Windfall Profits Tax

The Senate is debating S. 3044 today. This bill is called the Consumer-First Energy Act of 2008. Among other things, this bill would impose a "windfall profits tax." You can read the text of the bill for yourself by going here. So what is in the bill, and specifically what is this "windfall profits tax?"

`(a) In General- In addition to any other tax imposed under this title, there is hereby imposed on any applicable taxpayer an excise tax in an amount equal to 25 percent of the excess of--

`(1) the windfall profit of such taxpayer, over

`(2) the excess of--

`(A) the amount of the qualified investments of such applicable taxpayer for such taxable year, over

`(B) the average of the qualified investment of such applicable taxpayer for taxable years beginning during the 2002-2006 taxable year period.

`(b) Applicable Taxpayer- For purposes of this chapter, the term `applicable taxpayer' means any major integrated oil company (as defined in section 167(h)(5)(B))."

The Associated Press article on this includes:

With gasoline prices topping $4 a gallon, Senate Democrats want the government to grab some of the billions of dollars in profits being taken in by the major oil companies.

Senators were to vote Tuesday on whether to consider a windfall profits tax against the five largest U.S. oil companies and rescind $17 billion in tax breaks the companies expect to enjoy over the next decade.

"The oil companies need to know that there is a limit on how much profit they can take in this economy," said Sen. Richard Durbin of Illinois, the Senate's No. 3 Democrat, warning that if energy prices are not reined in "we're going to find ourselves in a deep recession."

So this is a bill that is supposed to be a response to the high prices for petroleum and gasoline. There has recently been quite a bit of political rhetoric from the Democrat presidential primary candidates who both said they support the idea of a windfall profits tax. Reuters reports that Senator Obama said this yesterday:

"I'll make oil companies like Exxon pay a tax on their windfall profits, and we'll use the money to help families pay for their skyrocketing energy costs and other bills,"

Before discussing what we could expect to be the result of imposing a windfall profits tax, just a couple of thoughts. First, Senator Durbin's comment in the Reuter's article just doesn't sound like economic liberty to me. The Senator's threat to use government's force to take some of the profits of 5 of the country's corporations makes our Congress appear to be quite a predator rather than a protector of individual liberty and freedom.

Second, just a picky little point about the Constitution and Senator Obama's claim that he will make oil companies pay. Mr. Obama cannot, on his own, make oil companies do anything, either as a member of the Senate or as President. The Constitution gives the power to tax to Congress, not to the Senate, and most certainly not to the President.

Now, what should we expect to be the result of imposing a windfall profits tax? To put this question in context, we should also ask why the prices of oil and gasoline have been increasing recently. There are probably several factors involved in explaining the recent price increases, but basic economic ideas suggest just a couple of general possibilities. Basically for a price to increase, other things constant, either the demand is increasing or the supply is decreasing, or both. With respect to the price of a barrel of oil, it seems to me that price is increasing both because demand is increasing (a good part of this is increasing demand from people and businesses in China and India) and because supply is decreasing or at least not increasing. With respect to the price of a gallon of gasoline, oil is an input into the production of gasoline, and we can expect an increase in the price of an production input to result in an increase in the price of the output, or the price of gasoline in this case.

Ordinarily, economics suggests to us that when profits are above "normal" in an industry that this is a signal or an incentive for businesses to increase supply. And, ordinarily, we would expect that over time, sometimes over a very short period of time, that the above "normal" profits would be bid away by new businesses and by increased supplies by existing businesses. Of course, all of this means that the existence of above "normal" profits can be expected to lead, over time, to increased supply and to a LOWER PRICE. In this case, we could expect above "normal" profits for oil suppliers and for gasoline suppliers to lead over time to lower prices both for oil and for gasoline as supplies for both increase.

But, the Senate, and perhaps then the House and even the President, will decide to intervene in all of this by imposing a "windfall profits" tax on U.S. oil producers. Will a "windfall profits" tax result in increased supplies and lower prices for oil and gasoline? This is not what I would expect to happen. Such a tax should decrease the incentive to produce new oil supplies if for no other reason than that such a tax would be a signal that there was less money to be made in oil production and this would lead to less effort to find new sources of oil and also to less effort to increase production from existing sources.

In other words, we should expect that imposing a "windfall profits" tax will result in higher prices for oil and for gasoline than would otherwise be the case. Wouldn't you like to see lower prices for oil and gasoline? If so, then you might want to support policies that would free producers of these products to respond with increased supplies over time.

There is perhaps a bit of irony in this last point. Congress has for some time now imposed moratoria on both new off shore oil production as well as the production of oil shale. If Congress ended these moratoria we would expect increased production of oil and this should lead to a lower price per barrel of oil which would of course then be expected to lead to a lower price per gallon of gasoline. In political terms, it seems to me the very politicians who support a windfall profits tax because of the "excess" profits due to a high price per barrel of oil are also, mostly, the politicians who support these moratoria on production. Is it ironic that the profits these politicians want to take are, at least in part, due to their own choice to restrict U.S. oil production below what it could, and would, be? Or, are they crazy? Or, do these politicians have another agenda that is promoted by decreased supplies and higher prices for oil and gasoline?

Where's My Summer Job

Kristen Lopez Eastlick:

Finals week is over; summer is here. And thanks to misguided politicians, your teenager is more likely to be sitting in front of the television than waiting tables or scooping ice cream.

This year, it’s harder than ever for teens to find a summer job. Researchers at Northeastern University described summer 2007 as “the worst in post-World War II history” for teen summer employment, and those same researchers say that 2008 is poised to be “even worse.”

[. . . ]

One of the prime reasons for this drastic employment drought is the mandated wage hikes that policymakers have forced down the throats of local businesses. Economic research has shown time and again that increasing the minimum wage destroys jobs for low-skilled workers while doing little to address poverty.

According to economist David Neumark of the University of California-Irvine for every 10 percent increase in the minimum wage, employment for high school dropouts and young black adults and teenagers falls by 8.5 percent. In the past 11 months alone, the United States minimum wage has increased by more than twice that amount.

Sad, eh? Demand curves, even demand curves for young summer employees have negative slopes.

Our fearless leaders in Washington are talking recession, they are concerned for the unemployed, and yet, they have also chosen public policy that makes more unemployed workers than would otherwise be the case. Oh, well, don't worry, be happy for those fearless leaders. Perhaps they know what a great job they have. They get to make policy that creates results they don't want only to be able to make more policy to fix the bad policy results they created earlier. There just always seems to be something to do in Washington. Especially since too few voters seem to understand the economic world.

Change & Media Bias Go Together?

Rasmussen Reports™:

"Just 17% of voters nationwide believe that most reporters try to offer unbiased coverage of election campaigns. A Rasmussen Reports national telephone survey found that four times as many—68%--believe most reporters try to help the candidate that they want to win.

The perception that reporters are advocates rather than observers is held by 82% of Republicans, 56% of Democrats, and 69% of voters not affiliated with either major party. The skepticism about reporters cuts across income, racial, gender, and age barriers."

What is a voter to do when he or she can't trust the media to provide unbiased reports? Well the voter can choose rational ignorance. Or, the voter can choose rational irrationality and simply believe what feels good. Especially if voters choose rational irrationality, I'm thinking a campaign of hope and change just might feel good to a lot of voters.

Adam Smith

HAPPY BIRTHDAY!!

McCain-Obama Townhalls

DRUDGE REPORTS that Senator McCain has asked Senator Obama to participate in townhall meetings before the Democrat convention:

I propose these town hall meetings be as free from the regimented trappings, rules and spectacle of formal debates as possible, and that we pledge to the American people we will not allow the idea to die on the negotiation table as our campaigns work out the details. I suggest we agree to participate in at least ten town halls once a week with the first on June 11 or 12 in New York City at Federal Hall until the week before the Democratic Convention begins at locations to be determined by our campaigns. Federal Hall is particularly fitting as it was the place where George Washington took the oath of office as our first President and the birthplace of American government hosting the first Congress, Supreme Court and Executive Branch offices. These town halls should be attended by an audience of between two to four hundred selected by an independent polling agency, could be sixty to ninety minutes in length, have very limited moderation by an independent local moderator, take blind questions from the audience selected by the moderator and allow for equally proportional time for answers by each of us. All of these are suggestions that can be finalized by our campaigns. What is important is that we commit to participate in these history making meetings to join in the higher level of discourse that Americans clearly would prefer.

It seems to me that such meetings might well offer a "higher level of discourse," at least when compared with the nature of the sound bit debates we are likely to get otherwise. But, why have such townhall meetings before the party conventions?

I wonder if this has anything to do with Senator McCain assuming that voters are rationally ignorant? I believe Senator Obama has a voting record as a Senator which makes him the most liberal member of the Senate since he has been in the Senate, and perhaps this voting record means Senator Obama will be the most liberal politician ever nominated by one of the major parties as a presidential candidate. Generally, the candidate for each party has to run in the primary campaign some distance from the median voter in the national election, and then after the nomination is gained each candidate has to find a way to move toward the center in the general election. Because most voters choose to be rationally ignorant, I suspect this process of moving either from the left or the right toward the center is usually not too difficult because there has often been some time between gaining sufficient votes in the primary and the actual nomination which opens the general election campaign. When September to November rolls around the rationally ignorant voters will probably have forgotton the speechs and policy positions taken by each candidate in the primaries. So, Senator Obama would, normally, have the next 2 months to choose how to reposition and recast himself as a moderate for the general election. If the Senators were to start holding townhall meetings next week, wouldn't there be a lot less opportunity to choose how you want to be redefined for the general election?

Oil Supply

ANTHONY EFFINGER WRITES ABOUT OIL in North Dakota:

John Bartelson, who smokes Marlboro Lights through fingers blackened with tractor grease, may look like an average wheat farmer. He isn't. He's one of North Dakota's new oil barons.

Every month, he gets a check for tens of thousands of dollars from a company in Houston called EOG Resources Inc., which drilled two oil wells on his land last year. He says the day his first royalty check arrived was one to remember.

``I smiled to beat hell, and I went to town and had a beer,'' Bartelson, 65, says.

His new wealth springs from the Bakken formation, a sprawling deposit of high-quality crude beneath the durum wheat fields of North Dakota, Montana and southern Saskatchewan and Manitoba. The Bakken may give the U.S. -- the world's biggest importer of oil -- a new domestic energy source at a time when demand from China and India is ratcheting up the global competition for supplies and propelling average U.S. gasoline prices to almost $4 a gallon.

And unlike the tar from Canada's oil sands, Bakken crude needs little refining. Swirl some of it in a Mason jar and it leaves a thin, honey-colored film along the sides. It's light - -almost like gasoline -- and sweet, meaning it's low in sulfur.

Best of all, the Bakken could be huge. The U.S. Geological Survey's Leigh Price, a Denver geochemist who died of a heart attack in 2000, estimated that the Bakken might hold a whopping 413 billion barrels. If so, it would dwarf Saudi Arabia's Ghawar, the world's biggest field, which has produced about 55 billion barrels.

So, this is a story of supply and demand. The high oil prices and the increased profits for oil production certainly offer incentives to find and produce more oil. I guess some have said that they believe annual production of oil worldwide has peaked, but stories like this seem to offer a much different picture.

This is a fun story to read, so read the whole piece, especially if you are unhappy about the prices you find at the pump these days. Here is the finish to the piece:

. . . with crude trading above $125 a barrel, it'll be a long time before the rigs leave again, and John Bartelson is likely to be a wealthy man before they do.

Earmarks: Corruption Continues

WALL STREET JOURNAL COMMENTARY:

"Remember those Congressional pledges of earmark reform? Democrats are hoping you don't, as they try to pull a fast one and evade President Bush's pledge to block these special-interest spending projects slipped into legislation without scrutiny.

The battle is over the $601 billion defense authorization bill, which the House passed last week, 384-23. Earmarks are supposed to be included in the text of legislation. Instead, the Members have 'airdropped,' in Beltway parlance, a huge number of them into the conference report that accompanies the bill. And, to ensure that the money is spent on these dark-of-night additions, the Members have included language insisting that federal agencies do so.

This is a blatant attempt to override Mr. Bush's executive order earlier this year on earmarks. That order took direct aim at 'airdropped' earmarks on grounds that they lack the force of law. If Members think their projects are defensible, then put them into actual legislation and vote on them. But because this can be politically embarrassing – think 'bridge to nowhere' – Members prefer to slip their pork into the conference reports that offer instructions on implementation. These reports are written by staff members, aren't debated or voted on by Members, and aren't signed by the President."

The corruption is clear, i.e., money is being spent by individual members of Congress and the entire Congress is participating in hiding these expenditures. Congress, not individual members of Congress, has the constitutional power to make appropriations. Whether the Democrat party or the Republican party controls Congress, and even after an election which emphasized the corruption of earmarks as well as promises to end the practice, the corruption continues. But, perhaps the continuing corruption is worse now, because this Congress seems to have made even greater efforts to hide the earmarks from public view.

Why make promises to reform but then make greater efforts to hide the practice of earmarks? Probably because members of Congress assume, as public choice theory tends to assume, that voters are rationally ignorant. It seems that members of Congress think they can spend tax money on friends, political benefactors, family, and even themselves because voters rationally choose to remain largely ignorant about the politicians they elect.

I'm afraid there is little that can be done unless there is a return to the conceptual understanding of government as a limited government that is constitutionally constrained by specifically enumerated powers.

Gasoline Demand

With the recent concerns about increased oil prices, I've had numerous conversations with students and others about the demand for gasoline. Many have asserted that people simply can't drive less even when the price at the pump increases. Of course, my response is that the demand for gasoline has a negative slope, just like every other demand curve. I also tend to add that the last time gasoline prices were as high in real economic terms as they are today, the decrease in quantity demand was an elastic reponse to higher prices over a relatively short period of time. These pictures, which are REPORTED IN THE NY TIMES, fit well with my expectations about the demand for gasoline.

Michigan's Tax Elasticity

WSJ COMMENTARY on Michigan state government:

Officials in Lansing reported this month that the state faces a revenue shortfall between $350 million and $550 million next budget year. This is a major embarrassment for Governor Jennifer Granholm, the second-term Democrat who shut down the state government last year until the Legislature approved Michigan's biggest tax hike in a generation. Her tax plan raised the state income tax rate to 4.35% from 3.9%, and increased the state's tax on gross business receipts by 22%. Ms. Granholm argued that these new taxes would raise some $1.3 billion in new revenue that could be 'invested' in social spending and new businesses and lead to a Michigan renaissance.

Not quite. Six months later one-third of the expected revenues have vanished as the state's economy continues to struggle. Income tax collections are falling behind estimates, as are property tax receipts and those from the state's transaction tax on home sales."

[ . . . ]

The tax hikes have done nothing but accelerate the departures of families and businesses. Michigan ranks fourth of the 50 states in declining home values, and these days about two families leave for every family that moves in. Making matters worse is that property taxes are continuing to rise by the rate of overall inflation, while home values fall. Michigan natives grumble that the only reason more people aren't blazing a path out of the state is they can't sell their homes. Research by former Comerica economist David Littmann finds that about the only industry still growing in Michigan is government. Ms. Granholm's $44.8 billion budget this year further fattened agency payrolls.

I don't like calling government an industry, but it is interesting to note that Michigan state government continues to grow even as people and businesses move from the state to greener pastures. Politicians and bureaucrats in state governments often seem to neglect the idea that people may well have a very elastic response to increases in the costs they face.

Maybe if government encroaches on liberty too much people will respond by taking their lives to other locales in which they can find just a bit more liberty.

Of Subsidies & Charity

ARNOLD KLING:

". . . I would argue that there is nothing morally wrong with receiving a subsidy, even from government. The moral corruption in government subsidies is not in the recipients, except insofar as they deliberately pressure legislators for money. The moral corruption is in the subsidizers, who are taking money involuntarily from A to give it to B."

I think this is an interesting point. There are people who are demanders of subsidies or gifts from others, and there are people who are suppliers of subsidies or gifts. When the suppliers respond by taking from their own pocketbooks, their charity is a good thing. But, when the suppliers respond by taking from the pocketbooks of others charity is not what is going on.

Drive Less

TIM HAAB writes about the high price of gas:

"The real question CNN should ask is: What can you do about $4 gas? There is only one answer. 'Drive Less'. You as a consumer have control over your own gas purchases and little over the market price. The choice to drive less may be uncomfortable, but all the whining, crying and shouting for the government to do something will only make the situation worse. Price controls, gas rationing, windfall profit taxes, gas tax holidays...are all bad policies that may make you (and politicians) happier in the short run but will make everyone miserable in the long run. Your solution to high gas prices is to adapt. Drive Less! If the market adjusts, all the better, you're saving even more money."

I guess he has heard of a demand curve. This is certainly the short run response because it is about the only way reduce consumption in the short run. Of course, in the long run, a person can respond to a higher gas price by purchasing a car that gets better gas mileage, or perhaps even by changing the location of his or her economic activities. There are already reports in the news of an increased demand for better gas mileage vehicles.

I'll Be Watching

This is well worth watching.

Obama's Capital Gains

A WALL STREET JOURNAL commentary notes Senator Obama has revised his views concerning increasing the capital gains tax rate:

After Senator Obama let it be known that he'd consider nearly doubling to 28% the current capital gains tax rate of 15%, he had to expect questions. In the Pennsylvania debate, the moderator pointedly asked Mr. Obama why he'd do this, since history has shown that higher rates bring less revenue. Mr. Obama's response was to take a shot at wealthy hedge fund managers.

Since then, he's done some homework on capital gains. In a weekend interview with Chris Wallace of Fox News Sunday, Mr. Obama was asked again about raising capital gains rates. Though still leaving open the chance of a higher rate, he suggested 'we might go back up to 20' (a number Hillary Clinton has proposed), because 'I'm mindful that we've got to keep our capital gains tax to a point where we can actually get more revenue.' Mark this down as economic progress.

Very interesting, eh? I suppose this isn't quite what we should call a "flip-flop." I do think it presents a curious change in his views over a relatively short period of time. I wonder which of the views he has publicly expressed about this tax rate he actually believes? Perhaps the Senator doesn't actually have a view about the capital gains tax rate? Perhaps he chooses his campaign rhetoric in light of his analysis that voters are rationally ignorant?

Senator McCain's Economy

Recently SENATOR MCCAIN gave a speech on the economy. Let's take a look at what he had to say.

I kind of like the way Senator McCain opens his discussion of the economy:

In our free society, it is left to each one of us to make our own way in the world -- and our jobs, businesses, savings, pensions, farms, and homes are the work of years . . . .

But, in almost no time, it seems to me he backs away:

Economic policy is not just some academic exercise, and we in Washington are not just passive spectators. We have a responsibility to act -- and if I am elected president I intend to act quickly and decisively. We need reforms that promote growth and opportunity. We need rules that assure fairness and punish wrongdoing in the market. We need tax policies that respect the wage-earners and job creators who make this economy run, and help them to succeed in a global economy. In all of this, it will not be enough to simply dust off the economic policies of four, eight, or twenty-eight years ago. We have our own work to do. We have our own challenges to meet.

He starts with freedom, and then turns to government acting to make reforms. I'm almost afraid to continue on because I suspect those reforms are not going to be for greater freedom.

Senator McCain seems to take a little time getting warmed up, but when he gets to the details about what he would like to do I think I can find quite a bit I can warm up to.

In so many ways, we need to make a clean break from the worst excesses of both political parties. For Republicans, it starts with reclaiming our good name as the party of spending restraint. Somewhere along the way, too many Republicans in Congress became indistinguishable from the big-spending Democrats they used to oppose. The only power of government that could stop them was the power of veto, and it was rarely used.

If that authority is entrusted to me, I will use the veto as needed, and as the Founders intended. I will veto every bill with earmarks, until the Congress stops sending bills with earmarks. I will seek a constitutionally valid line-item veto to end the practice once and for all. I will lead across-the-board reforms in the federal tax code, removing myriad corporate tax loopholes that are costly, unfair, and inconsistent with a free-market economy.

He then discusses a review of, and a different approach to, the government agencies and regulation that reminds me just a bit of the things President Reagan used to talk about. I'm not sure how much was changed in this regard by Reagan's presidency. I think there were some significant reductions in regulations and some improvements in bureaucratic operations, yet after time government in Washington has again become something for which Reagan's themes may now be reused in a McCain bid for the presidency.

Senator McCain has some interesting things to say specifically about tax reform:

The goal of reform, however, is not merely to check waste and keep a tidy budget process -- although these are important enough in themselves. The great goal is to get the American economy running at full strength again, creating the opportunities Americans expect and the jobs Americans need. And one very direct way to achieve that is by taking the savings from earmark, program review, and other budget reforms -- on the order of 100 billion dollars annually -- and use those savings to lower the business income tax for every employer that pays it.

So I will send to Congress a proposal to cut the taxes these employers pay, from a rate of 35 to 25 percent. As it is, we have the second-highest tax on business in the industrialized world. High tax rates are driving many businesses and jobs overseas -- and, of course, our foreign competitors wouldn't mind if we kept it that way. But if I am elected president, we're going to get rid of that drag on growth and job creation, and help American workers compete with any company in the world.

I will also send to the Congress a middle-class tax cut -- a complete phase-out of the Alternative Minimum Tax to save more than 25 million middle-class families more than 2,000 dollars every year.

[ . . . ]

The tax laws of America should also promote and reward innovation, because innovation creates jobs. Tax laws should not smother the ingenuity of our people with needless regulations and disincentives. So I will propose and sign into law a reform agenda to permit the first-year expensing of new equipment and technology... to ban Internet taxes, permanently... to ban new cell phone taxes... and to make the tax credit for R&D permanent, so that we never lose our competitive edge.

One of the more interesting tax proposals to ponder may be his suggestion with respect to a "flat" income tax:

. . . I will propose an alternative tax system. When this reform is enacted, all who wish to file under the current system could still do so. And everyone else could choose a vastly less complicated system with two tax rates and a generous standard deduction. Americans do not resent paying their rightful share of taxes -- what they do resent is being subjected to thousands of pages of needless and often irrational rules and demands from the IRS. We know from experience that no serious reform of the current tax code will come out of Congress, so now it is time to turn the decision over to the people. We are going to create a new and simpler tax system -- and give the American people a choice.

I wonder how taxpayers would respond if given this choice? If many choose the less complicated approach, perhaps this would be the opening of a door to a significant change in the way the federal government raises revenue. After all, the income tax code is so complex and so large essentially because our elected representatives find it impossible to resist supplying the rent seekers by writing special exemptions, exclusions, credits, etc., etc., etc., into the tax code. But, I suspect that even if many taxpayers chose the simple approach today that over time what would emerge is just a little new exemption or exclusion or credit to the simple approach one year, and then another a couple years later, and then several more later in order to fulfill some presidential campaign promise. Still, I wonder, if the Senator's specific suggestion here does catch voter attention, perhaps this would indicate an opening opportunity to significant tax reform that might tax consumption rather than income.

Here is some of what the Senator said specifically about free trade:

There's never been a problem Americans couldn't solve. We are the world's leaders, and leaders don't fear change, pine for the past and dread the future. We make the future better than the past. That is why I object when Senators Obama and Clinton and others preach the false virtues of economic isolationism. Senator Obama recently suggested that Americans are protectionist because they are bitter about being left behind in the global economy. Well, what's his excuse for embracing the false promises of protectionism? Opening new markets for American goods and services is indispensable to our future prosperity. We can compete with anyone. Senators Obama and Clinton think we should hide behind walls, bury our heads and industries in the sand, and hope we have enough left to live on while the world passes us by. But that is not good policy and it is not good leadershi p. And the short-sightedness of these policies can be seen today in Congress' refusal to vote on the Colombian Free Trade Agreement.

When new trading partners can sell in our market, and American companies can sell in theirs, the gains are great and they are lasting. The strength of the American economy offers a better life to every society we trade with, and the good comes back to us in many ways -- in better jobs, higher wages, and lower prices. Free trade can also give once troubled and impoverished nations a stake in the world economy, and in their relations with America. In the case of Colombia, a friend and crucial democratic ally, its stability and economic vitality are more critical now, as others in the region seek to turn Latin America away from democracy and away from our country. Trade serves all of these national interests, and the interests of the American economy as well -- and I call on the Congress once again to put this vital agreement to an up or down vote.

I know that open markets don't automatically translate into a higher quality of life for every single American. Change is hard, and while most of us gain, some industries, companies and workers are left to struggle with very difficult choices. And government should help workers get the education and training they need -- for the new jobs that will be created by new businesses in this new century.

Overall his views on trade seem good, although the last paragraph here suggests he may accept more government involvement than I would. He does promise to "give displaced workers of every age a fresh start with new skills and new opportunities," and with respect to the present mortgage crisis he says his approach would mean that "citizens will keep their homes, lenders will cut their losses, and everyone will move on."

He also proposes a "gas-tax holiday" between Memorial and Labor days this year. By suspending collection of federal excise taxes on gasoline the Senator says there would be an immediate economic stimulus. I'm sure I would welcome paying less in gasoline excise taxes, and I'll bet lots of other people would as well. Of course, this summer McCain cannot be President yet. Perhaps instead of proposing his tax holiday in a campaign speech the Senator could return to his work in the Senate and offer such a bill.

On the whole, the trepidation I expressed above was not well supported by McCain's view of the economy. I find much more in his view to like than I found in SENATOR OBAMA'S VIEW.

Climate Heretics

GLENN REYNOLDS:

THEY TOLD ME THAT IF GEORGE W. BUSH WERE RE-ELECTED, famous scientists would be punished for daring to dissent from politico-religious orthodoxy. And they were right!

Here is the article that motivates his comment:

By pioneering the science of seasonal hurricane forecasting and teaching 70 graduate students who now populate the National Hurricane Center and other research outposts, William Gray turned a city far from the stormy seas into a hurricane research mecca.

But now the institution in Fort Collins, Colo., where he has worked for nearly half a century, has told Gray it may end its support of his seasonal forecasting.

As he enters his 25th year of predicting hurricane season activity, Colorado State University officials say handling media inquiries related to Gray's forecasting requires too much time and detracts from efforts to promote other professors' work.

But Gray, a highly visible and sometimes acerbic skeptic of climate change, says that's a "flimsy excuse" for the real motivation — a desire to push him aside because of his global warming criticism.

Among other comments, Gray has said global warming scientists are "brainwashing our children."

Now an emeritus professor, Gray declined to comment on the university's possible termination of promotional support.

But a memo he wrote last year, after CSU officials informed him that media relations would no longer promote his forecasts after 2008, reveals his views:

"This is obviously a flimsy excuse and seems to me to be a cover for the Department's capitulation to the desires of some (in their own interest) who want to reign (sic) in my global warming and global warming-hurricane criticisms," Gray wrote to Dick Johnson, head of CSU's Department of Atmospheric Sciences, and others.

When science meets politics, it seems politics wins out. Bummer.

Global Warming

STOP GLOBAL WARMING NOW!

Capitalism Day

DON BOUDREAUX celebrated capitalism yesterday. Be sure to read his tribute:

"Peace and free trade."

Desperately Seeking Ludwig, F. A., and Milton

PETER BOETTKE:

"Right now the economics profession has not had a clear intellectual leader step forward to challenge the emerging statist hegemony in the wake of our current financial situation. We are in a state of desparately seeking the next Ludwig, F. A., and Milton. No disrespect to the great economists amongst us, e.g., Andrei Shleifer, or my colleagues at GMU, e.g., Tyler Cowen and Russ Roberts, but the arguments emerging from these talented men do not have the 'force' of those presented by Mises, Hayek and Friedman. And without that intellectual force, our future in the US is potentially very bleak as statism will crowd out market creativity, and wealth creation. Where is the next intellectual figure that will explain the impossibility of socialism, why the worst get on top, and why government policies are counter-productive?

How do we find these type of economists and how do we cultivate them? And without them can we survive the statist onslaught on our economic freedom?"

Senator Obama's Economy

Let's take a look at some of the text from SENATOR OBAMA'S SPEECH "Renewing the American Economy."

But the American experiment has worked in large part because we have guided the market's invisible hand with a higher principle. Our free market was never meant to be a free license to take whatever you can get, however you can get it. That is why we have put in place rules of the road to make competition fair, and open, and honest. We have done this not to stifle - but rather to advance prosperity and liberty. As I said at NASDAQ last September: the core of our economic success is the fundamental truth that each American does better when all Americans do better; that the well being of American business, its capital markets, and the American people are aligned.

I think all of us here today would acknowledge that we've lost that sense of shared prosperity.

I'm not liking the sounds of this. America works because "we have guided" the invisible hand? Who is this "we?" Does he mean because government has guided the invisible hand? I suspect that is what he means, although he doesn't seem to me to specifically state what the higher principle is that has been used by government to guide the invisible hand.

I don't think we've lost the sense of prosperity. I'm not sure about the "sense of shared prosperity," maybe because I'm not sure what he means by this phrase. But "sense" seems to me a lot like "preference" or "utility." That is, "sense" is something we can't easily see or measure, which makes it a convenient choice for political rhetoric.

But, let's take a look at his explanation for why our "sense of shared prosperity" has been lost.

This loss has not happened by accident. It's because of decisions made in boardrooms, on trading floors and in Washington. Under Republican and Democratic Administrations, we failed to guard against practices that all too often rewarded financial manipulation instead of productivity and sound business practices. We let the special interests put their thumbs on the economic scales. The result has been a distorted market that creates bubbles instead of steady, sustainable growth; a market that favors Wall Street over Main Street, but ends up hurting both.

I'm not sure what he means by a market that favors this street over that street. But, then, I like to think of markets as exchange, and I like to think of exchange as resulting from the voluntary choices of a buyer and a seller. Of course, an exchange cannot favor or disfavor anything, not even this street over that street.

Moving on:

Nor is this trend new. The concentrations of economic power - and the failures of our political system to protect the American economy from its worst excesses - have been a staple of our past, most famously in the 1920s, when with success we ended up plunging the country into the Great Depression. That is when government stepped in to create a series of regulatory structures - from the FDIC to the Glass-Steagall Act - to serve as a corrective to protect the American people and American business.

I'm not buying his history lesson in this speech either. Admittedly, I'm not an economic historian, and I didn't stay at a Holiday Inn Express last night either (I'll bet this is true for Senator Obama as well). But one of the things I learned about the economics of the Great Depression was that the research of Milton Friedman found that government's monetary policy was the explanation for why this recession turned into the Great Depression. Further, Amity Shlaes explains in THE FORGOTTEN MAN that when the "government stepped in to create a series of regulatory structures" those regulatory structures prolonged (not ended) the Great Depression. My students learn to suspect this as well when they study Supreme Court opinions from this period in my course Constitution and the Economy and discover numerous instances in which the policies of FDR reduced output at a time of "depression."

I also want to add that the "series of regulatory structures" referred to by Senator Obama were generally regarded by the Supreme Court at the time as unconstitutional, at least initially. I like to think our Constitution as it was written protected individual economic liberty and that these regulatory structures were seen as unconstitutional then because they infringed upon individual liberty. Unfortunately what emerged from politics at the time was FDR's scheme to pack the Supreme Court and the "switch in time that saved nine." Certainly from that time on, the Suprme Court's view of the Constitution became more and more a view that I think is fairly described as the lost constitution and which is discussed by Randy Barnett in RESTORING THE LOST CONSTITUTION.

Once again the Senator moves on to something that I'm not at all sure what he means by what he says:

Ironically, it was in reaction to the high taxes and some of the outmoded structures of the New Deal that both individuals and institutions began pushing for changes to this regulatory structure. But instead of sensible reform that rewarded success and freed the creative forces of the market, too often we've excused and even embraced an ethic of greed, corner cutting and inside dealing that has always threatened the long-term stability of our economic system. Too often, we've lost that common stake in each other's prosperity.

I don't think the Senator is clear here on who he is criticizing, and I don't think "that common stake in each other's prosperity" is something that can be lost because I think the "tendency to truck, barter and exchange" (to borrow from Adam Smith) is an inherent part of human nature. It seems to me that as long as government does not intervene with regulations that the "common stake in each other's prosperity" works out in exchange after exchange really rather well.

Now if Senator Obama means to say that the "we" who have lost a sense of understanding "that common stake" are our political leaders, then I might just be with him on this one. I do think much of Washington fails to understand (the basic economics) that exchange is voluntary and therefore beneficial for both buyer and seller (the common stake in prosperity), and that government's regulations bring force to bear upon the common stake in prosperity. When politicians overlook this stuff of basic economics, and when the Judicial branch of government fails to enforce the Constitutional constraints against government's infringements of economic liberty, then rent seeking prospers at the expense of "that common stake." But, my guess is that Senator Obama is not saying what I would say: "Government and rent seeking is the problem, not that answer."

I suspect Senator Obama means to say that the answer is to better use government's force in our lives and our individual daily economies. At least that is how I understand this:

Let me be clear: the American economy does not stand still, and neither should the rules that govern it. The evolution of industries often warrants regulatory reform - to foster competition, lower prices, or replace outdated oversight structures. Old institutions cannot adequately oversee new practices. . . .

Or, consider this as well:

. . . . This was not the invisible hand at work. Instead, it was the hand of industry lobbyists tilting the playing field in Washington, an accounting industry that had developed powerful conflicts of interest, and a financial sector that fueled over-investment. . . . .

In other words, it is the greedy corporate rent seekers (demanders), not the greedy Washington politicians (suppliers of rent seeking), who are to blame for our "failing" system of political economy.

What follows in his speech seems to be illustrations of his idea that "the rules that govern" the economy must be changed as the economy changes. I suspect this is an easy idea (or principle as I think he would say) to latch onto. In my view, this idea is of course quite the opposite of understanding that exchange, not force that is directed by government to intervene in exchange, is the foundation of "that common stake in each other's prosperity." When the Senator finishes with the list of illustrations he gets to the following:

Our history should give us confidence that we don't have to choose between an oppressive government-run economy and a chaotic and unforgiving capitalism. It tells us we can emerge from great economic upheavals stronger, not weaker. But we can do so only if we restore confidence in our markets. Only if we rebuild trust between investors and lenders. And only if we renew that common interest between Wall Street and Main Street that is the key to our success.

Of course this all sounds just fine on the surface, but I'm still nervous by his use of "we" in the context of restoring confidence and rebuilding trust. I already have great trust and confidence in "our markets," and I haven't lost that confidence because of any of the illustrations he draws upon. Instead, I see in his illustrations, and I see in our history, reason to conclude that "our markets" do just fine without government intervention. I'm nervous about his use of "we" because I'm pretty sure he means to say we have to involve government even more in our markets to restore trust and confidence, and I think it is largely because of government's intervention in the past that he can mistakenly assert today that we've lost trust and confidence in our markets. It seems he is saying that for all the ills he finds in our economy the answer is really more government policy so that "we" can try to fix the very problems "we" created with earlier government policy.

Well, the Senator's speech goes on for quite a bit longer, but, it seems to me that once I get to the end I've pretty much already covered with my comments above the Senator's view of our system of political economy. At the end of his speech he repeatedly refers again and again to "we" this and "we" that. While it sounds like by "we" he means all of us, it is pretty clear to me that he means "we" in the national government will fix all these ills for you. Or, perhaps I can say that Senator Obama's view of our economy is one in which he will try again and again (with his colleagues in Washington) to use government's force to intervene in our own individual economies to fix the problems that have now emerged from the earlier interventions of government policy. Of course, as you know by now, my view of government and prosperity is pretty much the opposite of the view I find in the Senator's speech.

Obama's Tax Expectations

GREG MANKIW MAKES an interesting observation with respect to Senator Obama's choice not to make use of tax-deferred savings opportunities:

I was surprised to see that Senator Obama has, for some reason, decided not to use this opportunity. His recently released tax returns show significant Schedule C income from book royalties (about half a million dollars in the most recent year). I am not a tax accountant, but I believe he could have put a substantial part of these earnings ($44,000) into a SEP-IRA and deferred taxes on it until withdrawal. Line 28 on his tax return, however, is completely blank.

Why? I don't know. Maybe he is getting bad tax advice. Or maybe he is expecting vastly higher tax rates in the future when the accumulated savings will need to be withdrawn and taxed. As Obama economic adviser Austan Goolsbee has written, "Future increases in tax rates potentially threaten to significantly reduce the value of your retirement savings and may even mean that you should not save in 401(k) accounts at all."

Well, this is a very interesting possibility, especially since I don't think there is a clear reason to think Senator Obama would not want to hire sound tax advice. Maybe, the Senator is looking at the financial and political future of Social Security and Medicare, or maybe he is simply expecting the democrat party to be in control of the power to tax in the future.

Bailouts

The NY Times has an article that notes the positions of the presidential candidates with respect to MORTGAGE BAILOUTS:

Drawing a sharp distinction between himself and the two Democratic presidential candidates, Senator John McCain of Arizona warned Tuesday against vigorous government action to solve the deepening mortgage crisis and the market turmoil it has caused, saying that “it is not the duty of government to bail out and reward those who act irresponsibly, whether they are big banks or small borrowers.”

Both democrat candidates have called for the federal government to create a fund to provide "relief" for those facing foreclosure.

I haven't watched this issue closely, but it seems to me taking the policy position that government should not save those who act irresponsibly is a good policy position to take.

Of course, since this is about mortgages, it would also seem relevant to point out the federal government is already in the business of subsidizing home mortgages because of government entitites that provide mortgages (e.g. FHA), and because of mortgage interest deductions from federal income tax liabilities. Perhaps we could guess that the federal government's subsidies had already caused an inefficiently large number of mortgages before the present crisis, and perhaps at least some of those facing foreclosure today are among those inefficient mortgages.

Hayek on the Benefits of Freedom

I often think about liberty from the point of view of what I can do with my freedom. In THE CONSTITUTION OF LIBERTY Hayek writes about the benefits of liberty by emphasizing what others do with their freedom:

The benefits I derive from freedom are thus largely the result of the uses of freedom by others, and mostly of those uses of freedom that I could never avail myself of. It is therefore not necessarily freedom that I can exercise myself that is most important to me. It is certainly more important that anything can be tried by somebody than that all can do the same things. It is not because we like to be able to do particular things, not because we regard any particular freedom as essential to our happiness, that we have a claim to freedom. . . .What is important is not what freedom I personally would like to exercise but what freedom some person may need in order to do things beneficial to society. This freedom we can assure to the unknown person only by giving it to all. (p. 32)

I think this is very important. It may be difficult to see why Hayek writes this about freedom. Perhaps one way to understand is to consider this question: How many of the things you use in your daily life would you have to make use of if you relied only upon your own freedom? Or consider this question: How many of the things you do in your daily life could you do if you relied only upon your own freedom?

If I relied only upon my own freedom, I would not have the personal computer I'm using right now, and I would not have the modem nor the internet connection I'm using to compose this blog post. I would not have the copy of THE CONSTITUTION OF LIBERTY that is sitting in front of me, and I would probably not have the eyeglasses I've been using to read this great book. Nor would I have the desk lamp I'm using to see the pages of this book. I would not have the desk my monitor and printer sit on, and for that matter I would not have the monitor and printer if I had to rely only upon my own freedom. I certainly would not have an automobile for transportation, nor would there be roads that I use every day if I relied only upon my own freedom. Of course I could go on and on and on with this. Take a look at your own daily life and consider what your life would be like if you relied only upon what you could do with your own freedom.

Perhaps some will read this and suggest that I am merely pointing out the fact that I rely on the production of others rather than the freedom of others, and that I would be able to benefit from the production of others even if those others were not allowed broad individual freedom and liberty. Such a suggestion would seem to miss the understanding of a fundamental aspect of the economic world:

It is through the mutually adjusted efforts of many people that more knowledge is utilized than any one individual possesses or that it is possible to synthesize intellectually; and it is through such utilization of dispersed knowledge that achievements are made possible greater than any single mind can foresee. It is because freedom means the renunciation of direct control of individual efforts that a free society can make use of so much more knowledge than the mind of the wisest ruler could comprehend.

. . .It is because we do not know how individuals will use their freedom that it is so important. If it were otherwise, the results of freedom could also be achieved by the majority's deciding what should be done by the individuals. (p. 30-31)

My standard of living is what it is not merely because I rely on the production of others.

I rely on the knowledge of others. I simply do not know how to make a car, a computer, a telephone, or the electricity that powers my computer and my desk lamp. Most importantly I rely on the use of knowledge in society which cannot possibly be known by any one individual. Even if I wanted to learn how to make a telephone or a modem or a personal computer, I would not be able to come to know for myself all of the knowledge that is required for such things to be part of my daily life. I cannot even come to know for myself all of the knowledge that is required to cause something as simple as a pencil to become part of my daily life. If you doubt this, then you must read I, PENCIL by Leonard E. Reed. Here is just a taste from I, Pencil:

My family tree begins with what in fact is a tree, a cedar of straight grain that grows in Northern California and Oregon. Now contemplate all the saws and trucks and rope and the countless other gear used in harvesting and carting the cedar logs to the railroad siding. . . . .

The logs are shipped to a mill in San Leandro, California. Can you imagine the individuals who make flat cars and rails and railroad engines . . . .

My "lead" itself -- it contains no lead at all -- is complex. The graphite is mined in Ceylon . . .

The graphite is mixed with clay from Mississippi in which ammonium hydroxide is used in the refining process. Then wetting agents are added such as sulfonated tallow -- animal fats chemically reacted with sulfuric acid . . . .To increase their strength and smoothness the leads are then treated with a hot mixture which includes candelilla wax from Mexico, paraffin wax, and hydrogenated natural fats.

My cedar receives six coats of lacquer. Do you know all the ingredients of lacquer? Who would think that the growers of castor beans and the refiners of castor oil are a part of it?

. . . . .

And, of course, there is much, much more to knowing all that needs to be known in making a pencil part of my daily life.

While I certainly value my own individual freedom, I think Hayek's insights are correct. My life depends on the freedom of others. And, as Hayek writes:

Of course the benefits we derive from the freedom of others become greater as the number of those who can exercise freedom increase. (p. 32)

Learn more about THE USE OF KNOWLEDGE IN SOCIETY.

Paternal Government

A letter by DON BOUDREAUX:

I'm outraged that Hillary Clinton promises, if elected president, to help people (in her words) "quit smoking, to get more exercise, to eat right, to take their vitamins" ("The Iron Lady," March 17). Perhaps I'm overreacting because I buried my mother on Wednesday, but neither Uncle Sam nor Mrs. Clinton is my parent. That role was performed remarkably well and lovingly by the persons who had responsibility for it: my father and late mother. I, like any self-respecting adult, resent beyond words the impertinence of any stranger presuming to possess the moral authority to intrude into my affairs.

To my own dying day, I will live by the creed instilled in me by my parents: My life is my own, and just as I have no right (or wish) to meddle in the affairs of others, no one - regardless of how exalted her status or how large her electoral majority - has the right to meddle in mine.

Senate Corruption Continues

THE HILL REPORTS:

Citizens Against Government Waste (CAGW) named all 71 senators who voted against a one-year earmark moratorium March Porkers of the Month. The amendment to the fiscal year 2009 Budget Resolution was offered by Sen. Jim DeMint (R-S.C.) and had fourteen bipartisan co-sponsors including the support of all three presidential candidates.

“King of Pork” Sen. Robert Byrd (D-W. Va.) dismissed the earmark ban saying, “The idea that an all-knowing, all-powerful executive bureaucracy is more trustworthy than the elected representatives of the people when it comes to spending taxpayer dollars challenges the most basic tenet of our political system.”

In a similar vein, Senate Majority Leader Harry Reid (D-Nev.) opposed the ban as “unrealistic” and even went so far as to erroneously claim that earmarking “has been going in this country for 230-some-odd years,” and that “The Founding Fathers would be cringing to hear people talking about eliminating earmarks.”

I guess "pork" is one word for this, but I think a better word for it is corruption.

It strikes me as pure nonsense to suggest the "Founding Fathers would be cringing" at talk of ending the practice of earmarks. Let's take a look at the list CITIZENS AGAINST GOVERNMENT WASTE provides with respect to 2006. Here are just a few of the earmarks:

• $5.7 million for a Wildlife Management Institute
• $1.3 million for curriculum development at Mississippi State
• $500,000 for the Artic Winter Games
• $1 million for the Griffth Observatory Planetarium
• $1 million for a competency based distance education initiative in the state of the Senator making the earmark
• $1 million for the closed Philadelphia Navy Yard for what appears to be local urban redevelopment
• $350,000 for the Chicago Greenstreets Program which included the design, installation, and maintenance of over 950 hanging baskets
• $400,000 for the Kam Wah Chung & Company Museum
• $250,000 for the Stanley Theater in Utica, New York
• $100 million to create a family literacy course
• $41 million for the Byrd Honors Scholarships
• $21.7 million for a project to improve the writing skills of grade school teachers
• $5 million for the Industrial Outreach Service at Mississippi State
• $1 million for academic programs at the University of Redlands
• $1.2 million for compact laser sensors at Montana State University
• $2 million for the Virginia Community College System web portal

Of course the list could go on and on. I think our Founders knew what was in the Constitution, and I think they knew our Congress was supposed to be a Congress of enumerated powers. I find it very difficult to place any of the earmarks in the above list within the list of enumerated powers written as Article I, Section 8 of the Constitution. At least while James Madison was a member of Congress, I'm pretty sure that there would have been one of our Founders who would have been arguing strongly against Congress having the power to tax and spend for programs such as these. I mean, really, does Congress have the constitutional power to spend tax dollars on hanging baskets in Chicago?

Of course it is not just that such expenditures should be considered unconstitutional, it is also that for most (maybe all) of these earmarks a member of Congress is specifically designating that tax dollars be spent in his or her district or state for purposes of their choosing. There have even been earmarked projects that cause tax dollars to be spent on projects that directly involve a member of the earmarker's family.

The corruption continues.

In Colorado it appears that Senator Allard voted to stop the corruption for a year, while Senator Salazar voted in favor of the continued corruption.

At least all 3 Senators still competing to be our next President voted to stop the corruption for a year.

Perfection

PERRY DE HAVILLAND:

The latest great idea from 'digital-strategy consultant' Jim Griffin, who is advising the Recording Industry Association of America on new and innovative ways of rent seeking, is to propose a piracy surcharge on ISPs in the USA.

Of course the advantage of that is if all broadband users have to pay the music industry $5 per month, regardless of whether or not you actually download any music, legal or illegal, why bother promoting music at all? Who needs products when you can just force people to pay you regardless? Is it great that we have governments around the world who are in a position to actually try and do stuff like that?

NO.

Free Trade Parable

ARNOLD KLING'S PARABLE of free trade:

The challenge is to make an argument for free trade in terms that everyone can understand. Perhaps a parable is in order. Perhaps we could start with "Once upon a time," and describe an economy that works like ours today. But we decide that free trade has gone too far.

First, we enact national protectionism. Then, the "buy local" movement catches on and leads to effective elimination of the Constitutional provisions against trade barriers within the United States. Cities and states start enacting tariffs, quotas, and trade subsidies.

Finally, the movement moves toward its logical conclusion: only buy products made in your own household. People give up computers, cars, packaged food, electricity, and plumbing. We go back to subsistence farming and hunter-gathering.

Notice that the advantages of free trade are not described in this parable directly in terms of comparative advantage. The advantages of free trade in this parable seem to be due to the division of labor, even though this concept is not explicitly described. The advantages of free trade in this parable seem, perhaps, to rely more on what I've described in class as the broadening or deepening of the network on which we individually depend in our daily lives.

Economic Advisors

Which economists are the presidential CANDIDATES LISTENING TO? Senator McCain's advisor is Douglas Holtz-Eakin:

"Nevertheless, Holtz-Eakin, a former director of the Congressional Budget Office and former chief economist on President Bush's Council of Economic Advisers, is well-respected among deficit hawks for his positions on less-than-hip issues like entitlement reform, for which he's advocated early and often.

In his view, the sooner the long-term shortfalls in Medicare and Social Security are addressed, the better for the economy. Shoring up both programs would involve tough choices when it comes to spending cuts, Holtz-Eakin has said, a route he believes would be more effective than tax increases. Both he and other economists estimate the economy is not likely to grow enough to offset the mandatory spending pressures that will build as Baby Boomers retire."

I agree that Medicare and Social Security are among the most important issues for Congress and the President to deal with.

Senator Obama's advisor is Austan Goolsbee:

But he is used to the politically fraught debate over how much to tax high-income Americans. In his estimate, the sky won't fall if the top tax rate returns to 39.6% from the current 35%.

In one of his New York Times columns, Goolsbee points to data showing income for the top 1% of earners rose disproportionately relative to everyone else both when tax rates fell and when they rose.

"Seeing the same pattern ... indicates that tax cuts weren't responsible. It suggests that cuts for high-income taxpayers likely gave windfalls to those whose incomes were already rising sharply because of broader market forces," he wrote.

I don't like an emphasis on taxing the rich, nor do I warm up to the idea that taking less money from anybody, rich or poor, should be called a "windfall."

Senator Clinton's advisor is Gene Sperling:

In his book "The Pro-Growth Progressive: An Economic Strategy for Shared Prosperity," Sperling calls for balancing the advantages of a global economy with the goals of protecting workers.

"With hundreds of millions of new middle-class consumers coming into the world economy, we should be confident that in the long run America will win more than it loses from an open global economy," he writes. "What practical options do we have between simply assuming greater globalization will lift all boats, and resorting to self-defeating protectionism?"

I haven't read Sperling's book, and I'm not sure this quote tells me very much about his policy view. But I like his reference to protectionism as self-defeating, and I can also agree "America will win more that it loses from an open global economy." Winning more than losing is probably a view that is a bit too weak for me.

Free Trade Politicians

The Cato Institute provides information about how our politicians line up in Washington CONCERNING FREE TRADE issues. The 3 Senators still in the hunt to be our next President are clearly different on free trade issues based upon their voting records in the Senate. Senator McCain is characterized as a Free Trader, while the 2 Senators on the democrat side appear to be Interventionists.

I've looked at 21 Senators so far, and all the Free Traders are republicans: McCain, Allard, Lugar, Voinovich, and Kyl.

In Colorado, Senator Allard is a Free Trader, while Senator Salazar is between an Interventionist and an Internationalist. Since 1986 (when I moved to Colorado) I think it has been traditional for the voters to elect a Republican Senator and a Democrat Senator. You might expect when voters elect a Senator from each party that the senators would have similar voting records on important issues such as trade. But, Colorado seems not to have done that, and Indiana (another state with a Democrat and a Republican senator) also has a Free Trader (Lugar) and an Interventionist-Internationalist (Bayh). What do you suppose this means with respect to voter preferences? Could this be consistent with voter irrationality, which Bryan Caplan emphasizes in The Myth of the Rational Voter? Or, could this be consistent with the standard assumption of public choice that voters choose to be rationally ignorant?

Olson's Logic In Neverland

BY LISA WERMUTH
for Econ 453 Power & Prosperity

Peter and Wendy is a children’s novel. However, the benefits of this delightful book extend far beyond merely entertaining young people. The inhabitants of Neverland take part in the most extraordinary adventures while behaving as rational human beings who are each a member of a group. For this reason, J.M. Barrie’s work is an excellent case study for students of Mancure Olson’s book The Logic of Collective Action. Neverland is home to two distinct groups. First I will discuss the classic small group represented by the Lost Boys. Then, I will analyze the large group behavior of the Pirates.

Peter and Wendy by J.M. Barrie is the story of a boy who never grows up. One night, Peter Pan flies in to the nursery in search of his shadow. There he meets Wendy, John, and Michael. Peter Pan teaches the children to fly and takes them to Neverland. Neverland is an island that the children have all imagined. They are shocked and delighted when they find the island is real. The island is inhabited by wild beasts, mermaids, redskins, pirates, and a band of motherless boys. Our hero, Peter Pan, is the leader of the orphans who call themselves the Lost Boys. In Pan’s absence, the people on the island have carried on in its usual routine. The Lost Boys go hunting for Peter Pan. The Pirates hunt the Lost Boys. The Redskins hunt the Pirates and the wild animals hunt the Redskins. When Peter Pan returns to Neverland, John and Michael fit right in with the Lost Boys and Wendy agrees to become their “mother.” Life in Neverland would continue without disturbance if it were not for the dreaded Captain James Hook. Captain Hook is the ruthless leader of the Pirates. Hook also has a deep seated hatred of Peter Pan and is determined to destroy the cocky boy. One night, Hook orders his band of swashbuckling pirates to capture the Lost Boys. Hook believes he has poisoned Peter Pan. However, Pan has a narrow escape and is able to rescue Wendy and the Lost Boys. Once they are free, the Lost Boys destroy the Pirates and Peter Pan himself drives Hook to his death. At the conclusion of the grand adventures, Pan returns Wendy, John, and Michael back their nursery.

The Lost Boys are a small group in which all its members share common goals. Each one of the seven boys shares a common need for food, shelter, and protection. In addition, each has a desire for care and attention. As is the nature of small groups, Peter Pan does not need to use force to keep his group together. The many collective and non-collective goods that the boys gain from group membership are more than enough to hold the group together. Their collective goods include the benefit of safety and the comfort of the underground home (Barrie 120). According to Olson, “social status and social acceptance are individual, noncollective goods (61).” Therefore, the affection each member receives in a noncollective good, along with the food he eats.

Social pressure is another factor that adds coherence to the group. According to Olson, “social pressure and social incentives operate only in groups of smaller size, in the groups so small that the members can have face-to-face contact with one another (62).” There are multiple instances where the Lost Boys use this kind of social pressure to influence group members. In one example, Tootles mistakes Wendy for a bird and shoots her out of the sky. Once he realizes what he has done, Tootles turns to leave the group. The other boys beg him not to go. When they ask him why he can’t stay he simple responds, “I can’t, I’m so afraid of Peter (124).” There is no evidence that leads us to believe that Peter would actually punish Tootles in any way for his mistake. Merely the thought of displeasing his hero and beloved leader was enough to drive Tootles to despair.

The Lost Boys are an effective, action-taking group. Olson presents the findings of his colleague that help us to better understand the logic behind the Lost Boys proficiency as a group. Olson explains, “Professor James found that in a variety of institutions, public and private, national and local, “action taking” groups and subgroups tended to be much smaller than “non-action taking” groups and subgroups. In one sample he studied, the average size of “action taking” subgroups was 6.5 members, whereas the average size of the “non-action taking subgroups was 14 members (54).” With a membership of seven boys, Peter Pan’s troop fits this description perfectly. Hunting wild beasts, playing make believe, or fighting off Pirates, the Lost Boys efficiently utilize their resources. For example, when Wendy first comes to the Neverland, Peter suggests they build her a house.

“’Quick,’ he ordered them, ‘bring me each of you the best of what you have. Gut our house. Be sharp.’ In an instant they were busy as tailors the night before a wedding. They scurried this way and that, down for bedding, up for firewood, and while they were at it who should appear but John and Michael….’Curly,’ said Peter in his most captiany voice, ‘see that these boys help in the building of the house.’…The astonished brothers were dragged away to hack and hew and carry (128).”

When this small group takes on a project, they are quick to act and maximize the utility of every available asset. Nothing stands between Peter and the boys when they are on a mission. This illustrates the point that Olson is making when he says that “small, centripetally organized groups usually call on and use all their energies, while in large groups, forces remain much oftener potential (54).”

Another example of the efficiency of our small group is when the Lost Boys embark on a lobbying campaign for a desired collective good. The boys want Wendy to become their mother. When they are finished building Wendy’s house they approach her with their request. Each boy contributes to the plea adding his own personal inputs. There is not a free-rider among them. Wendy is unsure at first until “all went on their knees, and holding out their arms cried, ‘O Wendy lady, be our mother.’ (131)” At this, the dear girl is won over. The lobby was a success. From that moment on, Wendy mothers the boys to the best of her abilities. She willingly cooks their meals, mends their clothes, nurses their wounds, tells them stories, and tucks them into bed at night. It may seem irrational for Wendy to work so hard. However, even though Wendy contributes to the group more than any of the boys, she is given selective incentives for her dedicated efforts. She lives in her own house, enjoys a pet wolf, and has a button that was given to her as a special gift from Peter. She also has the love and admiration of “her” boys.

On the other side of the island, there is another group that is altogether different from the jolly Lost Boys. The Pirates are the second group we will analyze. Captain Hook has seventeen men under his brutal command. Hook controls the size and actions of his large group by force and coersion. There are no apparent collective goods offered to followers of the infamous James Hook. Furthermore, the Captain would never consider offering selective incentives. In short, the Pirates are The Neverland edition of a union. Mancur Olson states that “by far the most important single factor enabling large, national unions to survive was that membership in those unions… was to a great degree compulsory (68).” Signing with Hook is compulsory for anyone in the Pirate profession who wishes to practice in Neverland. The very nature of the Pirate business is all about coercion. Hook has a monopoly on pirate ships and runs a strict union-ship policy among his crew. Moreover, the barriers of entry for piracy are insurmountable. If an individual wanted to be an independent pirate he would have to build a ship by himself from the limited resources of the island while warding off the Lost Boys, the Redskins, and the dreaded Hook. The Lost Boys discover for themselves what Hook will do to anyone who will not join his crew. One night, the Pirates raid the underground home of the Lost Boys and carry them off to their pirate ship. Hook addresses the boys as they are tied to the mast and informs them that he needs two cabin boys. All those who do not volunteer will be forced to walk the plank. When every boy refused to sign on “the infuriated pirates buffeted them in the mouth and Hook roared out, ‘That seals your doom. Bring up their mother. Get the plank ready’ (192).”

In response to Hook’s brutality, the Pirates waste no time in explicitly following his orders. Even though there is no perceived benefit for the individual members of the group, they still strive to carry out Hook’s ultimate goal. Early on, Hook shares his goal with his first mate Smee when he says, “’Most of all,…I want their captain Peter Pan. ‘Twas he cut off my arm.’ He brandishes his hook threateningly. ‘I’ve waited long to shake his hand with this. Oh, I’ll tear him’ (119).” Even though the crew labors to capture Peter Pan, none try harder than Captain Hook himself. Olson explains this behavior when he says:

“One point is immediately evident. If there is some quantity of a collective good that can be obtained at a cost sufficiently low in relation to its benefit that some one person in the relevant group would gain from providing that good all by himself, then there is some presumption that the collective good will be provided. The total gain would be so large in relation to the total cost that some one individual’s share would exceed the total cost (22).”

Hook believes that the personal benefit he would derive from Peter Pan’s death is so great, he is willing to carry the cost for the entire group of Pirates.

Neverland may not be the first place economic students would look for a case study. However, economists who go the Neverland will find two groups of people who behave rationally in group situations. The Lost Boys demonstrate the effective, action taking, small group while the Pirates exemplify a powerful and coercive union. Mancure Olson’s study of group theory is as true as the fact that Peter Pan will never grow up. The Logic of Collective Action is logical today and will be tomorrow. Olson’s theory is true in Professor Eubanks political economics class… and yes, even in Neverland.

Works Cited:
Peter and Wendy
The Logic of Collective Action

Something Higher? President Obama

LEONARD PITTS, JR.:

The chief executive's power does not derive solely from the authority vested in him by the Constitution. To the contrary, it derives also - and in some ways, more so - from his ability to rally the people, to inspire them in some great challenge or crusade.

We do not live - yet - in a dictatorship. Americans do not move because they are told to move. They move because they are inspired to. It is no accident that history's most successful presidents are the ones who were able to frame, with concision and grace, America's challenges and hopes, the ones who had greatest command over what Theodore Roosevelt famously called "the bully pulpit."

Think Ronald Reagan saying government is not the solution to the problem, government is the problem. Think Franklin Roosevelt declaring that the only thing we had to fear was fear itself. Think Abraham Lincoln at Gettysburg vowing a new birth of freedom.

Now, try to remember anything Millard Fillmore ever uttered. A hundred years from now, will anyone still be saying, "I'm the decider?"

What some of us don't understand is that Mr. Obama is not running a campaign. He is rallying a movement. After seven years of what may go down as the worst presidency ever, after the grime of the Clinton-Lewinsky scandal, after dreary years of internecine sniping where ideological purity has routinely trumped national interest, Americans want something else. Something higher.

DON BOUDREAUX'S THOUGHTS on this idea of something higher:

If you, Dear Reader, want to be part of a collective movement, that's fine with me. Really, it is. I wish you luck and happiness. But please don't force me to join you in your crusade (whatever it might be). And please don't presume that if I choose not to join in any collective effort, or only in a collective effort involving fewer persons than the efforts you favor, that my life is somehow empty, my soul shriveled, my mind small, my heart uncaring, my habits contemptible. I myself might well wish to be part of a cause larger than myself -- I reserve that right -- but I promise never to force you to join with me; I promise never to presume that you are less of a person if you refuse to join my cause or even if you refuse to join any collectively pursued cause.

I tend more to Mr. Boudreaux's thoughts than to Mr. Pitts' thoughts on something higher. On the other hand if the something higher was a passion for individual liberty then I might well jump on board the train. But, the something higher in Senator Obama's campaign strikes me as more likely the opposite of a passion for liberty.

Hayek on Coercion

What does "coercion" mean? Let's look to Hayek in The Constitution of Liberty:

By ‘coercion’ we mean such control of the environment or circumstances of a person by another that, in order to avoid greater evil, he is forced to act not according to a coherent plan of his own but to serve the ends of another. . . . he is unable either to use his own intelligence or knowledge or to follow his own aims and beliefs. Coercion is evil precisely because it thus eliminates an individual as a thinking and valuing person and makes him a bare tool in the achievement of the ends of another. (20-21)

Certainly this idea of coercion can be related to what happens between people. Theft and assault clearly fit the idea of coercion. In addition, this meaning of coercion suggests to me, almost immediately, the relationships between government and the individual. It seems to me much public policy, and much of the efforts of individuals to influence government to choose this or that public policy, match this idea of coercion very well. Just consider policies like banning the incandescent light bulb, or policies that require automobiles to have passive restraint systems. Both sorts of policies seem to me to be very well described by the idea of being forced to act according to the plans and ends chosen by another, by being unable to use a person’s own knowledge and beliefs and intelligence to act in ways he chooses to in pursuit of his own aims and beliefs.

Hayek’s discussion of coercion and government suggests an interesting difference from my own discussions of government and coercion. I often emphasize that there is one word to characterize government’s inherent nature and it is “coercion.” I also suggest that I want government to be coercive because I want government to be the “protective state” which acts to protect me from harm to person and property caused by the deliberate actions of others. But, discussing things in this way may encourage us to miss something of importance that we can see from Hayek’s discussion of coercion and government.

Coercion, however, cannot be altogether avoided because the only way to prevent it is by the threat of coercion. Free society has met this problem by conferring the monopoly of coercion on the state and by attempting to limit this power of the state to instances where it is required to prevent coercion by private persons. This is possible only by the state’s protecting known private spheres of the individuals against interference by others and delimiting these private spheres, not by specific assignation, but by creating conditions under which the individual can determine his own sphere by relying on rules which tell him what the government will do in different types of situations.

The coercion which a government must still use for this end is reduced to a minimum and made as innocuous as possible by restraining it through known general rules, so that in most instances the individual need never be coerced unless he has placed himself in a position where he knows he will be coerced. . . .Being made impersonal and dependent upon general, abstract rules, whose effect on particular individuals cannot be foreseen at the time they are laid down, even the coercive acts of government become data on which the individual can base his own plans. Coercion according to known rules, which is generally the result of circumstances in which the person to be coerced has placed himself, then becomes an instrument assisting the individuals in the pursuit of their own ends and not a means to be used for the ends of others. (21)

For Hayek the idea of coercion is about being made to do certain things by others. By way of contrast, a person may be prevented from doing certain things. Hayek is discussing a government for freedom or liberty as a government that may make rules and use power and coercion to enforce those rules in order to protect individuals from harm to person or property by others. This seems to be my idea of the protective state, and my idea of wanting government to be coercive for these purposes. But, what my discussion probably misses, and Hayek’s emphasizes, is the idea of the rule of law. Hayek is really talking about what we would want “rule of law” to mean, i.e., known general rules that restrain rather than laws that force certain actions. The known rules will be supported by government’s use of coercion and force, but since they are known general rules about actions and conduct, Hayek sees the individual as being able to act to avoid the coercion or to place himself in position to have to suffer the coercion of government. Government is indeed coercive, even when it’s actions are structured within the rule of law, but as Hayek points out, the coercion is “minimized.” The rule of law is coercion, but it is coercion according to known rules, and as such Hayek suggests that the coercion embodied in following the rule of law becomes an instrument that assists individuals in pursuing their own ends. Coercion in general rules that do not pick out favored treatment for some means coercion that is not used for the ends of others.

Hayek: Liberty Is

Here is the way Hayek opens THE CONSTITUTION OF LIBERTY:

We are concerned in this book with that condition of men in which coercion of some by others is reduced as much as is possible in society. This state we shall describe throughout as a state of liberty or freedom. (11)

This definition of liberty or freedom makes it clear that freedom is a relation between men. Freedom is not about having greater possibilities or more things to choose from. I’ve heard or read some who do seem to equate freedom or liberty with a larger range of choices. Hayek also notes that restrictions on or infringements of freedom result from the coercion of some by another or by others. A person’s freedom is not reduced by weather or some physical event in nature, or by an accident that leads to a person being confined to a wheelchair.

This idea of freedom implies a person has a private sphere that means some realm for which the individual can act without the direct interference of others:

Whether he is free or not does not depend on the range of choice but on whether he can expect to shape his course of action in accordance with this present intentions, or whether somebody else has power so to manipulate the conditions as to make him act according to that person’s will rather than his own. Freedom thus presupposes that the individual has some assured private sphere, that there is some set of circumstances in his environment with which others cannot interfere. (13)

The words liberty and freedom are often used in different ways, which of course means the possibility of confusion and misunderstandings. Hayek discusses a dangerous and troubling use of the word liberty, which follows from the point of noting above that freedom is not about more choices and it is not about having the physical ability to do something a person wants to do.

. . .until comparatively recent times few people seriously confused this ‘freedom from’ obstacles, this freedom that means omnipotence, with the individual freedom that any kind of social order can secure. Only since this confusion was deliberately fostered as part of the socialist argument has it become dangerous. Once this identification of freedom with power is admitted, there is no limit to the sophisms by which the attractions of the word ‘liberty’ can be used to support measures which destroy individual liberty, no end to the tricks by which people can be exhorted in the name of liberty to give up their liberty. It has been with the help of this equivocation that the notion of collective power over circumstances has been substituted for that of individual liberty and that in totalitarian states liberty has been suppressed in the name of liberty. (16)

Hayek observes that this use of the word freedom has become accepted in the United States by those on the political left, and he specifically associates this view with J.R. Commons and John Dewey. While these figures are from an earlier generation of intellectuals, their work influenced much of the philosophy of the political left today.

This confusion of liberty with power is especially troubling because it can be used to associate that natural appeal of the word with the call to redistribute wealth:

This confusion of liberty as power with liberty in its original meaning inevitably leads to the identification of liberty with wealth; and this makes it possible to exploit all the appeal which the word ‘liberty’ carries in the support for a demand for the redistribution of wealth. Yet, though freedom and wealth are both good things which most of us desire and though we often need both to obtain what we wish, they still remain different. (17)

Another way of thinking about the meaning of liberty puts things more directly, I think, in terms that relate to government and the individual.

. . . it describes the absence of a particular obstacle – coercion by other men. . . .It does not assure us of any particular opportunities, but leaves it to us to decide what use we shall make of the circumstances in which we find ourselves. . . .it does not exist if one needs permission for most of what one can do. The difference between liberty and liberties is that which exists between a condition in which all is permitted that is not prohibited by general rules and one in which all is prohibited that is not explicitly permitted. (19)

It seems to me this last suggestion relates to a perspective often heard at least in political discussions, and probably also in many academic circles. Some discuss the rights of individuals as though those rights are granted to the individuals by the government. I think this is a view often used to discuss property rights for example, and it seems to me a view which is often used by law professors and legal scholars. It would seem that if government grants rights to individuals, then individuals do not have a right to do something or to take some action unless they have been explicitly granted the right to take that action by government. In contrast is the view that an individual has a right to act as he wants unless that action has been prohibited by general rules. This view seems much more the view Jefferson relied on in writing the Declaration of Independence, and it is much more the view of Locke and many others.