Q: Who said this:
Second, the idea that U.S. economic difficulties hinge crucially on our failures in international economic competition somewhat paradoxically makes those difficulties seem easier to solve. The productivity of the average American worker is determined by a complex array of factors, most of them unreachable by any likely government policy. So if you accept the reality that our “competitive” problem is really a domestic productivity problem pure and simple, you are unlikely to be optimistic about any dramatic turnaround. But if you can convince yourself that the problem is really one of failures in international competition—that imports are pushing workers out of high-wage jobs, or subsidized foreign competition is driving the United States out of the high value-added sectors—then the answers to economic malaise may seem to you to involve simple things like subsidizing high technology and being tough on Japan. [Emphasis added.]
A: Paul Krugman (Pop Internationalism p. 16 , The MIT Press, Cambridge).
In spite of his remarkable daily stupidity, Krugman actually correctly recognizes the problem of American competitiveness in international trade. What hampers America is not foreign trade, but domestic productivity. And one of the biggest hindrances to domestic productivity is government, both at the state and municipal level, and particularly at the federal level. Thus, if one wants to know why Americans are losing manufacturing jobs, one need only look at domestic policy. The federal government has increasingly hamstrung manufacturing jobs over the past several decades.
Furthermore, instead of allowing consumers to feel the pain that domestic production policy would naturally incur, the federal government instead decided to promote increased foreign trade (under, it should be noted, the auspices of so-called “free” trade). This policy has then had the effect of subsidizing foreign production at the expense of domestic production because foreign manufacturers do not have to face the massive regulatory costs that domestic manufacturers face, giving foreign manufacturers a leg up on their competition.
As I have undoubtedly noted before, there are only two correct positions for a domestic government that presumably claims to represent the people over which it governs. Either the government can highly regulate domestic business and place tariffs on imports that approximate the costs faced by domestic producers or the government can reduce the burden of regulation on domestic business in conjunction with the decreased cost of importing. It is, however, quite foolish to do what the U.S. government is doing now: highly regulate domestic business while decreasing the cost of importing. Either a high degree of regulation is desirable or it is not. If it is, whatever regulations that exist should be applied to every person and corporation that wishes to do business in America. If it is not, the domestic market should be deregulated posthaste. There is no excuse for the current state of affairs.
Some blogs that caught my eye last week. First is The Burning Platform
with Edward Gibbon’s five marks of Rome’s decaying culture from his book The Decline and Fall of the Roman Empire:
1. Concern with displaying affluence instead of building wealth.
2. Obsession with sex and perversions of sex.
3. Art becomes freakish and sensationalistic instead of creative and original.
4. Widening disparity between very rich and very poor.
5. Increased demand to live off the state
I think it would be fair to say we are close to ticking all of them. Second is Steve Keen on the RBA’s setting of the cash rate:
The graph shows an almost 100% correlation between the cash rate and the 90-day bank bill rates. However the data also shows that in almost every instance the RBA cash rate FOLLOWS the 90-day bank bill rate, rather than leads it. … This analysis raises a number of interesting questions:
1. Why do we have the RBA as an interest-rate setting body at all when all they do is follow the market?
2. Why does the RBA shroud itself in such mysticism when their actions are so transparent to all?
3. What is the quality of our economists, politicians and financial commentators that we have to go through the “Will They or Won’t They” pantomime each month?
4. How could any economist get their forecasts wrong, particularly on the up-side?
Very much Wizard of Oz man behind the curtain. Third is Mark Tier at economics.org.au with two takeways on small/no government, which speak for themselves:
“… when the income tax was introduced in 1913 no one in his right mind would have suggested a top rate of 90 percent. In fact, there was considerable support for capping the income tax at 4 percent. This was shot down by those who argued that specifying such a maximum rate would mean the income tax would rapidly rise to that (then) horrific level. Can you imagine living in a world where an income tax of 4 percent is unthinkable!?”
“On January 24, 1848, the California gold rush began. But it took eighteen years for the U.S. Congress to enact a mining law to regulate such discoveries. Meanwhile, gold production in California boomed. How could that have happened without a governmental framework to recognize mining claims, register titles, and regulate disputes?
The miners created their own. They established districts, registries, procedures for establishing and registering a claim and buying and selling claim titles, and a system for resolving disputes. Officers were usually elected, including the recorder of claims.”
Finally, we have a report by Mineweb that I think few PM commentators will pick up, but which I think is a good signal that gold is on the move into the mainstream. Mineweb reported on Thomson Reuters buying GFMS which “will enable Thomson Reuters to offer clients analysis of metals markets alongside its news and prices”. This is a sign to me that smart money is moving into gold, as they are the only ones who can afford a Reuters feed. The mass market (dumb?) money follows much later, which is when we’ll see a real bubble.
The Credit Card Accountability, Responsibility and Disclosure Act, (CARD Act) is now one year old, and the Consumer Financial Protection Bureau released data showing its impact on the credit card industry as it prepares to begin its role as regulator of consumer financial products later this year.
This data showed that credit card late fees dropped from $901 million in January 2010 to to $427 million in November 2010, due to a cap of $25 on the first late fee on an account and $35 for a second late fee within six months of the first offense, and the number of accounts that were charged late fees dropped by 30%.
Also, the number of accounts that were impacted by an interest rate increase dropped from 15% a year to 2% in the year after the new regulations took effect.
The final change mentioned by the agency was a regulation that prevents credit card issuers from penalizing cardholders for going over the card’s limit, unless the cardholder requests that these charges be accepted. As a result of this change, many credit card issuers have eliminated over the limit fees that were charged if a transaction pushed an account over its limit. These fees were as high as $39 before the new rules were put in place.
However, not all of the changes that have taken place since the enactment of the CARD Act have been positive. Banks have cut perks and added many fees in an attempt to make up the lost revenue, such as application fees, annual fees, inactivity fees, increased balance transfer fees, and even fees for receiving a statement by mail.
Another negative for consumers is that credit card interest rates have risen from 13.26% to 14.27%, making it more difficult to find a low rate credit card, and the amount of available credit has dropped from over $4,400 to $3,900 on the average account, which can hurt those with a high utilization or those who need to apply for a new card.
Overall, the act seems to have accomplished its goals of providing consumers with more information about the cost of credit and the consequences of carrying a balance and protecting cardholders from predatory practices by issuers, but that protection has come at a cost, especially to those with poor credit or lower incomes who have been effectively shut out of the credit market, leaving the results of this regulation mixed at best.
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The U.S. plant will employ 100 people, and more than a year ago the company bought a former liquor warehouse outside of Baltimore, thinking they would be open in nine months. But it’s 13 months and counting. Xu and Wang have already spent $1 million more than planned and they don’t yet have an occupancy permit.
The storage room Wang and Xu budgeted to cost $25,000, would have cost $250,000 to comply with the city’s requirements, so the company will not store as many fragrance oils on site, making it more difficult to meet orders.
The building has to be equipped with fire sprinklers and handicapped restrooms. In total, code compliance is estimated to be 30% of the $3.5 million the company has spent on the plant.
One oft-overlooked tax is that of compliance costs. Quite simply, compliance costs refer to the costs of meeting regulations set forth by the government. As this story indicates, compliance costs can be quite expensive, and in many cases prohibitively so. I suspect the main reason why compliance costs are overlooked when discussing tax policy is because compliance costs are largely invisible.
In the first place, the government does not directly receive money from compliance costs. In fact, ensuring that businesses and individuals have complied with government regulations usually costs the government a decent amount of money. Plus, the only ones who profit from regulatory compliance are those who sell products that ensure compliance. It is probable that there is a significant amount of corruption associated with this, but it does not necessarily follow that the government profits from this, either directly or indirectly. (Certain government officials may profit from regulatory corruption, but it seems highly unlikely that said officials use their illicit gains to, say, reinvest in the government. It seems more likely that they simply pocket the money for themselves.)
In the second place, compliance costs aren’t always recorded by businesses and individuals because there are times when it is impossible to tell how large a role regulatory compliance plays in a purchasing decision. For example, a fast food restaurant may decide to replace its ice machine. The restaurant will pay for the ice machine, and will thus bear some of the cost of the machine. However, since it is impossible to tell what sort of machine, specifically, the restaurant would have purchased were there no regulations with which to comply, we cannot be certain how much regulations cost the restaurant, if at all.
Finally, compliance costs remain invisible because they are hard to measure, in total. The sale of gasoline provides a perfect example of this, for it is impossible to say how oil refinement regulation compliance impacts the final cost of gas, how pump safety standard compliance impacts the price of gas, and so on. Compliance with these different regulations and standards occur at different points in the supply chain and, as such, the costs are assessed at different points in the supply chain. They have a cumulative effect, to be sure, but determining the extent of these costs is a fool’s errand, particularly if one tries to do so on a per-unit basis.
At any rate, the lesson to take away from this is that the cost of regulatory compliance should be part of the debate on taxation. That the costs are hard to see and difficult to measure doesn’t mean that the costs don’t exist. Nor does it mean that the costs should be ignored. Thus, when it comes to tax policy, regulations should be fair game.
‘Again, trade is a social act. Whoever undertakes to sell any description of goods to the public, does what affects the interests of other persons, and of society in general; and thus his conduct, in principle, comes within the jurisdiction of society’ … . The ‘so-called doctrine of Free Trade … rests on grounds different from, though equally solid with, the principle of liberty … . Restrictions on trade, or on production for purposes of trade, are indeed restraints; and all restraints qua restraint, is an evil: but the restraints in question affect only that part of conduct which society is competent to restrain, and are wrong solely because they do not really produce the results which it is desired to produce by them.’ J S Mill, ‘On Liberty’, 1859, Ch. 5
This passage has puzzled me since I was a young man. It seems to me that individual liberty is obviously violated when governments intervene in trade. If a government imposes a tax on a good for the purposes of assisting the producers of a close substitute, this must be just as much an infringement of the liberty of consumers as when it imposes a sin tax on a good to discourage consumers from purchasing that good.
However, it is now clearer to me what Mill was trying to say. The first key to the puzzle is that Mill refers to ‘the principle of individual liberty’ rather than just ‘individual liberty’. What Mill means by the principle of individual liberty is explained a couple of paragraphs earlier as the maxim ‘that the individual is not accountable to society for his actions, in so far as these concern the interests of no person but himself’. According to that view, the individual should be accountable to society for ‘actions that are prejudicial to the interests of others’.
Friedrich Hayek and others have noted that the distinction that Mill sought to make between actions that affect the acting person and actions that affect others is not very useful because there is hardly any action that may not conceivably affect others in some way. According to Hayek the relevant issue is whether it is reasonable for the affected persons to expect legal protection from the action concerned (‘Constitution of Liberty’, 1960, p 145).
Now, in the paragraph immediately prior to his discussion of international trade, Mill acknowledges that damage to the interests of others does not necessarily justify the interference of society. In this context he discussed the views of society toward various forms of contest in which people who succeed benefit ‘from the loss of others’. He notes: ‘society admits no right, either legal or moral, in the disappointed competitors to immunity from this kind of suffering’.
The second key to the puzzle is that in the passage quoted above Mill suggests that all restraints are evil. If Mill is referring to coercion, as seems likely, then it seems to me that at this point he is close to recognizing the merits of the definition of liberty that Hayek later adopted. Hayek defined liberty as ‘a state in which coercion of some by others is reduced as much as possible in society’ (‘Constitution of Liberty’, p 11). This definition meets Mill’s desire to acknowledge that restraints are necessary to protect citizens from force and fraud, and may be appropriate under some other circumstances where individual conduct adversely affects the interests of others.
Mill seems to have been attempting to establish that the attitude of society toward individual conduct should depend on where it lies on a spectrum. At one end of the spectrum, where conduct affects only the individual actor, other people have no right to intervene. At the other end, force and fraud should obviously be illegal. At other points on the spectrum the effects of individual conduct on the welfare of society are ‘open to discussion’. (Mill uses these words are used in the introductory paragraphs of Ch. IV.)
In asserting that the ‘doctrine’ of free trade rests on equally solid ground to ‘the principle of liberty’ Mill is clearly implying that in our discussion of trade there should be a strong presumption that free trade enhances the general welfare of society. It follows that he must believe that government intervention in trade is generally an unwarranted form of coercion. That seems to me to be just another way of saying that such intervention is generally an unwarranted interference with individual liberty.
That is a big part of the problem. It is not politically possible for either the Federal Reserve or the Obama administration to leave the economy alone and let it recover on its own.
Both are under pressure to “do something.” If one thing doesn’t work, then they have to try something else. And if that doesn’t work, they have to come up with yet another gimmick.
All this constant experimentation by the government makes it more risky for investors to invest or employers to employ, when neither of them knows when the government’s rules of the game are going to change again. Whatever the merits or demerits of particular government policies, the uncertainty that such ever-changing policies generate can paralyze an economy today, just as it did back in the days of FDR.
There are two ways in which government tinkering promotes systemic uncertainty: by discouraging investment or by encouraging malinvestment.
The government discourages investment when it increases taxes and/or the cost of regulatory compliance. The state also discourages investment when it constantly reverses its own policies or is erratic in the enforcement of already existing policies. A continual state of flux discourages long-term investment because no one is able to feel certain about forecasting. One of the main reasons why ObamaCare and its counterpart RyanCare is so damaging is imply due to the fact that businesses aren’t able to feel certain about the future. The vociferousness with which RyanCare was debated helped to fuel systemic uncertainty, to a limited extent, because economic actors weren’t able to tell if any (or all) of the proposal would become law, and were thus unable to also determine what sort of long- and short-term plans would be viable.
But beyond that, the constant flux of change that is government tinkering also has a tendency to encourage malinvestment and market timing. Virtually every subsidy speaks as evidence for the former; Cash for Clunkers speaks as evidence for the latter.
Subsidies encourage malinvestment because they eliminate what economists refer to as moral hazard. Moral hazard is simply a fancy way of saying that people are more careful when investing their own money. When the government, for example, subsidizes corn-based ethanol, farmers have an incentive to grow more corn and venture capitalists have an incentive to invest in companies that will turn corn into ethanol-based fuel. This is generally unsustainable by market means because corn-based ethanol is energy negative, which simply means that producing ethanol burns more energy than it creates. Malinvestment can also be encouraged by indirect subsidies, like tax breaks or regulatory exemptions. This lowers the cost of doing business and increases profits, encouraging companies to pursue certain ventures.
When people think that the government may subsidize them, directly or by tax breaks, they have a tendency to wait until they qualify for the terms of the subsidy. This is true especially of temporary programs, like Cash for Clunkers, as mentioned before, or special tax breaks, like the first-time homeowners tax credit. These programs were ultimately failures because all the accomplished was pulling demand forward by a couple of months. They did not jump start the economy or increase long-term demand. Temporary subsidies, then, contribute to systemic uncertainty because economic actors try to time the market in order to get the most favorable deal. Businesses hold inventories to take advantage of greater demand later on. Consumers delay spending money in order to purchase things later on. Instead of allowing the market to function as it ought and smooth demand over time, government interference causes people to time the market and upset long-term plans.
Incidentally, the reason why temporary government programs generally become permanent is because there are some people who find temporary programs to be personally beneficial. When you have programs that offer lower prices to consumers and larger profit margins to businesses, most of the parties involved want to continue taking advantage of that system. Because of this, politicians vote to make temporary programs permanent because it is politically popular with their constituents, and because the political costs are widely dispersed and indirect.
Of course, the possibility of a temporary program becoming permanent also encourages systemic uncertainty because economic actors are unsure which specific programs will become permanent and if the terms of those programs will be altered in the process of attaining permanence.
In sum, it is simply best to let the market correct itself. Tinkering is futile at best and counterproductive at worst. Therefore, simply letting the market be is the best strategy, even if it is somewhat painful from time to time.
Just to clarify from an earlier post
, my stance on protecting IP is that is wrong for the government to do so, but I have no issue if a private business wants to protect its intellectual creation.
Furthermore, I am not a piracy positivist.
I do not believe that people have a “right” to IP for free.
If they can capture another’s idea for free, more power to them.
If they have to pay, so be it.
No one has a right to information.
In keeping with the above, I would recommend reading this article
To me, this seems like the perfect way to handle IP protection.
Obviously, the government isn’t cracking down like it used to, so businesses have built designed their own protections to ensure that they actually paid when people use their product.
This seems to be the optimal way of handling this issue, especially since IP law has devolved into a massive redistributionist scheme for big business (cf. Apple’s recent lawsuit, Microsoft’s recent lawsuit, Google’s recent lawsuit, etc.) Why not let people protect their own intellectual “property,” and stop this headache of a legal system? This system does not seem to make any difference to the big companies and has a tendency to screw over the small time inventers and innovators (ever heard if patent trolls?)
On 18th June, the President signed an ordinance that would settle the recent spat between SEBI and IRDA over unit linked insurance plans (”ULIPs”). The ordinance makes it clear that ULIPs cannot be regulated by SEBI and places them within the jurisdiction of IRDA. The ordinance also tries to prevent further disputes by setting up a joint committee to address future conflicts. But this is not all there is to the matter. The ordinance also amends 4 major acts of parliament governing financial markets in the country (the RBI Act, the Insurance Act, the Securities Contract Regulation Act and the SEBI Act) with minimal consultation. The language of the ordinance also raises a wide range of questions about regulatory arbitrage, misselling, what issues the joint committee would actually consider, the very effectiveness of the proposed solutions, good governance and the structure of financial sector regulation. This is not a small list.
Looking at these matters in turn, the ordinance raises serious concerns about regulatory arbitrage. Today, ULIPs act as ‘endowment policies’ where the premium paid by the insured on a what is nominally a life insurance contract is invested in the stock market. Under these contracts, if the insured dies before the maturity of the policy, there is an insurance payout. After a fixed period or maturity, the investments in the stock market are liquidated and returned to the insured minus charges. Under these conditions, insurance companies cover the risk of premature death for only a short period of time (between entering into a contract and maturity). As such, the insurance component of these policies (the money which the insurance company must keep with itself to meet its contingent liability) is very low. The rest of the money can easily be invested and payouts depend upon the stock market.
Mutual funds are similar in all aspects to ULIPs except for the small component of insurance that an ULIP carries. However, mutual funds must comply with tough regulations imposed by SEBI and are severly limited in the forms of fees they can charge. Financial firms faced with the choice of registering as a mutual fund and complying with SEBIs regulatory framework or providing a small component of insurance in their product structures, registering as a ULIP, and charging open-ended fees, will rationally choose the latter.
Second, as many others have commented, the ordinance does not address misselling. (See recent articles by Monika Halan, Deepak Shenoy and Jayant Thakur). The ordinance does not include any provisions to deal with misselling. The ordinance also does not address IRDAs lack of enforcement capabilities vis a vis SEBI. The ordinance does active harm and removes provisions that previously protected investors. By amending the Securities Contract Regulation Act, insurance instruments are now not considered securities for the purposes of the Act. Section 27 A and B were one of the few statutes in the country addressing misselling. These two sections gave investors in collective investment schemes and mutual funds limited investment protection, namely rights to income under collective investment scheme. These small provisions will now not apply to insurance products, weakening investor protection for the time being.
Third, the provisions of the ordinance raise concerns about what matters the joint committee would actually consider. The dispute settlement mechanism in the ordinance specifies the securities which can be referred to the joint committee. We wonder: could the ULIP controversy have been the first matter submitted to the joint committee? In any case, since new types of securities are constantly being developed by financial firms, the joint committee would need frequent legislative interventions to be operable. For example, the joint committee in its current form, does not include the Forwards Markets Commission (FMC). If a product were to be launched which consisted of a hybrid of steel futures and steel companies futures (not an absurd proposition to the extent that steel prices play a significant role in the profits of the steel industry), the FMC would not be allowed to approach the joint committee as the Commission is not a recognised regulator under the ordinance.
To take up a different example, the joint committee is also limited in its jurisdiction to “hybrid” or “composite” instruments. Certainly many disputes could arise between regulators that do not involve an underlying hybrid or composite instrument. An instrument governed by one regulator that has a negative effect on the market regulated by another regulator, as with the regulatory arbitrage hypothesis suggested above, could not be referred to the joint committee. Neither could issues which bring instability to multiple markets, unless, of course the underlying instrument is hybrid or composite.
Fourth, the structure of the joint committee points to problems of institutional design. The ordinance is largely silent about the procedures the joint committee would follow. This is not simply a technical matter. How would differences of opinion in the board be settled? By majority vote? Consensus? Would there be staffing? Who would be responsible for expenses? No doubt, to a significant extent disputes would be settled by reference to soft norms and existing hierarchies in government. The culture of deference by IAS officers to other IAS officers of a senior class provides one example. The unlikely possibility of agency regulators going against the deeply held preferences of a strong finance minister provide another. Yet these are not simply mundane questions and impact, materially, how extensively the committee could study and resolve matters before it.
Fifth, the process by which the ordinance was passed is worrisome. As suggested by the Economic Times, regulators were not consulted on a ordinance that amends 4 major acts of parliament. What does this say for consultativeness and democratic process? What does this say for the legitimacy of the proposed solution? Is the failure to consult and rush to promulgate this solution reflected in the drafting and policy flaws of the instrument suggested above?
Sixth, the ULIP dispute has been presented as a contest between SEBI and IRDA. Implicitly, one regulator had to win, and the other, lose. This is misleading. One scenario would have each regulator govern the portion of ULIPs which fall within their domain. IRDA would govern the insurance component of these instruments and SEBI would govern the investment component. Some might suggest that this would lead to too much complexity. Yet, we are more used to dealing with complexity than we realize. A person driving a vehicle who causes damage to property could be liable for damages under rules of the Motor Vehicle Act, tort law and possibly the Indian Penal Code. That the net zone of freedom of action in driving a car would be limited to the conjunction of the areas prescribed by these laws seems hardly remarkable. The government would never declare that all motor vehicle drivers are immune from civil or criminal laws. The more complex the transaction, the more regulation might apply. Financial firms are as well-equipped as any actor in society to handle this complexity.
Another scenario would involve crafting a mechanism for joint regulation of ULIPs. As Monika Halan suggests, this proposal has precedent in the arrangements between the banking and capital markets regulators and could lead to the harmonisation of regulation to the benefit of investors and the marketplace.
Yet another scenario would involve actively fostering or allowing some measure of regulatory competition. The heightened regulation of ULIPs as a result of this controversy is itself a salutary case in point. We do not suggest that the government allow this issue to fester but feel confident that serious scholars and practitioners of administrative law and institutional design could develop interesting ways of promoting regulatory competition given time and a mandate.
Hurried solutions lead to poor law with implications that will be felt by investors and markets down the line. Ordinances are intended for use when Parliament is out of session and the President perceives a need for immediate legislation. Ordinances may be amended. The conflict between SEBI and IRDA is also only one small piece of a larger problem of financial sector legislation that is fragmented, at times duplicative and at times inadequate. We can only hope that Parliament revisits this matter in a more thorough fashion, either independently or through the efforts of the proposed Financial Sector Legislative Reforms Commission proposed in the Finance Ministers budget speech of 2010-11.
I’m not sure Leonard Pitts is correct about Bobby Jindal rethinking his belief in less government. What if your next-door-neighbor contracted with a wind energy company to erect a wind generator, and it fell on your property? You’d be angry at the company, but you’d hold your neighbor responsible.
Now, the US Government claims ownership of the waters off the coast. It licensed BP to drill off the coast. That went sour, and Louisiana has been hurt. They’re holding the US Government responsible.
This has nothing to do with the correct size of your next-door neighbor. Nor does it have anything to do with the correct size of the US Government (which does things not even remotely present in the US Constitution).
Government is the enemy in the case of this oil spill, since it didn’t require remotely operated valves on the blowout preventer.