes in law and society mean in gains in liberty. But that is an observation that pretty much any decent person, libertarian or not, can be expected to make. There is a distinctiveness to the point of insisting, as Hornberger and Brad do, that the very liberty that is reaching to more people is radically constrained in many ways. We can grant, it seems to me, that many people are freer in significant ways than they once were, while insisting that the point of liberty itself is in danger of getting lost in the process. That, it seems to me, is a case that libertarians are uniquely in position to make.

Eugene Volokh: Prof. LeBar writes, that “what it means to be free is a shadow of its former self.”  But is that right, even as to white males?  Economic regulation, including of a sort that libertarians much oppose, is not a novel matter.  Neither is taxation (which, to be sure, is at a much higher rate than in the past, but I’m not sure that the precise rate is that much a part of “what it means to be free”).  Neither is regulation of trade.  Neither is restriction on freedom of association.  Neither is regulation of guns.  Neither is regulation of personal behavior; alcohol prohibition first emerged in the U.S., for instance, in the mid-1800s, and of course the regulation of sexual behavior was far greater in the past tan today.

What’s more, all these were favored, I think, by people who believed in freedom, which meant to them (as it does to many lovers of freedom today) freedom subject to at least some constraints aimed at protecting the freedom of others and at protecting the well-being of society.  Liberty has long been respected and fought for by Americans; but that the late 1700s and late 1800s were liberty-loving times doesn’t mean that the legal systems of that era were particularly libertarian as we libertarians would want them to be.  “We all declare for liberty; but in using the same word we do not all mean the same thing.”  I don’t think there’s been a past Golden Age of Liberty, in which freedom was generally accepted as meaning something far deeper and broader than what it means today, even for white men.

Steve Horwitz: I do think part of what’s going on here are two cross-cutting conversations.  Or at least two distinct claims.

1.  “Americans, on the whole, are freer than they were, say, 150 years ago.”

2.  “Government is more obtrusive in a moment-to-moment or day-to-day way than 150 years ago.”

I actually think both of these are true.  The enormous restrictions on the freedom of blacks and women (and others) of 150 years ago, though ultimately backed by the force of the state, did not require the state to be, as it were, “in their faces” on a moment-to-moment basis, as slavery and the second-class status of women were simply part of the institutional furniture (and often policed “privately” as Keith noted and as I noted about domestic violence in my earlier comments).

So it seems to me 1 and 2 are both true if one accepts that slavery and patriarchy don’t require the kind of constant and widespread, if small on each margin, government intervention we have in our own time.

We are collectively more free, I would argue, even though the underlying principles that assured the freedom of those who had such freedom 150 years ago have broken down significantly.

Keith Whittington: There is no doubt that you can run through statutes, court decisions and executive actions in the mid-19th century and compare the total to the mid-20th century and conclude that there is more overall government regulation in the latter than the former.  The latter is more voluminous and more detailed.  My only qualification/concern on this would be to note that while the 19th century regulation is less detailed it could be extremely intrusive (Sunday laws literally shut down all commercial, social and transportation activity in large parts of several states during parts of the 19th century) and that formal government activity was supplemented with informal private activity that was equally stultifying.  Without a robust vision of individual self-ownership, to borrow from Mark, that combination of social and governmental regulation could be extremely restrictive of anything we would want to recognize as individual liberty.  The battle for the idea of individual liberty, as well as the legal and social reality of it, was an on-going one throughout the 19th and 20th centuries, and I’m not confident how you net out the debits and credits.

Glen Whitman: Might it be helpful to ask why so many libertarians and conservatives want to say that America used to be more free than it is now?

Aside from sheer misplaced patriotism (which I’m sure is a big piece of the story), I think it comes from the desire to have an answer to the question, so often posed by statists, “When has a laissez-faire system ever worked?”  Rather than saying, “I’m advocating an untested idea,” we’d like to be able to say, “Yes, laissez-faire has indeed worked.”

And is that really wrong to say?  I think that with respect to specific issues, we can say that (a) the U.S. was freer before, and (b) somehow the country didn’t go to hell in a handbasket.  We can say, for instance, that drugs used to be largely legal and we didn’t become a nation of useless addicts.  We can say that labor markets functioned without extensive regulation.  (Of course, blacks and women were often excluded from those markets — but I’d say the markets functioned *despite* their exclusion, not because of it.)  We can say that there wasn’t a welfare state, and private charities and mutual aid societies did a fine job of helping those who fell on hard times.

None of which refutes David’s point.  Some groups were markedly less free, and everyone was less free in certain ways.  But that doesn’t mean we can’t sometimes point to history as a guide, which I suspect is what we really want.

Stephen Davies: I think Glen makes an important point here. Quite apart from the argument about how to quantify or compare different restrictions on liberty at different times and in different areas of lie is the question of rhetoric. Why present the story of liberty in the US as one of a decline from a golden age rather than as a story of slow growth in a positive direction or (my own favourite) one of decline in some areas and growth in others? Apart from the reason he gives I think one reason is the dominance of the jeremiad as a form of political argument. This isn’t confined to libertarians of course, in fact it seems sometimes that every political persuasion thinks things are going to the dogs. I think it’s a bad strategy however as well as being questionable.

I do think Mark and Aeon are on to something however in saying that there’s been a decline in the ideal of self-government or at least in the degree to which it’s articulated and the extent to which it’s understood as a complex idea rather than just a matter of doing your own thing. It was a much thicker concept in times past partly because it was associated with lots of other ideas of psychology (the notion of character) and sociology for example – there was a strongly held idea that you couldn’t be fully self-governing or independent if you were not economically self supporting and so the idea of freedom was tied in with all sorts of other ideas.

If you look outside the US, Dicey made the argument towards the end of the nineteenth century that there’d actually been a movement away from intrusive paternalistic regulation in the earlier nineteenth century followed by the growth of a new kind of intrusive state action after the later 1880s. He ralated this to public opinion which for him meant widely held but often unarticulated notions, beliefs and understandings on the part of the population at large or at least the politically active part of it. This kind of account makes more sense to me, particularly if you combine it with an approach that says that while freedom may have increased for some groups it declined for others and that at any one time it was growing in some areas of life while being in recession elsewhere. Complicated and messy but that’s history for you.

Loren Lomasky: To the extent that a consensus emerges in preceding comments it’s that the losses of liberty to white males over the past century or two are juxtaposed against liberty gains for people of color, women, some marginalized others.  Enjoying somewhat less than a genuinely full consensus is the proposition that on the liberty ledger the minuses of the former class are outweighed by the pluses of the latter.

Because the balance seemed so patent to me, I’ve said nothing previously.  I now wish to add, though, that it is far from obvious that even establishment white males suffered a liberty deficit over this period, and that not just because of gains with regard to social freedom but even with regard to core economic liberty.  Each of the following is an enormous gain for liberty:

1) The capacity to pursue one’s ends with willing others by forming corporations without any need of special legislative grants;

2) Rights of workers to associate freely with each other in pursuit of economic advancement  (unions, etc.)

3) Military services now performed by paid professionals who volunteer for the job rather than via a draft.

I could go on, but these themselves are not trivial.  Each is orders of magnitude more significant on the plus side than, say, Obamacare is on the negative.  An enormous number of state actions piss me off, but not to the extent that they blind me to the evident truth that the history of the United States since 1776 is a history of liberty in ascendance.

David Mayer: Albert Venn Dicey’s Law and Public Opinion in England in the Nineteenth Century does indeed identify a “golden age” for liberty, in (roughly) the middle third of the 19th century, when (according to Dicey’s analysis) classical liberal ideas were the dominant opinion (in terms of public policy).  That was a “golden age,” in Britain, because it was sandwiched in between (again, according to Dicey’s analysis) a period of “Old Tory” paternalism (the early 19th-century, continuing from the 18th century) and a period of “collectivism,” or socialism (with the rise of the late-Victorian-era welfare state in Britain, in the last third of the 19th century and continuing into the 20th century).

U.S. history is quite different.  We were founded as, essentially, a classical liberal nation:  the American Revolution was based on “radical Whig” ideas – the same ideas that so influenced British public policy during its classical liberal reform period (for example, many of the mid-18th-century radical Whigs who were friends of American independence – men like John Cartwright – were also leaders in the Parliamentary reform movement, culminating in the Reform Act of 1832).  But, as I have written elsewhere (see my essay on “Completing the American Revolution” (my Atlas Shrugged 50th anniversary essay) in Journal of Ayn Rand Studies, Spring 2008) the American “liberal” revolution of 1776 was far from complete.  Sure, we founded government explicitly on the protection of individual rights, and we instituted written constitutions to help limit the power of government (a huge advance in the history of world “political science”).  But, of course, as David and other participants in this discussion have noted, we did not consistently implement the “new science of politics” implied by the principles of 1776:  not only did we retain the institution of slavery and denied full legal equality to women but, in many ways, we retained in the law (mostly in the English common law as received and only slightly modified in American law) much of the older, paternalistic role of government that England had had for centuries and that had been brought over to the English colonies in America.  (One simple example:  the notion that government may regulate prices of businesses “affected with a public interest” – a concept from English law (one that in the early 17th century was used by apologists for royal absolutism to justify various kinds of economic regulations by the King’s government) not only survived in early American law but was used by the U.S. Supreme Court, in its 1877 decision in Munn v. Illinois, to justify government fixing of maximum rates for certain businesses – and ultimately, in the 20th century, to justify all sorts of needless government licensing and other restrictions on businesses.)

So, it’s quite true (as several participants in the discussion have noted) that there’s not been really any single “golden age” for liberty in the history of the United States.  Depending on how you measure it (by the size of government, the magnitude of taxes and spending, or the variety of forms of “legal paternalism,” for example), or what aspect you’re focused on (“economic” liberty versus “personal” liberty, for example, notwithstanding the artificiality of that distinction), or whose liberty you’re focusing on (business owners versus workers and/or consumers, men vs. women, whites vs. blacks, native-born Americans vs. immigrants, etc.), there’s no clear pattern:  liberty (as a whole) is at once on the ascendance, on the decline, and staying about even, in the American “mixed bag” of freedom/paternalism.  But (if I might be permitted to return to the main point of my original post) there’s little doubt that government regulation of business – government interference with the free market – at all levels, and especially at the national level, has been steeply rising, and thus a very important aspect of liberty (economic freedom) has been steeply falling, since the rise of the “progressive” regulatory/ welfare state in the early 20th century.  That part of American history (the past century or so) most closely resembles the age of “collectivism,” or socialism, that Dicey identified in Britain in the latter third of the 19th century.

Was There a Libertarian Golden Age? is a post from Cato @ Liberty - Cato Institute Blog

The March-April issue of Cato Policy Report featured a discussion among Timothy Carney, Uwe Reinhardt, and Ross Douthat of Carney’s book Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. The tenor of the discussion was reflected in the title, ”Big Business, Big Government, and Libertarian Populism.” Richard L. Gordon, a distinguished economist emeritus at Pennsylvania State University and a Cato adjunct scholar, took strong issue with all three commenters and sent us the following rebuttal, which we’re pleased to publish here:

The March/April Cato Policy Report covered a January 2010 Cato Book Forum on Timothy P. Carney’s Obamanomics. Carney summarized his book and there were responses from Uwe Reinhardt, a Professor at Princeton noted for advocacy of strong government intervention in health care, and Ross Douthat, a (first-year) New York Times columnist, a self-styled conservative who (from scanning his columns) seems a weak one. The result was three tirades about how big business runs government. It is surprising in the twenty-first century to see outside of WhiteHouse.gov, movies, and television dramas such naïve attacks on the power of big business. This is not the libertarianism that I know. However, superficially plausible dominance theories are too convenient not to revive frequently, regardless of enormous refutations. Thus, some key, familiar points need recollection.

The charge of big-business dominance has at least three flaws. First, it is a myth. Politicians created the massive growth of government with more input from intellectuals than from business executives. Second, it reverses causation; government ensnares industry. Third, it is absurd since big business, however defined, consists of diverse, often conflicting companies.

Much, including the most problematic, expansion of government, has almost nothing to do with big business and is certainly not what any big (or small) firms would want. The entitlements explosion is in social security, government-employee pensions, Medicaid, and Medicare. The first is notoriously a shifting of savings from private firms to an entirely government-run program with a rigid reliance on treasury paper debt whose repayment is dubious. Other government pension plans do invest in the private sector so they rely somewhat on private firms. Again, this only displaces what individuals would have done for themselves, despite the fears of libertarian interventionists.

The messes that are Medicaid and Medicare do involve among many others big businesses in pharmacy and medical insurance. In the latter case, the non-profit Blue Cross and Blue Shield companies are major, often dominant factors. The other, more important participants are the large number of separate medical providers and hospitals. The final involved sector is much of American business. To lessen the impact of World-War II wage and price controls, the U.S. government extended to medical insurance the legal fiction used for Social Security that part of insurance costs could be called “employer contributions” and not considered income subject to personal income tax. Basic economic theory amply confirmed by empirical research shows that these payments are labor costs and lead to reduced direct compensation.

The result is a system in which payment is widely separated from decisions about medical procedures. Physicians err on the side of ordering additional tests because they know that neither they nor the patient directly incur the costs. (The fear of lawsuits may increase that bias, but it is unclear that tort reform without reform of insurance provision would make a big difference.) The prime fault of Obama care is that it reinforces, rather than lessens, the separation of patient from payee. This again is hardly an ideal for business.

Even more obviously, another great problem area, education, suffers from a government takeover so ancient and thorough that only specialists are aware of its existence. The federal government increasingly intervenes into pre-college education. Since World War II, all government has greatly expanded its role in higher education to the extent that the great private universities are heavily government dependent. Congress tacked on to the health-care bill the total government takeover of college loans. Only a lunatic would postulate that any of this is due to a big-business conspiracy to control minds, particularly given the massive leftward tilt of academia.

The largest non-entitlement component of the federal government, defense, does notoriously, in part, involve an excessively cozy relationship with suppliers. However, spending for equipment is dwarfed by direct and indirect personnel costs. The spending on equipment, like many government decisions, is distorted by Congressional obsession with bringing jobs to their districts. No big-business excuse applies to nondefense discretionary spending. In short, it is a mockery to assert big business is the primary source of excessive government spending.

Second, politicians, rather than business executives, generate the dependence on government. What was described as a craven sellout to big pharma was actually part of the ruthless blackmail through which the Obama administration silenced a wide range of the potential criticism of its health-care monstrosity. Aside from all the normal government tools of torture such as the Internal Revenue Service, the antitrust agencies, and the Environmental Protection Agency, drug companies are subject to special and critical government scrutiny. The companies must endure the cumbersome, slow, expensive, ineffective Food and Drug Administration approval process. The industry relies on patent protection and re-importation bans to secure profits sufficient to recover research costs bloated by regulation.

The “big” drug and insurance companies were far from the only frightened firms. Despite widespread physician concerns, the American Medical Association abandoned its long-time opposition. More strikingly, AARP, the relentlessly wrong-headed self-created representative of seniors, flooded its publications with distorted pro-legislation articles.

This is unfortunately typical of the pressures companies face. Anyone who argues that lobbying is improper fails to recognize the excessive power that government possesses. It becomes essential to resist in every legitimate way widespread unbridled pressure. As Obama and his admirers constantly demonstrate, response to outrageous interventionist claims is regularly defamed. Efforts are made to discredit and even ban critics. In such a situation, limiting lobbying and other forms of response is an outrageous threat to constitutional government.

Famously, Microsoft did not take lobbying seriously until hit by dubious antitrust suits. In the energy sector, clearly pressures to go green and not oppose global-warming policies caused enormous fawning by a distressingly wide range of companies. Many leading retailers have jumped on green initiatives such as the long-life-bulb bandwagon arising because legislators responded to three decades of public resistance by forcing use of these bulbs. Exxon, after slander over its support, far smaller than that of the U.S. government, of research skeptical of global-warming concerns, has added a green tinge to its advertising, albeit not as blatantly as BP and Chevron. General Electric became a sell-out due to its involvement in financing, medical equipment, and power generating devices. The major banks and brokers faced and suffered badly from the political pressures to lend heavily to potential homebuyers with questionable financial situations.

At best, we can admit that big business is no less, but not no more, likely than any interest group to seek to twist the web of government control in its favor. A prime example of the defects is that Obama regularly assumes away trade-union influence in his attacks on interest groups. One of my great teachers, M.A. Adelman, forcefully argued that it is the voting power of interest groups that matters. He reached that conclusion in studying the antitrust attack on A&P that was driven by the extensive anti-chain store outlook of the thirties. His student Peter Pashigian showed that similarly automobile dealers secured protection from automobile manufacturers. When Adelman turned to oil, he found that “small” oil producers were sheltered at great cost to consumers from competition, domestic as well as imported, by big oil. A long-time concern about banking was the legislation limiting bank consolidation. A well-known, but regularly neglected part of this is the unreality of the big versus small company distinction. In most of these cases, the protected were rich local notables. In contrast, through pension funds and mutual funds increasingly, big companies are ultimately owned by much less affluent people.

Finally, a pro-big-business or even a general pro-business outlook is a nonsense concept. Big businesses conflict, not just with small business, but with each other. Protection of the once-big business of steel production was at the expense of the manufacturers of automobiles and other durable goods and their customers. The oil industry disagreed with the automobile industry on the best policy, given the inevitability of action, to reduce gasoline consumption legislatively. Large retailers relentlessly turn to imports when domestic producers, big and small, become too expensive.

This last point is key to understanding what libertarian economics is about. Decades before tea parties, libertarians were for limited government that involves among other things free markets. We want the market to decide winners and losers. We feel that private monopoly is so rare and difficult to detect and reform or regulate that we oppose purportedly anti-monopoly policies.

The real danger is the unopposed monopoly power of government. The need is protection from politicians unaware of the limits of prudent, constitutional government. The heath-care debate provided many examples. The quintessence of the disgraceful process of passing Obamacare was Nancy Pelosi, yielding a grossly oversized gavel, leading an unnecessarily confrontational walk up the Capitol steps through a wall of peaceful protestors, instead of taking the underground access that is available. Less dramatic, but more chilling, was the consistent dismissal by the law’s proponents of constitutional flaws in the bill. It suggests a variant on what Jimmy Durante’s character in Jumbo said when caught with an elephant, “Constitution, what Constitution?” As Cato has validly argued, what we need is less, not more, restrictions on speech and stringent term limits.

Richard L. Gordon
Pennsylvania State University

For some other libertarian views on this topic, see Roy A. Childs, Jr., “Big Business and the Rise of American Statism” or this discussion at Cato Unbound.

Libertarianism and Big Business: A Dissent is a post from Cato @ Liberty - Cato Institute Blog

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.

To get these mortgages in better shape so the FHA can insure them, $14 billion in TARP money is going to be used to pay private lenders to reduce the amount borrowers owe on their mortgages. Some of this money will also be used to cover eventual losses on these loans. As a taxpayer whose mortgage is underwater, and who would rather go bankrupt than accept a government handout, I find it infuriating that my tax dollars are being used to bail out others in a similar situation.

But with government housing programs, it’s standard practice for officials to cannonball into the pool and worry about who gets splashed by the water later. On Sunday, CNN.com reported on “FHA’s Florida Fiasco,” where the collapse of the heavily FHA-insured condo market has contributed to the possibility of a FHA bailout. The FHA has now tightened its condo standards, but once again it’s a day late and possibly more than few bucks short.

The new FHA initiative is the latest in a series of efforts to “stabilize” the housing market with more subsidies. Policymakers seem oblivious that it was government interventions that helped instigate the housing meltdown to begin with. The housing market would stabilize itself if the supply of and demand for housing was allowed to be brought back into equilibrium. There would be pain in the short-term, but in the long-term we would have a smoother functioning housing market. Unfortunately, for politicians the long-term means the next election.

Obama to Increase FHA Risk is a post from Cato @ Liberty - Cato Institute Blog

I suspect I may be falling into a publicity trap here, but nonetheless I am unable to resist blogging about an email I received this morning from the Global Development and Environment Institute at Tufts University.  The email contained this teaser:

How does cheap food contribute to global hunger?  GDAE’s Timothy A. Wise, in this recent article in Resurgence magazine, explains the contradictory nature of food and agriculture under globalization. He refers to globalization as “the cheapening of everything” and concludes:

“Some things just shouldn’t be cheapened. The market is very good at establishing the value of many things but it is not a good substitute for human values. Societies need to determine their own human values, not let the market do it for them. There are some essential things, such as our land and the life-sustaining foods it can produce, that should not be cheapened.”

This sort of stuff could only be written by someone on full academic tenure and who has never had to worry about feeding his family.

It would take many hours to rebut all of the idiocies contained in the full article, but for now I will just say: Yes, it is true that U.S. government subsidies for corn, for example, cause environmental damage in the Gulf of Mexico (Cato scholars have in fact covered this before as part of our ongoing campaign to eliminate farm subsidies). And yes, poor farmers abroad have suffered because of government intervention in food markets. But those are problems stemming from government intervention, not the free market.

Tufts Academic Gives Two Thumbs Down to Cheap Food is a post from Cato @ Liberty - Cato Institute Blog