My letter from the Editorial Board of the Cayman Financial Review addresses the above and other American Government over reaches in the use of U.S. dollars abroad: Financial Review, April, 2016
I hope that you enjoy it.
Warren
Tag: Big Brother
In Defense of Vultures
They clean up the mess beside the road that has been left there to rot. It is not a pleasant sight but who can really object to the service these birds perform. Actually, the vultures I want to defend are not the feathered ones but the even uglier, so called, bottom- feeders, who take advantage of asset fire sales.
I am trying to find words to explain the stupidity of the attack on people who swoop in to buy things when their prices are depressed, that will not be insulting to the intelligence of non economist. I think that every one understands that if the demand for something increases its price will go up (or not fall as far). A so-called fire sale is when someone, often a company facing bankruptcy, is forced to liquidate some or all of its assets in order to pay its bills. The forced sale often pushes the price of the asset below its true long run value (to the extent anyone knows what that is). Bottom feeders step in and buy when they think the price has fallen to or below that long run value. If they are right, they will make money in the long run when the price of the asset recovers. Are they doing a bad thing? If we some how could keep them out of the market, what would happen to the price of the asset being sold under duress? It would fall further, of course! If you think that these vultures are exploiting distressed sellers, you are free to offer a higher price.
The attack on Payday lenders, so called because borrowers use an upcoming paycheck as collateral, is a bit more subtle. Interest fees on these emergency loans are very high, as these risky borrowers don’t qualify for normal bank loans. According to the Washington Post “Each loan comes with steep fees. The CFPB found that payday borrowers pay a median $15 in fees for every $100 they borrow, amounting to an annual percentage rate of 391 percent on a median loan of $350.” The new Consumer Financial Protection Bureau (CFPB) has just proposed “sweeping new rules” that will limit their use. As with restrictions on vulture investors (which fortunately have not been proposed by the administration), restricting access to payday loans would force such borrowers to seek out loans with still worse terms or suffer the consequences of no loan. If you think that payday lenders are exploiting their customers, you are free to lend to them at better terms.
However, restrictions on payday loans have a big brother, paternalistic purpose. The argument is that these emergency borrowers can’t be trusted to use the money responsibly. “The agency found that about 80 percent of payday loans are rolled over into a repeat loan, causing fees to pile up for borrowers. Roughly 45 percent of payday customers take out at least four loans in a row.” http://wapo.st/1sPFODl It is appropriate to take away the freedom of choice from people judged mentally or emotionally incapable of exorcising that judgment in their own best interest. The power to do this is potentially dangerous and should only be used sparingly and with careful judicial guidelines and oversight. Dangerously our government has pushed this boundary far beyond what can be justified in a free society. Big brother has grown fat.
A further step in the direction of ever more intrusive government are the new rules issued by the Obama administration that would require investment advisors to put the interests of their clients above their own. “Trade groups representing businesses, Wall Street firms and other financial professionals joined forces to file a legal challenge against a new rule from the Obama administration that would restrict the advice brokers and advisers can offer to retirement savers…. The groups are attempting to block a rule announced by the Labor Department in April that created a higher standard for the investment advice offered to retirement savers. The new regulations require brokers selling investments for retirement accounts to put their clients’ interest ahead of their own.” http://wapo.st/1TM6gVj
Putting the interests of investors above those of their advisors is a perfectly good standard. It is what I, and most people, expect from their financial advisors. The questionable self-interest of the trade groups opposing it is obvious. It doesn’t follow that every good practice should be made a legal requirement enforced by the government, which is the direction we have been going in recent decades resulting in thousands and thousands of pages of regulations in almost every area of economic activity. Markets tend to adopt good practice on their own.
Investment advisors who give the best advice from their clients point of view (rather than investments that might pay the advisors the highest commissions) are certainly more desirable to investors. The marketing issue is how to know and insure that that is the standard followed by a particular advisor. If such a standard is written into your contract with your investment advisor—something she would surely proudly advertise—you would have the legal basis to sue if that standard were violated.
Private markets don’t have the best solutions to all problems of product quality but they do have the best solutions in an ever-changing technical world for most of them when given the chance.
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.
More on cell phones in planes
My blog Friday was meant to contrast two attitudes toward the desired role of government—regulating our behavior for our own good (Big Brother), or regulating our behavior when necessary for the protection of third parties. But the more I thought about the cell phones in airplanes issue, the more convoluted it seemed.
There is no evidence, despite lots of testing, of any danger from cell phones, iPads, PCs, etc. for the operations of airplanes. See the article by a WSJ staff reporter: http://www.cs.ccsu.edu/~pelletie/local/news/telecom/Cell_phones_on_planes.html. The Big Brother argument that it protects those of us preferring quite from the conversations of other passengers is also bogus. Not only are people free to carry on conversations with other (willing) passengers, but we have been able to talk to people on the ground from phones in our arm rests for well over two decades. So what is going on? Without denying that many well-meaning, public-spirited people go into government service, the answer seems to lie in the usual place. Government regulations very often come to protect the interests of the incumbent members of the industry being regulation. Most monopoly power of private companies is bestowed by government. Please save me from Big Brother.
Cell Phones on Planes: A Defining Issue
The Federal Communications Commission is moving towards allowing the use of cell phones on airplanes. Many of us have known for a long time that their use poses no safety issues (yes the government does sometimes—how shall I say it in a way that will not attract NSA attention—misrepresent things). The FCC’s ruling rests on whether it would be good or nice for us to be able to use them. Whether we want our government to establish rules on what is nice public behavior is one of those issues that help define and reflect differing attitudes toward the desirable (not to mention, because it seems largely irrelevant these days, constitutional) role of government.
As I write this note, it seems that the FCC is moving towards a compromise ruling that would allow the use of phones and other electronic devises (Mac, iPad, etc – yes I am an Apple fan) for internet access to email, text messages, and web surfing but not talking. This strikes me as odd in that it has been possible to do that for some years now. I have used the service (for a fee) to send and receive email on Delta and other planes with the equipment: http://www.gogoair.com/gogo/splash.do. Oh well.
I cringe when people base their views on whether government should control certain behaviors (pot smoking, public profanity, talking lauding in public etc) on whether such behavior is good or bad for the person doing it. For me the test (along with the constitution) is whether my behavior endangers other people. Thus the issue of whether secondary smoke is harmful and if so should be banned in the workplace, for example, is a legitimate public policy concern. The outcome should rest on the facts; is it harmful to third parties or not.
I would not like for people to talk on their cell phones on planes, but am appalled by the idea that the government would not allow airlines to set their own policies in this regard. I don’t like talking on planes in any form. I have not talked to anyone on a plane other than the flight crew for many years. No government ruling caused this or is desired. Somehow I have been able to successfully and without words communicate to anyone next to me that I do not want to talk. My loss, I am sure, but it is fortunately still my choice.
I am reminded of a flight home from a wonderful European vacation with my son, Brandon, years ago. The man and woman behind us were chattering away and their conversation became more and more homophobic. My son finally turned around and said, “Would you please shut up.” Those lobbying the FCC to forbid phone calls on planes should probably include fines for offensive speech on planes or in other public places (the First Amendment be damned). Those, like me, who prefer a more limited, less intrusive government, prefer to rely on common courtesy as it evolves through private interactions. Perhaps because I am the oldest of my siblings I never liked the idea of a Big Brother.
Life and Death in Boston
We will all die and can hope that our passing and the passing of our loved ones will be peaceful and painless. It is sad when anyone dies prematurely. It is very disturbing when someone’s death is the result of a deliberate act. And is seems worse yet, when the targets of murder are random. How should we react to each of these?
I am struck by how differently we have reacted to the terrorist attack at the Boston Marathon that killed (initially) 3 innocent soles and injured over 180, the Texas fertilizer plant blast two days later that killed 14 (at the time of this writing) and injured about 200, and the 88 deaths on American highways on average every day (down from the high of 150 per day in 1972). No one would think to propose closing all of the highways, yet much of the area around Boston and Cambridge has been locked down (a term I know very well from my many trips to Iraq and Afghanistan) for over a day.
There is of course an important difference between the dangers of driving and a 19-year-old killer on the loose. However, Ed Crane’s comment (in a private email) introduces what I wish to reflect on: “Since when does the government shut down half of Massachusetts (stay in your house!) to catch one 19-yr-old? If everyone in Boston had a gun there would be no shut down. Just a dead 19-yr-old.” Ed is the founder and until last month the President of the Cato Institute here in Washington D.C.
Where it is possible and/or necessary to take precautionary measures to protect the public safety, it is prudent to do so. However, zero risk is not the standard we live by or automobiles and much else would be banned. Were we safer or did we feel safer a few years ago when signs and laud speakers kept announce that the city was code orange so be on alert? At best such measures were silly and at worst they were part of a pernicious campaign to make us all feel more dependent on the government.
Public safety is a legitimate concern, but needs to be pursued sensibly. But what about the impact of our reactions on those wishing to terrorize us? We do not yet know what motivated the Chechnyan brothers Tamerlan, 26, and Dzhokhar, 19, Tsarnaev to blow up some joggers. Young Dzhokhar lived in the United States most of his life. What was his point? If it was to terrorize us, for whatever reason, our reactions have fulfilled that goal beyond his wildest dreams.
This brings to mind another recent case where our reaction to intimidation has surely rewarded the intimidator, another near child, beyond any reasonable expectation. I am speaking of (probably) 29 year old man child Kim Jong Un, the ruler of North Korea. It is only prudent for the U.S. government to take defensive measures in response to the daily threats coming from young Kim. But why reward his behavior so loudly with such importance and publicity.
Consider the comments by Professor Andrei Lankov from Seoul’s Kookmin University: “The North Koreans are very, very rational. … Why do the foreign media, why do people overseas consider Kim Jong Un to be suicidal? … If he attacks he will be dead in 10 or 15 minutes and he knows it perfectly well. He is not suicidal. He is a young boy who is madly in love with his wife, who loves fast cars and a slice of pizza. And the people around him are not suicidal. They are hard-nosed, cynical Machiavellians who survived decades in the cutthroat world of a Stalinist palace. … They are not ideological zealots. They are just brilliant manipulators.” “Threats and crises are just normal North Korean diplomacy”
I am not suggesting that it is easy or obvious what measures should be taken to keep the risks of living in balance with its joys. But life has always been a risky undertaking. If our big brother government insists on trying to reduce its risks to near zero, which is not possible anyway, it will not be worth living.
Remembering 9/11– Bratislava, Slovakia
As my generation did for many years following the assassination of JFK, we today remember where we were and what we were doing on the day ten years ago that 19 Middle Eastern terrorists hijacked and crashed four American passenger planes into the twin towers of the World Trade Center, the Pentagon, and a field in rural Pennsylvania.
On September 11, 2001 I was in Bratislava, Slovakia (the former Czechoslovakia’s eastern half). I had combined an IMF technical assistance visit to Slovakia’s central bank with a meeting of the Mont Pelerin Society, the free market group established over 50 years earlier by Friedrich Hayek and Milton Friedman. I returned to my hotel room around 3:00 pm (9:00 am in New York and Washington, DC) to an email from IMF security announcing that a plane had crashed into one of the World Trade Center towers. I turned on the television and watched in shock and disbelief as a second plane crashed into the other tower. Then a third plane crashed into the Pentagon, and I wondered if this was the beginning or the end of the attacks.
I called my Icelandic friend Hannes Gissurarson, a member of the board of Iceland’s central bank, who was also attending the MPS meetings. “Hannes, you will not believe what has happened. I don’t want to watch this alone. Please come.” For the next few hours we sat in front of the television emptying the liquor from my refrigerator and then his. We watched in real-time as the two towers collapsed. I remember thinking that they fell so perfectly straight down that it looked like a Hollywood stunt. I was hoping disparately that it was. We did not see any of the people who jumped or fell to their deaths from the towers, which were not visible or shown at that time (thank God).
Michael Novak, a fellow MPS member, called a meeting to meditate together on these events. Michael has a comforting way of talking about difficult things and the gathering was helpful. Many other friends were there, including Richard Rahn and Marian Tupy.
Later in the evening Hannes and I decided to take a walk. As we walked through the lobby of our hotel, the hotel clerks expressed their heart-felt sympathy. We walked the seven or eight blocks to the American Embassy where we saw people placing flowers and small American flags outside of the Embassy. I was very touched by these displays of sympathy and friendship but felt dazed.
Three days later I was finally able to get a flight home, which was a few blocks from the Pentagon. The hole in western side of the five sided building made by American Airlines flight 77 seemed small considering that it had been made by a very large Boeing 757. It dramatized just how huge the Pentagon is. Barbara Olson, the wife of the United States Solicitor General at the time (and currently a defender of Marriage Equality in the California appeal of Proposition 8), was one of the 64 people on that plane who died when it crashed into the Pentagon killing an additional 125 people in the building.
The positive side of this tragedy was the outpouring of sympathy and support around the word and the strengthened unity among all Americans. As Ronald Reagan had put it: America is a beacon on a hill. We have created a government that is meant to service us, not the other way around. We have established a society in which very diverse people with very diverse personal beliefs and ambitions live peacefully together (most of the time) because our constitution and our beliefs provide considerable space for such diversity. We require that others respect our property and our space in turn for which we respect theirs. To a large extent we can prosper on the basis of our efforts and the extent to which they satisfy the needs and wants of others in the market place.
The world respected and envied American society. The idea, circulated by a few Neanderthals, that Al Qaeda attacked us because they resented our freedoms, was a silly lie. They resented our troops on their soil (Saudi Arabia) and our intrusions into their countries and affairs. If our leaders had understood that correctly, and fashioned policies accordingly, perhaps we would have retained the respect of the rest of the world over the next ten years after 9/11.
Instead, we have lost thousands of American lives and Afghanistan and Iraq have lost multiples of that. We have weakened our economic strength and thus our military strength by squandering several trillion dollars in Afghanistan, Iraq and elsewhere. We have traded off more of our liberties and way of life in the name of security (the infamous “War on Terror”) than we should have. We have lost the respect and support of much of the world.
A poll taken in the U.S. near the end of August found that: “Six in ten Americans believe that the U.S. weakened its economy by overspending in its responses to the 9/11 attacks. In particular, respondents felt this was especially true of the U.S. mission in Iraq. Two out of three Americans perceive that over the decade since 9/11, U.S. power and influence in the world has declined. This view is highly correlated with the belief that the U.S. overspent in its post-9/11 response efforts — the wars in Iraq and Afghanistan.”
The “Patriot Act” and the “Department of Homeland Security” are names that could have been proposed by “Big Brother” in Orwell’s 1984. How could our government have chosen such names and more importantly how could we have let it. The constant announcements at airports to be on the alert—the flashing signs along the main streets of Washington, DC to report any suspicious activities to XXXXX, are right out of 1984 and Huxley’s Brave New World. Former Vice President Cheney writes without embarrassment that we were right to torture terrorists. I get extremely uncomfortable sitting in the same room with Paul Wolfowitz at AEI. Hopefully I would get up and leave if John Bolton walked in. What has happened to us?
Big Brother/Big Government, however well-meaning, are dangerous to what made us great. They create self-interests that work night and day to direct government spending and policies to their benefit rather than to the nations benefit. That is just how governments work and why our founding fathers were so concerned to limit its scope as much as possible. Governments work best to serve the broad social (national) interest when they provide impartial enforcement of private agreements (courts) and property rights (police and army) and the basic infrastructure of commerce (roads, water, sewage disposal).
Though with every nibble and further intrusion into what was once the private sector Leviathan grows stronger and more dangerous, we don’t have to lose the principles that made us great and made us the envy of the world. We can again be the beacon on the hill that cares about each and every person and thus mankind and sets an example of respect for our fellow-man that others will want to emulate.
But we cannot each have everything in the social sphere exactly the way we each want it. We must live together in cooperation in the pubic sphere. This requires compromises whenever the government is involved (there are not enough desert islands for each of us to each have everything our own way). Thus the broadly accepted need to eliminate our government’s deficit in the future and bring its cumulative debt down to lower levels relative to our economic output over the coming decade or two can only be achieved if each side compromises a few things in order to reach a common agreement on how to do it (what to cut and what taxes to adjust). The President’s largely ignored Debt Commission set out a good basis for such compromises last year. I hope that we can come together again to find an agreement and again become a nation we can be proud of and that is again respected by our neighbors around the world.
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