Sunday, June 14, 2015

Free market fixes for climate change?

In her recent article for the Chicago Tribune titled "End climate change scare tactics; try free market fixes" Rachel Marsden dismisses President Obama's recent concerns about climate change as a threat to global security and goes on to suggest that although there is no way to control the earth's climate we can adjust by allowing multinational corporations to conquer the environment. Both of these claims seem misguided to me for a number of reasons.

As to the concern about security and the environment there are many documented cases of destruction of the environment by human action and subsequent societal collapse. The story of Easter Island is a good example, and may serve as a miniature version of what could happen globally.

As the earth's climate changes, areas that were marginally able to support the local population will suffer. And unfortunately the results are not self contained. Collapse results in lawlessness, chaos, and refugees who naturally head for the closest haven. Sudan is a text book example of the problems that can result.

After dismissing human causes for climate change as a scam, Masden goes on to say "If we're talking about human comfort and livelihood, then addressing climate change is not the same thing as trying to control the earth's temperature. Human adaptation is readily doable."

Of course adaptation is possible to a point, although the history of the climate of Mars demonstrates that this may be a losing proposition in the (very) long run. And providing comfort for those who can afford it will quickly become a losing proposition if large populations are displaced and decide to head for more promising territory.

The part of this article that I find most unbelievable is that the free market is the "definitive, catch-all climate solution" and her claim is that "The multinationals will invest in stability and engagement programs in and around their assets to protect their interests -- with the local population benefiting."
I think that this would be more credible if she provided a few examples. My opinion is that, just like individuals, multinational corporations are susceptible to the tragedy of the commons. Rational behavior on their part can result in destruction of the environment or depletion of renewable resources and usually requires the community (aka government) to intervene to prevent it. This is especially true for extractive industries (mining) where there is no residual value, and in fact potentially large liabilities due to environmental damage.

An excellent example of this is illustrated by the border between Haiti and the Dominican Republic. The Dominican Republic has a history of government intervention to try to preserve the ecology while Haiti doesn't. The results are clear and have major effects on the economies of both.

Finally, Marsden's preference for adaptation is based on her belief that "Controlling the entire planet's climate clearly is not (doable) -- even if you're a narcissist of epic proportions who refuses to believe otherwise."

This strikes me as odd since, based on our experiences with chlorofluorocarbons, ozone depletion, and CO2 emissions, it's clear that humans can affect the earth's atmosphere and climate. Control may be more challenging, but if we can create negative effects why not positive? At least a good start would be to stop damaging it. And as we saw with chlorofluorocarbons, the solution won't come from corporations responding to the free market, but to regulations imposed by governments who are protecting the best interests of the population and planet.

Saturday, May 23, 2015

Lets Cut Taxes!

The Texas legislature is in session and a tax cut is on the agenda with two competing proposals. One is to reduce property taxes and the other is to reduce sales taxes. Which one is the best?

I've been complaining about property taxes for years, and since I'm close to retirement I see property taxes as an unending, uncontrollable, and increasing drain on my future fixed income. Sales taxes on the other hand are proportional to my spending, and so somewhat controllable. That's why I'd prefer the property tax cut.

But on further reflection I changed my mind. Here's why...

If government is going to work it needs to be fair, but historians and economists know that this isn't the natural order of things. Throughout history wealth has tended to become concentrated. People in power naturally act in their own self interest, and the result is to further increase their power and wealth. I don't see this as intentionally evil. It's simply the result of rational (as defined by economists) behavior.

The problem is that this trend is unsustainable. At some point it's inevitable that the concentration becomes so extreme that a correction is made, and it's rarely pleasant.

So what does this have to do with the tax cut proposals? Of the two it seems clear to me that the fairest proposal would be the sales tax cut because everyone who spends money would benefit. And it's inherently progressive (tending to reduce inequality) because lower income people spend (rather than save) a higher percentage of their income.

If you're a cynic you can probably guess which of the two proposals is on the fast track to pass. It's the property tax cut. Admittedly it is a progressive cut since the proposed method is to increase the homestead exemption, but before you small fry homeowners celebrate here's another twist or two.

A recent study from UT's McCombs School of Business claims that commercial properties tend to be appraised well below their market value, which shifts the cost of government from the wealthy to homeowners. And remember the last time we were promised a property tax cut? It was quickly offset by rate increases at the local level.

So what's the bottom line? Neither cut is going to make a huge difference to the average Texan, but if the property tax cut wins it will be one more example of how wealth slowly becomes concentrated at the top.

Saturday, February 8, 2014

Government is not your enemy, business is not your friend

Sometimes it seems that for every problem we face in the modern world the conservative community has the same solution, eliminate government regulation.  If only we would free businesses (the job creators) to innovate in a free and open market all our problems would be solved.

Now I’m not going to claim that there aren’t way too many silly, destructive, or overly complex government regulations[1] (although it seems like many of them were created by the same job creators to protect some favorite benefit or government perk). And it’s perfectly rational that the business community is in favor of less restrictive regulation. But I don’t buy the “government is evil / business is good conclusion”, which in my opinion requires a stunning ignorance (or dismissal) of history, as well as current events.

Business needs government

First of all, business can’t exist without the legal infrastructure, including contract law and corporate protections, provided by government regulation. And government plays a role in building or enabling natural monopolies including transportation and communications infrastructure that businesses rely on.

But the larger issue is that the natural role of business is to maximize returns for shareholders, and history has shown repeatedly that without regulation they will do so with no regard for the overall well being of society. Although disappointing, this is also perfectly rational behavior. In fact it’s an illustration of a well know moral dilemma, the tragedy of the commons[2], where rational behavior by individuals, including corporations, can be detrimental to society.

Examples are so common it seems unnecessary to point them out, but here are a few…

Working conditions

Henry Ford believed that paying his workers enough to become customers was good for his bottom line, but that type of thinking is rare in today’s modern corporations where decisions are dictated by the quarterly earnings cycle.

Examples of business taking advantage of workers are plentiful. In the US the most extreme case is probably the justification of slavery by the cotton, tobacco, rice, and sugar cane industries among others. As usual the argument was made that these industries couldn't survive without slavery and the economy of the South would collapse.[3]

Short of slavery, long work weeks, work days and child labor were common in the US until the emergence of strong unions that gave worker a voice that could match the power of employers[4]. Unsafe working conditions were common until regulation sparked by industrial accidents such as the Triangle Shirtwaist Fire.

And it’s not that these are less common now because of enlightened business practices. We’ve just exported these conditions to third world countries where there are no protections[5].

Conservative philosophy argues that, in a free market, workers are free to vote with their feet and that wages and working conditions will reach a natural equilibrium. But competition forces businesses to match wages and related costs to stay viable, resulting in a downward spiral of wages, benefits and working conditions.


Businesses have a long history of polluting the environment, (LA Smog, Cuyahoga River Fire), a perfect example of the tragedy of the commons. In their defense businesses claim that they can’t survive if required to eliminate pollution, but unless their product reflects the true cost of production the result is effectively a subsidy by the community at large. Only government has the power to prevent businesses from passing costs of production on to the community.

The conservative response is that reducing pollution is too expensive and will damage our economy, but the cost is real. The question is, should it be ignored, born by government, or incorporated in the cost of the product.

Building standards

According to Wikipedia one of the earliest records of building codes are found in the Code of Hammurabi dating from around 1772 BCE [5]. Today’s building standards are fairly strong in the US, but examples of lax enforcement or the lack of standards elsewhere are easy to come by[6]. Once again the free market can’t provide protection from unsafe construction.

Adulterated of Unsafe Food

Food safety regulations started in the US following the Swill Milk scandals in the 1800’s in the US. Think this can’t happen today? In the US most of our food comes from large corporations that won’t risk the damage that would result from contaminated food. This is an example of effective protection in an open market. What gives consumers power is the high frequency of purchase from an identifiable source, but we still require someone with the ability and incentive to do periodic tests.

Role of Government

From the examples above it seems clear to me that government has a role to play by representing society as a whole and preventing the natural inclination of businesses to profit at the expense of the community.

This isn't to say that there aren't a lot of examples excessive or unnecessary regulations. In fact that is where I think we need to focus the debate. Rather than mindlessly repeating the mantra of government is bad and business is good let’s have a civil discussion about specific regulations that should be eliminated, changed, or added and judge them on their merits.

Tuesday, March 13, 2012

United We're a Monopoly

When I think of the unequal distribution of gains in our economy over the last 30 years I wonder what it would take to reverse the trend. It seems that the solution would have to include reducing the inequality in influence between upper management and employees.

In the past, one way to level the playing field was through unions. In theory this should give employees the power to negotiate with management as equals and claim a bigger share of the proceeds. But personally I've always been a little wary of unions. Part of it is their early association with communist and socialist philosophy and ties to organized crime. And it sometimes appears that the union is just another large corporation with their hand in the till at the members expense. It may be that negative stereotypes have made it easier for corporations slowly reduce the unions power. For whatever reason, union membership is at historically low levels.

Even if unions were more successful there seems to be a bigger problem. Sometimes powerful unions seem to cause undesirable outcomes, like teachers that can't be fired and autoworkers that price themselves out of a job. It seems to me that the underlying problem is that, unlike corporations, unions are allowed to become monopolistic. I believe that one monolithic teachers union can be just as damaging to education as Carlos Slim's lock on the Mexican telecommunications market, resulting in lower quality and higher prices.

I wonder if it would be possible to revitalize the benefits of unions by creating smaller competing entities that could combine the benefits of collective bargaining with the Darwinian forces of a competitive marketplace.

If so, the first step may be to use anti-trust legislation to break the industry wide unions into smaller entities that could compete for employees on their merits. (BTW, I have not idea how or if this would work.)

There could be other ways to reinvigorate or re-invent the idea of unions. One thought is via information sharing which seem to be revolutionizing lots of businesses. For instance, what if employees organized to share salary information, or feedback on management? I'm sure that there are other good ideas out there.

So, a few questions; 
  • Do you agree that inequality is an issue?
  • If so, how can it be reduced?
  • Can unions play a role?
  • Are monopolistic unions really a problem, or should they remain exempt from anti-trust regulations?
  • Do you have an idea for other ways to build employee influence?
Maybe there's a new billion dollar company to be started.

Sunday, February 26, 2012

War on Religion?

Over the last few weeks the news has been full of controversy about the intersection between religion and government. The catalyst was a ruling regarding medial insurance coverage, but since then the 'debate' has grown to a broader concern of government interfering in individuals religious practices.

I would never claim that this is a simple issue, but I also don't believe that there is a systematic attack or war on religion by government, as claimed by Newt Gingrich among others..

Of course there is reason to fear such an attack. History is filled with examples of governments outlawing and attacking religion. Mexico, the Soviet Union and China are good examples.

But our government has religious freedom guaranteed in the constitution, along with a requirement in the first amendment that "Congress shall make no law respecting an establishment of religion..." And this isn't a hollow promise as demonstrated by numerous lawsuits and court rulings.

The problem is that it's not always clear how to accomplish these two requirements. There's a lot of grey between the black and white, so this debate will continue indefinitely. Unfortunately, at least the public debate seems rarely to be conducted as a respectful conversation.

From the left the goal sometimes seems to be a desire to completely exclude religion, even though the great majority of citizens are religious. On the other hand, the religious arguments appear to be more a desire to protect or promote a particular religion or even belief.

For instance, last year's demand to prevent the creation of an Islamic community center in New York City would seem to be a clear violation of the first amendment. And within the Christian community politicians can be very selective when quoting religious arguments. For an example take a look at an article by Juan Cole titled "Top 10 Catholic Teachings Santorum Rejects while Obsessing About Birth Control".

To me the fundamental issue is that religion, by it's nature, is faith based and therefore not subject to any objective test for legitimacy. This means that I'm free to invent any religion I please and then claim protection from the first amendment. At some point the public good will trump individual belief and the result will be an incursion by government. Recent examples include Warren Jeffs conviction for statutory rape or the murder conviction of Muzzammil Hassan.

So what about the specific issue of insurance, birth control, and religious institutions? I have no idea what the 'correct' solution is, but I doubt that the issue is simple or that there's an obvious fix that would satisfy everyone. I just wish that the public debate would consist of reasoned arguments rather than attacks on individuals or sensational claims.

Thursday, February 16, 2012

Money for Nothing?

Despite recent setbacks over the last 30 years the US economy has grown by over 120% in constant dollars. This should be good news for all Americans, but there's something interesting about this period of time that's quite different from prior years.

Over most of the history of the US gains in GDP were shared more or less equally on a percentage basis among all income groups. This makes sense if you assume that the success of an enterprise, whether it's a small business or the country as a whole, is the result of the efforts of the group rather than a few individuals.

What's unusual about the last 30 years is that, unlike prior periods, the gains have gone exclusively to the upper 20% of wage earners, and the bulk of that to the top 1%.

My first reaction is that this just doesn't seem 'fair'. Shouldn't everyone participate in our country's financial success?

We know from history that there's no economic force that tends to favor equitable distribution of gains from a large enterprise. Business operates to maximize profit, and it took government regulation to eliminate slavery and sweatshops. And unions, which can give employees a voice in the distribution of gains, also need government to exist and survive.

But beyond the ethical arguments from a completely practical point of view this trend doesn't seem sustainable. We know that the US economy is heavily dependent on consumer spending, so if 80% of consumers are getting a smaller and smaller part of the gains their spending will have to decrease as well, resulting in a downward spiral. If this is true business does have a long term incentive to share gains, but I don't see a strong feedback mechanism. The correction could be traumatic.

So here are my questions;

  • Is there a problem, or is our economy behaving correctly?
  • If you believe there's a problem will it correct itself, or is some type of intervention required?
  • If you believe intervention is required, what would you do?

If you're interested in additional reading on the topic take a look at "Winner Take All Politics" which details the authors opinions that government actually created the current imbalance. Other suggestions for reading on this topic are welcome.

Tuesday, February 14, 2012

Minority Rule

One of the foundations of our democracy is rule by the majority. Of course early on there was a lot of debate about who was allowed to vote as well as the issue of the power of states versus a plurality of voters. But the general idea was that a vote would be taken on issues and the majority would decide.

Starting in the 1970's the filibuster, began to be used in the senate by both parties as a means to prevent a vote that would be won by a simple majority. This tactic allows 41 Senators to block passage of a bill, and over time this has become the rule for all major decisions resulting in gridlock at the will of a minority.

During the debate over ratification of the US Constitution Alexander Hamilton saw the danger of this and described it in one of his contributions to The Federalist Papers, a series of articles in support of ratification of the proposed US Constitution. Here's an excerpt from Federalist 22;

"... what at first sight may seem a remedy, is, in reality, a poison. To give a minority a negative upon the majority (which is always the case where more than a majority is requisite to a decision), is, in its tendency, to subject the sense of the greater number to that of the lesser. ... If a pertinacious minority can control the opinion of a majority, respecting the best mode of conducting it, the majority, in order that something may be done, must conform to the views of the minority; and thus the sense of the smaller number will overrule that of the greater, and give a tone to the national proceedings. Hence, tedious delays; continual negotiation and intrigue; contemptible compromises of the public good. And yet, in such a system, it is even happy when such compromises can take place: for upon some occasions things will not admit of accommodation; and then the measures of government must be injuriously suspended, or fatally defeated. It is often, by the impracticability of obtaining the concurrence of the necessary number of votes, kept in a state of inaction. Its situation must always savor of weakness, sometimes border upon anarchy."

Hamilton's prediction seems prescient given recent events.  

Routine use of the filibuster appears to be a clear case of our government operating in a way that is both at odds with the fundamentals of democracy as well as the intentions of at least one of our founding fathers. I believe that the filibuster should be eliminated and rule by the majority reinstated. What's your opinion?