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Tuesday, May 31, 2011

Medicare’s Elusive Search for the Ideal Success Criterion (Consult Specialists on the Soviet Economy Before They Are All Dead)

Medicare has a new success criterion for rewarding hospitals: “Medicare spending per beneficiary.” The unusual twist is that Medicare bureaucrats will include expenditures three days before and 90 days after the patient leaves the hospital. Medicare will pay hospitals that have lower than average “Medicare spending per beneficiary” a higher percentage of each claim.

Those of us who studied the Soviet economy find the announcement of a “new and better” Medicare success criterion familiar. We also know it will be one of many to come. As hospitals learn to game this criterion, Medicare bureaucrats will propose another one to close the gap. Hospitals will then learn to game that one, and so on. The cat-and-mouse game goes on forever, until the system itself ends.

Soviet planners began with quantity targets, such as tons of steel or numbers of tractors. Factories churned out nails too heavy to use and “incomplete” tractors (=lacking engines). Planners adjusted to this gaming by specifying both tons and steel assortments and requiring “complete” tractors. Planners could not keep track of the assortment; so factories still produced the heaviest of metal products and tractor producers left off the tires or the windshields.

Planners then discovered that steel and complete tractors were being produced with a huge waste of inputs. The next magic success criterion was cost reduction targets, but the bureaucrats discovered that cost reductions were being achieved at the expense of assortment and quality. The next silver bullet was to reward profits, but factories gamed profits by producing only high priced items. The next step was to put everything on computers, which were supposed to churn out magic “scientific norms” that would solve all problems. At about this time, the Soviet economic system collapsed.

If hospitals can find some ex-Soviet managers, they could put them to good use.

I can imagine some of the tricks: Accept only low-cost cases. Put patients recovering from serious operations in nursing homes and hospices for 90 days and hope that they survive to resume treatment. If a patient needs a complicated operation involving two procedures, do not do them at once. Wait ninety days for the second one.

The Medicare bureaucrats will respond with new rules that reward hospitals for taking on difficult cases and will prohibit the parking of patients in nursing homes and hospices. The hospitals will respond and the game will go on without end.

Hospitals will eventually decide the game is not worth playing and try to figure a way to exit Medicare entirely. But by that time, the Medicare bureaucrats will have figured out a way to keep them captive. In the Soviet case, we called this the “treadmill of reform.” Good luck to the hospitals out there with their treadmill.

Saturday, May 28, 2011

At Last, Peggy Noonan Says Something Interesting: “We Don’t Accept That Card Anymore.”

I rarely make it through a Peggy Noonan article. Her WSJ column soars into the stratosphere, high above the political fray. She muses in rhetorical flourishes about the human condition. She offers little advice or analysis that I consider of practical use.

Enter the mainstream media and their newfound consensus: The Republican Ryan plan to change Medicare from a card guaranteeing senior citizens medical care to a voucher to buy private insurance will hand the 2012 election to the Democrats.

I suggest that the Republicans offer a prize for the shortest and clearest explanation of why senior citizens are better off with the Ryan voucher. This task is not easy. It requires that voters understand that “there is no such thing as a free lunch.” (I offered a parable in my posting of yesterday).

Noonan, so far, is my nominee for the prize. She notes the great political appeal of Medicare as it is currently constituted:

“Here's the great thing about Medicare: You turn 65 and it's there. They give you a card and the nurse takes it. Supporters of Mr. Ryan's Medicare plan must talk very specifically about how this would all work, and why it would make your life better, not worse.”

And here is the nugget buried in her column:

“They also have to make two things clearer. One is that if nothing is done to change Medicare, the system will collapse. You'll give the card to the nurse and she'll laugh: ‘We don't take that anymore.’ This already happens in doctors offices. Without reform it will happen more often.”

“Sorry, we do not take that card anymore” should be the Republican rallying cry.

I can imagine the 20-second commercial: A timid elderly couple walks into the doctor’s office to be told by a frosty receptionist: “Oh, you want to see the doctor. We haven’t taken that card for years. I’d tell you to go at the cash clinic at Walmart but they have been on strike every since they unionized.”

In confusion and tears, the elderly couple stumbles out of the office.

Friday, May 27, 2011

An Amazing Statistic: America’s License Raj

We righteously lecture India, Russia, and other wayward countries on their restrictive licenses. We complain to Russian oil authorities that they have too many “license windows” for approving oil projects. The late Angus Maddison identified “License Raj” as the main reason for India’s economic backwardness. International economic organizations compile statistics that count how many days it takes to get licenses to establish a new business.

Lo and behold, I now learn that the United States is among the worst offenders. America’s license Raj is more hidden because most licensing takes place at the state level. In 1950, five percent of American workers required a license in their work. Now between thirty and thirty-eight percent do. In the U.K. only 13 percent of workers require licenses.

Licenses usually claim to protect public health and safety. Some do such as the licensing of doctors, dentists, and tattoo artists. Licenses for other professions, such as florists, handymen, tour guides, second-hand book sellers, and interior designers, do not. Apparently cat groomers and dog walkers will soon require licenses in many states.

Most licenses are the result of interest group pressure on state legislatures. They are quiet about the real reason for the license – to restrict supply and raise incomes. Yet interest groups couch the need for a license, citing health and safety, no matter how ridiculous. Florida interior designers argue that unlicensed designers might use fabrics that spread disease and cause 88,000 deaths per year. The Louisiana Board of Embalmers and Funeral Directors got a cease and desist order against a maker of simple wooden coffins on the grounds that they might leak.

Empirical studies show that licenses raise the incomes of licensees by about fifteen percent, which is about the same effect that unions have on wages. Licenses protect the licensee from competition by making it difficult to enter the profession. Barbers, hair stylists, and manicurists must study hundreds of hours at their own expenses and pass stiff exams to enter the profession.

Why should be worry about licenses? They raise prices to the consumer. They reduce labor mobility and increase unemployment. Licensed workers cannot move from a state where they have no job to a state with jobs because they must requalify for the license.

We tend to focus on the costs of regulation and licensing at the federal level. State licensing falls below our radar screen. Licensing reduces the number of jobs during a period when we desperately need job growth.

It is more difficult to challenge hundreds of thousands of restrictive licensing standards in the 50 states than national regulation. In each state, vested interests can work behind the scenes to keep the license protection alive.

Source: “Rules for Fools,” The Economist, May 14, 2011.

The 2012 Election Hinges on Whether Voters Believe in the Free Lunch (The Parable of the Good King and His Wise Men)

Most of us understand that free time-share vacations and free dinners with investment advisers mean harassment, telephone calls at night, and worse. We know: “There is no such thing as a free lunch.” Yet, the “Free Lunch” scam prospers because benefits are clear, the costs are hidden.

The 2012 election may depend on whether voters understand that free lunches are not free. The Democrats version of Medicare “guarantees essential medical services” to senior citizens. The government, not they, pays out of payroll taxes. Medical care, they claim, is a free lunch. The benefits are alluring; the costs are hidden. Like the “free” time-share vacation, senior citizens will understand only when it is too late.

Let me offer a parable to illustrate the Medicare free lunch:

Once upon a time in a faraway kingdom, there lived a good king. Three quarters of his people are young, work, and pay taxes. One quarter is old and no longer work. The kingdom has two royal physicians. The good king decrees that the elderly have a “right” to medical care. He orders his two royal physicians to treat them for free and pays them from the taxes on the young.

The king’s healthy young subjects see the royal physicians once a year. They pay out of their own pocket. The older subjects come ten times a year. They come more partly because they have more illnesses, but also because someone else pays their bill. The average number of visits per year of young and old combined is 3.5.

Time passes in the kingdom. There are fewer babies, and the old people live longer. Now half are young, and half old. The two groups now visit the royal physicians an average of 5.5 times per year – an almost 60 percent increase. Worse, with only half his subjects working, the king collects less in taxes.

The good king tells his royal physicians that they must work 60 percent more, but he must pay them less. After all, he has guaranteed his older subjects free medical care. The royal physicians do not take this news well. Their wives are complaining. They are overworked and poorer. They leave refusing to work more for less.

The agitated good king seeks advice from his Committee of Wise Men. Their answer: “It is simple. We’ll decide who, among the old, deserves treatment. We’ll get the average number of visits back to where it was in the old days.” The king approves, and the Wise Men use wise rules to decide who can see the royal physicians.

Now the elderly come to the good king to complain: The wise men are denying them their rights to medical care. So many good people have died because the wise men did not permit them to see the royal physicians.

The good king weeps. He calls in his royal physicians and orders them to work more for less. Instead of complaining, they should raise their productivity. They are already well paid. They can afford to work for less.

The royal physicians return to work full of resentment against the good king. They unlock their door only for young patients. They open the door for old patients only if they bring live chickens or silver coins. They post signs welcoming foreign visitors passing through the land.

The good king is outraged when he sees lines of old people standing at the locked doors of the royal physicians. He sends the royal constable to threaten arrest unless they follow his orders.

In the night, the frightened physicians pack their bags and leave the kingdom forever.

The king convenes a meeting with his wise men. Surely we can train new physicians quickly, perhaps even five royal physicians? They answer: No one wants to be a royal physician. They can earn more as a butcher or a baker.

And everyone lives unhappily ever after.

Tuesday, May 24, 2011

A Kremlin Rift?

President Medvedev chose the futuristic Skolkovo Business School campus outside of Moscow for his first-ever televised question-and-answer session last Wednesday. He was greeted by applause from the eight hundred journalists in attendance. They were hoping for the announcement. It did not come, but Medvedev did not pass up the opportunity to indirectly advance the case that he should be reelected president in 2012. Putin’s camp was less subtle. Over the weekend, “sources close to Putin” disclosed that he intended to run in the 2012 presidential election.

Over the past half year, Medvedev and Prime Minister Putin have “announced” competing platforms for the presidential “campaign.” It’s a bit different from an American political campaign. Russia’s 2012 presidential election will be resolved behind closed doors in a byzantine process that no outsider can understand. There will emerge one candidate, who will run against token opposition, and who will be Russia’s president for the next four years.

For the full article, see National Review Online http://www.nationalreview.com/author/267808/latest

Surprise, Surprise, Outrage, Outrage: Russian Supreme Court Upholds Khodorkovsky Conviction

The Russian Supreme Court today upheld former oil tycoon, Mikhail Khodorkovsky’s conviction to a second prison term. Khodorkovsky, now Russia’s most prominent political prisoner, will return to his Siberian jail cell. He will stay there at least until 2017, well into what is likely Putin’s fourth term as president. His court case out of the way, he will conveniently disappear from view. Khodorkovsky went to jail as a young man. He will emerge (if ever) an old man.

The Russian Supreme Court ignored that the Moscow court decision under appeal was dictated by the Kremlin. Two brave court insiders publicly testified to this fact. It also ignored that the charges against him had no credibility. In fact, they bordered on the ridiculous (Khodorkovsky was charged with stealing the entire output of his Yukos oil company).

Khodorkovsky committed two sins: He used his vast wealth to support democratic political parties, and he, unlike the other oligarchs who retained their wealth and empires, sought to turn his Yukos Company into a transparent Western-style company.

The Supreme Court ruling opens further distance between Putin and Russian President Medvedev. In Davos, Medvedev’s economic advisor acknowledged that the Khodorkovsky case will reduce the flow of needed foreign investment into Russia. Medvedev is also on record that Khodorkovsky’s release would pose no public danger.

Let us hope the Khodorkovsky case will not be forgotten outside of Russia. The Council of Europe, Freedom House, and Amnesty International have concluded that Khodorkovsky was charged and imprisoned in a process that did not follow the rule of law and was politically motivated.

The U.S. Senate’s Magnitsky Rule of Law Bill proposes to deny visas to Russian officials involved in the denial of human rights to Russian citizens. The bill was inspired by journalist Sergei Magnitsky, who died in a Russian prison after being denied medical treatment. The bill now includes the Khodorkovsky case as evoking “serious concerns about the right to a fair trial and the independence of the judiciary in the Russian Federation. The lack of credible charges, intimidation of witnesses, violations of due process and procedural norms, falsification or withholding of documents, denial of attorney-client privilege, and illegal detention in the Yukos case are highly troubling.”

Any company considering investing in Russia should think twice. Those companies who invested in good faith in Yukos lost everything. They were politically expropriated. Major international companies, such as Shell and BP, have suffered arbitrary treatment at the hands of Russian officials and have no recourse. Companies considering entering the Russian market are assured that such things will not happen to them. They should realize that anyone doing business in Russia could find themselves in Khodorkovsky’s shoes.

Let's face it. Khodorkovsky's only chance for release would be in the form of an act of bravery. Medvedev, as Russian President, has the power to pardon him. I doubt that Medvedev has the guts to do so.

Sunday, May 22, 2011

Chilling Words: Obama’s Regulators Are Now Punishing Thought Crime

“The law allows companies to shift production for economic reasons, but not to retaliate for past strikes or other worker actions. For us, it’s a motive analysis.”

Lafe Solomon, Acting General Counsel, NLRB

If federal regulators base their actions on “motives,” they have assumed unlimited power. Under this regulatory philosophy, regulatory decisions are based on what is presumed going on inside the heads of businesses as they make their decisions.

It seems that NLRB regulators have determined that Boeing’s “motive” in locating a new plant in South Carolina violated the National Labor Relations Act. In coming to this conclusion, the NLRB had thousands of pages of internal Boeing documents relating to its plant location decisions. In these thousands of pages, a large number of reasons were given for Boeing’s decision. Among them were considerations of supply certainty, labor costs, and tens or hundreds of other factors.

Somehow the NLRB was able to read the minds of Boeing executives and brush aside all other factors as distractions. Boeing’s true “motive” was to retaliate illegally against unions for past strikes. No other motive counted. Boeing had committed a thought crime against its Washington state union.

The Soviet 1936 Constitution also made thought crimes a criminal offense. Any action that “lessened the economic achievements of the Soviet Union” was a potential capital offense. Accordingly, every plane crash, railway accident, or factory breakdown had to be investigated to determine the “motives” of those involved. There was always the fact that something had gone wrong, and to get to the real “truth” investigators had to look into souls of those involved. Perhaps they had the wrong background, had relatives abroad, or circulated among the wrong people. Under Stalin, tens of thousands of innocent managers and engineers were executed for thought crimes. It was safer for prosecutors to conclude that the motives of these managers and engineers were criminal than to miss a few real counter-revolutionaries.

In the NLRB versus Boeing, there is also one fact: Boeing built its new plant in South Carolina. If the NLRB can claim knowledge of Boeing’s “motives,” it is no longer constrained in any way. It can rule that any business decision relating to organized labor was motivated by a thought crime.

Let Labor Compete: Why Does It Need NLRB Protection?

The National Labor Relations Board May 10 “notice” requires reviews of cases involving businesses that move production to curb labor costs. The May 10 notice was overshadowed by the NLRB’s ruling against Boeing’s new plant in South Carolina, but it could have a more substantial effect. While businesses can locate plants on the basis of other costs, they must think twice about locating production to take advantage of labor cost savings. It is an attempt to intimidate companies that are considering moving operations to right-to-work states. The May 10 Notice will be challenged in Congress and in the courts when it gains the attention it deserves.

The “New Theory of Unions” argued in the 1980s that union labor is more efficient than non-union labor. Its higher productivity offsets higher union wages and does not raise labor costs to employers. The upshot of this new theory was that unions should be able to compete in the marketplace against non-union labor. It would not need sympathetic regulatory agencies like the NLRB to impose higher union labor costs on employers by decree.

This New Theory of Unions challenged the traditional view. According to standard textbook accounts, unions gained higher wages through restricting supply and by collective bargaining. Craft unions used licensing, barriers to entry to the profession, and the other restrictions to drive wages above competitive levels. Industrial unions used the threat of strike to impose higher wages on reluctant employers. The traditional view of unions did not allow for unions to offer employers a “bargain” in the form of a more productive work force.

The New Theory of Unions argued that unions make their members more productive than they would have been without unions. With unions, employees gain a “voice” other than the “exit voice” – that is the sound of the employee leaving. Union seniority rules raise the loyalty of employees. Union members are more willing to train junior employees. They become more interested in the long-term health of the company. The proponents of the New Theory of Unions cited empirical studies of particular industries and professions finding that union workers indeed had higher labor productivity than non-union labor. In a number of cases, the higher productivity offset the higher union wages.

The continued decline in private-sector union membership (now below 7 percent) suggests that unions are not delivering on the promises of the New Theory of Unions. If union labor could out-compete non-union labor through higher productivity, employers would not be tempted to change to non-union labor. Unions would not require NLRB decrees to force private employers to hire their members.

The best union protection would be to deliver higher productivity workers. If they cannot, private-sector unions will continue their decline. The only role left for unions will be in the public sector where wages and employment are determined by politics, not economics.


The fact that unions need activist protection from agencies like the NLRB tells us that unions do not offer productivity advantages to offset higher union wages. If the New Theory of Unions holds any water, unions might be advised to turn their attention from politics to making their members more efficient and productive. It would be interesting to look at union budgets to see how much they spend on improving and raising the skills and motivations of their members.

Sunday, May 15, 2011

Alibaba and the Chinese Thieves (Yahoo in China): Serious Questions About China’s Growth Prospects

U.S. business may know something about China they are not telling us. Despite booming Chinese growth, the U.S. share of foreign direct investment (FDI) in China has fallen from 11 to 3 percent since 2000. In absolute terms, U.S. FDI has fallen from $5 billion to its current $3 billion. If China is such a great place to do business, why are U.S. companies opting out?

More than 60 percent of China’s FDI now comes from Hong Kong and Taiwan. This is a form of “internal” FDI by insiders, who recycle money back into China or from outside-insiders who know the ins-and-outs of doing business in China. Russian FDI is similar: Most “foreign” investment comes from tiny Cyprus.

The decision of U.S. businesses to opt out of China, relatively speaking, is no surprise. China’s legal and economic institutions are those of a sub-Saharan African nation. China ranks directly below Guinea and Cameroon and just above Haiti in the world economic freedom index.

U.S. firms are not anxious to publicize their failures in China, but Yahoo had no choice. In its regulatory filing, Yahoo disclosed that Alibaba Group, 43 percent owned by Yahoo but under Chinese management, transferred Alibaba’s on-line payment service, Alipay, to a company headed by its Chinese CEO. Yahoo learned of the transfer only after it was completed and without approval of Alibaba’s board. Alibaba’s excuse: It had to transfer ownership because of regulatory rules.

In the wake of this disclosure, Yahoo’s share price fell 11 percent.

The Chinese CEO of Alibaba, Jack Ma, is a major businessman and celebrity in China. Presumably he is well connected. In a legal battle in China between him and Yahoo, Ma would be the winner.

Yahoo’s travails illustrate why China has such dismal institutional ratings. It is a good place to do business only as long as you stay on the right side of influential people. If they decide to take you to the cleaners, they can.

A few months back, a Taiwanese restaurant tycoon told me of his experience in Shanghai. After expressing an interest in opening a restaurant, city officials drove him around and asked him to identify some good locations already occupied by restaurants. He picked out a couple and was told that they could have the current owner out in a few weeks.

Another person with an intimate knowledge of Chinese business told me that experienced foreign firms no longer invest in China. Rather they let medium sized Chinese firms compete for contracts to produce specified goods without the bidders knowing their identity. The winning bidder delivers the goods, gets paid, and that is it.

Yahoo’s misadventure raises a serious question: Surely the highly-disciplined Chinese state and party know such arbitrary actions drive away foreign investment. They are bad for China. Would they not intervene on the side of Yahoo? The fact that they will not tells us that China is actually run by interest groups that look after themselves first. Only those who really know how to play the Chinese game will stay. But they are the ones with the least to offer China.

China’s rapid growth is explained by the vast transfer of technology from advanced countries like the United States and Germany. This transfer has taken place despite minimal protection of intellectual property rights. With China’s tightening labor market and wage inflation, China’s growth will increasingly depend on continued transfers of technology. If there are more Yahoos, this won’t take place.

Alibaba’s thieves are actually stealing from China, and there is no one to tell them to stop.

Saturday, May 14, 2011

A Banner Day for Media Bias: The NYT’s Friday the 13th On Global Warming

The New York Times outdid itself in media bias on Friday the 13th. It reported that “the nation’s scientific establishment” as represented by the National Research Council has reaffirmed that “global warming is real” and that “its effects are already becoming serious.” The NYT warns that we must act now because “adverse changes in the climate system…may be impossible to undo.”

The NYT regrets that “the answer comes at a time when efforts to adopt a climate-change policy have stalled in Washington, with many of the Republicans who control the House expressing open skepticism about the science of climate change. Other legislators, including some Democrats, worry that any new law would translate into higher energy prices and hurt the economy.”

For those few and uninformed skeptics, the NYT assures us that “Not only is the science behind the climate-change forecast solid, but the risks to future generations from further inaction are profound.” Already, “the sea level is rising in many American towns” and the average United States air temperature has increased by two degrees in the last 50 years.

The only skeptic cited is Texas Representative Joe Barton, who “swiftly dismissed the council’s findings.” But pay no attention to Barton. We are informed he is “leading the charge against further regulating carbon emissions,” presumably a stooge for Texas’s “Big Oil.” (A photo of a scowling Barton is attached to the article).

According to the NYT, the committee itself “is an unusual combination of climate scientists, businessmen and politicians,” and even includes “non scientist, Jim Geringer, a conservative Republican.” Such a committee would clearly bend over backwards to be fair.

The report ends on an unsurprising note. America’s greatest scientists recommend that the federal government spend a gazillion dollars on scientific and engineering research before it is too late.

Well, anyone can read the summary of the Research Council’s report on line, which I did. Here is what I found in a few minutes of research:

1) On the Committee:
Of the first eight names, only one appears to be a climate scientist. The others are engineers, lawyers, and public policy types. There are other names, but I did not want to waste my time. I presume the pattern holds. No top climate change skeptic, like MIT’s Richard Lindzen, is included. This report was not written by climate scientists but by public policy wonks.

2) On the certainty of the science:
The report tells us, contrary to the NYT account, that the science is far from certain. I quote: “How will the climate system respond to increased greenhouse gases? The exact value of ‘climate sensitivity’—that is, how much temperature rise will occur for a given increase in atmospheric greenhouse gas concentration—is uncertain due to incomplete understanding of some elements of the earth’s climate system.” Note the wobbly use of language, such as “exact” or “some elements,” to signal that the science is “almost certain.” I can imagine the illustrious committee members searching for appropriate qualifiers that would not let the cat out of the bag.

3) If the science is uncertain, why act now?
The report, which is not a study of climate science but of risk management, argues that the potential environmental damage from temperature increases (which the committee admits we really do not understand) is so large that we cannot afford to wait until we understand the science. (With this argument, we should wipe North Korea and Iran off the map now because of the future risk of their future nuclear weapons).

4) How about the NYT’s claim of “rising sea levels in many American towns?”
Not surprisingly, I could not find this is in the report (perhaps it is hidden some where). There is only a general reference to risks to coastal areas from future rises in sea levels. The NYT’s claim is puzzling. How can sea levels be higher in one coastal town and lower in another nearby town? I’d like the NYT writer (Leslie Kaufman) to explain that one. (I do recall an earlier NYT report with “Rising Sea Levels and Global Warming” in the headline, but it turned out to be subsidence. The earth was inconveniently sinking not the sea level rising).

The NYT is again trying to tell us that the science is certain and that anyone who disagrees is a stooge or an idiot. If global warming alarmism is so scientifically proven, why is it that respected top scientists at institutions such as M.I.T., Princeton, Harvard, Pennsylvania, Virginia and Wisconsin say there is no scientific evidence to support it? Has the Times ever tried to answer this question? Global warming alarmism should not be taken seriously until and unless the question is satisfactorily answered.

Why should a layman give global warming alarmism any credence if these scientists do not?

Friday, May 13, 2011

The NYT’s Conservative Columnist: Future Congresses To Make Future Spending Cuts?

“Conservative” NYT columnist, David Brooks, has suddenly turned optimist. He opines that the upcoming vote on the debt ceiling will force Congress into a real compromise on spending cuts. He assures us: “Something good is about to happen.” The Republicans have leverage because “the debt-ceiling limit has to pass.” This is their chance to really stick it to the free spending Democrats.

Wait a minute. In reading further, I am less optimistic: “Congress won’t be able to produce specific program cuts and policy reform in the next few weeks, but it can come up with structural rules that will obligate future Congresses to make cuts and reforms for years ahead.”

It is all clear now. We won’t make significant cuts now but future Congresses will. As Brooks notes: “The important argument now is over what kind of restrictions to impose on future Congresses.”

Last I heard, future Congresses tax and spend as they see fit in the future. Our history is littered with the carcasses of “pay as you go” agreements and promises to spend less “next year.” Republicans, who have fallen for this line, deserve what they get. George H. W. Bush might have had a second term if he had not fallen for this, the oldest bait and switch.

Here is what Brooks wants: A bill that would cap federal spending at 20.6 percent of GDP, the recent historic average. If spending rose above that, automatic cuts would ensue. Well, let’s pass that one and see how long it is honored by future Congresses. The only thing that counts is what we do now, not what we say we will do later.

Brooks seems to have great faith in rules that bind future Congresses. He credits pay-as-you-go rules “for restraining spending and debt in the 1990s.” How long did they last? Was the remarkable spending restraint of the 1990s not the result of a strong Republican majority and a Democratic president who decided to make a strong move to the center?

Rules for future Congresses mean next to nothing. The only thing that counts is who wins the 2012 elections. If the Republicans gain a strong Congressional majority, the “rules” might be followed. If not, forget about the iron-clad rule from 2011.

My advice: If the Republicans have leverage now, they must use it to cut now.

As far as the Republicans are concerned, with David Brooks as a friend, who needs enemies?

The Power to Regulate Is the Power to Destroy: Three Political Appointees versus 547,461 Shareholders (NLRB vs. Boeing)

Corporation-haters want you to believe big corporations are run in the interests of greedy executives. This is wrong: U.S. corporations align the interests of executives with their bosses, the shareholders. If executives do not act in the interests of shareholders, they will be gone and rather quickly.

The National Labor Relations Board, comprised of three political appointees, has just ruled Boeing’s new $1 billion South Carolina plant illegal because it was chosen to “retaliate” against organized labor. Boeing claims it chose South Carolina, which happens to be a right to work state, for a large number of reasons. One was the need to assure steady production of its new 787 Dreamliner without the threat of strike.

Boeing’s management would not base such a major investment decision on the desire for “retaliation.” It decides on the basis of what serves the interests of its 547,461 shareholders.

Well, even if that is true, are not Boeing’s 547,461 shareholders greedy fat cats. Why should we feel sorry if their investment goes sour?

The top 20 shareholders of Boeing are all investment funds, like Vanguard, CREF, and T. Rowe Price. The largest of them owns 2.1 percent. The 20th largest, Fidelity Blue Chip, owns one quarter of one percent. These are not “fat cats” but investment and retirement funds managing the savings of ordinary people. Among its individual shareholders, there may be “rich” investors, but there are many more ordinary people just trying to get by. All of them are harmed by the NLRB, which does not take its interests into consideration.

John Marshall, Chief Justice from 1801-1835, famously declared “the power to tax is the power to destroy.” Marshall clearly understood the corollary: “The power to regulate is also the power to destroy.” Marshall’s court -- "as a mighty instrument for the protection of the rights of private property" -- consistently held the line against government regulation of private business.

The constitutional protection of private property broke in 1877 with a ruling that businesses “affected with the public interest” can be regulated by the state. Now thousands of federal and state regulators, such as the NLRB, routinely intervene in the affairs of private business, acting, as they claim “in the public interest.”

Is the NLRB ruling in the public interest? If it stands, Boeing will have to write off its $1 billion investment. It cannot meet its orders for the 787, which is already three years behind schedule. South Carolina workers who thought they had a Boeing job do not. The interests of its more than half million shareholders are damaged. Boeing, our premier manufacturing exporter, can lose its competitive battle with European Airbus Industrie. A wiser Boeing then builds its next plant in China, and pundits, who openly welcome the NLRB decision, bemoan the decline of U.S. manufacturing.

Boeing’s only recourse right now may be to throw money at Congress and the President. Maybe they can rein in their NLRB for the right price.

If the NLRB ruling is in the public interest, someone must benefit. The beneficiaries are clear: The couple of thousand union members and their leaders at Boeing’s Washington state plant. They have received their reward for political support of the administration. The country has lost.

Yes, the power to regulate is the power to destroy (and no one can do much about it).

Wednesday, May 11, 2011

Reading David Brooks and Missing William Safire

David Brooks’ “The Missing Fifth” (NYT, May 10) sent me to Google to confirm that Brooks is really the token conservative in the NYT’s stable of liberal columnists. Yes, the internet chatter says it is true.

I try to read Brooks’s columns, but I am hard pressed to find anything conservative in what he writes. Am I alone in this assessment?

Take Brooks’ “Missing Fifth.” In this column, he asks why America has lost its “energy” as reflected in the fact that only eighty percent of American men aged 25-54 work today versus 96 percent back in 1954. According to Brooks’ source (the OECD), the American “Missing Fifth” is the highest among the G-7 countries. I suspect this is because almost 3 percent of US males in this age group are in jail. Three percentage points of Brooks’ twenty percent have lost “energy” because they are sitting in jail. If so, this brings us down to the “Missing Seventeen Percent.”

Any conservative thinker, when confronted with the question of non-working adult males, would consider the incentives and human motivations underlying the “Missing Seventeen Percent.” Brooks mentions the increase in Americans on permanent disability, but he does not ask why. It is doubtful that we collectively became less healthy in the last three decades. Nor does he ask whether there are incentives to qualify for disability that were not present earlier.

Consideration of disabilities is a diversion, however. Unlike the Netherlands where at one time some ten percent of the work force was on permanent disability, our numbers are small.

Brooks does not ask whether the costs of “not working” have dropped. In 1954, unemployed men had a small percentage of their lost earnings replaced and only for a short time. Today, it is a much different story. Nor is he curious about other countries, such as Germany, where unemployment benefits have become an entitlement. With growing political pressure to extend unemployment benefits, we are only a few steps behind Germany (which is trying to correct its earlier mistake).

A glance at the latest BLS statistics shows a 9 percent unemployment rate for adult males and another three percent or more for “discouraged workers ” or workers marginally attached to the labor force. Thus, Brooks’ “Missing Fifth/Seventeen Percent” is explained mostly by unemployment and tenuous attachment to the labor force.

Brooks does not ask whether food stamps, AFDC, or more generous and extended unemployment benefits have anything to do with this. I do not know the answer, but these questions should be asked.

Instead, Brooks goes into a rambling discussion of human capital and the rise of services and other structural issues and commits the old Marxian fallacy about machines replacing men. At least Brooks concedes that Keynesian solutions are not the answer.

His proposed solution to the “Missing Fifth” is that we (meaning the government) must spend more on community colleges, wage subsidies, and extending unemployment benefits to potential entrepreneurs. Brooks’ knee-jerk reaction is: If there is a problem, the government must fix it. There is no curiosity about whether the government has caused the problem.

Brooks’ writings evoke in me nostalgia for William Safire. How about the venerable NYT hiring a real conservative columnist?

Tuesday, May 10, 2011

The NYT Reveals the Real Reason For a Flat Tax: If Congress Can Mug Big Oil, It Can Mug Anyone

When Robert Hall and Alvin Rabushka proposed the flat tax more than a quarter century ago, they justified it on the grounds of economic efficiency and tax simplification. We now understand the real reason we need a flat tax.

Under our current federal tax system, everyone pays different tax rates depending on their lobbying clout, political donations, or interest group. Differences in realized tax rates are brought about by exemptions, loopholes, and preferences, most justified as promoting the common good. If you are in good with Congress or the administration (like GE or Hollywood), your breaks are secure and you get new ones. If you cross them or are a convenient target (like “Big Oil”), they take them away. Many have learned the bitter lesson: “What one hand giveth, the other taketh away.”

Our tax code has become a blunt instrument for political mugging, shakedowns, and intimidation. It insures a steady flow of political contributions. Anyone can find themselves a target. But everyone should remember that tomorrow the shoe can be on the other foot.

Our federal tax code is not a rule of law, but a rule of the political jungle.

The New York Times, Monday May 9, provides a case in point: “Senate Democrats say they will move forward this week with a plan that would eliminate tax breaks for big oil companies…..As currently written, the bill would apply only to what Democrats have identified as the five largest and most profitable oil companies.”

The long-forgotten Article 1, Section 9 of the U.S. Constitution forbids Bill of Attainders – legislation that punishes specific persons or groups without judicial review. But the NYT declares that the proposed Democrat legislation is written specifically to deprive BP, Exxon Mobil, Shell, Chevron, and Conoco Phillips of tax advantages that other companies enjoy. These five oil companies are not named specifically, but the legislation is written to apply only to companies that meet their profile.

What would the framers of the Constitution think about this?

A concern expressed in the NYT article is that the recent drop in oil prices will reduce prices at the pump, and there will less support for this legislation. I guess this means that we should base tax regulations on good or bad fortune. If doctors are doing well, let’s take away their home mortgage deduction. Those who aren’t doing so well can keep it. If people are paying more for movie tickets, let’s take away subsidies for film producers. If unions succeed in obtaining higher fringe benefits, let’s tax them as regular income, but only for union members. This is where the logic leads us.

The flat tax has been adopted with the least difficulty in the new countries of Eastern Europe. They have been free to choose optimal institutions before powerful interest groups form. We have reached a point of no return. Too many politicians, companies, and individuals benefit from our crazy system. They have too much to lose if we move to a rational system.

Monday, May 9, 2011

The Pentagon Knows How to Spike the Football: Saddam’s Fleas and Osama’s Home Movies

The Pentagon’s image makers have again displayed their skills (or was it the CIA?).

What image comes to mind when we think of Saddam? It is not of a Saddam defiantly discharging a rifle or even a subdued Saddam stepping up to the gallows. Rather it is the bearded and disheveled Saddam being checked for fleas after his capture. Saddam’s image would never recover after that.

Osama understood publicity. He cultivated the image of the rugged warrior, rifle at his shoulder, marching on treacherous terrain, ready to kill the infidels. With the release of Osama’s home movies, his lasting image will be the hunched, elderly-looking Osama-couch-potato admiring himself on the TV screen.

The Pentagon has delivered the deepest cut of all: “Osama Watching Osama.”

Brilliant!

Sunday, May 8, 2011

If You Love or Hate My Blog, You’ll Love My “Politics, Murder and Love in Stalin’s Kremlin”

Let me engage in some crass advertising, probably in violation of all rules of blogging etiquette. Readers may have noted that I do not worry much about such things.

Although I write on economic and political issues, my real specialty is Russia. My “Politics, Murder, and Love in Stalin’s Kremlin: The Story of Nikolai Bukharin and Anna Larina” tells one of the great love stories and political intrigues of the 20th century. It uses letters, transcripts and eyewitness to tell of Bukharin and Larina’s losing battle to Stalin in their own words. Arthur Koestler’s Darkness at Noon is a fictionalized version of Bukharin’s trial. Mine is the true account.

“Politics, Murder and Love in Stalin’s Kremlin is a great buy and a short and easy read.

Buy it at Amazon where it has a five-star rating:

http://www.amazon.com/Politics-Murder-Love-Stalins-Kremlin/dp/0817910344

Holder’s New Bluster: The Fraud Task Force on Gas Prices

Strapped American families can rest easy. On Thursday April 21, Attorney General Eric Holder Attorney rode to our rescue with the following announcement:

“Rapidly rising gasoline prices are pinching the pockets of consumers across the country. We will be vigilant in monitoring the oil and gas markets for any wrongdoing so that consumers can be confident they are not paying higher prices as a result of illegal activity. If illegal conduct is responsible for increasing gas prices, state and federal authorities should take swift action.”

Holder’s new Financial Fraud Enforcement Task Force Working Group (acronym FFETFWG) will protect us from the sinister forces that raise gas prices by “monitoring oil and gas markets for potential violations of criminal or civil laws to safeguard against unlawful consumer harm.”

I guess Uncle Sam is in the business of deciding what is a “just” price of gas!

Holder’s announcement sent me to Google to download the last 120 months of data on U.S. crude oil and gas prices. As a patriot, I should assist him in this worthy investigation of gas price gouging.

Here is what I learned from my 30-minute investigation:

1) Gas prices are determined about 72 percent by oil prices. On average, for every plus or minus dollar change in crude, the gas price changes plus or minus 2.5 cents.

2) Factors other than crude prices, such as weather, economic conditions, consumer hoarding, expectations, and random factors explain the other 28 percent. How in the world will Holder’s agents sort out the fraud they have been charged to find from these other factors? I do not envy them in their task.

3) In some cases, a dollar increase in crude raises the gas price by more than 2.5 cents, and a dollar drop in crude lowers the gas price by less than 2.5 cents. (Aha: We seem to have evidence of chicanery!) But in almost as many cases, the rascally oil giants raise the gas price by less than 2.5 cents and lower the gas price by more than 2.5 cents. (I guess they do this to throw the Holder Fraud detectives off their scent).

My main finding is that the Holder fraud-seekers should expand their portfolio to investigate “cases of the unlawful and artificial holding down of retail gas prices.”

If “Big Oil” does not always pass crude price increases fully on to the gas consumer, Holder’s agents should track down cases of “unlawful” holding down of gas prices for the purpose of discouraging alternative green fuels. They could perhaps find some Saudi Sheikhs behind this sinister plot. We might as well throw this into the mix as well.

Attorney Generals should do what Attorney Generals are supposed to do. There is no point to his Fraud Task Force other than to intimidate, to score political points, and to shakedown campaign contributions.

Saturday, May 7, 2011

I was Right All Along: BP ¼, Russia ¾

In my March 4 posting, I wrote that BP was about to be rolled by Russia again. On Friday, the debacle took place.

BP’s share swap deal with Russia’s national oil company Rosneft was supposed to give it a half interest in the development of rich Arctic offshore reserves. BP’s billionaire partners in its ongoing TNK-BP venture objected. BP had signed an exclusive agreement with them, and an arbitration court agreed. To go along, the billionaire partners demanded half of BP’s half. BP vetoed that offer at a TNK-BP board meeting in early March. BP had expected Putin to take care of the billionaires’ objections. He did not. Putting Khodorkovsky in jail was one thing, but the TNK billionaires are his friends.

BP now understands that what they were offered in early March is the best deal they will get.

My March 4 prediction was that BP would end up with a quarter of the deal (instead of a half) and Russia (Putin and the billionaires) would get the three quarters they wanted.

Low and behold, BP announced on Friday, May 6, that it would hand the deal over to TNK-BP (thereby reducing its share to ¼) with the hope that its Russian partner, Rossneft, would agree. Rossneft greeted BP’s offering with grumbling. Maybe BP will get ¼, but they will have to make further concessions to get even that.

This outcome will not endear Robert Dudley to his shareholders, who accuse him rightly of misreading Russian politics. It is also another cautionary tale about doing business in Russia.

Friday, May 6, 2011

Tax Preferences and Idle Chatter: Should We Tax “Big Oil” or “Big Hollywood”? Why Everyone Gets Breaks Except the People

"When oil companies are making huge profits and you're struggling at the pump, and we're scouring the federal budget for spending we can afford to do without, these tax giveaways aren't right." They aren't smart. And we need to end them. (Barack Obama, Weekly Radio Address)

Let me begin with some background information:

The United States Internal Revenue Code is 44,000 pages, 5.5 million words, and has 721 different forms. A nightmare of unmatched complexity, it conceals, in undecipherable language, tens of thousands of favors, preferences, and influence buying, bordering on corruption.

Many provisions favor specific individuals, organizations, or companies. They are hidden deep without any attempt to justify them (Example: breaks for upgrading a motor sport race track). Others are justified as promoting green energy, reducing unemployment, encouraging home ownership, supporting research and development, or any other social engineering goal that sounds good.

Our complicated tax code breeds approximately 40,000 registered lobbyists at the federal and state level. Washington lobbyists spend $4 billion per year, much of it devoted to obtaining favorable tax treatment. Lobbyists either aim for specific tax breaks for themselves or form into interest groups, such as the National Association of Realtors, Chamber of Commerce, the NCAA, or the Service Employees International Union, to push for tax breaks.

House and Senate candidates combined receive one billion dollars in campaign contributions. The average costs of defending a House or Senate seat are $1.5 and $10 million, respectively. A seat on the House Ways and Means Committee costs more. After all, this committee drafts tax legislation.

All talk of tax reform is idle chatter. Why should we change a system from which everyone except John Q. Public benefits? The rules of the game are clear to the players: Individuals, businesses, universities, sports associations, labor unions, and any other organization that can hire good lobbyists get their tax breaks. Members of Congress and the President receive generous campaign contributions. Incumbents get more than challengers. The public has no way of knowing or understanding the horse trading going on. Everyone is happy.

The gains are huge: Tax breaks for specific businesses, organizations, and businesses are estimated to save $100 billion in tax obligations. Lobbying costs and campaign contributions are no more than $5 billion. What person or business can pass up a 2000 percent return? Politicians, who can hand out such windfalls (for windmills), are also happy. They get more than enough in campaign contributions. Of course, there is no quid pro quo.

Now let’s turn to tax breaks for “Big Oil” as the current political discussion is being framed. These breaks for greedy capitalists with soaring profits, we are told, deprive our depleted treasury of $5 billion. Isn’t it time they pay their fair share? This is a rare case where the Democrat Party is itching to put “Big Oil” tax breaks to a vote. Any Senator who votes in favor of “Big Oil” will be exposed as a corrupt stooge.

Such posturing is the equivalent of the bribe taker accusing the bribe giver of giving him a bribe!

If we dig a little deeper into the tax code, we learn that “Big Oil” tax breaks apply, in most cases, to other industries, not just to “Big Oil” as we are led to think. These other beneficiaries are not under attack. I guess they are either less successful or less greedy.

For example:

1) Depletion allowances apply generally to industries with finite supplies of natural resources above and below ground. They even apply to timber, which I thought was a renewable resource.

2) Intangible drilling costs allow oil companies to write off in one year costs associated with drilling, such as building roads and transporting supplies. Many other companies and industries have similar provisions (See Hollywood below).

3) The sheltering of taxes on profits earned abroad applies to all companies with international operations, not just to “Big Oil.” Microsoft may save as much from this provision as “Big Oil,” but Microsoft is not a target at this moment. Maybe later.

After reading Sec. 181 of the IRS code on “Treatment of Certain Qualified Film and Television Productions,” I became more concerned about “Big Hollywood” than about “Big Oil.” It turns out the film makers can write off the entire costs of film or television productions up to $15 million. In a deft touch of social engineering, I further learn that film makers can write off more if the costs are incurred in a low-income community (under section 4-D) or an isolated area of distress (designated by the Delta Regional Authority under section 20009aa-1 of Title 7). The latter must be a pay off to New Orleans. I can also imagine an IRS agent tracking film crews through treacherous slums to make sure they are spending their money in the hood.

Our poor politicians must constantly make such tough choices: Should we cancel the tax privileges of “Big Oil” or of “Big Hollywood”? Which will sell better to the public, who have little idea of what is going on. Right now “Big Oil” is a better target.

Let us see which politicians have a backbone. I imagine few.

Our tax code would be a joke if this were not such serious business. We berate less civilized countries for their lack of a rule of law. We also lack a rule of law with respect to our own tax system, if politicians can arbitrarily single out one industry or one company as a political scapegoat. In such a situation, who knows who will be next.

These problems would go away with a flat tax, but we will never have a flat tax in the United States. Politicians would have to give up much of their power over our lives.

Originally published at WorldNetDaily May 6, 2011 http://www.wnd.com/index.php?fa=PAGE.view&pageId=295377

Wednesday, May 4, 2011

Dissecting Chinese Growth: How Long Will It Continue?

Academic specialists know a great deal, but they are not good at sharing their results with general readers. What we know about Chinese growth is a case in point.

There is practically no question more important than the future of Chinese growth. If it continues unabated for another decade, its GDP would be fifty percent larger than the U.S., and its per capita GDP would be a third. If growth continued two decades, its GDP would be two and a half times ours, and its per capita GDP would be half. China would be a dominant super power, its people affluent, and an economic powerhouse. As some have argued, affluence may bring with it democracy.

Other countries – Japan, the USSR, Germany – had long episodes of fast growth that came to an end. They were all high savers, but not to the extremes of China today. We all know that China’s growth spurt must eventually end, but it is vitally important to know when.

We can apply growth accounting to explain Chinese growth. (I’ll try to make it simple but the results are important).

Growth accounting divides growth into three sources:

1) The growth of capital and labor,
2) Technological progress, which allows us to produce more from the same inputs, and
3) Reallocation of inputs from less to more productive activities.

Since 1978, China’s output and capital grew at exceptional rates ((9% and 12%, respectively), labor at a more normal (but fast) 2%. According to the growth-accounting formula, some two thirds of Chinese growth is due to fast labor and capital growth. The remaining one third is technological progress.

Japan (1953-1985) is the closest parallel to China. Japan’s output and capital grew 7% and 9%, respectively, and labor at 1%. Less than half of Japan’s growth was from labor and capital; more than half was from technological progress.

Germany, in the early postwar years grew at 7%, capital at 6% and more than 60% of its growth was from technological progress.

China is underperforming Japan and Germany in percentage terms in marshalling new technologies for growth, but its performance is nonetheless impressive.

Japan’s and Germany’s huge productivity growth in the early postwar period was due to the vast technology backlog that had arisen during the war. China also benefits from a backlog, not due to war but to its earlier isolation. Like Japan and Germany, its growth will drop as the backlog is worked off. China was relatively more backward than Germany or Japan when each began their move; it may take longer for China to work off the backlog.

What do such figures tell us about the future, especially in light of the newly released census results?

First, China’s labor force growth has stopped for all practical purposes. This factor should reduce China’s growth by one percentage point, still leaving enough room for continued rapid growth.

Second, urban and rural populations have reached parity and labor migration appears to have peaked. With about one fifth of Chinese productivity growth due to labor reallocation, we can knock off another 2 percent, more or less, from Chinese growth.

Third, improvements in educational achievements have been striking, but they may not be enough to offset the effects of aging in an assembly-line economy such as China.

Fourth, with the destruction of the extended family by the one-child policy, the government will increasingly have to care of the elderly. When this happens, China will suffer the growth declines characteristic of transfer economies.

Fifth, with the “easy growth” of labor expansion and migration behind it, China’s growth will depend increasingly on technology. Technology advances depend on continued inflows of foreign direct investment. If the West decides to switch its FDI to other (lower wage) countries, China will lose it major source of growth.

China is more dependent on us than many think.

Monday, May 2, 2011

Notice: Posting Comments

Dear Readers of my blog:

I have learned that it has been very difficult to post comments on my blog. This has been corrected. Please post any comments you wish.