Posted by on December 18, 2014

After a lengthy vacation riding motorcycles in Baja, Mexico, I come back to a changed world.   Here are comments on some of the key developments.

Michael Brown and Eric Garner

I won’t really comment on the merits of either of these cases and the associated grand jury decisions, although it is difficult to watch the video of Eric Garner without concluding that the police (all of them, including those who were merely observing) were excessive and callous, and should be held to account.  But I do want to comment on two aspects of these cases that raise more general issues.

Eric Garner was selling “loosies”, single cigarettes out of a pack, which is apparently illegal in New York.   As some columnists have pointed out, notably Yale law professor Stephen Carter, the deadly clash with the police would not have occurred without the criminalization of this victimless activity.  Senator Rand Paul of Kentucky, the closet libertarian in the Republican Party, also blamed the statutes for Eric Garner’s death.

Professor Carter points out that “loosies” are far from the only way that a seemingly innocuous activity can put any one of us in harm’s way.  Carter cites statistics that there are over 3,000 crimes in federal law and an estimated 300,000 federal regulations that may be enforceable through criminal punishment, producing an estimate that over 70% of American adults have committed a crime.  For this reason, Carter says that “I always counsel my first-year students never to support a law they are not willing to kill to enforce.  Usually they greet this advice with something between scepticism and puzzlement, until I remind them that the police go armed to enforce the will of the state, and if you resist, they might kill you”.  One wonders how many of these 3,000 crimes and 300,000 regulations would have been put on the books if the lawmakers had applied this standard.

There are further points about these victimless crimes.  Since they offend many people’s sense of justice, they are a major contributor to the poisoned atmosphere that exists in poor, minority neighborhoods between the locals and “the man”.  As I have commented before in my review of the movie End of Watch, it is also hard not to feel pity or, alternatively, contempt for the officers sent in to enforce laws of such a trivial and pointless nature: to an idealistic and conscientious officer, this must be demoralizing; to a power-crazed and domineering one, it must be corrupting.

A second point was made by the Economist in a lead editorial.  In a country with over 300 million handguns, a “trigger happy” police force is a given.  Although no consolidated figures are maintained, police in the US shot and killed at least 458 people last year, while losing 46 of their own.  The figures in the UK and Canada were exactly zero for both of these statistics.  Advocates of America’s loose gun laws, including nearly all of my fellow libertarians, need to understand that these laws promote an “arms race” between the police, the criminals and the general public. Like all arms races, there is always the risk of overreaction.  Ironically, those who think that the right to bear arms is a protection against criminal violence and government  coercion, are in fact encouraging the very excesses that they fear.

The Plunge of Oil

When I was in California following my Mexico trip, I was astonished to find gasoline readily available at less than $3.00 a gallon; two summers ago, I struggled to find it for less than $4.00.   News articles report that the $2.00 barrier has been broken in some states.  Although I am sure that this delights the American motorist, for me it represents a huge lost opportunity.

As I have argued before, America needs to tax oil and other fossil fuels much more heavily.  This is an environmental imperative as well as a geopolitical one.  The price mechanism is the only reliable way to promote conservation and the development of alternatives, and the unwillingness of our voting public and politicians to implement this change is one of America’s biggest policy mistakes.

But if increased taxes are needed, then what better time to impose them than when prices are falling?  The economy had already largely adjusted to higher oil prices so that taxing to maintain an artificially high level would be minimally disruptive.   In fact, probably the best tax would be a variable one:  a tax that rises when the price of a barrel falls and vice versa.  This tax would automatically lessen the economic blow from oil shocks and, very importantly, it would strongly support the development of alternative energy sources and conservation.  Probably the biggest barrier to investment in these fields is uncertainty over the future price of the competing product, oil; providing a fixed target – or at least a lesser moving one – would greatly reduce this risk.  This is certainly a much better way to incentivize alternatives and conservation than the patchwork of regulations, subsidies and loans (à la Solyndra) that we currently employ.

This tax would also be one of the best ways to weaken many of the world’s bad actors.  Normally, increased consumption would cushion the impact of falling prices on the revenue of producers; a variable tax would remove this effect.  Falling oil revenues will do far more to undermine the corrupt, incompetent and aggressive regimes in Russia, Iran and Venezuela than any other policy we can pursue.

The falling oil price is giving a nice macroeconomic lift to the US consumer, but this should not deter us from imposing the tax.  If the added stimulus is viewed as beneficial, then balancing tax cuts elsewhere can easily neutralize the new levy.   Or the politicians could actually do the unexpected and use the windfall to pay down some of our growing mountain of debt (which just tripped over $18 trillion).


After the Democratic trouncing in the mid-term elections, the ever-courageous President Obama decided that he had nothing further to lose and he finally made good on his threat to implement immigration changes through Executive Order.  The Republicans, far from blameless on this issue, predictably responded like offended maidens.

Immigration reform is long overdue.  For the young and educated, particularly those educated in science and technology in US universities, we need the same type of “open door” policy that countries like Canada and Australia have; frankly, we should be thrilled to “cherry pick” these immigrants and benefit from the productive years of their lives, without having borne the costs of their infancies.  For the uneducated, we should have a broad “guest worker” program that legalizes their status but grants them only very limited access to governmental services and benefits, while allowing them prove, over a 5 to 10 year period, that they can become productive and law-abiding citizens.

Meanwhile, in Europe, there is an illuminating immigration debate.  As I have noted before, anti-immigrant fringe parties are on the rise in Europe, including with the UK Independence Party.  One of UKIP’s principal demands is a reduction in immigration into the UK, including people from other EU countries who are benefiting from the Union’s freedom of movement laws.  UKIP’s strong inroads, including the recent defection of two MPs from the Conservative Party and strong poll results, have prompted Prime Minister David Cameron to respond with loose promises to curtail immigration.

Cameron was promptly slapped down by Germany’s Chancellor Merkel, who, having grown up behind the Wall in East Germany, quite rightly believes that movement is the most fundamental freedom of all.  But, interestingly, she was willing to grant Cameron one concession: the ability to restrict the access of recent immigrants to government benefits.  This step against “welfare tourism”, where some EU migrants are suspected of shopping for the most generous benefit packages, is intended to blunt public opposition to immigration.  It appears to be having this effect.

This development in Europe confirms me in one of my basic beliefs: many of the objections to immigration are really an indirect plea for welfare reform.    The public sometimes object to immigrants, but it almost universally objects to freeloaders.  Welfare laws that invite abuse conflate the two issues and substantially contribute to the opposition to immigration.

Republican Mid-Term Victory

The Republicans made huge advances in the mid-term elections, reinforcing their control over the House and taking a substantial majority in the Senate.  The Republicans also scored resounding victories in state elections, picking up four governor’s mansions and control over two state legislatures, while splitting control on a further six state legislatures where the Democrats previously ruled the roost.

Although mostly a referendum on Obama’s failed presidency and certainly helped by the laudable tendency of important Democratic constituencies to perform at the mid-term elections as badly and absently as they almost certainly did at their mid-term economics exams, there is another important message in these results.  The Republican National Committee made a conscious effort to throttle in the rhetoric on social issues, notably on abortion.  In short, the Republic Party proved that, as I argued in an earlier post, a move to the center on social issues can win elections.  Let’s hope that the religious right wing of the GOP is paying attention.

Quantitative Easing

The Federal Reserve ended its bond-buying program (“quantitative easing” or “QE”) after nearly six years in which it acquired $4.5 trillion of bonds (and issued the same amount of money).

This is not the place for a full post mortem on QE, although I continue to be of the belief that we will look back in regret on this episode.   The actual benefits to the real economy were small, but the distortions in the capital markets were huge and pervasive.   The bills for these distortions are starting to come in and it is pretty clear that the “fracking” revolution will be one of the first victims.

Like the “dot com” bubble before it, the fracking explosion was driven as much by loose money as it was by technology, the former largely in the form of high yield bonds bearing interest rates at an all-time low.  The energy sector has recently issued roughly $500 billion of these bonds, becoming the single largest player in the market.  Their prices are now plummeting and refinancing opportunities are disappearing, which means mass defaults are just around the corner.   This appears to be spreading to other parts of the high yield market, where spreads are up substantilly.

This is very bad news for the US economy.  I have seen graphs showing that the totality of the net jobs created in the US over the last seven years come from the shale oil states of Colorado, North Dakota, Pennsylvania, Texas and West Virginia.  The influence of shale is even wider than this since it has been one of the few growth sectors in an otherwise moribund capital expenditure recovery after the Great Recession.  In another manifestation of its distorting effects, QE and the zero interest rate policy (“ZIRP”) in place since the financial crisis has driven $3.3 trillion of share buybacks and dividends since 2010, as corporations have used low interest rates and readily available debt to bump up their EPS rather than make the productive investments the Federal Reserve intended.

Most disturbing of all is the reaction of many economists to these distortions.  The waste of a fracking bubble, or the dot com or housing bubbles that preceded it, do not overly disturb the likes of Paul Krugman and his like.  They are, after all, the heirs of Keynes who once famously wrote:

 “If the Treasury were to fill old bottles with banknotes, bury them at suitable depths in disused coalmines which are then filled up to the surface with town rubbish, and leave it to private enterprise … to dig the notes up again, there need be no more unemployment and, with the help of the repercussions, the real income of the community, and its capital wealth also, would probably become a good deal greater than it actually is.”

For Keynesians, this waste was no waste at all, because the resources used in burying and then digging up old bottles were unemployed anyway, and therefore could be utilized at zero cost to society.   In the real world, however, I will leave it to the reader to decide if the trained software and IT engineers used in the dot com bubble, or the construction workers, equipment and material used in the housing bubble, or the petroleum engineers and drilling equipment misused in fracking, along with all of the workers and equipment that fed these industries, could not have been put to better use.  Or that these misdirected resources could be quickly and costlessly put to alternative uses after the bubbles burst.   And all this before considering the financial repercussions of each of these episodes, which can be, as we have just seen in the 2008 crisis, even more damaging than the direct effects.

Yet, notwithstanding the self-evident role played by loose financial conditions and the mal-investment it engenders, the response of central banks and governments to our recent crises has always been “the hair of the dog that bit you”.  When these policies fail to generate growth, as they manifestly have in places like Japan, the inevitable response of Krugman and his like is to lambast the politicians and central bankers for their timidity and, as the self-important Krugman has recently claimed, to “bully” them into more.

There is something very wrong with this picture.

There They Go Again

A potential Eurozone breakup is back in the news.

The catalyst this time is, once again, those pesky Greeks.  Prime Minister Antonis Samaris has called for an early vote for a new president.  The fear is that Samaris’ candidate will fail to garner the necessary two-thirds majority in parliament, forcing an early general election at which the left-wing, anti-austerity party, Syriza, would be favoured to win.  Although Syriza is nominally committed to staying in the Euro, they only wish to do so on terms which are unacceptable to the “troika” of the EU, ECB and the IMF.  This could result in a clash between Greece and the EU, followed by a “Grexit” (a Greek exit) initiated by either side.  The prospect of this produced a 13% drop in the Greek stock market and a sky-rocketing of yields on Greek government bonds.

For me, a breakup of the Eurozone is still a question of when rather than if.  The history of currency unions is not a happy one, including in regions (eg., Scandinavia) which were far more economically and culturally homogeneous than the Eurozone.    Ditto the history of economic policies that are pursued for political ends, which is fundamentally what the common currency is: the economic benefits of the EU were largely achieved when free-trade and free-movement were implemented; the Euro was an overlay motivated more by political egos than economic logic.   Breakup, when it comes, will likely be a multi-step process, with the periphery going first, while the “core” countries continue to flog a dead horse.  Before this happens, though, we can expect periodic crises until the politicians accept economic inevitability.

Roger Barris, London

I wish that I had said that (although not in all cases)

“She is a dull, grating, inauthentic, over-eager, insipid elitist with ideological blinders yet no particular vision and is likely to be reduced to running on a dubious promise of experience and competence while faking idealism and hope,” political commentator Yuval Levin writing about Hillary Clinton in the National Review.

“Politics is the gentle art of getting votes from the poor and campaign funds from the rich, by promising to protect each from the other,” Oscar Ameringer, a German-American socialist organizer.

“The economic arm of the individualism and materialism ideologies that keep us framed in a narrow bandwith of consciousness prevents us from seeing that we are all connected,” Russell Brand, a talentless UK “comedian” and self-proclaimed revolutionary, winning this year’s “Foot in Mouth” prize from the Plain English campaign and proving that not only Hollywood produces pretentious imbeciles who think that their notoriety entitles them to comment on economic and political matters which are manifestly behind their competence.

“We will be in Washington, D.C., and will be demanding a redress (sic) on these cases,” Al Sharpton on his way to one of his 61 meetings in the White House since 2009, making him one of President Obama’s leading advisors on race matters.

“Never believe anything until it is officially denied,” Anonymous.







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Scott Arden
Roger – Good commentary and, as always, very entertaining and thought provoking. Just one comment from your first points re: Eric Garner. Regarding the below excerpt: ‘For this reason, Carter says that “I always counsel my first-year students never to support a law they are not willing to kill to enforce. Usually they greet this advice with something between scepticism and puzzlement, until I remind them that the police go armed to enforce the will of the state, and if you resist, they might kill you”. One wonders how many of these 3,000 crimes and 300,000 regulations would have been… Read more »