Reason Magazine - Topics > Business and Industry

The Coming Recession

Mon, 05 May 2008 12:05:00 EDT

As this issue of reason goes to press, the dollar is at a record low against the euro, oil is more than $100 a barrel, consumer prices are up 4 percent from a year ago, and Federal Reserve Chairman Ben Bernanke is cutting interest rates so often that the guys at the office have taken to calling him Edward Scissorhands. The subprime mortgage fallout has yet to finish wreaking its havoc, Bear Stearns is holding on by the skin of its teeth, and the government’s bucket may not be big enough for all the bailouts under way. Gloomy faces dominate CNBC and the Fox Business Channel, muttering long-forgotten terms like inflation and recession.

President George W. Bush, by contrast, is relatively cheery, conceding that we are in “challenging times” but arguing that “our financial institutions are strong” and the capital markets “functioning efficiently and effectively.” “In the long run,” Bush said in a March 17 White House address, “our economy is going to be fine.” And some statistics back up the sunny view: Unemployment is still at a low 5.1 percent, and productivity remains high.

Presidential hopefuls are offering a variety of explanations and possible solutions for what 42 percent of voters say is the most important issue to them, according to a recent CNN poll. At a March 20 rally, Sen. Barack Obama (D-Ill.) suggested the problem was a combination of “special interests” and war: “At a time when we’re on the brink of recession, when neighborhoods have ‘For Sale’ signs outside every home, and working families are struggling to keep up with rising costs, ordinary Americans are paying a price for this war.” Sen. Hillary Clinton (D-N.Y.) took a different tack: The “economic crisis is, at its core, a housing crisis,” she said in a major Philadelphia address on March 24, but she cited other factors as well, including Bush’s “brain dead energy policy.” Sen. John McCain (R-Ariz.) won the Republican nomination without really talking much about the economy.

How will we know when it’s fair to speak the dreaded r-word? In general, a recession is defined as a decline in a country’s gross domestic product for two or more successive quarters. In the United States, an official pronouncement is required from the professional doom diagnosticians on the business-cycle dating committee of the National Bureau of Economic Research, who often take other aspects of an ailing economy into account. GDP growth slowed dramatically at the end of 2007 and is projected to be zero in the second quarter of 2008, so we look to be well on our way.

As oil prices continued to climb and housing prices continued to slide, Reason assembled a panel of economists and other market watchers to help make sense of the headlines, point some fingers, figure out how we got where we are, and offer advice about how to get out with our wallets intact.

Blame the Fed
Gerald P. O’Driscoll Jr.
The U.S. economy is in the midst of an old-style credit crunch brought on by a combination of bad policies and incredibly lax underwriting standards at financial institutions. The biggest policy failure was the decision by Alan Greenspan’s Federal Reserve to hold interest rates too low for too long. That led to a tsunami of credit that inundated the economy with cheap money. Mortgage lenders in particular were flush with funds and searched for deals wherever they could be found. Heretofore unqualified borrowers suddenly “qualified” as underwriting standards relaxed and then disappeared.

Egged on by statements from Chairman Greenspan, market participants came to believe the era of low interest rates would last indefinitely. But the era did come to an end as the Fed was forced to begin raising interest rates. Faced with the prospect of paying higher rates on their mortgages in the future, borrowers began defaulting. First home prices stopped rising, and then home prices began dropping—precipitously in some overheated housing markets. Now we are approximately six months into a new cycle of lower interest rates, but with no end in sight to the crunch.

At least two other factors stoked the crisis. First, many exotic financial products were issued whose value was tied in one way or another to home prices and the value of the securities into which home mortgages were bundled, such as collateralized mortgage obligations. The pricing of these financial products was the product of complex economic models, not the outcome of market transactions. As the value of the underlying homes and mortgages declined, pricing of the financial exotica became nearly impossible. As we learned in the collapse of Long Term Capital Management, these pricing models fail precisely when their accuracy is most important—in times of financial turbulence. The inability to price the financial products has exacerbated losses among the firms holding them.

There is a wonderful parallel here to the collapse of the Soviet Union. As the great Austrian economist Ludwig von Mises argued almost 100 years ago, central planning inevitably fails because there are no market prices to allocate resources. Market prices can only be the outcome of actual market transactions among buyers and sellers. Planners used mathematical formulas to value resources, especially capital. Now Wall Street wizards have imported Soviet thinking to allocate financial capital. Is it any wonder that it failed?

The second factor contributing to the housing market collapse was the federal government’s commitment to “affordable housing.” Lenders, especially Fannie Mae and Freddie Mac, were pressured into promoting housing to low-income groups that could not qualify for normal loans. That policy is predicated on the belief that there is an underserved group of people who, but for economic discrimination or some other market failure, would be homeowners. That social goal and the credit-driven desire for more deals merged into mortgages made without adequate collateral.

We learned two lessons from the drive to make home ownership available to the heretofore underserved. First, many of these were not homeowners because they could not afford a home. Only under the temporary “hothouse” conditions in mortgage markets did they seem to qualify. Second, people who have no equity in their homes cannot meaningfully be said to be owners. When times turn tough, they will walk away. They were effectively renters, not homeowners.

The crisis will end when housing markets hit bottom and the prices of mortgage securities stabilize. Banks also need to unwind their positions in exotic financial derivatives.

The Fed needs to understand it is facing a capital crisis, not a liquidity crisis. The very low interest rates on safe assets show there is ample liquidity in financial markets. The Fed should not supply capital. That is the job of markets, and they are doing it.

Gerald P. O’Driscoll Jr., formerly a vice president and economic adviser at the Federal Reserve Bank of Dallas, is a senior fellow at the Cato Institute.

No Hoofing to Hooverville
Megan McArdle
Just one thing puzzles me about the race to the White House: Why would anyone want to get there? I know that being crowned prettiest girl at the prom is the great lasting rejoinder to everyone who made fun of you in middle school, but given the economic condition of the country, the next four years seem like a rotten time to reign.

Ignore the econopundits making comparisons to the 1930s. While the parallels are striking, we are missing the key ingredient in the onset of the Great Depression: tight Fed policy that caused the money supply to shrink by 25 percent. You can put away that bindle and push the apple cart back in the garage.

But if we’re not exactly hoofing it to Hooverville, we nonetheless face one hell of a rough patch. Record high oil prices, surpassing even the momentous spikes of the 1970s, have brought with them another piece of ’70s memorabilia: stagflation. Federal Reserve bankers are faced with an extremely unpalatable choice. They can tighten up the money supply to combat inflation, at the cost of making the probable recession even deeper. Or they can hang loose and watch inflation march upward while the economy does God knows what. With the credit markets broken, the Fed may end up losing its hard-won credibility as an inflation fighter while producing only marginal benefits to growth.

The president has no control over any of this, but that won’t stop people from blaming him anyway. He will also almost certainly have to come up with some regulatory scheme for increasing transparency and accountability in the vast new financial markets that have been created by the securitization of loans during the last 30 years. It will be a tough order to give investors better information without strangling valuable financial innovation.

But by far his biggest quandary will be the budget. Obama (who I assume will be the Democratic nominee) wants a big new health care entitlement; John McCain wants even more tax cuts. Both will be frustrated by adverse budget math. The economic slowdown is going to cut into tax revenues, and most economists agree that a recession is not a good time to raise taxes—nay, not even on “the rich.” Meanwhile, the baby boomers are about to start retiring, turning Social Security, Medicare, and Medicaid into the sucking chest wound of the federal budget. Assurances that the trust fund won’t run out until 2042 notwithstanding, the president will have to start coping with Medicare deficits as soon as next year, and a falling Social Security surplus soon thereafter. All this will be compounded by the slowdown in GDP growth made inevitable by declining labor force participation and service-intensive elder care.

Any future president should be panicking. That doesn’t mean the rest of us should. At the end of the day, America has the most flexible and resilient economy in the world. We’ll pull through somehow, although a lot of us won’t be very happy in the process. But least happy of all will be the president—the bum we get to throw out when things don’t go our way.

Megan McArdle blogs about economics at The Atlantic.

First, Do No (More) Harm
Ron Paul
This nation is facing an economic crisis the likes of which have not been seen in several generations. It is crucial that we take to heart the lesson that should have been learned after the Great Depression, which is that the central bank should do nothing.

I have been writing and speaking for years about the dangers of the Federal Reserve, but the importance of the actions of the Fed in laying the groundwork for the downturn in the business cycle pales in comparison to the damage done by actions the Fed takes once the downturn arrives. At the first sign of crisis, even with growing inflation, the Fed began to further inflate, lowering interest rates, stepping up open market operations, and injecting liquidity. World markets, already jittery, see these steps as affirmations of their worst fears and react accordingly by selling assets denominated in smoke-and-mirrors fiat currency and fleeing to the solid value of gold, oil, and commodities.

Every action the Fed takes sends a signal that the U.S. dollar will continue to be inflated and therefore debased, which is why the correct action is no action at all. Lower interest rates and liquidity injections are viewed with alarm by foreign markets, while higher interest rates and money tightening are anathema to many domestic investors. The Fed is between a rock and a hard place, and its insistence on inflating the money supply to manage the brittle economy will likely be our undoing.

Until we realize that the Federal Reserve system itself is flawed, and until we recognize that no one economic maestro or committee of economic experts can set prices and plan the economy, this nation will continue to flounder about in an economic malaise. Ending that may take a much more serious downturn than anything we’ve seen yet. It is beyond doubt that our economy is in recession, and the only rational response is for the government to allow malinvested resources to liquidate so that we can return to a stable economy.

While the Fed should take a hands-off approach, Congress should aggressively cut taxes and spending and repeal regulations that stifle economic growth, such as the Sarbanes-Oxley Act. This country has enormous economic potential, an industrious work force, and an enviable history of innovation and entrepreneurship. If the government would learn from its past mistakes and abstain from further interference, we could get back on a solid footing and grow to our full potential.

My fear is that the Fed will continue with its policy of inflation and Congress will be pressured to continue to stimulate the economy with government spending, probably extending to even more outright taxpayer-funded bailouts of financial institutions, subprime mortgages, and government-sponsored enterprises that are “too big to fail.” These debt-funded efforts reward the recklessness of some institutions at the expense of the productive sectors of our economy. Until the federal government acts to extricate itself from intervention in the markets, economic activity will be hindered and true recovery will not take place.

Rep. Ron Paul (R-Texas) is a nine-term congressman and a candidate for the Republican presidential nomination.

The Vicious Ethanol Cycle
Robert Bryce
I see three big dangers to the global economy: the ongoing fallout from the mortgage mess, rising energy prices, and rising food prices. That last item is the most maddening, because surging food prices are largely the result of the ethanol scam.

As U.S. ethanol distilleries vacuum up ever increasing quantities of corn, and corn takes up an ever larger percentage of arable land, prices for all types of food are skyrocketing. During the last two years, corn prices have more than doubled and soybean prices have nearly tripled. In 2007 food prices in the U.S. increased by nearly 5 percent. Bill Lapp, of the Omaha-based research firm Advanced Economic Solutions, told The Boston Globe in March that he expects food prices to increase at an annual rate of 7.5 percent for the next five years.

Because of mandates requiring gasoline producers to mix ethanol with their fuel, 20 percent of the U.S. corn crop in 2006—about 2.1 billion bushels—was diverted into ethanol production. By 2009, according to the National Corn Growers Association, about one-third of the expected crop—some 4 billion bushels—will be used to make motor fuel. And those projections were made in April 2007, eight months before Congress passed the Energy Independence and Security Act of 2007, which requires the consumption of 36 billion gallons of ethanol by 2020, a fivefold increase over current levels.

The far-reaching economic impact of ethanol mandates is already being felt. In early 2007, tens of thousands of people marched in the streets of Mexico City to protest the rising cost of tortillas, an increase that Mexico’s secretary of economy, Eduardo Sojo, blamed on American corn ethanol production. In March of this year, Pilgrim’s Pride, the world’s largest poultry processor, shuttered a plant in Siler City, North Carolina, and fired 1,100 workers. Company CEO Clint Rivers laid the blame squarely on the ethanol mandates, predicting that “there is much more to come” in the way of food price increases. “We’re spending our tax dollars to raise the price of our food to subsidize the ethanol industry,” he said.

Congressional meddling in the energy market has created what Lester Brown, the president of the Earth Policy Institute, calls an “epic competition” between “the world’s supermarkets and its service stations.” Therein lies the perversity of ethanol mandates: As the global economy heads for rougher times, food prices are soaring. And those prices will increase anxiety among consumers, who will further reduce their discretionary spending. Congress has created a negative feedback loop that will reverberate for years to come.

Robert Bryce is the managing editor of Energy Tribune. His latest book is Gusher of Lies: The Dangerous Delusions of “Energy Independence” (PublicAffairs).

War Is the Health of the Civilian State
Robert Higgs
Adam Smith famously observed that there is “a great deal of ruin in a nation”—that is, nations can take a lot of abuse. Let’s hope he was right, because the George W. Bush administration has taken a great many actions during the past seven years that contribute to economic ruin.

Much of the White House’s faulty economic policy can be traced to its wars in Afghanistan and Iraq, especially the latter because it has been larger, costlier, and more diverting. I use the word diverting deliberately to emphasize that the government’s military adventures in southwest Asia have served to draw the public’s attention away from economic measures that otherwise would have attracted more notice and hence more resistance.

One reason war is always associated with especially rapid growth in the size, scope, and power of the state is that it focuses people’s attention on what is seen as the most urgent matter, so they simply don’t notice what the government is doing in other areas. Another reason is that during wartime many people increase their broad support for the government and are less inclined to challenge its actions even when those actions have little or nothing to do with the war.

Hardly anyone was surprised that real military spending (measured in accordance with the government’s own narrow definition) increased by almost 60 percent between 2000 and 2007, compared to real GDP growth of 18 percent during that time. Note, however, that the government’s real nondefense outlays increased concurrently by more than 24 percent—an increase one-third greater than that of GDP. When people let down their guard in “supporting the troops,” they permit the government to make greater headway in its ceaseless quest to enlarge spending in a wide range of areas, many of them strictly civilian in nature.

The administration has partially concealed the burden of its spending binge by resorting to deficit finance. Federal debt held by the public increased by 49 percent between the end of fiscal 2000 and the end of fiscal 2007—a 24 percent increase after adjusting for inflation. To facilitate this surge in public borrowing, the Federal Reserve engineered a 40 percent increase in the monetary base, easing credit conditions in the commercial banking sector. The real estate bubble (now bursting) and the substantial depreciation of the dollar’s international exchange value are but two of the consequences of these reckless, war-spawned fiscal and monetary policies.

In view of the plunging stock market, my guess is that the current recession—in which many of the easy-credit-induced malinvestments of the past seven years are being liquidated by means of write-offs, loan defaults, bankruptcies, and other asset forfeitures—has much further to run. If you like the present worsening economic situation, write the president and your congressional representatives a letter and thank them for their war and their related economic spoliation.

Robert Higgs, a senior fellow in political economy at the Independent Institute, is author of Crisis and Leviathan: Critical Episodes in the Growth of American Government (Oxford University Press) and many other books.

Stagflation or Depression?
Robert E. Wright
The current U.S. economic outlook is as bleak as it was in 1974 or even 1930. Will the economy wither? Or will it just wilt a little before blossoming in a bath of Fed-supplied liquidity? Nobody knows for sure, but I fear the former. Here’s why:

Our educational system does a poor job of teaching people how to think independently. It always has, but until recently that wasn’t a big problem. Today’s globalized economy, however, demands ever larger numbers of engineers, doctors, scientists, and sundry creative types. We probably won’t create enough independent thinkers until we have school choice at the primary, secondary, and tertiary levels.

Thankfully, entrepreneurs abound. They’ve pulled us out of the economic fire in the past and could do so again. But they are more hamstrung than ever with high, uncertain, and often capricious taxes and regulations that do not appear to be going away anytime soon.

Something stinks in our financial system. Six different mortgage securitization schemes blew up between the Civil War and World War II for exactly the same reason that subprime mortgages tanked last year: very poorly designed incentives for mortgage originators. Why don’t financiers and their regulators pay more attention to America’s rich financial heritage? Their modeling is more sophisticated than ever, but their economic reasoning is not.

The national debt is so high ($9.4 trillion, or almost $31,000 per person) that the government must largely rely on monetary stimulus rather than more salubrious fiscal measures, such as permanently cutting taxes. Too much easing by the Fed could lead to 1970s-like inflation and further financial havoc.

Urged on in part by the example set by their profligate leaders, Americans wallow in a huge pile of private debt as well. A high level of individual leverage has become a permanent fixture of the nation’s landscape. Americans owe so much that to keep growing, financial institutions have to push the margin of safety by making loans on ever thinner collateral and ever weaker covenants. If the economy slows significantly, many more poor-quality loans will hit the proverbial fan. The ensuing mess will stink and take a long time to clean up.

Even if the Federal Reserve manages to save the economy this time, these problems may continue to fester, breeding the next economic catastrophe. Perhaps, though, even greater levels of incompetence in other countries will break our fall.

Robert E. Wright is the author of One Nation Under Debt: Hamilton, Jefferson and the History of What We Owe (McGraw-Hill) and a curator for the Museum of American Finance. He teaches business, economic, and financial history at New York University’s Stern School of Business.

The Only Thing to Fear Is Fear-Driven Government ‘Control’
Donald J. Boudreaux
New York Times columnist Gail Collins was underwhelmed by the president’s folksy course-things-ain’t-great-now-but-we-Americans-with-our-rebate-checks-and-incessant-complaining-about-congressional-earmarks-are-gonna-be-just-fine address to the Economic Club of New York on March 14. She complained that “in times of crisis you would like to at least believe your leader has the capacity to pretend he’s in control.”

This is the attitude that scares me. I worry not a whit that the subprime crisis or falling share prices will cause long-term economic woe. As unnerving as the current downturn might be today, people in competitive markets always find ways of regaining their economic footing tomorrow. Investors recalibrate their expectations and entrepreneurs redirect their energies to take better advantage of the changing economic landscape. Workers’ pay and consumers’ standard of living, after blipping briefly downward, resume their upward trend.

“Nonsense!” a chorus yells. “What about the Great Depression? Or the 1970s?” The experiences of these decades are indeed relevant. They are, however, precisely why the clamor for putting someone “in control” of this crisis is so frightening.

Contrary to the conventional wisdom, whose strength of empirical support rivals that for the flat-earth hypothesis (“It seems so obvious!”), the massive move toward centralized control of the economy during the administrations of both Herbert Hoover and Franklin Roosevelt did not “rescue” Americans from economic hardship. All that FDR’s soaring rhetoric and army of officials manning newly created alphabet-soup agencies managed to do was to prolong an economic downturn into America’s deepest and longest depression—one that showed no reliable signs of ending until after Roosevelt met his maker. As the economic historian Robert Higgs documents in his 2006 book Depression, War, and Cold War, investors were terrified by the very real risk during the 1930s that government would extend its control over the economy even beyond what it achieved with its New Deal programs.

The 1970s weren’t as bad as the 1930s. Most important, there was no serious talk during the ’70s of nationalizing industries or socializing investment decisions. International trade was expanding rather than being suffocated by a disco-era Smoot-Hawley tariff. Still, wage and price controls were in vogue (and in effect), Congress and Richard Nixon were keen on command-and-control regulations, and Fed chairmen Arthur Burns’ and G. William Miller’s control over the money supply was injuriously inflationary. Shot through with so many interventions giving government more “control,” the economy slipped into an infamous malaise.

My only fear, therefore, is fear itself—fear that deludes people into believing that giving government greater control is the key to earthly salvation. As I write these words, the Fed’s aggressive moves to bail out Bear Stearns and prevent other necessary market corrections—along with increasing public support for protectionism, anti-immigrant nativism, and environmental hysteria—send shivers down my spine. The threat of a long-term crisis is only as real as is the likelihood that government will try to exert more control.

Donald J. Boudreaux is a professor of economics at George Mason University.

Homesteading on the High Seas

kmw@reason.com (Katherine Mangu-Ward) — Mon, 28 Apr 2008 16:58:00 EDT

If Peter Thiel funds something, it's bound to be cutting-edge awesome.

He is a supporter of the Methuselah Mouse Prize, which seeks to slow, stop, and eventually reverse aging. He was a producer of the film Thank You for Smoking, based on Christopher Buckley's charmingly ambiguous novel about a pro-tobacco lobbyist. An early investor in social networking, he was involved with Linked In and was the first investor in Facebook. He's big at the Singularity Institute (reason's Ronald Bailey caught up with him at the Singularity Summit earlier this year, check out the interview in the May print edition), which ponders and pushes artificial intelligence in preparation for a Vernor Vingeian "intelligence explosion." His first success was PayPal, which he originally hoped "would grow to become an extra-governmental system of currency, something reminiscent of the world described in Neal Stephenson's novel Cryptonomicon, in which programmers use encryption to create an offshore data haven free from government control."

And last week, Thiel announced a $500,000 investment—the same amount he put into Facebook in June 2004—in the Seasteading Institute. Seasteading, or "homesteading on the high seas," is an idea that has long attracted libertarians and others who would like to see a little more competition between forms of government. The idea is to get out into international waters and set up a floating outpost (or 12, or 1,200) from which people can come and go, experimenting with different types of legal, social, and contractual arrangements.

Thiel's co-conspirator and resident big thinker is none other than the impeccably credentialed Patri Friedman, son of David "Machinery of Freedom" Friedman, grandson of Milton "Capitalism and Freedom" Friedman. Patri, 31, has been beating the drums for various floating autonomous entities for several years, whenever he can steal time from his work as a software engineer at Google and from his now 2-year-old son, Tovar.

Despite the seemingly radical idea he's championing, Patri sees himself as a practical guy: "Starting a new country is actually a much less hard problem than, say, a libertarian winning a U.S. election," he says. He says that most of his competitors in the libertarian/anarchist autonomous entity business have been too ambitious, citing efforts from Sealand (the abandoned offshore fort-turned-free-state "which sort of worked" until it was devastated by fire in 2006) to more dramatic failures like Freedom Ship (current estimated cost >$11 billion, construction not yet begun) and the Aquarius phase of the Millennial Project ("colonizing the galaxy in eight easy steps!") to Minerva Reef (an uninhabited dredged island "invaded" by neighboring Tonga and eventually more or less reclaimed by the sea).

Learning a valuable lesson from his predecessors, Friedman is an incrementalist. "I want to talk about what to do this year, not how to colonize the galaxy." One way to start small, he says, is to hold a kind of floating Burning Man, called Ephemerisle, an idea inspired by childhood pilgrimages with his father to Pennsic, a Society for Creative Anachronism medieval reenactment held outside Pittsburgh, and college stints at Burning Man.

"There aren't that many people who are wiling to drop their lives and move to the ocean." Instead, he says, "it could start as a one week vacation, but then unlike Burning Man it could grow and eventually become permanent." Friedman hopes to hold the first Ephemerisle next summer, inviting many types of floating vessels to join him in international waters. Even an ordinary cruise ship might be enough to get started, since the cruise industry has proven that "providing power, water, food, and internet on the ocean is not only possible but can be profitable." But some of Thiel's grant is going toward figuring out the best way to throw up some small, cheap seasteads to provide a little non-state infrastructure and get things rolling (or floating, as the case may be).

From the official website: "Think about all the hot air and argumentation about a whole host of different political issues—freedom vs. security, absolute wealth vs. inequality, strong family vs. tolerance, open vs. closed borders, whatever the topic du jour is. Instead of deciding them through rhetoric, or voting on a few representatives to decide them for tens or hundreds of millions of people at once, imagine if we could try them each on a small scale and see what happens."

Thiel and Friedman met at a dinner set up by a couple of guys who work for Thiel's investment firm, Clarium Capital, and happened to be fans of Friedman's blog. Ajay Royan, a principal at Clarion and now a board member at the Seasteading Institute, described how the meeting of minds between Friedman and Thiel came about a few months back: "Peter knows Patri's grandfather, so we were just tickled that somebody of that lineage was so close to us physically and was thinking about macro issues from that perspective," says Royan. "We'd been having a lot internal debate [at Clarium] about how we get a freer space for people to function in. What was intriguing to us was that here was somebody proposing to shift the canvas to a relatively neutral space by recreating a frontier."

Not content with revolutionizing technology and society, Thiel says he's looking to bring "innovation to the public sector, where it's vitally needed." As with PayPal, his aspirations for the project are far from modest: "We're at a fascinating juncture: the nature of government is about to change at a very fundamental level."

Having a low-cost, gradually ramping up cluster of choices to live on would lower the cost of "jurisdictional arbitrage," which is very high right now, says Friedman. If you don't like your government right now, the only way to get a new one is to sell your house, pack up, move to another country, deal with immigration, get a new job and a new house, make new friends, and learn a new culture. This is expensive. But hopping from boat to boat, platform to platform, or island to island is cheap.

In fact, Friedman sees seasteading as a real, viable version of a metaphor his dad once used to sell anarcho-capitalism, and demonstrate why Nozickian utopias with lots of free entry and exit will tend toward libertarianism rather than authoritarianism:

Consider our world as it would be if the cost of moving from one country to another were zero. Everyone lives in a housetrailer and speaks the same language. One day, the president of France announces that because of troubles with neighboring countries, new military taxes are being levied and conscription will begin shortly. The next morning the president of France finds himself ruling a peaceful but empty landscape, the population having been reduced to himself, three generals, and twenty-seven war correspondents.

The question is (to paraphrase Justice Oliver Wendell Holmes): Will three generations of Friedmans be enough? Patri Friedman is optimistic. "I hope I can create a world where [my son] doesn't need to worry about how to increase freedom because we've already got it." he says. "But I suspect that I'll still be working on it by the time he's old enough to help."

Katherine Mangu-Ward is a reason associate editor

A $100 Million Tip

rbalko@reason.com (Radley Balko) — Fri, 21 Mar 2008 12:42:00 EDT

Yikes.

A Superior Court judge on Thursday ordered Starbucks to pay its California baristas more than $100 million in back tips that the coffee chain paid to shift supervisors. Saying baristas were entitled to $86 million in back tips plus interest, San Diego Superior Court Judge Patricia Cowett also issued an injunction preventing Starbucks’ shift supervisors from sharing in future tips. Cowett said the practice was a violation of a state law prohibiting managers and supervisors from sharing in employee tips.

Will they be obligated to track down everyone who's ever worked at a Starbucks to give them their reimbursement? And will crappy baristas get the same amount in back tips as the good ones?

Ikea: Libertarian Utopia?

matt.welch@reason.com (Matt Welch) — Mon, 10 Mar 2008 06:50:00 EDT

That's what entertaining New York Post film reviewer Kyle Smith argued this weekend. A snippet, complete with Swedish characters FUBARred by the translation to Internetese:

Libertarians should be F„rgglad. I'm not being Sn„rtig when I say IKEA isn't soft cushiony socialism; it's Wal-Mart in Democrat drag.
Outsourcing? IKEA invented it. In the 1960s, when Sweden's furniture cartel tried to drive it out of business by organizing a boycott of suppliers, IKEA went to Poland for materials. Today it outsources its customers, sending us on free buses from Manhattan to Elizabeth, NJ.
Taxes? IKEA hates them. At the onshore tax haven underneath Newark Airport's flight patterns, you pay half -- 3.5 percent -- of the typical New Jersey tax rate. Kamprad is a tax refugee living in Switzerland, not Sweden, and the complicated corporate structure of IKEA, which is run by a taxman-disorienting array of holding companies, drives down its Eurotaxes.
Imagine what would happen if Macy's were subjected to a "ruthless" business model, i.e. one that put customers ahead of job creation. Macy's is run like a Soviet train station, where one guy sells your ticket, another guy inspects it, a third guy tears it, and nobody can tell you what train goes where. The last time I was in Macy's to test-drive a sofa, four different sales gnats came buzzing around me in search of a commission. There were three customers.
Fire the hard-sellers, lower the price of the sofa by $200 and you've got IKEA, where most items can simply be picked up and rolled out the door. At the entrance there is a sign: "No one will bother you." Five words, one libertarian ideal.

Whole thing here. I for one despise my Swedish overlords -- I always feel like I'm in one of those endless cornfield mazes, unable to find my way out, only it's swollen with meandering humanity and the sickly sweet smell of meatball stroganoff -- but I say that while typing on my freshly Ikea'd desk, next to my matching new Ikea bookshelf and file cabinet, all purchased for less than $200.

Stagflation, Or Just a Good Ol' Recession?

bdoherty@reason.com (Brian Doherty) — Tue, 26 Feb 2008 09:51:00 EST

Might there be a little something to worry about in the Federal Reserve's recent let-er-rip attitude toward cutting interest rates? See the latest inflation news from the Wall Street Journal:

U.S. wholesale prices surged in January and core inflation also climbed above expectations, according to more data revealing price pressures amid the economic slowdown.
The producer price index for finished goods rose 1.0% on a seasonally adjusted basis after a 0.3% decrease in December, the Labor Department said Tuesday. Originally, prices in December were estimated down 0.1%.
The core index, which excludes food and energy items, rose 0.4% last month, seasonally adjusted. It rose 0.2% in December.
Wall Street expected smaller price increases.....
In the 12 months ending in January, prices climbed 7.4% on an unadjusted basis. In the 12 months ending in December, prices were up 6.3%. The 7.4% climb is the largest since 7.5% in October 1981.

Analyst Paul Kasriel says it ain't stagflation (although a bunch of people quoted in the New York Times and Wall Street Journal might disagree)--just a natural and predictable start-of-recession phenomenon, with inflation lagging the slowing of GDP growth.

A reason roundtable on the Federal Reserve, from November 2006, featuring, among others, Milton Friedman and Ron Paul.

In possibly not unrelated commentary, see some recent goldblogging from me and Matt Welch.

Everything Still Turns to Gold

bdoherty@reason.com (Brian Doherty) — Mon, 25 Feb 2008 10:45:00 EST

Ron Paul associate, old libertarian movement hand, and retired coin dealer Burt Blumert is profiled at the San Francisco Chronicle's website. An excerpt:

Precious-metal prices tend to increase in times of economic uncertainty and a weakened U.S. dollar. And this inverse relationship is key to understanding Blumert's reference to gold dealers' dismal view of the future. To a philosophical goldbug, when the price of their commodity increases, it's a sign that the global economy is tanking. Inflation is proof that the fiat money system is an illusion — and an affirmation that, in the portentous, Arthurian terms of a recent book by Nathan Lewis, gold is The Once and Future Money.
But — and here's the paradox — for the goldbug's worldview to be finally vindicated, the fiat money system has to collapse. "Many of my clients would like to be standing in the rubble of our society saying, 'I told you so,'" Blumert says. "And there was a time when I did want collapse — when I was young and excited about my view. But the older I get, personally I can't deal with rubble anymore. I don't want to see a collapse, to be vindicated and say, 'See, I was right.'"

My reason interview with Nathan Lewis, mentioned in the above excerpt, on gold. Recent goldblogging from Matt Welch.

Some Businesses Are Inherently Public, Says Washington State Supreme Court

bdoherty@reason.com (Brian Doherty) — Thu, 21 Feb 2008 13:11:00 EST

Some bad news from the Institute for Justice, in a press release ~~that does not yet seem to be on their website~~ that you can read here in its entirety:

The Washington Supreme Court today dealt a blow to civil liberties. In Ventenbergs v. City of Seattle, a divided Court decided that the city of Seattle could violate local entrepreneur Joe Ventenbergs' constitutional right to earn an honest living by creating construction waste-hauling monopolies for two multi-national corporations, making it illegal for Joe to practice his profession.

“The Court got the law wrong today and Washingtonians will suffer as a result,” said William Maurer, executive director for the Institute for Justice Washington Chapter (IJ-WA), which represents Joe Ventenbergs. “The Court ruled that our constitutional rights are less important than protecting two enormous, out-of-state corporations from competition. The sole good news from this decision, however, is that it is so narrow that it affects only hard-working entrepreneurs in the waste-hauling business and not other entrepreneurs throughout the state, who will be able to continue to rely on the protections of our state constitution to combat the creation of government monopolies.”

In a decision released this morning, the Court stated that hauling construction waste is not a private enterprise and “is in the realm belonging to the State and delegated to local governments.” The court found specifically that the provision of waste hauling service is a “government service” and constitutional protections do not apply to government-provided services.

Justice Richard Sanders, joined by Chief Justice Gerry Alexander and Justice Jim Johnson, dissented, arguing that today’s decision “presents a textbook example of governmental corporate favoritism to advance the profits of the privileged few at the expense, and the extinction, of any potential competitors. It flies in the face of the state’s privileges and immunities clause which was adopted to combat this exact sort of unholy alliance between government and big business, which ultimately not only disserves the excluded businesses but also the public in general.”

IJ's page dedicated to the Ventenbergs case. with a timeline and many links.

Mark Cuban in GQ

rbalko@reason.com (Radley Balko) — Wed, 20 Feb 2008 21:19:00 EST

The quirky Dallas Mavs owner and HDTV pioneer (and fellow Hoosier) gives a freewheeling interview in this month's issue to Deadspin editor Will Leitch. Worthy excerpts:

When the scandal over referee gambling broke, everyone came to you, since you’ve always been so vocal in criticizing the referees. They were expecting you to say, “See, I knew this was happening.” And you didn’t. Why not?
Well, I did know it was happening, but what was the point? If you’ve been saying it all along, there’s no point in repeating it. I mean, look at the way the media handled Barry Bonds. They never pay attention to the fact that no one in government ever gets fired for trying to put a skin on the wall. They’ll only get promoted—other than Nifong from Duke.
Nifong was an extreme case.
It wasn’t an extreme case. He was just stupid enough to drive it in the media with his own name. You don’t know the guys behind the Barry Bonds investigation. You don’t know that someone’s not saying, “If I can only get Barry Bonds, I’ll be the stud in this government office.” Barry Bonds can’t sue the person who’s trying to make him a poster child. To spend however many years of government money to prove something that happened four years ago—what does it accomplish for the American people?
It sounds like you’re taking this personally.
Well, I’m a target, too. Like Barry Bonds. The most disgusting thing in the world is how much money I pay to lawyers. I get audited every year, and if you saw some of the things that the IRS said to me, you would think we’re living in a Communist country. I even had someone who worked for a government agency accuse me of throwing the playoff series with the Warriors last year. It’s ridiculous. I can afford it, so it’s okay, but it’s kind of sad.
Do you consider yourself libertarian?
Absolutely.
I take it you’re supporting Ron Paul, then.
No. I just don’t think he’s a legitimate candidate at this point in time. It’s interesting and fun to watch the Internet support he gets, and I like conceptually a lot of the things he says, but I wouldn’t vote for him.

I like this, too:

What do you think about college sports? You’re a Big Ten alum, yes? Any plans to do something for Indiana?
People always ask me if I’m going to be building a new assembly hall for them, and the answer is: No chance. Of all the places you can put your money, it’s not the most effective place. I’m a huge IU basketball fan, but I’m also a critic of the NCAA student-athlete hypocrisy. If I had my druthers, I’d find four colleges and create a conference that’s sort of a Juilliard for sports. I’d say, “Okay, Indiana, North Carolina, Duke, and SMU: I’m going to give all your programs $100 million, plus $25 million a year to withdraw from the NCAA, and we’re going to pay athletes to play for these schools. We’re going to call it NBA 101; we’re going to bring in the best coaches. We’re going to emulate the best music schools across the world and apply it to what athletes want to do.” It’d be just like now, how you can go to IU to be the best musician you can be, and if you want to work for the New York Philharmonic in the summer and get paid for it, you can.

I think it'd be an even better idea for football.

It's probably appropriate that Leitch asked Cuban about Ron Paul. There are some similarities. Both are generally forces for good, with some occasional eccentricities and bouts of nuttiness. But I'd be quite happy with more politicians like Paul, and more tycoons like Cuban.

Bank Nationalisation (sic) in Britain

bdoherty@reason.com (Brian Doherty) — Tue, 19 Feb 2008 13:35:00 EST

Cue up talks of pipers and calling tunes: what started as a bailout in September turns into a takeover as Britain's Northern Rock bank is nationalized.

The Financial Times on some of the reaction, from analysts, stockholders, and the private interests who wanted to buy the bank. As the Telegraph reports, the government says it hopes to be able to sell it back to the private sector at a propitious time in the future, "When the market conditions improve and when the housing market comes back."

Worker Safety: Is Government Helpful?

bdoherty@reason.com (Brian Doherty) — Thu, 07 Feb 2008 12:46:00 EST

Not too much, Bryan Caplan concludes, studying the numbers from Kip Viscusi's article on "job safety" in the Concise Encyclopedia of Economics:

Annual OSHA penalties for safety violations (2002): $149,000,000
Annual Workers Compensation Premiums (2001): $26,000,000,000
Estimated Annual Wage Premiums for Risky Activities (2004 dollars): $245,000,000,000
His point: Market incentives for worker safety dwarf legal incentives, which in turn dwarf regulatory incentives. The level of safety we see in the workplace today is about the same as the level we'd see if government just looked the other way.

For a look at the "cost" side of any cost-benefit analysis of OSHA-style workplace regulations, from our Aug/Sept 2001 issue, James De Long on "how New Deal-era regulations stifle flexible work arrangements."

If We Don't Understand It, It's Probably Illegal

rbalko@reason.com (Radley Balko) — Thu, 31 Jan 2008 08:54:00 EST

The state of Pennsylvania has shut down the eBay business of Mary Jo Pletz, who started the endeavor so she could earn money at home while caring for daughter, who had developed a brain tumor.

Not content with merely running her out of business, state officials are also prosecuting her. One inspector who visited her home threatened that they were "drawing a line in the sand."

Her crime? Selling goods on the Internet without an "auctioneer's license." Weirdly, they're also threatening to take away her dental hygienist's license.

Newspapers: A Long History of Giving Away the Story, and the Store

bdoherty@reason.com (Brian Doherty) — Fri, 28 Dec 2007 15:38:00 EST

Time's "Curious Capitalist" Justin Fox jousts with newspaper industry analysts who gripe that papers need to stop giving away their precious commodity online by arguing that they've more or less been doing that on dead paper forever. An excerpt:

....it's not really about a generation gap. News was already pretty close to free long before the Internet came along. It was free on TV, free on the radio, and effectively free in newspapers when you consider all the valuable stuff that came packaged with it for 25 or 50 cents, from comics to crosswords to classifieds to supermarket ads. And unlike, say, a song--which was free on the radio but worth spending money on to be able to play again and again whenever you wanted to hear it--a day-old newspaper was usually less than worthless.
What's hurting newspapers now is not the fact that people were willing to pay for news offline and aren't willing to do so online, but that their days as the monopoly conduit of timely written information into Americans' homes are over. The delivery boys have been displaced by Comcast and AT&T and Google and Yahoo, and there's no way newspapers will ever reclaim that role.

Here is LA Times man David Lazarus making the arguments Fox is trying to contradict.

Teaser Freezer Burn

info@reason.com (Jeff Taylor) — Thu, 06 Dec 2007 14:20:00 EST

Given the amazingly complex world of high finance—full of derivatives, hedges, and tranches—Treasury Secretary Henry Paulson last week hit upon a stunningly simple plan to fix the nation's subprime mortgage mess: Lie. And don't just lie, but get everybody together and agree to lie, thereby making the lie become truth.

The fiction Paulson and the major banks are promoting is that extending the low "teaser rates" initially offered to many subprime borrowers fundamentally will help them and—here is a big lie—transform them from bad loans to good.

Put another way, if the problem of bad subprime mortgages was caused by delusion over lending risk, this latest solution enshrines delusion as the defining characteristic of the American banker—backed by a facile enabler in Uncle Sam and his trillions, of course.

Financial risk analyst Chris Whalen calls Paulson's plan "appalling." Whalen's Institutional Risk Analytics zeroed in on the banks' unwillingness to acknowledge risk in their lending portfolios back in 2005. Now he sees the so-called "teaser freezer" plan as an attempt to put Humpty Dumpty back together again and build a floor underneath uncertainty in the financial sector. Except that he estimates around one-third of teaser borrowers will default anyway, a measure of just how dumb lenders are in handing out loans to people with bad credit.

"It is probably in their best interest to walk away. They have no equity," Whalen says of the hapless borrowers.

The possibility of their underwater borrowers actually taking a walk terrifies the banks, however. Banks would have no choice but to write down and make real phantom losses lurking just off their books. What to do? How about pretending that the loans aren't actually bad. How do you do that? Pretend that the borrowers can pay them back. How do you do that? Pretend the teaser rate is the real rate. Presto, problem solved.

At this point, some adult would ideally step in and say, "no, that's fraud." But clearly Treasury is not that mature. And it appears the Fed has resigned itself to some form of greater idiocy coming out of Congress on the subprime front that maybe, just maybe, the teaser freezer can head off.

However, the stubborn fact remains that banks will lose money on teaser rates. Regulators and investors both know this. Who exactly are we trying to fool? Besides inattentive voters.

Meanwhile, by allowing big banks to keep their rot off the books, the potential exists for it to continue to spread. Whalen and other experts have wondered for months about losing the ability to price risk, or even recognize it given the complexity of the constructs floating around financial markets. The Paulson fix only exacerbates the problem by continuing to assert that real world constraints do not matter. And the stakes are already high.

"We could lose a money center bank next year," Whalen warns.

Should you duck your head out of Treasury's "let's pretend" camp for a second, one notices that there are major legal obstructions to rewriting millions of loan contracts by federal fiat. Contrary to the wish of some in Congress, mortgage lending is still largely an activity engaged in by two private entities, each of whom assume very specific obligations. This is not a federal program to be tweaked at the margins. Real estate lending contracts are a dozen pages long for a reason. And each contract is different yet just as legally binding, depending on a given state's law. That's right, state law.

It is unclear how federal action to extend low-low teaser rates can square with state lending laws which may require an actual change in the underlying contract. Unless the idea is just to do this all informally, with a notification letter from lender to borrower and as long as federally chartered banks get approval from their federal regulators to pretend.

After all, what is a little lie between friends?

Contributing Editor Jeff Taylor is a writer in Charlotte, North Carolina.

The Costs of Doing Business

info@reason.com (Paul Karl Lukacs) — Wed, 07 Nov 2007 12:30:00 EST

Business taxes in Sierra Leone total 233.5 percent of profits. Firing an employee in Nepal will cost a business the equivalent of 90 weeks’ salary, which is better than the situation in Venezuela, where firing most employees is illegal. A contract dispute requires an average of 1,442 days to work its way through the Bangladeshi trial courts.

These curiously precise statistics can mean only one thing: The World Bank has issued its annual Doing Business report on the world’s economies.

Doing Business 2008, the fifth release in the series, summarizes the often surreal difficulty of being a local entrepreneur starting a small or medium-sized corporation. For instance, Tarik, one of the businessmen profiled in the report, is a Yemeni fish exporter who would dearly love to sell fresh tuna to Germany at $5.20 a kilogram. But he has to ship most of his tuna frozen to Pakistan at $1.10 a kilogram, because complying with Yemeni export regulations takes on average a sushi-unfriendly 33 calendar days. And Yemen isn’t close to having the slowest border. Iraq takes that prize, requiring exporters to wait an average of 102 days.

The World Bank and its affiliate and co-author, the private sector-oriented International Finance Corporation, rely heavily upon statistics to tell their tale. In total, almost every nation in the world was analyzed, the principal exceptions being countries with regimes that loathe the free market (e.g., Burma, Cuba, North Korea) and pinpricks like San Marino and Tuvalu. After all the laws are reviewed and every number crunched, each country is quantified and ranked in ten different categories, then given an overall ranking on the general ease of doing business.

The winner was no surprise. For the second year in a row, Singapore is ranked as the easiest country in the world in which to start and operate a business. The Asian city-state is followed in the league tables by, in order, New Zealand, the United States, Hong Kong (which is considered separately from mainland China), and Denmark. Dead last is the Democratic Republic of Congo, edging out the Central African Republic, Guinea-Bissau, the Republic of Congo and Burundi.

The real action is in the individual categories, which read like a gazetteer of finance ministry options, ranging from prudent transparency to contemptuous shake-downs—all spread around the world in unusual combinations. While Afghanistan, Kenya and the United States do not require an entrepreneur to deposit a single penny in start-up capital, Latvia requires a deposit equal to 22 percent of per capita income, South Korea requires a 296% deposit, and Syria wants a whopping 3,673.3 percent. New Zealand, Sweden and Thailand can each register a deed in two days, while Haiti, Kiribati and Slovenia each take more than a year.

Corporate income and payroll taxes are what differentiate economies that are merely misguided from the ravenous kleptocracies. Colombia and Tajikistan aren’t helping themselves with corporate tax burdens that hover around 82 percent, but they're bargains compared to the eight countries in which a business is expected to hand over more than 100 percent of its profits. This Hall of Shame includes likely suspects (D.R. Congo at 229.8 percent and Burundi at 278.7 percent) as well as relatively industrialized countries that should know better (Argentina at 112.9 percent and Belarus at 144.4 percent). Bottom of the barrel is Gambia, which taxes 286.7 percent of corporate profits.

In the past, libertarians have had their differences with the World Bank and its top-down interventions. “The World Bank et al.,” reason noted in 1995 while summarizing the Bank’s critics, “see capital and technology transfer as the key to growth, and fail to appreciate the economic potential of ordinary Third World citizens operating in free markets.”

The Doing Business series helps correct for the Bank’s 62 years of statist drift. By focusing on the minutia of business regulation, the Bank uses its hortatory powers to praise reformers while criticizing holdouts and backsliders. The current edition lauds Georgia (which targeted a spot in the top 25) and Egypt (which reformed in five of the ten categories) while noting that “Venezuela had the largest negative reforms.”

The Bank is employing a clever strategy, because each individual reform grants the entire business class of a country greater economic freedom without directly threatening the elites. A standard-issue military dictator is not going to conduct an open auction of the phosphate concession controlled by his family, but he probably won’t care if foreign diplomats request that he amend the banking code to allow general descriptions of inventory to be pledged as collateral.

Each quotidian reform tracked by the Doing Business report means that someone, somewhere will find it faster and less costly to create jobs and wealth. In that respect, the World Bank, of all unlikely institutions, is doing a better job of converting souls to free market capitalism than the Bush Administration.

Paul Karl Lukacs is a Los Angeles attorney who blogs about foreign affairs and travel at Knife Tricks.

Casting a Shadow on Solar Power

bdoherty@reason.com (Brian Doherty) — Tue, 06 Nov 2007 12:23:00 EST

William Tucker at the American Spectator wonders why the currently touted future of solar power looks suspiciously like its past, suggests shorting your new wave of hot "new age of energy" stocks, and makes a plug for nuclear.

Bailout or Handout?

info@reason.com (Jeff Taylor) — Thu, 06 Sep 2007 12:15:00 EDT

You can tell the feds are bailing out mortgage lenders by the way no one wants to call it a bailout.

President George Bush made that clear last week when he announced his plan to rescue broke borrowers. "A federal bailout of lenders would only encourage a recurrence of the problem," Bush explained.

So this is not a bailout, you see, because it is for the borrowers, not the lenders. And if you believe that, then you'll also believe that the Federal Reserve has been shoving money at the banks by the billions in recent weeks in order to help borrowers, too.

In truth, what Bush has proposed is far worse than a bailout. Federal regulators and policies would supplant market discipline and price signals in the mortgage market. And all because a long-overdue correction in the domestic mortgage-making sector manifested itself this summer.

What is happening with real estate lending now is not unlike the dot-com bust. America survived that bubble. Then, as now, actual income-production became secondary to complicated financial constructs which obscured the underlying business. If there ever was a business. Recall that Enron invented entire energy-trading markets that ultimately dealt in nothing.

The mortgage industry is not quite that far along, but it is close. Although securitization of mortgages has overall been a great boon to both borrowers and lenders, spreading risk and allowing many more mortgages to be issued than otherwise be the case, it has also brought the derivative frenzy and the obsession with yield that has landed us in correction mode.

The very move into the subprime market—make that a stampede—was predicated on the notion that the added risk could spread thinly enough not to matter while collecting the massive bonus of substantially higher interest rate income streams. Those streams could then be further bought and sold, adding yet more margin to the endeavor.

And this worked, to some extent. Countless subprime borrowers got loans and homes and are not now facing foreclosure. This inconvenient bit of information has to be forgotten in the rush to condemn the "excesses" of subprime leading. Still, somewhere along the way, the vital link between a borrower who is making monthly payments and all the wheeling and dealing in securities was broken. Without those payments, you do not have mortgage to buy, sell, or trade. With dot-coms, it was the lack of income-producing products that triggered the correction. In past few weeks lenders—and traders downstream dealing in mortgage derived instruments—have rediscovered that is really does matter who you lend your money to, assuming you want any of it back.

There is another aspect of the current mortgage industry that is often overlooked, and it too is related to income streams. The streams are what lenders want, not the underlying real estate assets. In contrast to years past, there is no Dirk Dastardly down at the bank looking to swindle the widow out of the family farm. The banks do not want to own the assets that they themselves took as collateral for their loans—ever.

The correct federal response to this should be, "Too bad. You broke it, you bought it." Let the realtors, bankers, Wall Street sharpies, and—yes—the borrowers fight it out amongst themselves. Somewhere there is a market-clearing price for these assets.

Of course, the uber-nannies in the Bush Administration can't allow that. Instead they have opted to compound the problem by using federal assets to move in on the private mortgage insurance market and otherwise encouraging banks to forgive bad loans.

Worse, the White House intends to make the Federal Housing Administration the Federal Housing Administration by directly assuming responsibility for 80,000 underwater loans. Look for that number to double once Democrats in Congress are finished bidding it up.

In sum, we have the makings of the financial equivalent of Medicare Part D—a massive federal program in the place of a semi-private sector that more or less works. Not perfectly, but it is better than making Washington largely responsible for credit allocation in America.

The frustrating thing is that the White House and Congress are chomping to act, while the Fed's more targeted response to the credit crunch has just begun. By using the discount window to entice healthy banks to take on some of the rot, an immediate lockdown on all credit seems to have been averted. It will take time to digest the bad loans, and real estate prices might dip in some markets going forward as a result. California, for example, has a consensus 10 to 15 percent overvaluation to work through, and that may take a year or two to correct.

But that process will slam to a halt once Uncle Sucker begins assuming bad loans left and right.

reason contributor Jeff Taylor writes from North Carolina.

The Industrial Revolution Continues Apace, Just Without Workers This Time Around

gillespie@reason.com (Nick Gillespie) — Tue, 04 Sep 2007 07:41:00 EDT

Where have all the good manufacturing jobs in the U.S. gone? Into better production technology:

The United States makes more manufactured goods today than at any time in history, as measured by the dollar value of production adjusted for inflation -- three times as much as in the mid-1950s, the supposed heyday of American industry. Between 1977 and 2005, the value of American manufacturing swelled from $1.3 trillion to an all-time record $4.5 trillion, according to the Bureau of Economic Analysis.
With less than 5 percent of the world's population, the United States is responsible for almost one-fourth of global manufacturing, a share that has changed little in decades. The United States is the largest manufacturing economy by far. Japan, the only serious rival for that title, has been losing ground. China has been growing but represents only about one-tenth of world manufacturing.

And here's a good development (at least for those of us who have ever worked on an assembly line):

While American manufacturing is not declining, manufacturing employment has been shrinking dramatically. After peaking in 1979 at 19 million workers, the American manufacturing workforce has since dropped to 14 million, the lowest number since 1950.

More here, via the Wash Post.

Hat Tip: Film critic extraordinaire Alan Vanneman.

Telecommuting or Hell-ecommuting?

gillespie@reason.com (Nick Gillespie) — Thu, 30 Aug 2007 13:11:00 EDT

MSNBC.com has a long story about telecommuting (i.e., goofing off at home rather than at the office) portentously named "The Quiet Revolution":

Today, upwards of 12 million employees telework more than 8 hours per week, up from about 6 million in 2000, according to Gartner Dataquest. The number will hit nearly 14 million by 2009. Caroline Smith, an analyst for Gartner who expects the number to continue to grow, says the rate of increase has been steady for a number of years even though telecommuting hasn't been getting a lot of publicity in recent years.

More here.

Reason Foundation, the nonprofit that publishes reason and operates a think tank, was an early adopter of telecommuting and I've been phoning it in (so to speak) since 1996. Maintaining a virtual office has its drawbacks but so does having to see the goddamned people you work with every goddamn day. Overall, telecommuting has been a great boon to this here magazine and website, allowing us to keep people we want regardless of location and other issues. So I for one welcome our telecommuting overlords.

However, I'm also not blind to "The Terrible Truth of Telecommuting!" and have been known to spin a few "Tales from the Cache" (with help from Terry Colon) as long ago as 2001:

Who Mourns for J.J. Newberry's?

gillespie@reason.com (Nick Gillespie) — Wed, 25 Jul 2007 07:52:00 EDT

Interesting piece from American Heritage on the 10-year anniversary of F.W. Woolworth's going out of business:

Fundamentally, the rise of chain stores like Woolworth took place in cities. On the eve of the Civil War, less than 20 percent of Americans qualified as "urban," a category that then included all persons living in towns with a population of at least 2,500. By 1920 more than half of all Americans lived in towns or cities, and the number of people living in cities of at least 8,000 had jumped from 6.2 million to 54.3 million. In this new environment, Woolworth became an anchor of the downtown business district.
It didn't happen overnight, though. As late as 1930, working-class city dwellers still did most of their shopping at corner groceries and mom-and-pop stores, where they often were allowed generous credit. A survey in 1926 revealed that chains accounted for 53 percent of grocery stores in the upscale Oak Park suburb of Chicago but just one percent of stores in the working-class towns of Joliet and Gary. The Depression changed all that, as mom-and-pops found it harder to extend credit and customers found the lower prices at chains like Woolworth impossible to resist. A survey in 1939 showed that 91 percent of lower-income shoppers were now paying cash for their purchases, having evidently abandoned the old neighborhood store for the cheaper, cash-only chains. Woolworth was a prime beneficiary.

Woolworth's closed up shop for good in 1997, but lives on through related franchises such as Foot Locker and Champ Sports.

More here (in a magazine that is itself going out of business).

Answer to titular question here.

Take an AIDS test--Win a Pickup Truck!!!

jsamuel@reason.com (Juliet Samuel) — Thu, 12 Jul 2007 15:07:00 EDT

Could mining firms be at the forefront in the fight to contain AIDS? A Reuters story claims that up to one in every three mining workers in South Africa is infected with the virus, and it’s getting so bad that companies are taking notice:

Firms are enticing miners to take HIV/AIDS tests by offering prizes, sending mobile treatment units to the bush where sex workers operate and blanketing the region with condoms.
For instance, Gold Fields gives each miner who takes an HIV/AIDS test a lottery ticket, offering monthly prizes of cell phones, televisions and cash, plus a final sweepstake where one worker wins a new pick-up truck.
…
BHP Billiton -- the world's largest mining company -- said for every dollar it invests in HIV training, education and medical programs the return is four-fold in terms of benefits such as re-training, absenteeism and productivity.
…
"When we started our HIV program we didn't wait for any government to say yes or no, if there is a risk for an organization we take appropriate action."

For years, activists have been calling on governments and the UN to spread awareness and treatment. It looks like business could instead be the source of more effective and efficient efforts against the epidemic.

Steve Chapman pointed out the idiocy of government needle policy and AIDS, while Ronald Bailey has looked at the progress made (and yet to come) in developing AIDS treatments.

Idiot Investors?

kmw@reason.com (Katherine Mangu-Ward) — Mon, 25 Jun 2007 12:30:00 EDT

Two things happened on Thursday: 1) A Newsweek poll was released, showing that approval ratings for Congress have fallen to Bushian levels, with only 25 percent of Americans giving Congress their favor. 2) The Blackstone Group, an enormous private equity firm, got the OK to go public, bringing its market value to $40 billion. Like all private equity firms, Blackstone's income is taxed as capital gains at 15 percent, instead of the standard corporate tax rate of 35 percent.

It doesn't take a public relations consultant to figure out what happened next. (Actually, it probably took at least a dozen, but who's counting?) With a whiff of desperation in the air, Congress took a flying leap onto the Blackstone-bashing bandwagon.

Leading the charge was the once and future presidential candidate and Ohio Democratic Rep. Dennis Kucinich. He shot off a letter to the SEC (along with Rep. Henry Waxman (D-Ca.)) asking the agency to hold up the Blackstone IPO while Congress puzzled out the best way to demagogue the issue.

Kucinich and Waxman fretted that small investors could be harmed, simultaneously worrying that trading Blackstone on the stock market was "exposing unsophisticated investors" to risk, while "depriv[ing] them of control over the management of the funds and of many of the protections provided by fiduciary duties typically owed to them by management."

To review: Investors are too stupid to know when they're getting screwed, but also deserve a chance to control the "management of the funds." In fact, the biggest hit small investors are likely to take is if they buy Blackstone and then Congress tanks the price by imposing a specifically targeted tax.

Of course, Blackstone's largest and most recently raised private equity fund raised more than $9 billion from public pension funds. The government is happy to put its money in Schwartzman's hands, but heaven forbid the rest of us do so. We might be exposed to risk.

The litany of (occasionally conflicting) reasons why Blackstone shouldn't be allowed to continue with its nefarious plan is telling. It's not about principle, it's about scapegoating.

Sen. James Webb (D-Va.) has opted for the national security angle, fretting about the $3 billion in non-voting Blackstone stock that eChina purchased in May. The Washington Post reports that "Webb said he was worried that China could get access to sensitive technology being developed by companies Blackstone owns." (I wish that all companies handed out free samples of their products to investors, national security be damned. If they did, I'd head out to pick up some Hostess and Harley-Davidson stock right now.)

Rep. Barney Frank (D-Mass.) jumped in to demonstrate his tenuous grasp on finance: "There's so much money involved that I don't believe the tax change would retard the [Blackstone] IPO," said Barney Frank, noting that the Blackstone principals stand to reap billions from the offering. "And even if it did, there's no great social loss. This is a financial transaction."

Jesse Jackson inveighed against "Wall Street apartheid," claiming that the IPO doesn't benefit enough minority-owned firms, and that big firms are "spiraling up, but not out to be more inclusive."

To be fair, Blackstone co-founder and chief executive Stephen Schwarzman has been cruising for a bruising and he knows it. He's not exactly keeping a low profile, recently throwing himself an A-list birthday party featuring Donald Trump, Patti LaBelle, Barbara Walters, two Harlem choirs, a marching band, and Rod Stewart-some as entertainment, and some as guests. Mr. Schwarzman, who made $400 million in 2006, is set to own a stake in the Blackstone Group worth about $8 billion if the company's initial public offering goes ahead as planned. He started the firm with just $400,000 in seed money.

But Gilded Age comparisons aside, it has been a long time since America passed legislation as targeted at a single business as was being entertained on the Hill this week.

As anti-Blackstone rhetoric swirled, the Securities and Exchange Commission found itself in the uncomfortable position of being the last bulwark for rule of law and equal treatment this time around. Spokesman John Nester said the SEC could only delay approval if Blackstone's filings contained "material misstatements or omissions."

On Thursday, despite increasingly high-pitched pleas from Congress, the SEC gave its OK, and issued a brief statement saying, "Congress has created the world's strongest investor protection laws, which the commission has rigorously applied."

Two weeks ago, Senate Finance Committee Chairman Max Baucus (D-Mont.) and Charles E. Grassley (R-Iowa) introduced a bill that would force private equity firms to pay taxes at the 35 percent corporate rate if they went public as limited partnerships. The bill would give Blackstone a five-year grace period. A similar bill without the grace period was introduced in the House on Wednesday.

Schwartzman might find solace and strategy from Wal-Mart's Lee Scott, who fought off an effort by the Maryland legislature to pass a law requiring the company to spend 8 percent of its payroll on medical benefits. The bill technically covered all companies with more than 10,000 employees, but was targeted at Wal-Mart. The legislation was eventually overturned by a judge.

Raising taxes on private equity firms as a form of populist demagoguery is slimy, but more or less within the course of normal conduct. But to go after this one company, this one man, is inexcusable.

Katherine Mangu-Ward is an associate editor of Reason.

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National Mood Ring at Orange Alert: Approval Ratings in the Crapper for Just about Everything!

gillespie@reason.com (Nick Gillespie) — Fri, 22 Jun 2007 08:28:00 EDT

Here's some good news for modern man: According to the Gallup Poll, which has been tracking this stuff since the 1970s, approval of Congress has never been lower. And the president ain't doing so well, either, posting Nixonian percentages. The poll was done via telephone with 1,007 adults in mid-June.

Some specifics:

Folks saying they have a "great deal" or "quite a lot" of confidence in the Supreme Court: 34 percent; "the presidency": 25 percent; in Congress: 14 percent. All are down since 2002.
Folks saying they have a great deal/a lot of confidence in the military: 69 percent (down from a high of 82 percent in June 2003).
Folks saying that have a great deal/a lot of confidence in TV news: 23 percent. In newspapers: 22 percent....

In fact, it's pretty much a clean sweep across the board, says Gallup:

Americans are currently in a very sour mood; a state of affairs that is reflected in the relatively low confidence ratings given many Americans institutions [including business, religion, the police, banks, and more] in Gallup's latest survey....
We assume that the low confidence ratings measured this year are connected to Americans' broader malaise with the state of the country. It is not entirely clear what is behind the currently bad mood on the part of Americans, but Gallup analyses show that the Iraq war and the economy are certainly perceived as major problems at this point in time. The very low ratings for Congress suggest that Americans may be upset that their elected representatives have not been able to rectify these concerns as well.

More here.

Who's Afraid of Mergers?

schapman@tribune.com (Steve Chapman) — Thu, 21 Jun 2007 06:33:00 EDT

Someone once said that the best way to get rid of a bad law is to enforce it vigorously, thus making its flaws visible to all. Federal regulators may not induce repeal of the antitrust laws, but they show a talent for making the statutes look obsolete.

It's widely accepted that one of the crucial functions of government is to protect against monopolists and cartels. Left to its own devices, many critics of capitalism believe, the market would allow voracious corporations to collude, joining forces to hold consumers upside down and shake the nickels out of their pockets. To ensure that free markets operate for the benefit of all, we are told, the government has to strictly police mergers to keep any company from gaining an unfair advantage.

That is what it claims to be doing in two different sectors. Federal Communications Commission Chairman Kevin Martin has expressed serious qualms about approving a wedding between the only two satellite radio companies, Sirius and XM. The Federal Trade Commission is going to court to block a merger between two organic grocery chains, Wild Oats and Whole Foods.

In both cases, the rationale is that fewer companies will mean fewer choices and higher prices. But consumers who want what these firms provide have more options than the Milky Way has stars. If a couple of those stars cease to exist, nobody will notice, and besides, new stars are born every day.

Organic food consumers would not be the suffering captives of this new company. The business is growing like an organic weed. Every grocery store has a raft of offerings, and chains from Wal-Mart to Trader Joe's are fighting to get their share of sales. If the bigger Whole Foods price-gouging, customers can easily find other sources for what they want—from farmers markets to online suppliers.

The key government error is defining the market as a narrow sector isolated from other sectors that provide reasonable substitutes. That same mistake explains the FCC chairman's aversion to the satellite radio deal, as well as the letter from 72 members of the House of Representatives claiming it would have "devastating" consequences for listeners.

As it happens, the alternative to one satellite radio company may not be two companies but none. The existing ones have accumulated some $7 billion in losses between them. The merger may allow them to reduce costs, so they can eke out a profit and stay in business.

Raising prices would not be easy, since consumers have plenty of affordable options. Music fans can listen to terrestrial radio, pop in a CD, find an Internet feed, turn on an iPod, flip to the cable TV music station or check out unknown talents on YouTube.

Web radio may not get as much attention as Howard Stern, but it has four times as big an audience as XM and Sirius combined. In his alarm about the proposed merger, Martin has mistaken a mouse for a moose.

The truth is, markets are more complex and dynamic than regulators assume. Bill Clinton's Justice Department tried to break up Microsoft before it enslaved us all, but the feds got far less than they wanted. Microsoft, however, has found out that even a virtual monopoly doesn't guarantee prosperity. Despite controlling more than 90 percent of the market for computer operating systems, the company's stock price has been flat for the last decade—while Apple, which has only a tiny share, has increased in value 15-fold since 2003.

Meanwhile, other companies, notably Google, have trounced Microsoft in other areas. Over the last decade, says Thomas Hazlett, a professor of law and economics at George Mason University, "Microsoft has seen its market position erode, and it has virtually nothing to do with the antitrust case."

The point is not that corporations will never try to suppress competition, as Microsoft is accused of attempting with its new Vista operating system, which it recently agreed to alter in response to a complaint from Google. The point is that they will usually fail, because of the many choices available to the buying public—and that on the rare occasions when they succeed, the success is invariably fleeting.

Even corporations that gain dominance find that no matter how they connive, they can't escape competition. In a market economy, today's fearsome predator is tomorrow's frightened prey.

COPYRIGHT 2007 CREATORS SYNDICATE, INC.

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Integers Want to Be Free!

bdoherty@reason.com (Brian Doherty) — Fri, 01 Jun 2007 12:22:00 EDT

Boing-Boing details the failed attempts to keep secret how to get around AACS (Advanced Access Copy System) copy protection on the latest HD-DVD movies. It raises the musical question: can you legally own a number and restrict others from using it or writing it in public? Whether you can or not, it apparently isn't going to do you much good in this crazy world of tomorrow we are living in today.

Return of the Air Pirates

bdoherty@reason.com (Brian Doherty) — Mon, 21 May 2007 10:57:00 EDT

Small airports (many providing service mostly or exclusively to private planes) make out like bandits from federal fees attached to everyone's plane ticket prices. This Washington Times report quotes Reason Foundation director of trasportation studies (and former editor of reason) Robert Poole:

"They're making out like bandits," said Bob Poole....author of several studies on air transportation costs. "It's not only that airline passengers are paying more than their fair share, but they're being overtaxed to give private jets a free ride.

The full article has a detailed list of various small airports around the country and the full amount of subsidies they are receiving from the rest of us.

A collection of Poole's airport-related work for the Reason Foundation.