Uncertainty More Than Anecdotal
During a recent CNBC debate on federal spending, I argued that government policies are creating uncertainty in the business community. Businesses are reluctant to invest or hire because they’re concerned that the president’s big government agenda will mean higher taxes and more onerous regulations.
I mentioned that every business owner I’ve spoken with has expressed this concern. In fact, the owner of the TV studio I was in told me that he wants to hire more employees but is afraid he may have to turn around and fire them later on thanks to Washington. My debate opponent dismissed my argument on the basis that “you cannot conduct macroeconomic policy by anecdote.”
Unfortunately, there is plenty of evidence to support my concern beyond what I’ve heard from folks in the business community. Yesterday, the chairman of the Business Roundtable, which the Washington Post calls “President Obama’s closest ally in the business community,” said that the president and his Democratic allies are creating an “increasingly hostile environment for investment and job creation.”
From the article:
Ivan G. Seidenberg, chief executive of Verizon Communications, said that Democrats in Washington are pursuing tax increases, policy changes and regulatory actions that together threaten to dampen economic growth and “harm our ability . . . to grow private-sector jobs in the U.S.”
“In our judgment, we have reached a point where the negative effects of these policies are simply too significant to ignore,” Seidenberg said in a lunchtime speech to the Economic Club of Washington. “By reaching into virtually every sector of economic life, government is injecting uncertainty into the marketplace and making it harder to raise capital and create new businesses.”
Big businesses aren’t the only ones complaining. Surveys of small businesses conducted by the National Federation of Independent Business continue to point to government taxes and regulations as their single biggest obstacle.
Even the Washington Post’s editorial page is now acknowledging that government-induced uncertainty is an issue:
But as analysts ponder the mystery of weak private-sector hiring despite signs of economic growth, it’s worth asking what role is played by government-induced uncertainty. With the federal government promoting major changes in health care, financial regulation and energy law, it wouldn’t be surprising if some companies are more inclined to wait and see than they might otherwise be. And that’s especially true when they look at looming American indebtedness and the effect that could have on long-term interest rates.
The uncertainty caused by expanding government that we are facing today isn’t a new phenomenon. Economist Robert Higgs coined the phrase “regime uncertainty” in a study that showed that FDR’s anti-business policies prolonged the Great Depression. Had the Roosevelt administration heeded the “anecdotes” from the business community in the 1930s, perhaps the country could have been spared some pain. Let’s hope history doesn’t repeat itself.
Congress Begins Conference on Financial Regulation
Today begins the televised political theatre that Barney Frank has been waiting months for: the first public meeting of the House and Senate conferees on the two financial regulation bills. While there are a handful of important differences between the House and Senate bills, these differences are overshadowed by what the bills have in common. The most important, and tragic, commonality is that both bills ignore the real causes of the financial crisis and focus on convenient political targets.
As our financial system was brought to its knees by an exploding housing bubble, fueled by government mandates and distortions, one would think, just maybe, that Congress would roll back these distortions. Despite their role in contributing to the crisis and the size of their bailout, however, neither bill barely mentions Fannie Mae and Freddie Mac. Except, of course, to continue their favored and privileged status, such as their exemption from a proposed new “consumer protection” agency. What we really need is a new “taxpayer protection” agency.
Nor will either bill change the government’s meddling in what is probably the most important price in the economy: the interest rate. Given the overwhelming evidence that loose monetary policy was a direct cause of the housing bubble, one might expect Congress to spend time and effort preventing the Fed from creating another bubble. Not only does Congress ignore the issue, the Senate won’t even allow GAO to look at the Fed’s conduct of monetary policy.
Instead of spending the next few weeks gazing into the camera, Congress should stop and gaze into the mirror. This was a crisis conceived and born in Washington DC. The Rayburn building serving as the proverbial back-seat of the housing bubble.
Feds Propose Forfeiture as Immigration Employer Sanction
As recent posts in this space indicate, advocates of individual liberty have a variety of views on the proper policy response to illegal immigration. Whatever the disagreements, I suspect there’s some degree of consensus that certain proposed remedies are entirely too Draconian. From the California Labor and Employment Law Blog:
The U.S. Attorneys Office in San Diego has recently criminally prosecuted a French bakery for allegedly engaging in an intentional pattern and practice of hiring unauthorized workers. As part of the indictment, the Government is seeking hefty monetary fines, prison time for the owner and management, and asset forfeiture of the entire business to the Government. While the Government does not have experience running a French bakery, they are getting very serious about enforcing I-9 regulations.
More details on the French Gourmet prosecution can be found at the San Diego Union-Tribune and Restaurant Hospitality.
When government began pushing for asset forfeiture powers, some imagined that the formidable power would remain mostly confined to use in, say, illegal drug or money laundering prosecutions. But that’s not how it has worked. And immigration is hardly the only area in which employers should be worried about the expanding bounds of criminalization. Bills pending in Congress would criminalize “misclassification” of employees — which commonly consists of disagreeing with the government or with labor unions as to whether particular employees should count as independent contractors not covered by overtime and similar federal labor laws. Are we far from the day when prosecutors will start proposing forfeitures against employers over such infractions?
Goodbye to Locally Processed Meats?
The Atlantic has posted (h/t Future of Capitalism) an article by Virginia artisanal meat provider Joe Cloud sounding the alarm about how as regulation intensifies, only producers with the scale and sophistication to deal with it will be left standing:
Although species go extinct on Earth on a regular basis, every so often there is a major event that comes along and wipes out 40 or 50 percent of them. The same thing happens in the small business world. A few businesses fold every year due to retirement, poor management, and changes in the market, and that is quite normal. But then every so often a catastrophe comes along and causes a wholesale wipeout.
For small meat businesses in America, catastrophic events result from changes high up in the regulatory food chain that make it very difficult for small plants to adapt. The most recent extinction event occurred at the turn of the millennium, when small and very small USDA-inspected slaughter and processing plants were required to adopt the costly Hazard Analysis and Critical Control Point (HACCP) food safety plan. It has been estimated that 20 percent of existing small plants, and perhaps more, went out of business at that time. Now, proposed changes to HACCP for small and very small USDA-inspected plants threaten to take down many of the ones that remain, making healthy, local meats a rare commodity.
I’ve been following this particular controversy for a while, and perhaps its most depressing aspect is how very typical the pattern is. In 2008, following demands that it do something about much-publicized Chinese toy recalls, Congress passed the Consumer Product Safety Improvement Act, which devastated many hundreds of smaller manufacturers, importers and retailers of children’s clothing and playthings while leaving relatively unscathed Mattel, Hasbro, and the biggest discount retailers (all of which had in fact supported passage of the law). More recently, major food and agribusiness firms have signed on to support a major new round of federal food safety regulation despite warnings that it could pose big compliance challenges for many local bakers, fruit-baggers, and other small providers whether or not their products pose any notable risks.
I generally share many of the views of the “locavore” movement regarding the value of distinctive local food cultures and the importance to kids and cooks of getting a more direct sense where food comes from. Trouble is, some of us who imagine ourselves friendly to locavore thinking reflexively support whatever regulatory proposals are billed as most stringent and thus most protective. By the time we realize the choices we have lost, it can be too late.
Regulatory Spending Actually Rose under Bush
Analysts across the ideological spectrum generally agree that the government’s regulatory bodies fail far too frequently. However, analysts seem to learn different lessons from this experience.
Washington Post business columnist Steve Pearlstein cites numerous examples of failure and concludes, “It’s time for the business community to give up its jihad against regulation.”
He says:
It hardly captures the breadth and depth of these regulatory failures to say that during the Bush administration the pendulum swung a bit too far in the direction of deregulation and lax enforcement. What it misses is just how dramatically the regulatory agencies have been shrunken in size, stripped of talent and resources, demoralized by lousy leadership, captured by the industries they were meant to oversee and undermined by political interference and relentless attacks on their competence and purpose.
It’s true that regulators often do the bidding of the industries that they regulate. But “regulatory capture” is a long recognized phenomenon that undermines the contention that the government is well-suited to be a watchdog.
Regardless, is Pearlstein right that federal regulatory agencies were “dramatically” shrunk? Not according to a new study from George Washington University and Washington University in St. Louis. The figure shows that regulatory spending actually rose an inflation-adjusted 31 percent during the Bush administration (FY2002-FY2009):
Similarly, regulatory staff jumped by 42 percent under Bush’s watch:
Krugman and Oil Spills, cont’d
Last week Paul Krugman seized on the Gulf oil spill as another occasion to bash libertarians in general and the great Milton Friedman in particular. On Friday David skewered the Times columnist over his odd rhetorical ploy of treating politicians’ failure to follow Friedman’s principles as a refutation of those principles. Now economist Alex Tabarrok at Marginal Revolution reports that Krugman also completely misunderstands the current set of laws governing oil spill liability:
The Oil Pollution Act of 1990 (OPA), which is the law that caps liability for economic damages at $75 million, does not override state law or common law remedies in tort (click on the link and search for common law or see here). Thus, Milton Friedman’s preferred remedy for corporate negligence, tort law, continues to operate and there is no doubt that BP’s potential liability under common law alone would be in the billions of dollars.
…The point of the OPA was not to limit tort law but to supplement it.
Tort law, as traditionally understood, could only be used to recover damages to people and property rather than force firms to pay cleanup costs per se. Thus, in the OPA as I read it — and take the details with a grain of salt since I’m not a lawyer–there is no limit on cleanup costs. Moreover, the OPA makes the offender strictly liable for cleanup costs which means that if these costs are proven the offender must pay them regardless (there are a few defenses, such as an act of war, but they are unlikely to apply). The offender is also strictly liable for up to $75 million in economic damages above and beyond cleanup costs. Thus the $75 million is simply a cap on the strictly liable damages, the damages that if proven BP has to pay regardless. But there is no limit, even under the OPA, on economic damages in the event that BP failed to follow regulations or is otherwise shown to be negligent (same as under common law).
The link Krugman supplies, and perhaps the source of his error, was this Talking Points Memo item baldly describing “the maximum liability for oil companies after a spill” as “a paltry $75 million.” Even the most passing acquaintance with the aftermath of real-world oil spills should have been enough for Krugman and TPM author Zachary Roth to realize that liability for assessments to this one federal rainy-day fund is but one component, perhaps but a minor one, of liability for overall spill damage. And even as regards this one specialized federal fund, Krugman and Roth got it wrong, as a glance at the May 1 edition of Krugman’s own paper would have revealed:
When a rich and well-insured company like BP is responsible for the spill, the government will seek reimbursement of what it spends on cleanup from the company and its insurers.
So Krugman’s post not only strained to take a cheap shot at libertarians, but also thoroughly botched a factual background that it would have been easy enough for him to have looked up. Other that that, it was fine.
Federal Redesign of Hot Dogs?
From a Richmond Times-Dispatch editorial, the sort of passage you think at first must be satire:
At the instigation of the American Academy of Pediatrics, federal bureaucrats at the FDA, the Department of Agriculture, and the Consumer Product Safety Commission are studying whether to require the nation’s hot-dog makers to redesign hot dogs to reduce the likelihood of choking.
But it’s not satire, as other news clips confirm.
Now, as every parent knows who makes sure to cut up a hot dog for the smallest eaters, the risk of choking on one of these food objects is not zero (though it is very, very low; 13 children’s deaths in 2006 were linked to hot-dog asphyxiation, but children eat nearly 2 billion hot dogs a year). In that sense, the proposal is less obviously batty than some other federal regulatory initiatives that have upended whole sectors of commerce over risks that have never been shown to have harmed anyone at all.
But notice that the only truly effective way to keep the familiar cylindrical hot dog off the plates of small children would be to ban it for everyone — the logical end point, perhaps, of a policy that infantilizes parents by assuming they cannot be trusted to watch out for their children’s safety. If on some future Memorial Day you find only squared-off frankfurters or triangular-prism bratwursts in the supermarket cooler, don’t say you weren’t warned.
What Do The Economist‘s Bloggers Think a Free Market Is, Anyway?
A correspondent for The Economist, whose initials are M.S., posts this on the Democracy in America blog:
[T]he new health-care-reform law passed in March is an entirely private-insurer, free-market-based reform. If someone were to refer to it as a “government takeover of the health-care sector”, that person would hold a factually incorrect ideological belief.
I wonder what convinced M.S. that the new health care law is an entirely free-market-based reform. Was it the expansion of the government’s Medicaid program to another 16 million Americans? Was it the 19-million-plus other Americans who will receive government subsidies to purchase private health insurance? Was it the new price controls that the law imposes on health insurance? Or the price and exchange controls that it will extend to even more of the market? Was it the dynamics those regulations set in motion, which will reduce variety and innovation in health insurance? Was it the mandates that require private actors to spend their resources according to the wishes of the state? Or the new federal regulations that will shape every health insurance plan in the United States, whether purchased through the employer-based market, the individual market, or the new health insurance “exchanges”? Was it the half-trillion dollars of (explicit) tax increases over the next 10 years?
I wonder what it is about this law that M.S. thinks is consonant with the principles of a free market. Perhaps we have a different idea of what “free” means.
M.S. lists other “factually incorrect beliefs,” including:
that the Clinton plan would deny patients their choice of doctor, and that the health-care-reform bills in Congress at the time involved government “death panels” that could decide to withhold care from elderly patients on a cost-benefit basis.
I won’t dredge up the Clinton health plan. But I have previously demonstrated that, when Sarah Palin claimed that President Obama wanted to give a government panel the power to deny medical care to the elderly and disabled based on cost-effectiveness criteria, the president had in fact proposed a panel with the power to do exactly that.
I agree with M.S. about this much: “once people are exposed to false information, it’s extremely difficult to convince them it’s false.”
Was There a Libertarian Golden Age?
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:
SEC vs. Goldman Sachs: Legislation by Demonization
The Obama administration thinks it has discovered the perfect formula to cram legislation through in a hurry: Demonize some prominent firm within an industry you plan to redesign, and then pass a law that has nothing to do with the accusation against the demonized firm. They did this with health insurance and now they’re trying it with finance.
With health insurance, the demon was Anthem Blue Cross Blue Shield of California, which Obama accused of raising premiums by “anywhere from 35 to 39 percent.” Why didn’t some curious reporter interview a single person who actually paid 39% more, or quote from a letter announcing such an increase? Because it didn’t happen. Insurance premiums are regulated by the states, and California wouldn’t approve such a boost. Yet the media’s uncritical outrage over that 39% rumor helped to enact an intrusive, redistributive health bill that has nothing to do with health insurance premiums (which remain regulated by the states).
Today, the new demon de jour is Goldman Sachs, a handy scapegoat to promote hasty financial rejiggering schemes The SEC’s suspiciously-timed civil suit against Goldman looks as flimsy as the last month’s health insurance story. It also looks unlikely to win in court.
As Washington Post columnist Sebastian Mallaby explains, “This is a non-scandal. The securities in question, so-called synthetic collateralized debt obligations, cannot exist unless somebody is betting that they will lose value.” In such a zero-sum contest, big investors who went long knew perfectly well that other investors had to be taking the other side of the bet. Goldman lost $90 million by betting this CDO would go up; John Paulson went short.
Columnists have moralized about the unfairness of the short investor (Paulson) negotiating the terms of this deal with a long investor, ACA Management, which had the last word. This too, notes Mallaby, “is another non-scandal. An investor who wants to bet against a bundle of mortgages is entitled to suggest what should go into the bundle. The buyer is equally entitled to make counter-suggestions. As the SEC’s complaint states clearly, the lead buyer in this deal, a boutique called ACA that specialized in mortgage securities, did precisely that.”
Like the earlier fuming about Anthem California, this new SEC publicity stunt is likewise irrelevant to the pending legislation. Congress hopes to get standardized derivatives traded on an exchange. But synthetic collateralized debt obligations dealing with a customized bundle of securities could not possibly be traded on an exchange, and would therefore be untouched by reform.
Losses sustained by a few financial speculators on one exotic derivative had nothing to do with starting a global recession in December 2007 or the related financial crisis of September 2008. The core of the latter crisis was mortgage-backed securities per se, yet Goldman was only the 12th largest private MBS issuer in 2007. Fannie Mae and Freddie Mac were and are the biggest risk; any reform that excludes them is a fraud.
The SEC’s dubious civil suit against Goldman is a wasteful diversion at best. It has nothing to do with the Obama administration’s suicidal impulse to impose more tough regulations and taxes on banks to encourage them to lend more.
Ending the Black Market in Low-skilled Labor
Alex Nowrasteh and Ryan Young of the Competitive Enterprise Institute make the case for immigration reform in an especially appealing way in a fresh op-ed this week in the Detroit News.
In a commentary article titled, “Fix immigration rules to crush black market,” they dissect a well-meaning but flawed Obama administration effort to fix the dysfunctional H-2A visa program for temporary farm workers. Instead of fine tuning an unworkable law, Nowrasteh and Young advocate liberalization:
That means making H-2A visas inexpensive, easy to obtain, and keeping the related paperwork and regulations to a minimum. That means no minimum wage hike. No costly background check requirements. People rarely break laws that are reasonable and easy to obey.
When legal channels cost too much in time and money, people will turn to illegal channels every time. That’s how the world works. Getting rid of immigration’s black market begins with admitting that fact.
Hear, hear.
When Regulators Attack
No, that’s not the name of a new TV series. We should be so lucky.
It’s actually a good description of the government’s approach to tobacco.
Instead of letting adults make up their own minds about costs and benefits of risky choices (which includes most things in life, such as crossing a street and eating a cheeseburger), nanny-state officials have decided to investigate menthol-flavored cigarettes. And since the Food and Drug Administration has been given authority over the tobacco industry and since the FDA’s supposed purpose is to ensure drugs are “safe and effective,” that almost certainly means this latest campaign will lead to either further restrictions on free speech or outright bans.
Here’s a blurb from the Wall Street Journal:
Congress last year added the tobacco industry to the FDA’s regulatory mix and today a panel of health experts making up the agency’s new Tobacco Products Scientific Advisory Committee is kicking off a two-day meeting. First on the agenda: how menthol flavoring in cigarettes affects smokers’ habits. Small wonder that menthol is getting early attention, says the New York Times, which notes menthol butts account for almost a third of the $70 billion U.S. cigarette market.
After more meetings, the advisory panel will send recommendations to the FDA, which could eventually decide to ban menthol products or take steps to curtail their marketing.
One can only wonder how far down the slope we will slide. There already are attacks against fatty foods and sugary soft drinks. Both provide pleasure to many people, but that no longer means much in Washington. Will regulators, either at the FDA or elsewhere, eventually decide that anything linked to obesity must be regulated and/or taxed?
And now that government is going to pick up the tab for an even larger share of health costs, how long before the politicians use obesity-related costs as a major justification for further efforts to control our private lives? Maybe some day we will have a Federal Health Police to enforce daily exercise mandates? I better stop now before I give them any ideas.
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