A Quick Example of Media Bias
TIME Magazine’s quote of the day for 6/9/11 is “I believe the world’s getting warmer.” The caption read “MITT ROMNEY, the conservative presidential candidate, reaffirming his belief that climate change is real and that humans are contributing to it in the first town hall meeting of his campaign in New Hampshire”.
It’s curious that they chose to use the adjective “conservative” instead of “Republican”, isn’t it?
Today’s economic lesson is brought to you by Saudi Arabia
In an article with the front page headline of Saudi prince: Keep U.S. hooked on oil which, by the way, is yet another example of media bias, Saudi prince Al-Waleed bin Talal gave an interview where he stated he wants the price of oil to be around 70-80 dollars per barrel. The reason? So that the Western world doesn’t try and wean itself off of the black stuff. The fact that this was newsworthy reflects poorly on the level of economic and political discourse we enjoy. I’m sure some people will jump on this and say “straight from the horse’s mouth, they want us addicted to oil!”
But those people are fools in need of a basic lesson in economics, namely the substitution effect. The modern economy is predicated on the notion of cheap energy to fuel the machines we use to reduce the amount of human labor. If one source of energy becomes more expensive than the other, then demand for that other energy source will grow. If the price of oil rises, then more people will consider the use of liquid natural gas, or nuclear, or coal, or hydro or any other energy source that isn’t oil. That’s basic economic fact. The Saudi prince should be lauded for his intellectual honesty. But I think the 12,211 people who recommended the article (at the time of this writing) have a decidedly different reaction in mind.
Right now, petroleum is a cheap energy source for our cars, trucks, planes, boats, and trains. Almost none of our electricity is generated by oil because we have cheaper energy sources for electricity (there’s that substitution effect again). Refined petroleum is currently the best tradeoff of cost and energy density when it comes to moving people and goods across sea, air, and land.
“That’s not the point”, the pseudo-environmentalists will say. They want increased subsidies for alternative energies like solar and wind because they’re cleaner sources of energy and more environmentally friendly. But the problem is they are vastly more expensive. If they truly cared about producing clean energy, nuclear fission is just as clean and is much cheaper than any other energy source except for coal and, depending on market fluctuations, natural gas. But given the choice, the general public isn’t going to want to pay triple their current energy costs for cleaner energy, especially when the tangible benefits of a marginally “cleaner” environment is so minute.
But that’s a socioeconomic lesson for another day.
The View From Jerusalem and Manhattan
I remember reading an op-ed in the Wall Street Journal’s editorial page (which is still America’s best editorial page) entitled Thinking Outside the Lox. It was written by a Jew (why do I always feel dirty when I use this word?) who usually votes for Republican Presidential candidates. It’s a pretty good read and I just want to expand on it in light of President Obama’s recent speech on the Middle East, in which he called for a two state solution where Israel would revert back to its borders status quo ante Six Day War.
Israelis, particularly those in their government, are shocked and outraged. The Israeli Foreign Ministry was not expecting such a bold public statement. Indeed it seems like they were not expecting Israel to be a major part of the speech. Prime Minister Netanyahu publicly rebuked Obama over his speech, which highlights the tension between the USA and Israel since the beginning of the Obama Administration. Many Israeli diplomats were surprised and dismayed by Obama’s call to freeze Israeli settlements in the West Bank two years ago and privately complain about America’s Israel policy to their counterparts at State.
It has been said that any Democratic Presidential hopeful must first past the Israel test. Rich Jewish backers in in the Democratic Party are widely thought to hold effective veto power over any candidate that does not have sufficiently pro-Israel positions. But Obama is really a creature of the WASPish far left. The fact that he’s half black speaks more about his tastes in sports than it does his views on domestic and foreign policy.
What I mean by that is that once you get on the marches of Democratic party, the borderlands between the truly fringe left and the more moderate denizens of the liberal left, you start to observe a real anti-Zionist streak. Certain WASPs and their comrades-in-arms in Europe, using people like Noam Chomsky and Howard Zinn as their inspiration and intellectual cover, will assert that the Israeli government is just as oppressive and hateful towards the Palestinians as the Nazis were to the Jews. Such an analogy is utterly crude and entirely superficial. But the ideological core of such beliefs is rooted in Israel’s unquestioned position as the Middle East’s premier military power and the impoverished state of most Palestinians.
The problem with such views is that they come mostly from a safe and secure ivory tower. Israel does not have the same luxury. A small country with a relatively small population surrounded by many nations and peoples that abhor its very existence can only survive if it displays and exercises its strength. Israel cannot afford to appear weak at any time. And any time Jerusalem is forced to make an imperfect decision (in a very imperfect part of the world), it must err on the side of strength. Israel is playing for keeps, and one wrong move can mean the end of the Israeli state.
That is something that the intellectual left in US and Europe completely fail to grasp. So they ramble on and on about the injustices wrought upon the Palestinian people while absolving the Palestinians and their incredibly corrupt government of any and all barbarous acts that they inflict upon Israel. It’s not hard to imagine that there is a significant faction within the Democratic Party, let alone the foreign policy establishment at State, that would favor abandoning Israel in an attempt to ingratiate the US to the rest of the Middle East.
All of this brings me to my actual point: Jewish Americans would probably be better off in the Republican Party. Conservative Christians and foreign policy hawks are the most pro-Israel groups in the US besides Jewish Americans. But at the same time, Israel probably isn’t the most important political issue for most Jewish Americans. All of that being said, Prime Minister Netanyahu would probably be a lot more comfortable with a Republican in the White House.
Californicated
Call it a reverse-Obama, circa late 2010. In the wake of a crushing Democratic electoral defeat, the President signaled his intent to extend the Bush tax cuts while also proposing additional spending. But today, California’s governor announces that he wants to extend the temporary sales and income tax hikes that was first enacted when the revenues plunged in 2009 when the country was mired in recession.
Californians disapprove of the tax extensions by a margin of about 2 to 1. This is understandable. Nobody wants to pay higher taxes if they don’t have to. 9.3 billion dollars translates to about 240 dollars from every Californian every year, not an insignificant sum. But the real issue is that the tax burden is carried mostly by the rich, which is a significant part of why California’s fiscal situation is so dire to begin with.
In March, a columnist for the WSJ reported that almost half of California’s income taxes are paid for by the top 1% of California earners before the recession. Because the rich experience much larger income fluctuations than other income groups, this tends to create boom-and-bust revenue cycles for the state government.
But state governments usually have predictable, stable expenses. But whenever they see a surplus, the first instinct is to simply spend the surplus instead of saving it. In the case of California, it used the huge surpluses to justify extraordinary spending obligations, many of them involving public employee expenditures.
For example, over 16,000 retired state workers have an annual pension that’s worth at least 100,000 USD. The employee with the highest pension collects over 500,000 USD per year. No joke. The actual list can be found here. These extraordinary retirement benefits are draining state coffers, since the pension funds managed by the state have lost billions of money in the market the past few years.
The Federal government’s main fiscal challenge is the runaway costs of Medicare, Medicaid, and Social Security. In a decade or less, the cost of these three programs threaten to overwhelm the Federal balance sheet. Draconian tax increases or massive benefit cuts will be required soon enough. But California is even closer to the crossroads.
At this point, it seems California will be unlikely to shed its public employee salary, pension, and benefits obligations unless the state declares bankruptcy. And with the way things are currently going, it looks like that is slowly becoming an inevitability.
Pro Torture
Details surrounding Osama bin Laden’s killing are still hazy. But one issue has suddenly taken center stage: enhanced interrogation techniques (EITs). Ever since John Yoo authored the infamous legal memo that guided the Administration’s decisions behind EITs, this has been a polarizing issue.
On one side, you have people arguing that EITs are inhumane. It violates rights guaranteed under the Constitution. That it debases us to the level of our hated foes. And, on a more pragmatic level, that they are ineffective at worst and at best yield the same results as a normal interrogation would.
The other side argues that they are effective in gathering intelligence from the interrogated, that it is necessary to safeguard national security, and that no statute or section in the Constitution prohibits using EITs on high value targets such as Khalid Sheikh Mohammed (KSM) and Abu Faraj al-Libbi.
I’m not going to pull any punches. Place me firmly into the “pro-torture” camp. Although I didn’t need any more proselytizing, the director of the CIA, Leon Panetta, has admitted that the initial strands of intelligence that led to Osama bin Laden’s death were taken from KSM and al-Libbi after they had been subjected to EITs. But that is just empirical. From a theoretical standpoint, I don’t think those responsible for national security should be deprived of a potential tool for intelligence gathering. Everything must be put on the table.
There is no use arguing from a legal standpoint whether these tools are lawful or not. The law is what we make it out to be, and our opinions are notoriously fickle. That being said, the Constitution explicitly states that due process can be suspended by the executive during a time of war. That principle has been upheld by the Supreme Court and has been advocated by Justice lawyers under both the Bush and Obama administrations.
And as for the notion that EITs bring us to the level of our enemy is a logical fallacy. It perpetuates a false equivalency. The EITs that we use are a means to an end: gathering intelligence that can thwart or mitigate an attack on the United States. And they have no long lasting physical effects. Our enemies show callous disregard for a person’s physical well being. People captured by terrorists have been beheaded, had their testicles crushed, and splashed with acid.
I am a libertarian. That means I’m generally for smaller government that leaves people alone. Freedom is a beautiful thing. And the bigger a government is, the more freedoms it takes away from those under its jurisdiction. That being said, a person who abridges another person’s freedom without their consent deserves to have their own freedoms taken away. People are not free to steal from one another. Nor can they rape, murder, and debase others. When that happens, there must be retribution.
And in the case of people like Osama bin Laden and Khalid Sheikh Mohammed, they have engaged in acts that have directly resulted in the deaths of thousands of people and tens, if not hundreds, of billions of dollars worth of property destruction. They deserve neither our compassion nor the rights outlined by our Constitution. They forfeited those things a long time ago.
Ladies and Gentlemen…We Got Him
US Forces Raid Compound, Kill Osama bin Laden
Almost 10 years after September 11th, 2001, the US military found the person most responsible for that attack and killed him. This is a symbolic victory for us. A big win. But it does not mean our work is done. And it doesn’t mean that things will necessarily get better.
But more on that later. Credit must go where credit is due. I have long maintained (before this blog ever started) that President Obama had essentially continued Bush’s foreign policy, even though he radically rebranded it from the “War on Terror” to “Overseas Contingency Operations”. But I don’t want to take anything away from Obama. This was his victory and perhaps the biggest achievement in his Presidency.
Public perception of our Commander in Chief is that he’s weak, indecisive, and debases himself by bowing down to other foreign heads of state. But I think Obama is cunning, calculating, albeit in a reserved way. He doesn’t tip his hand very often. And I think that’s an important trait to have when dealing in foreign policy.
Intelligence files of a sensitive nature generally don’t get declassified until decades of years have passed. So it’s unlikely we’ll know what really happened until everybody forgets about it. But given the face value of what’s happened, this goes down as a big win. For the President, the United States, and the entire world.
But that is no excuse to bring the troops home and to relax our watch. We still live in an age of turbulence and uncertainty. And it’s important to continue fighting against the forces of extremism and terrorism. Because if we become complacent, another bin Laden will come along and shake us out of it, perhaps at an even greater price than we paid in 2001.
In the mean time, we should congratulate ourselves on a job well done, and then continue on the task at hand.
Prosecutorial Discretion and the Case for Deregulation
The biggest reason why I am a fan of deregulation and simplifying legal codes is broad prosecutorial discretion. I can’t stand it and you shouldn’t either. Huge injustices have been made possible by it and although it will always exist in law enforcement, we should always strive to reduce its impact.
Prosecutorial discretion is the ability of government officials to selectively enforce the law. For example, if a police officer sees two drivers speeding, he can only realistically detain one vehicle. Right now, he has to decide which car to pull over. After he makes that decision, he can decide again whether to let the driver off with a warning or to write up a ticket. In this little example, an agent of the government is forced to make two judgment calls. And the agent’s judgment can be affected by numerous factors, many of which are arbitrary.
The officer might pull over the more expensive car, or the car with the brighter paint job, or the car with a black driver, or an attractive female driver. Any number of factors, arbitrary or principled, go into his decision. And once he pulls the driver over, another set of factors, whether arbitrary or principled, will be calculated in his decision to issue a citation or let the driver off with a warning. But we shouldn’t give our law enforcement agents such broad discretion.
Only lawmakers should make laws. Only law enforcement agents should enforce the law. Only judges should deliver judgments. But each time the law empowers law enforcement officers to make judgments, it creates another opportunity for corruption or injustice. And that weakens the legitimacy of the entire legal system. If a law enforcement agent is only known for prosecuting cases against black people, a black person can legitimately doubt that prosecutor’s respect for the law, and then lose respect for the law as well.
One of the greatest assets of America is our adherence to the rule of law. When people respect and follow the law, it creates stability. Stability creates order. Order engenders prosperity. Prosperity manufactures power. The United States of America turned into the most powerful country in the world in an era where laws were still respected and followed.
But in the modern era (WWII and onward), the government and the legal code grew exponentially. We have thousands of regulatory agencies spread out across the local, state, and Federal governments. Each agent at each level of government has varying levels of prosecutorial discretion. With such broad powers of judgment, the legitimacy of law and the rule of law is weakened. Before the financial crisis became acute, the Federal government decided to rescue Bear Stearns, which was a day away from declaring bankruptcy.
But when Lehman Brothers was on the verge of collapse, the Federal government decided to let it fail. That was when the financial crisis became acute and overnight, the Dow Jones lost over 500 points, the largest single day drop since the 9/11 attacks. Why did the Federal government save Bear but not Lehman? Why was the Federal government inconsistent in its regulation of the financial sector? These questions created doubt and uncertainty in investors, who were expecting a bailout of Lehman due to the precedent set by Bear Stearns.
The fact is the Federal government wasn’t enforcing any law. It was improvising policy, making a series of judgment calls on the fly. It’s no surprise that it eventually made a bad decision (some would say a series of bad decisions, compounding on each other). And when the Federal government makes a bad decision, it throws everything into turmoil.
So how does deregulation factor into all of this? For starters, the US Code (a compilation of all permanent laws ostensibly enforced by the Federal government), is comprised of 51 titles and is over 60,000 pages long. And it grows with every year. This is compounded by the regulations enforced by hundreds of different Federal agencies. And the enforcement of those regulations differ with each administration in power. Every Federal agency in the executive branch takes its cue from the President, the chief executive. So a Democratic President might have an executive branch that is more zealous in enforcing the various laws and regulations of the land, but a Republican president might instruct his subordinates to practice salutary neglect.
Prosecutorial discretion creates uncertainty, breeds mistrust, and weakens the rule of law. Countries that have weak rule of law are also countries that are less desirable to live in. When everybody knowingly breaks the law, order breaks down and it becomes harder to conduct business. A country that has no respect for the law has trouble attracting investment. Nobody invests in a war zone, where the rule of law is absent.
This is why we need deregulation. The law must be simple, understandable, consistently enforced, and well known to all. It does us no good to have a huge legal code and regulatory burden because that means it’s impossible to enforce every law, let alone enforcing it evenly.
Road to an American….Fiscal Burn?
S&P Cuts U.S. Ratings Outlook to Negative
This isn’t exactly a big surprise. Markets are understandably nervous about the long term solvency of the Federal government. Debt growth has outpaced GDP growth by a huge margin and, as of right now, the government has no plans to substantially reduce the structural deficit.
Recently, the CBO forecast that fiscal 2011 will tally up a 1.5 trillion dollar deficit, and the next five years we’ll have deficits of 1 trillion dollars or more. The long term consequences could be disastrous. Right now, there is a sovereign debt crisis in Europe. Three of the PIIGS have already gone to the ECB, hat in hand, to ask for a bailout.If a peripheral state like Greece or Portugal can shake confidence in financial markets, the fallout of a debt crisis here would be catastrophic.
When Greece asked for a bailout, the relative size of their debt to GDP was 140%. In Ireland, it was 95%. Portugal weighs in at 90%. The next country to ask for a bailout will undoubtedly be Italy, which is at 120%. US debt is at a much more reasonable 65%, but that number grows by 8-9% every year. Still, the US is much different and investors will give us considerably more latitude in managing our finances.
That being said, this is definitely a warning shot from the private sector and a stark reminder for politicians to come together and find out a way to get the Federal fiscal house in order before the bond market vigilantes force us to do so in the worst way possible.
Unfortunately, classic American shortsightedness and ignorance will probably keep us along our current path for the foreseeable future.
Twofer: Media Bias and a Surprising Statistic
45% of households have zero Federal income tax liability
I’ve noticed that this writer, Jeanne Sahadi, has a very condescending and arrogant writing style. And it’s come out in full force for her latest article about tax liability. The actual news, that an estimate by the NGO Tax Policy Center has 45% of households with zero or negative tax liability, comes in the third paragraph, after she all but laments how such a statistic would be spun and used as a political tool of rage.
She then goes on to tell us how people still pay taxes, just not Federal income taxes, to counter the argument that “nearly half of all people pay no taxes whatsoever”, a strawman argument that she explicitly creates. The entire article is written in a way that insinuates her personality and political leanings without actually being an editorial.
But let’s get into the meat of this issue. 45% pay no Federal income taxes. Sure, just about everybody pays FICA and the Federal excise on gasoline, but why did she bring up state and local taxes? We’re talking about the Federal taxes here, not state and local ones.
The other issue she only mentioned in passing is that FICA, the 7.65% payroll tax (on the employee, the employer pays a matching rate), goes only toward Social Security and Medicare. Federal revenue from FICA won’t match Federal expenditures on those two wealth transfer this year.
So that means the people paying Federal income taxes will be asked to step in and make up that gap. At the Federal level, income taxes are supposed to pay for interest on the national debt and discretionary spending. The entitlement programs are a pay-go scheme where you pay into the system and get something back from it. So, theoretically, the fiscal effect of paying FICA is offset in the long run.
Of course, that would be an intellectually dishonest argument. Because a person who just got a job in their twenties now paying FICA isn’t going to get the same benefits that the person before them got, unless taxes go up even more on the next poor bastard paying into the system.
Suffice it to say that the way we do taxes now is ridiculously complex, opaque, and suffers from extreme volatility because the effective tax base is shrinking with each year. It is important, both as a moral and economic principle, to have a broad tax base, where everybody pays into the government. Otherwise moral hazard increases and government accountability and efficiency decreases.
Uncle Sam Gets a Reprieve
Congress Clears 2011 Budget Bill
Our Federal government will have funding provisions throughout the end of the fiscal year of 2011. But this was an exercise in brinksmanship by both parties, as well as a healthy dose of political cowardice by the Democrats. Typically, budgets for the fiscal year are passed the year before. The Democrats could have easily passed a budget when they still held huge majorities in both chambers of Congress.
But election season is a feverish haze and they had an eye for political survival rather than ensuring the smooth operation of government. I can’t say I blame them for taking the coward’s way out, but it is worth noting. It just goes to show that very few people in the capitol will stand for politically unpopular convictions. Idealogues don’t last long on the Hill.
In terms of fiscal matters, all eyes are on the debt ceiling. Treasury has stated that it’ll run out of money by no later than May 15th and should that occur, it could have disastrous consequences for our debt. The key word is could. Both parties know what will happen if the US government defaults on its debt obligations. Soaring interest rates combined with 9.5 trillion dollars of publicly held debt would result in crushing interest payments.
President Obama recently delivered a speech that outlined his own effort to fight the deficits, but I think it’s woefully short on detail and full of partisan politics. He’s gearing up for an election fight. Odds are he’ll do like every other politician before him did and kick the can down the road.
Our national debt, despite its frighteningly large number, is actually quite manageable. We paid 183 billion dollars worth of debt service in 2009. We paid just a few billion more for debt service in 2010. Due to low interest rates, which have now been artificially suppressed by the Fed’s easy money policy, debt service really won’t be a huge part of the budget until the economy picks up.
Once the economy recovers, the Fed will be forced to raise short term interest rates, which will also sharply increase our debt payments. The vast majority of our debt is denominated in bonds that mature in 2 years or less. It wouldn’t be a surprise to see debt payments grow from 5% of our budget now to 15-20% in 4 years.
If no action is taken now, it will take at least another decade before interest payments seriously threaten the core services of the Federal government. The successor to President Obama’s successor will probably be the last President who can punt on the issue of our ballooning fiscal liabilities.
Setting The Line 