Month: June 2014

The Rule of Law

The rule of law is an essential foundation of modern market economies. It increases the prospect and expectation that our individual efforts will be rewarded on the basis of merit (i.e., the success with which we satisfy the public’s wants at prices the public is willing to pay) rather than on the basis of favoritism (i.e., who we know). It introduces an element of certainty (rules of the game) in an otherwise uncertain world upon which to build our entrepreneurial efforts. It is fundamental to our notion of fairness and a protector of our personal freedoms. It is a notion and practice that attracts wide admiration from ambitious and freedom-loving people around the world and to our great benefit brings many of them to our shores.

We have never enjoyed the rule of law fully or perfectly, but our belief in it and our relatively close adherence to it remains critical to our success and the world’s eroding respect. Departures from the rule of law in our dealings with each other at home or abroad, undermine the efficiency of our market economy and diminish our freedom, but more importantly undermine the respect of others and our moral authority, which is almost as important to our place in the world as our military strength. Thus any erosions of the rule of law should be exposed and resisted vigorously.

Two principles of the rule of law are that they must apply to everyone equally (ourselves as well as others) and that the rules can’t be changed retroactively.

Through the Foreign Account Tax Compliance Act (FATCA) and other tax and Anti Money Laundering measures the United States has been increasingly forcing its own laws on other countries and turning banks into policemen to the detriment of the banking system. According to The Economist magazine (6/28/14): “In a piece of extraterritoriality stunning even by Washington’s standards, the new law requires banks, funds and other financial institutions around the world to report assets held by American clients or face a ruinous 30% withholding tax. America is, in essence, using threats to outsource its financial policing. This is working: so far, more than 77,000 financial institutions have agreed to pass information to the IRS. The costs of complying with FATCA are likely to dwarf the extra revenue it raises” Many of the approximately 7 million Americans living abroad are finding it difficult to open bank accounts. “Many have been rejected by foreign providers of banking services, insurance and mortgages because, given the amount of paperwork needed to satisfy Uncle Sam, American clients are simply too much hassle. Foreign firms are less keen to hire Americans because of the extra tax complications. Not surprisingly, the number of Americans renouncing their citizenship has quadrupled since FATCA was hatched…. FATCA’s intrusiveness raises serious privacy issues…. The financial superpower looks ever more a regulatory bully, setting rules it ignores itself.” “America’s new law tax compliance heavy handed inequitable and hypocritical FATCAs-flaws?”

When contracts can’t be honored because a company is not earning enough money, bankruptcy laws provide for a well-defined process for transferring ownership from shareholders to creditors, which includes the priority of creditor claims against the inadequate assets of the failed company. Bank bondholders and other creditors price their credit in light of their place in the cue. It violates the principles of the rule of law to changes these priorities after the fact, but this is exactly what the Obama administration did when it put General Motors into bankruptcy by favoring the United Auto Workers pension fund: “A bedrock principle of bankruptcy law is that creditors with similar claims priority receive equal treatment. In the auto bankruptcies, however, the administration gave the unsecured claims of VEBA [union pension] much higher priority than those of other unsecured creditors, such as suppliers and unsecured bondholders.” “Obama’s UAW Bailout”

The government’s inconsistent and unpredictable treatment of distressed financial institutions in 2007-8, some were bailed out and some were allowed to fail, and the resulting uncertainty about future treatment, has surely contributed to the reluctance of banks to lend and of firms to invest thus slowing the pace of our economic recovery. “The Financial Crisis: Act II”

Sadly the examples of political hypocrisy with regard to the rules of the game are growing. Fortunately there are some signs of push back. The Supreme Court just unanimously overturned as illegal the President’s so called recess appointments of members to the National Labor Relations Board. “Supreme court strikes blow-Obama exceeded authority with recess appointments” The Speaker of the House of Representatives is suing “the Obama administration for its use of executive actions to change laws.” “Boehner confirms lawsuit against Obama executive actions”

The hypocrisy has been non-partisan. Though fully justified, the hypocrisy of the outcry over the IRS’s missing emails related to targeting conservative organizations was exposed fully in Sunday’s Washington Post. Government departments and agencies are required by law to maintain copies of official correspondence (all office emails included). This law has been regularly violated. Examples are “the Bush White House’s destruction of millions of e-mail messages [including those of John Yoo, the Department of Justice lawyer who justified torture] as well as the destruction of pre-investigative files by the Securities and Exchange Commission, including files pertaining to Bernie Madoff and Goldman Sachs.” How has this happened? “Congress has neither appropriated sufficient funds for agencies to implement electronic record-keeping nor added oversight and penalties to the Federal Records Act that would ensure compliance.” “The IRS isn’t the only agency with an e-mail-problem”

Hypocrisy is rendered impotent, hopefully, from exposure. Thus hopefully George Wills’ latest column on the Redskins will be widely read. “The government decided that redskins bothers you” It begins: “Amanda Blackhorse, a Navajo who successfully moved a federal agency to withdraw trademark protections from the Washington Redskins because it considers the team’s name derogatory, lives on a reservation where Navajos root for the Red Mesa High School Redskins.” And the hypocrisy gets worse from there.

For more examples see my “Big brother is getting bigger”

Minimum Wages

Saving people money so they can live better

Walmart helps people around the world save money and live better — anytime and anywhere — in retail stores, online and through their mobile devices. Each week, more than 245 million customers and members visit our nearly 11,000 stores under 71 banners in 27 countries and e-commerce websites in 10 countries. With fiscal year 2014 sales of approximately $473 billion, Walmart employs 2.2 million associates worldwide.

The above words are taken from the first page of Walmart’s website. Some have claimed that Walmart achieves this great feat by exploiting its workers. What might that mean?

A number of the gulf countries have workforces that are predominantly foreign. Qatar is the world’s wealthiest country on a per capital basis. In a recent article The Guardian reported that: “the Guardian visited a group of more than 60 workers from south Asian countries in a workers’ camp in the desert 25km west of Doha. They have had their passports taken from them, in breach of Qatar’s labour laws, which prevents them from leaving the country, and many of them have not been paid for several months. Most paid hundreds of pounds to agents in their home countries simply for the right to get a job in Qatar. Among them lives Ujjwal Thapa, 25, who left Nepal last autumn…. He has not been paid for several months despite working for 11 hours a day, six days a week, on building sites for an Indian contractor.

“Another worker was conned over the wage he would earn. His immigration document, stamped by the Nepalese government before his departure from Kathmandu, shows he had agreed to work as a foreman on a basic salary of £410 a month. But the contract signed with the employer on arrival was for £150 [US$ 240] a month to work as a carpenter “ “Qatar promises change-unpaid migrant workers”

Labor practices in Qatar are truly exploitive even though workers came voluntarily. Walmart has been accused of paying poverty level wages: “Walmart’s average sale Associate makes $8.81 per hour, according to IBISWorld, an independent market research group. This translates to annual pay of $15,576, based upon Walmart’s full-time status of 34 hours per week.” Should they pay more?

If the number of workers they now employ, about 2 million, were not willing to work for the wages offered, Walmart would have to pay more, but would almost certainly choose to get by with fewer workers. The demand curve for labor (wages on the vertical axis and number of workers on the horizontal axis) is downward slopping—lower wages brings larger demand. If a minimum wage law required them to increase their minimum wage to say $10.10 dollars an hour as proposed by President Obama, Walmart would hire fewer people. Some people working at the current minimum of $7.25 would enjoy an increase and some would become unemployed. Not only would the quality of Walmart service drop a bit with fewer employees helping customers but the customers would have to pay a bit more as higher wages were passed through to higher prices paid by customers. The Congressional Budget Office estimates raising the federal minimum wage to $10.10 an hour would eliminate 500,000 to 1,000,000 jobs. On the other hand, if customer demand for Walmart services increased and Walmart found it profitable increase its staff, it would have to pay more to attract them even without a minimum wage law.

It is obvious that if some one offers their services cheaply enough you will use more them than otherwise. If you could hire the neighbor kid for a dollar an hour to weed the garden and clean up the garage you might do so when you wouldn’t for $10.00 per hour. If he or she doesn’t want to do the work for a dollar an hour or has a better offer somewhere else, you might do it yourself. The supply curve for labor is upward sloping—fewer people are willing to work at lower wages. The intersection of the supply and demand for labor is the wage at which everyone wanting to work has a job.

But of course not every worker is the same as every other worker. You are happy (or at least willing) to pay the plumber $30 per hour because of his greater skills. In fact very few people earn the minimum wage or less and thus most workers will be unaffected by its prospective increase. Some jobs are exempt from the minimum wage to prevent closing off some services altogether (home companions for the elderly, newspaper delivery people, babysitters, disabled workers, etc.). Failing to win the economically obvious case for eliminating minimum wage laws all together, some have argued for sparing teenagers at least from its damaging effects. Young people just entering the job market from high school must learn skills on the job. They begin with very low productivity and employers are not willing to hire them at the same wage paid to more experienced (older) workers.In 2013, 16-19 year olds had an unemployment rate of more than 20 percent in the U.S. when total unemployment averaged 7.4%. “Minimum wage hike means more sub-minimum workers”

So why does President Obama (and George W Bush before him) want to raise the minimum wage? It seems to exploit the public’s ignorance of economics, with the feel good prospect that the government can make us richer by legislating it. The public is not really that dumb. It is frankly difficult for me to understand. Marc Linder argued for minimum wages, not because he believed that people could be made wealthier with magic wands, but because he believed that some (very low wage) jobs should not exist at all because they were beneath man’s dignity. He assumed (or advocated) that those unable to work as a result would be cared for by the state. At least I think that is what he is saying (he is a lawyer, not an economist). The abstract to his book: The Minimum Wage as Industrial Policy: A Forgotten Role, says: “In the welter of arguments being debated in connection with amending minimum wage legislation, the protagonists have lost sight of the original intent of such state intervention. That purpose was to help — exclusively — those workers whose wage formation process was subject to “market failure” by forcing their employers to internalize the minimum social costs of maintaining a worker, which they had succeeded in shifting onto the worker or society.

“Although the minimum wage was obviously also designed to create micro-welfare effects, its primary function lay in removing labor costs from competition, increasing productivity macro-economically by driving “parasitic” firms out of business and concentrating production in the most competent firms, and steering capital-labor relations.” “Marc Linder” I have no idea what that means, but the evidence is overwhelming that minimum wage laws harm the least advantaged if they set minimum wages high enough to make any difference.

Big Brother is getting bigger

Americans are forever debating the best boundary between the domain of government authority and our personal authority. It is an important discussion, which should continue forever. Many but not all of the issues discussed have to do with the balance between security (protecting us from attack, disease, hunger, etc.) and liberty (leaving us free to hold our own religious and political beliefs, and set our own personal goals, make our own decisions, etc.). Many of the considerations in these discussions revolve around the relative advantage and efficiency of the government, or entrepreneurs, or ourselves —which can do something better (set standards, build bridges, build rockets, develop and implement more efficient sources of energy, cure cancer, develop better telephones, put on a play, etc). An important class of considerations concerns the risks of granting the government powers that can potentially be abused. Edward Snowden has certainly made us think about some of these risks. I urge you to reread my earlier blog on this subject: https://wcoats.wordpress.com/2013/03/08/protecting-our-civil-liberties/.

Four recent examples of the government’s abuse of power suggest that it is sliding into increasingly dangerous habits. I optimistically count on the good sense of you all to push the pendulum in the other direction.

The Common Core. The effectiveness of any undertaking should be measured by its output – its result. In the critically important area of education, data on what we spend on education tells us nothing about whether the money was well spent. Expenditures measure inputs not outputs. In order to determine whether children have learned what we think they should have learned, we test them. Some tests are better than others, of course, but there is value (at the very least to parents trying to decide where to live) in being able to measure the quality of teaching in one area with that in another, and common, standard tests are one of the ways of doing so. Different localities may have different ideas about what they want their kids to learn, but otherwise it is helpful to be able to compare how much kids learn on average in different schools, communities, and states. It would also be of concern if the skills and knowledge one area aims for are very different from those sought in another area of the same country, as there are a core of values and shared knowledge necessary to preserving a peaceful, flourishing society within a nation, to preserving a shared sense of nationhood. For an immigrant nation like the United States, this is especially important.

These are the considerations that led Bill Gates to finance the development of the common core of knowledge expected for each grade level and the standard examinations to test their achievement. I strongly support the desirability and value of this goal. But what is the role and scope for experimentation in approaches to effectively teaching what we think our kids need to learn? Though it is a little disturbing to use our kids as guinea pigs, it is better to do so one school or school district at a time rather than experiment with the entire nation (which eliminates the possibility of comparisons between approaches). Many educational fads have proven to be misguided and have done great damage (look-see reading methods, the elimination of groups of different ability within one class, etc.) More over, it is essential that parents have a choice of what school and approach to send their kids to. Such School Choice and the variety of approaches offered allow limited experimentation while preserving social peace (each family is free to make their own choices) at the same time. Still, there is a minimum standard core of values and knowledge we rightly expect every child (our future citizens and voters) to have if we are to preserve the values on which the country was founded and has so successfully operated for over two hundred years.

These somewhat conflicting objectives cannot be resolved easily. There is a balance between individual choices and the minimum common values needed to live peacefully together. The search for the best balance is facilitated by keeping most education decisions local and close to the families for which it is most important. We are suffering from Ronald Reagan’s failure to deliver on his promise to abolish the Department of Education (a department of the federal government, which has no constitutional role in education). I think that a Common Core of educational achievements is desirable but that they must be voluntarily adopted by each school district and state. The process of discussion between districts and states will improve the standards that most choose to adopt.

If you think that the federal government leaves this choice to the states (where it has constitutionally been placed), think again. The federal government both penalizes and rewards (subsidizes) states in order to pressure them into adopting the standards promoted by the federal government. It should not.

Lois Lerner’s missing emails

It is not surprising that government officials and bureaucrats sometimes let their own political, religious, or cultural views influence their performance of their official duties. After all, they are human like the rest of us. Thus where we have given a responsibility to government, and collecting taxes is a proper and necessary function of government, it is important to impose strong checks and balances against the abuse of such powers. The misuse of the IRS to punish political enemies is a disturbing abuse of government power, reminiscent of Richard Nixon’s enemies list. But such things happen from time to time under every administration. What is much more disturbing is the failure of this administration to take all reasonable measures to punish those responsible. The missing IRS emails subpoenaed by Congress (like all government agencies, the IRS had contracted a company to back up its emails) are reminiscent of the missing 18 minutes of Nixon’s White House tapes. Ms. Lerner and others involved should be in jail.

The Redskin’s name

I am not a Native American and thus have no idea why some of them consider the name of our football team, “The Washington Redskins”, offensive. Negro’s (aka African-Americans) are regularly referred to as “blacks” without apparent offense. In my opinion, ethnic groups should be free to inform the rest of us what they prefer to be called, and out of respect I am happy to oblige (though it is a bit annoying when they change their preferred designation every decade or so). But this should be none of the government’s business. Social conventions of good manners should be communicated to the government, not the other way around. But our government seems to be imposing its views on such private matters more and more these days. Upon visiting ground zero (the monuments constructed where the Twin Towers used to stand in New York City) a few weeks ago, I was very offended by a sign with a details list of how to behave while in the area. I didn’t object to the substance of the behavior demanded, but to the presumption of the government of the need to do so.

Last week the U.S. Patent and Trademark Office canceled the Washington Redskins’ trademark on the grounds that federal trademark law does not permit registration of trademarks that “may disparage” individuals or groups. In its announcement the Office stated: “that these registrations must be canceled because they were disparaging to Native Americans.” We will need to pay more attention in the future to the social/religious views of those we elect to office in the expectation that they will be increasingly imposing those views on society. This is not where we should want to go. “The-patent-office-goes-out-of-bounds-in-redskins-trademark-case”

Operation Choke Point

Imposing the government’s views on how we should behave takes a frightening leap forward with Operation Choke Point. As reported in The Economist: “a scathing report released on May 29th by a congressional committee… claims the operation was designed to strangle legitimate businesses that the government objects to for ideological reasons, such as payday lenders or gun dealers. The method is to deny them access to banks and payment systems, by prosecuting payment firms that abet suspect transactions…. The congressional report raises an even more vexing question: whether Operation Choke Point ‘inappropriately demands that bankers act as the moral arbiters and policemen of the commercial world’. The banks’ own legal travails suggest they are not obvious candidates for the job.” “Anti-fraud push accused of turning bankers into unaccountable cops”

I find this totally unjustified intrusion into private affairs deeply disturbing. We should push back hard. I would not be surprised, and would be quite pleased to see the rest of the world push back against similar U.S. bullying of foreign banks via its Foreign Account Tax Compliance Act (FATCA) and long running Anti Money Laundering (AML) campaign. Via FATCA and in total disregard for the laws of other countries, the U.S. is extorting foreign banks to share private depositor information and undertake costly vetting not only of their customers but of their customers’ customers. “Big-banks-are-cutting-customers-and-retreating-markets” This is imposing large costs on banks, which are increasingly refusing to deal with American customers rather than incur those costs. To the extent this concerns compliance with tax obligations, the United States needs to fix its impossible and dysfunctional income tax codes (individual and corporate) rather than bully the rest of the world. “The principles of tax reform” This is not a promising trend.

War – Bosnia, Kosovo, Afghanistan, Iraq, Libya, ??

Current developments in Iraq are depressing but follow the pattern of America’s well meaning but misguided attempts to remake the world in our own image. “Chaos in Iraq prompts soul searching among military veterans” WP /2014/06/18/ For my friends in Iraq the advances of the Islamic State of Iraq and Syria (ISIS) fighters is alarming and dangerous. I am truly sorry for them that they have not yet sorted out their internal sectarian (Shia and Sunni Muslims) and ethnic (Kurds and Arabs) issues. However, these developments do not constitute a serious risk to the United States, though reengaging militarily in Iraq to support the terrible al-Maliki government would. I hope that President Obama sticks to his current resolve not to. Our attack of far away Iraq ten years ago was a disastrous mistake foisted upon us by misguided neocon warmongers. See my account of my work and life in Baghdad in 2004: “My Travels to Baghdad”. And Senator McCain would you please shut up before I loose all respect.

For over twenty years I have worked in transition economies (Bulgaria, Kazakhstan, Kyrgyzstan, Moldova) and post conflict economies (Bosnia, Kosovo, Serbia, Afghanistan, Iraq, South Sudan and West Bank and Gaza) to help them develop central banks capable of supplying a stable currency and overseeing a sound banking system. I have made many wonderful friends along the way and am thankful for the opportunity given me by the International Monetary Fund to have these experiences. My primary motivation, which I think I share with most people, has been the desire to help make the world a better place by sharing the knowledge and expertise I have developed in my field (monetary policy). Often working alongside or with the U.S. military, which is I am sure the finest that ever existed, has convinced me that the neocon dream of forced democracy at the point of a gun is a dangerous delusion. Our post cold war military adventures have weakened our national security, weakened our liberties at home as part of a mad war on terror, and failed to establish better governments in the countries we attacked. We need to engage the rest of the world cooperatively to help build a peaceful, productive, and just world based on the rule of law. Our Army should stay at home to defend our territory.

My longest engagement has been in Afghanistan, starting with a visit in January 2002 and lasting through this last December. I have watched bright and dedicated young Afghans (some still in their twenties) grow up into outstanding leaders in Afghanistan’s central bank (Da Afghanistan Bank). I admire and respect them and have been privileged to enjoy their company. If Afghanistan succeeds in becoming a viable country, it will be because of them and other young Afghans like them. I pray for it to happen. It cannot be made to happen by the U.S. military and President Obama is right to finally bring them home. The rest of the world and its international organizations such as the IMF and World Bank should remain engaged with Afghanistan, sharing its advice and resources. But only Afghans can sort out the country’s ethnic, corruption and governance problems.

A full transition to a truly democratic country based on the rule of law, something badly wanted by the younger generation I have been working with, will take decades of hard work by Afghans. Significant progress has been made. Both candidates for President in Afghanistan’s run off election this past week are capable people who should be able to put together and run a successful government. Success of the election and Afghanistan’s continued progress toward becoming a modern, effectively governed country depends, in my view, more on the Afghan peoples’ broad acceptance of the outcome of the election rather than on who wins. Thus I am saddened (appalled actually) by the behavior of Abdullah Abdullah, one of the two candidates. Today’s Washington Post reports that he “is calling the government’s vote-counting process illegitimate, laying the groundwork for a protracted dispute that could destabilize the country.” This risks sabotaging Afghanistan’s future. “Afghan-presidential-election-thrown-into-question-as-abdullah-disputes-vote-counting”