Boycott Beijing

The 2006 Winter Olympics in Torino have just ended (not so successfully for the US, it seems), which turns world attention to the 2008 Summer games in Beijing, and to calls for the US to boycott these games. The group Reporters without Borders has been advocating for a boycott of the games to protest Chinese human rights abuses ever since Beijing was announced as the host. Of course, Olympic boycotts are nothing new. The most famous one was the US-led boycott of the 1980 Olympics in Moscow, to protest the Soviet invasion of Afghanistan. Eight nations boycotted the 1956 Olympics in Melbourne, Australia, for a whole series of international slights. Twenty-two African nations boycotted the 1976 Olympics in Montreal to protest New Zealand rapport with South Africa. Those who support a boycott actually point to the 1936 Olympics in Berlin as the example not to follow. That Olympics legitimized the Nazi regime, and many fear that the 2008 games will similarly legitimize Chinese despotism. Supporters of the Beijing Olympics believe that opening itself to the world in the way that the Olympics do will only persuade China to change for the better. (This argument is similar to the one that supports Google's censorial entry into China). Others, of course, disagree.

Government and Business

It is a mantra among conservatives that government should act more like business (and indeed, Bush ran on a campaign of government-as-business). If only FEMA had acted like Wal-Mart after Katrina.... is the wistful sigh of those over at the Heritage Foundation. While I agree that government is often inefficient and wasteful, it is important to remember two things. First, that business is also often inefficient and wasteful. No one, for instance, is wishing that FEMA had acted like Webvan or Enron. Second, that government is not business. Business is motivated only by the bottom line, while government is motivated by equity and well as efficiency.

More microeconomics

Check out yesterday's post. One commenter refuses to be swayed by my brilliant rhetoric and razor-sharp microeconomic reasoning. I chose not to respond at length because I didn't want to belabor the point, but I hope that future discussions, on all topics, will be likewise interesting (and civil). Just don't disagree with me.

Ports and Politics

There's been a real furor over the sale of the 6 US port facilities to the UAE-based company. National security is the primary concern, but national sovereignty and declining American manufacturing sector have also come up. Oddly enough, the issue seems to have united the Congress against the White House without regard to political party. But I think that on this issue, I agree with the Heritage Foundation that the outrage is still mainly political anyway. I remember the same things were said in 1997 when the US was selling its Panama Canal freight facilities to a company that was based in mainland China, only it was the commies we were worried about, not the terrorists.

Microeconomics and Fire Protection

Observer takes issue with my fee-for-service arguments from earlier in the week. I am pleased at the interest and the tenacity, but once again feel that my point is somehow not penetrating. So at the risk of boring an audience that is not micro-economically inclined, let's look at Observer's objections one by one. First, recall what "market failure" means. It doesn't mean that there is no functioning market, that there is no exchange of goods or services. Rather, it means that the market has failed to provide the optimum amount of good or service at the optimum price. In a public goods situation, because of free riders, negative externalities, and other problems, the market tends to underproduce the good or, conversely, overcharge for the good. So in the example at hand, I disagree with Observer that the neighbors are paying a fair price for their service. They are actually paying a higher price than a perfect market would produce because they are paying for the actions of Mr Rueda. To use the jargon, Mr Rueda's external costs have been internalized in the higher fees that the dues-payers pay. My argument here would break down if Mr Rueda's house were miles from anywhere. But since the fire department has to respond to a fire at his house even though he is not a paying customer, a market failure occurs. Second, purchasing fire protection is not like buying a toaster. There are 24,500 fire protection districts in the United States. How many are fee-for-service? In my (admittedly brief) search, I could find two, the one in the article and one in Brount County, TN. But for the sake of argument, let's assume that there are 245. That's 1% of the total. And since fee-for-service districts will almost invariably be in rural areas, in aggregate, they probably only service, say, 0.25% of the population. In other words, for the newcomer arriving in a fee-for-service district, there is a 99.75% chance that his last fire protection was publicly provided. I don't think it is unreasonable for someone to therefore assume that his new district will be the same. How would he know differently? How would he know to investigate? My point is that public provision of fire protection is so overwhelmingly the norm that a deviation like the one here represents an information asymmetry. To use a rather extreme example, imagine moving to a town where you had to pay for the amount of oxygen you consumed. ( This may seem laughable now, but after the passage of the 1927 Radio Act, which created federal regulation of the electromagnetic spectrum, there was widespread concern that the logical next step was regulation of the "very air we breath.") I think you would be surprised, then, if someone slapped a rubber mask over your face because you had failed to pay, in advance, your oxygen dues. Mr Rueda must have been similarly surprised when the fire department showed up at his fire but refused to fight it because he hadn't paid the fee. I think that certainly represents an imbalance of information. Third, with regard to the per-household cost, Observer makes a good point about rural residents subsidizing urban residents, which is exactly what would happen if the fire district were organized to include both regions and average-cost pricing were used. If marginal-cost pricing were used (which is often used for water and sewer service), however, I don't think Observer's point would be valid. But I do have to disagree with the point about residents being free to choose a different fire district. Fire protection displays all the features of a natural monopoly: high capital costs and therefore high barriers to entry. There would realistically be no other competing districts. This is why in situations where private companies do provide fire protection, such as by the company Rural/Metro, the service is never provided in a competitive market but under contract to the local government--the private company is essentially filling the role of the local government. (Granted, there is competition in the tendering process, but this so-called privatization is rich fodder for another discussion). Finally, I have to also disagree with the comparison of mandatory car insurance to taxes. Sure, you can pay less for car insurance if you opt for less service. But you can avoid paying the gas tax if you drive less, and the sales tax if you buy less, and the income tax if you earn less even though they are all still taxes. In our case here, if a resident is required to pay a membership fee to receive fire protection, I don't see how it differs from having to pay a mandatory tax. Is a homeowner association fee, which is mandatory if you live in a house covered by the association, the same as a tax? I would say yes. I think the mandatory fire fee would be the same. Maybe Observer knows more about the situation then I do. I only read one newspaper article about it. And we can quibble about exactly which market failures are at play here. But I think my underlying point still holds (which maybe I haven't yet made adequately clear), that governments exist for a reason, and I think the Grover Norquist starve-the-beast crowd need to always keep that in mind.

More on eminent domain

As readers may recall, I've long maintained that the outcry against the Supreme Court ruling Kelo v. New London was an overreaction to something only partially understood. The court case upheld economic redevelopment as a "public use" and therefore as a legitimate reason for exercising eminent domain. No new power was created by the ruling, and the Supreme Court made it clear that the legislative bodies could modify the use of eminent domain however they liked. So I feel somewhat vindicated by this article from the New York Times: "States Curbing Rights to Seize Private Homes." The article itself is breathless in tone and a symptom of the overreaction I'm taking about. But the article shows that legislators are doing exactly what legislators should be doing--passing laws and setting public policy. As the Court said in the ruling, legislative bodies have deference in this matter. So maybe the question we should be asking instead is, why did it take so long to modify eminent domain laws if it was so darned important? After all, the situation in Kelo v. New London was not new; economic redevelopment has been used as a reason for exercising eminent domain since at least 1954.

Fee for service, part II

My Fee for service piece from last week received some interesting commentary, but I realize that I may not have been as clear as I should have been. I agree with the commenters who say that insurance can only work if everyone pays the premiums. But I contend that fire protection is not the same as insurance. Fire protection is a classic example of a public good. What if Mr. Rueda in the article maintained a property that was a firetrap (he makes amateur fireworks) , and what if he deliberately chose not to pay his fire dues (he's a cheapskate)? His dues-paying neighbors are endangered, and the fire department, in order to service its clients, would need to be extra-vigilant and would have to respond in anticipation every time something happened at Mr. Rueda's house (as they actually did in the article). Who pays for the extra vigilance and the extra responses? Not Mr. Rueda, since he doesn't pay dues, even though he is the reason for these extra costs. No, the costs are passed on to the dues-paying members. They are paying for Mr. Rueda's decisions. This shows how the market cannot properly price public goods. There was another market failure at work in the article--information asymmetry. Mr. Rueda says he didn't know about the membership dues situation. Let's take him at his word. Is, then, he really at fault? After all, in most jurisdictions in the US, fire protection is paid for by local property taxes, not by membership dues. Should Mr. Rueda have been expected to research the fire protection payment structure when he moved in to his new house? Should he have noted that his property tax bill seemed unusually low and found out why? Or should the fire department have undertaken a marketing campaign? At any rate, Mr. Rueda made a poor decision because he didn't have all the information, a decision, by the way, that incurred costs for the dues payers as well, since the fire department still responded. Finally, note that the per-household cost of fire protection in a membership scheme will be higher than in a property tax scheme. Fire protection has very high fixed costs and smaller marginal costs. These fixed costs must be distributed over the service base, and the fixed costs will not vary by the number of dues payers. One commentator actually seemed to agree with this, saying, "The fire department, just like most social services, and the insurance industry can only function if everyone pays yet only a portion of those who pay actually receive services since the services typically have a cost much greater than the sum total of contributions made by any single individual recpient. " So, in sum, my point was that the market cannot adequately address all situation. There are well-known market failures that require public-sector remedy. Both the market failures I mentioned could have been addressed by, say, mandatory dues-paying, but isn't that the same as a tax? Instead of saying "free market capitalists," perhaps I should have said "libertarians." The target of my post was the Cato Institute types, who think that the market contains the solution to all problems and that the government should stay out of the market as much as possible. In this line of thinking, there is no reason that fire protection should not be placed on the market. And yet, when fire protection IS placed on the market, as in the jurisdiction in the article (membership dues are not equal to taxes), something happens (i.e., property is destroyed as the fire department looks on) that I think most people would think is somehow not right.

How do you say Google in Chinese?

As everyone I'm sure knows by now, Google, in exchange for getting permission to work in China, has agreed to Chinese government demands for censorship. This is a classic dilemma. Is Google truly evil? Or is Google actually performing a valuable service by bringing Western ideas of free speech, albeit in a stunted form, to an autocratic regime? What do you think?

Fee for service

"Rural firefighters stood by and watched a fire destroy a garage and a vehicle because the property owner had not paid membership dues." I think most people would look askance at this situation (heck, I pulled the story off of a conservative website), but it is exactly what free market capitalists want, or at least, think it's what they want.

Global Warming?

This is a graph produced by the National Academies of Science. It is one of a series at their site dedicated to global warming. It shows the link between global surface temperature and carbon content in the atmosphere. Striking.

I post it because I received some comments on my post about global warming the other day to the tune that global climate change is not anthropogenic. I am really surprised that anyone can read the evidence out there and still come to that conclusion.

When we think about global warming, we need to think about Pascal's wager. If it's caused by humans and we ignore it, the consequences will be much worse than if it's natural and we address it.

Presidential Extreme Makeover

Senator Sam Brownback from Kansas wants to run as Jesus' candidate in the 2008 Presidential election. Should we care? Well, here is his agenda: "In his dream America, the one he believes both the Bible and the Constitution promise, the state will simply wither away. In its place will be a country so suffused with God and the free market that the social fabric of the last hundred years -- schools, Social Security, welfare -- will be privatized or simply done away with. There will be no abortions; sex will be confined to heterosexual marriage. Men will lead families, mothers will tend children, and big business and the church will take care of all." Fortunately, we probably needn't really worry about Brownback, as potentially worrisome as he may be. America isn't as religiously or culturally divided as we are often told. The "values vote" of the last couple of elections has been exaggerated. At the end of the day, there is a "striking degree of compatibility in the values of most Americans," and I doubt most Americans want Brownback's extreme makeover. Amen to that.

Freedom of Speech

The Houses of Parliament in the UK are currently debating a new anti-terrorism bill. The bill presently includes a provision to ban the "glorification" of terrorism. While I understand the motiviation behind this, I seems to me a very hard law to enforce. What exactly is the "glorification" of terrorism? How do you draw the line between "glorification" and "agreeing with"? It reminds me of the numerous laws in Europe against Holocaust denial. Why have such a law, and how is it enforced? Many think these laws are counter to a free society. Meanwhile, Al Gore is being accused of treason and sedition for some anti-Iraq war comments he made recently. These things demonstrate how hard preserving free speech can be. Hard but important.

God and Global Climate Change

There has been a recent flurry of anti-global warming articles in the conservative press, perhaps spurred by the announcement of the Evangelical Global Warming Initiative. Cal Thomas thinks these evangelicals are wasting their time. They should be fighting real problems like poverty and godlessness. Jerry Falwell agrees. Global warming is not yet proven, he says. Alan Caruba takes a harder line. He calls the whole global warming debate "nonsense." Thomas Brewton, predictably, blames Darwinists for making stuff up. But let's review what we do know about global climate change. It's a fact that the earth is getting warmer. It's a fact the sea levels are rising, and rising faster than ever before. It's a fact that we are causing a net increase in the amount of carbon in the atmosphere. It's a fact that the large polar ice sheets are melting and causing large-scale climatic change. It's a fact that we are causing massive deforestation, which impacts both the amount of carbon produced and the amount that can be sequestered. So if the Evangelical Christians think that God wants us to do something about this, then I consider that a good sign.

Tax Tools

There's been a lot of talk about Bush's recently unveiled 2007 federal budget proposal. It's big on defense spending, cuts many programs to low- and medium-income families, and is pretty much a bad idea. But the Heritage Foundation picked up on something in the budget that I found illuminating. The 2007 budget contains a plan to create a Dynamic Analysis Division within the Treasury Department that will look at the economic effects of tax proposals and advise policymakers of the same. The idea is that "policymakers can see that some tax policy changes support more vigorous economic activity while others do not, they may (and indeed have) enact tax laws that are, at best, economically meaningless or, at worst, downright harmful. Dynamic scoring can help to sort the good from the bad." The reason I think this is illuminating is because it shows that conservative groups like the Heritage Foundation think that the only purpose of taxes and tax policy is to spur economic activity, to catalyze economic growth. They are wrong. The single largest tax deduction for most Americans, the mortgage interest deduction, was enacted not for economic reasons but to stimulate home-ownership, which was and still is seen as a cornerstone of good society. Excise taxes on cigarettes are high because society wants to discourage smoking. Import and export duties are tinkered with all the time for reasons that aren't purely economic. In other words, taxes are just as powerful social tools as they are economic tools, and they are often used that way. I hope that dymanic scoring takes that into account.

Eminent Domain on the Electromagnetic Spectrum

Yesterday, I made a brief point about eminent domain, which the power that government has to forcibly acquire private property. It is in the headlines lately because of a recent US Supreme Court ruling. But the government, especially the federal government, acts coercively all the time with respect to private property, and often in hidden ways. Take for instance Uncle Sam's efforts in the push for High Definition Television (HDTV). HDTV is, as the name suggests, television with a very high picture and sound quality. It is digital as opposed to analog in nature. For a more in-depth discussion, check here. The HDTV issue rests on two key features. One, HDTV requires a lot less space on the electromagnetic (EM) spectrum. Two, it requires a completely different TV set to watch. You may not have realized it, but the federal government owns the EM spectrum (this fact in itself was once highly controversial. Congress passed the Radio Act in 1927 ostensibily to bring order to EM chaos, but at the time it was seen as an assualt on free speech and on private property rights.) The Federal Communications Commission controls and assigns the various frequencies and power levels that broadcast technologies use, technologies such as TV, FM and AM radio, cell phones, WiFi, and police band radios. The government cares about HDTV because it would love to free up bandwith that old TV is now using. It wants to conduct a potentially lucrative bandwidth auction. Unfortunately, the market is not cooperating with federal plans. In order for HDTV to replace old TV, the viewing public actually has to own HDTV sets, and the broadcasters actually have to produce HDTV content. Neither of these is true. To solve this problem, the government is passing laws that require TV manufacturers and local TV affiliates to start dealing with HDTV. The feds have mandated that by Feb 17, 2009, all TV must be HDTV. So, where does that leave consumers? In the dark, as they say. Consumers will be forced to buy new TV sets. But, luckily, Uncle Sam won't completely abandon us. To avoid a consumer revolt, Congress has set aside about $1.5 billion to smooth the transition. Owners of outmoded TV sets will be eligible for two vouchers, worth $40 each, to help buy converter boxes that will enable today's analog TV sets to receive digital signals. Of course, no one really knows how much the converter boxes will cost, so no one knows if $40 will suffice. This issue has many angles. Does the federal government really have to power to do this? Is this the best use of scarce tax dollars? Is this an instance of corporations winning out over the individual? What do you think? Here are some quotes picked up from various sources: "I'd rather go to college than watch TV. Why is it that I can get help buying a digital TV, but can't get help with tuition?" "I think this undervalues television. It is a means of communication that reaches more citizens than any other. Yes, education is more important, and yes, there's lots of crap on the telly, but TV is still an important medium by which ideas and knowledge can be disseminated." "In our current system of government, the greatest danger to the existing power structure is voting. A better educated populace is more likely to vote, while a TV watching populace is less likely to do so. So it is in the interests of the state to do what it can to discourage education beyond the minimum level necessary to support the state. Hence the emphasis on putting lots of dollars into extending the reach and influence of TV." "Why is Congress and the FCC even bothering with what is obviously not within their powers as delegated to them by the Constitution? The 9th and 10th Amendments apply here." "I'll bet these vouchers are only good for "approved" digital sets, with DRM and broadcast flag enabled by default, for your "convenience", of course."

Eminent Domain

Readers may remember a while ago discussions about eminent domain and the recent Supreme Court ruling Kelo v. New London. The ruling affirmed (but did not create) state government's power to exercise the power of eminent domain for reasons of economic development. In those earlier discussions, I said that I felt the sudden and fierce backlast against the ruling was unwarranted. The situation that opponents fear is this one: A city government wants to condemn a mall to make room for a Wal-Mart. (Boy, that's the Right and the Left's worst nightmare). But the reason this doesn't worry me can be found in the Supreme Court's opinion. In sum, the Supreme Court said that eminent domain for economic development must be a part of a redevelopment plan that went through the legislative process. It can't be done arbitrarily and it cannot be done explicitly to transfer property from party A to party B. In my mind, the case in Massena is a clear violation of the intent of Kelo v. New London.

Myths of rich and poor

A common refrain among conservative commentators is that since everyone is better off in today's economy than they used to be, we shouldn't worry about the widening gap in income inequality. Thomas Sowell repeats it again today in his column Myths of Rich and Poor. Sowell's thesis is that "Despite the statistics that show real wages going downhill over time, somehow Americans are consuming more than ever and have a larger net worth than ever." He cites figures that show that Americans have more central A/C, more dishwashers, and more color televisions than they did 30 years ago. He also says that even if real wages are shrinking, more and more of our compensation comes in the form of fringe benefits. But the increase in the incidence of possession of these consumer goods could just as easily be explained by their plummeting prices. For instance, when color televisions first appeared on the market in 1954, they cost more than a car or even a small house. Now a 19" color televison can be had for $70 or even less. He also ignores the fact that Americans are in personal debt like never before. Finally, he hinges his argument on the interpretation of the consumer price index. He claims that economists routinely overestimate it, thus statistically demonstrating declining real wages. However, he could be just as guily in underestimating it. Even if the consumer price index argument is murky, we do know that the widening income gap is real. We also know that when people evaluate their well-being, they don't compare themselves to how they were 30 years ago, but rather how they stand in relation to their neighbors today. All this, in my mind, suggests that the real myth is the conservative viewpoint.

Household costs and benefits

According to the Wall Street Journal, the federal government spent over $20,000 per household in fiscal year 2005. Tax reciepts per household averaged about $17,000. The $3000/household deficit is certainly worrisome for anyone who cares about fiscal solvency. Here's how the spending breaks out. What should be done? Well, we can cut spending or increase taxes or both. The problem, of course, is that when it comes time to cut spending or increase taxes, it is always easier to say than to d0. There will always be a loser. President Bush, paradoxically, has chosen to increase spending and cut taxes. He claims that tax cuts will generate economic growth, thus generating a larger tax base and making the tax cuts "pay for themselves." As great as that would be--a tax cut that benefits everyone and hurts no one--the evidence doesn't bear him out. In the meantime, the federal deficit in 2005 was $337 billion. The national debt, the result of years and years of deficit spending, is $8.2 trillion.

Bush and his Constitution

With the Patriot Act under consideration for extension, the illegal wire-tapping of US citizens, the extramural detentions and tortures, there's been a lot of talk recently about our Constitutional rights and exactly how far they can be stretched or even broken in the fight against terror. Some say that there actually have been no violations of our rights. Others take a somewhat limited view of what those rights are. But really there is no problem at all. The People for the American Way have uncovered a copy of the version of the Constitution that Bush is following. As you'll see, Bush is merely exercising his authority.

Energy and the Invisible Hand, part 2

Yet another conservative pundit says that the solution to our energy problem lies in the private sector. This time it is Ben Lieberman at the Heritage Foundation. He trots out the usual suspects: reduce federal restrictions on domestic energy production, make it easier to build refineries, drill in the Arctic National Wildlife Reserve. His goal, by the way, is "to ensure that oil is as affordable as market forces allow." Meanwhile, Ronald Bailey at Reason Magazine offers a little more reasoned support to the private sector idea. Needless to say, I disagree. But I don't need to repeat the points I made yesterday, and the day before, and a month ago.

Energy and the Invisible Hand

The more nuanced reactions to the State of the Union are starting to trickle out. Alan Reynolds offers one that is highly critical of Bush (and he's a conservative, by the way). But I have to disagree with Reynolds on the energy problem. He, like Taylor yesterday, thinks that government should stay out of the way and let the market work its magic. I quote: "If alternative energy sources have any chance of being competitive, they will not need subsidies. If they need subsidies, they are not 'more affordable.' " If it were only that simple. But consider this: We have been investing in a petroleum-based, automobile-based transportation infrastructure for almost 100 years, with ample government funding along the way. That infrastructure includes the very form of our urban developments. The government subsidies continue. Some say that the true price of a gallon of gas is $15, the difference at the pump being a pretty big subsidy. We have a natural gas distrubution system that was 60 years in the making and that received significant government help. The construction of our national electrical grid received explicit government funding in the form of the Rural Electrification Act. The nuclear energy industry was never commercially viable and received much, much help from Uncle Sam, including a controversial federally-subsidized indemnification in case of an accident. Not a single hydroelectric plant in this country was built by the private sector, but rather by the federal government. In other words, the only reason that our energy sources seem affordable today is because they have benefited from years of federal subsidies, and now they are imbedded. So of course it will take time and leadership and, yes, public sector funding, to change energy paths.

Energy and and the State of the Union

It was hoped and expected that Bush would address national energy policy in his State of the Union address. He did. Some people are encouraged by Bush's words. Others are more skeptical. Jerry Taylor at the Cato Institute called Bush's energy proposals "old wine in new bottles." I find Taylor's comments a little jejeune. He's essentially saying "Let the market work it out," but I think it's clear to most people that the market has not and will not solve this problem. While I'm pleased that energy is gaining importance on the national policy agenda, I don't think Bush is going far enough. Many commentators have suggested a crash program akin to the Manhattan Project or the Apollo moon landings. And for that, we need national leadership