New legislation responding to old EU crisis

From BBC Business News on the status of Spain and a potential bail-out:

On Wednesday, the European Commission unveiled proposals designed to stop taxpayers' money being used to bail out failed banks.
The aim is to ensure losses are borne by bank shareholders and creditors and minimise costs for taxpayers.
However, new legislation is unlikely to come into force before 2014 at the earliest, too late to protect taxpayers from any further immediate bank failures.
"The proposal we have today may be only useful for the future but it does not solve the current problems we face," said Sharon Bowles, chair of the European Parliament's economic and finance committee.
There would be new requirements for countries to prepare for a bank collapse, collecting money through an annual levy on banks that would be used to provide emergency loans or guarantees.

Brilliant. The European Commission will have new laws on the books to prevent a redux of the EU crisis occurring again in the future... if the EU even still exists in the future.

It seems European politicians are acting as if their policies could apply retroactively, but even if these sort of reforms could have stopped the current crisis, that's no guarantee that future crises will look anything like the current one.

There's also the chance that this new legislation - "an annual levy on banks that would be used to provide emergency loans or guarantees" - will just add to the moral hazard problem and make excessive risk-taking by banks even more likely.

Responding to the last crisis is of great temptation to politicians, who must be "doing something" in order to satisfy their constituents, but this foolhardy rush to action may do more damage than good. Post-Enron accounting reforms have been blamed for making the U.S. financial crisis worse, and Europe could be reading a parallel story five years from now if these proposals go through.

Paycheck Fairness Act is anti-womens' employment

Scheduled to come to a vote in Congress tomorrow, the Paycheck Fairness Act is a bad solution to a statistically trumped-up problem.

The most frequently cited statistic is that women earn 77 cents for every dollar a man makes. However, not all of that gap can be attributed to discrimination.

The Bureau of Labor Statistics reports that comparing male and female full-time workers, men work more hours: 8.2 versus 7.8 hours per day, on average. Just assuming an exactly even hourly rate, we'd expect women to earn 95% of men's total on a yearly basis; however, there are also more women working part-time than men, widening the gap further. Men are also disproportionately likely to die from an injury on the job, as this chart shows.

Source: US Department of Labor, Bureau of Labor Statistics, Current Population Survey, and Census of Fatal Occupational Injuries, 2012.

But put aside those statistical details. A gap in male-female wages undoubtedly remains, and some of it is probably due to gender-bias and discrimination. What does the Paycheck Fairness Act do to fix that?

The Act would strengthen the Equal Pay Act of 1963, which already requires similar workers be paid the same. The new legislation would expand the damages that women can claim in court, and give women more tools to sue their employers if discrimination is suspected.

The new law would result in effectively unlimited liability for a business sued for giving unequal pay. Put yourself in the shoes of a small business owner. Suppose you are considering hiring either a male or female employee for an entry-level position. Suddenly knowing that your business could be shut down if a court decides your payment to the woman is unfair, who would you be more inclined to hire?

Let's think of another group that has been "protected" by sweeping federal legislation. Persons with physical disabilities are given additional tort resources by the Americans with Disabilities Act if it's found that they were treated unfairly. A paper by Acemoglu and Angrist (2001), using reliable econometric techniques, found that employment of disabled people dropped substantially following the ADA's passage. Now, twenty years later, physically disabled persons are unemployed at record levels.

There are obvious weaknesses in the analogy between the Paycheck Fairness Act and Americans with Disabilities Act - women are a larger segment of the population, and aren't physically limited from doing most jobs - but a lesson remains. Creating new protected classes of workers is not always to that group's overall benefit.

Even well-intentioned laws may end up punishing businesses for hiring certain workers, which hurts both individuals and the economy as a whole. The Paycheck Fairness Act is almost certainly dead in the water; even without passage, its political purpose will have been achieved. But, if President Obama and the Democrats want to show they are helping women, a first step is to not shut them out of the labor market.

Collective Action Solutions for Libertarian Politics

The biggest problem for an individualistic, freedom-oriented political movement is getting each of those individuals to join any sort of movement in the first place.

Many economists wonder why anyone votes at all  -- the chance of any one ballot changing the outcome is statistically zero and the cost of voting is small but positive (e.g. risk of dying in a car accident on the way to the polls), so rationally it would be better to stay home on election day. Most people vote out of a feeling of moral obligation or civic duty.

The low impact of voting helps to explain why barely more than half of the American electorate usually shows up to vote. That problem is magnified for a political party whose "base" has a strong individualist leaning; they are less likely to feel the civic obligation which pushes others to the polls.

Enter the Free State Project. Goal: collect signatures from libertarians, who will move to New Hampshire when total signatures reach 20,000. Why New Hampshire? It has low tax rates, little dependence on federal spending, and a small enough electorate that 20,000 people might be able to sway its political orientation.

In economic jargon, the Free State Project uses a pre-commitment device to solve a collective action problem. No one is asked to move to New Hampshire until sufficient signatures are obtained (as of this writing there are 11,578 participants; 8,422 to go). Any one person moving to New Hampshire in order to change its politics would bear a large cost, with uncertain chance of success. Assuming people stick to their word, the Free State Project allows each person more confidence that their action will make a difference.

Agree or disagree with the libertarian political platform, it's hard to argue about because there are few real examples of libertarian societies to reference. I hope the libertarians do succeed in taking over New Hampshire, because it will be an interesting test case for a liberty-motivated legislative majority. Even if the result is a total disaster the impact will be negligible, and the advance in knowledge for political science / public choice well worth it.

The 'Landes Law' on imperialism and its domestic corollary.

Historian David S. Landes

In his New York Times bestseller The Wealth and Poverty of Nations: Why Some are so Rich and Some so Poor, David Landes claims

"a law of social and political relationships, namely, that three factors cannot coexist: (1) a marked disparity of power; (2) private access to the instruments of power; and (3) equality of groups or nations." [63]

Penned in 1998, this writing still sheds some interesting light on our recent foreign policy adventures in Afghanistan and Iraq. Conspiracy theories and "blood for oil" slogans aside, private companies did have a large involvement in immediate invasions as well the as follow-up occupations. Along with industry lobbying and corporate connections in the White House, condition (2) seems to have been justified. The marked disparity of power and inequality between groups hardly even need discussion.


On face, the principle at work here seems accurate. As Landes argues, "Where one group is strong enough to push another around and stands to gain by it, it will do so." However, this incentive isn't limited to foreign policy. I'll propose the following corollary to Landes Law:

Welfare State Corollary: three factors cannot coexist: (1) a marked disparity of specialized interests; (2) private access to the instruments of government; and (3) national government running a balanced budget.

In other words, when an interest group (e.g. farmers, doctors, bus-drivers, etc.) has enough political influence, it will push others around through the legislative process, as long as it stands to gain by doing so. When a multitude of such interests exist, satisfying all their demands will flout any efforts at a balanced budget (unless taxes are incredibly high, and there's an interest group against that too).

While Landes' Law poses a serious challenge to efforts at global peace, the Welfare State Corollary has implications on our current political system's ability to respond to the current financial crisis. I'll leave it to the reader to decide on the accuracy of this analogy.

If Bernie Madoff had a hobby... an exploration of D.O.D. accounting practices

In the news: Special Inspector General for Iraq Reconstruction says that 96% of the money from the Development Fund for Iraq cannot be accounted for. This is very different, and probably worse, than saying those funds were ineffective. Based on press releases, the Department of Defense just hasn't a clue where the money went. To further illustrate the situation, see the attached pie chart.

No one has ever accused the military of being efficient, but even with the infamous $640 toilet seat we at least knew where the money went. If there's one thing a giant bureaucracy like the D.O.D. should be good at, it's keeping paperwork. Those times seem to have changed since the Bush presidency and Iraq invasion.  

So where did those 8.7 billion dollars go? As a personal guess, we'll probably find Jimmy Hoffa before those funds are fully accounted for. However, based on the record so far, it's likely that money was eaten up by the fraud, bribery and theft which has plagued reconstruction efforts from the start. How did this problem begin?

Krugman on "Greed and Cowardice" in the climate debate

Was Paul Krugman famous for his work in economics, or was it environmental studies? Right now, I'm not sure. From an op-ed article yesterday:

It has always been funny, in a gallows humor sort of way, to watch conservatives who laud the limitless power and flexibility of markets turn around and insist that the economy would collapse if we were to put a price on carbon.

Source. An intelligent person like Mr. Krugman can spot a bad argument, especially when it applies to his home discipline of economics. The passage above contains logical flaws which should have stood out to a Nobel Laureate.

- "Putting a price on carbon" is a bit more complicated than grabbing the sticker gun and tagging away like a manic grocery store employee.