Economist: Is America Turning Left?

Good cover story in the previous issue of Economist magazine on the political direction of the U.S. The significant momentum behind the Democrats is illustrated:

Having recaptured Congress last year, the Democrats are on course to retake the presidency in 2008…Voters now favour generic Democratic candidates over Republican ones by wide margins. Democrats are more trusted even on traditional conservative issues, such as national security, and they have opened up a wide gap among the young, among independents and among Latinos…

…and a rather interesting theory for it is offered:

…the worrying parallel for the right is not 1992 but the liberal overreach of the 1960s. By embracing leftish causes that were too extreme for the American mainstream…the Democrats cast themselves into the political wilderness. Now the American people seem to be reacting to conservative over-reach by turning left. More want universal health insurance; more distrust force as a way to bring about peace; more like greenery; ever more dislike intolerance on social issues.

…along with an important caveat (with a great one liner about European bishops): 

America, even if it shifts to the left, will still be a conservative force on the international stage. Mrs Clinton might be portrayed as a communist on talk radio in Kansas, but set her alongside France’s Nicolas Sarkozy, Germany’s Angela Merkel, Britain’s David Cameron or any other supposed European conservative, and on virtually every significant issue Mrs Clinton is the more right-wing. She also mentions God more often than the average European bishop. As for foreign policy, the main Democratic candidates are equally staunch in their support of Israel; none of them has ruled out attacking Iran; Mr Obama might take a shot at Pakistan; and few of them want to cede power to multilateral organisations.

…and a rather encouraging reminder that the American electorat hasn’t changed all that much since the 18th century:

One finding that stands out in the polls is that most Americans distrust government strongly. Forty years ago they turned against a leftish elite trying to boss them around; now they have had to endure a right-wing version. In democracies political revolutions usually become obvious only in retrospect. In 1968…few liberals saw…a long-term turn to the right. All that was clear then was that most Americans urgently wanted a change of direction. That is also true today.

But as an investor and a stakeholder in this country’s future, I’m still concerned. We continue to believe that the biggest risk of full Democrat control is the enactment of policies that lessen the economic competitiveness of the U.S. in a world full of emerging tigers. That risk does not come from France, Germany, the developed nations of Europe, nor does it come from Israel, Iran, or Pakistan for that matter. It comes from those countries and regions of the world that have, as Henry Paulson recently noted, learned from our successes and from stories like Ireland’s, and are now staking their futures on attracting business investment and productive human capital. And unless fiscal, regulatory, and other impediments to American business activity are lowered, permanently, we will face either a relative contraction at home, or U.S. dollar inflation, or some combination of the two in the years ahead. As things stand, it’s unlikely to turn into unmitigated disaster, but it will undoubtedly inflict some economic pain.

Financial Panic Readings

The following authors have penned some helpful pieces on the current global financial panic:

Stephen Ceccheti has provided a helpful technical primer on Federal Reserve operations.

Charles Wyplosz offers some observations on the subprime ‘crisis’ and the importance of uncertainty in financial markets and economies.

Bob Novak reports that the Fed had planned to change its policy stance before the current crisis emerged.

Paulson: Our Corporate Tax Code Is Broken

Treasury Secretary Henry Paulson penned a fine op-ed for the Wall Street Journal back on July 19th in order to tee up his July 26th conference on U.S. business taxation. Here’s the link (subscription required) and a few choice excerpts follow. The looming competitive disparities between the U.S. and the rest of the world that Paulson discusses are some of the same ones we’ve been writing (and warning) about, and in our view, they have contributed in part to the domestic financial upheaval of recent weeks:

In 1986, [we] simplified the tax code…The U.S. moved from a country with above-average corporate tax rates to one with below-average rates…[These] reforms set the stage for 20 years of remarkable economic performance in the U.S. and around the world…Twenty years later, after much of the world has followed our lead, the U.S. is once again a high corporate tax country. We now have, on average, the second-highest statutory corporate tax rate…Instead of building on the proven success of [the 1986] reforms, we have moved in the opposite direction, making the code more complex, adding narrow provisions that create or respond to current headlines.

Tax systems have one fundamental purpose — to raise revenue — and the best systems minimize the drag on the economy…At a time when markets change rapidly, requiring businesses to be ever more flexible and swift, they are burdened with a business tax code complicated by parochial political interests…

Over the past two decades, while U.S. tax law has grown more complicated and our statutory corporate income tax rate has increased, other nations have been reducing their rates to replicate our miracle. A study by Treasury economists estimated that a country with a tax rate one percentage point lower than another country’s attracts 3% more capital. It’s not surprising then, that average OECD corporate tax rates have trended steadily downward.

Maintaining our competitiveness in today’s global environment requires us to think comprehensively and act prudently. As Europe’s biggest economies and developing nations around the world move to reduce corporate taxes and gain the benefits for their workers that U.S. workers already enjoy, now is an opportune time, when our economy is in a position of strength, to consider ways our business tax system can be improved.

Amen, Mr. Secretary.

CFO.com: Bankruptcy Through the Ages

With the U.S. and much of the developed world feeling the effects of a massive credit squeeze, this article is timely–perhaps even a bit macabre. Read on if you’ve ever wondered about the etymology of "bankrupt", "draconian", or "peon":

Finance in History: Bankruptcy "Chapter 11 may be tough, but it beats death, dismemberment, slavery, exile, prison, and other insolvency solutions."

Benedict XVI: Tax Evasion Is Immoral

An interesting news leak from the Vatican over the weekend, carried by Times Online (U.K.) and Free Republic, claims that Pope Benedict XVI is crafting his second encyclical, one that will focus on social development challenges and denounce tax evasion as an immoral act. According to the Times:   

Pope Benedict XVI is working on a doctrinal pronouncement that will condemn tax evasion as “socially unjust”, according to Vatican sources. In his second encyclical – the most authoritative statement a pope can issue – the pontiff will denounce the use of “tax havens” and offshore bank accounts by wealthy individuals, since this reduces tax revenues for the benefit of society as a whole…Benedict intends to argue for a world trade and economic system “regulated in such a way as to avoid further injustice and discrimination”, Ignazio Ingrao, a Vatican watcher, said yesterday.

According to an Associated Press story, Italian premier Romano Prodi has been "call[ing] on Roman Catholic priests to help him battle Italy’s widespread tax evasion by invoking the seventh commandment — thou shalt not steal."

The Pope’s expected declaration is sure to arouse passionate and diametrically opposed moral opinions. My own views, briefly, are that equating the protection of property obtained legally and ethically (ie, without theft, fraud, or coercion) to "stealing" is preposterous, and consistency would require condemnation of other sanctioned forms of tax evasion as well, such as the tax advantaged status conferred on non-profit organizations, certain types of investors, and certain kinds of securities and activities. As one reader pointed out in response to the Times online article:

Oh Dear. The Pope is condemning tax evasion and all those who do it and those who promote it. This is either very naive or very stupid (and hypocritical). For a start, the Vatican is a tax free zone. Employees in the Vatican pay no income tax. The Vatican is also as secretive in its financial dealings as any good Swiss Bank. Secondly, the condemnation will embrace good Catholic families like the Grimaldis in Monaco and the Liechtensteins of Liechtenstein who run well known tax havens.Third, the Vatican is itself an investor in tax havens (at the very least indirectly)…John Stenhouse, Wolverley, Worcestershire, UKI

Furthermore, although tax evasion of the kind being condemned is not typically available to the bulk of legal income earners and property owners in an economy, it may still provide an important signalling mechanism regarding optimal levels of taxation.

If the Pope and the Premier are truly concerned about tax collections (and the social challenges they want to address with public resources), they might be better served to ask how governments can make taxation feel less like "stealing" to those who carry its burden. And doing so could have very positive economic effects in Italy. There’s no question that the country has been a chronic underperformer in Europe for decades. And it’s reasonable to assume that this stems from a relative underdevelopment of its financial system, which in turn arises from a high proportion of domestic economic activity occurring ’underground’ (an academic and empirical case for this argument is made in this paper from the Bank of Italy). That said, a higher level of taxation, whether through stepped up enforcement, additional taxes, or higher tax rates, is unlikely to provide the additional resources needed to address the social challenges that are Prodi and Pope Benedict’s concern. By threatening to push the country in that direction, they are threatening to undermine their own agendas.

Moral opinions and economic theory aside, the economic and financial implications of heavier tax burdens interest us, especially here in the U.S.. We are at a unique point in history, where effective tax burdens have been declining for roughly five straight decades. But that trend is now at serious risk from a confluence of political, social, economic, and demographic factors. As a firm, we are well attuned to the reciprocal effects and sometimes unintended consequences that can occur at the nexus between tax and monetary policies. For that reason, we continue to believe that, barring a change in the current political trajectory of the U.S., fiscal and monetary currents beyond 2008 are likely to change significantly–reading and navigating those currents successfully will be critical for investors.

Update 9/7/2007: A response to the Pope via open letter from George Mason University economist (and libertarian firebrand) Walter Williams:

The pope might say that the welfare state reflects the will of the people. Would that mean the church interprets God’s commandment to Moses "Thou shalt not steal" as not an absolute, but as "Thou shalt not steal unless you got a majority vote in parliament or congress"?

I share Pope Benedict’s desire to assist our fellow man in need. But I believe that reaching into one’s own pocket to do so is praiseworthy and laudable. Reaching into another’s pocket to assist one’s fellow man in need is despicable and worthy of condemnation.

Guest Commentary: Why I Love Barry Bonds

The following piece came to my attention yesterday, and it was so good that I offered it a guest spot on our firm’s weblog. It’s by Robert Churchill, an acquaintance of ours who is an engineer by trade and also one of the sharpest amateur baseball aficionados we know of. It’s clear that few people in the world would claim to love Barry Bonds. But in light of his breaking Hank Aaron’s home run record this week, and in line with our contrarian tendencies, it seemed fitting to post a piece that runs so counter to prevailing sentiment. I like this one because it employs thoughtful analysis in order to draw historical comparisons and insights, and no-holds-barred philosophizing that questions some of the background assumptions we make and encounter every day (both favorite past times of ours). Our investment philosophy includes the belief that unusual value tends to be found outside of the mainstream. While you may not agree with everything–or anything!–that Bob has written here, we think his article still embodies that idea rather well, and we hope it stimulates some conversation. Enjoy!

*****

I Love Barry Bonds!

Robert Churchill © 2007

I love Barry Bonds. That’s right, I said it. I watched him play in Pittsburgh at the beginning of his career. He hit for power and average. He could steal 30-50 bases a year. He used his speed and savvy to cover left field efficiently enough to overcome his less than stellar arm. Yeah, I let him hear it one evening when he let an easy fly ball pop out of his glove and nonchalantly tossed it back in, but I showed up to the ballpark often just to see him. He won the MVP in both ‘90 and ‘92. Was he warm and fuzzy? Nope. That was Bobby Bonilla. Was Bonds frustrated at having to spend so many early years hitting leadoff? Check. Especially after watching Bonilla leave Pittsburgh when he couldn’t get a decent contract, he stated that he was going to hit homers and drive in runs "to get paid." That he did. Did Jim Leland get on his case? Sure. Did Bonds deserve such treatment? Probably. Was he a prickly SOB with an epic sense of entitlement? Almost certainly.

Then he went to San Francisco and gradually moved from being a star to a superstar. He won another MVP in ‘93. Lots of walks. Lots of home runs and other extra base hits. Solid averages.

Then came all the love for McGwire and Sosa. None for Barry. Then he got mad. Then he became a legend. Four straight MVPs starting in ‘01. Then records for home runs, slugging average, on-base percentage, and OPS. Often with little protection in the order. He is so dangerous and so feared he has more walks and twice as many intentional walks as any other player in history. The awesome playoff and World Series performance finally came in ‘02.

He worked hard. He wore out exercise partners. He showed up sober and on time. Whatever issues may have been going on in his personal life didn’t flow obviously into the headlines. He didn’t gamble. He didn’t get into fights in nightclubs. He didn’t get shot. He didn’t wreck cars.

I have a lot of sympathy for a guy who thinks he deserves a shot to hit in a more advantageous spot in the order. I can understand the frustration when the public showered adulation on guys like McGwire and Sosa who, while talented, were not nearly the complete ballplayer he was. I can understand the frustration of having to answer the same stupid questions from reporters over and over day after day week after week month after month year after year… Would it be easier to be mellow and nice and Ripkenesque? Yeah. But what if that’s just not your personality? Not everyone has the personality and outlook of Tony Gwynn. Adults pay for the way they act, and I can handle that. So can Barry Bonds.

He lost roughly a quarter of a spectacular season to the strike in 1994. Add in a few more home runs and he’d already have the record. Oh yeah, and Bonds didn’t start in the Majors until he was 21.

So let’s compare Barry Bonds to the two other baseball legends that are part of the current conversation.

Babe Ruth hit more home runs in fewer at bats than anybody. He set all sorts of records. He towered above every other player of his time. He should have been credited with a 715th home run due to a rule change having to do with driving in runs at the end of a game. He would be credited with even more if fair-foul calls were made the way they are now where the ball only has to be fair when it crosses the outfield wall. He would have hit far more if he had played in one of the postage stamp ballparks found in other cities and in other times. He was a pitcher for the first five or six years of his career. And a damned good one. Even late in his career, if only as a novelty, he could still throw complete game shutouts. He had a career batting average of .342. He was a larger than life character who was amazingly generous to fans and children. He could often play well after staying out all night getting plowed off his bazoo. He made the sport of professional baseball, and to some degree all professional sports, what they are today. The man was just a beast. And I mean that in the best way!

Ruth played on great teams with great supporting players. He played in an era where batting averages were high, lots of runs were produced, and where there weren’t legions of specialist, weightlifting, steriod-swilling pitchers who could throw 95-100 mph in the late innings. Babe Ruth never played against the many talented black players that were relegated to the Negro Leagues, nor against the many great Latin players that came along at the same time.

Hank Aaron set his records, and they are voluminous, during the era of the pitcher. By 1968, the pitchers had become so dominant that the sport had to lower the pitcher’s mound. From 1962 through 1989 exactly two players hit as many as 50 home runs in a season. There were more specialist pitchers and fewer complete games. He stole a decent number of bases, played the field well, and racked up RBIs (1st), runs (3rd), hits (3rd), extra-base hits (1st), and total bases (1st) in incredible numbers. Steadily. Year after year. On good teams and bad. Relentlessly. Like a force of nature. He played the last two seasons as a designated hitter with much-reduced power but still racking up 60-plus runs and nearly 100 RBIs. He did this in far more plate appearances and at-bats than either Ruth or Bonds.

And that’s just comparing Bonds to Aaron and Ruth. There are other players worthy of mention in this conversation. Ted Williams racked up walks at the same rate, hit home runs at the same rate, and scored and drove in runs at a greater rate. He missed four and a half seasons when he served as a fighter pilot in WWII and Korea. His average was also 40-plus points higher than Bonds’ (as Kevin Costner’s character points out in "Bull Durham," that’s about one hit per week…), and he could easily be regarded as the greatest batter in history. Babe Ruth remains the legend but Williams compares favorably with anyone in the modern era. How about Jimmy Foxx? His numbers are comparable to anyone’s for the 14 seasons he was actually healthy. Willie Mays? Really a bit behind, but spectacular nonetheless. Alex Rodriguez? If he doesn’t get hurt he’ll put up some amazing numbers. He doesn’t seem to rack them up at such amazing rates, though, and he strikes out more and doesn’t get on base as much. Even at 43 Bond’s OPS [on base plus slugging] is over 1.000. By any stretch that’s just amazing.

The kinds of observations that are possible, comparing lifetimes of numbers from different eras, is part of what makes the game so interesting, and even, if I may, magical.

But outside of the magic, baseball also exists in the real world. This leads us to many considerations, not least of which is that steroid thing. Did Bonds do them? Did he do so knowingly? While we can’t say with absolute certainty, given what w
e know such a conclusion is all but inescapable. However, it also appears likely that several hundred of his peers did the same. That means not only other batters, but also other pitchers.

You don’t get much in this life–a mind and a body to do with what you can. Taking many types of drugs only limits the use of the gifts with which one is blessed and which one will need to face a life that is difficult enough already. But what of performance-enhancing drugs? On a purely philosophical level, why is a well-managed program of steroids or HGH, which are often prescribed legally, different from getting laser eye surgery? Why is it different from getting Tommy John surgery, a procedure that makes a throwing arm stronger than it was originally? Looking at other sorts of medical advances, what might Sandy Koufax or Gayle Sayers have achieved given the current state of medical technology?

Why are any of these things different than enhancing vision with a well-chosen pair of colored contact lenses? Mark McGwire tested dozens of pairs. What about the arm protection some batters employ to allow them to crowd the stike zone? How about the streamlined handlebars and tires used by cyclists starting in the mid-80s?

Why are steroids different from cold medicine? Doesn’t that enhance perfomance by letting a player take the field when he might otherwise be incapacitated by a hacking cough, watery eyes, and a vicious case of post-nasal drip? If one is restoring a player to normal and one is making normal a little better, who’s to say what’s right? Look at the controversy explored in the movie "Chariots of Fire." At one time it was deemed inappropriate to even use the services of professional trainers to improve performance. One wouldn’t want England’s sons to fail to look like they could win "with the effortlessness of gods." Look at the resistance players like Nolan Ryan got to lifting weights. When the competitive breast- and side-stroking swimmers of 1840’s Europe first encountered versions of "the crawl" exhibited by the much-faster natives of the Americas, West Africa, and the Pacific Islands, the new methods were regarded as uncivilized thrashing. Of course, they were eventually and inevitably adopted. Things change.

We must also ask just what effect such substances have on baseball players. For certain strength and endurance sports the benefits appear to be clear. EPO and blood doping clearly enhance performance in endurance sports. But in baseball? Yeah, a player can train harder, recover more quickly, and hit or throw a bit harder, but remember that Hank Aaron and his friends wiled away their youthful summer nights hitting bottle caps with a broomstick. He played in the major leagues. His friends did not. There’s something about elite athletes at high levels that separate them from the rest of humanity. Basketball players need height for obvious reasons. Swimmers need that, too. If a male swimmer is less than about 6′ 5" he can pretty much forget being competitive on the international level. It’s simply a question of geometry. Female gymnasts, of course, must be quite compact, and the intense training during their youth changes their bodies even further in that direction. Sumo wrestlers must be large. Height helps golfers hit the ball farther. Height, combined with witdth but also minimal depth, make one ski jumper fly farther than the next. Matti Nuknen won many competitions, including gold in Calgary, in part because he was shaped like a door. Other activities favor certain body geometries in even more subtle ways, like the ratio of upper- to lower-leg length for cyclists. It should come as no surprise that Lance Armstrong is perfectly proportioned in this way.

But those considerations are only part of the battle. A certain type of hand-eye coordination and body kinesthetic awareness have a huge amount to do with an athlete’s success. Can anyone doubt that Wayne Gretzky or Mario Lemieux had this in abundance? The list goes on. Oxygen uptake. Ratio of slow-twitch and fast-twitch muscle fibers. Bone density and joint strength. Steve Prefontaine, anyone? Sure, some of this can be enhanced through training, but only so far. Coaches in East Germany used to screen young children to find those that had a sophisticated way of moving. The children selected were then tapped for special training in the state gymnasia. Hello, Katarina Witt. Ever see a contestant on "Dancing with the Stars" try and try and try and just never look as good as the next competitor? As an enthusiastic practitioner and occasional teacher of swing dancing I see this all the time (especially in the mirror…). In the end, some people are just born with a bit more athletic ability than others.

But then I’ll ask one more question. Can the use of performance-enhancing drugs be stopped? It used to be that those "evil" Eastern European countries doped their weightlifters, swimmers, and track and field athelets. Then everyone else got into the act. Is there any major endurance or strength-related sport that can reasonably be thought free of such influence? Body-building? While plenty of people have axes to grind about the state of cycling, there is also some indication that performance enhancement is all but endemic to the sport. Is the Tour de France, as compelling a sporting event as exists anywhere, all but over as a meaningful event?

At this point the performance-enhancing cat is out of the bag. It will never be put back in. Ever. Oh, attempts will be made. But short of assigning a full-time shadow on every major athlete (who themselves are endlessly subject to corruption), the rewards are too great and the competitive desires are too strong. If a means of getting ahead is available, it will be used. If spitballers, spikers, and sign-stealers are in Cooperstown, how do you keep out those who pumped themselves full of this or that? If the average sports fan wants to protest from the sofa (or the average sportwriter from a typewriter), then I’ll ask just what makes them so pure? How many people cheat on their taxes? Shoot, how many cheat on their spouses? And for much smaller stakes.

Baseball has a government-granted exemption from anti-trust penalties. Like too many other private businesses, it has successfully held up city after city for publicly-funded ballparks. While trying to fight with its players (themselves no angels but certainly right to demand free agency), baseball ran its fan base and its reputation into the ground with continual strikes culminating in the loss of a World Series in 1994. I haven’t paid a dime for a ticket or piece of merchandise since, though I still watch and listen to it. Faced with a loss of credibility, goodwill, and ultimately business, it had two aces up its sleeve.

The first was Cal Ripken, Jr. and The Streak. Not only is Ripken deservedly respected for his work ethic and accomplishments, he is by all accounts also a "nice guy." Absent the streak I submit that he would simply be a beloved local hero like Willie Stargell, but not the major icon he has become. However it was a great story, baseball was right to sell it, and Mr. Ripken gets all the credit in the world.

The other ace was offense. And lots of it. Especially in the form of The Home Run. "Chicks dig the long ball!" In bunches. And nobody seemed to notice. In improbable bunches. And nobody seemed to notice. In numbers not seen since the 20s and 30s. And nobody seemed to notice. By pumped up men swatting at little-league fences. And nobody seemed to notice. There were McGwire and Sosa. And nobody seemed to notice. Roger Clemens experienced a late-career surge rather like Bonds’. And nobody seemed to notice.

But then came the perfect storm. A surly man challenging the Greatest Record in Sports. Who "cheated" by using steroids. Who wasn’t a happy-go-skippy, smiley-faced, love-and-fuzzy-bunnies-for-everyone-and-especially-including-small-children kind of guy. Nobody cares about the hundreds of other players who supposedly used steroids but Bo
nds’ case, for some reason, shall not stand!

So you don’t like Barry Bonds? Well guess what–I love the man. He went for it. He’s probably gonna get to keep it. Bonds made the choice of whether the risk of negative effects from steroids are worth the benefits, just as would a person jumping out of an airplane, even with a parachute. I don’t need to invite him to a children’s birthday party. I don’t need to have a beer with him. I just want to watch him play baseball. He does that more or less as well as anyone ever has.

*****
Robert P. Churchill can be reached via e-mail here

Darda: Tax and Trade Insanity

I recommend checking out Mike Darda’s latest riff (rip) on Congress at National Review Online.

NYT: Meat Is Strategy

As a dedicated carnivore, this NY Times story on the sex appeal of eating red meat grabbed my attention:

Restaurateurs and veterans of the dating scene say that for many women, meat is no longer murder. Instead, meat is strategy…In an earlier era, conventional dating wisdom for women was to eat something at home alone before a date, and then in company order a light dinner to portray oneself as dainty and ladylike…“It seems wimpy, insipid, childish,” said Michelle Heller, 34, a copy editor at TV Guide…Ordering meat, on the other hand, is a declarative statement, something along the lines of “I am woman, hear me chew.” In fact, red meat on a date has become such an effective statement of self-acceptance that even a vegetarian like Sloane Crosley, a publicist at Random House, sometimes longs to order a burger. “Everyone wants to be the girl who drinks the beer and eats the steak and looks like Kate Hudson…"

I was first converted to the flesh-noshing lifestyle by cultural anthropologist Marvin Harris’ classic book Cannibals and Kings. Unfortunately, there’s a caveat in the article for single male carnivores:

What about when the tables, so to speak, are reversed? Can a man order a juicy New York strip on the first date and make a good impression? Gentlemen, be careful. Real men, it seems, must eat kale. “When a guy sits down and eats something fatty and big, you wonder if they eat like that all the time,” said Brice Gaillard, a freelance design writer. “It crosses my mind they’ll probably die early.”

Mises.org: Tariffs and Unintended Consequences

The Mises Institute carried an interesting article on its website yesterday demonstrating how (bad pun ahead) slippery global shrimp markets were able to avoid the intended effects of anti-dumping tariffs passed in 2005:

After a year of investigation, the Department of Commerce determined that shrimp importers from the six countries were indeed guilty of dumping…In January 2005, the department imposed tariffs on shrimp imports from the six countries named in the petition…: Ecuador, 3.58 percent; Thailand, 5.95 percent; Brazil, 7.05 percent; India, 10.17 percent; Vietnam, 25.76 percent; and China, 112.81 percent.

The tariff was expected to protect US shrimpers by reducing shrimp imports and, consequently, pushing domestic shrimp prices up. And just how has the tariff affected the domestic shrimp market? According to data published by the National Marine Fisheries Service (NMFS), total shrimp imports to the United States have increased by 14 percent since the tariff was imposed, while domestic shrimp prices have decreased by 9 percent. Also, US shrimp imports from the six countries targeted by the tariff have increased by almost 20 percent since the tariff was imposed. These were not the effects that the SSA, US shrimpers, and the Department of Commerce expected.

In line with The Mises Institute’s philosophy, the article is written from a classical liberal perspective ("libertarian" nowadays), and the overarching thesis is that government intervention is generally undesirable and counterproductive. It should be kept in mind, however, that the original petition was allegedly motivated by the subsidies being given by foreign governments to their domestic shrimp producers. I’m sympathetic to the idea that lower costs for U.S. consumers are desirable. But if U.S. producers in a particular industry are not subsidized, but are instead subject to taxes and stricter regulations on production, then foreign producers who are subsidized present a formidable competitive challenge, and there are bound to be negative effects on those who earn a living in the domestic industry. One might argue that if a country wants to subsidize particular industries, so what? But once you consider that some of those foreign subsidies are essentially financed by developed countries (e.g., through foreign aid and institutions like the World Bank), it becomes clear that these concerns may not be purely "anti-trade" (an interesting but inconclusive debate on this in regards to shrimp can be found here–note that neither party is disinterested). In fact, the Byrd Amendment that diverted tariff duties to the industries affected instead of the U.S. Treasury can be seen as an attempt to match, at least partially, the subsidies being received by overseas producers. While for the overall economy, a better approach for an industry under pressure is to innovate (as domestic steel producers have done for example), we must still accept the inevitable fact that global economic competition will probably always have a strong political component to it.

So what can be done, if we accept that the mutual influence between business interests and governments is unavoidable in all or most countries (not to mention intrinsically human)? When pundits gnash teeth and rend garments over the influence of lobbyists on our political process, they should keep an important fact in mind: as long as lobbyists (including various consumer advocate and "public interest" groups) have sufficiently differing interests and are allowed to compete openly, the process can work reasonably well (in fact, the shrimp tariffs were fought against by other domestic lobbies, such as seafood distributors, and the final tariff rates were pushed towards the low end of the Commerce Department’s original target ranges). It’s clear that a diversity of opinion from groups with different interests and experience is vital to the political process. And lobbyists, love ‘em or hate ‘em, play a critical role.

In the end, the biggest risks in our system are probably agency risk and obscurity. Agency risk occurs, for example, when a politician makes a decision (driven by personal interests) that differs from the one they would make based solely on the evidence and arguments presented, or when a journalist or pundit becomes a compensated lobbyist and PR agent (‘pundit payola’). Obscurity is a deliberate attempt to withhold information from the electorate, which renders our political markets less effective. Openness requires disclosure, and I can think of no compelling reason why the people who own this government should not know which interests are in competition around a particular issue. For the most part, this is only possible if people are willing to investigate (for example, one really had to scour between the bylines to learn that the 401(k) industry played a key role in defeating social security reform several years ago). Frustrating, perhaps, but this is why a free and competitive press, honest citizen watchdogs, and periodic elections are vital to the health of our system. No political system can be perfect, but overall, the architects of ours seemed to know what they were doing.

On a side note, a particular irony of the shrimp tariffs was that the most extreme actions were taken against China and Vietnam. A story published a few years ago–in the New York Times, if memory serves–quoted the lament of a Vietnamese shrimp producer, something to the effect of, ‘the Vietnam war was about capitalism versus communism, here we are trying to embrace capitalist practices, and we are being attacked by the U.S. for it.’ 

Interesting Political Undercurrents

A couple of obscure news stories today (to US news consumers, at least) provide some important insights into current and historic trends in the global political economy.

First is IHT coverage of the London convention of "Hizb ut-Tahrir, or Party of Liberation, a group that calls for a caliphate in Muslim countries, the end of Israel and the withdrawal of all Western interests in the Middle East." The organization is one that concerns some western governments, though it apparently does not meet the test of a terrorist organization. What was interesting in the story is that the attendees are described as middle class professionals, and one of them offered a quote that echoes what we think is a primary driver of Islamic terrorism:

"If you look at the political structure in the Muslim world, it’s a police state," said Mohammed Baig, 28, a second-generation British Indian who is an asset manager specializing in corporate governance. "You have the public opinion underground, and then staged public opinion in the media."

The existence of a Muslim middle class in the U.K. (and elsewehere in Europe) is no coincidence, as western institutional settings make it possible for a much larger number of people to earn a satisfactory living than they would in their home countries. So why do some agitate for political change in their home countries? Perhaps it’s because they had to emigrate in the first place; in other words, social, political, and economic institutions in their home country are poor enough to make emigration a rational choice. However, this has the effect of lowering the quality of human capital in their home countries, which perpetuates the situation. The result is an entrenched elite, a resentful majority at the bottom, and (mostly self-appointed perhaps) representatives of the downtrodden in radical clerics and jihadists. This situation is reminiscent of 19th century Russia, interestingly, and it should be apparent that Russia’s 150-plus years of political mismanagement have cost the world dearly.

Although western institutions offer the surest path to peace and prosperity, an article from The First Post illustrates that they are far from perfect, and prone to serious errors in global affairs. The article is meant as a warning about recent electoral trends in Turkey– 

"A new generation of politicians is aiming to Islamise the state by stealth. The AKP – Adalet ve Kalkinma Partisi, or Justice and Development Party – has a stranglehold on Turkey for the foreseeable future."

–and one of the important observations is that Turkey’s membership in the EU is contingent, among other things, on "a key condition imposed by the EU [which] is the army’s abrogation of political authority – which suits the AKP just fine, for the military is the greatest barrier to Islamisation." [emphasis added] To illustrate what a glaring institutional error this is, we turn to economist Reuven Brenner, who wrote in The Force of Finance:

"Modern Turkey is another good example [of a democracy that is not thriving]…Here is a country that is democratic on paper, but that, since Kemal Ataturk’s times, has been dominated by political parties that are tightly controlled by self-perpetuating elites…Turks consistently rate the military as the country’s most trusted institution. They credit it with preventing the country from lapsing into chaos or falling under religious rule…in a democracy such as Turkey’s, such a role for the army is understandable. Its occasional intervention does not necessarily imply the same thing that it does in a country with open capital markets."

The institutional gap between states and regions of the world is one of the great riddles of modern statesmanship, one that we don’t have a pithy answer to. We simply think it’s important to realize that the best answers will be found somewhere between two extremes: (1) propping up insular and corrupt regimes and (2) radical and religious populism. On that first count, support of closed governments and defective institutions is often pursued by western governments in the name of regional stability, but it should be clear that this is not a reliable path to long term peace and prosperity. On the second, religious radicalism is likely to undermine the effectiveness of radical populism. The latter is a means for improving, in the here and now, the lot of people who have been shut out of political and economic instutions, while religious radicalism tends to promise eased suffering in the hereafter, while establishing its own worldy and well insulated elites. There are compelling arguments to be made for a renewed populism in the middle east, but if they are overly secularized by radical Islamic or any other divisive views, they will remain marginalized. A radical populism aimed at improving the overall well-being of a society can be palatable and even beneficial; merely turning the tables on perceived oppressors, although it may offer immense short term gratification, is not. 

As far as closing the gaps goes, the world is getting there, slowly and haltingly. Modern and postmodern states and economies are a very novel experiment in the span of human existence, after all. And with all due respect for the national debt mongers our there, this is likely to offer the greatest challenges, risks, and rewards to our children and grandchildren.

8/9/2007 – It came to my attention yesterday that a negative op-ed on the AKP was published in the Wall Street Journal on July 30th, which might indicate that an information or disinformation (depending on which side you’re on) campaign is taking place. It’s always fun to puzzle over the likely players and interests at work…