Free Markets, Free People

Government

Throwing the BS Flag (Update)

The usual suspects have blamed the usual suspects in the GM bailout:

Austan Goolsbee, a senior economic adviser to President Obama, said the administration’s options were sharply limited by President Bush’s handling of the auto industry, and accused the prior administration of running out the clock.

“They shook up the can. They opened the can and handed [it] to us in our laps,” Goolsbee said on Fox News Sunday.

“When George Bush put money into General Motors, almost explicitly with the purpose — how many dollars do they need to stay alive until January 20th, 2009, there was no commitment to restructuring, to making these viable enterprises of any kind,” said Goolsbee, who serves as staff director and chief economist of the Obama’s Economic Recovery Advisory Board.

All of that is probably true, but the BS flag is thrown at the implication that the Bush administration left them with few options such that it had to funnel more and more bailout money into GM.

There was a clear second option – back off, tell GM that bankruptcy and restructuring are the best option and let the system take care of it. But they didn’t. They made the case that GM was “too big to fail” and that the “downstream impact” in terms of unemployment was unacceptable.

The continued bailout had two outcomes that the Obama administration wanted but won’t admit. One – they got a majority equity stake in the company. And they manipulated the bankruptcy proceedings to preserve that majority.

Secondly, it saved the jobs of a favored special interest group, the UAW, until such a time they too could be handed an equity stake in the “new” company through the manipulated process.

Without the Bush administration’s bailout, none of that would have been possible. And, of course, previous to taking office, Obama had lauded the handling of the GM problem.

So the Goolsbee blame shifting is more than nonsense, it’s nonsense on stilts.

UPDATE: Keith Hennesy, a member of the Bush administration who dealt directly with this subject and the incoming Obama administration throws a very detailed BS flag of his own.  [HT: Rick Caird]

~McQ

Wow, That Stimulus – Just What Was Needed! More, Please!

Another indicator that those in charge haven’t a clue about what they’re doing and anything they say or claim should be taken with a large grain of salt.

Chart: Innocentbystanders.net

Chart: Innocentbystanders.net

So let’s see, given the “logic” which has driven the “solution” thus far, what this calls for is more stimulus money, right?

~McQ

Socialism In America

Perhaps the time has come to be perfectly frank. We Americans live in a socialist country. In point of fact, we have for quite some time, even though private property has a long, continuing and still revered position in our society. To be sure, we aren’t an entirely socialist country, but instead a mixed one that teeters between the two extremes of collectivism and freedom (i.e. socialism and capitalism). In the past century or so, however, the scale tipped noticeably toward the socialism side, and we are now at the point where capitalism is not the dominant force. Of course, there are many who will disagree with my assessment.

Conor Clarke, for example, offers the following to dispel notions that we have become a socialist country:

Government vs. Private Ownership

Government vs. Private Ownership

Conor explains:

Have you heard that the United States is headed toward socialism? Jonah Goldberg says it is. Alabama Senator Richard Shelby says it is. Phyllis Schlafly says it is. Richard Viguerie says it is. The Republican National Committee says it is. We must be getting pretty close.

[…]

The hot-pink portion of this pie chart is the percentage of listed American business assets that have recently been nationalized by the American government (ie, General Motors). Obama’s version of socialism is so sneaky you can hardly see it!

(And there is some reason to think this actually overstates the portion of the corporate landscape that’s been nationalized, but more on that at the end of the post.*)

While the chart above would appear at first glance to be pretty dispositive of the issue (if the federal government owns so little, can we really be socialist?), it actually begs a huge question. If the segment of the economy effectively nationalized in the past several months is so vanishingly small, why is it necessary for taxpayers to fund trillions of dollars to save it? We’ll come back to that.

Next, Jon Henke observes:

NOTE: The fact is, American has always had a mixed economy, as do all modern, developed economies. The question is not one of category – capitalism or socialism? – but of degree.

[…]

Obama is not socialist. But he is more comfortable with centralizing economic power. As that centralization proceeds, the focus of public interest will shift from “how do we fix the immediate economic problems?” to “how do we fix the problems we created when we tried to fix that temporary problem?” That is when the pendulum can swing back towards decentralization and individual empowerment.

Jon takes a more organic view of the subject. That is, he posits the governing structure of the US as subject to the tolerance of the polity for centralized control of the economy. In his view, just because Obama “is more comfortable with centralizing economic power” that does not mean that we have become a socialist nation. Instead, we are merely experiencing a swing of the political pendulum towards socialism that will inevitably swing back towards the capitalism node. Left unsaid is how often that pendulum has swung away from socialism in the past 100+ years. More importantly, Jon’s assertions beg their own question — i.e. how “comfortable” must a politician and/or the populace be with centralized power before we can safely label it socialism?

In addition to the above, another line of argument is sure to be made (if it hasn’t been already) that we cannot possibly be a socialist country because private property has not been outlawed and the people as a whole do not own and control the means of production. Truly, this is the argument that Conor attempts to support with his graph (not that Conor necessarily agrees with that argument, just that he is holding up evidence that would tend to suggest socialism is not at hand). Essentially, although socialism comes in many forms, a primary ingredient is that the state (on behalf of the people) have dominance over the means of production instead of private concerns. The most extreme form, of course, is where all private property is abolished and the state decides what will be produced, by who, when and how much. Much milder versions such as social democracy exist today that, while they allow private property and much more freedom than, say, Stalinist North Korea, maintain a firm grip over the economy as a whole. Is there any doubt that Germany is a socialist country for example? The question then is, where does America fit when it this spectrum of socialist possibilities, if it fits at all?

At bottom, the problem with these sorts of arguments is almost always definitional. If I start arguing that communism never works and use the Soviet Union as an example, someone is sure to pipe up “that wasn’t real communism” followed by a neat explanation how Lenin and Stalin perverted what the true communists wanted in order to seize power for their own means. In order to avoid that annoyance, let’s at least agree on the dictionary definition of socialism:

An economic system in which the production and distribution of goods are [owned and] controlled substantially by the government rather than by private enterprise, and in which cooperation rather than competition guides economic activity. There are many varieties of socialism. Some socialists tolerate capitalism, as long as the government maintains the dominant influence over the economy; others insist on an abolition of private enterprise. All communists are socialists, but not all socialists are communists.

The definition above comes from the The American Heritage® New Dictionary of Cultural Literacy, Third Edition, and I think sums up the idea nicely. The one thing missing is the word “ownership” which, I expect, someone will insist upon, so I’ve inserted the words “owned and” into the definition. As luck would have it, this is the very concept that I think is missed by almost everyone who discusses whether or not we are a socialist country.

Specifically, what is the difference between ownership and control? Looking again to the dictionary, here is a good legal definition of “ownership”:

“one’s exclusive right of possessing, enjoying, and disposing of a thing.” 72 So. 891. The term has been given a wide range of meanings, but is often said to comprehend both the concept of possession and, further, that of title and thus to be broader than either. See 139 N.W. 101. See fee simple.

The primary concept behind ownership is that of exclusivity, such that if I own real property, for example, I can by right exclude all others. Without the ability to exclude, my “ownership” is something less than complete and the use, enjoyment and alienation (a fancy word for selling, trading or giving away) of property is limited.

To illustrate the idea, consider that you own a piece of real property (Blackacre) which is rich with gold and silver mines, oil, and an abundance of flora and fauna. In short, it is a little slice of heaven and it is all yours. Or at least it would be if were not for the fact that the flora are mostly designated as protected, the fauna are all listed as endangered, and the mineral deposits are tightly regulated, all to the extent that you cannot make any real use of your land except to look at it from a neighbor’s yard in humble admiration for its splendor. Not only are you prevented from drilling or mining on your property, you cannot even build a house or structure of any kind because that might disturb the protected species. The rules and regulations governing Blackacre are so ominous, that you can’t even sell it without first offering it to the government for a price it will set in its own arbitrary discretion. Furthermore, just on the other side of Blackacre is the Pacific Ocean fronted by a lovely beach, to which the law declares access must be allowed for the public, and there is nothing you can do to prevent them from traipsing across your wonderland. In short, you may own Blackacre in title, but you have very little, if any, control.

Of course, at least here in America, the laws and regulations aren’t quite that strict. And the vast majority of people would agree to at least some controls over private property to prevent the owners from harming other property or people (e.g. pollution, building setbacks to prevent fire, etc.)[ed. – let’s ignore Coasean bargaining for now, shall we?]. At some point, however, those restrictions on the owner’s use become so burdensome as to effectively deprive the owner of any real control. The same can be said for the ownership of capital, which can be anything from money to a large factory for building tractors. When the government sets up enough rules and regulations affecting the use and enjoyment of that capital, the fact that ownership is nominally in private hands does not somehow render that government as something other than socialist.

Now, getting back to our definition of socialism, which is more important, “ownership” or “control”? To my mind, this isn’t even a close call. Without control, ownership is next to meaningless. Therefore, if the state has the ability to control the means of production (a.k.a. capital), whether directly through ownership, or indirectly through law and regulation, I contend that such state should be deemed socialist.

Think of a scale that measures the owner’s rights in her own property and how, with each new government missive, that ownership indication drops a little more. Where the state’s intervention becomes intolerable will be different for each person, but from a definitional standpoint, that intervention represents socialism. When the scale registers a significant enough intervention into the owner’s rights, socialism becomes the prevalent factor in the control of property, and private, capitalist “ownership” is either dulled or altogether neutered. Again, without the ability to control that capital, ownership is a meaningless concept that should be left out of the conversation.

Accordingly, when Conor suggests that we are not a socialist nation because the government only owns an almost immeasurable portion of the corporate assets of this country, I suggest that he use a new measurement. Specifically, one that measures the amount of control that “owners” have over their property/capital/etc. That graph would look significantly different in my estimation.

Furthermore, when Jon states that Obama is not a socialist, he’s just comfortable with centralizing economic power, I ask that he consider what ways centralizing power (i.e. control over the means of production) is not socialist, and that he provide a few examples for clarification. Also, if the pendulum is going to swing back towards more decentralization (i.e. less control over capital), how far back would it have to go before most people could be reasonably certain that we are not, in fact, a socialist nation? How far back does he think it would have to go, or is his contention that the pendulum simply hasn’t swung into socialist territory? In considering those questions, I’d ask that the concept of control, rather than titular ownership, be the dominant factor in deciding where the state stands vis-à-vis socialism.

As I see it, we’ve been living with socialism in this country for a very long time. The only difference has been one of degree and magnitude. Its pervasiveness has ebbed and flowed over the decades, but American’s tolerance for it has grown substantially, even if many of us don’t like to call the governance we desire “socialism.” Unfortunately, that’s exactly what it is, and it’s only going to become more prevalent and intrusive. After all, why would anyone who is comfortable with centralizing economic power stop it? They’ll just call it something else and move on with asserting they’re control until one day you’ll be gazing longingly at Blackacre from the public beach, because that’s the only place where you can legally see it.

“Health Care Reform” Update (Updated)

A few new developments, none of them good.

One – Obama has indicated his willingness to entertain legislation that would tax your private health care benefits. What that means is you’ll be taxed on the money your employer spends on your health care insurance. Of course the obvious immediate effect would be to raise revenue to pay for the public portion of his health care plan.

Two – Obama has decided that making insurance mandatory may not be such a bad idea. This is 180 degree change from candidate Obama who attempted to hide his statist tendencies by pretending that he wouldn’t require mandatory insurance for Americans.

Threein a letter to Democratic senators:

He told Democratic Sens. Edward Kennedy (Mass.) and Max Baucus (Mont.) that their legislation must include a government-run insurance option that would compete against the private sector. He also reaffirmed his support for a Massachusetts-style insurance exchange.

What do you suppose will happen if government-run insurance is an option for all? Depending on how it is structured (if, for instance, if it is a universal pool), we could see massive dumping of private insurance by businesses pointing their employees to the government option.

Four:

[I]mbuing a federal panel with the power to make Medicare payment recommendations that Congress must either accept or reject in their entirety.

Obama likens this proposal, based on the current Medicare Payment Advisory Commission, to the way military base closure decisions are made. To Republicans, however, the notion smacks of the kind of “rationing” dictated by government-run healthcare programs in Europe and Canada.

Ezra Klein explains the “federal panel’s” proposed role:

The health system changes too quickly for Congress to address through massive, infrequent, efforts at total reform. New technologies and new care structures create new problems. A health care reform package signed in 2009 might miss some real deficiencies, or real opportunities, that present themselves in 2012. A health reform process that recognizes that fact is a health reform process that is continual, rather than episodic.

But the reason health reform is so infrequent is that it’s structurally difficult. Small tweaks are too technically complex for Congress to easily conduct and so are dominated by lobbyists. Large reforms attract broad interest but are impeded by polarization and the threat of the filibuster. The MedPAC changes under discussion are, in other words, nothing less than a new process for health care cost reforms. They empower experts who won’t be intimidated by the intricacy of the issues and sidestep the filibuster’s ability to halt change in its tracks.

In other words health care decisions that will directly effect you will be in the hands of an unelected and unaccountable panel of bureaucrats just as all the critics of this sort have program have been claiming since the beginning of the debate.

The effect?

MedPAC, of course, is restricted to Medicare. But there’s little doubt that where Medicare leads, the health care industry follows. Private insurers frequently set their prices in relation to Medicare’s payment rates. Hospitals are sufficiently dependent on Medicare that a reform instituted by the entitlement program becomes a de facto change for the whole institution, and thus all patients. A process that empowers Medicare to aggressively and fluidly reform itself would end up dramatically changing the face of American health care in general.

Klein is exactly right, but most likely not for the reasons he thinks he is. The level of care, innovation and incentive will follow the decline in prices driven by MedPAC. What the nation needs is insurance reform, not “health care reform”. And while that is how the proponents of this try to spin the issue as just that, MedPAC’s existence and proposed expanded role argues persuasively against that spin.

Watch carefully – the Democrats are going to try to move this quickly and with little debate.

UPDATE: Apparently the letter from Obama I spoke about above also had another effect:

President Obama’s letter to Senate lawmakers yesterday saying a healthcare package must include a public option may have stalled progress on a bipartisan deal, Sen. Judd Gregg (R-N.H.) said Thursday.

Gregg said that the president’s letter, which said a public option should be included in the legislation, stalled “significant progress” in negotiations.

“We were making great progress up until yesterday, in my opinion,” Gregg said during an interview on CNBC. “There’s a working group under Sen. Baucus that involves senior Republican and Senate senior members who are involved in the healthcare debate, and we were, I thought, making some fairly significant progress.”

The most discouraging thing about this update is the fact that Republicans, who are claiming government is too big and we’re spending too much are knee deep in negotiating more government and more spending (i.e. selling out – again) having apparently swallowed the Democratic premise that this is necessary whole.

~McQ

Tiananmen Square 20 Years After

China, despite its economic progress, remains a rigidly totalitarian state that certainly doesn’t wish to be reminded of the pro-democracy rallies 20 years ago, or the bloody government crackdown that ended them:

China blanketed Tiananmen Square with police officers Thursday, determined to prevent any commemoration of the 20th anniversary of a military crackdown on pro-democracy protesters that left hundreds dead.

The government reacted angrily to a mention of the anniversary by Sec. State Hillary Clinton:

“The U.S. action makes groundless accusations against the Chinese government. We express strong dissatisfaction,” a Foreign Ministry spokesman, Qin Gang, told reporters at a regular briefing.

“The party and government have already come to a conclusion on the relevant issue,” he said. “History has shown that the party and government have put China on the proper socialist path that serves the fundamental interests of the Chinese people.”

And to ensure that the people of China have few venues in which to discuss this anniversary, the “fundmental interests of the Chinese people” are being “served” by blocking various internet sites:

Access was blocked to popular Internet services like Twitter, as well as to many university message boards. The home pages of a mini-blogging site and a video-sharing site warned users they would be closed through Saturday for “technical maintenance.

Known activists and dissidents are under close supervision:

One government notice about the need to seek out potential troublemakers apparently slipped onto the Internet by mistake, remaining just long enough to be reported by Agence France-Presse. “Village cadres must visit main persons of interest and place them under thought supervision and control,” read the order to Guishan township, about 870 miles from Beijing.

In a report released Thursday, the rights group Chinese Human Rights Defenders said 65 activists in nine provinces have been subjected to official harassment to keep them from commemorating the anniversary.

Ten have been taken into police custody since late May, the group said. Dozens of others, mostly from Beijing, are either under police guard or have been forced to leave their homes, according to the report.

The mass media has, as expected, cooperated with the state as well:

There was no mention of the day’s significance in Thursday’s Beijing newspapers. The state-run mass-circulation China Daily led with a story about job growth signaling China’s economic recovery.

An interesting counterpoint to the claims that China has become more democratic over the years, and is actually doing a much better job with human rights than it has in the past. The fear of a simple remembrance of government brutality 20 years ago says that’s not at all true. And the government’s concerted effort to wipe that memory away prove it.

~McQ

Quote of the Day

Guess who is outdoing the avowed Socialists? And they’re jealous:

“Hey, Obama has just nationalized nothing more and nothing less than General Motors. Comrade Obama!” [Hugo] Chavez cheered on Venezuelan TV Tuesday. He gushingly added that he and Cuba’s Fidel Castro would now have to work harder just to keep up.

A real point of pride, huh?

~McQ

There Is A Solution

Although many people don’t want to hear it.

Arnold Schwarzenegger on the situation in California:

“People come up to me all the time, pleading ‘governor, please don’t cut my program,'” he said. “They tell me how the cuts will affect them and their loved ones. I see the pain in their eyes and hear the fear in their voice. It’s an awful feeling. But we have no choice.

“Our wallet is empty. Our bank is closed. Our credit is dried up.”

Then. Cut. Spending.

For real this time.

~McQ

Japanese “Lost Decade” Redux

It certainly seems like it. Reason magazine finds the current way the US is addressing the economic crises to be pretty familiar:

The scenario was eerily familiar. A long real estate bubble that had expanded extra rapidly for the previous five years suddenly burst, and asset prices came crashing back down to earth. Banks and financial institutions were left holding piles of worthless paper, and the economy soon headed south. The national government responded to the crisis by encouraging more lending and spending previously unfathomable amounts of money on public works projects in an effort to stimulate consumer spending and restart growth.

Of course that’s where we are now and what that led too in Japan has come to be known as the “lost decade” (now three decades old).

One of the things we’ve pointed out is there is an element within this model that both Japan and now the US has used that is focused on “pain avoidance” (GM and Chrysler are prefect examples of that). Part of that is driven by the belief by those in power that the government can address problems within markets and lessen the impact. The second part of that, of course, is by convincing the public that’s the case, they then have to try to do what they claim they can do. But the law of unintended consequences has a bad habit of pushing its way into such situations and turning them sour:

The Japanese experience shows that when the government is an active participant in the market, many firms would rather accept state support than initiate the inevitable financial reckoning. Such a status quo does not provide a sustainable foundation for the economy. Instead, it restricts economic growth and creates a cycle of stagnation.

A friend, talking about the recession and eventual recovery, said that we’ll come out of it “okay” because “Americans are neurotically productive”. True. But so are the Japanese. While we have a fantastic workforce which is among the most productive in the world, even they won’t be able to overcome restricted economic growth caused by the government’s deep intrusion into various markets.

Comparing Japan’s reaction to the US reaction in similar circumstances is instructive:

When a recession began to set in after the 1990 stock market crash, Japan responded by reversing its tight money policy, cutting rates to 4.5 percent in 1991, 3.25 percent in 1992, 1.75 percent from 1993 to 1994, 0.5 percent from 1995 to 2000, and as low as 0.1 percent in September 2001.

A similar pattern took place in the United States. From 2000 to 2002, the Federal Reserve slashed the target discount rate from 6 percent to 0.75 percent. Fearing irrational exuberance, to borrow Alan Greenspan’s famous phrase, the Fed then raised the rate as high as 6.25 percent in June 2006. But now that the bubble has burst and the economy contracted, the Fed has cut the discount rate 12 times, lowering it to the current 0.5 percent. Federal Reserve Chairman Ben Bernanke has repeatedly stated that he sees interest rate cuts as a way to “support growth and to provide adequate insurance against downside risks.”

In both the Japanese and the American cases, post-bubble policy makers believed that lowering interest rates would make credit easier to obtain, thus recreating the environment that had spurred economic growth to begin with. But this meant that the supposed cure for a bubble created by easy credit was to extend even more easy credit.

These rate cuts only perpetuated the distortion of economic decisions and prevented savings, investment, and consumption from realigning with true preferences, as opposed to the illusory ones created by easy credit and artificially low interest rates. The lesson is that when monetary policy is used to “smooth” or “tweak” the market, it inevitably causes unintended consequences that in some cases can be very damaging to long-term economic growth.

Of course it is hard to say what future growth might be had the US government not done what it has done. But again, using Japan of that era vs. the US of that era, the difference is between 1.3% growth on average vs. 3.5% growth here. In economic terms that is a huge difference.

Reason also does a nice job of dismantling the “failure of regulation” argument. As they point out, what must be examined is how the regulatory environment then in place spawned the crisis vs. the claim that not enough regulation was in place.

For instance, government housing policy of the era:

The push to expand homeownership had two big effects. First, it greatly increased the number of buyers, driving up housing prices. Second, it provided mortgages to a large number of people who had a high risk of default.

That policy was further enabled by the capital reserve requirements which, in effect, encouraged heavy lending and an insensitivity to risk. Instead of admitting that and understanding that such policies are dangerous, the reaction has mostly been to ignore that and shift the blame to the private sector with calls for “more regulation”.

And then, going back to the “pain avoidance” point (justified as “too big to fail” by the government), what has happened is, as in the case of GM and Chrysler before the bankruptcies, government propping up failed businesses:

The Bank of Japan tried to ease economic pain by loaning large amounts to businesses. But the attempts to recapitalize the market ignored underlying management problems in the dying firms. It was a costly mistake. Intense lobbying from special-interest groups representing various sectors of the Japanese economy perpetuated the ill-fated loans and funneled government money to zombie businesses.

The United States has already begun to copy this policy, lending billions of dollars to financial institutions and auto companies and buying up billions more in bank equity in an effort to recapitalize the marketplace. The effect has been to keep poorly managed firms alive with taxpayer money.

Had they been allowed to fail and go through the reorganization process, those problems would have at least been addressed. They haven’t, at this point, in most of the financial sector and in the auto sector, it remains to be seen.

Of course the government’s deep involvement in these sectors and businesses sets up a natural conflict of interests. While a business is market oriented, and takes signals from consumers, governments are agenda driven and politically oriented. And it then comes down to a matter of incentives. In the first case the incentive of a business is to serve its consumer base. But that’s not the case with politicians necessarily, is it?

Lawmakers’ incentives are to serve their constituencies or their own political careers. This can put them at odds with the businesses they are suddenly attempting to manage. The more the government is involved in directing business activity, the less likely those firms will succeed in maintaining long-term growth, and the more likely they will turn into Japanese-style zombies.

While we’d like to believe that lawmaker’s constituencies consist of the people in their state or district, in reality they consist of special interests who help keep them in office. The ability to deliver to those special interests and keep their support and dollars flowing is just to much to resist for most.

Additionally:

Studies from Okimoto’s center and the Bank of Japan concluded that data revealing the scope of the economic malaise were suppressed and that regulations were developed with governmental interests in mind.

Given how the discussion has been driven here by the likes of Barney Frank and Chris Dodd, there’s little doubt that regulations will be “developed with governmental interests in mind”.

In reality it all comes down to power, or the illusion of power, and politics. Short-term politics with no real eye on the future impact of actions taken today. And these actions are based in a false premise that the market is not self-correcting and that it must be both controlled and tweaked by government.

Japan bought into that premise, and so has the US:

The principle of creative destruction—the economic mutation that continuously breaks down old forms and creates newer, more productive and efficient ones—was ignored in the hope that legacy corporations could somehow save Japan. From Wall Street to Detroit, under both George W. Bush and Barack Obama, the American government has been equally unwilling to let once-formidable companies fail.

And that, in my opinion, will see us repeat the Japanese experience, despite the small glimmers of hope we’ve been seeing in the reports in recent days. This isn’t about short term increases in home sales and construction spending. This is about the long term economic health of our economy.

Unsurprisingly, I’m not seeing moves by the government that work toward the most positive outcome in that regard.

~McQ

Feldstein: Cap-and-Trade A “Bad Idea”

Martin Feldstein, a professor of economics at Harvard University, president emeritus of the nonprofit National Bureau of Economic Research, and former chairman of the Council of Economic Advisers from 1982 to 1984 has concluded that the Waxman/Markey cap-and-trade legislation is a bad idea. He comes to that conclusion for a number of reasons.

First, his understanding of the legislation and its economic impact:

The leading legislative proposal, the Waxman-Markey bill that was recently passed out of the House Energy and Commerce Committee, would reduce allowable CO2 emissions to 83 percent of the 2005 level by 2020, then gradually decrease the amount further. Under the cap-and-trade system, the federal government would limit the total volume of CO2 that U.S. companies can emit each year and would issue permits that companies would be required to have for each ton of CO2 emitted. Once issued, these permits would be tradable and could be bought and sold, establishing a market price reflecting the targeted CO2 reduction, with a tougher CO2 standard and fewer available permits leading to higher prices.

Companies would buy permits from each other as long as it is cheaper to do that than to make the technological changes needed to eliminate an equivalent amount of CO2 emissions. Companies would also pass along the cost of the permits in their prices, pushing up the relative price of CO2-intensive goods and services such as gasoline, electricity and a range of industrial products. Consumers would respond by cutting back on consumption of CO2-intensive products in favor of other goods and services. This pass-through of the permit cost in higher consumer prices is the primary way the cap-and-trade system would reduce the production of CO2 in the United States.

Note that he doesn’t play any games when talking about where the cost of such permits will end up – passed through to consumers. He prefers the CBO’s lower estimate of the impact per family of about $1,600 per “typical” family to some of the higher estimates in the $3,000 t0 $4,000. But they’re all estimates and they all say, even at the low end, that the impact is going to be significant.

Feldstein then looks at the possible payoff and challenges Americans to ask a very pertinent question. He also calls the plan exactly what it is – a tax:

Americans should ask themselves whether this annual tax of $1,600-plus per family is justified by the very small resulting decline in global CO2. Since the U.S. share of global CO2 production is now less than 25 percent (and is projected to decline as China and other developing nations grow), a 15 percent fall in U.S. CO2 output would lower global CO2 output by less than 4 percent. Its impact on global warming would be virtually unnoticeable.

But its impact on the American economy? Well, you don’t have to be a Harvard economist to figure that out. And a quick glance at Europe and how quickly most of the countries there figured out a way to ignore Kyoto should tell you the rest of the story.

Feldstein may or may not believe the theory that says CO2 is a pollutant and the cause of “global climate change”. But what is clear is he certainly doesn’t believe our seeming desire to strap ourselves economically without the big emitters (China and India) doing the same is a) worth it economically and b) make a bit of difference in real terms.  Doing it without those two and all others included is about as smart as committing to unilateral nuclear disarmarment.

Feldstein goes on to attack the pending cap-and-trade legislation for other reasons as well – mostly on a revenue and impact basis (and how revenue can soften the impact – yeah, subsidy – at the “payee” end – i.e. consumers.  Of course, only a certain class of consumers would most likely be eligable and it will be up to the more well-to-do to pay their “fair share”).  But the two big points of his criticism are the most important in my thinking.

1. It will, regardless of how it is structured, have a negative economic impact on every American household and thus our economy.

2. It won’t make a bit of real difference unless everyone is involved in such reductions.  Exclusion of the big emitters makes our “economic sacrifice” literally worthless in terms of the supposed overall goal of cutting CO2 worldwide.

Because of those two points alone, we should demand that such legislation be voted down.  I think the focus on CO2 is a load of unscientific nonsense, but politically that has no legs at this time.  But what does have legs is the argument summed up in those two points and opponents of cap-and-trade should use them (and Feldstein’s name) to make the argument against the pending legislation.

~McQ

The Threshold for Political Violence

Here’s a question for readers of all political stripes:

How big would a moral outrage have to be before you turned to violence?

Imagine that you live in a place in which what you perceive as a grave moral injustice–specifically violence against innocents–is enshrined in law.  You may perceive your opponents as anywhere from mean-spirited to perfectly well-meaning, but either way they are determined to continue, and your prospects for overturning this outrage through the normal legal process any time soon are scarce or nil.  In the meantime, you believe something horrific is happening on a massive scale.

For our purposes, try to think of different governments — direct democracy, representative democracy, oligarchy, monarchy, whatever.

At what point do you decide to act against law, by an alternative code?  And specifically, I mean turning to violence: threats, destruction of property, assault, assassination, even terrorism* and revolution.

What prevents you from acting violently up to that point?

  • The high personal cost?
  • The low probability of success?
  • The fear that things will turn out worse than simply allowing the grave injustice to continue?
  • Simple aversion to personally engaging in violence, despite your belief that the status quo is violence under color of law?

I’m trying to get at what flips a switch in someone to get them to turn to political violence.  Can you imagine a situation in which you would turn to such violence?

I suppose this turned into more of a thought experiment than a question.  But your input is welcome.

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* I prefer Philip Bobbitt’s definition of terrorism in Terror and Consent as “the pursuit of political goals through the use of violence against noncombatants in order to dissuade them from doing what they have a lawful right to do,” so remember, you oppose these noncombatants for supporting laws.