Thursday, December 31, 2009

Estate Tax Update

Congress is apparently not going to fix the odd dynamics of the estate tax, with awkward implications:

Starting Jan. 1, the estate tax -- which can erase nearly half of a wealthy person's estate -- goes away for a year. For families facing end-of-life decisions in the immediate future, the change is making one of life's most trying episodes only more complex.

"I have two clients on life support, and the families are struggling with whether to continue heroic measures for a few more days," says Joshua Rubenstein, a lawyer with Katten Muchin Rosenman LLP in New York. "Do they want to live for the rest of their lives having made serious medical decisions based on estate-tax law?"
The greater challenge will toward the end of 2010 if Congress has still failed to act:

Under current laws in effect until the end of this year, the size of the exemption is $3.5 million per individual or up to $7 million per couple. The tax is slated to disappear entirely on Jan 1. ...

The estate tax is scheduled to return in 2011 at a 55% rate with an exemption of slightly more than $1 million.
Thus, next December, heirs will face a strong incentive to pull the cord on ederly relatives.

The right policy is to make repeal permanent.  The estate tax punishes saving relative to spending and serves mainly to prop up the incomes of estate tax lawyers and accountants.

Wednesday, December 30, 2009

Gambling and Indian Tribes

As Shinnecock Indians returned to their reservation on Long Island after World War II, elders warned that their tribe’s long struggle for survival was once again threatened.

Decent jobs were scarce and many Shinnecock veterans were leaving, draining the reservation of needed hands. ...

Now this small tribe on the eastern end of Long Island is on the verge of sketching a new, perhaps more prosperous chapter. The Obama administration’s recent announcement that the Shinnecocks met the criteria for federal recognition finally paves the way for a casino, generating a bounty of jobs and revenue.
The odd fact raised by this story is that the U.S. pays restitution to Indian Tribes by giving them monopoly rights (within a given state or area) to sell casino gambling services. 
Here's a different approach: legalize all gambling.  Then have an honest debate about whether, or how much, the U.S. should pay restitution to Native Americans.

Tuesday, December 29, 2009

Linking the Components of Health Care "Reform"

According to M.I.T. economist Jon Gruber, the Senate's tax on cadillac health plans is good policy because it

would reduce the incentives for employers to provide excessively generous insurance, leading to more cost-conscious use of health care and, ultimately, lower spending.
Gruber is right, and virtually every economist agrees. The ideal reform would combine increased taxation of employer-provided health insurance with offsetting reductions in personal or corporate income taxes.  Both changes would reduce distortions in the tax system and allow government to raise any given amount of tax revenue with a smaller negative impact on the economy.

But that does not mean government should expand spending, on health insurance or anything else. That is a logically separate question.

Monday, December 28, 2009

Trading Sewage for Carp

Libertarians are fond of noting that government projects can have unintended consequences; here's an example:

The reversal of the Chicago River a century ago, to send the city's sewage to the Mississippi River instead of into Lake Michigan, was hailed as an engineering marvel. Now Michigan is suing Illinois to potentially re-reverse the river to prevent the movement of voracious, invasive Asian carp into the lake.
Perhaps the right action now is to re-reverse the river, but perhaps that will have its own unintended consequences.  Any thoughts?

Besides, aren't carp good eating?   My grandmother made wicked-good smoked carp (using carp spear-gunned in Lake Erie by a neighbor at my grandparents' cottage).  Carp is a delicacy in Europe and Asia.

Think I'm kidding? Check out these carp recipes.

Sunday, December 27, 2009

Capitalism and Freedom in North Korea

Milton Friedman would not be surprised by this story:

North Korean leader Kim Jong Il moved early this month to wipe out much of the wealth earned in the past decade in his country's private markets. As part of a surprise currency revaluation, the government sharply restricted the amount of old bills that could be traded for new and made it illegal for citizens to have more than $40 worth of local currency.

It was an unexplained decision -- the kind of command that for more than six decades has been obeyed without question in North Korea. But this time ... the markets and the people who depend on them pushed back.

Grass-roots anger and a reported riot in an eastern coastal city pressured the government to amend its confiscatory policy. ...

The currency episode reveals new constraints on Kim's power and may signal a fundamental change in the operation of what is often called the world's most repressive state -- a change driven by private markets that now feed and employ half the country's 23.5 million people, and appear to have grown too big and too important to be crushed, even by a leader who loathes them.
These events do not guarantee that North Korea will soon become a freer state, but they do suggest that economic freedoms help constrain oppressive government, which is precisely the point of Friedman's famous work.

Friday, December 25, 2009

Why Have Legal Holidays?

I can think of two possible justifications.

The first is that society wants to promote particular ideas, values, individuals, or the like; think of the 4th of July or President's Day.  I find this defense problematic: the choice of holidays is a vehicle for thought control.

The second justification asserts that legal holidays solve a co-ordination problem by helping people take vacations at the same time as their friends and relatives.  This view has some merit, but a countervailing effect is that promoting specific vacation days generates crowding at airports, beaches, and so on.

So I do not see a convincing justification for government holidays, especially not those associated with religion.

Yes, I know I am a Scrooge.  My family has been telling me this for years.

Thursday, December 24, 2009

My Run-In with the Law

While driving last night from Wellesley to Charlottesville, I was stopped for not having a working light over the rear license plate.

My wife said, "It makes sense to have such a rule; otherwise police could not read your license (at night)."

My response was, "Why do the police need to read my license plate (at night or otherwise)?  Why require license plates at all?"

The answer is presumably something like, "It helps police solve crimes." 

But how many?  Is it worth the cost of all those license plates?

Wednesday, December 23, 2009

Why Are We Closing Guantanamo?

Rebuffed this month by skeptical lawmakers when it sought finances to buy a prison in rural Illinois, the Obama administration is struggling to come up with the money to replace the Guantánamo Bay prison.

As a result, officials now believe that they are unlikely to close the prison at Guantánamo Bay, Cuba, and transfer its population of terrorism suspects until 2011 at the earliest — a far slower timeline for achieving one of President Obama’s signature national security policies than they had previously hinted.
So, closure is not going to happen soon.  And the taxpayer will undoubtedly get stuck with a payoff to whatever U.S. locality ends up housing the Guantanamo inmates.   What will this have accomplished?

Nothing. The issue should never have been whether the U.S. closes Guantanamo.  I am not aware of a compelling reason to maintain this base, and I am equally unaware of a compelling reason to close it.

The crucial question has always been, and remains, what legal rules and procedures to employ for individuals designated by the federal government as enemy combatants?

The Bush administration's view was that the federal government could detain anyone, whether a U.S. citizen or not, whether captured on U.S. soil or not, indefinitely.  And that such detainees had no right to counsel, process, procedure, or anything.

That cannot be the right balance between protecting national security and safeguarding individual rights.   I can imagine a reasonable argument that says, "persons captured under such and such cirmcumstances, who might be a threat to national security, do not have the same rights as a standard criminal suspect." Perhaps this would mean trials held in secret, or under different rules of evidence, or something.  But anyone detained by the government must have some ability to protest his innocence.

So, I would have cheered Obama had he iniated a serious discussion of the appropriate rules and procedures for dealing with enemy combatants.  Instead, he focussed on the irrelevant question of whether to close Guantanamo.  By so doing he has given and aid and comfort to proponents of the extreme positions that he and his supporters claim to oppose.

Tuesday, December 22, 2009

Sitting on the Tarmac

The federal government will impose big fines starting this spring on airlines that keep passengers waiting on the tarmac too long without feeding them or letting them off the plane.

Airlines that let a plane sit on the tarmac for more than two hours without giving passengers food or water, or more than three hours without offering them the option of getting off, will face fines of $27,500 a passenger, the secretary of transportation announced on Monday.
Does this rule make sense?  At first blush it might sound reasonable, but let's think it through.

Without the rule, some planes that have been sitting for three hours leave soon after the three-hour point, while some sit on the tarmac for an extended, additional period.

The planes in the first category arrive at their destinations even later, becuase it takes time to get passengers off and back on the plance, and because the plane ends up at the back of the line for takeoffs.  Worse, some of these flights get cancelled.

So, sometimes the rule benefits passengers, sometimes it makes them worse off.

Does the Department of Transportation have any evidence that the welfare of passengers is higher, on average, under the rule?

No.  It has just pandered to customer annoyance and the press coverage of a few extreme incidents.  It has responded to what is seen (the long delays that occur without the rule) and ignored what is unseen (the canceled flights and delays that will result from the rule).

Bastiat is spinning in his grave.

Monday, December 21, 2009

The Fed's Record as a Regulator

As Congress prepares to give the Fed more regulatory power, and to expand financial regulation more generally, it is useful to review the Fed's track record as a regulator:

Foreclosures already pocked Chicago's poorer neighborhoods but the downtown still was booming as the Federal Reserve Bank of Chicago convened its annual conference in May 2007.

The keynote speaker, Federal Reserve Chairman Ben S. Bernanke, assured the bankers and businessmen gathered at the Westin Hotel on Michigan Avenue that their prosperity was not threatened by the plight of borrowers struggling to repay high-cost subprime loans.

Bernanke, who was in charge of regulating the nation's largest banks, told the audience that these firms were not at risk. He said most were not even involved in subprime lending. And the broader economy, he concluded, would be fine.

"Importantly, we see no serious broad spillover to banks or thrift institutions from the problems in the subprime market," Bernanke said. "The troubled lenders, for the most part, have not been institutions with federally insured deposits."

He was wrong. Five of the 10 largest subprime lenders during the previous year were banks regulated by the Fed. Even as Bernanke spoke, the spillover from subprime lending was driving the banking industry into a historic crisis that some firms would not survive. And the upheaval would shove the economy into recession.

Sunday, December 20, 2009


The number of gun permits issued in Massachusetts surged by more than 15 percent over the past two years, reversing nearly a decade of steady declines and marking a pronounced departure for a state known for its antigun sentiment.

The magnitude of the rise, evident in nearly every corner of the state, surprised law enforcement officials, and gun advocates and opponents alike.
What's the explanation for this surge?  Perhaps fear that Democrats would enact new gun control laws, perhaps just increased economic anxiety.  You tell me.

Saturday, December 19, 2009

Federal Funding for Needle Exchanges

After two decades, Congress has voted to lift a ban on federal funding of needle exchange programs. AIDS activists are cheering the move, saying it legitimizes needle exchange in the nationwide fight against HIV/AIDS.
This issue illustrates perfectly the cascade of unintended consequences that arises from misguided policies.  The root of the problem here is drug prohibition, because it fosters restrictions on the legal sale of syringes and, worse, raises drug prices, which encourages users to inject to get a big bang for the buck.

If needles were legally available without a prescription, many users would purchase them and avoid sharing dirty needles, even under prohibition.

And if drugs were legal, they would be far cheaper, so most users would consume via less risky methods than injection.

Government funding for needle exchanges, given current law, is compassionate and good for the public health.  Yet it puts government in the awkward position of funding an activity that many citizens find distasteful or even abhorrent.

So yet again, legalization is the answer.

Friday, December 18, 2009

Barney Frank and I Agree on Something

Over the objections of gambling opponents in Congress, the Obama administration has granted a request by US Representative Barney Frank to delay a long-scheduled federal crackdown on illegal Internet poker and casino sites.

Frank sought the six-month reprieve so he could keep working on a pet issue: legalizing online gambling.
The best part of the story is this:

You won’t find the chairman of the House Financial Services Committee at a poker table or roulette wheel, as Frank doesn’t gamble. But he said he does not want the government telling people what to do with their own money.
Frank (who happens to be my congressman) is absolutely right about this.  Too bad he does not want to let people keep more their own money in the first place.

Thursday, December 17, 2009

Drug Reimportation

Should the U.S. ban re-importation of medicines produced by U.S. manufacturers and then sold in other countries? This issue has arisen again as part of the health care debate, and it does not have an obvious answer.

The problem is that price controls on pharmaceuticals in countries like Canada cause prices for some drugs to be much lower abroad.  The difference is often large enough to generate a substantial incentive for re-importation.  This lowers profits for the U.S. manufacturer and reduces the incentive to develop new drugs.

If patent protection is important for innovation, then it seems to make sense to ban re-importation given the price controls imposed by other countries.

Yet I think the situation is more complicated.

First, the pratical issues involved in banning re-important are daunting.  To reduce the flow materially, the U.S. would have to ramp up scrutiny at border crossings and inspect a substantial fraction of packages delivered across borders.  More broadly, any attempt to impede trade in one product is likely to inhibit trade more generally.

Second, drug companies can reduce the risk of re-importation by refusing to sell their products in countries that insist on excessively low prices.

My hunch, therefore, is that U.S. policy should enforce patent protection within our borders, but if patent owners sell their products overseas, they assume the risks of re-importation.  I make no claim this policy is "optimal," but I suspect it is better than the alternative.

This position is even more compelling if in fact patent protection is not necessary to generate a reasonable amount of innovation.  David Levine at Washington University makes exactly this argument.   I am not yet convinced David is right, but he raises good objections to the claim that patent protection is benefical overall.

Wednesday, December 16, 2009

Government Efficiency ...

is making the security lines at airports sufficiently long that you have plenty of time to untie your shoelaces before you reach the conveyer belt.

Tuesday, December 15, 2009

The Political Aftermath of Bailouts

The Obama administration is again pressing banks to increase lending, explicitly sugesting that banks "owe" the country because of the bailouts.  Chief administration economist Larry Summers, for example, said Sunday:

“We were there for them and the banks need to do everything they can to be sure they’re there for customers across this country,” Summers said in an interview on ABC’s “This Week” program.

President Obama pressured the heads of the nation’s biggest banks on Monday to take “extraordinary” steps to revive lending for small businesses and homeowners, drawing a firm commitment from one large bank to make more loans and vaguer assurances from others.
This kind of jaw-boning, with its implicit threats, is one crucial negative of the bailouts, and it will contaminate policy for a long time. 

It is true that the banks benefited from taxpayer largesse.  But they presumably have a reason now for their limited lending: they do not see profitable lending opportunities.  If the administration bludgeons them into increasing credit, the banks will end up making bad loans that ultimately fail, creating yet another excuse for bailouts.

We made one huge mistake: the bailout.  We should not compound it with another mistake: interfering with private lending decisions.   Instead, we must lest the recovery take its course.  And we should recognize that one reason for the slow recovery is private sector concern about incessant government meddling.

Monday, December 14, 2009

To Create Jobs, Stop Destroying Jobs

With unemployment stuck around 10 percent, President Obama has pledged "to take every responsible step to accelerate the pace of job growth." Here's a thought: Instead of trying to "create" jobs by tweaking this tax break or increasing that spending program, why not stop doing things that destroy jobs?
The author of that incredibly sensible view, Charles Lange of the Washington Post editorial staff, suggests three specifics:

End federal protectionism and price supports for sugar.

Repeal the Davis-Bacon Act. ... This law requires employers to pay the "prevailing" local wage on federally funded projects.

Reduce the federal minimum wage.
And if we start thinking this way, we can find other good examples.  For example, we could eliminate professional licensure in medicine, law, and other occupations.

Policy Insight from David Letterman

"I mean, honest, you can't blame the Salahis for going where they're not invited.  I mean, isn't that our foreign policy?"

Sunday, December 13, 2009

Financial Brain Drain

Britain’s financiers and entrepreneurs are quitting the UK at a rate of 10 a week to avoid Labour’s new 50% taxes.

The burgeoning exodus threatens to deepen a £178 billion black hole in the public finances and leave middle-class voters with higher taxes for years to come, figures obtained from Companies House reveal.

The number of directors of British businesses registered as living in the low-tax centres of Jersey, Guernsey or the Isle of Man has risen by almost 500 to 6,729 in the past 12 months.

The British Virgin Islands is also a popular destination, with 615 directors of UK companies now based in the Caribbean tax haven — an 18% rise on a year ago.
Utterly predictable.  But at least Jersey is prospering.

Saturday, December 12, 2009

Sausages in Financial Reform

The old saw says that the two things no one wants to see being made are laws and sausages.  That's probably unfair to sausages:

Buried in a 239-page amendment to the U.S. House of Representatives' financial regulatory overhaul is a provision that appears to do just one thing: exempts financial-services company USAA from some of the bill's tougher provisions.

The carve-out is one of a number of exceptions that allow companies to avoid fresh scrutiny envisioned by the White House, which is aiming to overhaul the nation's financial-regulatory apparatus. The beneficiaries run from corporations such as General Electric Co. and Pitney Bowes Inc. to USAA, which caters to members of the military and their families, to so-called fraternal benefit societies.
But for those of you who think more financial regulation is necessary to avoid future financial crises, and that therefore exempting certain companies is problematic, no need to worry:

Referring to USAA, House Financial Services Committee Chairman Barney Frank (D., Mass.) said ... "There's no remote prospect of them being a problem."

Friday, December 11, 2009

Toddler Terrorism

From the Times of London:

Nursery-age children should be monitored for signs of brainwashing by Islamist extremists, according to a leaked police memo obtained by The Times.

In an e-mail to community groups, an officer in the West Midlands counter-terrorism unit wrote: “I do hope that you will tell me about persons, of whatever age, you think may have been radicalised or be vulnerable to radicalisation ... Evidence suggests that radicalisation can take place from the age of 4.”

The police unit confirmed that counter-terrorist officers specially trained in identifying children and young people vulnerable to radicalisation had visited nursery schools.

Thursday, December 10, 2009

Ginnie Mae, Ticking Time Bomb

The trouble signs surrounding Lend America had been building for years. A top executive was convicted of mortgage fraud but still helped run the company. Home loans made by its headquarters were defaulting at an extremely high rate. Federal prosecutors alleged in a civil suit that the company falsified loan documents and committed fraud.

Yet despite these red flags, a little-known federal agency continued giving its blessing to Lend America, allowing it to do business in the name of the U.S. government. The Government National Mortgage Association, known as Ginnie Mae, authorized the firm to bundle its mortgages into securities and sell them to investors around the world -- all backed by U.S. taxpayer money.

Until last week, federal housing officials said that Lend America met requirements for participating in the program run by Ginnie Mae, an agency in the Department of Housing and Urban Development, and allowed the firm to sell more than $1 billion in mortgages via Ginnie Mae securities.
Read the whole story; it gets worse.  The root of the recent financial crisis, and the growing seed of the next one, is the U.S. obsession with subsidizing homeownership.

Wednesday, December 9, 2009

Driver's Ed at Age 52

Yesterday I signed up my son up for driver's ed classes.  Under a recent revision of the laws in Massachusetts, parents must also attend two hours of classes, so I get to go as well.

Does this requirement accomplish anything?  Hard to see how.  Just two hours down the drain.

Tuesday, December 8, 2009

Did the Iraq Surge Really Work?

Consider this headline from today's New York Times:

Coordinated Bombings Kill at Least 101 in Baghdad
Does that sound like a country that has achieved peace and understanding?  And we still have over 100,000 troops there.   Not to mention that since the Iraq surge, violence has escalated in Pakistan and Afghanistan.

Once we leave (if we leave), civil war seems almost inevitable.  This does not mean we should stay; that just delays the inevitable, and at a large, ongoing cost.  But we should not kid ourselves about what will happen once we are gone.

Monday, December 7, 2009

"Mild" Gun Control Laws

Like public health care, Canada’s tight gun-control laws help distinguish the country from its powerful neighbor to the south. But as Canadians commemorated the 20th anniversary of one of the country’s most notorious shooting sprees on Sunday, their Parliament was on course to eliminate one of its most significant gun-control measures.

A long-gun registry, which requires the registration of rifles and shotguns, emerged largely from public revulsion over the massacre in 1989.
What should libertarians think about gun control laws, like long-gun registration in Canada, that inconvenience purchasers but do not, by themselves, prevent responsible persons from owning guns?

My view is that the direct costs of such laws are small, but so are the direct benefits.  It is possible that registration occassionally allows police to solve a crime or remove a gun from an unstable situation, but the number of such instances is rare.   Thus, it is hard to get excited about such laws, for or against, if one considers only their direct impact.

The crucial question is slippery slopes.  If mild controls like registration or background checks pave the way for more serious laws - bans on some or all guns - then in my judgment mild laws cause substantial harm.

What does the evidence say about slippery slopes?  Most countries had no gun control laws a century ago, and their initial laws were "mild."  Yet over time gun control has expanded enormously, and in some countries it amounts to virtual prohibition.   This is consistent with slopes being slippery.

Given this, and my view that mild laws rarely generate direct benefits, I oppose all gun control laws, including mild ones.

Sunday, December 6, 2009

Why Climate Negotations Are a Waste of Time

In the weeks leading up to the Copenhagen climate conference, countries from China to Singapore have pledged cuts to their greenhouse-gas emissions.

One question still lurks unanswered: Who is going to pay for it?
Short answer: no one.  So any agreements made in Copenhagen will pretend to cut emissions but will not impose any mechanism for achieving those cuts.

More broadly, no international agreement will ever achieve meaningful reductions in emissions because the costs created and the cross-country transfers implied would require a level of coercion that the relevant powers are not willing to utilize.

So it is time to accept that whatever climate change is going to happen is going to happen, and learn to adapt to whatever costs this creates.

Saturday, December 5, 2009

Late-Term Abortions in Nebraska

The national battle over abortion, for decades firmly planted outside the Kansas clinic of Dr. George R. Tiller, has erupted here in suburban Omaha, where a longtime colleague has taken up the cause of late-term abortions.

Since Dr. Tiller was shot to death in May, his colleague, Dr. LeRoy H. Carhart, has hired two people who worked at Dr. Tiller’s clinic and has trained his own staff members in the technical intricacies of performing late-term abortions.

Dr. Carhart has also begun performing some abortions “past 24 weeks,” he said in an interview, and is prepared to perform them still later if they meet legal requirements and if he considers them medically necessary.
What should the dividing line be for legal, late-term abortion?  I do not have a good answer, but I offer a few thoughts.

1. The frequency of late-term abortions is likely to be low, even when legal, because so many people - including some doctors and nurses - oppose them.  For example,

The late-term abortions, coming after the earliest point when a fetus might survive outside the womb, are the most controversial, even among some who favor abortion rights. A few of Dr. Carhart’s employees quit when he told them of his plans to expand the clinic’s work.
2. It is easy to demonize late-term abortions as immoral, yet banning them can harm women who face serious health risks from carrying a baby to term.

3. A reasonable way to balance competing concerns is to leave the legality of late-term abortion (like abortion generally) to individual states.  A few will permit late-term abortions, but most will significantly restrict or outlaw.  This hodgepodge may not be "perfect," but no perfect solution exists.   Any federal involvement - for or against late term abortions - is likely to do more harm than good.

Friday, December 4, 2009

Whither the Estate Tax

The esstate tax is currently scheduled to disappear entirely in 2010 and then return in 2011 at a rate above that currently in place.   The incentive created by this policy is to keep your rich but ailing grandmother alive for another month; then, make sure her docs pull the cord before midnight on December 31st, 2011.

The right fix to this idiocy, of course, is to eliminate the estate tax: it punishes savings, creates windfalls for estate lawyers and accountants, and raises little revenue.

This is not going to happen, however:

The House approved Thursday a measure making the current estate tax rate permanent, overcoming the objections of an unusual coalition of liberal and conservative critics.

The bill passed, 225 to 200, with 26 Democrats joining all Republicans present to vote no. It would make permanent the current estate tax rate of 45 percent, with an exemption of $3.5 million per individual.

Thursday, December 3, 2009

Gay Marriage or Civil Union: Would Less be More?

New York lawmakers on Wednesday rejected a bill that would have made their state the sixth to allow gay marriage, stunning advocates who suffered a similar decision by Maine voters just last month.

The New York measure needed 32 votes to pass and failed by a wider-than-expected margin, falling eight votes short in a 24-38 decision by the state Senate. The Assembly had earlier approved the bill, and Gov. David Paterson, perhaps the bill's strongest advocate, had pledged to sign it.
The outcomes in New York and Maine are disappointing because they would have represented legislative legalization of gay marriage, rather than judicial imposition.   The former is more likely to reflect the general will of the people and therefore be more stable.
I wonder whether advocates of gay marriage would have greater success if they focussed on civil unions, rather than marriage per se.  While the actual difference is small to non-existent, the symbolic difference seems to be large.  Widespread adoption of civil union need not be the ultimate goal, but it represents a significant, positive step.
The ultimate goal, of course, should not be marriage for opposite and same-sex couples; it should be civil unions for both, with marriages a private matter left to religions.   The strategy of adopting civil unions for same-sex couples would not necessarily achieve this goal, but the current strategy does not appear especially successful either.

Wednesday, December 2, 2009

The U.S. in the Middle East: A Prediction

When the U.S. invaded Afghanistan and then Iraq, I suggested to my father that we would exit within a few years.  He laughed, and said "25 years, at least."

I am beginning to think he was right.  I predict we will have at least 200,000 troops in Iraq / Afghanistan in November, 2012.  We currently have about 120,000 in Iraq, and with the new surge we will have about 100,000 in Afghanistan.

Tobacco Prohibition, Bit by Bit

It was a gentlemen's protest: Scores of cigar-smokers filed into an upscale steakhouse in Reston on Monday night to light up their stogies over cocktails and beef Wellington and lament that the smoking police had finally come to, of all places, Virginia.

Four hundred years after John Rolfe planted the nation's first commercial tobacco in Virginia, and decades after state leaders paid homage to the crop by carving its leaves into the ceiling of the old state Senate chamber, smoking officially becomes illegal Tuesday in the state's 17,500 bars and restaurants.
Smoking bans in restaurants make no sense for the simple reason that anyone who dislikes second-hand smoke can frequent non-smoking restaurants.  Market demand has produced large numbers of smoke-free restuarants because that is what much of the public wants.  Bans impose the preferences of some on the many, without justification.

A bigger cost of smoking bans is that they will evolve into prohibitions on tobacco.  When that happens, the tobacco wars will mimic the drugs wars in all but name.

Tuesday, December 1, 2009


For the past many months, President Obama has been trying to convince us that the nation can lower its health care costs by adopting a new government health insurance program that will cost at least $1 trillion over the next ten years.

In tonight's address from West Point, the President will try to convince us that we can implement a good exit strategy from Afghanistan by sending another 30,000 troops there.


Monday, November 30, 2009

A Debate About Mexico's Drug Wars

The event, tomorrow night at the Skirball Center at NYU, is produced by Intelligence Squared; see here for details.

Fareed Zakaria, Andres Martinez, and I will aruge in favor of the proposition:

America is to Blame for Mexico's Drug Wars
Jorge Casteneda, Chris W. Cox, and Asa Hutchinson will argue against.

Stay tuned for the outcome; I2 identifies the winner as the side that moved the most undecided members of the audience to its position.

Bernanke on the Fed

In a recent op-ed, Federal Reserve Chairman Ben Bernanke argues that proposals in Congress to reduce the Fed's powers or increase Congressional oversight are misguided.  My reactions to Ben's piece are as follows:

1. Given that the Fed exists, it probably made sense for it to lower interest rates in response to the financial crisis.  The private sector expected this; had the Fed not undertaken these actions, the confusion generated might have been counterproductive.

2. The Fed should have argued vociferously against, rather than for, the bailouts of Wall Street banks.  These bailouts probably made things worse rather than better in the short term by generating uncertainty and delaying appropriate adjustments in bank balance sheets.  And the bailouts virtually guarantee increased moral hazard in the long term.

3. Granting more regulatory power to the Fed is silly.  Regulation of large, complex, and constantly evolving finanicial market activities is not going to fix anything, since the financial sector will innovate around it.  Worse, regulation gives some investors a false sense of security.

4. Giving Congress more oversight of the Fed is a terrible idea; libertarians, in particular, should be wary of fixing bad government with more government.  The way to improve the Fed is to eliminate the Fed.

Sunday, November 29, 2009

George Will, Medical Marijuana, and Legalization

George Will writes an interesting column on medical marijuana. 

Will argues that a large fraction of "medical" marijuana purchases are in fact for recreational use, a claim no reasonable person disputes.  Will believes that widespread circumvention of the law's official intent undermines respsect for the rule of law, and I agree.

Will also suggests that estimates of the tax revenue states can collect from medical marijuana are probably inflated; my own estimates suggest he is right on this as well.

But the most intriguing issue is Will's last sentence:

By mocking the idea of lawful behavior, legalization of medical marijuana may be more socially destructive than full legalization.
This last sentence leaves us hanging: is Will advocating legalization, or arguing that legalization is undesirable and medicalization is even worse? 

If Will is true to his small government, individual responsibility ideals (which I share), he must surely advocate full legalization.  To the best of my knowledge, however, he has yet to do that in so many words. 

Now would be a good time.

A College for Cannabis

At most colleges, marijuana is very much an extracurricular matter. But at Med Grow Cannabis College, marijuana is the curriculum: the history, the horticulture and the legal how-to’s of Michigan’s new medical marijuana program. ...

Even though the business of growing medical marijuana is legal under Michigan’s new law, there is enough nervousness about the enterprise that most students at a recent class did not want their names or photographs used. An instructor also asked not to be identified.

“My wife works for the government,” one student said, “and I told my mother-in-law I was going to a small-business class.”
 The rest of the story is here.

Saturday, November 28, 2009

The Politics of Cap and Trade

A discussion at the New York Times's Room for Debate.  My bottom line:

Any policy to reduce emissions may be more costly than the emissions themselves, given the unintended consequences of such policies (e.g., pushing carbon-emitting activity to countries with lower carbon prices).

Friday, November 27, 2009

Dollars for Dishwashers

On the heels of its ballyhooed "Cash for Clunkers" program for cars, the federal government is expected to finalize details in the coming weeks of another tax-supported shopping extravaganza, known as "Cash for Appliances."

Supported by $300 million from the economic stimulus, the program will offer rebates to consumers who buy energy-efficient refrigerators, dishwashers, air conditioners and other appliances to replace their older models.
This program is just as misguided as the original Cash for Clunkers.  The only half-way respectable argument in its favor is the one offered by the Council on Economic Advisers:

Clunkers "is one of several stimulus programs whose purpose is to shift expenditures by households, businesses, and governments from the future to the present," the council wrote in a September report. "Such time-shifting is valuable in a recession, when the economy has an abundance of unemployed resources that can be put to work at low net economic cost."
This view could be right in principle, but it is unlikely to be right in practice.  Just as governments are error-prone and easily swayed by special interests when it comes to picking industries to support (industrial policy), they are likely to miscalculate often in picking when and where to stimulate.

Plus, this particular stimulus requires destruction of consumer durables that still work, an unambiguous waste.

Given its $300 million size, the program cannot have much influence.  But a better approach with that $300 million is to reduce tax rates and let consumers choose how to spend their money.

Thursday, November 26, 2009

Franksgiving: Another Flawed Stimulus

In 1939, FDR decided to move Thanksgiving Day forward by a week. Rather than take place on its traditional date, the last Thursday of November, he decreed that the annual holiday would instead be celebrated a week earlier.

The reason was economic. There were five Thursdays in November that year, which meant that Thanksgiving would fall on the 30th. That left just 20 shopping days till Christmas. By moving the holiday up a week to Nov. 23, the president hoped to give the economy a lift by allowing shoppers more time to make their purchases and—so his theory went—spend more money.
 The plan did not turn out too well:

For the next two years, Roosevelt continued to move up the date of Thanksgiving, and more states resigned themselves to celebrating early. By 1941, however, the facts turned against Roosevelt.

By then, retailers had two years of experience with the early Thanksgiving, and data were available regarding the 1939 and 1940 Christmas shopping seasons. In mid-March 1941, The Wall Street Journal reported the results of a survey done in New York City. The Journal's headline put it succinctly: "Early Thanksgiving Not Worth Extra Turkey or Doll." Only 37% of stores surveyed favored the early date. In Washington, the federal government reported that the early Thanksgiving resulted in no boost to retail sales.

And so, on May 20, 1941, FDR called a press conference at the White House and announced that he was changing Thanksgiving Day back to its traditional date. The early Thanksgiving had been an "experiment," he said, and the experiment failed. It was too late to move the 1941 Thanksgiving back to the traditional date, but in 1942 Thanksgiving would revert to the last Thursday of the month. This was "the first time any New Deal experiment was voluntarily abandoned," a Washington Post columnist wrote.
Apparently during the debate over whether to honor the Roosevelt's wishes,

People started referring to Nov. 30 as the "Republican Thanksgiving" and Nov. 23 as the "Democratic Thanksgiving" or "Franksgiving."

Wednesday, November 25, 2009

Is Nuclear the Answer to Global Warming?

Probably not, although environmentalists are jumping on this bandwagon:

Nuclear power -- long considered environmentally hazardous -- is emerging as perhaps the world's most unlikely weapon against climate change, with the backing of even some green activists who once campaigned against it.

It has been 13 years since the last new nuclear power plant opened in the United States. But around the world, nations under pressure to reduce the production of climate-warming gases are turning to low-emission nuclear energy as never before. The Obama administration and leading Democrats, in an effort to win greater support for climate change legislation, are eyeing federal tax incentives and loan guarantees to fund a new crop of nuclear power plants across the United States that could eventually help drive down carbon emissions.

Nuclear power may be low emissions, but that is not the whole story.  In the United States, the Price-Anderson Act of 1957 limits the liability of the nuclear power industry in the case of accidents. In other countries governments own and operate the nuclear industry and, implicitly, insure themselves, thereby hiding the liability cost of nuclear power.

Without government-subsidized insurance, the nuclear power industry would have to buy private insurance, which would be prohibitively expensive. Thus the true costs of nuclear power are much higher than they appear.  These costs must be balanced against any reductions in emissions achieved by nuclear power.

Tuesday, November 24, 2009

Right Meets Left on Criminal Justice

In the next several months, the Supreme Court will decide at least a half-dozen cases about the rights of people accused of crimes involving drugs, sex and corruption. Civil liberties groups and associations of defense lawyers have lined up on the side of the accused.

But so have conservative, libertarian and business groups. Their briefs and public statements are signs of an emerging consensus on the right that the criminal justice system is an aspect of big government that must be contained.

Libertarians and civil liberties groups have long agreed on many of these issues. The surprise is that prominent conservatives (e.g., former Reagan Attorney General Edwin Meese) have moved into the libertarian camp.

the conservative re-evaluation of crime policy is not universal, of course. Two notable exceptions to the trend, said Timothy Lynch, director of the Cato Institute’s criminal justice project, are Chief Justice John G. Roberts Jr. and Justice Samuel A. Alito Jr.

Still, with Justices Thomas and Scalia in the limited government camp, some reigning in of the worst abuses seems possible.

Monday, November 23, 2009

Obamanomics: Growing the Pie or Dividing the Pie?

My thoughts at Alister and Paine.

Comments Welcome

The comments feature of this blog was not working properly. I believe I have fixed it. Please let me know if you still have problems. Thanks, jeff

Sunday, November 22, 2009

Insane Mortgage Policy

As millions of Americans struggle to hold on to their homes, Wall Street has found a way to make money from the mortgage mess.

Investment funds are buying billions of dollars’ worth of home loans, discounted from the loans’ original value. Then, in what might seem an act of charity, the funds are helping homeowners by reducing the size of the loans.

But as part of these deals, the mortgages are being refinanced through lenders that work with government agencies like the Federal Housing Administration. This enables the funds to pocket sizable profits by reselling new, government-insured loans to other federal agencies, which then bundle the mortgages into securities for sale to investors.

While homeowners save money, the arrangement shifts nearly all the risk for the loans to the federal government — and, ultimately, taxpayers — at a time when Americans are falling behind on their mortgage payments in record numbers.

Yet one more reason why the deficit situation is far worse than the administation admits. Many of these insured mortgages will fail, and taxpayers will foot the bill.

Saturday, November 21, 2009

Tougher DUI Laws?

New York State would make it a felony to drive while intoxicated with a child in the vehicle and would require first-time convicted drunken drivers to buy a device that prevents them from driving their cars if they have been drinking, under a bill passed by the State Assembly on Tuesday.

Even libertarians agree that DUI laws make sense. I fear, however, that these particular enhancements to New York's laws are driven mainly by emotion:

The push for harsher drunken-driving penalties follows two recent crashes in New York in which children were killed while traveling with adults who had been drinking.

My guess is that the felony charge will often be bargained down, or police will let violators off with a warning because the felony charge seems excessive.

The provision for locking devices may again have little impact in practice, as those affected disable them, or use other cars.

I do not have an obviously better alternative to offer, but I am not convinced these enhancements to the DUI laws will change much.

Friday, November 20, 2009

Higher Tuition at the University of California

The University of California's Board of Regents agreed yesterday to raise undergraduate tuition by 32 percent. This had a predictable effect:

Hundreds of students from campuses across the state demonstrated ... More than 5,000 students demonstrated outside Sproul Hall at Berkeley

The increase is exactly the right thing to do, of course; the only problem is that it does not go far enough.

No good argument exists for state colleges or universities; the private sector does an excellent job.

A reasonable although oft-exaggerated argument exists for helping low-income students afford college, but this implies means-tested vouchers, not state-run higher education.

So California's tuition increase is a step in the right direction; its universities should mimic elite private universities by setting a high official tuition rate, while discounting that rate for those of limited means. Better yet, California should simply privatize the entire university system.

Thursday, November 19, 2009

The Headline ...

... says it all:

US wealthy should pay for health care overhaul, poll finds

That is the essence of the debate over health care. Nothing in existing bills constitutes "reform." Rather, these bills are just transfers from some people to others.

Tuesday, November 17, 2009

Global Warming Silliness

Buried in the text of Tuesday's joint declaration between the President Obama and Chinese President Hu Jintao was a significant climate announcement: The Obama administration will offer concrete emission reduction targets as part of next month's negotiations, as long as the Chinese offer a climate proposal of their own.

This is such nonsense. The agreement is not enforceable, so each side will do nothing and say it is waiting for the other side to go first. Then each can claim the other side is the problem.

Everyone knows that any policy toward global warming that has any chance of adoption will in fact have no effect. Everyone also knows that any policy that would actually reduce emissions to a signifcant degree would be incredibly costly.

So what's the answer? Repeal existing policies - like energy subsidies - that contribute to greenhouse gas emissions and that do not make sense in the first place. This makes sense no matter what one belives about global warming science.

The Jobs Summit

The Obama administration announced plans Monday to hold a forum on jobs and economic growth at the White House on Dec. 3, after which the president will go on the road to demonstrate his concern about the nation's rising jobless rate. ...

"During these difficult economic times, we have a responsibility to consider all good ideas to encourage and accelerate job creation in this country," Obama said in a statement.

We will see whether the administration is really willing to consider "all good ideas." The two that make the most sense are reductions in employment taxes and reductions in the corporate income tax. Yet I suspect those two are exactly the ideas that will get little or no attention.

Monday, November 16, 2009

Health Reform and Drug Prices

Even as drug makers promise to support Washington’s health care overhaul by shaving $8 billion a year off the nation’s drug costs after the legislation takes effect, the industry has been raising its prices at the fastest rate in years. ...

Drug makers say they have valid business reasons for the price increases. Critics say the industry is trying to establish a higher price base before Congress passes legislation that tries to curb drug spending in coming years.

Both the drug makers and the critics are right, of course: the only difference is that critics do not accept profit maximization as a legitimate goal for the drug makers.

The bigger problem posed by health reform is not just these increases in drug prices; it is the reduced incentive for innovation implied by spending controls going forward.

Sunday, November 15, 2009

Was the Iraq War Worth It?

Samarra, where the U.S. military closed a key base this fall, in many ways embodies the Iraq that American forces are leaving behind as the troop drawdown begins in earnest. The fighting here, as in much of the country, has ebbed. Iraqi troops are indisputably in charge. Sectarian and ethnic divisions remain deep, but political feuds and fights for power are, by and large, not being waged on the street.

As the American military footprint thins out in places such as Samarra, many U.S. soldiers are returning home making a strong case that they are leaving behind a country with a fighting chance. Just how good Iraq's odds are remains an open question ...

Depending on whom you ask, this phase is the preface of peace -- or a prelude to the fight.

"If it doesn't somehow reach an equilibrium, those who are have-nots could find themselves with no alternative except for violence," said Lt. Col. Samuel Whitehurst, an infantry battalion commander whose unit departed Samarra a month ago.

My forecast for Iraq's future: renewed violence between Sunni and Shiite as the U.S. funding that has temporarily bought peace dwindles. And any pretense of democracy will vanish. In the end we will have replaced one authoritarian state with another, at enormous cost.

Friday, November 13, 2009

And the Winner is ...

Yours truly.

Last night, in Albuquerque, New Mexico, I received the Alfred R. Lindesmith Award from the Drug Policy Alliance:

This award recognizes scholars, like Alfred Lindesmith, whose personal courage and quality of published research constitute a source of rational inspiration for all who labor in drug policy scholarship.
You can read about previous winners and other awardees here. I am grateful to the DPA and its executive director, Ethan Nadelmann, for this recognition, but even more for their tireless efforts to end the war on drugs.

Thursday, November 12, 2009

The Next Bailout Gets Closer

The Federal Housing Administration, the government agency whose loan-insurance programs have become a crucial source of support for the housing market, said on Thursday that its cash reserves had dwindled significantly in the last year as more borrowers defaulted on their mortgages. ...

As recently as a few weeks ago, the F.H.A. had said that even under the bleakest economic forecast, its cash cushion would quickly recover. On Thursday, it abandoned that position.

The only suprise here is that anyone kept a stright face while denying that this outcome was inevitable. So long as the U.S insures mortgage debt, bailouts will continue.

AMA Wants Review of Medical Marijuana

The American Medical Association on Tuesday adopted a resolution calling for the government to review its classification of marijuana, in order to ease the way for more research into the use of medical marijuana.

This is an interesting development. One glaring hypocrisy in the federal government's position on medical marijuana has been its claim that no standard medical research supports the claims made for marijuana's purported medical benefits.

This claim is overstated, but the amount of gold-standard, double blind research is small.

Why? Because the beauraucratic hurdles erected by federal authorities make it impossible for any medical researcher to conduct such research.

If the AMA's new position eases the way for more research on medical marijuana, everyone but the prohibitionists will benefit.

Wednesday, November 11, 2009

The Only Independent Fed is No Fed

Economists have long argued for the Fed to be independent so that politicians cannot pressure the Fed into ill-advised actions, such as juicing the economy in advance of elelctions.

The goal makes sense in principle, but achieving independence is hard. Congress created the Fed, so Congress can influence the Fed:

With the Federal Reserve under more intense attack than at any time in decades, Ben S. Bernanke, the professorial chairman of the central bank, was schooled last month in how to handle the increased political demands of his job.

For months, he had warned — without anyone on Capitol Hill appearing to listen — that a seemingly innocuous bill to let Congress “audit” the Fed would gravely threaten the central bank’s independence.

It was alarming enough that the bill’s author was Representative Ron Paul, the quixotic Texas Republican whose new book, “End the Fed,” had just landed on the best-seller lists. Despite vigorous protests by Mr. Bernanke, nearly 300 House lawmakers and 30 senators had endorsed Mr. Paul’s bill.

But when he sat down shortly after 8 a.m. on Oct. 1 at the Rayburn House Office Building for coffee and muffins with Representative Barney Frank, the rumpled and wisecracking chairman of the House Financial Services Committee, he took in some blunt advice. Voters had become suspicious and unnerved by the Fed because of its trillion-dollar efforts to bail out the financial system, Mr. Frank warned. If the Fed really wanted to survive the disgruntlement in both parties, he continued, Mr. Bernanke would have to step back and let him devise a compromise.

That is, Congress cannot commit itself not to interfere, so the Fed will frequently react to the threat of interference. True independence is unlikely.

A different question is whether independence is desirable. If you believe the Fed does only good things, then yes, but that is unlikely. That is why Ron Paul, correctly in my view, argues for eliminating the Fed.

Tuesday, November 10, 2009

Bait and Switch on Health "Reform"

As health care legislation moves toward a crucial airing in the Senate, the White House is facing a growing revolt from some Democrats and analysts who say the bills Congress is considering do not fulfill President Obama’s promise to slow the runaway rise in health care spending. ...

Health economists say it is impossible to know whether the bills, including one passed by the House on Saturday night, would meet that goal, and many are skeptical that they even come close.
The claim that "reform" of Medicare and Medicaid could "bend the curve" was always laughable. We have been trying to reign in these programs for decadaes; if we had easy, effective ways to reduce costs (other than simply reducing care) we would have adopted them long ago.

So, it is no surprise that experts do not expect the Congressional bills to reduce the growth in health costs. The only question is whether the administration's ploy has suckered enough voters to get this faux reform adopted before the reality hits home.

Monday, November 9, 2009

Needle Exchanges

Needle exchanges are programs funded by cities that provide clean syringes to IV drug users in exchange for dirty ones returned by users. These programs aim to reduce the spread of blood-borne diseases like HIV and hepatitis.

The exchanges are an awkward use of government funds: they appear to condone an activity that is both illegal and regard by some members of society as immoral. Yet exchanges plausibly save lives of drug users and others by reducing the spread of disease.

As further illustration of the policy dilemmas created by needle exchanges, consider this:

A bill working its way through Congress would lift a ban of more than 20 years on using federal money for needle exchange programs. But the bill would also ban federally financed exchanges from being within 1,000 feet of a school, park, library, college, video arcade or any place children might gather — a provision that would apply to a majority of the country’s approximately 200 exchanges.

So what's the resolution? A small step is to legalize syringes in those states that currently ban them. No evidence suggests that drug use is higher due to legal availability of syringes.

The better step is to legalize drugs. That would mean significantly cheaper drugs, so the incentive to inject - which provides a big bang for the buck - would diminish substantially. For users who still wanted to inject, a legalized market would provide drugs packaged with disposable syringes, thereby minimizing any incentive to share needles.

Sunday, November 8, 2009

Obamacare and Civil Society

If government is paying for everyone's health care, then it would seem to have an interest in promoting "healthy" lifestyles. This might sound innocuous, but it has troubling implications.

Consider, for example, the question of weight. Existing evidence seems to suggest that being overweight is bad for one's health and causes higher than average health care expenditure. So, government might want the health insurance plans it subsidizes to include incentives for exercise and weight loss.

Yet that approach runs headlong into a ban on pre-existing conditions, a crucial feature of Obamacare. This ban implies that overweight people get the same insurance, at the same price, as everyone else. This defeats an attempt to improve health by discouraging obesity and generates resentment from the non-obese who believe, accurately or not, that they are being forced to subsidize unhealthy behavior by others.

In a private, unregulated insurance market, competition between insurers would determine whether obesity actually predicts higher than average health expenditure. (Even if the obese are less healthy, their lifetime health expenditures might be near or below average because of shorter life expectancy.) Competition would determine whether provisions like required exercise regimes actually improve health. People who are overweight might face higher premiums, but they would bear the burden.

The same issue arises for an enormous range of behaviors: smoking, excessive drinking, downhill skiing, and so on. Government takeover of health insurance, implicitly or explicitly, takes a stand on all these issues. Government will not always get it right, no matter how well-intentioned, and competitive forces will not be allowed to correct the mistakes. In addition, imposition of a particular approach, with the implied cross-subsidies from the healthy to the unhealthy, constistutes one more way in which government intervention promotes an embittered, polarized society.

Saturday, November 7, 2009

If Brevity is the Soul of Wit ...

Then the House's health care bill is the epitome of insanity:

The 1,990-page health-care bill in the House is one of the weightiest pieces of legislation on Capitol Hill.

A single-sided copy of it printed by The Wall Street Journal weighed 19.6 pounds, and stood 8.25 inches tall.

Has anyone actually read the whole bill?

Friday, November 6, 2009

Not-so-Temporary Stimulus

In separate actions to address Americans’ continuing economic hardship, the government moved Thursday to assist long-unemployed workers and struggling businesses, as well as home buyers and homeowners facing foreclosure.

Fannie Mae, the federally controlled mortgage company, announced a Deed for Lease program in which those in danger of eviction may be able to stay as tenants in their houses for at least a year.

At the same time, Congress gave final approval to a stimulus measure that will extend unemployment benefits for the longtime jobless, aid that will bring total assistance for many to nearly two years. Other provisions of the bill will expand two popular tax breaks — one for home buyers, the other for businesses operating at a loss.

The worst components of these extensions of the stimulus are those that support housing. The U.S. economy got into trouble in part because it over-invested in housing. The recession is a chance to re-allocate investment from housing to non-residential investment (factories, equipment, R&D) and for people who bought homes they could not afford to find smaller houses or apartments.

Propping up the housing market merely delays inevitable adjustments and perpetuates a misallocation of resources.

Thursday, November 5, 2009

An Opportunity for Libertarians?

Daniel Henninger of the WSJ writes about yesterday's election results:

What was learned Tuesday is that the American voter is absolutely, totally, unremittingly disgusted with both political parties.

I could not agree more. I am not persuaded, however, by Henninger's assessment of what the electorate wants. He says

More than anything, the American voter is desperate for political leadership.
This may be part of the story, but here's a different interpretation: a signficant fraction of the electorate is neither liberal nor conservative but libertarian.

Not over the top, wingnut libertarian like me, but moderate, restrained libertarian: fiscally conservative and socially tolerant.

I doubt this augurs a flood of officially libertarian candidates. But perhaps it means that more politicians will shift toward the soft libertarian perspective.

Wednesday, November 4, 2009

Renewed Hope for Gridlock?

The results of yesterdays two gubernatorial elections - big wins for Republicans in Virginia and New Jersey - provide renewed hope for people with political preferences like mine:

The only thing worse than the Republicans is the Democrats, and vice versa.

Thus, I am not pleased because I want Republicans rather than Democrats to run the country; I am pleased because I want gridlock: a Congress with sufficient Republicans and Blue Dog Democrats to defeat most of the initiatives proposed by liberal Democrats.

Gridlock is not the ultimate goal, of course; I would like to see the U.S. eliminate huge amounts of existing government. But for starters, not enacting any new government would be an improvement over the path Democrats will adopt unconstrained.

It is nevertheless too early to forecast what will happen in the mid-term elections next year. If the economy has recovered substantially, the Democrats may hold their own. Last night's results nevertheless suggest that independents may be less enthusiastic about President Obama and the Democrats than they were last fall, and this should tilt the composition of Congress toward the Republicans.

That is one reason the Democrats are pushing so hard to get their agenda adopted immediately. They know their window of opportunity may soon close.

Monday, November 2, 2009

Letting the Sick Die on the Street

Blogger Matt Yglesias has described my op-ed on health care as follows:

Meanwhile, in Harvard economist and Cato Institute senior fellow Jeffrey Miron’s dystopia, if your parents wind up with no money through bad luck or poor decision-making and then you get sick you’ll just die on the street for lack of money.

Did I really say such an outrageous thing? Well, I did not use exactly those words (as Matt makes clear), but yes, that is the logical implication of my position.

And I stand by it. Here's why.

First, my assessment is that even with no government health insurance, hardly anyone would die on the street for lack of health care. The poor would use their income transfers to buy some health care or insurance. The poor would receive private charity. And health care would be far less expensive due to elimination of the distortions caused by government health insurance.

Second, my position is that government provision of health insurance is enormously inefficient: it means worse health care for everyone, and it wastes resources that can be put to other uses. So the negative of having a few people suffer without government health insurance must be balanced against the good of having better medical care for all and against the good that can be accomplished with those saved resources.

That good might be lower taxes for everyone, or more government spending on education, or greater public health spending to combat HIV in poor countries. Whatever the alternate uses turn out to be, one cannot escape the fact that a tradeoff exists between protecting the poor and other goals.

Did the Stimulus Work?

Responses from Simon Johnson, Mark Thoma, Russell Roberts, and me, at Room for Debate.

My answer in brief: probably not.

Sunday, November 1, 2009

Saturday, October 31, 2009

Cap and Trade Will not Reduce Emissions

Two EPA lawyers write:

Offsets -- considered indispensable to keeping cap-and-trade affordable -- are supposed to be "additional" reductions beyond what is legally required. But experience with offsets in Europe and California has shown that ensuring real "additionality" is not an achievable goal.

Suppose, for example, that a landowner is paid not to cut his forest so that it can continue capturing carbon dioxide from the atmosphere. Purchasing this offset allows owners of a coal-fired power plant to burn extra coal, above the cap.

But if the landowner wasn't planning to cut his forest, he just received a bonus for doing what he would have done anyway. Even if he was planning to cut his forest and doesn't, demand for wood isn't reduced. A different forest will be cut. Either way, there is no net reduction in production of greenhouse gases.

Here is a different example of "offset." A friend comes to me and says, "I want to have an affair, but if I did I would feel guilty about increasing marital discord in the world. So I want you to forego that affair your were "planning" to have. That way, the net number of affairs does not go up, and I will not feel guilty."

Friday, October 30, 2009

No Government Health Insurance

My thoughts on the current debate, at My bottom line:

The underlying presumption behind [proposals for "reform"] is that government health insurance should be expanded to cover the uninsured.

This presumption is wrong. Government should not subsidize health insurance -- for the uninsured, the poor, the elderly or anyone else -- or regulate health insurance markets.

Wednesday, October 28, 2009

All You Need to Know ...

... about this story is the headline:

Politicians Butt In at Bailed-Out GM.

Tuesday, October 27, 2009

Financial Market Reform

My thoughts, at The gist:

In the coming weeks and months, Congress will be turning its attention to financial market reform, in hopes of avoiding future financial crises. According to perceived wisdom, the root cause of the 2008 financial crisis was excessive risk-taking, and proper regulation can detect and prevent such excess in the future.

This view is a pipe dream. Most new regulation will do nothing to limit crises because markets will innovate around it. Worse, some regulation being considered by Congress will guarantee bigger and more frequent crises.

Monday, October 26, 2009

Medicare Shuns Seniors

Medicare has become a scary word to the doctors at the largest private group practice in Kansas City, Mo.

It's so scary that most physicians at Kansas City Internal Medicine, with 65% of its nearly 70,000 active patients age 65 or older, have stopped accepting walk-in Medicare enrollees, said Dr. David Wilt, an internist at the group.

Wilt and his colleagues say they are shunning the area's growing senior population because they believe Medicare doesn't reimburse physicians enough to cover the cost of care.

This outcome is inevitable under government provided health insurance. As health technology improves, expenditure on insured health care grows rapidly. Governments respond by limiting payments, lest deficits mushroom.

This problem is going to get worse, with or without Obamacare. Thus the only consistent position for those who oppose Obamacare is to also oppose Medicare and Medicaid.

Civil Union versus Civil Marriage

In defending his decision to sign Maine's same-sex marriage law, Governor John Baldacci noted that,

"The research that I did uncovered that a civil union didn't equal a civil marriage."

His statement is undeniable as a description of the current political landscape: many opponents of same sex marriage do not object to civil unions for same-sex couples, and many advocates of gay marriage are not satisfied with civil unions.

Yet Baldacci's statement is also puzzling: for all practical purposes, civil union and civil marriage are identical.

So how might governments resolve the conflict? By exiting the "marriage" business and providing civil unions only to both same-sex and opposite-sex couples.

This accomplishes any legitimate goal of having government define and enforce the particular bundle of contracts (regarding inheritance, property, children) known as civil marriage. But it leaves the controversial aspect of this action - using the term marriage - to private parties.

Under this policy, some couples will just get civil unions. Some couples will also get "married" in religious ceremonies, but these will have no legal significance. This will apply to both same-sex and opposite-sex couples.

Everybody should be happy with this arrangement. Right?

Sunday, October 25, 2009

The Fed and Policy Uncertainty

How and when should the Fed unwind the enormous monetary expansion it undertook in response to the financial crisis and recession:

As the Federal Reserve's next meeting approaches in early November, an internal debate is brewing about how and when to signal the possibility of interest-rate increases.

The Fed has said since March that it will keep rates very low for an "extended period." Long before it raises rates, however, it will need to change that public signal to financial markets.

Because the recovery is so young and is expected to be so weak, many central bank officials are comfortable, for now, keeping rates very low. But they are beginning to strategize about how to walk away from the "extended period" language.

My suggestion is that the Fed announce a path of gradual increases in the federal funds rate, say beginning next year and lasting for two years, until the rate is at some "normal level."

This approach is different than what the Fed is likely to undertake; it will probably want to maximize "discretion," the ability to adjust on the fly as conditions unfold.

My approach maximizes predictability and reassurance: it commits the Fed to shrinking the money supply and heading off future inflation. This reassures markets and takes substantial uncertainty out of the picture.

The problem with my approach is the pre-commitment: everyone knows the Fed could abandon a pre-announced path.

But such an announcement might still give markets useful guidance, and the Fed would know that any deviation would itself upset markets, and this might encourage adherence to the pre-commitment.

I do not expect the Fed to follow my advice, but I think it is an approach worth considering.

Saturday, October 24, 2009

Obama's Climate Speech at MIT

President Obama spoke at MIT yesterday, touting the benefits of the cap and trade legislation pending in Congress. According to the President,

"Such legislation can transform our energy system into one that is far more efficient, clean and independent -- making the best use of resources we have in abundance, through clean coal technology, safe nuclear power, sustainably grown biofuels and energy we harness from wind, waves and sun," Obama said.

The Washington Post coverage goes on to say,

But the legislation has stalled in the Senate, where critics say that curbing greenhouse gas emissions linked to climate change could lead to higher energy prices.

The President's claims for cap and trade legislation, and the Post's comment on this legislation, illustrate precisely what is wrong with it.

The President's comment does not say, "Cap and Trade will make energy more expensive; that is good because then people will use less of it."

Rather, the President's description is a deliberate obfuscation: the cap and trade approach allows some advocates to pretend, and some voters to believe, that we can reduce carbon emissions for free by magically becoming more energy efficient or using alternative energy.

That is nonsense. Cap and trade may reduce energy emissions (although it may not, because the offset provisions could virtually gut its impact), but if it does so, it will be by raising energy prices.

A better way to raise energy prices, however, is carbon taxes. Anyone who believes the U.S. should reduce its use of fossil fuel should advocate for those, not cap and trade.

Friday, October 23, 2009

Krugman on China and the Dollar

I rarely agree with Paul Krugman's views on economic policy, but his column today is dead on. His point is that China is propping up its currency, which is probably bad for China (because it distorts their choice of exports versus imports) and bad for the U.S. (because it hurts our exports), yet the U.S. refuses to recognize this fact:

U.S. officials have been extremely cautious about confronting the China problem, to such an extent that last week the Treasury Department, while expressing “concerns,” certified in a required report to Congress that China is not — repeat not — manipulating its currency. They’re kidding, right?

The thing is, right now this caution makes little sense. Suppose the Chinese were to do what Wall Street and Washington seem to fear and start selling some of their dollar hoard. Under current conditions, this would actually help the U.S. economy by making our exports more competitive.

I fully agree. The U.S. should take no official position on the value of China's currency, and we would be better off if China let its value fall to market levels.

Execs Quit to Avoid Pay Limits

In yesterday's post I wrote that the Obama's administration limits on executive compensation would have minimal impact in part because the affected executives would quit and work elsewhere.

Today's Washington post reports the following:

Even before the Obama administration formally tightened executive compensation at bailed-out companies, the prospect of pay cuts had led some top employees to depart. ...

Many executives were driven away by the uncertainty of working for companies closely overseen by Washington, opting instead for firms not under the microscope, including competitors that have already returned the bailout funds to the government, according to executives and supervisors at the companies.

At Bank of America, for instance, only 14 of the 25 highly paid executives remained by the time Feinberg announced his decision. Under his plan, compensation for the most highly paid employees at the bank would be a maximum of $9.9 million. The bank had sought permission to pay as much as $21 million, according to Treasury Department documents.

At American International Group, only 13 people of the top 25 were still on hand for Feinberg's decision.

The way to limit executive compensation is to let failing companies fail.

Thursday, October 22, 2009

No Limits on Executive Compensation

The Obama administration announced yesterday that it

will order the firms that received the most aid to slash compensation to their highest-paid employees ... .

The plan, for the 25 top earners at seven companies that received exceptional help, will on average cut total compensation this year by about 50 percent.

This plan, as emotionally appealing as it might appear, is miguided.

Excutive compensation did not cause the financial crisis, nor will limits prevent the next one.

The limits will not work, since the affected employees will either quit and work elsewhere, or find creative ways to maintain the same level of compensation (e.g., "retire," get hired as a consultant, and charge exorbitant fees), or relocate to overseas branches where they can circumvent the limits.

And government control of compensation is a horrendous precedent that will open the doors to even more destructive meddling in the financial sector.

My earlier thoughts on this issue are here. Bottom line:

The lesson to be learned ... is that this kind of dilemma is one reason governments should not provide bailouts in the first place. Once a bailout occurs, the government is inevitably drawn into the day-to-day business decisions of the companies and forced to resolve issues with no good resolution.

Wednesday, October 21, 2009

Massachusetts Should Lower, Not Raise, the Dropout Age

Under a propsal to be announced today by a special state commission,

Massachusetts students would be required to stay in school until age 18 ... , part of a broader effort to halve the state’s high school dropout rate.

This is a terrible idea.

The best path for many 16-17 year olds is not high school but vocational tech, apprenticehip, or even a minimum wage job. Additional schooling is good for some 16-17 year olds; that does not mean it is good for everyone.

A higher dropout age will in any case do little to keep students in school; many already drop out before legally permitted because enforcement is lax, and the resources to enforce an even higher age would be substantial. Those resources are better employed serving the students who want to be in school.

Students forced to stay in school, moreover, especially at ages 16-17, can be disruptive or even dangerous to other students.

The right policy change, therefore, is to lower the dropout age, or even eliminate it. Raising it to 18 will waste resources and reduce school quality for those who want to learn.

Tuesday, October 20, 2009

Fiddling While Rome Burns

It is good to see that amidst all the pressing issues of the day, our fearless leaders in Washington are focussed on the right things:

Senator Orrin Hatch (R-Utah), Rep. Neil Abercrombie (D-Hawaii) and Rep. Joe Barton (R-Texas) said Monday that they are backing a federal political action committee "dedicated to discarding the Bowl Championship Series and instituting a competitive post-season championship for college football."

The people behind Playoff PAC – whose tagline is "Beat the BCS. Save College Football." – believe that the Bowl Championship Series is "inherently flawed," the group said in a press release.

Actually, I am delighted to see Congress spending its time on the BCS; that means less time designing bad stimulus packages, or byzantine cap-and-trade programs, or ruinous expansions of government health insurance.

Monday, October 19, 2009

U.S. Legalizes Medical Marijuana

In a stunning announcement, the Justice Department has stated that

Federal drug agents won't pursue pot-smoking patients or their sanctioned suppliers in states that allow medical marijuana, under new legal guidelines to be issued Monday by the Obama administration.

Two Justice Department officials described the new policy to The Associated Press, saying prosecutors will be told it is not a good use of their time to arrest people who use or provide medical marijuana in strict compliance with state law.

In states where medicial marijuana is legal, this change in federal policy amounts to full legalization.

Why? Because the set of conditions for which medical marijuana is alleged to be effective is huge, and the California experience shows that, once state law treats medical marijauna as legal, doctors prescribe freely. So, any user, medical or recreational, who wants marijuana in a state that has legalized medicial marijuana will have no legal difficulty obtaining it.

This is a huge victory for the marijuana legalization movement. The only question is how the Justice Department will enforce the new policy. They have stated:

The guidelines to be issued by the department do, however, make it clear that agents will go after people whose marijuana distribution goes beyond what is permitted under state law or use medical marijuana as a cover for other crimes, the officials said.

My bet, however, is that enforcement will target only those distributors or users who blatantly fail to cover themselves in a "medical" veneer.

Sunday, October 18, 2009

Reefer Non-Madness

The city of Los Angeles is apparently ready to crack down on the incredible proliferation of cannabis dispensaries, which distribute marijuana under the state medical marijuana law:

Cannabis advocates claim that more than 800 dispensaries have sprouted here since 2002; some law enforcement officials say it is closer to 1,000. Whatever the real number, everyone agrees it is too high.

And so this, too, is taken for granted: Crackdowns on cannabis clubs will soon come in this city, which has more dispensaries than any other.

The most important fact about this situation is that by all accounts, legal and quasi-legal access to marijuana has exploded in recent years.

So, if marijuana really causes violence and amotivational syndrome, or acts as a gateway, drug, as asserted by the prohibitions, then we should have seen an explosion of violence, high school dropouts, and harder drug use in California; we have not. The California experience is one more piece of evidence that the prohibitionist claims are wrong.

Why, then, is LA cracking down on these clubs? The only sensible justification would be to clean up appearances so that the feds do not get tempted to intervene. From every other perspective, the crackdown makes no sense.

Saturday, October 17, 2009

Should Insider Trading be Illegal?

In a case announced yesterday,

federal authorities exposed what they claim is the biggest insider-trading ring in a generation -- a conspiracy in which a hedge-fund kingpin and executives at blue-chip firms including IBM and Intel allegedly connived to profit on Google and other big-name stocks.

I take no stand on whether the individuals accused in this case broke existing law; if so, the feds should prosecute them.

But it is not obvious that insider trading should be illegal.

The main argument for a ban is that it protects outsiders from being taken advantage of by insiders. Perhaps, but in a world with no ban, outsiders would be more careful about trading with insiders, so the net impact on who gains and loses from inside information might be modest.

More importantly, insider trading means that information about a company's prospects become incorporated in its stock price sooner rather than later; this is a good thing.

Insider trading can act as a check on malfeasance within a company; insiders who know the books are being cooked, for example, can start dumping their stock, alerting the market that something is up.

In a world with no ban, small investors might fear to trade individual stocks and would face a greater incentive to diversify; that is also a good thing.

On top of all this, consistent enforcement of the ban is close to impossible. Authorities catch a tiny fraction of violations, so honest insiders obey and dishonest insiders still profit.

So, my strong hunch is that the ban does more harm than good.

Friday, October 16, 2009

The Public Option is the Decoy

Al From writes in the WSJ that if the Democrats were willing to give up on the public option,

Congress would pass a bill that requires every American to buy insurance, offers consumers a choice of plans through a new health exchange like the successful Commonwealth Connector in Massachusetts, provides subsidies that assure everyone can afford a basic plan, and prevents insurance companies from denying coverage to people with pre-existing conditions or dropping coverage for people who become sick.

From is exactly right, as I argued earler.

From, of course, endores of Obamacare, while I oppose it. But our analyses of the political realities are identical.

Thursday, October 15, 2009

Emergency Aid to Seniors? No Way

Social Security benefits are indexed for inflation, but because inflation has been roughly zero for the past year, the adjustment formula implies no increase in benefits this year. Nevertheless,

President Obama on Wednesday attempted to preempt the announcement that Social Security recipients will not get an increase in their benefit checks for the first time in three decades, encouraging Congress to provide a one-time payment of $250 to help seniors and disabled Americans weather the recession.

Obama endorsed the idea, which is expected to cost at least $13 billion, as the administration gropes for ways to sustain an apparent economic rebound without the kind of massive spending package that critics could label a second stimulus act.

This is outrageous on four levels:

1. If the President thinks the economy needs more stimulus, he should say that explicitly and have an honest debate.

2. This is the wrong kind of stimulus. Any further stimulus should consist of reductions in marginal tax rates, such as a cut in the corporate income tax (or better yet, repeal).

3. All social security recipients already have a moderate guaranteed income, and many have significant income beyond their social security benefits. This kind of transfer has no plausible justification as redistribution for the needy.

4. Sending checks to seniors is a blatant attempt to buy their support for Obamacare, which promises to cut Medicare spending substantially.

Wednesday, October 14, 2009

Your Car and Home: Guilty Until Proven Innocent

One perversion of our civil liberties spawned by War on Drugs has been an enormous expansion of civil forfeiture:

Every year, police agencies seize more than $1 billion of cars, cash and other goods linked to drug crimes. The Supreme Court will hear arguments Wednesday on how hard it should be for owners to try to recover that property.

Police typically get to keep much of what they seize, although owners can fight forfeiture in court. On Wednesday, the central issue will be whether owners are entitled to a prompt, informal hearing to argue that they should get their property back while waiting for a formal forfeiture proceeding that could be scheduled months or years in the future. At present, some states impound the property during that lag time and provide owners no recourse. Critics say many innocent owners just give up during that period, and states then are free to sell their cars and other items.

The practice of seizing property that might have been used in a crime, even when an arrest of the person is never made, would seem to fly in the face of the presumption of innocence. Courts have reasoned, however, that this presumption applies only to your person, so police can seize your property by just asserting the property's "guilt," and force you to prove otherwise.

This distinction is of course absurd. By seizing your property, police and prosecutors can force you out of your home, take over your place of business, and freeze any financial assets you might use to hire a lawyer. This obviously stacks the deck against your ability to prove your innocence.

The best way to eliminate this outrage is to legalize drugs. A less satisfying, but nevertheless useful step, would be for the Supreme Court to restore some element of "presumed innocence" to the civil forfeiture procedure.