Sunday, July 20, 2008

Does Economics Trump All?

Academics use a number of election prediction models, and almost all rely on macroeconomic variables—GDP growth, inflation, unemployment, etc. Most of these models predicted a Gore win in 2000 (which was actually correct since he won the popular vote) and a Bush win in 2004. At the moment the models predict a resounding Obama win in 2008, based on dreary economic news as we head into the election.

Obviously these models are not 100% accurate; their architects freely admit that factors such as wars, disasters, and issues of character also influence voting patterns. But they stick by their fundamental insistence that it is the economy which ultimately dictates election outcomes.

In aggregate, there is little to dispute about these models. If Americans are feeling good about their economic prospects, by and large they can be expected to vote for the candidate who represents the party in power; if they think their economic prospects are dim, they will vote for the opposing party.

But hidden behind the national numbers are huge state-by-state and regional disparities that can’t be explained by economics alone. In huge swaths of the South as well as parts of the Midwest (e.g., Utah) the GOP has consistently outpolled Democrats by margins that correlated poorly if at all with economic factors.

It is these areas where “culture war” issues and race play a major factor, often turning economics into a secondary and even a tertiary issue. Large numbers of voters in these regions are genuinely more concerned about gay marriage, the government taking away their guns, abortion, the perceived dilution of American culture because of illegal immigration, and fears of an even more secular America. While the economy may still influences these voters, their ballots often end up going to the candidates who promise a kind of cultural security which they feel is slipping way.

Some political observers, like author and WSJ columnist Thomas Frank, take this as evidence that people have been duped into voting against their economic interests, when in fact it is evidence that these people simply give priority to issues other than economics.

When rich investment bankers in New York vote Democratic, nobody says they’ve been duped, even though they may very well be voting against their immediate economic interests since Democrats generally favor higher taxes for the rich*. If asked to justify their votes, these well-off Democrats might cite the party’s liberal social positions or less belligerent foreign policy; in exchange for these positions, they’re willing to accept higher taxes.

But when poor whites vote Republican because they oppose gay marriage or abortion, they’re assumed to be gullible. Unfortunately for Democrats and economic progressives, the disproportionate electoral sway of America’s Deep South and Midwestern states hands these “values” voters extra weight both in the Electoral College and the Senate.

In the end, it’s hard to accept any uni-causal case for the election of a U.S. president. There are too many factors, too many cross-currents, and it’s impossible to sort them out. The economy ultimately may swing the election, and certainly it will be more important than it was in 2004; but there are many motivations that can sway people on the margins, and have large electoral impacts.

As the Democrats have learned, in order to truly be competitive in certain parts of the country they have had to tone down their gun control rhetoric, speak more openly about faith and religion, and walk a fine line on gay rights (opposing gay marriage while supporting civil unions). This is what many voters in these regions want to hear, and the strategy has begun to pay dividends: Democrats are winning elections for state offices and Congressional seats in once-solid GOP territory, and Obama is competitive in states that haven’t voted Democratic for 40+ years.

The Republicans are in a much more difficult position because America overall is more socially liberal and economically progressive than the mainstream GOP. The party’s success this decade in some sense represents an anomaly; Bush actually lost in 2000, and won in 2004 largely because of a fearful citizenry that wanted to support a “war-time president.” Looking forward, it is hard to see how the far right’s message will resonate with voters, especially younger voters whose only taste of GOP rule has been an administration characterized by epic incompetence, cronyism, anti-intellectualism, and economic downturn. It will be interesting to see how the GOP retools, especially if they lose big in November.

Stay tuned….

*Wealthy individuals voting Democratic might be right to think that their long-run economic prospects under Democratic rule will be better than under Republican rule even if their immediate economic interests take a hit.

P.S. See here for a very interesting analysis of economic performance under Democratic and Republican administrations; it may surprise you.

Jason Scorse

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Sunday, July 6, 2008

Running On Empty

Americans are feeling pain at the pump; gas prices going into the July 4th weekend hit a record high national average of $4.09 for regular unleaded, up $1.14 from a year ago and roughly triple what it was when Bush took office. Oil has topped $145 a barrel and high fuel costs are leading to price increases across a wide swath of products.

But in truth, U.S. gas prices are low by world standards. As this chart shows, there are many developed nations where the average price of a gallon of gas is between $7 and $10.

Most of these nations are not being hurt as much by the current oil price shock because their governments were smart and made gas expensive long ago. This created incentives for better public transit, more fuel-efficient vehicles and industrial processes, and shorter commutes. For decades, many U.S. economists have been urging higher gasoline taxes for exactly these reasons; unfortunately, their advice has fallen on deaf ears.

As the price of oil plummeted in the 1990s, the SUV craze took hold and Detroit automakers ignored the lessons of the 1970s and 80s. Not only did these behemoths lead to more urban sprawl and less automotive safety, America’s carbon footprint grew enormously. Politicians of both parties took the myopic, short-term view. They could have seized on this period of low gas prices as an opportunity to phase in a higher gasoline tax, and move towards a more fuel-efficient and less oil-dependent society. They didn’t.

Fast forward to September 12, 2001.

Of the 19 hijackers who changed the world the previous day, 15 came from Saudi Arabia. We knew then that Saudi oil money financed extremist groups. Iran and Iraq, two other nations that represented serious national security challenges also relied on oil money, as well as Russia and Venezuela.

Given the growing threat of global warming, any serious U.S. effort in 2001 to reduce its oil dependency would have been warmly greeted by the world community, especially the Europeans. The massive investments in technology required for such an endeavor would have helped reinvigorate manufacturing in the U.S. and the American auto industry.

Instead, an administration run by oilmen told us that conservation is for hippies and that all America needed to do was go shopping.

Fast forward to the present.

Virtually all of the worst-case scenarios of 2001 have come to pass. Rogue, terrorist-sponsoring oil states are awash in cash, which they are using to fund groups hostile to America. Here at home, there’s a long list of problems: the economy is teetering on recession, auto sales are slumping sharply, with GM and Chrysler headed toward bankruptcy, and the U.S. has recorded its sixth straight month of job losses; at the same time, not coincidentally, the threat of global warming continues to accelerate. And while Bush and Cheney continue to beg the Saudis to open the taps a little more, the Saudis are putting pressure on us to raise interest rates (in order to strengthen the dollar) at a time when the financial sector would be further weakened by such a move.

And we have no one but ourselves to blame.

All of these outcomes were both predictable and avoidable. In April of 1977 President Jimmy Carter put forth a comprehensive energy policy that is amazing in its detail and prescience. In the speech Carter calls for collective sacrifice and warns us not to get sidetracked by the sudden drop in oil prices because of the need to plan for the long-run. Carter was largely scoffed at and ignored and now we have to live with the results (Nixon also devoted some of his 1974 State of the Union speech to energy issues, although he did not offer nearly as comprehensive an assessment of both the problems and the solutions).

Unfortunately, when it comes to sound energy policy the U.S. has been running on empty for way too long, and we’re going to have to suffer for a while before things turn around.

Jason Scorse

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Sunday, June 22, 2008

American Dominance In The 21st Century?

A spate of articles and books in recent months (e.g., Fareed Zakaria’s The Post-American World) raise the question of whether America will remain the dominant economic power in the coming decades; no one really doubts that America will remain the dominant military power. I just returned from a two-week trip to China, which got me thinking about the subject since one can’t fail to be impressed by the rise of this Asian power.

I am ambivalent about the issue. On one hand, as an American I want my country to remain strong and prosperous; but I also am an internationalist, and want to see prosperity spread across the world. Fortunately, it need not be a zero-sum game. American greatness can coexist with rapid wealth generation in the emerging markets.

In fact, an argument can be made that American wealth is partially dependent on the rise of the developing world: our historic low interest rates and (until recently) extremely low inflation are due in part to the high savings rates and low labor costs in Asia and the Middle East.

The key looking forward is to realize that American dominance is not some force of nature that is destined to continue. It is instead the result of specific policies and characteristics of the American economy and society that must constantly be revisited, revised, and maintained. Mistakes have been made that have weakened America’s economic position, but these mistakes can be rectified.

Here are four missteps, coupled with new opportunities, to consider as we look towards a new administration and getting back on the right economic track:

1. Nowhere has the failure of leadership been more damaging than in the U.S. auto sector. Both Republican and Democratic administrations have coddled Detroit; a combination of corporate mismanagement and intransigent, short-sighted unions has blocked all efforts at meaningful fuel efficiency for decades. Free-market advocates are finally seeing some vindication, decades late, now that high gas prices and tumbling demand for SUVs is forcing Detroit to see what thinking people have known for decades: fuel-efficient cars are the wave of the future. It is too early to tell whether Detroit will be able to recover, but there are encouraging signs: GM is pursuing plug-in electric vehicles, and both Obama and McCain support a cap on carbon emissions (although McCain oddly seems to forget that he does).

2. One way America has become so affluent is by recruiting the best of the best from across the world. Skimming the cream from countries across the globe has helped the U.S. to the highest living standards for any country remotely comparable in size. However, since 9/11, the enactment of anti-immigrant policies has slowed the influx of engineers, computer scientists, biochemists, doctors, et al. While tighter immigration controls are no doubt warranted, America should be expanding visa applications for the best and the brightest. This is an area that doesn’t make headlines, but it should be watched carefully.

3. Green technology, nanotechnology, and biotechnology are likely to be the leading areas for rapid growth and breakout products that dramatically impact global society. The U.S. nanotechnology industry seems in good shape, but our biotech industry has suffered under the anti-science policies promulgated by the Bush Administration at the insistence of the religious right. Legitimate moral issues related to cloning need to be addressed, but blocking embryonic stem-cell research that has the potential to cure major illnesses is both unwise and unconscionable. The embryos used in the process are already slated for destruction; in fact, a consistent “pro-life” stance would oppose fertility clinics, a fact which the right never mentions. Both Obama and McCain support lifting the ban on federal funding for stem-cell research (but given McCain’s numerous reversals and pandering to the right, I am not confident he will maintain this position; we’ll see).

4. The final issue is more long-term: America’s debt. America is the world’s most heavily indebted nation, both the government and the people. This has been possible because the rest of the world has sought the safety of U.S.-backed treasuries, but it will not persist indefinitely (especially as other countries begin to consume more and the emerging markets become more attractive for investment). High levels of American debt will inevitably result in higher domestic interest rates and lower economic growth. Higher taxes are also likely, especially if the federal deficit continues to rise. Neither Obama’s nor McCain’s fiscal plans make tackling the debt a priority, but McCain’s plan is much worse overall; it would increase the deficit by an estimated $5.7 trillion over the next decade. Regardless of what the government does, individual Americans should get their fiscal houses in order: we need to pay down our debts and increase our saving rates.

In conclusion, predictions of America’s economic decline are probably premature. At the same time, continued American dominance is in no way preordained. It will take hard work and sound policies; as always, a little luck wouldn’t hurt either.

Jason Scorse

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Sunday, March 23, 2008

Conversations America Should Be Having

An honest, non-ideological conversation about our current economic problems requires us to abandon the clichés of “big government” versus “small government”. The real issue is effective government: what should be done and what’s the best way to do it?

We cannot afford a laissez-faire attitude toward the banking sector. Banks cannot be allowed to fail for the simple reason that they can take the rest of the economy down with them. This means that ultimately the public sector (our tax dollars) acts as a final insurer for the private banking sector, and banks know this. Without adequate regulation they will always be tempted to take unnecessary risks, knowing that the federal government will eventually come to their rescue.

The conversation we should be having is how best to ensure that banks are not allowed to take risks of such magnitude that they can undermine the entire credit system, while at the same time allowing them to innovate and provide low cost capital to the general economy. While the details of this balancing act must be left to experts in finance and banking, the basic concept is not beyond the ability of the average voter to comprehend, nor of politicians to explain. There should be zero tolerance for anyone who simply spouts “the markets should be allowed to work things out;” the markets haven’t worked things out, and this line of reasoning ignores the “moral hazard” argument noted above.

On to another topic.

Barack Obama gave what many consider a brilliant speech on race relations in America last week, and it has already gone viral on YouTube. Obama is that super-rare politician who can take a serious liability (in this case an error in judgment) and turn it into an asset through his own rhetorical skills.

What Obama’s speech only hinted at should be the topic for a larger American conversation: the fact that social class and access to power divide us even more than race. Racism surely persists in America, as do sexism and homophobia; but the greatest drivers of American inequality are divisions between rich and poor, between the less educated and the more educated, and between the well-connected and the unconnected.

The millions without healthcare come from all ethnicities and racial backgrounds; coal miners who are dying by the dozens in the Appalachians are poor whites, and they have watched for generations as big coal companies have literally removed the mountains from their communities; the millions of manufacturing jobs that are leaving the Midwest are throwing blacks, white, and Latinos out of work; the corporations who flout all sorts of health and safety laws, aided by a Congress and a court system that caters to their needs above the public interest, do not discriminate in the harm they inflict.

The notion that class is the primary source of injustice in America was recognized by none other than Martin Luther King Jr., who vehemently attacked economic inequality in the last years of his life. While he is revered for his successes in the Civil Rights Movement, his positions on economic fairness and social class were not well received by the mainstream; at the time of his assassination he had lost much of his earlier support.

This is one of America’s “dirty secrets”: it is always in the interests of the powerful for the disenfranchised to fight among themselves for the crumbs (e.g., poor whites against blacks, Latinos against blacks) while those in the chips laugh all the way to the bank. This is not to suggest that there are no grievances with a specific racial or ethnic component, but that these are ultimately secondary to class interests. One doesn’t have to be a Marxist to understand this.

At a time when the federal government is once again bailing out the elite to the tunes of hundreds of billions of dollars, we have a clear choice: we can remain distracted by race, or take a moment to examine the concentration of power in this country and realize how it disadvantages whole swaths of people across all racial and ethnic categories. Greed sees only the color green, and all it really cares about is power.

P.S. Check out Paul Krugman on the topic of financial regulation making lots of sense and raising real concerns. And while I find most of Bill Kristol's columns offensive here I actually somewhat agree with him.

Jason Scorse

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Sunday, March 16, 2008

The Lost Decade

The terrorist attacks more than six years ago supposedly “changed everything”. They changed George Bush from someone who spoke forcefully against “nation-building” and foreign intervention into a president enamored with the idea of spreading democracy by force; they led the Administration to violate the Constitution on multiple occasions through warrantless domestic surveillance and the torture of enemy combatants; they provided cover for a far-right domestic agenda that the majority of Americans opposed.

But in one critical area 9/11 changed absolutely nothing: our dependence on Middle Eastern oil and the autocratic, terrorist-sponsoring regimes that benefit from this addiction.

Not only has the Bush Administration done nothing to diminish our reliance on Middle Eastern oil, Vice-President Cheney is on record mocking conservation as nothing more than a “personal virtue” (i.e., something only tree-huggers do), the GOP-led Congress passed energy bills that increased subsidies for oil companies (thereby further distorting markets against alternative energy), and the Administration sued the state of California for imposing a greenhouse gas reduction policy that would have resulted in higher fuel-efficiency mandates.

Let’s recap the results so far of this catastrophically misguided policy:

1. Oil prices (partly due to the effects of the Iraq War, which have crippled Iraq’s oil sector; see this NYT's piece on how insurgents are stealing Iraqi oil) are at records highs, which has helped stoke the highest inflation rate in decades and complicated efforts to deal with the coming recession

2. Oil-producing U.S. adversaries such as Iran, Venezuela, and Russia are awash in cash, helping to keep dictators in power and undermine democratic reform

3. So-called allies, such as Saudi Arabia, are also awash in cash, allowing them to stall on reforms and continue to funnel more money into the hands of terrorists

4. Our European allies are livid that we have not helped in any meaningful way to address global warming, which could be mitigated through comprehensive international efforts

5. Instead of tens of billions invested in alternative energy projects or tax rebates for the middle class, they’re going to the likes of Exxon-Mobil and Chevron (which routinely set corporate profit records every quarter)

Results like these all lead to the same conclusion. America’s long history of entanglement in the Middle East stems largely from our dependence on oil, and we will continue to be dragged into conflicts in the region until and unless we dramatically reduce the power of these regimes in the way that they would feel it most: their pocketbooks.

Following 9/11, a serious global push to reduce oil consumption would have sent a major signal to the Middle East regimes to either diversify their economies or witness their eventual decline. Ironically, having to face this reality would have provided significant incentives to liberalize their economies, which has proven to be one of the best paths to freedom and democracy.

Instead the Bush Administration took the low road, adopting policies guided by outdated thinking and its strong ties to the oil industry. Bush will leave behind many legacies of failure and incompetence, but this “lost decade” of wasted opportunity on the energy independence front may ultimately be seen as the most costly of all.

P.S. Check this article out in Sunday's WaPo for even more depressing analysis of how the Iraq War's impact on oil prices has hurt the U.S. economy and strengthened our adversaries.

Jason Scorse

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Sunday, February 3, 2008

The Humanist’s Conundrum

Modern-day humanism owes a large debt to economists like Adam Smith and his contemporaries. As products of the European Enlightenment, they were both informed by it and moved it forward in ways that were revolutionary at the time.

Smith’s free-market economics rests on the simple, yet profound premise that people are better off producing and trading with each other than fighting over resources; that economics need not be a zero-sum game, but an ever-expanding source of shared prosperity.

This was a radical idea in an age when countries battled for colonies and the conventional wisdom was that whoever could amass the most territory and wealth was the most powerful.

Yet even a cursory look at current affairs demonstrates that more than 200 years later the old views can still dominate. China, Iran, and Russia take and consider actions that threaten global stability; ethnic and religious strife and deep-seated class divisions still inflame passions; early in the 21st century we see conflicts that can tear countries apart, as is now the case in Kenya.

The transition to open societies has always been paved with bloodshed. The United States not only fought the Revolutionary War, but almost tore itself apart in the Civil War. Large parts of Europe were destroyed in two World Wars. Imperial Japan brought devastation and carnage to China and other parts of Asia. In Africa, nations once thought to be stable are mired in civil and regional wars that have killed millions over the past decade and a half. The Middle East is a powder keg of epic proportions.

The bottom line: Billions of people still live in societies with fundamental obstacles to achieving sustainable economic progress, i.e., progress that does not come from oppressing large segments of their own population or threatening other nations.

Enter the conundrum: Is there any hope that these societies can make a peaceful transition to modernity and freedom?

The humanist in me thinks that this is possible. I want to reject the notion that violence is needed to “purify” a nation, and rid it of ill-conceived ambitions and prejudices.

But I am not so sure that I can; history does not seem to be on my side.

Change always brings conflict; it is essentially a maxim of human affairs. Even the ultimately successful non-violent movements for independence in India and for civil rights in the U.S. were met with brutal force. In Ireland and South Africa, peace only came after sustained campaigns of terror. If there is ever to be peace between Israel and Palestine, how many more thousands of graves will it take?

I know there is a better way. If they are willing, the leaders and citizens of any society can compromise, use reason, and find their way to freedom and prosperity without violence. The economist and humanist in me is confident of these basic truths.

At the same time, I wouldn’t be sitting here comfortably if earlier generations of Americans hadn’t put their lives on the line. I am forever grateful to them: to those who died fighting the injustices that once plagued American society, to those who fell in two World Wars, to those who perished in Korea, Vietnam, and now in Iraq and Afghanistan.

I wish these men and women hadn’t died, that peaceful resolutions could have been found.

But they weren’t. This gives me pause; it makes me see the world in ways that I find troubling, and contrary to my humanist worldview.

Jason Scorse

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Sunday, January 27, 2008

The Current Financial Crisis: Causes and Lessons

On my 39th birthday this past Monday, I was greeted with a nearly 10% drop in the international stock indices that are highly correlated with my net worth. Fortunately, I’ve never put much stock in birthdays (no pun intended).

Since then markets in the U.S. and abroad have taken a roller coaster ride that is not for the timid. I don’t have statistics handy, but I wouldn’t be surprised if these past six months have been the most volatile in world financial markets since the Great Depression. It is an amazing time on trading floors everywhere.

Speculation, greed, outright fraud, and lax oversight of the lending and mortgage agencies have generated a degree of uncertainty and mistrust that is toxic to economic growth. The capitalist system relies on credit; when people are suspicious and don’t know who is a credit risk and who isn’t, things can grind to a halt. This is why the Federal Reserve and other central banks have been injecting billions into the global economy.

Will the United States fall into a recession? Although my crystal ball is in the repair shop, I think if we have one it won’t be severe. U.S. economic statistics have been sending mixed signals: there’s evidence of a slowdown, but no negative growth as yet. The good news is that many developing countries are sitting on trillions of dollars of reserves, and their economies are still expanding at a rapid pace. Oil prices are likely to moderate. As bad as the U.S. housing bubble was, I don’t think the hit on consumer spending will be enough to derail global economic growth. So if things do get ugly, you have proof of my Pollyanna nature right here.

As to the causes and lessons of all this, here are a few thoughts:

1. Alan Greenspan was a terrible Fed Chairman

I know this goes against conventional wisdom, but consider some facts. He provided political cover for tax cuts that have swollen the federal deficit; he took the Fed discount rate to historic lows and kept it there far longer than necessary, ignoring warnings about a housing bubble; in the midst of a run-up in home prices that was clearly unsustainable, he even urged people to take out adjustable rate mortgages instead of conventional fixed rate loans. Greenspan’s behavior lends credence to the view that the Federal Reserve has too much power, and that too often its power is used unwisely. In a genuinely free market, interest rates would never have remained so low for so long.

2. The bond rating agencies engaged in stupid (and possibly criminal) behavior

Hundreds of billions of dollars of bonds comprised of the mortgages of low income people who could not afford their homes were falsely rated “AAA”. This is negligence on a scale not seen since the savings and loan debacle.



3. That being said, what happened to the “wisdom of the market”?

The logic of the “invisible hand” in financial markets is that huge sums of money create equally huge incentives both for fraud and its detection. Were the rating agencies in bed with the banks making the mortgages? What about the institutions that bought the bonds: how were they so easily deceived with so much on the line? Where was the oversight and regulation when it was needed? This is big-time egg on the face of those who preach the wonders of markets; things like this simply aren’t supposed to happen, especially on such a grand scale.

4. How inter-connected is the world financial system?

We’re about to find out. You may have heard the term “decoupling” a few times over the past week. It refers to the idea that foreign economies may no longer be as dependent on exports to the U.S. as they once were. The link between fears of a U.S. recession and plunges in overseas stock markets led many this week to pronounce an end to the decoupling theory. This is premature: the theory never assumed complete decoupling, only a decrease in the influence of the U.S market. I think the decoupling idea is sound, and that a mild U.S. recession will not have a major impact on foreign economies, especially those in emerging countries.

Final thought. One silver lining from the burst in the housing bubble is that no longer do I have to endure people bragging about what financial geniuses they were to buy real estate in California at inflated prices. Thankfully I was saved from having to eat that very expensive piece of humble pie.

Jason Scorse

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Sunday, December 16, 2007

Sour On LuluLemon (A Tale of Corporate Greenwashing)

Lululemon Athletica appeals to a demographic that can lay down fifty plus dollars on a pair of stretch pants for yoga classes. It advertises in New Age aphorisms and images of rock n’ roll rebellion, and refers to its customers as yogis (which should immediately raise eyebrows, since traditional yogis were aesthetes unconcerned with “yoga fashion”).

But their clothes are extremely nice.

After much shopping around I decided that Lululemon’s Elevation Jacket was just what I needed for the California winter. The only problem was the jacket’s wool sleeves; I will only buy wool products if the wool is guaranteed to have been harvested using the most humane methods (if you don’t know about inhumane wool harvesting check this). Given the Lululemon clientele and the image they try to maintain, I assumed the store’s workers would be able to quickly directly me to documentation certifying that the wool in Lululemon products meets the highest ethical standards.

The first worker I spoke with assured me that Lululemon only gets wool from “happy sheep” but couldn’t provide documentation to back this up. She gave me a phone number and an email address for the “Customer Education Center”.

I emailed and later spoke on the phone with numerous Lululemon employees over the next three weeks. They kept assuring me that the company adhered to the strictest ethical standards, but couldn’t provide specifics. This email from an employee sums up their “just trust us” position:

We don't have any "documentation" to show you that our wool was harvested in a ethical manner, but I can assure you that we would never associate with any form of animal cruelty.

A few days ago I received a follow-up email from the person in charge of sourcing for Lululemon. She informed me that they buy their wool on the open market in Australia and Asia, and cannot guarantee that the sheep are treated humanely. She informed me that wool from those regions had to comply with “local and federal regulations”, which is roughly equivalent to claiming that cows are treated well in America because businesses have to comply with USDA regulations. It’s a joke; in fact, in a difficult feat, animal standards throughout Asia are even more abhorrent than in the U.S.

Bottom line: The entreaties to simply trust that Lululemon’s wool products were obtained from ethical suppliers were false; I was lied to many times.

Instead of playing the New Age card to engage in deceptive practices, Lululemon would do better to follow the lead of a competitor. Patagonia, another clothing company, has addressed the issue of the wool in its products by going the extra yard to ensure that it’s done right.

After learning that I had been given false information for upwards of three weeks, I told Lululemon that I wanted to file a formal complaint and also that I would be contacting the federal authorities. I lodged a complaint for false advertising with the Federal Trade Commission; I also plan to submit some version of this article to Bay Area newspapers, and to use it in my college courses as an example of corporate greenwashing.

All of this could have been avoided if Lululemon employees had simply told me that they couldn’t vouch for how the wool was harvested. Better yet, the company could have lived up to its principles, sourced the wool from ethical farms, and showed me the documentation to back it up.

Instead they figured that I wouldn’t bother to actually make them substantiate their claims. But I’m not your average customer; I’m an economics professor who teaches this stuff, and I viewed this as a case study.

They tried to pull the wool over the eyes of the wrong guy.

The moral?

Simply put, we cannot rely on the voluntary actions of corporations to significantly improve social and environmental standards. Without stringent oversight, regulation and penalties, corporations will not do the right thing. I’m a capitalist to the core, but as Adam Smith noted more than 200 years ago, the “invisible hand” only produces positive outcomes within a strong institutional context that puts a premium on ethical conduct.

P.S. Here’s a nice video that expresses a similar sentiment.

Jason Scorse

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Sunday, October 28, 2007

How The War On Drugs Undermines Democracy

The “war on drugs” will ultimately go down in history as one of the most ill-conceived, unjust, and plainly stupid set of policies ever enacted. It is a failure on every level and a black hole for tens billions of dollars every year (here's what Walter Cronkite has to say about it). While most of its failings are well known (e.g., absurdly high incarceration rates for non-violent offenses and the diversion of law enforcement from serious threats), there is increasing evidence that this misguided war is undermining democracy around the world.

From Columbia to Guatemala, from Mexico to the poppy fields of Afghanistan, the war on drugs is creating political chaos and empowering criminal elements that are literally ripping apart the democratic fabric of these nations.

Take Mexico for example, to which President Bush has just pledged $500 million for drug enforcement efforts. Ever since the U.S. began cracking down on Miami as a port of entry for drugs from Latin America, traffickers have switched to Mexico as the preferred entry point. This has led to the growth of drugs gangs that have unleashed a massive wave of violence and killed thousands of people over the last few years, including policemen, army personnel, and innocent civilians. As a result entire states in Mexico are now essentially under military occupation.

Much the same can be said for Guatemala and Columbia, where drug gangs routinely assassinate political leaders and have created such a culture of fear that the countries can aptly be described as “narco-states”.

But what is happening on the other side of the world in Afghanistan is particularly troubling. Not only did we unwisely divert resources from rebuilding and stabilizing Afghanistan to the war in Iraq, we now seem intent on doing everything we can to disrupt the booming poppy trade even if it enrages the Afghan farmers and drives them into the hands of the Taliban and Al Qaeda.

There is no doubt that the poppy trade is fueling these terrorist organizations, but the best way to dampen their influence is not to turn the farmers against us by destroying their livelihood. Instead we should buy the poppy directly from them at high prices. We could use the crops to help supply morphine to developing world nations which desperately need the drug for legitimate medical purposes; doing this would produce goodwill for the U.S. at a time when we could certainly use it.

Instead we are stubbornly maintaining our ideological opposition to illegal drugs and are preparing to spray the Afghan fields with herbicides, which will kill the plants and poison wildlife and humans alike. This is insane; it’s hard to imagine a better way to alienate the Afghan farmers and force them into the arms of our enemies. Unfortunately, this insanity is totally consistent with our irrational decades-long “war on drugs” policy.

Still there may be a glimmer of hope.

With national security concerns seeming to trump all else these days, maybe the glaring contradiction between pursuing the war on drugs and our stated aim of global democracy will lead to a reevaluation of the policy (at least in Afghanistan).

I’m not holding my breath.

P.S. Get a taste for how brutal Mexican drug cartels are and how the U.S. supplies them with their firepower here.

Jason Scorse

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Sunday, August 12, 2007

Technology Is The Solution

There are many debates about the best ways to address global warming, with most centering on whether a carbon tax or a cap and trade scheme is best (or some combination of the two). There are also some lively, though less extensive, debates about the extent to which we should balance our attempts to reduce global warming with attempts to mitigate its effects.

I propose shifting the focus and asking what to me is the key question: which policies would best promote technological innovation? This is crucial because simple demographics and economic trends make it impossible to significantly curtail greenhouse gas emissions without major technological advances.

By the end of the century the Earth’s population will likely be in the range of 9 billion, a roughly 50% increase. Even though most will be born in what are now developing countries, by century’s end these billions of people will have benefited from significant economic growth (as will those who already live in the developed world) and perhaps their now-emerging nations will have joined the ranks of modern economies.

These two facts alone mean that if we all we did was rely on today’s technology, the Earth’s population in 2100 would emit many more times the greenhouse gases than we do currently. And yet if we’re to tackle global warming we need reductions of 50-80% from current levels. Do the math and you’ll see that there are only two options: massive increases in technology or massive reductions in material living standards. This essential conclusion is inescapable (with one major exception--see below).

Technological innovations can come in many forms, including more fuel-efficient cars, greener buildings and new renewable energy sources. It makes sense to investigate whether the types of policies currently on the table are really the best at helping to promote innovations in these areas. We also need to think more creatively. For example, should prizes for discoveries play a bigger role? How can we best support the development of technologies that don’t even yet exist (but which history tell us will surely be a part of the mix)?

And we need to determine which policies can have the most direct impact on shifting consumption patterns. Along those lines, many experts have suggested that a reduction in per capita consumption of animal products might be extremely helpful.

Here’s why. When the price of carbon (and other scarce resources) is factored into the price of animal products, these staples of modern life will become much more expensive; as a result people’s ability to purchase them will likely decline sharply. Whereas most people would feel poorer if they couldn’t vacation as much or own as many playthings, they might come to realize that eating fewer animal products was in fact a blessing in disguise: it would dramatically reduce greenhouse gas emissions and improve people’s health as well.

I know that some might look at this as a reduction in living standards. To me it’s a win-win we could all look forward to.

Jason Scorse

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Sunday, August 5, 2007

Good Versus Bad Capitalism

A book has just come out with the above title, and it has sparked an interesting conversation on the different forms that capitalism can take and the proper balance between unfettered markets and state intervention. I would like to discuss this issue from a slightly different angle, drawing on some unscientific observations between the capitalism that predominates in Northern California (where I currently reside) and New York City (where I grew up and am now vacationing).

The economic engines in Silicon Valley (SV) are responsible for some of the most important and productive advances in history. Not only is SV still the driver of the computer industry, but it has been branching out into biotechnology and renewable energy; the next generation of technological innovations in these fields is likely to originate in this tiny space between Santa Cruz and San Francisco.

Bottom line: the people getting rich in SV are by and large getting rich by producing products that have tremendous benefits to people not only in America but all over the world. This is why I don’t feel so bad that I have been priced out of the housing market; even my own job is vastly easier because of the developments made by this generation of entrepreneurs, some of whom are my neighbors.

Contrast this form of capitalism with the industry that generates the most wealth in New York City: financial services and marketing. While Wall Street and the banking sector provide crucial services to the economy, including investment capital, risk management, retirement investing, and a host of other indispensable services, there are just as many brokers and financiers in the Big Apple whose main concern is finding ways for the rich to avoid taxes and looking for ways to “game the system”. Over the last decades the compensation for many top fund managers has grown out of all proportion to the risks they take and the returns they bring in.

In addition, Los Angeles aside, New York City is the center of the image industry. Here anorexic women who are famous for being famous are paid tens of thousands to show up at clubs, bars, and restaurants; at the same time, and unknown to most people, men are paid by companies that make alcoholic products to cavort with these women, litter tables with bottles bearing their corporate logos, and entice people to pick their brands. In New York City the art of media manipulation and spin is elevated to a science and everyone who lives and visits here are the guinea pigs. So it’s difficult not to feel a tinge of resentment that people such as this are turning New York City into little more than a playground for the rich and connected.

On top of all of this, in Northern California the standard of living is not as directly tied to income as it is in New York City. Of course money matters a lot; but California’s riches are mostly nature-based and there is a tremendous amount of public access, so even the less than well-off can enjoy a pretty nice life. In New York City it’s the opposite: little money means no air conditioning on hot summer days, long commutes from the boroughs, little or no vacation, and limited access to the city’s restaurants, theaters, and museums.

While there is no doubt that capitalism has its good and bad sides, public policy and our own choices can influence the relative weights of each. For example, if we moved to a simpler tax system that was largely devoid of deductions there would be fewer ways for the rich to both avoid and evade taxes. And if people stopped being swayed by mindless advertising, maybe Madison Avenue execs could turn their attention to improving America’s image in the world.

Now that would a great service to society, and might begin to rival Silicon Valley’s.

Jason Scorse

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Sunday, July 15, 2007

The Accident Of Birth (Or The Case For Progressive Policies)

You probably don’t deserve what you have. Neither do I.

Despite what we like to tell ourselves about meritocracy, the greatest predictors of a person’s lot in life are things completely out of their control: where they were born and their genetic inheritance.

Let’s take my life as an example. I was born a white male into a middle class educated family in New York City with above average intelligence (at least according to standardized tests). From the day I was born a relatively prosperous life was almost guaranteed; it was laid out for me on a red carpet. All I had to do was go through the motions—elementary school, high school, college, career. At the same time there are tens of millions just as able as I, who were born in other parts of the world, who live their lives in squalor and misery for no other reason than the injustice of random fate.

None of this is to suggest that there aren’t exceptions to the rule; there are some privileged kids who experience tough times, and there are some who rise from poor upbringings to great success. (Even these individuals were likely hampered or helped by their genetic predispositions.)

My point is not to portray the world as a deterministic product of class and genetics; it is not. Individual choice and action are essential and societies must provide incentives for people to strive.

However, the fact that individual fortune is so much a product of things beyond a person’s control presents the greatest argument in favor of progressive government policies. The philosopher John Rawls long ago noted that if we had no idea where we were going to be born and with what attributes, the types of redistributive policies that we would favor would be much different than the ones that we currently employ.

As always, for all redistributive systems, the “devil is in the details”. Many utopian schemes (such as communism) can easily backfire and make life worse off for nearly everyone.

But the notion that individual merit alone should be the basis for society’s rewards should be laid to rest once and for all. Let us reserve praise for those who take their gifts and use them to do extraordinary things, and to those whose gifts and opportunities have been limited and yet against all odds have managed to succeed.

The rest of us deserve little praise or blame.

P.S. An article on the new "Gilded Age" in today's NYT shows how the basic points outlined above are still not universally understood.

Jason Scorse

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Sunday, June 3, 2007

Ending The Legacy Of Slavery

We are nearing the end of the first decade of the 21st century and yet it is still true that the color of a person´s skin is probably the best predictor of their material standard of living. On my recent trip to Brazil I saw this firsthand and was struck yet again by the enduring legacy of slavery and racism.

In the elite neighborhoods of Rio de Janeiro and other Brazilian cities, the residents have almost entirely European features and the overwhelming majority of blacks are maids, street cleaners, or other service workers. The proportion of national income that goes to whites versus blacks has changed little in centuries and the concentration of wealth is even greater.

The same situation persists throughout Latin America, where the treatment of indigenous people also includes blatant human rights violations and virtual second-class citizenship. Whatever can be said about inequality in America and its racial component, we have come a long way and progressed much further than our Southern neighbors.

But we have a long way to go.

For four decades we have experimented with various methods of affirmative action based on raced-based preferences, which have resulted in significant upward mobility for blacks and other minority groups. That we have a fairly robust and sizeable black middle class and a rising Latino professional class is a testament to the success of affirmative action (which is not to say that many of these men and women would not have succeeded without racial preferences).

But there is a perception that racial preferences are un-American and amount to reverse discrimination. The perception has become widespread; there are too many examples of preferences being extending to the sons and daughters of the minority elite, and patience with affirmative action is wearing thin. Fortunately there is an easy fix that is starting to catch on. By simply changing preferences from race to economic status, we can lose the stigma of race and yet still lend a hand to those at the bottom of the economic ladder, who are disproportionately black and Hispanic. If we also happen to assist poor whites from Appalachia or the Pacific Northwest or anywhere else, all the better.

The second thing that should be done to help ameliorate the effects of racism is to wholeheartedly promote universal preschool education. For a long time educators have realized that a child´s cognitive potential is largely determined before the child ever sets foot in kindergarten. From birth until the ages of 3-4 a child´s brain is absorbing information at a staggering pace. Without significant stimuli, a child´s development during these years is severely handicapped and their potential significantly stymied. Increasingly, researchers are showing that investments in preschool are some of the best that individuals and society can make.

Neither of these policies will completely end the legacy of racism, but they represent improvements over the status quo. They are policies that all countries should adopt, especially those where slavery once reigned.

Jason Scorse

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Sunday, March 11, 2007

The Phony Case For Low Taxes On Capital Gains

Today’s piece, in addition to discussing a tax issue that is sure to heat up after the 2008 election, illustrates a point worth exploring. The author has spent the past six years trying to close a loophole that allows taxpayers with capital gains to misreport their earnings; this loophole costs the government tens of billions of dollars in lost revenue each year. He has lobbied Congressmen, testified, and written numerous articles. It is thankless work: it’s not sexy, it doesn’t make headlines, and few people are even aware of the issue.

But it matters big time.

Through his efforts and those of many others, a bill closing that loophole is now before Congress. In contrast to this focus on capital gains taxes, I have become a generalist. On this site and even within my work as a professor of economics and policy studies, I am all over the map. Sometimes I wonder whether the world wouldn’t be better served by more people focusing on specific issues and sticking to them. So please read the piece below and feel free to offer comments on this larger question as well. Thanks.

These are heady times for backers of low taxes on capital gains. Presidents Clinton and Bush both cut the capital gains rate, bringing the current levy on long-term gains down to 15%. That’s the lowest in more than 70 years, “gloriously low” in the words of economist Ben Stein, and it means that profits on stock market transactions are now taxed at a lower rate than the wages of average Americans.

There’s no good reason for such preferential treatment, and powerful reasons to end it. Leading the list is the simple fact that stock market “investors” are almost never real investors in the first place.

The argument for a low rate on capital gains is invariable (and in recent years, invariably effective): it holds that investments in the stock market grow jobs, grow businesses, and provide vital fuel for the United States economy. Partly as inducement and partly in gratitude, the argument goes, it behooves government to reward investors with low capital gains taxes.

A potent blend of myth, propaganda and misimpressions. Let’s look instead at some truths.

It’s routine on Wall Street these days for trading volume to run in the billions of shares. On any given day, only a tiny fraction of those billions has any valid claim to growing jobs or businesses or the economy. On many days not a single share qualifies as a bona fide investment.

Almost all the time, all that’s happening is money changing hands as shares move from sellers to buyers. Not a cent goes to the companies whose shares are traded. No jobs are created (except in the financial community, which is not the point here). No businesses are expanded. Investments are really being made not in the economy but in personal portfolios.

The only genuine stock market investments are those in initial public offerings (IPOs) and secondary offerings. In those cases alone does the money move on to do the work it’s purported to do. All the rest is aftermarket noise as the players place their bets at the tables down on Wall Street.

Securities markets clearly play an energizing role in the American economy. All the same it mocks reality to claim that buyers of stocks deserve a tax break when they sell their shares at a profit. A tax break? For making money in the market?

Now for more reasons why this preferential treatment is poor policy.

There’s a fairness issue that stems from taxing one kind of income differently from another. Income is income and should be taxed at the same rates no matter where it comes from; what’s good for the goose is good for the gander.

There’s the issue of income inequality, which has soared in America in recent years. According to the David Cay Johnston book Perfectly Legal, the top one percent of taxpayers controls about half the nation’s financial assets. Two-thirds of the income of the 400 highest-income Americans comes from long-term capital gains. Undeniably, the benefits of tax breaks for capital gains flow overwhelmingly to the already-wealthy; undeniably, preferential rates on capital gains exacerbate income inequality.

Finally there’s a tax equity issue which our forebears even considered a moral issue. In 1924 Congress first differentiated between earned income (wages and salaries) and unearned income (e.g., capital gains and dividends), and taxed the unearned income at higher rates. It was deemed the right thing to do; old-timers would have shuddered at the notion of taxing wages at higher rates than capital gains.

Those were the days. Now it’s 2007.

Under the trumped-up cover of spurring economic growth, average American workers have to pay higher taxes on their wages than if they made the same amount of money in the stock market. They’re getting stiffed by carrying a heavier relative tax burden, getting fewer services or some of both.

The latest capital gains tax cut is set to expire in 2010, and the new Democratic Congress has indicated that it has no plans to visit the issue until after the 2008 elections. This gives them plenty of time to look beyond the propaganda, and to consider taxing capital gains at least as much as earned income. A political pipedream? It was the rule not long ago: from 1988 to 1992, long-term realized gains were essentially taxed at the same rate as other income.

Then the K Street apostles went forth and preached, and the spurious case became gospel.

By Gerald E. Scorse

The writer's articles on capital gains tax reporting helped lead to a reform bill now before Congress. The bill has bi-partisan support and seems likely to pass.

P.S. The Baltimore Chronicle ran this piece.

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October 25, 2006

Minds on the Prize

There has been a lot of discussion lately on a topic that often comes up in my economics classes: the use of prizes as incentives for innovation. Despite the long history of using prizes to spur technological development, the renewed interest in this tool is a good sign because it is underused and could yield tremendous global benefits.

The underlying reasons why prizes may represent one of the most effective and efficient ways to accelerate innovation are relatively straight-forward:

1. All entities, but particularly governments, are notoriously bad at picking technological winners, especially in emerging fields. For example, the energy or telecommunications technologies that may prove to be the best in the coming decades may not even be on the radar screen right now. Creating prizes for technological developments allows scientists and engineers wide latitude in figuring out the best ways to make advancements. For example, while directly supporting hybrid technology may help to increase innovation in this industry, a prize for the first group to come up with a 100 mpg car creates incentives for development within a much broader range of technologies, some of which may ultimately be superior to hybrid technology.

2. Prizes engage the broadest group of innovators possible because by their definition they don’t favor any group or industry. As we are all well aware, sometimes the best inventions come from people’s backyards or garages, or across borders and therefore, prizes are some of the most efficient generators of creative and competitive activity.

3. Prizes do not just confer money on the winners, but also prestige. Whereas direct support of industries or groups provides only a monetary reward, many scientists (who have egos just like the rest of us) may be extra-driven by a desire for the media attention and fame that accompanies winning a competition; the same amount of money spent on directly supporting given research may actually generate additional work if used instead as prize money.

The potential uses of prizes to help generate new technology are almost limitless, but there are a few areas where it would be especially beneficial to world society: new medicines and new environmental technology. Probably the best possible uses of prizes would be to encourage the development of a vaccine for AIDs or malaria or for new highly efficient and clean energy technologies.

Prize money must be sufficiently high to cover the costs of R&D by at minimum an order of magnitude; since most players have a small probability of winning they will only spend their own money to take the risk if the prize is very big. This might mean a prize of say $50-$100 billion for a major medical cure or $10 billion for new energy technology, but compared to the potential benefits to the world even such sums are a relatively small price to pay. In addition, these sums would only be paid if the desired technologies were developed, whereas most forms of subsidies don’t guarantee almost any desirable outcome.

Given the huge sums the world already spends on fighting disease and environmental regulation, I can think of almost no better way to commit resources than providing incentives for the best minds in the world to focus their attention on the world’s most pressing problems.

Jason Scorse

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July 30, 2006

Rethinking Development Aid for the 21st Century

This week witnessed the collapse of negotiations over the WTO’s Doha Round, with no indication as to whether serious moves will be made to get the process back on track anytime soon. This is very bad news for global economic development, but particularly for poorer countries (although there is widespread disagreement on the extent to which this round of trade talks would have benefited developing countries, there is no doubt that they would have gained).

Fortunately, there is plenty that can be done to help developing countries, which doesn’t require a difficult round of multilateral negotiations; the priority should be a major revamping of development aid. This would include a paradigmatic shift in how aid is dispersed by all of the major aid institutions, especially the World Bank, USAID, and the United Nations. Aid as it is currently structured is not only largely ineffective and tremendously wasteful, but in many ways counter-productive. Here’s what needs to change and why:

1. Stop funding large development projects (just about everywhere)

Anyone who has taken Econ 1 can probably understand why funding large projects (such as energy projects or other large infrastructure) in almost all developing countries is an exercise in futility. The proper question to ask is why hasn’t this project been undertaken by the private market already? For example, if the private market has not decided to fund a large energy project in a particular country it is probably because the project is either unprofitable (given the low incomes of the population), the political climate is unstable, or the country lacks the proper legal regulatory institutions to ensure that their investment is protected. If this is the case the project is likely to fail or be unsustainable no matter who funds it. And in the cases of middle-income countries where the projects may in fact be profitable and sustainable, why not leave the private markets to fund such projects? It makes no sense for people in the rich countries to subsidize large projects in such up and coming nations such as Brazil, which have the markets and institutions already in place to fund such projects. There is a slight caveat, however, which brings us to point number two.

2. Focus only on projects where the social returns are much greater than the private returns

In a market system where profit is the ultimate motive there are some types of projects that may have huge social benefits but may not be initiated by private entities. For example: a water delivery system for poor rural areas or roads and bridges for which it would be difficult to collect toll revenue. Therefore, there may be examples of larger-scale projects, particularly in some of the most cash-strapped least-developed countries, where assistance is needed to build basic infrastructure, which is the prerequisite for sustained economic development. However, since many of the least developed countries suffer from immense political instability, civil strife, and corruption such projects should only be undertaken when there is a substantial chance for success (otherwise the money is likely to be captured by corrupt elites and further entrench their power). Major aid organizations should in general stay away from supporting major physical projects altogether, and instead focus on a class of intellectual property that I now turn to that has the greatest potential social returns.

3. Shift the majority of aid resources to the development of common intellectual property in key areas

The greatest gains to be achieved in the developing world are to be derived from new technologies in health, energy, agriculture. Just as with many large infrastructure projects in much of the developing world, private corporations do not find it profitable to invest in vaccines that afflict poor people, small-scale water purification systems, crops grown by households or small farmers, or small-scale energy systems for rural communities. Aid that is directed at developing new technologies in all of these areas for the masses in the developing world would yield benefits orders of magnitude greater than from most of projects currently being funded by the major aid organizations.

Creating new technologies and making them part of the public domain such that all entities– governments, NGOs, and private corporations– have equal access to them would lead to massive diffusion. For example, a vaccine for malaria or a bioengineered drought-resistant seed that was part of the public domain could be produced for pennies by any organization anywhere in the world. Since knowledge is easily transferable and allows for local production of the finished goods it creates much less opportunity for corruption and ensures a much higher probability that benefits will actually accrue to those most in need. (For an example of an organization that is a model for this type of development aid check out One World Health. Coincidentally, there is a great article on a recent success by the organization in Monday's nYT.)

Making a major shift in development aid will be extremely difficult because there are so many vested interests in the current system. The people who work for development organizations such as the World Bank are well-intentioned but the “poverty industry”, with its extremely high salaries and first-class perks, has enamored them to a failed system. It will require some very courageous employees as well as outside pressure to radically shift a bureaucratic culture that is stuck in its largely obsolete ways. In addition, since what I have outlined would decrease the coffers of the ranks of corrupt officials throughout the developing world, who are all too happy to continue failed models that line their pockets while their people continue to suffer, there would no doubt be fierce resistance from the rulers in many of the countries we are actually trying to help.

But in the end, it is only fair to the billions of people mired in undeveloped societies, as well as those in the developed world who are subsidizing aid projects to the tune of tens of billions a year that aid money be spent wisely. We know how; what we need is public recognition and the political will.

Jason Scorse

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July 2, 2006

The Problems and Limitations of Utilitarianism

Utilitarianism is often called the foundation of modern economics. It is the belief that human beings try to maximize their utility (happiness), and that good social policy aims to maximize the sum of individual utilities. This idea is central to most economic analysis, notably cost-benefit analysis. Unfortunately, this sort of analysis presents problems that are rarely discussed in economic and political circles.

We all know, for example, that there are things we are forbidden to do to other people regardless of whether the loss of that person’s utility would be made up by increases in other people’s utility. A modern-day Robin Hood might increase society’s total utility, but theft is both legally and morally wrong. To imagine an extreme case, we could certainly increase overall utility if we infected a small population of humans with AIDS and studied them in labs; this would greatly increase our knowledge of the disease, but it would be morally abhorrent. War is one activity where we do explicitly trade off the death of innocents to achieve some “greater good” (and hide what we’re doing behind euphemisms like “collateral damage”).

I suggest that when cost-benefit analysis is used as a public policy tool, we often engage in actions that are in many ways equivalent: actions which meet the “benefit” goal, but which cross the divide into morally slippery areas.

For example, when new coal power plants are built the benefit (cheap electricity for large numbers of people) is weighed against the costs (for one, a certain number of premature deaths due to particulate pollution). The fact that these deaths are statistical makes it easy for us to accept the trade-off. But what if we could identify the people who were going to suffer and die because of each new power plant, and then had to ask ourselves whether it was alright to go ahead and build it? It would obviously be much more difficult and morally problematic.

In addition, utilitarianism is incapable of differentiating the root sources of utility. For example, some people may get utility from viewing beautiful scenery while others get it from performing sadistic acts. In the value-free world of utility theory, utility is utility no matter what it comes from. This is troubling since we clearly need to differentiate between the sources of happiness: in any sensible moral calculus, deriving pleasure from harming others cannot be equivalent to getting pleasure from helping others.

When it comes to the environment, utilitarianism runs into even greater problems. Humans are the sole deciders of what has value: paradoxically, any intrinsic value for non-humans can only be granted by humans. So if a hunter gains utility by killing an animal, or a person by eating that animal’s meat, cost-benefit analysis gives no weight at all to the animal’s interests (unless of course human beings choose to, and sometimes we care enough to do so.)

The notion that only human interests count is not based on reason or any ethical system. Taking this position is essentially no different than claiming that only one nation has value, or one religion: it is an arbitrary dividing line in a world of millions of types of living entities, many of which are animals, many of which are highly intelligent and social creatures with a great capacity for pleasure and pain. (As a side note, advances in genetics are making it harder than ever to support arguments based on a “unique species” claim. It now appears likely that a male monkey has more genetic similarity to a male human than a male human has to a female human.)

I was moved to consider this issue because of the renewed interest in whaling by Japan, Norway, and Iceland (a topic I specifically addressed in last week’s Voices). Some people in these countries (very few) desire to eat whale meat, and believe that this desire supersedes the right to life of some of the most highly evolved creatures on the planet. The fact that whales can be harvested “sustainably” points once again to the problematic nature of utilitarian doctrine. We could probably kill thousands upon thousands of all types of whales, dolphins, turtles, elephants, rhinos, lions, and tigers and not wipe out an entire species, but does our desire to eat these animals or kill them for sport entirely negate their right to exist?

The point is not that we should scrap utilitarianism or its accompanying cost-benefit analyis; we do need to be able, in some way, to calculate benefits and costs in the public policy arena. But I would argue that there are some actions that are wrong in and of themselves, and not subject to any utilitarian calculus. (Or perhaps that the utilitarian calculus should be extended to non-humans as well.)

The sooner that we think more broadly about the interests of animals and the environment, the sooner we might come to realize that many of our actions today are immoral and should be stopped: regardless of whether they or sustainable or not, regardless of whether they pass a cost-benefit analysis based solely on our wants and desires.

Jason Scorse

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April 9, 2006

One Tax Tweak That’s Worth Billions

(With tax day coming up, it is the perfect time to put forth the type of reasonable, fair, and economically sensible reform that is laid out in this piece, which just appeared in the SF Chronicle on Thursday.)

Should capital gains, like wages, be reported to the Internal Revenue Service? National Taxpayer Advocate Nina E. Olson thinks they should, and she wants Capitol Hill to make it happen.

A legislative recommendation in the Advocate’s 2005 report to Congress calls for brokers to report basis prices and purchase dates for stock transactions to the IRS. This would effectively hold capital gains to the same tax rule as wages, which employers have had to report since 1943; under the Advocate’s plan, financial institutions would have to do the same for capital gains. Only the proceeds from sales are currently reported, and these tell the IRS next to nothing.

Few tax reforms could be fairer or make more fiscal sense.

It mocks tax equity that wages are reported by a third party to the IRS, but capital gains are not. What’s up with keeping a tighter tax rein on ordinary workers than on the high rollers?

And consider the hit the Treasury takes. Listen to the Advocate: “From the government’s perspective, the absence of information reporting enables underreporting by taxpayers who deliberately overstate their basis (thereby reducing their gain or even generating a loss), because they know the IRS generally cannot detect errors in basis reporting in the absence of an audit. One recent estimate puts the revenue loss…from such underreporting at $250 billion over the next 10 years.”

To which you can add the billions lost every year by states and cities that base their taxes on federally-reported amounts.

The Taxpayer Advocate is not alone in recognizing the merits of third-party capital gains reporting. Pamela Olson served as the Treasury’s acting assistant secretary for tax policy during George W. Bush’s first term. In May 2002, she answered my letter to Congressman Charles Rangel: “…Mr. Scorse believes that tax compliance would be improved if information reporting for capital gains included the amount of capital gains income that a taxpayer is required to show on his or her return. We couldn’t agree more! Information reporting is the most efficient, least intrusive way of helping taxpayers comply with their tax obligations to the federal government.”

Professors Joseph M. Dodge of Florida State and Jay Soled of Rutgers couldn’t agree more, either. Their paper in the tax policy journal Tax Notes called the potential for capital gains tax cheating “virtually unlimited,” particularly for stock transactions; in their opinion, it could virtually be eliminated with third-party reporting.

IRS Commissioner Mark Everson, speaking generally, told a Congressional hearing last April that “Average Americans pay their taxes honestly and accurately, and have every right to be confident that when they do, their neighbors…are doing the same.” It’s hard to have such confidence when capital gains are not reported to the IRS.

The Advocate’s recommendation takes note of financial institutions that do not keep track of basis prices, leaving clients the sometimes-daunting task of doing it on their own. Ms. Olson floats a remedy, a one-time tax credit to brokers for setting up a tracking system. Full speed ahead, and let the Congress work out the details. (In mid-March, Senator Evan Bayh (D-IN) introduced legislation that would do exactly what the Taxpayer Advocate recommends. Senators John Kerry (D-MA), Barack Obama (D-IL), Carl Levin (D-MI) and Tom Carper (D-DE) are co-sponsors of Senator Bayh’s bill, S. 2414.)

Look at the Advocate’s idea this way. It’s one tweak of the Tax Code, one large leap for tax fairness. Plus those billions for the Treasury.

Gerald Scorse testified on this issue in writing at Congressional hearings in 2003, 2004 and 2005. He has an MBA from Baruch College.

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March 19, 2006

It’s Not the Economy, Stupid

It’s inarguably true that while GDP has grown exponentially for the past half-century, human happiness has remained relatively flat. All the same, as an economist, it baffles me when these two facts are put forth as evidence that capitalism, markets, and economic growth are largely one big mirage, with only minor links to human welfare.

First off, the measures of happiness that most people refer to are self-reported measures that have been taken across countries over many decades. These reports typically rate people’s happiness on a relative scale from very unhappy to very happy. If in the 1950s people rated their happiness a 7 on a scale of 1 to 10, and happiness supposedly increases with per capita GDP, then by now happiness would have to be at least a 15 on a 1 to10 scale! Clearly, we can’t assume that when GDP increases, happiness increases right along with it.

Aha, but isn’t that what the critics of capitalism have been saying all along? No matter how wealthy we get, we ultimately think of our happiness in relative terms; therefore, we’re never really happier than before.

This may very well be true, but ask yourself: would you rather be “happy” in a society where people use outhouses, nobody ever leaves their village, and the average life expectancy is 40? Or would you rather be “happy” in the contemporary United States of America or European Union? I thought so. And the simple fact that life expectancy has increased so much over the decades points to an immense increase in overall happiness, since people have so many more years to enjoy whatever level they have; 40 years of being happy is only half as much as 80 years.

The basic point so far is that people tend to judge their happiness compared to current norms, so that happiness is continually dependent on greater levels of material comfort and well-being. This is far from trivial. In addition, while overall levels of happiness at a given point in time may not be much greater than in the past, happiness is not the only important metric in society. Opportunity, levels of knowledge, convenience, variety, and a host of other variables influence people’s lives in positive ways. True, my happiness might not really be too dependent on how many flavors of ice cream there are; nevertheless, given a certain level of happiness I prefer a world with more flavors than fewer.

As to what actually makes people happy, it is no mystery. Love, friendship, spiritual connectedness, a sense of purpose; these have been the keys to happiness from time immemorial. That money doesn’t buy these things is self-evident; therefore, to assume a linear relationship between GDP growth and happiness is patently ridiculous. Once again, however, this hardly means that economic growth isn’t good.

An example of where the logic of the anti-economic growth crowd becomes really perverse relates to marriage and lifespan. One of the many reasons divorce rates are higher nowadays is because people are living longer; it is simply easier to stay married when you only live to 50 than when you live to 85. (Since we know that divorce is often traumatic and associated with a deep sense of failure, if we really want to make people happier perhaps we should help them die sooner!)

There is another key misapprehension: that somehow happiness is the primary goal in life. While certainly worth striving for, happiness is hardly the only worthy goal; how about facing challenges, trying new things, sacrificing to care for others, expanding one’s intellectual capacity? These endeavors may bring happiness, or they may also bring frustration, sadness, longing, and pain; still, that doesn’t mean they should be avoided.

Unsurprisingly, it is always those in the most privileged positions (who travel the world and have every luxury at their disposal) who are the first to question the need for economic growth. More often than not, this is because of the supposed links between growth and the destruction of the environment, links which are tenuous at best. Wealthy environmentalists like to tell poor people in the developing world that there’s really nothing to be gained from having cars, TVs, supermarkets and all that superfluous stuff that doesn’t really make you happy anyway. There’s no need to consider developing into industrial societies because that might threaten all the pretty places they love to visit.

There are also those who rightfully point to the connection between global warming and GDP growth, but again, they tend to minimize the essential lessons: 1) it is the wealthier countries who produce much more output per unit of energy (i.e., growth doesn’t necessarily have to mean more physical throughput), 2) it is the wealthier countries who have the technological capacity to innovate to reduce CO2 output, 3) it is the wealthier countries that have the political institutions that are required for effective strategies aimed at combating climate change.

All of which means that environmentalists had better get serious about helping the poorer nations get a taste of all those “non-essential” material goods that we take for granted. Those nations are not going to listen to people who have it all telling others to forego the good life.

And when development occurs in those places, an amazing thing will likely happen. As their essential needs get met, the people in these countries will increase their demand for environmental protection. Such a confluence is only possible when people realize that while GDP growth may not make people all that much happier, it gives us our best chance of creating an equitable world where everyone at least has the potential to be happy, where the environment is protected, and where we can experience all of life’s adventures for a very long time.

So instead of campaigning against economic growth a much more constructive approach would be to campaign against perverse subsidies, protectionist trade barriers, and to promote technology transfer from rich countries to poor ones.

J.S.

P.S. Harvard economist Benjamin Friedman has come out with a new book, “The Moral Consequences of Economic Growth” that addresses a lot of these issues (what a coincidence!). One of the main points he makes (which I wholeheartedly agree with) is that median GDP growth, not per capita GDP growth, is the correct metric for a society’s well-being. Unfortunately, median GDP has been decreasing in the U.S. for the last six years, and surprise, surprise, with this decline has come increased anti-immigrant sentiment and a move towards religious extremism. For a great discussion with Dr. Friedman on NPR click here.

P.P.S.
Another book on the history of happiness just came out as well; for a great discussion with the author and others on NPR click here.

Jason Scorse

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February 19, 2006

Defending the World Trade Organization (Again)

A few weeks ago I was one of the speakers on a panel entitled, “Free Trade Agreements and Sustainable Agriculture,” at the Ecofarm Conference in Asilomar, California. The other two speakers were a representative from Oxfam and a representative from The Forum for Free Trade and Democracy. I knew that both of them, as well as the crowd, would favor the anti-globalization agenda, and I looked forward to making the case in favor of free trade. I put together a 20-minute talk on who would be the likely winners and losers if we truly made a shift to free trade in agriculture, and how the benefits both to people and the environment would clearly outweigh any costs (and even these would mostly come at the expense of special interests).

The panel began with the representative from Oxfam struggling to fill her 20 minutes. Somehow she believed that citing statistics about global poverty, and how most poor people work in agriculture, was a substantive critique of free trade. She added a few random statements about CAFTA being bad, but that “we” almost defeated it was a sign of the strength of the anti-globalization movement. She also made fuzzy statements about NAFTA having harmed farmers in Mexico, though this has largely been disproved (not that she thought evidence was necessary anyway).

Then came the man representing the Forum for Free Trade and Democracy, who spoke for almost 40 minutes (more on that in a moment). I don’t remember clearly what he said, since he immediately began fielding questions from the audience and got sidetracked on issues that had little to do with the topic. One thing that did strike me was his insistence that if you wanted people to work on your side of the free trade debate, there are none better than the South Koreans. I found this both disturbing and bizarre, since it was an apparent reference to the South Korean who committed suicide at the WTO ministerial meeting in Cancun; I didn’t realize that people were actually in search of martyrs for the cause.

Now it was my turn. To get people’s attention I announced that I was pro-WTO, pro-free trade, pro-markets, pro-NAFTA, and pro-CAFTA, and I think that did the trick. I then ticked off the winners and losers in our highly protected and subsidized global agricultural system, in which hundreds of billions of dollars are wasted every year on special interests, the environment is trashed, and on balance developing countries are hurt (for details of the talk please contact me). I also noted that the WTO is one of the most democratic institutions in the world, and that the problem is not that people are following its mandate, but that they aren’t following it enough. (It was around here, after only 10 minutes of my allotted 20, that I was told I was almost out of time; I joked that I guess you get less time if you’re in favor of free trade at an Ecofarm conference.)

I concluded with two observations.

First, that I believe it has been a terrible miscalculation on the left to jump aboard the anti-globalization bandwagon, and that helping to direct globalization in a way that helps people raise their standards of living and moderate the difficult transitions would be much more constructive. I asked the audience whether the world might be a better place if, since the Seattle protests in 1999, organizers had been working to end perverse subsidies and protectionist policies instead of trying to disrupt every WTO meeting.

Second, I used an example involving CAFTA to point out how to tell when you’re on the wrong side of a debate. Florida sugar producers receive about $1 billion a year in subsidies, and they fiercely opposed CAFTA because of the modest competition that the agreement would create (competition that would cut into the money they receive from American taxpayers). These producers have for decades had some of the worst labor violations and conditions in America, have almost single-handedly trashed the Florida Everglades (with damages in the billions), are directly impoverishing many Caribbean and Central American producers who could sell sugar more cheaply, and have forced many U.S. candy and soda manufacturers to move operations to Canada. If there was ever a progressive cause to get behind, it would be to decrease their power. But the anti-globalization crowd, in its blind opposition to free-trade, joined hands with this special interest to oppose CAFTA. This should cause all those who considers themselves liberal to take a long look in the mirror.

It was at this point when someone in the audience yelled out “who’s paying you?” I reminded him that free-thinking individuals can support free trade.

Many of the questions during the Q&A session that followed were directed at me. A number of people came up to talk and were generally supportive that someone had dared to break the “party line” and engage in a substantive debate.

But the fun wasn’t over. I decided to sit in on a discussion about the upcoming Farm Bill.

One of the speakers, a representative of the assorted Farm Bureaus of California, made his case that California farmers must unite as a caucus in order to get as much money as possible for California, including more money for every possible agricultural program. Keep in mind, federal farm support is already at record highs (budget deficits and other national priorities be damned!). He mentioned that discord between the cotton growers, who get a lot of subsidies already, and other California farmers has in the past hampered California’s efforts to get its “fair share” of the subsidy bounty.

I wish my students could have been there to hear it: it was the most blatant example of a corrupt special interest operating in broad daylight that I had seen in a long time (and at an Ecofarm conference no less!) During the Q&A session I asked him why, as a Californian, I should support cotton growers who have no business getting subsidized water to grow subsidized cotton with tons of pesticides in the middle of the desert. I could see his blush from all the way in the back of the hall. He made some vacuous point about representing all of his clients and moved on; I guess his clients don’t include the public interest of California.

In summary, I remain a steadfast supporter of the WTO and free trade. The benefits so overwhelm the negatives that I’m amazed there is even a controversy. The real debate should be over how to best manage the forces of globalization in order to balance the need for continuing national economic progress with individual economic security. The sooner we focus on these issues, the better. I’m prepared to go back to Ecofarm next year and repeat the same talk if need be.

J.S.

“The extreme left and the extreme right are in reality two sides of the same coin.”

P.S. The WTO has ruled that the EU’s ban on GMO’s is illegal since the EU has not proven that GMOs represent a public health risk, and that the labeling of GMO products is a less trade-distorting way to allow people to discriminate against GMO products if they chose to on an individual basis. This is clearly the correct ruling, and I say that as someone who pretty much buys 100% organic food, which is just about the only non-GMO food you can buy in America. While there are legitimate scientific issues regarding GMOs, so far the scientific consensus is that they are safe both from the environmental and health perspectives. If Europeans don’t want to eat GMOs they don’t have to, but for those who don’t care they should be able to purchase the (mostly) cheaper GMO products. This case also speaks to the larger issue of what should be done when environmental scare tactics go awry, such as the cases of poor African nations actually refusing food aid because the food contains GMOs. In cases like this the precautionary principle goes too far, and the environmental movement becomes a creature of hysteria rather than a sensible movement that wants to balance human and non-human needs.

P.P.S. This is the absolute best response to the Danish cartoon controversy imaginable. Check it out.

Jason Scorse

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August 14, 2005

Communication Breakdown

Communication is the foundation of any prosperous society. It is not only the backbone of the economy, but a steady flow of (accurate) information is necessary for both democracy and technological innovation. And if you want “proof” that capitalism and market-economies have “delivered the goods” you need look no further than the telecom/internet industry.

I remember back in the 1980s when it cost $.25 a minute to make calls within the U.S. during peak hours, $.10 a minute on nights and weekends, and international calls required a second mortgage. These days, thanks both to innovation and deregulation, it costs about $.05 to call within the U.S. at all hours, which accounting for inflation is a drop in price of over 90%. International rates have dropped even more, and now you can call Europe for $.03 a minute and China for $.02, which for all practical purposes is essentially free. Whereas cell phones initially cost over $1,000 (remember those huge clunky things?) and rates were upwards of $1 a minute now you can get what amounts to unlimited usage for around $40 a month with free phones that are pocket-size, complete with email, cameras, and all sorts of nice features. On the computer front, you can now get internet phone service (such as Vonage) which is even cheaper than land lines, and I just signed up for a new high-speed DSL contract for the outrageous price of, drum roll please, $15 a month. Unlimited email remains 100% free and customers get tons of additional free services like maps (some even with Satellite photos- see Google Maps), attachments, and photo-sharing.

Digression: Where I live in Central California, in close proximity to many of the architects of these wonderful consumer windfalls, the telecommunications and internet revolution has led to a record surge in real-estate prices (above and beyond the national increases). For property owners this has meant huge profits, while for renters like myself I have steadily watched my prospects for owning a nice house diminish (or at least become vastly more expensive). Putting aside whether or not I believe there is a housing price bubble, my attitude has remained largely unchanged. I am a believer in the merits of the free-market system and it would be hypocritical if I were to praise all the great services the telecom and internet revolution has brought the world (which allows me to publish this blog and has made my life as an academic vastly easier), while at the same time bemoan the fact that the people responsible for this innovation have become vastly wealthier, driving up home prices. I say good for those lucky enough to buy at the right time or who can afford the high prices; people like me will just have to be a little more creative and frugal with our money. Nowhere in the Bill of Rights does it say that all Americans shall have the right to buy beautiful beach front property in sunny California.

Back to communications…

I recently returned from a trip to Mexico where one can witness the opposite of the telecom revolution that we have experienced in the United States and the rest of the developed world. Mexico continues to suffer under the heels of one of the worst telecom monopolies in the Western Hemisphere (Telmex). Not only is service hard to get and spotty in many areas, but the prices are through the roof. It is not uncommon for households to pay $.20 or more to call within Mexico and since most people don’t have phones they must rely on calling cards, which are even more expensive (as much as $.50 a minute). The cheapest calling card I was able to get to call the States from Mexico was $.35 a minute. That’s a markup of an order of magnitude over standard international rates. DSL service in Mexico costs upwards of $100 per month and it’s slow. The monopoly rents that Telmex extracts from the Mexican people in reverse Robin Hood fashion are at minimum billions of dollars a year. In fact, the owner of Telmex owns much of Mexican industry and is one of Forbes richest men. His telecom enterprise is also predatory and criminal in every sense of the word. Rumor has it that when AT&T was allowed access into the country his company sabotaged AT&T’s lines so that it was hard to hear people using their service.

The telecom revolution that began in the developed countries has quickly spread throughout much of the developing world, as many poorer countries have allowed competition and solicited foreign direct investment in the telecom sectors. Public access to telecommunication services has skyrocketed in many areas, and cell phones have played an especially critical role since they allow countries to forego providing expensive land-line infrastructure (which has left most poor rural areas of the world largely isolated).

Unfortunately, countries like Mexico, which continue to allow a monopoly to blatantly exploit its citizenry, will find their economies falling further and further behind as the world globalizes. Telmex’s monopoly not only deters business investment, but acts as a hugely regressive tax on the already (mostly) poor Mexican population. Hopefully, some courageous Mexican politician will eventually challenge the status quo and build his or her candidacy around the promise of breaking up Telmex and reducing phone rates; there is almost no single thing that would help the Mexican people more over the long-run. Low-cost and reliable communication is truly that important.

J.S.

P.S. A while back I critiqued Thomas Franks’ What’s the Matter with Kansas. This article seems to lend credibility to my analysis.

Jason Scorse

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June 8, 2005

Will the Defenders of Free Trade Please Stand Up?

If free trade benefited everyone all the time there would be no controversy. Unfortunately, along with the tremendous net gains from freer trade – higher productivity, lower costs to consumers, the creation of new industries, and the chance for poorer countries to earn foreign currency and develop economically – come large costs for the industries and workers that get caught in the transition as economies adjust.In order to get everyone to support free trade, workers who lose their jobs or have their pay cut deserve to get help from the government. Workers who are displaced need to feel that society takes their pain to heart, and that they are not simply cogs in the larger economic machine who can be sacrificed for the greater good. In effect, free trade presents a political paradox: it calls for hands-off government with respect to tariffs and quotas, but hands-on government with respect to increased worker benefits in times of economic transition. For example, wage insurance can be an effective way to protect the stability and quality of life for displaced workers at a reasonable expense. Workers in industries harmed by trade liberalization are paid a portion of the difference between their old salaries and those in any new job they get (if the salary is lower) for a set period of years.

The gains from free trade are too large to be squandered, but these days both the Republicans and Democrats are so beholden to protectionism and special interests, and are so committed to their own ideological biases that they are incapable of consistently supporting free trade and the policies that must accompany it.

Under the Bush Administration, Republicans have levied a number of significant tariffs on American goods, fought the WTO regarding the elimination of U.S. export subsidies, and are now threatening China with punitive tariffs or quotas because Chinese textiles are flooding the market. Think about that: the greatest and most advanced economic superpower in the world is turning its back on free trade in order to protect one of its lowest value industries that has been in decline for decades. In addition, the Republicans are so instinctively committed to a ‘less-government’ stance that they seem incapable of promoting the types of policies that will insure a long-term commitment to free trade within the United States. A case in point is the GOP’s continual stalling over the last four years on extending unemployment benefits for workers who couldn’t find jobs.

The Democrats, on the other hand, are so stuck in the protectionist mindset that they have completely lost sight of the potential wealth that can be generated from a freer and more liberalized global economy in conjunction with the promotion of labor rights and environmental goals. Instead of proposing wage insurance, increased retraining programs, or funds to combat labor rights abuses abroad, they are willing to fight against any free trade deals put forth by Republicans regardless of how perverse their arguments are. A case in point revolves around the proposed Central American Free Trade Agreement (CAFTA): the Democrats have teamed up with the Florida sugar lobby, probably the country’s most wasteful and environmentally destructive lobby that bilks the public for billions a year and trashes the Everglades, in order to defeat CAFTA. Anyone concerned with the environment should be aghast at this development.

This short-sightedness on the part of both political parties provides a huge opportunity for a courageous leader who is willing to extol the virtues of free trade, and at the same time, emphasize the need for government intervention to ameliorate the suffering of displaced workers. Free trade presents America (and the world) with a potential win-win situation, but only with the proper leadership that is not afraid to expand government policies where they are needed, and to stand up to the special interests who cry foul every time their government handouts are in jeopardy.

J.S.

P.S. A follow-up to my last piece on animal rights: Definitely check out this interview with Matthew Scully, author of Dominion (a book I highly recommend). Also, check out Scully's website that has excellent articles and links. For those who haven't heard of him, Scully is a conservative Republican who is a former speech writer for President Bush- not your typical animal rights activist.

Jason Scorse

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April 13, 2005

An Honest Discussion about Taxes

The issue of taxes is fascinating because on one hand it’s a discussion about different policies, rates, and incentives (something economists love), while at its core it is a deeply philosophical issue: what right does the state have to take people’s money and use it for “social” purposes?

Let me begin by putting a few things on the table: I think there are many uses of our tax dollars that are indefensible (e.g. agricultural subsidies, maintaining a nuclear arsenal of 10,000 warheads, and export subsidies for corporations), and I also believe the tax code is a nightmare: little more than a hidden subsidy for accountants and lawyers. It is too bad that Bush and the GOP didn’t start with tax reform before pushing Social Security privatization since I think this is not only much more important (at least in the short-term), but it is something almost everyone could’ve gotten behind. More on this in the future.

While it is a truism that virtually everyone hates taxes, I would like to take a moment to assess what I, a middle-class man in his 30s, gets for his tax dollars. To begin, I have attended publicly subsidized universities for many years to the tune of at least $20,000 per year provided by the state. This alone is more than I have paid in taxes in my entire life. In addition, I get some of the best infrastructure in the world, my taxes fund a variety of worthy programs for environmental protection, poverty alleviation, medical care (though not for everyone), science research, international aid, and of course, I contribute to the national defense budget. Looking at a balance sheet it is obvious that I have received more in services than I have ever paid for and probably ever will.

Of course, the fact that I am paying less than I am receiving in goods and services means that someone else is paying more; notably the rich. While I may not ever enter their ranks, as my income grows I will no doubt pay more in taxes, but I will also get additional services when I have children and they attend public schools (another subsidy of at least $15,000 per child per year).

The bottom line: the wealthy do subsidize the middle and lower classes in American society, and while we in the middle and lower brackets have a right to complain about certain aspects of the tax code we are getting a great deal.

So is this wrong or is it morally justifiable?

This is a tough question and in some sense there is no “right” answer. Extreme libertarians will argue that tax is theft and there is no other way to view it; if you take someone’s money without their express permission you are stealing. I don’t subscribe to this perspective for a number of reasons.

First, if we are to live in a society and not in anarchy we must subsume some of our individual wants to the “greater good.” With regards to taxes, as long as they are not confiscatory the state has a right to levy them in order to promote social goals. Second, taxation for public goods (such as infrastructure, environmental protection, and national defense) is actually quite efficient. Imagine if all the roads were private and we had to pay each time we used them; picture those long lines at toll booths just about everywhere. It is much better for us to pay taxes and have these roads built for everyone; even the people who don’t own cars benefit from them since goods and services are delivered using the transportation system. Third, while wealthy people might not make use of public education or many of the goods and services provided directly by government, it is fair to say that the entire state apparatus disproportionately protects their interests. After all, the court system protects their corporate interests, the roads transport a disproportionate share of their goods and services, they get to enjoy the nicest physical environments in the country, and the military defends their financial interests disproportionately as well.

In summary, I think approaching the issue of tax reform and taxation in general would be greatly improved if people in the middle and lower classes acknowledged that the current system redistributes wealth from the top to bottom and that they get a very good deal. At the same time, the rich should acknowledge that while they pay a large share of the taxes, the state largely exists in order to protect their economic interests above all else. Approaching the issue in this manner might temper some of the harsher rhetoric and allow us to look at legitimate ways to improve efficiency (and hence reduce costs), while not tampering with the essential progressivity of the system.

Let me be clear that the perspective I have laid out should not be construed as support for the current tax system or the massive tax cuts made by the Bush administration; my point was simply to outline the philosophical starting points for the future discussion of tax reform, which is desperately needed given how inefficient our current system is.

J.S.

*Update on “A Tale of Two (Groups of Fanatics)”: Check out this very good article by the Economist.

Jason Scorse

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April 10, 2005

Searching for Tax Fairness

If you haven’t read James Surowiecki’s The Wisdom of Crowds, get ready for a surprise.

In a book that’s part math, part psychology and part common sense, Surowiecki upends the popular belief that individuals are smarter than groups. Not so, he says. When it comes to solving problems, look to the group for dead-on answers.

Paying taxes, Surowiecki states, “is a classic example of a cooperation problem”. Everyone benefits from the services that taxes provide, but this is true whether or not they pay any taxes. Therefore, why pay?

In Surowiecki’s view, taxpayers ante up in large part because they believe that others are doing likewise. Americans, according to historian Margaret Levi, are “contingent consenters”. Few of us are thrilled to pay taxes, but we don’t mind paying our share as long as we’re sure that the folks next door are paying theirs.

But hold on. What makes us believe that our fellow citizens are giving the taxman his due? Are we being chumps, or does something in the system give us the assurance we need?

The answer arrives like clockwork every tax season. It’s the blizzard of W-2s and 1099s sent out by employers, banks, brokerage houses and mutual funds, telling us how much we made the year before in wages, interest, dividends and other forms of income. Each bears the reminder, “This information is being furnished to the Internal Revenue Service.”

It’s this third-party reporting that forms the linchpin of our “voluntary” tax system. It is the lodestar that keeps us on the straight and narrow, and tells us that we’re all in the same boat.

But hold on one more time. There’s a gold mine of unearned income that has its own set of rules, that isn’t “furnished to the Internal Revenue Service.” This rich vein is capital gains income from the sale of stocks, bonds and mutual funds. None of this income is reported by a third party to the IRS, though you could easily think it is.

To explain: The IRS does get reports of proceeds from stock, bond and mutual fund sales. But the agency isn’t told what these holdings cost to begin with, or when they were bought. In tax-speak, income from these transactions is “self-reported”; the figures don’t come from a third party, they come from the taxpayer.

This is unfair on its face, and porous tax policy besides.

A major IRS study found that misreporting rises sharply with self-reporting, climbing to more than 12 times the rate for income reported by third parties. Other government and scholarly studies have produced similar results. Kim Bloomquist, a senior economist with the IRS, makes the point the other way around: “One of the few generally accepted facts in the literature on tax compliance economics is the existence of a positive relationship between transaction visibility and reporting compliance.”

There’s no question that the self-reporting of capital gains costs the U.S. Treasury; the only question is how much. Unless we’re a nation of angels, the figure likely hits the double-digit billions every year. On top of that there’s the multiplier effect: states and cities which simply plug federal totals into their tax returns get short-changed as well.

The solution is only half a step away, staring us in the face and daring us to put it in place.
Brokerage houses and mutual funds routinely track their customers’ basis prices, purchase dates and realized capital gains, and report the information to them. With little more than the click of a mouse, the same data could be reported to the IRS at tax time.

Circle back to Surowiecki: “Getting people to pay taxes is a collective problem. We know what the goal is: everyone should pay their fair share….” Just last month, IRS Commissioner Mark W. Everson sounded a similar note when he told the National Press Club, “Average Americans pay their taxes honestly and accurately, and have every right to be confident that when they do, their neighbors…are doing the same.”

It’s time to put more reality into Everson’s rhetoric; it’s time to treat capital gains income the same as wage income, and have it reported by third parties.

Just ask any crowd.

This piece was in the Baltimore Chronicle on 4/20/05: Click here

G.S.

Side Note: I received some very interesting responses to my last piece on drawing the line between respecting culture and sanctioning oppression- some of which are in the comments section. I urge anyone interested in this issue (which I think is hugely important) to go and read the Universal Declaration of Human Rights; it is a document almost 60 years old that lays out the foundations for justice that transcend culture. Promoting these values can never be self-righteous since these are the foundations for human progress and dignity; that was my essential point.

Gerald Scorse

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February 13, 2005

The Capitalist Conundrum

A recent editorial in the New York Times on the horrific conditions for workers in the U.S. meat industry sparked an exchange between a friend and I on one of the fundamental dilemmas inherent in capitalism, which is recognized on at least a superficial level by most people, but rarely made explicit and explored in detail.

The fundamental assumption underlying capitalism and market-based economies is that people trade goods and services, including their labor, voluntarily. Contrary to the rants of its most vocal critics, capitalism is inimical to slavery. If exchange is non-voluntary (i.e. achieved through coercion) it is by definition not a capitalist exchange. The power of this concept is not to be underestimated; it leads to a profound set of conclusions. The most important is that if exchanges are made voluntarily then all parties engaged are by definition better off after the exchange; after all, if they weren’t why would they have agreed to take part in the first place? Putting aside legitimate issues of perfect information and externalities that accompany this conclusion, the essential logic is sound and helps to explains why market-based systems are dominant almost everywhere in the world, even in places without political freedoms. It also explains why overall, no other system has been able to improve the standard of living for so many in such (relatively) short periods of time. The bottom line: Allowing people to freely trade and specialize amongst themselves is the most powerful driver of prosperity in the world.

There is a catch, however.

There are many situations in which people find themselves willing to do things voluntarily that are demeaning, obscenely dangerous, and deprive them of their basic human dignity because they are so down and out that they have no other options. For example, the meat workers in the NYT editorial are often poor, uneducated immigrants who don’t speak English and are therefore willing to work in conditions almost identical to what Upton Sinclair exposed in the Jungle almost 100 years ago. While it is true that these men volunteered for the job does that mean it is right to subject them to these conditions?

Economics as a science rarely differentiates between degrees of voluntarism, but you don’t need to be a moral philosopher to understand that this poses a problem. My deciding which high paying and fulfilling job to take is qualitatively different then a woman with no education and no money deciding whether to work in a brothel or a sweatshop in order to survive at some subsistence level. (I want to make sure to differentiate this example from someone in the U.S. who chooses to work in a dangerous occupation but is compensated with higher wages. In this case, the individual is not forced to choose the risky job because t Sitemap