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April 29, 2006

Wikipedia - the ultimate blog?

A recent story makes one of my favorite resources out to be dirtopedia. Part of blogging is pointing to other blogs, not out of homage, but with the idea that a multiverse of intellectual output is more than zero sum. I don't mean that in a collectivist sense, as in we are working together under some altruistic bent to further the common good, but rather than one's own work can be buttressed or enlarged by independent self-interested contributions of others to intellectual life. Further one's own ideas can be subject to revision and criticism even as they revise and criticize the ideas of others.

Wikipedia is the logical conclusion of this cerebral megaverse (pardon the rhetoric of emerging string theory - I just finished Susskind's popular distillation of string theory The Cosmic Landscape in which he lays out metastable laws of physics that result from compactified dimensions resembling a cross between a bagel and a block of swiss cheese -- not a bad read despite my offhanded review).

And my quick reference to Wikipedia to clarify who Leonard Susskind is epitomizes the utility of this device. Of course, if you think politics is characterized by dirty tricks and hadron physics is not, guess again. There are colossal egos at play here at the edge of the universe and even entries for the likes of Susskind might be subject to intellectual mob rule in which those who disagree with his prognostications or wish to make more or less of their spiritual ramifications make subtle belittling or elevating additions to Susskind's wikipedia curriculum vitae.

The fact that Wikipedia is subject to skullduggery doens't dash my hopes for this everyman blog. If men were angels they wouldn't need blogs and we'd all be out of 'work'. Maybe the simplest 'policing' strategy is sunshine, about the only form of 'campaign finance reform' I would support as well. I think the identity of posters, even if it is only a virtual identity established by some fiduciary intermediary, then allows you to follow the intellectual trail of a particular participant if anyone becomes concerned regarding the bias of their additions to wikipedia - or elsewhere - not in general as a mechanism for prohbiting any participation but for contextualizing it.

April 26, 2006

iPrices

Tyler Cowen is hosting a good discussion about why all the songs on iTunes cost the same ($0.99). Since there is obviously a higher demand for some songs and less for others why not charge $2 for one and $0.50 for the other? Cowen has a number of good suggestions, and I think he's real close when he writes "Apple makes much of its money on hardware, especially iPods. Low song prices cross-subsidize the hardware, to some extent at the expense of music companies. That said, some music companies wish to charge lower not higher prices."

But it is not simply that iTunes is trying to subsidize iPod, there could be a bigger marketing angle. There are many companies that are producing similar hardware, Creative's ZEN for instance. The key to iPod is the iTunes interface, with which most (if not all) competitors are incompatible. The low price is all about keeping you inside the iPod/iTunes music loop. The minute prices for a song approach your expected cost at a standard, or even used, brick-and-mortar cd store, then the incentives to my the iPod itself decrease and competitor hardware becomes more attractive. I would imagine that if some music companies want more per song, then Apple would be willing to eat that cost in order to keep it's prices down.

This is just my theory, but it seems the price of the music is part of an overall marketing strategy that has been extremely successful. To change it now would be absurd.

April 25, 2006

A touch of supply-side heresy

At the risk of having Pat Toomey, Dick Armey, and Stephen Moore show up at my door this evening clad in their finest Torquemada-like attire, I need to get something off my chest regarding supply-side dogma.

It isn't that I necessarily disagree with supply-side theory. Properly understood, supply-side economics is just another term for basic capitalist economics, of the variety that Adam Smith wrote so approvingly of in that great year, 1776. Supply-side theory is really nothing fancier than a restatement of one of the most basic and unchallengeable premises of economics: incentives matter.

No, my quibble with supply side is not with the theory itself. It's with the advocates and practitioners.

For years, I've been reading op-eds in the Wall Street Journal, among other places, that essentially follow the same form. The form is as follows:

Elected Official X has proposed reducing taxes by increasing or creating exemptions, deductions or tax credits, or lowering property or sales taxes. Elected Official X should instead be promoting loweing the marginal tax rates on income taxes, because the incentives for producers will then be improved which will lead to higher tax revenue and greater prosperity and wealth.


I don't disagree with the theory outlined, as history has clearly shown that reducing marginal income tax rates will indeed lead to economic growth, prosperity, and increased revenue for the government (although why this last one is a virtue remains somewhat of a mystery to me). Instead, I have a problem with the idea that lowering other taxes is, essentially, not worth the bother, because it doesn't increase economic growth.

Such single-minded focus has always been an irritant to me. Yes, taxes that increase economic growth and prosperity are good. But I think there needs to be an equally compelling case made on behalf cutting other taxes as well, taxes which, let's face it, aren't going to be felt much by entrepreneurs but that are going to be felt by families that are struggling to meet the mortgage or car payment or save money for a child's education. No, tax cuts targeted at such families aren't going to do much for economic growth, but they can do a world of good in terms of lifting the onerous tax burden felt by the millions of families that have little income tax liability, but do have to pay sales taxes on their day to day purchases.

The supply-side orthodoxy has, sadly, abandoned citizens who aren't in a position to benefit directly from the improved economic enviroment created by marginal income tax rate cuts. I don't mean they've abandoned them in terms of not caring about them, because supply siders believe that 'a rising tide lifts all boats' and so their tax cuts will indeed, to borrow an unfairly maligned term, 'trickle down' to those at the bottom of the economic ladder.

No, the abandonment is of a different type, the abandoning of the development of intellectually rigorous arguments against increases in sales and excise taxes, among other types of taxes. While the supply-side, free-market, anti-tax coalition has developed a broad array of evidence, theory, and arguments in favor of lowering marginal income tax rates, capital gains taxes, and similar pro-growth measures, it has not spent much time developing a similar arsenal for arguments against sales and excise taxes. Nor has it spent much time educating and persuading the voting public that taxes other than income, capital gains, and similar taxes should be guarded against hikes. Instead, most of the resources of the anti-tax coalition has been devoted to pro-growth tax cuts.

This has been, in my opinion, a dangerous oversight. For some time, I've been observing that few politicians (particularly the ones that want to be re-elected) have been willing to propose increases in income taxes or property taxes (while supply-siders haven't spent much time on property taxes, they are in many ways the source of the original tax revolt, and politicians understand that raising property taxes can be perilous to their political health). The same cannot be said, unfortunately, for sales and excise taxes. Here, whether broadbased like the sales tax or narrowly-targeted like cigarette, alcohol, hotel rental, and telecom taxes, politicians have focused their efforts to raise new revenue.

By not developing arguments against raising such taxes with anywhere near the same fervor they have on income and capital gains taxes, the anti-tax coalition has helped to create a climate where politicians continue to feel comfortable proposing and voting for hikes in sales and excise taxes. Their argument is almost always that they aren't taxing their citizens, but rather the highly profitable corporations that produce and sell these goods and services. It's really 'someone else' that is being taxed, not the people.

Sure, local anti-tax activists may try to stir the hornets nest when sales and excise tax hikes are proposed. But where was the anti-tax movement before the tax hike was proposed? When state revenue began climbing again after the last recession, and many states found themselves with surpluses, where were the anti-tax forces? I can tell you where they were, they were preparing their case for a reduction in income and capital gains taxes. I would hazard a guess that the idea of proposing that part of the surplus be returned in a sales tax cut was scarcely mentioned, and if it was it was most likely as part of a 'sales tax holiday' gimmick.

No, if the anti-tax movement can't put together coherent, well-supported arguments for cutting sales taxes and excise taxes when the opportunity arises, it can hardly be surprised when politicians looking for ever-expanding sources of revenue decide that they have a better chance of getting away with hiking those taxes instead of income or property taxes.

Politicians should be fearful of raising any tax, not just those taxes that supply-siders argue have an impact on economic growth.

And if Messrs. Toomey, Army, and Moore wish to discuss this with me this evening, my address is 1060 West Addison in Chicago. My roomate Jake will probably answer the door.

High Gasoline Prices—What the Government Can Do

In an effort to deal with—or be seen as dealing with—high gasoline prices, President Bush called upon Congress to "find a way to approve permits to build new refineries a year after they are filed." In addition, Bush noted that he had "told the Environmental Protection Agency to use 'all available authority to grant waivers that would relieve critical fuel shortages,' and said he would seek more waiver authority from Congress if needed." Both quotes are from a brief Reuters story on the subject.

In addition, AP reports that Bush today also "halted for the summer the purchase of crude oil for the government's emergency reserve."

Analysis: the President's suggestions are valid and reasonable things for the federal government to do: to alter federal policies that force up the price of gasoline without paying off in a cleaner environment. (Reducing gasoline taxes at all levels of government would lower prices at the pump significantly as well.)

There are plenty other federal laws that are exceedingly valid candidates for such treatment, in countless areas of life and the economy, and I hope that this can be the beginning of a trend.

Although it almost certainly won't be.

April 24, 2006

Are we journalists? does it matter? EFF broken clock?

Apple, the company that teeters between radical innovation and insular reactionary business models has moved the debate over leaks to the private sphere.

An appeal of an order providing Apple with subpoena's over an e-mail provider was heard last Thursday. The anti-intellectual property Electronic Frontier Foundation (EFF) is busy making bloggers into journalists to extend the imaginary journalists' shield - proposed by EFF to work like the shields on the starship Enterprise but having more in common with the cone of silence from Mel Brook's classic sitcom Get Smart.

Given the general state of journalism, I'd just as soon not be included. But a more interesting question is whether the EFF is, as they claim, defending freedom in the digital world, or defending cyber theft.

The journalist's shield is no different than anyone else’s. If we're talking about defending freedom here, we should not be making this artificial distinction between journalists and everyone else. Whatever a journalist has the freedom to do, I have the freedom to do, although I don't consider myself a journalist.

In the second case of the 'Broken Clock' I have reported on this week, it appears that EFF is on the right side of the Apple v. Does case, but not because bloggers are or aren't journalists which they insist on advancing as the primary argument in the case.

Can that teen-something who lives down the hall steal a CD because music ought to be free? In the culture of disrespect for property cultivated by the EFF many teens answer yes. After all, the plastic is only worth a few cents, what’s the difference between taking a CD and grabbing a penny out of the dish to help you make change at the store counter.

Assuming that the present audience is immune to such rationalizations, the next socratic step is to ask is: can a Journalist steal the same CD in order to review it?

Of course it is the intellectual content of the CD that makes it worth arguing over (in the case of what passes for popular music today this is, perhaps, debatable -- but let's grant the point for the sake of argument). In the Does case, Apple advances the idea that their trade secrets are intellectual property that have been similarly misappropriated.

There seems little doubt that, if Microsoft parachuted a tac team into Cupertino to spy on Apple's undertakings, we would recognize this as [post] industrial espionage. But if bloggers do the same thing are they insulated from culpability by their ubiquitious nature and more complex motives.

At root, it appears the Apple is really trying to find out which one of their employees spilled the beans on their "Asteroid" project - an interface between a guitar and computer. A strong case attaches to their ability to hold such an employee responsible, as they no doubt have contractual provisions regarding how employees treat with internal information and - oddly enough - the terms of the contract ought to govern the result.

But what of the people to whom these employees apparently gave information. Are they just folks who think they got a 'comp CD', i.e., harmless inside dialogue and essentially non-proprietary intra-institutional soap opera stuff which is only boosting Apple's fortunes in the long run, or did they know and understand that they were robbing the companies cradle of development ideas -- if indeed Asteroid were such a child.

Characterizing these undertakings requires a complex case by case examination. Certainly the nature of human interest in information puts Apple on notice that there is no societal bar to trying to know these things. Society would, on the other hand, frown on breaking and entering or clearly nefarious means for discovering them. But to the extent that this proceeds along the lines of a who's dating whose wife in Hollywood, it is clear that there is a large range of information that people would wish to keep private but they can expect the public to attempt to ferret out.

But if the company's putative interest in closely holding the information, or the nature of the ferret (never send a ferret to do a weasel's job - heard in a Budweiser ad once), makes this any kind of close call, an obvious tie break is the 'obvious' test. In this case Apple is apparently going to the mat to keep the public from finding out that they have secret plans to hook up a guitar to a computer. Now there is something no one would ever have dreamed of. In the day of digital music, this is supposed to be a new idea?

Just as patents for the peanut butter and jelly sandwich -- the case was a little more complex than that but the rhetorical convenience is unavoidable -- cheapen respect for intellectual property, Apple risks the same here. These bloggers don't deserve protection because they are journalists, but because they are human -- and it seems reasonably clear they haven't made off with the [Mac]family jewels.


April 21, 2006

Choice Series: Lawrence Patrick, BAEO


!DVD available - call Gwen at 312-377-4000 or email carver@heartland.org for more info!

On April 20th, Lawrence Patrick III addressed the need for educational choice for Black parents and students. Described as a visionary leader, Patrick is a leading voice in the movement to increase educational options for black children. Patrick is passionate about ensuring children have access to high-quality education and information. He is a co-founding member of BAEO.

In a dynamic and engaging speech, Patrick told a room full of school choice supporters that if you "Get the Money, You Get the Power, and You Get the Respect," a phrase first coined by rap artist Lil’ Kim.

Reason in Amsterdam

I'm glad I'm not the only one thinking of maxing out my credit cards for this Reason conference, though sadly, I have no desire to propose to Trey Parker. I wonder if they comp think tankers? Genius, those guys are.

reasonamsterdam_sm.jpg

The Terrorists are among us and not who you think

Americans are correct to be concerned about potential terror activities by Muslims, but the most common form of terrorism since 9/11 has been among so-called environmental and animal-rights activists.

In their vigilante-style attempts to force people to obey laws set by these groups themselves, laws which the American people and their federal, state, and local governments have declined to impose, these terrorists have set forth on a continuous and increasing effort to terrorize residents of new communities, individuals and firms even remotely associated with organizations that use animals in even the most benign way to discover cures for human ills, logging companies (whose work, by the way, if allowed to go forward more sensibly, would prevent the kinds of huge forest fires we endure every summer), and other people who have offended the sensibilities of these eco-fascists.

The U.S. federal and state governments have been woefully slow in responding to this rising tide of domestic terrorism, but they are finally starting to get it, and the individuals, researchers, and businesses under attack are starting to fight back as well.

In today's edition of TechCentralStation, the redoubtable Iain Murray tells the story of several concerted attacks in Great Britian by "animal-rights" activists, which led to strong action against the terrorists when they began to attack Oxford University.

Here, from Iain's article, is a sample of the kind of heroic things these "activists" do:

In February 2001, Brian Cass, the managing director of HLS, later honored by Queen Elizabeth II for services to medical research, was attacked by three men armed with pickaxe handles. Its marketing director, Andrew Gay, was attacked with a chemical spray that temporarily blinded him.

Murray notes that the extremists' actions are becoming increasingly bold and bizarre:

[L]ast year a British farm that bred guinea pigs for use in animal experiments pulled out of the business after the culmination of a long campaign against them when activists desecrated the grave of the owner's grandmother and "kidnapped" her body. The activists were tracked down and recently entered a plea of guilty to blackmail in relation to the desecration. The whereabouts of the remains, however, are still unknown.

Fellow members of the Left have condemned this sort of activity, as they certainly should. Murray writes, "One of the most powerful summaries and indictments of SHAC's method came from the Southern Poverty Law Center, which compared SHAC to anti-abortion extremists."

These are not activists; they are thugs and terrorists.

The good news is that when the terrorists went after Oxford, they bit off much more than they could chew. Their incursions against the university "and everyone linked to [that] institution," which the U.S.-based Animal Liberation Front called for, backfired. A strong counter-protest group, Pro Test (founded by a fed-up 16-year-old high school dropout), arose, and prominent scientists and researchers joined politicians and citizens of both Left and Right to stand up against the bullies. Work on the institution's proposed facility consolidating all of the university's biomedical research efforts into a unified research center is moving forward.

In the United States, as our Heartland publications have regularly reported, terrorists targeting tree farms in the Pacific Northwest were recently apprehended and indicted, six animal-rights terrorists were convicted of animal enterprise terrorism and multiple counts of conspiring and committing interstate stalking and of telephone harassment (they face substantial fines and prison terms of up to 14 years when sentencing is imposed in June), and Congress is considering an update of the 1992 Animal Enterprise Protection Act to an Animal Enterprise Terrorism Act.

Much work remains to be done in restoring rule of law under violent attack by fanatics such as these, but it is good to see steps being taken in that direction. Read Iain's excellent article here.

Rejoinder to Steffy on Skilling

On April 14, Loren Steffy of the Houston Chronicle’s Business Blog responded to the Heartland article by Paul Fisher and me trying to make the discussion of Jeffrey Skilling a bit more balanced by offering some thoughts that seemed to be missing. We anticipated that our thoughts would receive a hostile reception in Houston. However, the ferocity of the objections greatly exceeded our expectations. One of the least offensive responses is from Loren Steffy of the Houston Chronicle’s Business Blog. While more polite, it is still erroneous in many respects.

Steffy:I link to the article because it's part of a disturbing trend, the belief that Enron was an unpreventable corporate failure brought on by random market factors. I find that disturbing because if you believe it, every business in America is at risk. Indeed, it could indicate our very system of capitalism is unstable.
I plead not guilty to Mr. Steffy’s charges. Indeed, he must have missed the part of our discussion where we state in clear terms that it was a government conspiracy led by the Democrats, mainly in California, to punish Enron and other energy companies for supporting President George Bush and finding ways of bringing electricity from a regulated price to a market price. There is a principle in economics that resources unrestricted by government interference go to their highest valued use. That is what was happening. Initially, according to Business Week of February 2001, “consumer groups, municipal water districts, and the City of San Francisco allege Enron and other electricity marketers engaged in unlawful market manipulation.” Later suits and in particular the Federal Energy Regulatory Commission said that Enron and others manipulated the regulations, not market prices. Believe me, if the FERC knows nothing else, they can tell the difference between regulations and markets.
Steffy:My take is that, far from being the "whole picture" as it claims, the article actually has a fairly narrow view of what happened at Enron. First, it implies that investors could have sold their stock as Enron rose, which is true. But that doesn't give management a license to deceive investors. Indeed, had management been more forthcoming about Enron's financial position, more investors probably would have sold.

First, a word about what Enron was hiding. According to the “superseding indictment” the profits were “massive” while the losses were merely “large.” That implies it was overall profitability that the market did not see. Indeed, the indictment years later talks about the losses being on the order of several hundred million dollars. In 2001 the FERC claimed that the profits from just California were $1.8 billion. The same report cited $900 million in profits from trading natural gas. The last time I looked, $2 billion is greater than a few hundreds of million dollars. So, what is the beef? Was the Enron management artificially holding down or propping up the price of its shares? The answer is probably neither. The share price of Enron and other natural gas companies follow the price of energy. Since oil and natural gas are substitutes in some uses, their prices move together and are mostly determined in the world market. Compare the Enron stock price history with the oil and natural gas price history.

What about the poor investors who experienced a run up in Enron’s stock in 2000 and 2001 and saw the price collapse when Enron went bankrupt on December 2, 2001? They could have sold out, as Mr. Steffy said. But a better strategy would have been to buy a put on Enron shares. In other words, they should have hedged their risk exposure. If they did not, they were like motorists who have accidents while driving without automobile insurance. We generally do not feel sorry for those people. Moreover, not being hedged is an indicator that those folks did not understand Enron’s basic business model and therefore did not deserve the run up in Enron’s stock price in 2000 and 2001. They gambled. For a while they won, but eventually lost. This is hardly any different from going to Las Vegas. Except, the federal government is not being asked to prosecute the casinos for fraud.

Steffy: The piece also takes a political bent, and blames much of Enron's demise on the California electricity crisis. Certainly, as I've said before, California's attempt at deregulation was poorly structured, but even Skilling contended that California was a small part of Enron's business.
First I should clear up what Skilling probably meant about California being a small part of Enron’s business. Remember, the FERC said that Enron made $1.8 billion in California. That might not be big money in Texas, but it ain’t chump change in Chicago. Enron had tried in 1996 to sell electricity to retail customers, without much success. However, it retained rights to grid capacity and continued to make a market in electricity. Market makers according to the trading lore in Chicago make their money picking up nickels in the path of a moving steam roller. But they are ever alert to “finding money on the floor.” That is why they spend a lot of money buying or renting a seat. That is what Enron did and other traders do not see anything wrong with that. Here is what Andrea M. P. Neves says in Corporate Aftershock (Cato 2003) page 103:
Many of the strategies which Enron is alleged to have manipulated the market are actually ordinary transactions in wholesale power markets. Selling power in the day-ahead market to buy it back in the real-time market is more commonly known as parking and lending or banking power and, provided it is done within the FERC rules (e.g., still adheres to open access rules for transmission), is a legitimate “calendar spread” trade that is actually liquidity enhancing.
The politicians, especially in California, did not see it that way. As Smith and Emshwiller of the Wall Street Journal observed in their book, 24 Days, after revelations of how much money was made in California by the power trading industry, the FERC moved into action in June 2001 and imposed price caps, and there developed toward the end of 2001 a real threat of wholesale default by the California utilities. “In short order, power-trading companies saw their stock prices plummet, their credit ratings slashed, and their executives forced out. An entire industry was thrown into disarray.” (See page 370.)
Steffy: The piece also says that Enron "underlings" may have lacked the mathematical sophistication to understand Enron's business. Yet, Vince Kaminski, the risk expert, was one of those underlings, and he protested Enron's hedging structures precisely because he thought it put the company in a precarious financial position. In response to his concerns, management demoted him. Skilling, by the way, said this week that Kaminski was happy about that.
If you look at the Chronicle story that reports on Vincent Kaminski’s testimony, you will see that he complained in mid-1999 about the accounting underlings who did not seem to understand the riskiness of the LJM1 off book entity. This included his boss who was not Skilling. I note that he stuck around until the end. If he thought the boat was sinking why did he stay on board? Why did he wait until October 2001 before going public with his concerns? Or more directly, if he was a risk expert, when did he sell his Enron stock? Did he stupidly hold on until the end, or did he act on insider information and sell his stock like Sherron Watkins did? Could avoiding prosecution for insider trading be the reason he testified against Skilling? It seems to me that a good reporter would have asked these questions.
Steffy: The article's conclusion is that Enron benefited consumers by bringing greater efficiency to energy markets, and that consumers have suffered by its absence.Enron may have done that in natural gas, but I'm not sure it ever achieved it in any other market. Certainly, not broadband and water. Even if it did, do the ends justify the means?
I am glad to hear that the establishment of a once vibrant risk management system for natural gas is not just chopped liver in Mr. Steffy’s opinion. The failed attempts with broadband, water and more importantly electricity, were good attempts and much was learned from the efforts. Maybe someday markets will be established in broadband and water. Electricity markets are even now recovering. It will take entrepreneurial companies with sizable assets to reestablish these markets. These companies will also have to watch out for the politicians.

April 20, 2006

Immigration problems

As much as I acknowledge the economic and political problems caused by illegal immigration, I understand the hypocrisy that we ignore these laws, and I understand the concern for the working class, the reason I am still troubled by the heated debate over immigration is statements like these:

There is a growing anxiety in America – particularly among the middle and working classes – over the unprecedented cultural and demographic changes being effected by uncontrolled immigration and a declining native birth rate, especially since these changes are occurring during a time of great foreign hostility and domestic security risk.

I believe that anxiety over "unprecedented cultural and demographic changes ... and a declining native birth rate" is the real source of this outcry ... and that just doesn't sit well with me.

The broken clock theory - Clinton era oil incentives probably right

The New York Times splashed what appeared to be one more story about how the Texan's in the current administration are giving it away to the oil companies: U.S. Has Royalty Plan to Give Windfall to Oil Companies. Enough to make your average, even your below average, libertarian nash their teeth.

As per usual, the New York Times is misleading its readers. The story should be titled: Clinton Era Decisions Bring More Oil but Less Royalties. This is the kind of not so subtle bias that pervades the New York Times. The story isn't outright dishonest or untrue, it is just cryptically titled and doesn't reveal that this is principally a Clinton administration decision until you jump to the follow and are 1400 words into a 1700 word article. I would call that irresponsible journalism, but I expect nothing less from the New York Times.

Unfortunately, the Rockefeller Republican and Truman Democrats who people editorial boards at northeastern papers that aren't per se house organs for the Socialist Workers Party don't understand oil exploration economics any better than the New York Times (free sign-up required). But the irony here is that the Clinton administration might actually have gotten it right -- even if the New York Times never will.

The Providence Journal, house organ in the whacky world of Rhode Island that is reported on with disbelief regularly in this forum, and from which sanctum I file these screeds, attempts to equate royalty relief with subsidies for alternative energy. This is a hackneyed if easy hook, but it doesn't fish. Royalty relief does involve some targeted meddling in energy markets, but it presupposes the creation of energy wealth from the public domain and abates government separation royalties related directly to that activity. If the activity is not taking place, the government doesn't get the royalty.

The program exists to encourage offshore drilling in deeper water where heavier infrastructure, specializied deep water drilling technologis and longer distances to ports and pipelines complicating transport of this equipment and the produced oil inflate expense (and risk since the quantity of oil to be recovered is unknown and only vaguely predictable). It is essentially an earned income tax credit in the royalty department. The EITC effectively rebates a significant portion of social security taxes to low wage workers so their take home pay doesn't suffer, especially as compared to various supports for not working. The federal royalty is a flat fee and does not consider the investment necessary to produce the underlying energy wealth for which the royalty is paid, so royalty relief was designed to encourage work that would economically have given way to idle.

Theoretically, although Kerr-McGee argues not, Congress established price triggers so that relief ends when the price of oil reaches a level at which the market would have, putatively, supported more expensive exploration on its own. The New York Times reports that "apparently" the Clinton administration waived these triggers to provide additional incentive when there still were no bids on many of the deep water leases they were offering. No one argues this federal managment of incentives is identical to the market, because the additional supply could prevent prices from rising in such a manner, or at least have a significant impact on prices as a secondary wave on top of the macro trend. It was energy policy, bipartisan policy at that.

In any event, if we look at offshore windmill proposals, we will look in vain for the royalties associated. There are none. Federal support for wind energy is an outright subsidy. The generators are awarded a tax credit of about 2 cents per KWH unrelated to the net wealth brought to the economy by their activity (and much more in convoluted schemes of many states as well). If the tax credit could only be taken against income earned from selling wind power, and if a portion of that income were not earned by forcing ratepayers to buy windpower at more than the market rate, then the wind power subsidy would look a little more like royalty relief (except that there still is no payment for the claim or lease of the public waters analogous to the royalty at issue).

No matter what way you slice it, alternative energy subsidies are orders of magnitude beyond the tailoring of energy policy, both philosophically and fiscally. On the numbers side, all of this tempest in a royal[ty] teapot is over 12% of the energy value. The alternative energy subsidies, combining state and federal largess, have amounted to about 100% (the percentage associated with the federal credit will decline somewhat because it is a fixed price per KWH and electricity prices are rising; the state subsides are a complex series of mandates on electricity consumers and the derivative buyout afforded wind generators, where traditional energy producers pay extra for "alternative" energy to satisfy state requirements, defies any absolute prediction.)

One very obvious bit of analysis omitted from the Times story is: how much of the current domestic oil supply can be correlated to this royalty relief? If you work backwards from the NYT numbers, up to $35 billion in royalties over the next 5 years are in play. The standard royalty is 12% so that means we're talking about $291 billion worth of oil. At the $50 per barrel they cite, that amounts to about 5.82 billion barrels divided by 1825 days in the five year window being considered that is 3.13 million barrels per day or more than 15% of domestic consumption.

The semantic debate over whether these are incentives or subsidies, and the substantive debate over whether they were causitively responsbile for all this deep water production or whether some might have been accomplished in the same time frame without the royalty relief, or whether it might have been undertaken in the current price environment and have been available later, i.e. 2010 or so, and whether any of those scenarios are more perfectly libertarian or desirable than the extant one, can't limit the inescapable conclusion that this might actually have been reasonable policy on the part of the Clinton administration.

Indeed, some libertarians propose that there shouldn't be a royalty at all, as this enriches the government and encourages spending while just acquisition from nature would award the value of the oil to those who prospected for and recovered it. In this case the royalty relief provisions have arguably moved a significant amount of money from the federal purse to taxpayers.

No you say, it was to oil companies; but isn't derivative non zero-sum economics a wonderful thing. No one can rationally believe that oil prices wouldn't be significantly higher, probably at least on the order of the foregone royalties, if this production were not presently available. Thus the oil companies keep the royalties and the taxpayers get a benefit at the pump and the government gets nothing. I'd like to see more policies that work out like this.

April 19, 2006

Alternative to school choice - Segregation

I am only half as cynical about this idea as you might expect. The cynical half is the one concerned that the public is paying for this experiment. The open inquiry half of me observes that there may be some buy-in, some results. You would get more buy-in if the segments of the population, or, better understood, their individual constituents, were taking responsibility for the education of their own children -- that is buy-in in the ultimate sense.

If nothing else I enjoy the message it sends (or could I say 'sends up') to all the snooty academics who defend 'affirmative action' on the basis that 'diversity' is so critical to education.

April 18, 2006

And the Adam Smith prize for good tax policy goes to - RI Dems?

A few weeks ago I co-wrote an op-ed titled something like "The Rhode Island Disease." The subject was a recent jury verdict against several manufacturers of lead-paint pigment. Without going into the dreadfully boring details, it was my opinion that the verdict would damage Rhode Island’s business climate, as the verdict seemed to have little relationship to common understanding of legal liability. I concluded that “...if Rhode Island continues abandon basic notions that support a stable and predictable legal system, it is quite likely that it's economy will suffer compared to other states as businesses look away from Rhode Island and towards more friendly legal climates.”

Well, that still holds true, in my opinion. But state legislators in Rhode Island, particularly Democrats, certainly seem to be working hard in other areas to make Rhode Island a better place to do business.

A few months ago, I read a blurb that Democrats (who control the Rhode Island legislature) had introduced a proposal to adopt a flat tax on income, something that those of us on the free-market side have generally advocated for many years. A front-page story appeared in the April issue of Budget & Tax News on this proposal (http://www.heartland.org/Article.cfm?artId=18731). A few select bits of that article:

Key Democrat lawmakers in Rhode Island have concluded that to keep the state competitive, they need to overhaul the state's tax system, including going from a progressive to a flat-rate income tax for high-income earners.

"We're proposing this for better competition, fairer competition, and trying to attract new business to Rhode Island," said Larry Berman, press secretary to [House Speaker William Murphy (D-West Warwick)].

"What's happening is business leaders have a choice," Berman said. "These are people making $250,000 and above, and when they want to create jobs, they look at Massachusetts and see a 5.3 percent income tax, Connecticut with a 5.0 percent tax, and Rhode Island with a 9.9 percent tax. They make a choice on where to move and create jobs, and that difference in tax rates is a big factor in the choice they make."


Not bad, not bad at all, especially from a ‘blue’ state that isn’t exactly known for free-market policy. But, it gets better. Just a week or so ago, I read that Rhode Island Democrats introduced earlier this year, of all things, a taxpayer-protection bill!

From a February 16 article in the Providence Journal (http://www.projo.com/news/content/projo_20060216_spend16.180753f7.html):

Legislation that would give Rhode Island voters a chance to impose new caps on state and local spending was rolled out by its Senate sponsors at a State House news conference yesterday.

The lead sponsor of the proposed spending-cap amendment, Sen. J. Michael Lenihan, D-East Greenwich, said the proposal was born of a belief that "government should not grow faster than people's ability to pay for it."

Joining Lenihan at yesterday's news conference were his Senate cosponsors: Marc Cote, D-Woonsocket; Leonidas P. Raptakis, D-Coventry; and James C. Sheehan, D-North Kingstown. Three of the four -- Lenihan, Cote and Raptakis -- are also proposing a voter-initiative amendment to the state Constitution that would give citizens direct access to the ballot, without having to win the General Assembly's approval first.


Now, today, across my desk comes an article on a Democrat in Rhode Island proposing cutting the state’s gas tax: (http://www.projo.com/news/content/projo_20060411_gastax11.d8a1048.html).

Rep. Charlene M. Lima, D-Cranston, is proposing to suspend the state's 30-cent-a-gallon tax for four months or until the price of gas falls to $2.50 a gallon.

Rhode Island's gas tax is one of the highest in the nation. A gallon of regular unleaded costs an average of $2.65 in Rhode Island now, according to AAA of Southern New England.

All I can say is, whatever the Democratic legislators in Rhode Island are drinking when they discuss tax policy, please bottle it and send it to your colleagues in the other 49 states!

The challenges of social science

Reading Gladwell's blog I found this quote very interesting:

(from a reader) market research actually encourages people to answer in conventions, and doesn't encourage the telling of stories. Many of these stories are probably complex and deeply buried such that they are hard to consciously access anyway.
This, in fact, is one of the critical problem of all social science and why Gladwell's work is so well received.

The unit of analysis with all social sciences is not society, but rather people. Society itself is much too complex to be studied as a whole, so social scientists (just as a natural scientist would) study smaller groups and individuals with the expectation that results of these observations can be generalized.

The problem is that studying people is fundamentally different from studying something in the natural world. Why? Because we have to assume that people adequately understand their own behavior and have the ability to truly communicate it too the researcher. Only, these are very big assumptions. First, as Freud pointed out, a person's recollection of his or her own life is often incomplete and sometime down right incorrect. Second, people often have a "sense" of something they are yet unable to articulate. My wife and I have had arguments (as I imagine many of you have) where only at the end do we actually realize what it was we were arguing about.

Add to these complications, the standard sociological methodologies of the survey or the experiment and you get even more complications. The survey is perhaps the most popular method of social research because it yields quantifiable data, the false god of the modern academy (and apparently marketing research). And yet survey responses capture only a fraction of a person’s overall motive structure. For most of us, making a decision is a process not a ‘fact.’ We first have to sort through all our competing motivations, our histories, our beliefs, social conventions, the latest media interpretation, etc. Moreover, we often reach a point where analysis itself has a cost (paralysis by analysis?) and we simply have to choose something and hope it works out.

At any given moment we are at many different stages of many different decisions, and surveys are incapable of getting inside that ambivalence. The problem is that so much of our society is based on social science, marketing and politics specifically, that one worries that our cultural forms are now taking on an expression not of our complex selves, but of a significantly oversimplified version of that self.

The dumbing down of our culture and our politics, in this sense, is a direct result of our chosen methods of social science, and not an indication that people are getting less interesting. This might come as a bit of a surprise and relief to some who have observed the RealityTV phenomena with gloom.

Gladwell (yes, back to Gladwell) has been well received precisely because by telling stories he's getting deeper inside the human consciousness than most social scientists. In fact, one might argue Gladwell is somewhat of an interpreter ... not a scientist, and calling him this does not demean his work, but only distinguishes what he does from what most people imagine constitutes science.

Policy wonks often like to say things like "anecdote is not data." But there's a sense in which they are wrong.

April 17, 2006

Tax extensions, what a marvelous concept!

Let's forget for a moment that the government is robbing me blind. Last year, I discovered how easy it was to file a tax extension and now I'm hooked. Sitting at my computer, contemplating how complex my taxes are going to be this year, it took me all of about three minutes to decide to go the extension route. There's got to be a drawback to this. If so, please warn me, otherwise Tax Day will forever be Tax Extension Day in my house. Comments are open.

April 15, 2006

Doubting the doubters - A white paper on the black magic of skeptics

As promised a week ago, I have been pursuing the intersection of religion, science and political society -- a realm ever bit as energetic as your average hadron collider.

The superstitious skeptic, Professor Daniel Dennett

Noted atheist philosopher Daniel Dennett was spreading his ‘gospel’ at Harvard recently, i.e., his new book Breaking the Spell: Religion as a natural phenomenon. Dennett opened ironically by embracing naturalism, a religion rooted in natural phenomenon. He even encouraged donations to the lecture’s sponsor, the Center for Naturalism. This immediately brought to mind what might have been the reaction if, say, Exxon Mobil, had sponsored a lecture by Pat Michaels, a noted skeptic of global warming.

It is striking the extent to which secularists, the driving force behind the modern skeptical movement, are themselves insular to skepticism. If you are willing to stand up and be counted as a vocal critic of superstition, then anything you believe is presumptively rational – and consequently your exhortations on public policy are blithely accepted by followers. If Pat Michaels would only open his lectures by denouncing intelligent design instead of debunking climatological scare tactics, he could count on a much broader academic engagement of his ideas.

This little backslapping between Dennett and a former student who runs this Center for Naturalism is just the tip of the iceberg when it comes to the inextricable links between skepticism and the push for a humanist ethic. There is a yin and yang quality to this fact. It implicitly concedes that banishing religious arguments from political discourse leaves a vacuum of values. Ironically, this makes a paragon of philosophy like Dennett an empirical rather than philosophical skeptic.

Meanwhile, empericists like myself find themselves philosophical skeptics, doubting that there is an absolute truth. This isn’t to say that a reasonable, if fallible, understanding of right and wrong cannot be derived in the human sphere. But I think it decidedly suspicious that atheists always set themselves up as the new moralists – as Pete Townsend and The Who aptly observed (and thanks to an objectivist cousin for reminding me it wasn’t Pink Floyd): “Meet the new boss, same as the old boss”.

The collaboration of secularists around building not a climate of reason, but an authority of reason, can be seen beyond the individual relations acknowledged by Dennett. The Committee for the Scientific Investigation of Claims (CSICOP) of the Paranormal, a noted skeptical society that publishes The Skeptical Inquirer and whose founders include the likes of Isaac Assimov and Carl Sagan, joined with the Council for Secular Humanism (CSH) to create the Center for Inquiry (CFI). It is chaired by one of the lesser known but more active founders of CSICOP who is also the Founder and Chairman of CSH, Paul Kurtz, who attempted to slay Pete Townsend's allegations of hypocrisy thusly:

Pope Benedict XVI fired a salvo at the beginning of his papacy, declaring that “secularization” and “relativism” were leading to a breakdown of “the moral order.” Morality, he declared, must be derived from Christian theology. [CFI]pointed out in response that secular morality has well-established principles and values and that its ethical judgments are amenable to rational criticism and modification—unlike absolute theological codes, which are held to be immune to questioning.

I decided to test this premise by questioning the derivation of Dennett’s ethics. He had slipped seamlessly from ‘breaking the spell’ of religion to casting his own when responding to a question on the possible benefits of religion (1), citing an analysis by Paul MacCready (noted for the design of successful human powered flight) that found the pre-agricultural human biomass footprint was 1/10th of 1 per cent of the vertebrate population whereas he finds the human component of the contemporary vertebrate throng, i.e., humanity itself plus domestic vertebrates, to be 98%.

This isolate observation of the delta vertebrate biomass was obviously intended, in its sensational appeal to the emotions, to impart some purportedly ‘scientific’ or ‘objective’ moral lesson that ought to attach to human dominance among vertebrates. But it is difficult without belief in some correct ratio to ascertain what that lesson ought to be. One was left hanging with the distinct impression that Dennett believed the contemporary ratio represented an ethical lapse of some sort, and that he was uncomfortable with a human world uncharacterized by devotion to this belief, but he offered no evidence in this regard. Rather, he touted Paul MacCready, the author of this proposition and noted for the design of successful human powered flight, as a “visionary”(2) and obviously expected the audience to take some ethical teaching from the isolated anecdote alone.

This postulate seemed to perfectly crystalize the false dichotomy offered by naturalism, humanism, secularism, you-name-itism, that purports to replace religion with scientifically derived values. Secularists argue that MacCready’s maxim is testable, while the resurrection, creation and other articles of faith fail such testing, or defy it altogether.

That is vaguely true, so far as it goes. But when you look at the scientific propositions advanced by secularists as useful in daily life, they have a decidedly qualitative rather than quantitative precision. Vertebrate biomass is a natural phenomenon, but establishing a pre-agricultural zoological census is informed speculation at best. Even positing a current ratio is modeling more than counting. But the larger point is, even if you gain some consensus on historic or contemporary ratios, this says nothing whatsoever about the correct ratio.

None of MacCready’s notes appear to be published anywhere, so no serious testing of his hypothesis has occurred to even establish any kind of range of confidence, probably enormous, for these figures that reek a bit of exaggeration. Like qualitative observations about everything from species diversity to the climate, it is ambiguous, if not downright devious, to present such semantistics as an objective basis for value judgments. Not only does the initial premise, as a quantitative proposition, essentially fail the Popperist test of falsifiability (of which I’m not an outright fan, but I suggest those who live by the sword, in slaying religion this way, ought to die by it as well), derivative inferences to be drawn even if these were hard numbers are themselves from qualitative theories regarding the ‘balance of life’ that are sentimentally appealling, even intellectually useful metaphors but without the kind of grounding that suggests that universal ethics can be stated objectively in their consequence.

Stephen Budiansky, in Nature's keepers: The new science of nature management, authoritatively debunks the theory of “island biogeography” that proposes to predict species diversity as a function of the size of various micro-habitats. It is an appealing analytical rubric, but it doesn’t work. It is not so much that he proves some alternative, but rather reveals the guesswork and subjective assumptions that go into making numerical statistics of complex qualitative relationships. Essentially he questions seriously the very idea that they are subject to uniform prediction. This is certainly equally true with regard to climate science, carrying capacity, etc. Popular securlarist gurus have advanced, with no embarrassment regarding their certainty, the inevitability of global cooling (currently making a comeback with the latest qualitative idea that global warming will shut down the gulf stream and bring on the next ice age), mass starvation as the human population exceeded earth’s agricultural carrying capacity, the loss of hundreds of thousands of species.

The unifying thesis behind this kind of science, chosen as important by secularists, is essentially a retelling of the fallibility of man – what, after all, is so different between their outlook and the idea of the forbidden fruit. Advancing these sensational natural phenomenon is designed to create gnawing doubt that man’s pursuit of technology and industry in the furtherance of economic society can be considered objectively good.

How does enlightenment thinking, that fueled western civilization’s progress along these now ‘suspect’ lines, figure in secularist attacks on the status quo. It might seem counterintuitive for scientists to decry the society resulting in no small part from the enlightenment. But humanist gurus like E.O. Wilson demur, arguing that the enlightenment simply is not complete because modern man has not submitted to the authority of science in the social realm. What a coincidence, that the value system striving to replace religion on the cultural side, has a plan to take over government as well – holism takes on a new meaning.

But, back at the lecture, suppose that one simply concedes the obvious: that the human component, as a percentage of the vertebrate total -- essentially a qualitative function, has changed significantly since the inception of agriculture. Does this lead to any moral rules?

Taken at its purely empirical level, it would seem that humans are the fittest. Indeed, even if The Origin of Species is your bible, a reasonable choice at that, the Genesis idea of dominion doesn’t seem to have been a myth at all. Taken as a metaphor or a parable foreshadowing man’s place in the world, you could certainly call its authors ‘visionary’, in Dennett’s own vernacular, forerunners to Darwin.

Some folks take Genesis literally, which is probably no sillier than believing what Lester Brown and Paul Ehrlich have to say. I have the perspective of believing in no sense what the Bible says. It is a historical novel. It has both a literary and superstitious staying quality that I suspect won’t be supplanted by similar less sweeping efforts, e.g. The Da Vinci code, The Population Bomb or Earth in the Balance. Certainly tomes of the latter genre gerrymander anecdotes of natural phenomenon into secularist books of Revelations. In this sense they capitalize on rather than refute the merits of biblical style.

But is this how Dennett views MacCready’s credo on vertebrate ratio, or am I reading too much into the sacred quality of his recitation? His first response regarding the lessons of this MacCready maxim was that kind of disdainful dismissal intended to convey the message that the teachings are obvious. Noticing that I was perhaps too dense to see even the obvious, he grabbed a copy of his book, Breaking the Spell, to quote the statistic in the context he sees it -- with a description of earth as thinly veneered with green and blue and man now holding the paintbrush.

It may seem that Dennett is simply referring to the obvious caution that man’s enormous ecological success coupled with unique consciousness militates for an ethic of stewardship. There is no small coincidence that this very idea is being used to crosspollinate liberal churches. But this mission to humanity, epitomized by the approach in both the sacred and secular contexts, attempts to draw much more than mild derivative truisms from postulates such as MacCready’s.

It provides cover for multiple maharishis touting their own versions of ecological Armageddon to advance emotionally supported ideas of substantive stewardship disguised as science. This goes back to the question of whether one can scientifically derive a correct MacCready ratio, or can really answer any such ‘balance’ questions scientifically -- given that value judgments are currently the only way to establish real world targets and that politically contrived economic dislocation is certainly the only way to compel society to observe it.

The MacCredy Maxim is essentially meaningless and untethered. Those who attempt to rein it in have used reindeer, juxtaposing it as explanatory of the plight of 29 Reindeer introduced in 1944 to St. Matthew Island in the Bering Sea. The original herd grew to some 6000 in 20 years, but had disappeared only 15 years after that as a consequence of stripping the island of vegetation.

The inference one is supposed to draw is that the lack of predators and the monocultural bloom of reindeer on the island is equivalent to the lack of predators on the globe with respect to humanity and thus its vast ‘monocultural’ expansion. But, in terms of biomass statistics and any extrapolatory explanatory quality they lend to man’s place on the globe, vetebrate ratios are irrelevant. It is essentially a given that first world man has no vertebrate predators to speak of (there are outlier efforts by various sentimentalists and lifeboat ecologists to bring them back and rationality may ultimately lose out here) but the population bomb never went off.

To the extent that these qualitative phenomenon of isolated cases like the reindeer can be analogized usefully, relevantly and scientifically on a global basis, the domestic to wild vertebrate ratio is not implicated. Rather, one would look to the ratio of domestic vertebrate biomass to all other biomass over time (another matchbook calculation of dubious specificity, but since we're playing the game) in order to understand if man were somehow outstripping carrying capacity. Those ratios are far less sensational with man and his attendant domestic component amounting to little more than 1 per cent of the total. Little wonder that Dennett didn’t wish to bring up that comparison, as it does not affect the emotions in the same way.

The ultimate goal of securalists values is embodied in Lovelock’s call to worship the earth as Gaia. His ‘visionary’ conception is to view the earth as a life form, analogizing homeostatic happenstance to the processes of a living thing. Observations of emergent self-regulatory “feedback mechanisms” that keep the earth’s climate in the range that supports life are the basis of an ‘intelligent design for agnostics’ movement. As long as you view these processes as miraculous, it doesn’t really matter if you think god did it or not. But Lovelock’s proposition of the earth as an organism fails fundamental tests of the definition of life. Principally, there is no reproductive ability, not meaning there is no reproduction on earth, but of earth. Where are the baby earths it has spawned, or at least the evidence that it is the biological spawn of another?

Just because there is no evidence that the world is alive doesn’t mean it might not be so (although this is just the line that religion relies on). But proponents of Gaia theory suggest we replace scientific effort to discover life at a global scale with the belief that it exists. Of course the didactic derivative inferred by many promoting this concept reads that man is a parasite that has upset the correct balance of the organism, i.e., the earth is ill. These are articles of faith not science.

Simply because he is blind to the religious quality of his own ethics, doesn't prevent Dennett from usefully inquiring into religion’s grip. In fact his own beliefs essentially demonstrate the merits of a premise he advances, that religion evolves in a kind of institutional Darwinism.

He presented one possible evolutionary plateau as the "Creedless Moral Team". This would encompass everything from Amway to the growth of megachurches where Dennett sees membership as a matter of belonging to something larger than oneself, rather than a clear commitment to underlying dogma.

But, if the humanist ethical alternative is about submitting to contrived venn diagrams of natural phenomenon -- and not some methodical and logically defensible resort to analytical science -- then its moral foundation crumbles, even while its creed of earth worship remains. What Dennett offers is a Moral-less Creed Team. I won’t be joining.

Notes:


(1) The question was actually about Dennett’s analogy of religion to parasitic relationships, in particular to suicidal parasitism epitomized by the flatworm Dicrocoelium dendriticum whose metacercarial cycle is spent in brown ants. A few metacercaria lodge in the brain of the ant upsetting its instinctive behavior and driving it to the top of a blade of grass where it is likely to be eaten by grazing cattle allowing the parasite, if not the ant, to continue its life cycle. While this could be an obvious analogy to suicide bombers, for instance, whether religion as a whole can be taken this way was the question posed, given that the natural world is often characterized by symbiotic as well as detrimental parasitic opportunism.

Dennett seems to hold to the vacuum argument I set out, that going ‘cold turkey’ off religion would be a bad thing because the institution provides some useful functions. In this sense he concedes the argument of the questioner, but opens another. If religion has beneficial qualities in the real world, are its merits assessed less by reference to its superstitious underpinnings and instead by balancing the assets and liabilities it contributes to society, or to the success of individuals within that society?

Objectivists, who have been bequeathed a seething hostility to religion, have tried to parse emotional or spiritual responses to real world experiences, i.e., those that humanism tries to capitalize on to gain adherents, as different from sacred transport. Emotional concern for nature is really instinctive concern for protecting one’s survival. Emotional attachment, especially as in seeking a mate, is part of our reproductive wiring. If the means of it’s pursuit is not always cooly objective its ends are nothing less than our own Darwinian advancement. But if one can trace benefits to religion, then its spirtual or, in trite scientific idiom, unfalsifiable nature, is not in and of itself dispositive of its merits in human life.

(2) Visionary is certainly an adjective whose connotative fortunes have improved at the hands of secularists as they try to distinguish their clairvoyants from religious prophets. The first dictionary I bought in the mid ‘70s has as a first definition: “given to or characterized by fanciful or unpractical ideas, views, or schemes.”; and the word remains unredeemed in subsequent constructions in that publication. Today’s lexicography indicates that visionary is making a play for better consideration, with Miriam Webster placing first the more literal definitions, e.g. characterized by a vision; disposed to reverie and imagining, and then closing with the analogous cultural definition: “having or marked by foresight and imagination”.

Humans indeed are clever, and if eskimos have one hundred words for snow (there is some disagreement whether this is so, but even the most conservative linguists concede they have 2 words for snow, and I counted 97 on a web page proposing to list them all but have no verificiation of its authenticity), why not attempt to insert a semantic difference between visionary and prophetic. Of course religion also has a semantic reference for secular visionaries, false idol.

April 14, 2006

Charles Murray, Live From Chicago!

The Heartland Institute is excited to announce that Charles Murray, author of In Our Hands: A Plan to replace the Welfare State, will be coming to Chicago to sign copies of his book. Heartland will host the book signing on May 4th, 2006 from 5:30pm - 8:00pm in room 700 of the Union League Club which is located at 65 W. Jackson in downtown Chicago, Illinois (view map).

Charles Murray has been a topic of debate lately due to his bold proposal, expained in this WSJ op-ed, to replace all government welfare services with an annual $10,000 check to every citizen in the country; the key being that this method of delivering social welfare would encourage personal responsibility, something the existing welfare state subverts at every turn.

The event is FREE. So if you want to register, all you have to do is drop me an email at vanwinkle -at- heartland.org

April 13, 2006

Alpha-ism

Alex Tabarrok is pointing to a new paper arguing that the cruelest despot in academia is actually the alphabet. Ask anyone named "Van Winkle" and they'll agree whole-heartedly. I remember distinctly noticing at my high school graduation the bleachers were noticably emptier when my name was called.

April 12, 2006

Rhode Island disease?

FTH contributor and Heartland Senior Fellow, Maureen Martin, has been busy lately tackling the growing lead paint controversy. If you haven't been keeping up with this one, it's a doozy. A jury in Rhode Island found the state's paint manufacturers liable for the cost of removing lead paint from something like 200,000 state owned buildings and private residences. They're going to hold paint companies responsible even though they haven't sold lead paint since it was outlawed (decades ago) and no "victim" has even alleged they were poisoned by existing lead based paint.

Moreover, the state, rather than presenting the case itself, outsourced the suit to Motley Rice, a high-power law firm that got rich from tobacco settlements. Check out Martin’s op-ed in Monday’s Star Ledger. Also of interest might be the New York Times coverage (subscription only).

April 11, 2006

Parting thoughts on immigration

The immigration debate is winding down, and as usual twilight reveals the murky truths. At the end of the day, the American people lead by our fearful and uncourageous leaders have missed yet another opportunity for a real debate. We have yet again traded substance and profundity for an all too familiar dance of sound and fury signifying nothing but our own confusion and conceit.

According to a FoxNews/Dynamics poll, 60% of America feels immigration is a “serious problem” for the nation, while only 23% believe immigration is a "serious problem" for their community. Have we perverted the mantra “Think globally, act locally.” This indicates a troubling disconnect, suggesting that our anger is terribly out of proportion.

Of course, the primary reason given for this global concern is that immigrants “cost” our country hard earned tax dollars by burdening our social service system. They do not pay taxes! Why should they benefit from our hospital, our schools, our food stamps?

But then again, what is the point of a social safety net if we maintain a perquisite that the recipient of care also be a tax contributor. According to the Tax Foundation, 50% of Americans fund more than 96 percent of the overall tax burden. What then of the other 50 percent of Americans, are they not a burden to our society? They go to our schools, they feast on our food stamps and clog the arteries of unemployment lines. Are they not aliens in our midst? Perhaps they are, perhaps they’re not? And perhaps we should be having a discussion about the fact our country has become divided into taxpayers and tax-receivers, a tense dichotomy that can’t survive indefinitely.

The anti-alien crowd also claims these illegals take our jobs, to which the pro-alien responds “Yes, but they take jobs Americans don’t want!” And yet, the truth is so much more complicated than this. Illegals don’t steal our jobs … they do not arrive in the middle of the night like a cat bugler stealing jewels. Instead, they compete with regular Americans for regular jobs in honest regular competition … and win! Why?

By setting national minimum wage laws and exorbitant payroll taxes, our government creates strong and often perverse incentives for employers to hire employees “under the table.” Moreover, our affluenza has created an entitlement mentality among American workers. We’ve been so long without strife or struggle, without hunger or unemployment that we look at a job as a right. The illegal, on the other hand, sees a job as a priceless tether to a word of plenty like no one in his native country knows. It is, indeed, a little unfair to ask Americans to compete with this. Can we really ask Americans to return themselves to depravity just to be better laborers? But when we throw all the illegals out, let’s at least be honest about why we’re doing it.

The solutions to the immigration dilemma are just as troubling as our debate. There are those who would see a fence put up across America’s southern border. This they tell us will ensure that America is secure. This will ensure we are safe from illegal infiltration.

And yet proponents of this medieval fortification miss the irony, the irony of a free country surrounded by walls. They do not ask the question “How will those walls affect the inside.” So transfixed are they by America’s external threats that they overlook the country’s soul. Lest we remind these wall-builders that the wall separating Germany, east from west, served two purposes. It kept the commies out of the west, but it also imprisoned those in the east. Wall-builders everywhere should remember, walls keep us in just as well as they keep 'them' out.

The better solutions, don't bear directly on the problem itself but the incentives that exacerbate it. Eliminate the minimum wage? Voucherize all government welfare?

As we continue to look for solutions to our immigration problems, we should fight to keep the problem in context. People flocking to this country for a chance to work, a chance to live, and a chance to be free … well, this is the kind of problem one wants to have. Moreover, putting this issue in the context of all others, how many of us are actually burdened on a daily basis with direct interaction with the illegal problem? Perhaps 23%. On the other hand, how many are burdene by an over-regulated health care system, failing public schools, and an intrusive federal government? Many, many more.

April 10, 2006

Defending Jeffrey Skilling?

You heard it right. Heartland dares to go where no man (or woman) has gone before. Defending blacklisted CEO's is considered a final frontier, a magnet for bad press. Yet, we persevere. Undaunted, our courage takes us to the outer-reaches of controversy to defend those who must be defended, against the forces of politics, bureaucracy, and lack of common sense everywhere.

Behold Paul Fisher and Jim Johnston's Seeing the Whole Picture on Jeffrey Skilling:


The Enron picture is broader than a question of fraud because it goes to the heart of the energy trading system developed since the 1990s.

The “superseding” indictment of Jeffrey Skilling contains several strange interpretations of Enron’s business model and a contorted description of the “fraud” that is purported to have occurred. In order to have a fraud it is necessary not only to have a misrepresentation of financial conditions or prospects but also to induce another to part with something of value or to surrender a legal right. Who are the victims?

If you believe the prosecutors, they are the investors who have been riding an ever upward movement in share price until the end in bankruptcy. Remember these beneficiaries of early gains could have sold out, especially if they did not understand the Enron business model. In terms of actual dollar losses, we would argue that Ken Lay and Jeffrey Skilling are way ahead of the herd. According to Business Week of February 6, 2006, Lay and Skilling had substantial unrealized equity holdings at the end of 2000. Lay’s was $545 million and Skilling’s was $144 million.

Not only did Skilling, Lay and the rest of Enron lose big time, but the rest of the economy did too. The hedging of energy prices was severely damaged as we all saw when two hurricanes hit the Gulf Coast in August and September of 2005. The orderly transition of the energy sector was crippled and recovery is only just now taking place. (See the Wall Street Journal, March 21, 2006.)

What about the deceptions in the accounting? The reader of the overriding indictment might be surprised to learn there were not only hidden losses, but also hidden profits. Indeed, the energy trading profits, mainly from California, were “massive.” The losses in Enron Energy Services and Enron Broadband Services, on the other hand, were merely “large.” So where is the deterioration in share price? Profits offset losses, thereby diluting any erosion in share price. It should be mentioned in passing that the broadband joint venture by Enron and Blockbuster of providing television programming on demand is flourishing on cable.

This situation raises another question. Why would Lay and Skilling risk their huge stakes in Enron by distorting the books with offsetting accounting entries? One plausible explanation is that they did not know the accounting statements were distorted. In part that might have been due to reliance on Enron’s accountants in reporting on extremely complex transactions. In part they were disserved by underlings like Andrew Fastow, Ben Glisan, and their minions who were stealing and had every incentive to hide the thefts from everybody, including Lay and Skilling.

OK, you are thinking, why did Enron go bankrupt? After all, the thefts were just in the tens of millions. The answer in our opinion lies in California. In 1996 the California legislature passed the electricity restructuring plan without a single “no” vote. That alone should have been a danger signal.

The plan was complex, but the essentials were a separation of generation from transmission, price caps to residential consumers, and relegation of all wholesale trades into the spot market. The spot market trading began in April of 1998. This was the year when the world market prices for crude oil, adjusted for inflation, hit an all-time low. Since oil and natural gas are substitutes in some uses, including the generation of electricity, gas prices were also very low. The market conditions made living out of the spot market deceptively attractive. When markets are calm, spot prices are typically lower than long-term contract prices. The difference between the spot and contract price is the insurance premium or options price.

Living out of the spot market is like driving without insurance. The motorist seems to be saving money by not having to pay the insurance premium. But sooner or later the inevitable accident occurs and the cost of recovering from the ill fortune dwarfs the “savings” from not having insurance. That is exactly what happened in the California electricity spot market.

On May 22, 2000, the crisis began on an extremely hot day. The California Independent System Operator (ISO) declared a Stage 2 alert as power reserves dropped to 5 percent. On June 14 temperatures in the San Francisco area rose to 103 degrees at the same time several plants were down for maintenance. The California ISO ordered a series of localized rolling blackouts.

Where was Enron when all this was going on? Earlier Enron had tried to be a retail seller of electricity. However, that effort met failure as most consumers stayed with the incumbent utilities. Enron did remain in its usual arbitrage function. It saw many profitable opportunities, including taking some electricity outside of California at price-controlled prices and reselling it back at spot market prices. (Actually, there is no physical control on where a particular stream of electrons actually goes.) By the end of the year 2000 many of the power generators sold much larger amounts of electricity than Enron at prices that approached $1,400 per megawatt hour, compared to an average price of $45 per megawatt hour one year earlier.

The politicians, led by Democrat Governor Gray Davis, were livid. On August 2, 2000, he raised the possibility of price manipulation. For some reason he did not mention the possibility of a poor market design by the political establishment as a cause of the crisis. The focus of the political attack soon became Enron as one of the culprits and urged a price cap to be imposed by the Federal Energy Regulatory Commission.

Looking back to late 2000 and 2001, Anthony York of Salon.com observed

Enron has long been seen as a way for Democrats--particularly in California--to score political points against the Bush administration. Even before the company’s bankruptcy, it had become a sort of shorthand for Democrats wanting to paint an administration that was propped up by big contributions from the energy industry in exchange for federal policy that would not interfere with their profits.

One might reasonably ask, how can politicians push the seventh largest company on the Fortune 500 list into bankruptcy and then into federal indictment? The answer can be found in Business Week of February 12, 2001.


By now there is nearly universal agreement that the biggest flaw in California’s deregulation plan was the decision to force utilities to buy all of their power needs one day in advance from a newly formed entity called the California Power Exchange. The theory was that the exchange would provide the most transparent prices, since every buyer and seller had to operate through it. Whatever power didn’t get bought through the exchange would be purchased on a last-minute basis the following day by another entity called the Independent System Operator (ISO).

But many observers believe this two-step setup encouraged generators to offer less power to the exchange and instead wait until the last minute to sell power to the ISO, which out of desperation would have to pay higher prices. In three lawsuits, consumer groups, municipal water districts, and the City of San Francisco allege Enron and other electricity marketers engaged in unlawful market manipulation. Several investigations so far have failed to prove collusion by Enron or others.

The Democrat establishment, led by Gray Davis, repeatedly asked the Federal Energy Regulatory Commission to (a) put price caps on wholesale electricity prices, (b) order a refund of $8.9 billion to California consumers, and (c) investigate the energy companies, especially Enron, for influencing the regulatory process. California Attorney General Bill Locklear had been investigating energy producers since late in 2000 and Rep. Henry Waxman was also investigating the connection between Lay and Vice President Dick Cheney.

With the political rain clouds blowing in from California, the main business of Enron became threatened. To understand the severity of the threat, it is necessary to look at the principal Enron business model.

It started when gas pipeline InterNorth, Inc. acquired Houston Natural Gas (HNG) in 1985 at the urging of economist Kenneth Lay, who had just completed his first year as CEO of HNG. At the same time, the Federal Energy Regulatory Commission issued Order 436, which unbundled natural gas transportation from the commodity. It also opened access to interstate natural gas pipelines on a nondiscriminatory basis by both producers and consumers. The next year InterNorth changed its name to Enron.

It was at this time that McKinsey’s Jeffrey Skilling was brought in as an advisor. He soon set up the “gasbank” to offer price risk insurance to producers and large industrial consumers. In 1990 he formally joined Enron. The pipeline company observed that producers and large industrial customers were operating unprotected against large price movements in the spot market. But the producers and consumers had opposite risk exposure, i.e., rising prices were good for producers and bad for consumers and the reverse was true with falling prices.

This created a business opportunity for Enron. It could guarantee prices to both parties and collect a small fee for the service. The advantage to the parties is that the fixed price allows both to tailor their production to a specific set of prices, thereby conserving on investment dollars. The trading process is known in the business as picking up nickels in the path of a moving steam roller.

A problem arises when the short and long contracts are not equal. This can be accommodated by taking physical positions for the difference. Thus, the problem is fairly modest. A more serious problem arises when one party defaults. Since Enron was the counterparty to all trades, it was obligated to pay off the defaulted position from its asset base, and then take action against the defaulter.

This is normally a rare event because the hedger usually has an ongoing physical position to protect. But in the natural gas business there is a history of reneging in order to reopen and reprice contracts. Legal enforcement is rarely helpful in these situations because of the time and cost involved. During the 1980s, as natural gas was undergoing vertical separation and prices were volatile, some take-or-pay contracts were abrogated. The effect was to destroy the long-term contract arrangements between producers and pipelines, even though most of the take-or-pay contracts were not abrogated. The misbehavior of a few forced nearly all deals into the spot market.

In 1990 Skilling formally joined Enron and subsequently expanded on the gasbank into other areas including water, electricity, coal, pulp, weather, and broadband. At the same time Enron made small investments in allied assets, helping with the default risk problem.

Coping with these problems became easier when in 1993 the price controls were finally phased out by the Natural Gas Decontrol Act of 1989. Simultaneously, the New York Mercantile Exchange established futures and options contracts in natural gas. These contracts and their combination with physical assets became the fallback protection against credit risk.

Besides adding to the hedging alternatives for natural gas and electricity (because gas is the fuel at the margin for generating electricity), the Nymex contracts also improved the price discovery and importantly added extra meaningful legal protection against default. The role of the Nymex contracts in backing up hedging over the counter is not unique. Banks use exchange-traded interest rate and foreign exchange contracts to fashion individual hedging packages for clients.

Since 1973 the trading of options and futures has become highly mathematical, especially for the tailoring of individual hedges for clients. One might assume that this complexity gives an advantage to mathematically sophisticated academics. This is not so. Robert Merton and Myron Scholes, who jointly received the Nobel Prize in economics in 1997 for developing the fair value model for the European option, subsequently lost their shirts in the spectacular $4.6 billion loss at Long Term Capital Management in 1998. Merton, Scholes, and the other LTCM partners also lost $106 million in tax deductions and $40 million in fines by the Internal Revenue Service. That made the $1 million Nobel Prize chump change by comparison. It also emphasized the difficulty in applying the new finance mathematics in real markets and existing accounting conventions.

Viewed from this perspective, it is easy to understand that some Enron underlings without mathematical sophistication (notwithstanding the existence of in-house experts in the complex analyses) will not appreciate how delicate the balance is in valuing assets against the danger of default and how easily the loss of market confidence can destroy even the best business model. This danger is far beyond the usual problem of being enthusiastic about the future of a company’s business. Moreover, the accounting for derivatives is almost as complicated as the arbitrage mathematics. For example, it took years for the tax treatment of mark to market to be reconciled with a stream of hedged earnings.

The Enron model was “asset lite.” While this is not unusual according to Christopher Culp and Steve Hanke (Corporate Aftershock, Cato 2003), it made Enron vulnerable to a very large-scale reneging by California utilities, supported by the political establishment in that state. Under pressure by the Federal Energy Regulatory Commission, the successor company to Enron settled in 2005 for $1.5 billion. That potential threat was increasingly recognized in 2001 by Enron’s customers as a real danger to the market viability.

With the contract abrogations in the 1980s over take-or-pay liabilities fresh in the minds of the customers managing their energy risk through Enron, there began a “run on the bank,” as Skilling was to say later. Those with gains liquidated their positions early and those with loses threatened to skip paying their obligations. With a huge multibillion dollar default hanging over Enron, the lack of confidence on the part of the hedging customers and stockholders caused the company to crash on December 2, 2001.

The Enron story is reminiscent of an earlier political attack on an energy company during the Great Depression of the 1930s. New York Governor Franklin D. Roosevelt was making a political issue out of Samuel Insull, the CEO of Commonwealth Edison in Chicago. The matter helped get FDR elected president in 1932 but forced the ComEd holding company into bankruptcy, even though Insull and his associates were subsequently acquitted of all charges.

We hope the Enron jury will show the same wisdom as the jury in the Samuel Insull case and reject the politically inspired attack on energy risk management. Maybe in time efficient risk management will return to the natural gas and electricity industries. Energy consumers will be the prime beneficiaries.



Paul Fisher is partner at the law firm of McGuire Woods and Jim Johnston is an economist retired from the Amoco Corporation. Both are unpaid directors of The Heartland Institute and have no connection with either the defendants or the government prosecutors.

April 09, 2006

Paris mass transit priority: $1B loss & more pollution

In recent years, the ville de Paris (central city of Paris) has attempted to reduce automobile use and increase mass transit use by converting general purpose traffic lanes to bus-only lanes. According to Rémy Prud’homme, Pierre Kopp, Juan Pablo Bocarejo of the University of Paris, the cost to the economy is an economic loss of approximately $1 billion per year (€834 million) and an intensification of automobile produced air pollution.

According to estimates in their research paper ÉVALUATION ECONOMIQUE DE LA POLITIQUE PARISIENNE DES TRANSPORTS, there has been a nine percent reduction in vehicle kilometers, as average traffic speeds have fallen 12 percent. The authors estimate that the slower traffic has resulted in an increase in air pollution relative to the levels that would have been experienced without the roadway constraints (because cars operating at lower urban speeds tend to pollute more).

The Prud’homme-Kopp-Bocarego findings are evidence the continuing diminution of the ville de Paris relative to the Paris metropolitan area (Paris labor market). More than 80 percent of the population now lives outside the ville de Paris and approximately 70 percent of the jobs are in the suburbs. Virtually all population and job growth in recent decades has been in the suburbs.

Copies of ÉVALUATION ECONOMIQUE DE LA POLITIQUE PARISIENNE DES TRANSPORTS (in French) are available by request from vanwinkle@fromtheheartland.org.

April 07, 2006

Lifeboat ecologist resurgence - FBI outsourcing?

This is a me too post. Mike already noted the coverage of this lunatic. I'm shocked, shocked to see our cherished institutes of higher learning are employing misanthropes.

Now the FBI is investigating (sorry, this is an older article so you have to do a free sign-up to read it, but if you are interested in the 'exterminate 90 per-cent of humanity to protect the natural world' philosophy this little inconvenience is worthwhile). This little ditty makes me nostalgic for when the youth movement once had a sense of humor and a sense of freedom, before being completely co-opted by marxists.

In one of Arlo Guthrie's famous cynical tributes he dedicates a song to the FBI because "in America, there is no discrimination,
and there is no hypocrisy,'cause they'll get anybody."

Talk about kneejerk reactionary law enforcement, the FBI looks like distinctly the keystone cops chasing the crazy professor.

It is not that there is no potential for terrorist actors to be inspired by aging lunes of this sort. But if the FBI is waiting for the Drudgereport to ferret this out, we might as well all go take a dose of the bird flu.

Maybe this is just an example of outsourcing, saving government money by letting journalistic gumshoes do the work. But, of course, they aren't investigating the right person. No one has offered any evidence that Pianka is out to act on his bizarre philosophy. This is, as Arlo Guthrie would say, "the last guy". He can't find a street to lie in for a truck to run him over, but all he has to do to have a good time is send his resume in to some college and get a job filling kids heads full of this drivel.

Law enforcement should, of course, investigate any indication that anyone is planning to act on these 'instructions', but the notion that speech that may seem inflammatory or inciteful should be supressed comes too quickly to those presented with even these starkly sociopathic ramblings. One supposes that the secret service may not be completely out of line in imputing some concern to even the least likely threats made to the president, but the rest of law enforcement should remember Arlo's instructions on efficiency of resource deployment here:

Other countries would say "Hey, he's the last guy...screw him", you know? But in America, there is no discrimination, and there is no hypocrisy,'cause they'll get anybody. And that's a wonderful thing about America.

If they have some idea this guy is the unabomber redux, by all means, investigate full speed ahead. But if all that has happened is that some people view his speech as implying that humanity ought to be wiped off the face of the globe, that is mainstream thinking on