Asymmetrical Information

From the desk of Mindles H. Dreck:

IOUs for dummies

What sort of "asset" requires that you yourself borrow more money to cash it in? If I have to incur a new liability in the exact same amount to liquidate it, do I really have an asset?

In the extended entry, I explain one more time with pictures and ledger balances for the financially illiterate and/or analogy impaired that the assets in the Social Security Trust Fund are of no particular consequence (as my co-blogger already explained).

It is surprising that Democrats have made private accounts their Maginot Line in the Social Security* debate. In addition to the arguments made by the President, and his willingness to take this opportunity to make the system more progressive, there is the simple fact that creating private accounts is the only way to create a funded reserve for promised future social security benefits. To me this is the greatest benefit of such a plan. The government has proved itself incapable of maintaining reserves such as we normally demand from the private sector.

PRESS ECONOMIC ILLITERACY UPDATE: What's amusing is that I'm arguing below against calling the Trust Fund an asset from an external debt point of view. Anna Bernasek, exploring the limits of national debt in the Times on Sunday, doublecounts it as a liability alongside the actuarial shortfall. She actually increases government's net liability for Social Security to over $6 billion! It's both - it's neither! Could we get this straight? [of course this is the reporter who writes about taxes and incentives and conveniently ignores the work of our latest Nobel Prize winner on the subject. It didn't support her desired point, I guess]

DOUBLE UPDATE/CORRECTION: I see now, courtesy of commenter "Tom". I didn't realize the $4.4 Trillion shortfall is shown net of the $1.7 Trillion Trust Fund notes. The total of $6.1 is therefore not doublecounted, but it still is not entirely accurate from an external creditor point of view. The SS block should be $6.1 billion and the Trust Fund notes consolidated away in a presentation of "National Debt". However, I have just issued a special Trust Secured Lockbox Note (TSLN) to the Commenter Ridicule of Dreck Administration (CRDA), a wholly owned subsidiary of me! Now Tom can sleep at night knowing his future ridicule allowance is secured.

TRIPLE UPDATE: The One-Handed Economist did this in simple tabular form in early April.

The 'forces of real' have taken a serious beating in the comments. As well as the purported defenders of FDR. A puzzler for the impaired - what sort of "asset" requires that you borrow more money to cash it in?

*The program that shall not be criticized™ brought to you by the party whose ancient and noble schemes must not be questioned™

**charts have been updated to include gross SS liability of $6.1 Trillion and Medicare's $30 Trillion sinkhole**

Now, on to the accounting lesson....

Hypothetically, my wife and I co-sign a mortgage for $100,000. In exchange for an IOU, I also write her a check for $1 billion which she endorses to the governor, which he uses to educate a handfull of children in Camden, New Jersey. Our balance sheets are as presented. Does our mortage holder take comfort in my $1 billion net worth? Does it make a difference at all?

Now let's look at the SSA and the government as the "Trust Fund is Real" crowd sees it - just make up some balance sheet numbers. The theory here is that the SSA is stronger because it holds the notes from the government. True, as far as it goes. The problem is that the SSA is part of the government, implicitly backed by its full faith and credit. The Social Security beneficiary is in the position of my hypothetical mortgage holder. It makes no difference to the SSA beneficiary where the assets are located between these entities. The note is an 'I-O-ME' it is offset by an equal liability, and the payment or forgiveness of each side of the transaction is controlled by the same entity on the hook for SSA benefits. And just to drive the point home, imagine the notes didn't exist. Make any difference? None. In fact, this is how the government consolidates their accounts, for the reasons outlined above. You can also imagine here that the President instructs the SSA to forgive the notes and the Treasury to retire them. It makes NO DIFFERENCE.

By contrast, if these notes make such a material difference to the solvency problem, let's increase them to $170 Trillion! Does that make a difference? No, SSA beneficiaries still have a claim of $6.1 Trillion on a government net worth of -$43.7 Trillion:

For those of you who would like to know what an actual government reserve would look like - here it is. Note that the net worth in the system is higher by the amount of the reserve, because the money has not been spent in the general budget. Note that the government's consolidated net worth has improved by the amount of the reserve - $1.7 billion. The asset could also be located on the SSA's balance sheet without the intra-govt. note.

And here's what happens if we transfer the notes to the beneficiaries - assuming that they are used to satisfy, dollar-for-dollar, the social security obligations. The situation remains the same in dollars, but not in terms. The beneficiaries still have $6.1 million in claims against -$43.7 Trillion, but the terms of the $1.7 Trillion are now fixed, and these notes can be sold for something that pays a risk premium, potentially bringing more dollars into the system in the future. By 'fixed', I mean they no longer change with political decisions about payout ratio, demographics or longevity of the beneficiary.

Government and SSA figures approximated from here and here. The presentation above does not require exact, current or correct figures anyway.

ANOTHERUPDATE. There is some confusion in the comments that if employers are allowed to put their stock in their defined benefit plan, that must mean that doing so enhances pensioner security. It does not. It is merely a redundant unsecured claim on the company, as the pensioner already has a general claim on the company for his/her DB benefits. This is exactly analogous to the situation of the SSA pensioner with and without the 'Trust Fund'.

This can be illustrated by comparing the total resources available to pay a pensioner's claim with and without a note from the company to the plan using "XYZ Co." and their pension plan:

First XYZ co., its plan and pensioners with with the employer note:

Now without:

In both cases, the total resources available to back up the pensioner's claim remain the same. Hence the note makes no difference to the pensioners until it or its yield is converted into an obligation of some other entity.

From the desk of Mindles H. Dreck:

Wouldn't you like to be a 'fanatic' too?

Via Alex Tabarrok, we read this:

The Government Accountability Office found statistically significant evidence that passenger screeners, who work under a pilot program at five airports, including San Francisco International Airport, perform better than their federal counterparts at some 450 airports, Rep. John Mica, R-Fla. and chairman of the House aviation subcommittee, said Tuesday.

I took issue with Paul Krugman when he described the opposition to federalizing airport security as follows:

The story here is bigger than airport security. What's now clear, in case you had any doubts, is that America's hard right is simply fanatical — there is literally nothing that will persuade these people to accept the need for increased federal spending. And we're not talking about some isolated fringe; we're talking about the men who control the Congressional Republican Party — and seem, once again, to be in control of the White House.

For the Bush administration, after flirting with moderation in the weeks following the terrorist attack, seems in the last few days to have returned to its conviction that the hard right — which is relentless, and bears grudges — must always be deferred to, even in times of national crisis.

Or they could have simply disagreed and subsequently been proven right. Nah....

On a separate note, I dare you to say about the Bush Administration "there is literally nothing that will persuade these people to accept the need for increased federal spending" and keep a straight face.

UPDATE: The comments have gone AWOL, thanks to a commenter who somehow misread the above to read "proven right..about the 'war on terror' "and hijacked the thread. Should I parrot Atrios and just say "Open thread on the costs of the Afghanistan and Iraq wars"? Plug away!

From the desk of Jane Galt:

Economic trouble the whole world round

In America and Germany, at least.

Some slowdown was inevitable; higher oil prices mean consumers (and companies) buy less of everything else. And America's had a remarkably easy ride since the 2001 slowdown, with Alan Greenspan practically giving money away, and yet no inflation. That had to end sometime.

Still, there are dark clouds on the horizon. They're little right now, but there could be a storm comin' . . . if the housing bubble collapses, instead of tailing off, American consumer finances will start to look ugly. And if the rest of the world decides to stop buying our debt (private as well as public) . . . well, get out your rainslicker, friends.

From the desk of Jane Galt:

Fake compassion

Why is it that movies don't portray developmentally disabled people as anything like, well, actual people who are developmentally disabled? I'm talking about movies like "I Am Sam" and "Forrest Gump", which portray people who just talk slower and louder than normal people, and are of course a whole lot nicer and more true to their basic selves than those without cognitive disabilities. Or movies like this apparent Rosie O'Donnell gem. Like all the other movies of this type, it declines to show a consistent pathology. Why is thi? There are any number of places where one can go to find out how people with cognitive disabilities actually act; what problems they actually struggle with; what their lives are actually like.

Now, of course, this is Hollywood; one should not be surprised that the disabled are, like everyone else, considerably airbrushed. But these sorts of movies aim, with gooey smugness, to teach us to embrace disability. Getting America to be kinder to people with disabilities is a very worthy goal. But what purpose is served by teaching people to show love and kindness to a fictionalised version of disability that shows little relation to reality? America enjoys Forrest Gump, but it's not really that hard to learn to deal with someone who talks a little slow. Where are the movies covering the people who seriously discomfort us--the unverbal, or inappropriately verbal, or whose verbal skills just aren't up to sermonettes on love? Where are the realistic portrayals of the emotional difficulties that many cognitively disabled people have, because, like small children, they have no sense of the future and thus have a very difficult time dealing with broken promises or changed routines? Why are they trying to teach us to love people who don't exist, instead of the many helpless people, often treated shamefully, who deserve to be accepted by the society around them?

From the desk of Mindles H. Dreck:

A change in the denominator is not a change in the numerator

I have to agree with Brendan Nyhan's criticisms (and Drum and Atrios) in this discussion. The WSJ presents an incomplete argument here.

After all, if tax rates stayed exactly the same, and the shares of income changed as they did, the 'burden', as the WSJ carefully says, would fall 'more progressively'. Can we truly say that a tax system is more progressive even though the majority of the change is due to the change in pretax income distribution as opposed to any change in the tax structure? In a way, the WSJ is performing a variation of an error that it always bitches about when it appears on the other side of the debate- that the percentile cohorts of income distribution move around, so its difficult to compare the top percentile of this year to the top percentile of twenty years ago. They are often different people with a different share of the pie. Percentages, dollars, 'burden' - people defend the measurement that supports their view.

It does suggest that the tax system hasn't really become less progressive, but that's a different assertion. Indeed, it appears that most of the significant changes in tax system progressivity have taken place between the groups within the top decile. As David Cay Johnston pointed out*, we're really good at taxing earned income. Other stuff-not so much.

Interesting book, but Johnston does seem to confuse evasion and avoidance in parts - lumping together offshore credit cards and legitimate tax planning vehicles.

From the desk of Jane Galt:

Student loans getting you down?

You could be this guy, who is having his Social security checks garnished to pay his back debt of over $80K. When my friends and I complain that it feels like we'll never pay off our student loans . . . well, I had no idea that might be literally true.

From the desk of Jane Galt:

I am now less inclined to think that the parks department's refusal of permits for Anti-Republican rallies during the convention were viewpoint oriented, thanks to this New York Times article, which points out that the policy of not allowing groups llarger than 100,000 has been in place since 1997. Moreover, a Dave Matthews concert which drew a mere 80,000 in 2003 (against a projected 250,000 for the big rally) cost the parks service $120,000 in damage. As a New York City taxpayer, this makes me eager indeed to restrain the number of people allowed to tramp on the Great Lawn. Unless the Parks Service charged admission--say, $10 a head--in which case, hey, protest to your heart's content.

The actual subject of the article is the Parks department's new move to cut the size of crowds to 50,000, and allow only six a year, four of which will go to performances of the opera and the Philharmonic. The activists who organised the rally try to portray this as targeted at keeping them from holding future rallies, an argument which is undercut by the fact that the Parks department is apparently letting them protest away on unrestored sections of the park. They complain that there are few wide open spaces in New York City in which to protest, which is true, but that doesn't make it some sort of civil right to tear up the grass; you have a right to peacably assemble, not a right to hold your demonstrations in scenic & enjoyable locations. The Great Lawn is a public accomodation, and as such, competing interests have to be weighed. Protesting is a highly secondary purpose to the everyday function of the Great Lawn, which is to allow people to sit on a nice piece of grass that doesn't have to be fenced off and re-sodded every few years.

The Parks Service are totalitarian in defense of the grass, and it can be annoying, particularly to those of us with dogs who find 99% of Riverside Park's greenery has been fenced off for the sole enjoyment of the squirrels. I am well prepared to concede that they may go too far in their desire to defend their little patches o' emerald. But, remembering what the parks were like before the Parks Department became hypervigilant (ever seen pictures of the Dust Bowl?), I also realize that there are just too many people in this city, with too many competing desires, for them to allow everyone the unfettered access they long for. They are not targeting us because they hate dogs, or protest groups, but because they hate the site of raw brown fields where grass used to grow.

From the desk of Jane Galt:

Auld lang syne

This may just be the coolest site ever. Check out The QVC of the future! or engage in some fond nostalgia for those bygone days

of peppermint sticks and electric dog-washers, a magic time when running barefoot through the grass and having your cocker spaniel buffed and pressure-rinsed to a glossy sheen at the flip of a switch was every boy's birthright. Of course Rags is long gone now -- that unfortunate business with the faulty shutoff relay -- but you'll always have those stains on the ceiling to remember him by.

From the desk of Jane Galt:

Balancing the scales

Fantastic piece by Martin Wolf on those global imbalances I've been talking about. One of the most interesting arguments is an idea I've been toying with, but Mr Wolf fleshes out:

For some years a number of non-US observers, including Cambridge University's Wynne Godley (and me), have argued that US current account deficits are explained more by the behaviour of the rest of the world than by that of the US. Ben Bernanke's Homer Jones lecture, in March, marked official recognition of what the Federal Reserve governor called the "somewhat unconventional view" that it is the surplus savings of the rest of the world that have created US deficits.***

Yet the view should never have been unconventional, given two points: first, the US accepts the exchange rate policies of everyone else; second, US monetary and fiscal policies are aimed at achieving the economy's non-inflationary potential output. At the real exchange rate set largely by foreign decision-makers, a huge excess demand for tradeable goods and services - and so the trade deficits - emerges. Until 2001, the counterpart of the foreign lending was an unprecedented private sector financial deficit. After the bubble burst, the public sector took much of the strain.

If Al Gore had been president there would also have been a big increase in the fiscal deficit, though its composition and likely duration would have been different. Without such a fiscal expansion, the US would almost certainly have seen interest rates at zero, in a desperate (and probably unsuccessful) attempt to maintain the private sector's financial deficit.

This implies that even if the government reduced its budget deficit--something I think it should do, preferably through lower spending, but if not, through higher taxes--the massive problems with our national savings rate (we don't seem to have one) would not go away. For example, lending to Fannie Mae and Freddie Mac, with their implied government guarantees, is a nice substitute for lending to the US treasury. From the low long-term mortgage interest rates we're currently experiencing, against all reason, it's reasonable to assume that quite a lot of the Chinese treasury purchases are already spilling over into other credit markets.

Update Robert Samuelson has more.

From the desk of Jane Galt:

What do you mean by rich?

Ever noticed how no one in the United States--except for Paris Hilton--is rich? People making incomes well into the six figures don't think of themselves as rich; they're just upper middle class. That may be because someone on the Upper West Side making $700K is cramming his family into a seven room apartment that would hardly do for a garage in whatever leafy suburban haven spawned him.

What does it mean to be rich? We have only the vaguest idea, generally, which is why it's so hard to pinpoint in ourselves. My idea of being rich, having grown up on the Upper Westside, has less to do with several thousand square feet to dust and vacuum, and more to do with never having to worry about money.

But, of course, we can always find new things to worry about. By the standards of, say, 1920, every single one of us, even welfare mothers, is rich. Every single one of us has enough food that we never need to go to bed with our stomachs crying out to be filled. Every single one of us has running water--running hot water--and bathtubs and indoor toilets to put the water into. We have stoves that do not need to be carefully tended to keep the fire going. We have central heat. We have cars or public transportation to take us wherever we want to go for a trivial sum. Almost every poor person in America has a color television, offering free entertainment 24 hours a day, and most of them can afford to buy cable to go along with it. We are so wealthy that even a welfare mother can afford to let her children stay in school until they graduate--indeed, so wealthy that a once-unbiquitous dramatic scene, the child vowing to drop out of school in order to help the family out, has entirely dropped out of the literary canon. The average middle class man of 1920 would have regarded all but the most hopelessly drug addled or mentally ill street people as wealthy beyond dreams of avarice.

And yet we have not stopped dreaming, have we? There is always another IPod to buy, a vacation to take, an expensive school that our children must attend in order to make sure that they can afford to send their children to still more expensive schools. As long as human beings can dream, they will never get to be rich.

From the desk of Jane Galt:

I don't know quite what to say to this

Mark Kleiman seems to think that the US shouldn't favour democracy in Lebanon because it's bad for Israel, and that this is a sufficiently damning criticism as to need no explanation. As longtime readers know, I support the existance of Israel. But I don't think that America is supposed to run her foriegn policy for the benefit of Israel, at the expense of American interests like a broadly Democratic middle east.

But Hezbollah is going to win! wail critics, and to them I say, "So what?" Not that I'm in favour of Hezbollah; murderous thugs aren't my style, no matter how good their social services network. (See Hussein, Saddam). But I'd be much happier with a democratically elected government in which Hezbollah is the biggest part (provided of course that they can be democratically unelected if the population so desires) than with a government imposed by Syrian fiat. And I think that most people should be. It could well be against the short term interest of the US as well as Israel, but in the long term, a stable democracy is always better to deal with than the restless client state of an unstable dictatorship. Not to mention the fact that, as in Europe and elsewhere, every additional democracy in the Middle East increases the likelihood of more such forming.

Let's clear something up: any Arab democracy is going to be unfriendly to Israel. I am not going to debate the Israel/Palestinian question here, since no one ever wins those arguments. (And I will ruthlessly delete any comments that attempt to broach the question). But that is a fact on the ground: Arabs are very mad at Israel. The idea that because they are mad at Israel, they should be ruled over by despots who will make deals they hate with Israel and America is really pretty foul. That is what imperialism looks like, to those who have been carelessly throwing the word around lately, and I hope I'm not the only person who supported the Iraq war who would stand foursquare against interventions with such purposes.

Update I'm informed that Jonathan Zasloff, not Mark Kleiman, wrote the post in question.

From the desk of Jane Galt:

Finger food

They've arrested the woman who claimed to find a finger in her Wendy's chili.

From the desk of Jane Galt:

Notes from Britain

Everyone has their favorite exhibit at the British Museum. Mine is something that I never previously even dreamed existed: The New Soviet Man Commemorative Plate Collection

Yes, that's right, not satisfied with establishing the Worker's Paradise, the Bolsheviks apparently also established the Franklin Mint of the Proletariat in order to churn out very special plates honoring the (historically inevitable, but oh-so-collectible!) triumph of socialism.

On the left (closer look here), you can see the New Soviet Man striding towards the City of the Future with a hammer in his hand, the better to destroy the Spectre of Capitalism, which is still fighting its historically inevitable denouement, as you can see on the right. Apparently, free markets give you really bad halitosis.

But my favourite is this one:

It's a little hard to see (I was using a friend's camera), but you get the idea . . . weary workers gazing off into the bright Soviet future. There's a lot of that, in this collection, and in Soviet art in general. You get the idea that for some reason, the future will contain a lot of obelisks. Perhaps they're good for impaling the imperialist oppressor, or perhaps erecting obelisks is just what the proletariat will get up to once the Tyranny of Capital is ended and workers need to find some way to fill up all that spare time. It's impossible to shake the feeling that if you turned the plate over, you'd see a badly glued label promising that the plates are guaranteed to until the State withers away and True Communism arrives.

Really, if you only see one thing at the British Museum . . . you should see the Rosetta stone. But if you see two things, this had better be the second. It's truly, as the Franklin Mint might say, priceless.

Update A commenter points to his pictures of Soviet sculpture, which are not to be missed.

From the desk of Jane Galt:

Flattened

Ain't nothing finer than Matt Taibbi on the subject of Tom Friedman:

Thomas Friedman in possession of 500 pages of ruminations on the metaphorical theme of flatness would be a very dangerous thing indeed. It would be like letting a chimpanzee loose in the NORAD control room; even the best-case scenario is an image that could keep you awake well into your 50s.

So I tried not to think about it. But when I heard the book was actually coming out, I started to worry. Among other things, I knew I would be asked to write the review. The usual ratio of Friedman criticism is 2:1, i.e., two human words to make sense of each single word of Friedmanese. Friedman is such a genius of literary incompetence that even his most innocent passages invite feature-length essays. I'll give you an example, drawn at random from The World Is Flat. On page 174, Friedman is describing a flight he took on Southwest Airlines from Baltimore to Hartford, Connecticut. (Friedman never forgets to name the company or the brand name; if he had written The Metamorphosis, Gregor Samsa would have awoken from uneasy dreams in a Sealy Posturepedic.) Here's what he says:

I stomped off, went through security, bought a Cinnabon, and glumly sat at the back of the B line, waiting to be herded on board so that I could hunt for space in the overhead bins.

Forget the Cinnabon. Name me a herd animal that hunts. Name me one.

For my take on Tom Friedman's abusive, even criminal, deployment of metaphor, click here. Meanwhile, does the man know how many calories there are in a Cinnabon? I mean, seriously, now. What was he thinking?

From the desk of Mindles H. Dreck:

Not all class warfare, folks

Reading through the hysteria cited by my co-blogger I'm struck at the level of ignorance of the actual mechanics of the Estate Tax and the implications of repeal. Nor do any of the comments show an understanding of why so many who are not subject to it still think the estate tax is unfair.

It is instructive that just as Matthew Yglesias cries out in frustration over Estate Tax repeal "F*** the small businessman", the Small Business Council of America asserts that it does precisely that:

BETHESDA, Md.--(BUSINESS WIRE)--April 14, 2005--The Small Business Council of America ("SBCA") warned today in testimony before the Subcommittee on Tax, Finance and Exports of the Committee on Small Business of the House of Representatives that more small business owners would be hurt if the estate tax were to be permanently repealed in 2010, than if the law were frozen in 2009. "Proponents of repeal tout the benefits of estate tax repeal to the small business owner when, in fact, repeal will actually harm most small business owners because of the loss in the step-up in basis," said Paula Calimafde, Chair of the SBCA.

There is no case for saying, as the New York Times inexplicably does, that "Repeal would shield the estates of the very wealthiest Americans from the tax." It does not. It does, however, defer taxation. Because basis will no longer be 'stepped-up' after death (except for a $1.3 million exemption) they will simply be taxed like all other capital gains - at the time those gains are realized.

Stepped-up basis is one of the four legs of the estate-planning stool along with the life insurance tax exemption, minority discount valuations and the division of income and principal interests (such as the "estate freeze"). It is not entirely clear that beneficiaries of large estates are better off after repeal when the full toolkit of estate planning techniques is taken into account - unless capital gains tax is done away with altogether and the states stop taxing estates. Neither is likely to happen.

Given the large estates I've seen avoid taxes, I am skeptical of analyses that suggest an enormous impact to revenues from this repeal. I don't believe they factor in the new potential revenues from carryover basis outside the traditional estate tax shelter vehicles. Certainly, the capital gains rate is lower than the estate rate, but when estate tax shelter vehicles dwindle away, more assets will ultimately be subject to capital gains taxation. Based on what estate planning professionals tell me, it will be a wash in many cases and more expensive in some significant estates. In other words, with respect to the Estate Tax, we may still be in the fat part of the Laffer curve, where a lower statutory rate may yield higher revenues over time (due to avoidance behavior, not a lack of work incentives).

The end result of repeal is that taxes on appreciated assets will be paid, but death will no longer cause forced liquidation of illiquid assets, privately-held businesses in particular. I realize that folks over at MY's place have no sympathy for the rich, but I see this as positive, and not just for heirs. As an investment banker earlier in my career I had a front row seat at several forced liquidations after the death of a wealthy business owner and they are sad affairs, much like divorce. The death of a company founder/owner is a terrible time for rational decision-making. Yet the future of an enterprise, the current valuation of the business and many ordinary jobs often hang in the balance as the relatives grieve, squabble and fight off vultures.

Liberal commenters seem to miss the irrelevance of class envy to the popular dislike of this tax. The outrage isn't so much about who is being taxed but the punitive rates and unintended consequences of the taxation method. Also, as surveys have shown, people tend to believe that a fair tax rate is about 20%, but certainly less than 30%, and that wealth taxes (property and estate) are the most unfair. The estate tax is a wealth tax with rate brackets significantly higher than 30%. Fair is fair, as they say, regardless of how stinkin' rich the deceased may be.

Apart from the ignorance of how large estates are settled, one has to stop and laugh at some of the logic in this thread, such as the hoary notion that you 'get rich' by simply having the taxman overlook you. Then there is the Willie Horton theory of taxation - 'don't cry for them'. we learn there is no injustice in taking things from people who don't deserve it. Who selects the deserving? Perhaps the United States Handicapper General?

From the desk of Jane Galt:

This is cute, and one hates to quibble, but feeding one's pig dynamite will not, in fact, make the pig explode. That's why those people using dynamite on television have to light a fuse and all, instead of just forcing a pig to eat it.

From the desk of Jane Galt:

Jimmy, we hardly knew ye . . .

So Jim Jeffords is retiring. I never understood the outrage of Republican voters at his switch; we don't have a parliamentary system, and the voters of Vermont elected the guy. Booting him out of the Senate is properly a job for them, not the Republican Party.

On the other hand, I didn't think the move was particularly bright, either. He must have realised, given that he was breaking a 50-50 split, that there was a fighting chance that the Republicans would re-take the Senate in 2002. And given that this wasn't his first term, he must have realised that the payback was going to be a bitch. His switch accomplished little except alienating whatever shred of a Republican base exists in Vermont, and making it impossible for him to get even the tiniest concession for his state. Now, in the case of milk price supports, which are near and dear to Mr Jeffords' heart, I couldn't be happier about the whole thing, but still, you have to wonder what he was thinking.

And that goes double for naming his book "My Declaration of Independance". I mean, you could virtually see his head puffing up like one of those frogs that boys inflate with straws before putting them in the road to watch them explode when a truck crushes them. Hard to fathom.

From the desk of Jane Galt:

Bubblelicious

Is the American economy experiencing a housing bubble? Damn straight. And it looks like the party might be coming to an end.

Update Stephen Ayers has more. One quibble: he says that there's no short market for real estate. But in a way, renters are implicitly short the market; their rent is the carry.

From the desk of Jane Galt:

Pope-pourri

Not being Catholic, I haven't been following it too closely, but the BBC "Vaticam" is reporting we've got a new pope.

Update Gott im himmel, it's Ratzinger. All those adages about "He who goes in a Pope comes out a cardinal" seem to be falsified. And I think we can count out any possibility of ordained women, married priests, or condom bowls in the vestry.

Update II I can't say I think much of his Papal name: Benedict XVI. It's almost like getting to choose your own name, and picking "Melvin". But I'm sure it has all sorts of theological implications I don't know about.

Update III I'm pretty sure that we're going to see a lot of articles bemoaning the choice of Ratzinger (who is very conservative) and claiming that the Catholic Church is going to implode without ordination of married and female clergy, relaxed standards on birth control and divorce, and so forth. I don't think I buy this. Protestant denominations like the Anglican Communion have been liberalising like mad, and with each decline in membership, they decide that what they need is to liberalise some more. Doesn't seem to have worked so hard. Personally, if I were going to be religious, I'd want a religion that was demanding. Otherwise, what's the point? But on the other hand, my preferences in other matters are a pretty reliable guide to what the rest of the world doesn't prefer, so who knows?

Update IV Dumbest commentary so far comes from teh BBC fellow who I heard say that "Many of us never thought we'd see this day" -- which, he added, he'd been "Dreaming of for a long time". Probably not the best career move to tell viewers that you spent years fantasizing about the death of Pope John Paul II. Also, the announcer appears to be in his fifties. Pope John Paul II was in his eighties. Did he really think that John Paul II was going to live into his second century, stubbornly denying him his long-awaited dream of seeing another pope sworn in?

From the desk of Jane Galt:

Why aren't we doing anything about the budget deficit? Because no one cares that much

Oh, liberals say they care, just like conservatives cared when they were out of power. But what most liberals care about is rolling back the Bush tax cuts, not cutting the budget deficit. Why do I say this? Because they supported John Kerry's plan to roll back the Bush tax cuts, and replace them with new spending on health care. Even if we rolled back all of Bush's tax cuts to those making over $200K, that would raise (according to the Kerry campaign) about $700 billion over 10 years; this would make a dent in the budget deficit, but won't close it. But given the very high marginal rates that would be required to close it (presuming we don't want to raise taxes on the poor and middle class), it makes more economic sense to look at the spending side, for example by giving up the idea that Medicare should provide prescription drugs.

But given the choice between closing the deficit and getting spending they want--on national health care, for example--most liberals would be full of reasons that the budget deficit isn't nearly as bad as we all have been thinking. Similarly, if they were in the opposition, watching all that new spending get passed, most conservatives would be happy to wax lyrical on the terrible downfall that awaits countries that spend more than they earn.

That, in short, is why we run a budget deficit; whoever is in power has bigger priorities. Perhaps that's a feature of Americans, or the American political system, but it seems to me that the only way we'll see our budget balanced is if we have the same combination of things that hit us in the nineties: a huge capital gains surge that surprises the hell out of our politicians, and a political system too gridlocked to spend the booty.

In other words, I'm not holding my breath.

From the desk of Jane Galt:

Is the trust fund real

It's time for another argument with liberal defenders of social security who argue that the social security trust fund is too real, because it's got government bonds that have the Treasury secretary's signature right on them! Any attempt to say that it isn't real is a scurrilous attack on the sacred person of our government, denying that Our Fine American Politicians can be relied upon to pay their IOUs.

This is reductionism at it's worst. In case anyone thought it was in any doubt, I do, in fact, believe that there are bonds, and that the government will note the interest rates on those bonds in its account books. But the failure to understand that there is a difference between IOUs written to yourself, and IOUs written to someone else, strikes me as willfully obtuse. Upon even a moment's reflection, it's obvious that the trust fund does not exist in the way that its proponents are claiming -- as a guarantee of benefits -- because the bonds are not obligations to Social Security beneficiaries. They are obligations to the Social Security Administration. And the Social Security administration has no legal obligation to turn the accounting entry representing interest payments from the federal government into cash. According to the supreme court, Americans have no property right in their social security benefits, as they would as creditors of an underfunded private sector pension plan.

Let's say it's 2018, and Congress is running out of money, as the Social Security system stops paying money into the government coffers, and starts taking it out. Congress cuts benefits to the point where Social Security taxes are once again a net contributor to federal revenue. Have we violated the trust fund? Nope. Congress is still paying the interest on those bonds; it's just that the interest they pay is immediately lent back to the federal government. Congress could knock benefits to zero, and keep recording interest payments into the trust fund for all eternity, without violating anything except its constituents expectations.

Now, is this likely? Probably not, because the political cost would be high. But the point is that the continuation of benefits depends on the political cost of offending a highly motivated interest group, not the existance of this trust fund. And the effect on the government of continuing those benefits--forcing it to raise taxes, cut other spending, or borrow money to pay for them--is exactly the same whether or not the payments are recorded on the books as "interest on bonds" or "contribution from general revenue".

Moreover, liberals understand this difference very well. If some conservative jackass proposed a plan to, say, let companies top up their underfunded pension plans by stuffing them with their own bonds, liberals would be justifiably outraged, because that's not funding the pension plan; it's promising to fund it at some later date, provided there's money around to do so. When it's companies doing these sorts of things, liberals understand very well why such "trust funds" aren't, in any meaningful sense, real.

Of course, the US government is less likely to fold than a company is. On the other hand, if a company issued bonds like those, it would at least have to record the size of the liability on the financial statements it issues to its shareholders. Why we don't demand that sort of accounting from our government, I'll never know.

From the desk of Jane Galt:

Global imbalances? What global imbalances?

Let me explain just what I meant by global imbalances in the previous post:

The United States has been, as one particularly pretty metaphor has it, the locomotive dragging the global economy behind it. China, meanwhile, along with other Asian countries, have provided the coal to stoke the engine, by keeping their currencies artificially low against the dollar. This means, on the one hand, that we get fantastic deals on DVD players and lawn furniture. Americans have been snapping them up at a much greater rate than they've been selling goods to foreigners, to the tune of roughly 6% of GDP (our current account deficit).

The low exchange rate, and the current account deficit, also mean that the Asians are actually lending us a good portion of the money we use to buy their geegaws. A deficit in the current account (which measures the difference between the goods and services you buy, versus the goods and services you sell) must be matched by an equal-and-opposite surplus in the capital account (which measure how much money other people lend you, versus how much you lend them). You can think of it like this: a country is like a person. If it wants to consume more than it produces (run a current account deficit) it has to either borrow money from someone, or sell some of its assets (run a capital account surplus).

Deficits these sizes aren't really sustainable, any more than you can borrow 6% of your income every year (unless your income is growing really, really fast). Normally, the currencies would adjust; as people bought more Asian currencies to buy their goods, the value of their currencies would rise, and ours would fall, and the deficits would gradually move back towards balance. But the Asian central banks, which keep their currencies low in order to make their exports more attractive, have been stopping that from happening.

The only way that Asian countries can keep their currencies undervalued is to keep trading yen or yuan or won for dollars, thus pushing up the relative price of dollars in their currency. This leaves the central bank with a big pile of dollars they must do something with; that something is generally plowing them into the market for US treasuries. The result is a massive increase in the supply of capital in the US market, making borrowing more attractive for everyone, not just the government. The Asian central banks are effectively lending us the rope with which to hang ourselves.

Because of these currency imbalances, the dollar has actually depreciated more against the euro than it otherwise would. This should be helping us by making our goods more attractive to Europeans, but unfortunately, they're having considerable economic problems of their own, as is Japan. There's not much demand there for extra goods, even at bargain prices.

The imbalances then, are between fast growth in China and America, and stagnation in Japan and Europe, and between producers and consumers; America and Australia are consuming more than they produce, with no signs of stopping, while the others are producing while they consume. These are not stable arrangements over the long run. Meanwhile, the rest of the world is far too dependant on American demand to support export-driven growth in their countries. If America halts its spending binge, everyone else will be thrown into a tizzy. Since America's borrowing isn't really sustainable, that's an exceedingly dangerous place for the world to be in.

From the desk of Jane Galt:

Everyone wants to go to heaven, but nobody wants to die

This was the weekend for spring meetings in Washington. The IMF, the World Bank, and the G-7 all met to hash out the problems facing the world, and suggest what might be done about them.

They didn't exactly come up with any surprises. The developing world is less poor than it used to be, thanks mainly to economic growth in India and China, but still a lot poorer than it ought to be, with billions of people living on less than $2 a day. Many people think that debt relief would help things a great deal, but though governments agree in principle, they're having trouble implementing it in practice; the US is blocking a scheme to sell off half the IMF's gold reserves in order to pay for all that relief. Why, I'm not exactly sure, since as far as I know the IMF isn't really using the gold for anything except the aesthetic pleasure of having a lot of shiny things crowded together in a vault.

[Many other people think the World Bank is the problem, not the solution. They spent the meetings camped out on the Mall, selling genuine replica Che hats and/or Club For Growth bumper stickers]

There was a great deal of fretting about oil prices. That's all people can really do--fret--since the causes of high oil prices, such as high demand in China, offer limited scope for even multinational action. Of course, the US could slap a whacking great carbon tax on, the way Europe has, but the political prospects for such an action seem remote at best.

To me, the most interesting part of the meetings is where the various government personnel confronted the problem of large and growing imbalances in the global economy. Basically, everyone knows what needs to happen. Europe and Japan need to kick up economic growth. America needs to kick up its national savings rate through some combination of tighter fiscal policy and household savings. And Asian banks need to stop flooding us with cheap capital in order to subsidize their export sector.

Unfortunately, while everyone knows what needs to happen, no one knows how to do it. Japan has been stuck in an economic quagmire for a decade, and hopes are fading that it has finally made its way out of the Slough of Despond. [There's an even bigger, scarier worry, which is that Japan is what a country in demographic decline looks like, and Europe will follow suit. But that's another post.] Europe has run into the fact that the one-size-fits-all monetary policy of a single currency can have disastrous effects when labour and capital aren't mobile; France and Germany, the eurozone's biggest economies, are stuck in nasty recessions, but the ECB, which wants to establish its street cred on inflation, seems to be preparing to raise rates this fall. And there is little political support for the kinds of broad-based microeconomic reforms that might goose growth at the cost of cushy employment protections.

China, meanwhile, feels it needs a low currency in order to keep its export sector workers happily labouring in their factories, instead of angrily converging on Beijing with torches and pitchforks. And it will take a braver politician than George Bush to tell Americans that they can't have their tax cuts and their government programmes. Everyone recognizes that the world has a big problem. Everyone is in favour of doing something about it--as long as someone else does the doing. No one is in favour of telling a restive citizenry that things can't go on as they are. And in some cases, it mighten't do much good. For example, it won't help to rein in America's budget deficit if Chinese central banks just start lending the money to Fannie Mae instead, touching off another wave of home refinancings.

The longer we wait to correct these imbalances, the more likely the correction is to be catastrophic. That doesn't mean that disaster is inevitable. As James Surowiecki points out, when you owe the bank $1 million, you have a problem, but when you owe the bank $300 billion, the bank has a problem; China and the other Asian central banks have every incentive to let us down easy, if they can, if only to prevent their huge portfolio of American bonds from, er, accelerated depreciation. But with every passing day that our leaders collude to do nothing, the darker scenarios grow more plausible.

From the desk of Jane Galt:

Damn theocrats

So I'm catching up on my blog reading. This post from Chris Bertram certainly caught my eye:

I had a conversation at the weekend where the topic of baby-farming came up. Unmarried mother in Victorian England? Can’t stand the social stigma? No problem, babies disposed of no questions asked …. The full details are in Dorothy Haller’s online essay Bastardy and Baby Farming in Victorian England . A sample quote:

Baby farmers, the majority of whom were women, ran ads in newspapers which catered to working class girls. On any given day a young mother could find at least a dozen ads in the Daily Telegraph, and in the Christian Times, soliciting for the weekly, monthly, or yearly care of infants. All these advertisements were aimed at the mothers of illegitimate babies who were having difficulty finding employment with the added liability of a child. A typical ad might read:

NURSE CHILD WANTED, OR TO ADOPT —The Advertiser, a Widow with a little family of her own, and moderate allowance from her late husband’s friends, would be glad to accept the charge of a young child. Age no object. If sickly would receive a parent’s care. Terms, Fifteen Shillings a month; or would adopt entirely if under two months for the small sum of Twelve pounds.

This ad may have been misleading to the general public, but it read like a coded message to unwed mothers. The information about the character and financial condition of the person soliciting for nurse children appears to be acceptable at first glance, but no name and no address is given. No references are asked for and none are offered. The sum of 15s a week to keep an infant or a sickly child was inadequate, and a sickly child and an infant under two months were the least likely to survive and the cheapest to bury. Infants were taken no questions asked and it was understood that for 12 pounds no questions were expected to be asked. The transaction between the mother and the babyfarmer usually took place in a public place, on public transportation, or through a second party. No personal information was exchanged, the money was paid, and the transaction was complete. The mother knew she would never see her infant alive again.

No doubt this practice flourishes in certain societies today and would do wherever the theocrats get the upper hand.

Someone really needs to think about switching to herbal tea.

First of all, the practice wasn't a creation of theocratic Victorian England; it was common at least a century earlier. The euphemism may have been new--as I recall, in the 18th c. the "baby farmers" were called "angel makers"--but the idea certainly wasn't, and was practiced not only on illegitimate infants, but various inconvenient children of all sorts of social classes, including, I believe, the lesser nobility.

Second of all, infanticide is hardly a theocratic invention; as I recall, both Christianity and Islam substantially reduced earlier pagan practices of infanticide, and continue to do so in some areas where they are spreading.

Third of all, the practice of infanticide for unwed mothers was economic, as well as moral; it wasn't merely social stigma she worried about, but the real impossibility of nursing an infant and working. The invention of formula, paid day care, and the eight hour workday have changed things considerably. They've also increased the tax base from which to support orphanages.

Fourth, the theocrats themselves were the main support of orphanages in the United States. Surprisingly, Victorian America, which was much more, er, theocratic, than Victorian England, had no angel makers that I'm aware of (though its orphanages weren't anything to write home about).

Fifth, technologically speaking, it's just a mite easier to keep from getting pregnant than it was in Victorian times. Even if the theocrats banned all contraception--something which, as far as I'm aware, no one but the Catholic
church wants to do--the rhythm method would be a great improvement over the "hope" and "prayer" methods available to the Victorians. Are we now back at the point where our Progressives are raving about the dark future in which a Popish conspiracy conquers western civilisation and ushers in a thousand years of darkness?

From the desk of Jane Galt:

About that article

Liberals are championing this Foriegn Affairs piece on broadband as if it just goes to show you that the Bush administration is keeping us from the high-speed broadband that is our natural right. If we just had a good regulatory scheme like Japan's, they say . . .

[All right, we'll take a moment so that those of you who know something about the regulatory environment in Japan can wipe the saliva off your monitor. If you've aspirated any Hi-C, make sure you're all right before you continue reading.]

But it's not some indefinable excellence of regulation that caused Japan to get more high-speed broadband; as the article makes clear, they subsidised the hell out of it. The piece is a little bit shifty . . . he keeps talking about "access" rather than uptake, which is the relevant number; if 90 percent of Japanese have been given, at great government expense, something that 1 percent of Japanese actually use, that's not a great deal. Anyway, color me skeptical. Plus, remember how Europe's cell phone network was, like, eighty zillion times better than ours until it turned out they couldn't afford to upgrade to 3G? Big, honking government sponsored infrastructure projects, in which the government picks a technology winner, generally look better than the market's bumbling trial-and-error approach right up until it turns out that the government has made a whomping big mistake and it's too costly to fix.

Plus, he's urging us to make sure that by 2010 there's high speed internet access to every nook and cranny of America for $20-25 a month, which seems to betray a fundamental, total lack of understanding of the difference between Japan and South Korea, which have population densities of 327 and 432 persons per square mile, respectively, and the United States, which has a population density of 27 persons per square mile. Oh, we cluster, but still, all those square miles are between people who need broadband access, like the ranch I spent my summers on in Wyoming, two hours by car from the nearest town and several miles from the next neighbour. And if you've spent time in American suburbs or exurbs, and then gone to Europe or Asia, you know that we really do live differently. That this fellow doesn't seem to realise this makes me suspect everything else he says.

From the desk of Jane Galt:

Reading comprehension

Can you spot the error in this Foreign Affairs article?

By contrast, U.S. mobile-phone policy was born of a colossal blunder from which the industry has yet to recover fully. In the early 1980s, after the management consultancy McKinsey estimated that there would be little demand for mobile phones and a small prospect of profitability, the FCC carved the United States into 734 tiny mobile-phone districts. It handed out two provider licenses in each district: one automatically went to the regional telephone company, and the other was drawn by lottery. The resulting infrastructure was cripplingly fragmented. It could not support nationwide calls, and inefficiencies and expensive connection rates translated into sky-high charges for customers.

Twenty years later, the Clinton administration made a belated effort to encourage nationwide cellular networks. The government opened up enough spectrum for six nationwide networks and invited bids. Thanks to an imaginative on-line auction, it had sold off the spectrum for $7.7 billion by early 1995. Although the networks that entered the market still struggle to offer consistent quality, competition among them sharply reduced the price of mobile-phone service and spawned millions of new customers.

Click below for the answer.

Let's not always see the same hands . . . yes, that's right, twenty years later than "the early 1980's", the Clinton administration had come and gone.

From the desk of Jane Galt:

A modest proposal on the estate tax

Why don't we just get rid of the estate tax entirely, and set the basis on anything one inherits to $0? That way, if you sell whatever it is you inherited, you have to pay 20 percent or so of its value to the taxman, while if you just use it (i.e. a family small business) you pay no inheritance tax. Ah, you will say, but then Paris Hilton will pay no estate tax. Ah, I will say, but you must have noticed that Paris Hilton really isn't paying that much estate tax, because her family has employed an elite squadron of tactical tax warriors, who have "structured" her inheritance so as to minimise the tax burden. Moreover, I don't see why kids of the middle class (aka me) shouldn't have to pay capital gains when they sell their parent's house; first of all, their parents would have, and second of all, it didn't cost the kid anything to get the house; it seems to me that their capital gain is 100%.

But what about cash? You say. What's to stop parents from selling the house before they die and leaving a huge wad of non-taxable cash for the kids? Well, most people have to live somewhere, but apart from that, why not treat that wad of cash hitting the kid's bank account as, oh, I don't know . . . income?

As you can see, I'm not against taxing people; I'm against the special, complicated, economic-value-destroying structure of the estate tax.

From the desk of Jane Galt:

Economics jokes

I was told this one the other night:

Three econometricians go hunting, and spot a large deer. The first econometrician fires, but his shot goes three feet wide to the left. The second econometrician fires, but also misses, by three feet to the right. The third econometrician starts jumping up and down, shouting "We got it! We got it!"

From the desk of Jane Galt:

How to turn me into a tax-hater

I make a good living, for a journalist. But it's not *that* good. I live in a 400 square foot apartment on the ground floor with no light and not even enough room for a microwave. I give over $600 a month to the nice people who lent me the money to go to business school. I can't afford to fully fund my 401(k), and my budget for things like entertainment, travel, expensive electronics and so forth pretty much doesn't exist. If I want to save money, or have a treat, I have to do freelance work, such as book reviews.

Now, I'm not one of those libertarians who gets all hot and bothered because people have to pay taxes higher than 1 percent. Nonetheless, the federal government, along with the city and state of New York, are assiduously working to turn me into one. Do you know what my marginal tax rate was on my freelance work? More than fifty percent. When I was spending my evenings and weekends at some company's server bank, more than half of every dollar I earned went into the government's pocket. And for book reviews, which pay, on average, $200-$300 dollars, I was making just a little more than minimum wage.

Part of my indignation has to do with the fact that I've hit a taxation sweet spot--my income is now high enough that all my deductions disappear, but low enough that I get the full, 17.5 percent Social Security hit. I had one deduction this year, for my state and local income tax, and that by itself was enough to justify itemising. Friends have advised me to see an accountant, but why? I don't have any spare income to devote to restructuring. You'd have to be crazy to give me a mortgage, and I'd have to be crazy to buy a house when interest rates only have one way to go.

But more of my outrage goes to thinking that every time I hauled my ass out of bed at some unreasonable hour on a Sunday morning, or stayed up late into the wee-sma's pounding away on a book review, more than half the time I spent was working for someone else. I don't have any problem with really rather high marginal rates of taxation, but when it gets to the point where majority of your hours are spent laboring for a third party in an involuntary contract the terms of which you can't control, even to refusing to enter it, the words "taxation is slavery" do begin to have some bite. And of course, the fact is that my marginal tax rates aren't any lower on wages--the employer side of my payroll taxes is invisible to me, but no less paid by me because the law says my employer has to remit the check.

It is at times like this that I start to believe the supply siders, even though the empirical evidence for their propositions is pretty shaky. Book reviews look a lot less attractive when I net 47 cents on the dollar--why not have my evenings and weekends to myself, instead? Why not move to New Jersey, where I can get rid of my city tax, lower my state tax, and pay less sales tax to boot? Or if my parents hadn't weighted me down with all these middle American ideas about obeying the law and playing it straight and narrow--and I didn't have a morbid fear of going to jail--I could take the "poor man's tax shelter" and ask my employers to move my income off the books. This is what economists call deadweight loss, and as Zimran Ahmed points out, estimates are that the United States government burns about 25 cents this way for every dollar it raises in taxes.

I've no doubt that the liberals who read this will think "Waaa! waaa! Poor educated white professional girl has to pay her taxes." But I was against marginal rates this high before I had to pay them. There is some level at which taxation becomes confiscation, and I'd argue that when you are working more hours for the government than you are for yourself, we have crossed that bright line. By what moral right does the government tell anyone, from Warren Buffet on down, that it has a right to more than half their life?

From the desk of Jane Galt:

WSJ online profits top print

. . . . Or so says the NY Post.

The problem with this sort of accounting is that media outlets generally charge all the cost of content generation -- except for online-only content -- to the print side. This tends to make the online numbers look artificially wonderful. As far as I know, no online mainstream publication could turn a profit just on the web.

Nonetheless, this should have media titans everywhere sweating bullets. The problem is that no one has figured out a way to make online advertising come within an order of magnitude of the profit on print advertising. For one thing, people like print ads (or at most, ignore them); they hate online ads. For another, there's all sorts of software to strip the ads off your page, which isn't really practical with a newspaper or magazine. And while marketing departments should theoretically be willing to pay as much for interested clicks as for eyeballs flipping past the page, they aren't. Unless the media figures out a way to make people like, and marketers pay for, online advertising, traditional outlets are wholly screwed if and when people start converting their readership to online editions, since advertising is what currently covers their costs. Besides which, people won't pay as much for online subscriptions.

The blogosphere no doubt chortles in triumph. Perhaps I would too, if the traditional media didn't hand me a nifty check each month. But the fact is that traditional media does a lot of valuable work generating information that would go away if they weren't there. As a blogger, I could not do what I just did for the last week: spend most of my waking hours being lectured by experts, reading academic papers, and tracking down legal histories, in order to write comprehensively about bankruptcy reform. Nor could I, say, go to Sudan to tell you what's happening there. I would have to get another job, and that would cut into the time I could spend producing content. Bloggers will say that a lot of journalism is crap, and that's true, because a lot of everything is crap. But without CNN, ABC, WaPo, NYT, WSJ, and so forth, how would bloggers even know what the weather was going to be like, much less what was going on in the world? Blogging is a complement to traditional media, not a replacement for it, and if the traditional media gets hurt, the quality of blogging will also suffer.

From the desk of Jane Galt:

Things that make you go hmmmm. . . .

From Tyler Cowen:

In the study, women said they had a deeper emotional connection with their pets than men did. Nearly all women respondents (99%) reported that they frequently talked to their pets (vs. 95% of men) and an astonishing 93% of women think that their pets communicate with them (vs. 87% of men).

What exactly does communicate mean? I mean, my dog communicates things like "I want to go outside" and "I think you should feed me right now" very well, but he hasn't exactly come up with Unified Field Theory or anything.

From the desk of Jane Galt:

The Economics of Bankruptcy

If you're interested in the economic aspects of bankruptcy--and I'd argue that you should be much more interested in this than, say, whether Capital One is or is not the worldly embodiment of pure evil--then you should read this excellent post by William Sjostrom.

Y'all thought I was joking about how busy I was with bankruptcy, didn't you? Little did you dream . . .

From the desk of Jane Galt:

Who's to blame for bankruptcy?

I have to say, for all that I do wonder how credit card executives sleep at night, I find the consumer advocates' attempt to blame peoples' indebtedness on them pretty unconvincing.

This is partly because those opposing bankruptcy tried to have it both ways: "people going into bankruptcy are desperate, not deadbeats" and "it's the credit card company's fault anyway for lending them too much money".

But these cannot both be true. If people really needed the money, to put food on the table or shoes on the kids, then it's hard to argue that they would have been somehow better off without the credit cards. And if they spent the money on things they didn't need, well then surely most of the responsibility has to lie on their shoulders?

Mark Kleiman gets around this problem by arguing that you've got two villains here--the tempters and the tempted--and it's unfair to punish only the tempted. Fair enough, except that I don't exactly understand how requiring people to fulfil contracts they've undertaken is "punishment". The consumer advocates spend a lot of time talking about punishment, especially "punishing" the credit card companies for their "abusive lending tactics". This makes no sense to me. You can't "punish" a corporation; what you can do, if you think it a good idea, is make laws requiring them to curtail their lending. But those sorts of laws reek of arrogant paternalism, with their presumption that a large class of people can't be trusted with credit. Also, the sources that poor people turn to for credit when they can't get credit cards are even worse: loan sharks, pawn shops, payday lenders. The cure is worse than the disease.

The other problem with saying we shouldn't punish the temptee unless we also punish the tempter is, of course, that none of the people making this argument have any interest in punishing the temptee. Would consumer advocates claiming that the bill was unfair because it did nothing about "abusive lending practices" actually be happy if we made consumer bankruptcy more punitive, and also came down hard on the credit card companies? No, of course not--they only want to punish the tempter, like people who want to go after drug dealers but not drug users. There's possibly a "least cost" argument in favour of this strategy, but morally it's hard to argue people who borrow money they have no reasonable hope of repaying are somehow less culpable than the fellows who lent them the rope with which to hang themselves. To say otherwise is to deny moral agency to a huge swathe of our citizenry, which raises the question: why are we letting such moral lackwits vote?

The bankruptcy bill was flawed in many ways. But the way that both sides made it into a moral issue about "cracking down on abuse" and making people, or credit card companies, "take responsibility" for their behaviour, leaves me cold. Bankruptcy strikes me as an eminently practical matter; can people pay their debts, and if not, how do we settle matters with the least pain and the best economic effect? There are better and worse ways to determine who can pay what, and what economic and social effects are best--but people seemed to have no interest in anything but punishment. As far as I'm concerned, punishment is what criminal law is for. If you're not going prosecute people, then it's best to give up ideas about punishing them for some alleged wrongdoing.

(I should note that in Europe, unlike America, judges will actually look at what you've spent the money on, and may well deny you bankruptcy protection if you've spent it frivolously. That's punishment. But practically speaking, what's the point? Whether I charged prescription drugs or a trip to France, my creditors are out the money; if I can't pay it, it doesn't do them much good to deny me formal discharge of my debts. The European system incurs a lot of costs in search of justice, plus most Americans would be outraged if judges started getting to decide whether they really needed that extra case of Miller Lite.)

From the desk of Jane Galt:

How much bankruptcy fraud is there?

The true answer seems to be that no one knows. The best number out there is from the FBI, which sets it at around 10%, but government bureaucrats have been known in the past to pull numbers out of thin air in order to comply with the regulatory mania for quantitative precision in the face of uncertainty. The American Bankruptcy Institute, which is roughly neutral, estimates it's more like 3.5%. And these folks have done a study which I won't vouch for, but which is certainly entertaining reading:

We gathered a random sample of Chapter 7 petitions in 24 states, all filed the same day: June 5, 2002. It was the day in the middle of the worst year for filings. Our sample size was about 7.9% of all the Chapter 7 filings of that day.

All the cases we studied were successfully discharged.

We created a database of asset, debt, income, and living expense numbers and looked at the statistical results. We also did something judges don’t always do: We read some of the petitions carefully.

The FBI estimates that 10% of bankruptcy filings involve fraud of some kind. But fewer than 0.1% of filers are convicted. And our statistical analysis suggests that even the 10% fraud estimate is probably low.

For instance, in what amounts to a wild supposed coincidence, nearly one-third of filers say they spent their very last cash on their legal and filing fees.

Among individual petitions, one after another stretched credibility to its limits. We illustrate with 30 case studies, all pretty clear stuff. Check James, who had $800,000 of unsecured debt but claimed the assets he acquired were gone after being struck by lightning. Russ in California had no job, no income, and no cash but somehow maintained his monthly gym membership. Brian owed money on a hot tub he claimed was stolen (by a gang of patient thieves, apparently; it takes hours to drain one and at least six large men to lift the shell.)

Bob and Susan had $120,000 of annual income but couldn’t pay their debts for one big reason: $826 per month they spent on a SeaRay boat. Still, they reaffirmed the boat loan. Alexis filed, owing only $2,088 in total debt, even though she had a good job and could have paid half the debt with what she spent on lawyer and filing fees.

That last case, by the way, is malpractice by her bankruptcy lawyer; you should never, ever consider filing bankruptcy for a sum that you could pay back in a couple of years by working one shift a week at McDonalds. Those sorts of bankruptcies are far more costly to the "abuser" than the credit card companies.

But that brings up the question: what is fraud? Most of us would agree, I think, that there is a difference between, say, not listing your grandmother's engagement ring among your assets, and "forgetting" to mention a boat, some rolexes, a rembrant sketch and a numbered bank account in Switzerland. When the FBI says that 10% of cases involve fraud, how many of those cases are the former, and how many the latter?

That matters, because as with all social policy, there is a tradeoff between catching the guilty and persecuting the innocent. Living, as we do, in an imperfect world, having to make do with bankruptcy courts staffed with human beings rather than angels, we must deal with the fact that eliminating more fraud also means denying just relief to more innocents. If 10% of bankruptcy filings involve gross abuse of the process, then perhaps it's worth it. On the other hand, if 1% of filings involve gross abuse, and 9% involve people trying to hang onto a couple hundred bucks of extra stuff, then is it worth punishing the innocent in order to root this out?

From the desk of Jane Galt:

More on the bankruptcy bill

Two pieces from The Economist on our new bankruptcy bill, one comparing American bankruptcy law to Europe's, and the other on the relationship between entrepreneurship and personal bankruptcy (the latter requires a subscription). The first touches on the corporate side, which has been largely ignored in this debate, partly because the changes on the consumer side are much more radical, and partly because the corporate lobbies opposing the changes are a lot less popular and publicity-savvy than the consumer advocates pounding on the changes to personal bankruptcy. The Wall Street Journal's article has more detail, god bless it:

To speed up business bankruptcies, the measure specifies that companies filing for Chapter 11 protection will have a limit of 18 months to offer a reorganization plan. The bankruptcy code currently gives business filers the exclusive right to file their own reorganization plans within four months, but judges normally grant numerous extensions that allow companies to control the process for years.

For instance, Owens Corning Corp. of Toledo, Ohio, has been operating under bankruptcy protection since late 2000 because of asbestos claims.

Now, if a business doesn't have its own reorganization plan within 18 months, creditors can step in with their proposal.

"Lawyers who advise companies, which are considering filing Chapter 11, may recommend that it would be desirable to do it now" before the bill goes into effect, said Philip Corwin, an outside attorney for the American Bankers Association.

A new provision also requires companies operating under bankruptcy protection to commit within 210 days after the filing whether to continue lease arrangements. This will particularly affect retailers that have expensive leases, including space in shopping malls. The provision is meant to prevent companies from avoiding rent payments during bankruptcy proceedings and then canceling leases after reorganization.

The measure also restricts special bonuses from being paid to retain executives during bankruptcy proceedings.

. . . but if you're really consumed with curiosity about the changes in corporate bankruptcy, this is one of the best explanations I've read.

From the desk of Jane Galt:

On pharmacists refusing to prescribe birth control

Dalia Lithwick writes about the latest legal tizzy over pharmacists who refuse to dole out birth control. Why is it that no one seems to be suggesting the obvious compromise: allow pharmacists to refuse to fill prescritions for birth control pills, if they're morally opposed; and allow pharmacies to fire their asses if they want, and replace them with pharmacists who will? Have we really come to the point where every minor dispute must be made into a federal case?

From the desk of Jane Galt:

Reading comprehension test

Can you find the error this selection from the New York Times' article on the bankruptcy reform bill that passed last night?

"It feels like we've been waiting as long to pass bankruptcy reform as Washington spent trying to get baseball back in town," said Steve Pfister, the senior vice president for government relations at the retail federation. "The House hit one out of the park today. Now we're just waiting for President Bush to cross home plate by signing this bill into law."

Mr. Pfister said the legislation would lower costs for all consumers because they wind up making up the difference on the unpaid debts of those who abuse the system.

But others disagreed.

Opponents of the legislation said that the move by Congress was a harsh attack on the poorest and most needy and came just one day after the House adopted a measure of huge potential benefit to the wealthiest when it voted to eliminate the estate tax.

"The G.O.P. is practicing Robin Hood in reverse," said Representative John Conyers Jr. of Michigan, the ranking Democrat on the House Judiciary Committee. "Last night they repealed the estate tax, a gift to the wealthiest individuals in our society. Today they pushed through the special-interest bankruptcy bill, punishing the very poorest members of society. This shows all the world that all of that talk about values in the last election was just that - talk."

In fact, 73 Democrats joined the 229 Republicans in voting to approve the measure. It was opposed by 125 Democrats and Bernard Sanders of Vermont, the lone Independent in the House.

The legislation had been opposed by many bankruptcy law professors and judges who testified in recent months that it was unnecessary and would create more problems than it would solve. They said that it would impose new obstacles on many middle-income families seeking desperately needed protection from creditors, and that it would take far longer for those families to start over after suffering serious illnesses, unemployment and other calamities.

In a letter to Congress two months ago, 104 bankruptcy law professors predicted that "the deepest hardship" would "be felt in the heartland," where the filing rates are highest -Utah, Tennessee, Georgia, Nevada, Indiana, Alabama, Arkansas, Ohio, Mississippi and Idaho. A study conducted by legal and medical specialists at Harvard University of 1,771 personal bankruptcy filers in five federal courts found that about half were forced into bankruptcy because of heavy medical costs.

(Find the answer by clicking below)

Yes, students, that's right . . . none of the people quoted in the second half of the selection actually disagree with Mr Pfister. Mr Pfister has said that this will lower costs for all consumers by reducing bankruptcy. The people the second half quotes say that the burden will "punish the very poorest members of society", " impose new obstacles on many middle-income families seeking desperately needed protection from creditors", and "be felt in the heartland", none of which have anything to do with costs to consumers. If one says that deregulating trucking "lowers costs for all consumers", this is not contradicted by the fact that some truckers will be worse off after the change.

Now, conceivably, one could have found someone to argue (as many bankruptcy attorneys are), that some group of consumers will actually be paying higher costs because several provisions in the bill will cause attorney fees to rise. But while the people quoted in the second section undoubtedly disagree with Mr Pfister's unstated implication that the new bankruptcy law is a great thing for America, nothing they've said actually disagrees with anything he stated.

From the desk of Jane Galt:

Interesting bankruptcy chart

Sounds like an oxymoron, doesn't it? But this one, from the American Bankruptcy Institute (the closest thing one gets to a neutral source in this astonishingly charged debate), shows that the aggregate level of debt payments as a percentage of income don't seem to be related to the number of bankruptcies. The right-hand scale is a little silly, but it's still worth taking a look at.

From the desk of Jane Galt:

When you're in a hole, stop digging

Matthew Yglesias ably demonstrates why middle America hates blue state folks like us.

From the desk of Jane Galt:

Justice Delayed

I haven't been blogging about Tom DeLay because, well, I'm just not much of a scandalblogger. Also, I have a job. From what I understand, Mr DeLay, whatever the rules on the matter, has not comported himself as one would wish. The Republican leadership would do well to be rid of him, both because he lacks the moral authority to hold a leadership position, and because leaving him in place makes them look bad. But I lack the time or interest to investigate the various charges against him, so that's all I'll say on the matter.

But for bloggers wondering why the Democrats haven't leapt on this like white on rice, the answer is that Mr DeLay is probably not the only one guilty of this sort of thing. When it comes to ethics charges like these, no one wants to open their glass door and start the stone-throwing competition.

From the desk of Jane Galt:

Public service announcement

I am unbelievably, crazily busy with bankruptcy reform. Posting is likely to be nil between now and Thursday, after the House is expected to pass it. I note only in passing that a lot of the coverage is missing the stories: failing to mention the corporate side of puzzle, picking out the wrong things to criticise about the bill, making it sound much more radical a change than it is, and generally repeating the absurd exaggerations of advocates on both sides as if they were fact. I, of course, hope to avoid these pitfalls. Unfortunately, for the next couple of days, doing so will take all my time.

From the desk of Jane Galt:

Democracy isn't just a river in Egypt

Mark Kleiman wants to know what the American right is going to say about the current contretemps in Mexico, where the powers that be are using a legal strategy to prevent Mexico City's popular left-wing mayor from running for president in 2006. Personally, I think it's very, very dangerous. Having a legitimate democratic process is far more important than having someone whose policies I agree with in office, and I hope that other libertarians and conservatives feel the same way.

The Mayor is being removed over a technicality: you can't run for the office if you've committed a crime, and the Mayor apparently violated some judge's order about building an access road to a hospital. This is transparently . . . well, this is a family blog, so I can't say what it is, but you all know what I mean. I was against the Democratic attempts to keep Ralph Nader off the ballot in as many states as they could, which violated the spirit of election law while adhering to the letter. I'm against this for the same reason.

Update Yes, there's a fair amount of "tu quoque" that can be done at all the liberals staring hard rightward; as I said, most of them were curiously uninterested in the questionable democratic effects of using technical legal points to throw people off the ballot when the victim was Ralph Nader. But so what? Even a stopped clock is right twice a day, and this is one of those times. Moreover, I think this is pretty important. Mexico is close, and poor, and has a history of sclerotic and unresponsive government run by a political cartel. It has made admirable strides in recent years towards more democratic access, and it is not in our interest to see them take a step backwards.

But American politicians, like politicians everywhere, are tempted to put short term interests about things like help with illegal immigration, over America's clear long-term interest in having a stable, prosperous democracy on its southern border. Citizens can counteract that by putting pressure on their politicians to do the right thing: in this case, leaning on Mexican politicians to cut it out. We should do it not because Mark Kleiman says so, but because it is in keeping with the fine American tradition of liberty and justice for all.

From the desk of Jane Galt:

Holy cow!

Economics in One Easy Lesson, which is, like, the best popular book on economics ever, is online. If you haven't read it, trot over there right now, you lucky dog, you.

From the desk of Jane Galt:

A waste of a perfectly good snit

Okay, so as long-time readers know, I'm not a huge fan of Jimmy Carter's attempts to conduct his own foreign policy while Bush was in the White House, or what I consider to be his really quite dishonorable attempt to prepare the ground for fraud accusations in Florida prior to the 2004 elections, at the expense of ludicrously likening his own country to a banana republic in a national newspaper. Nonetheless, I was prepared to get all huffy because the Bush administration didn't invite him to the Pope's funeral; such a move struck me as strictly declasse. Now it turns out that Bush did invite him, but may--or may not--have "subtly discouraged" him from attending. What am I supposed to do with all this righteous indignation?

From the desk of Jane Galt:

Your right to live stops at the end of my power of attorney

Regardless of what your feelings were about the Schiavo case, I think we can all agree that this sort of thing is desperately wrong (provided the facts are correct). How about a nice big bipartisan blog hug on this one?

From the desk of Jane Galt:

Words to live by

A must read for anyone who is thinking of becoming an evil overlord.

From the desk of Jane Galt:

Handyman's corner

If I have two DC bricks which only take 60hz, can I really, truly not use them with my 50W converter? Engineers?

From the desk of Jane Galt:

Just say no to debt . . .

America and Asian central banks: enabling each other's addictions.

From the desk of Jane Galt:

The end of an era

The Atlantic Monthly will no longer publish fiction in the magazine.

From the desk of Jane Galt:

Priority clash

In today's FT (subscription required), the inimitable Martin Wolf writes that "old Europe's" welfare states will undermine European integration.

As Hans-Werner Sinn of the Ifo Institute for Economic Research in Munich points out, hourly labour costs in the present wave of accession countries were, on average, one-seventh of the west German level in 2003 (see chart)*. When Portugal and Spain joined in the 1980s, their wages were roughly half west German levels.

The incentive for migration then is huge, as is that for moving production in the opposite direction. The Ifo Institute calculates that about 4 to 5 per cent of the population of the accession countries would migrate to the old members if migration were unrestricted. While the numbers do not seem that large (about 4m for the current accession countries), most would probably go to Austria and Germany. Moreover, while migration is curbed for seven years from the date of accession, gaps in wages - and so in incentives to migrate - are certain to remain enormous long after.

Migration creates gains if prices and wages are flexible. But western labour markets and welfare states are designed to prevent such flexibility. In effect, the welfare state sets a minimum cost of labour well above the net earnings of workers in many poorer European regions.

The high minimum wage determines the employment offered in the economy. This then attracts migrants to take the jobs of nationals who are indifferent between work and state support. Between 1970 and 2002, unemployment of domestic workers rose by 3.2m in Germany. Over the same period, the net immigration of working people was about 3.1m. The match is uncanny.

As Prof Sinn notes, however, such migration is economically useless: it reduces output in the country of origin and lowers it in the recipient. Only if countries have flexible labour markets can migration be beneficial: Israel, the US and today's UK come to mind. Germany is in the opposite category.

Such unemployment-generating immigration is not the only danger. Another is that a generous welfare state is a magnet for immigrants and particularly for low-skilled immigrants. The higher the quality of public infrastructure and services, the bigger the attraction. It is for this reason that only after a lengthy period do immigrants pay back the general benefits they receive.

Within an integrated labour market it is impossible for one region to offer much better benefits than others without generating a ruinously costly inflow of benefit seekers. That is what happened to New York in the 1970s. This is why welfare states must work at the level of the entire labour market.

From the desk of Jane Galt:

Peter Jennings has lung cancer

This is awful news for him and his family. Here's wishing him a speedy recovery.

From the desk of Jane Galt:

Must read

How the Fed puts its monetary policy into practice. If you're even vaguely interested in economics, you need to know this.

From the desk of Jane Galt:

Yankees! Yankees! Yankees!

We rock. 'Nuff said.

From the desk of Jane Galt:

Competing values

Absolutely outstanding post by Stuart Buck about one of my pet peeves, the common belief that people who disagree with you are amoral lackwits, rather than putting different relative weights on principles we mostly all cherish:

People often accuse their opponents of being hypocrites when, in fact, they may simply have been balancing competing principles. We all do this constantly. And the mere fact that someone reaches a different balance than you, or that they decline to treat one principle alone as being absolute, does not prove that they are being hypocritical.

Example: Do you believe in free speech? Yes? Well, then, do you believe that someone can post your social security number, checking account and credit card information, and your complete medical history on the Internet? No? Then you have obviously reached a balance between the competing principles of free speech and privacy. Could someone else reach a different balance? Sure. Would that person have a right to criticize you for being a hypocrite ("if you really believed in free speech, you'd stick to that principle even at the expense of some other interest")?

Of course not. We all place differing degrees of importance on various principles, and there is hardly anyone who treats any principle as literally never worth violating. There are some, for example, who say that the overriding principle of federalism should have governed the Schiavo case. They are entitled to that opinion. But they themselves would probably violate the principle of federalism if the countervailing interest were strong enough. If Florida, for example, were taken over by a rogue regime that was literally planning to launch a nuclear attack on Washington, D.C., hardly anyone would maintain that the federal government should not interfere due to federalism principles.

That's a ridiculous example, one might say. Perhaps it is. But the point is that even the most devout adherents to federalism -- or virtually any other principle -- will find that they are nonetheless willing to strike a balance when a competing principle becomes strong enough.

And so, we have the crux of the matter. It wasn't that those who wanted to preserve Schiavo's life are necessarily fair-weather federalists. It was that in their estimation, preventing Schiavo's forced starvation was important enough to justify overriding the judgment of state courts. This doesn't justify a charge of hypocrisy, unless they -- alone out of all people on earth -- had previously maintained that federalism is so important that it automatically overrides any and all other competing principles in every conceivable situation. As no one on the pro-Schiavo side had ever made such an absolutist contention, that side was merely balancing competing principles, just as all people do in opining about nearly all political issues.

I might add, I think they were wrong, for all sorts of reasons. But I don't share the common belief that Republicans who did it were morally bankrupt; I just think they were wrong.

From the desk of Jane Galt:

A quick extra note on gay marriage

There are a lot of libertarians who dismiss arguments about gay marriage with the declaration that the state shouldn't be in the business of sanctifying marriage anyway. I don't find that a particularly satisfying argument. It's quite possibly true that in some ideal libertarian state, the government would not be in the business of defining marriages, or would merely enforce whatever creative contracts people chose to draw up. That's a lovely discussion for a libertarian forum. However, we are confronting a major legal change that is actually happening in the country we live in, where marriage is, and will continue to be for the foreseeable future, an institution in which the government is intimately involved. While I'm happy to debate about whether or not the state should define the form of marriage in my libertarian utopia, I don't think that this is necessarily a good guide to the kinds of laws I want to see enacted in America, which in so many, many ways does not look like my utopia.

For example, in my libertarian utopia, there would be no social security. People would save for their own retirements; social insurance would be for people who had something actually unpredictible and unexpected happen to them.If there is anything more predictible than ageing, I don't want to run into it.

Does that mean that I would advocate, say, getting rid of Social Security today? Shut down the administration, turn off the check-writing machines, and tell our senior citizens to get a goddamn job?

Don't be ridiculous. People planned their lives around this government assurance; you can't just rip it away and let millions of people starve. You can't just import one aspect of my libertarian utopia--no social security--without the crucial things that underpin it, like a population that knows it's expected to save for its own retirement. Similarly, you can't just import one feature of anarcho-capitalist life--anyone can marry anyone they want--as if all the vast social changes that an anarcho-capitalist or minarchist system would represent, are already there.

From the desk of Jane Galt:

A really, really, really long post about gay marriage that does not, in the end, support one side or the other

Unlike most libertarians, I don't have an opinion on gay marriage, and I'm not going to have an opinion no matter how much you bait me. However, I had an interesting discussion last night with another libertarian about it, which devolved into an argument about a certain kind of liberal/libertarian argument about gay marriage that I find really unconvincing.

Social conservatives of a more moderate stripe are essentially saying that marriage is an ancient institution, which has been carefully selected for throughout human history. It is a bedrock of our society; if it is destroyed, we will all be much worse off. (See what happened to the inner cities between 1960 and 1990 if you do not believe this.) For some reason, marriage always and everywhere, in every culture we know about, is between a man and a woman; this seems to be an important feature of the institution. We should not go mucking around and changing this extremely important institution, because if we make a bad change, the institution will fall apart.

A very common response to this is essentially to mock this as ridiculous. "Why on earth would it make any difference to me whether gay people are getting married? Why would that change my behavior as a heterosexual"

To which social conservatives reply that institutions have a number of complex ways in which they fulfill their roles, and one of the very important ways in which the institution of marriage perpetuates itself is by creating a romantic vision of oneself in marriage that is intrinsically tied into expressing one's masculinity or femininity in relation to a person of the opposite sex; stepping into an explicitly gendered role. This may not be true of every single marriage, and indeed undoubtedly it is untrue in some cases. But it is true of the culture-wide institution. By changing the explicitly gendered nature of marriage we might be accidentally cutting away something that turns out to be a crucial underpinning.

To which, again, the other side replies "That's ridiculous! I would never change my willingness to get married based on whether or not gay people were getting married!"

Now, economists hear this sort of argument all the time. "That's ridiculous! I would never start working fewer hours because my taxes went up!" This ignores the fact that you may not be the marginal case. The marginal case may be some consultant who just can't justify sacrificing valuable leisure for a new project when he's only making 60 cents on the dollar. The result will nonetheless be the same: less economic activity. Similarly, you--highly educated, firmly socialised, upper middle class you--may not be the marginal marriage candidate; it may be some high school dropout in Tuscaloosa. That doesn't mean that the institution of marriage won't be weakened in America just the same.

This should not be taken as an endorsement of the idea that gay marriage will weaken the current institution. I can tell a plausible story where it does; I can tell a plausible story where it doesn't. I have no idea which one is true. That is why I have no opinion on gay marriage, and am not planning to develop one. Marriage is a big institution; too big for me to feel I have a successful handle on it.

However, I am bothered by this specific argument, which I have heard over and over from the people I know who favor gay marriage laws. I mean, literally over and over; when they get into arguments, they just repeat it, again and again. "I will get married even if marriage is expanded to include gay people; I cannot imagine anyone up and deciding not to get married because gay people are getting married; therefore, the whole idea is ridiculous and bigoted."

They may well be right. Nonetheless, libertarians should know better. The limits of your imagination are not the limits of reality. Every government programme that libertarians have argued against has been defended at its inception with exactly this argument.

Let me take three major legal innovations, one of them general, two specific to marriage.

The first, the general one, is well known to most hard-core libertarians, but let me reprise it anyway. When the income tax was initially being debated, there was a suggestion to put in a mandatory cap; I believe the level was 10 percent.

Don't be ridiculous, the Senator's colleagues told him. Americans would never allow an income tax rate as high as ten percent. They would revolt! It is an outrage to even suggest it!

Many actually fought the cap on the grounds that it would encourage taxes to grow too high, towards the cap. The American people, they asserted, could be well counted on to keep income taxes in the range of a few percentage points.

Oops.

Now, I'm not a tax-crazy libertarian; I don't expect you to be horrified that we have income taxes higher than ten percent, as I'm not. But the point is that the Senators were completely right--at that time. However, the existance of the income tax allowed for a slow creep that eroded the American resistance to income taxation. External changes--from the Great Depression, to the technical ability to manage withholding rather than lump payments, also facilitated the rise, but they could not have without a cultural sea change in feelings about taxation. That "ridiculous" cap would have done a much, much better job holding down tax rates than the culture these Senators erroneously relied upon. Changing the law can, and does, change the culture of the thing regulated.

Another example is welfare. To sketch a brief history of welfare, it emerged in the nineteenth century as "Widows and orphans pensions", which were paid by the state to destitute families whose breadwinner had passed away. They were often not available to blacks; they were never available to unwed mothers. Though public services expanded in the first half of the twentieth century, that mentality was very much the same: public services were about supporting unfortunate families, not unwed mothers. Unwed mothers could not, in most cases, obtain welfare; they were not allowed in public housing (which was supposed to be--and was--a way station for young, struggling families on the way to homeownership, not a permanent abode); they were otherwise discriminated against by social services. The help you could expect from society was a home for wayward girls, in which you would give birth and then put the baby up for adoption.

The description of public housing in the fifties is shocking to anyone who's spent any time in modern public housing. Big item on the agenda at the tenant's meeting: housewives, don't shake your dustcloths out of the windows--other wives don't want your dirt in their apartment! Men, if you wear heavy work boots, please don't walk on the lawns until you can change into lighter shoes, as it damages the grass! (Descriptions taken from the invaluable book, The Inheritance, about the transition of the white working class from Democrat to Republican.) Needless to say, if those same housing projects could today find a majority of tenants who reliably dusted, or worked, they would be thrilled.

Public housing was, in short, a place full of functioning families.

Now, in the late fifties, a debate began over whether to extend benefits to the unmarried. It was unfair to stigmatise unwed mothers. Why shouldn't they be able to avail themselves of the benefits available to other citizens? The brutal societal prejudice against illegitimacy was old fashioned, bigoted, irrational.

But if you give unmarried mothers money, said the critics, you will get more unmarried mothers.

Ridiculous, said the proponents of the change. Being an unmarried mother is a brutal, thankless task. What kind of idiot would have a baby out of wedlock just because the state was willing to give her paltry welfare benefits?

People do all sorts of idiotic things, said the critics. If you pay for something, you usually get more of it.

C'mon said the activists. That's just silly. I just can't imagine anyone deciding to get pregnant out of wedlock simply because there are welfare benefits available.

Oooops.

Of course, change didn't happen overnight. But the marginal cases did have children out of wedlock, which made it more acceptable for the next marginal case to do so. Meanwhile, women who wanted to get married essentially found themselves in competition for young men with women who were willing to have sex, and bear children, without forcing the men to take any responsibility. This is a pretty attractive proposition for most young men. So despite the fact that the sixties brought us the biggest advance in birth control ever, illegitimacy exploded. In the early 1960s, a black illegitimacy rate of roughly 25 percent caused Daniel Patrick Moynihan to write a tract warning of a crisis in "the negro family" (a tract for which he was eviscerated by many of those selfsame activists.)

By 1990, that rate was over 70 percent. This, despite the fact that the inner city, where the illegitimacy problem was biggest, only accounts for a fraction of the black population.

But in that inner city, marriage had been destroyed. It had literally ceased to exist in any meaningful way. Possibly one of the most moving moments in Jason de Parle's absolutely wonderful book, American Dream, which follows three welfare mothers through welfare reform, is when he reveals that none of these three women, all in their late thirties, had ever been to a wedding.

Marriage matters. It is better for the kids; it is better for the adults raising those kids; and it is better for the childless people in the communities where those kids and adults live. Marriage reduces poverty, improves kids outcomes in all measurable ways, makes men live longer and both spouses happier. Marriage, it turns out, is an incredibly important institution. It also turns out to be a lot more fragile than we thought back then. It looked, to those extremely smart and well-meaning welfare reformers, practically unshakeable; the idea that it could be undone by something as simple as enabling women to have children without husbands, seemed ludicrous. Its cultural underpinnings were far too firm. Why would a woman choose such a hard road? It seemed self-evident that the only unwed mothers claiming benefits would be the ones pushed there by terrible circumstance.

This argument is compelling and logical. I would never become an unwed welfare mother, even if benefits were a great deal higher than they are now. It seems crazy to even suggest that one would bear a child out of wedlock for $567 a month. Indeed, to this day, I find the reformist side much more persuasive than the conservative side, except for one thing, which is that the conservatives turned out to be right. In fact, they turned out to be even more right than they suspected; they were predicting upticks in illegitimacy that were much more modest than what actually occurred--they expected marriage rates to suffer, not collapse.

How did people go so badly wrong? Well, to start with, they fell into the basic fallacy that economists are so well acquainted with: they thought about themselves instead of the marginal case. For another, they completely failed to realise that each additional illegitimate birth would, in effect, slightly destigmatise the next one. They assigned men very little agency, failing to predict that women willing to forgo marriage would essentially become unwelcome competition for women who weren't, and that as the numbers changed, that competition might push the marriage market towards unwelcome outcomes. They failed to forsee the confounding effect that the birth control pill would have on sexual mores.

But I think the core problems are two. The first is that they looked only at individuals, and took instititutions as a given. That is, they looked at all the cultural pressure to marry, and assumed that that would be a countervailing force powerful enough to overcome the new financial incentives for out-of-wedlock births. They failed to see the institution as dynamic. It wasn't a simple matter of two forces: cultural pressure to marry, financial freedom not to, arrayed against eachother; those forces had a complex interplay, and when you changed one, you changed the other.

The second is that they didn't assign any cultural reason for, or value to, the stigma on illegitimacy. They saw it as an outmoded vestige of a repressive Victorial values system, based on an unnatural fear of sexuality. But the stigma attached to unwed motherhood has quite logical, and important, foundations: having a child without a husband is bad for children, and bad for mothers, and thus bad for the rest of us. So our culture made it very costly for the mother to do. Lower the cost, and you raise the incidence. As an economist would say, incentives matter.

(Now, I am not arguing in favor of stigmatising unwed mothers the way the Victorians did. I'm just pointing out that the stigma did not exist merely, as many mid-century reformers seem to have believed, because of some dark Freudian excesses on the part of our ancestors.)

But all the reformers saw was the terrible pain--and it was terrible--inflicted on unwed mothers. They saw the terrible unfairness--and it was terribly unfair--of punishing the mother, and not the father. They saw the inherent injustice--and need I add, it was indeed unjust--of treating American citizens differently because of their marital status.

But as G.K. Chesterton points out, people who don't see the use of a social institution are the last people who should be allowed to reform it:

In the matter of reforming things, as distinct from deforming them, there is one plain and simple principle; a principle which will probably be called a paradox. There exists in such a case a certain institution or law; let us say, for the sake of simplicity, a fence or gate erected across a road. The more modern type of reformer goes gaily up to it and says, "I don't see the use of this; let us clear it away." To which the more intelligent type of reformer will do well to answer: "If you don't see the use of it, I certainly won't let you clear it away. Go away and think. Then, when you can come back and tell me that you do see the use of it, I may allow you to destroy it."

This paradox rests on the most elementary common sense. The gate or fence did not grow there. It was not set up by somnambulists who built it in their sleep. It is highly improbable that it was put there by escaped lunatics who were for some reason loose in the street. Some person had some reason for thinking it would be a good thing for somebody. And until we know what the reason was, we really cannot judge whether the reason was reasonable. It is extremely probable that we have overlooked some whole aspect of the question, if something set up by human beings like ourselves seems to be entirely meaningless and mysterious. There are reformers who get over this difficulty by assuming that all their fathers were fools; but if that be so, we can only say that folly appears to be a hereditary disease. But the truth is that nobody has any business to destroy a social institution until he has really seen it as an historical institution. If he knows how it arose, and what purposes it was supposed to serve, he may really be able to say that they were bad purposes, that they have since become bad purposes, or that they are purposes which are no longer served. But if he simply stares at the thing as a senseless monstrosity that has somehow sprung up in his path, it is he and not the traditionalist who is suffering from an illusion.

Now, of course, this can turn into a sort of precautionary principle that prevents reform from ever happening. That would be bad; all sorts of things need changing all the time, because society and our environment change. But as a matter of principle, it is probably a bad idea to let someone go mucking around with social arrangements, such as the way we treat unwed parenthood, if their idea about that institution is that "it just growed". You don't have to be a rock-ribbed conservative to recognise that there is something of an evolutionary process in society: institutional features are not necessarily the best possible arrangement, but they have been selected for a certain amount of fitness.

It might also be, of course, that the feature is what evolutionary biologists call a spandrel. It's a term taken from architecture; spandrels are the pretty little spaces between vaulted arches. They are not designed for; they are a useless, but pretty, side effect of the physical properties of arches. In evolutionary biology, spandrel is some feature which is not selected for, but appears as a byproduct of other traits that are selected for. Belly buttons are a neat place to put piercings, but they're not there because of that; they're a byproduct of mammalian reproduction.

However, and architect will be happy to tell you that if you try to rip out the spandrel, you might easily bring down the building.

The third example I'll give is of changes to the marriage laws, specifically the radical relaxation of divorce statutes during the twentieth century.

Divorce, in the nineteenth century, was unbelievably hard to get. It took years, was expensive, and required proving that your spouse had abandonned you for an extended period with no financial support; was (if male) not merely discreetly dallying but flagrantly carrying on; or was not just belting you one now and again when you got mouthy, but routinely pummeling you within an inch of your life. After you got divorced, you were a pariah in all but the largest cities. If you were a desperately wronged woman you might change your name, taking your maiden name as your first name and continuing to use your husband's last name to indicate that you expected to continue living as if you were married (i.e. chastely) and expect to have some limited intercourse with your neighbours, though of course you would not be invited to events held in a church, or evening affairs. Financially secure women generally (I am not making this up) moved to Europe; Edith Wharton, who moved to Paris when she got divorced, wrote moving stories about the way divorced women were shunned at home. Men, meanwhile (who were usually the respondants) could expect to see more than half their assets and income settled on their spouse and children.

There were, critics observed, a number of unhappy marriages in which people stuck together. Young people, who shouldn't have gotten married; older people, whose spouses were not physically abusive nor absent, nor flagrantly adulterous, but whose spouse was, for reasons of financial irresponsibility, mental viciousness, or some other major flaw, destroying their life. Why not make divorce easier to get? Rather than requiring people to show that there was an unforgiveable, physically visible, cause that the marriage should be dissolved, why not let people who wanted to get divorced agree to do so?

Because if you make divorce easier, said the critics, you will get much more of it, and divorce is bad for society.

That's ridiculous! said the reformers. (Can we sing it all together now?) People stay married because marriage is a bedrock institution of our society, not because of some law! The only people who get divorced will be people who have terrible problems! A few percentage points at most!

Oops. When the law changed, the institution changed. The marginal divorce made the next one easier. Again, the magnitude of the change swamped the dire predictions of the anti-reformist wing; no one could have imagined, in their wildest dreams, a day when half of all marriages ended in divorce.

There were actually two big changes; the first, when divorce laws were amended in most states to make it easier to get a divorce; and the second, when "no fault" divorce allowed one spouse to unilaterally end the marriage. The second change produced another huge surge in the divorce rate, and a nice decline in the incomes of divorced women; it seems advocates had failed to anticipate that removing the leverage of the financially weaker party to hold out for a good settlement would result in men keeping more of their earnings to themselves.

What's more, easy divorce didn't only change the divorce rate; it made drastic changes to the institution of marriage itself. David Brooks makes an argument I find convincing: that the proliferation of the kind of extravagent weddings that used to only be the province of high society (rented venue, extravagent flowers and food, hundreds of guests, a band with dancing, dresses that cost the same as a good used car) is because the event itself doesn't mean nearly as much as it used to, so we have to turn it into a three-ring circus to feel like we're really doing something.

A couple in 1940 (and even more so in 1910) could go to a minister's parlor, or a justice of the peace, and in five minutes totally change their lives. Unless you are a member of certain highly religious subcultures, this is simply no longer true. That is, of course, partly because of the sexual revolution and the emancipation of women; but it is also because you aren't really making a lifetime committment; you're making a lifetime committment unless you find something better to do. There is no way, psychologically, to make the latter as big an event as the former, and when you lost that committment, you lose, on the margin, some willingness to make the marriage work. Again, this doesn't mean I think divorce law should be toughened up; only that changes in law that affect marriage affect the cultural institution, not just the legal practice.

Three laws. Three well-meaning reformers who were genuinely, sincerely incapable of imagining that their changes would wreak such institutional havoc. Three sets of utterly logical and convincing, and wrong arguments about how people would behave after a major change.

So what does this mean? That we shouldn't enact gay marriage because of some sort of social Precautionary Principle

No. I have no such grand advice.

My only request is that people try to be a leeetle more humble about their ability to imagine the subtle results of big policy changes. The argument that gay marriage will not change the institution of marriage because you can't imagine it changing your personal reaction is pretty arrogant. It imagines, first of all, that your behavior is a guide for the behavior of everyone else in society, when in fact, as you may have noticed, all sorts of different people react to all sorts of different things in all sorts of different ways, which is why we have to have elections and stuff. And second, the unwavering belief that the only reason that marriage, always and everywhere, is a male-female institution (I exclude rare ritual behaviors), is just some sort of bizarre historical coincidence, and that you know better, needs examining. If you think you know why marriage is male-female, and why that's either outdated because of all the ways in which reproduction has lately changed, or was a bad reason to start with, then you are in a good place to advocate reform. If you think that marriage is just that way because our ancestors were all a bunch of repressed bastards with dark Freudian complexes that made them homophobic bigots, I'm a little leery of letting you muck around with it.

Is this post going to convince anyone? I doubt it; everyone but me seems to already know all the answers, so why listen to such a hedging, doubting bore? I myself am trying to draw a very fine line between being humble about making big changes to big social institutions, and telling people (which I am not trying to do) that they can't make those changes because other people have been wrong in the past. In the end, our judgement is all we have; everyone will have to rely on their judgement of whether gay marriage is, on net, a good or a bad idea. All I'm asking for is for people to think more deeply than a quick consultation of their imaginations to make that decision. I realise that this probably falls on the side of supporting the anti-gay-marriage forces, and I'm sorry, but I can't help that. This humility is what I want from liberals when approaching market changes; now I'm asking it from my side too, in approaching social ones. I think the approach is consistent, if not exactly popular.

Update A number of libertarians are, as I predicted, making the "Why don't we just privatise marriage?" argument. I don't find that useful in the context of the debate about gay marriage in America, where marriage is simply not going to be privatised in any foreseeable near-term future. I wrote an immediate follow up saying just that, but of course, I got a lot of readers from an Instalanche, which I didn't expect (no one expects an Instalanche!), and they just read the one post. So the second post is here; if you are thinking of making the argument that we should just get the state out of the marriage business, please read it.

Also, a lot of readers are saying that I'm wrong about marriage always being between a man and a woman, citing polygamy. I have been told this is a "basic factual error."

No, it's not. Polygamous societies do not (at least in any society I have ever heard about) have group marriages. Men with more than one wife have multiple marriages with multiple women, not a single marriage with several wives. In fact, they generally take pains to separate the women, preferably in different houses. Whether or not you allow men to contract for more than one marriage (and for all sorts of reasons, this seems to me to be a bad idea unless you're in an era of permanent war), each marriage remains the union of a man and a woman.

From the desk of Jane Galt:

Incentives matter

The Atlantic delivers some not-very-surprising information about corporate scandals:

Corporate scandals often happen at the most successful firms—or at least at firms where the appearance of success breeds a megalomaniac CEO, reams of stock options, overoptimistic goals, and gaga recommendations from Wall Street equity analysts. This is the conclusion of a Boston Consulting Group study that analyzes the companies responsible for twenty-five of the largest corporate frauds since 1996. Compared with their clean competitors, "fraud firms" offered their CEOs eight times as much stock-based pay and set corporate performance targets 250 percent higher. Other factors associated with executive malfeasance were inflated stock prices and attention from the press (before their downfalls, fraud-firm CEOs were three times as likely to be quoted in the media as their competitors). Moreover, two interesting insights emerged. First, good corporate governance—of the sort mandated by post-bubble regulations—may have done little to prevent fraud. Enron's board, for instance, was rated among the nation's five best-governed in 2000. Second, while crooked execs may have fooled analysts, the media, and the public, the market sniffed them out. The median fraud firm lost 40 percent of its value in the year before its actions came to light. (One wonders who was selling …)

From the desk of Jane Galt:

What's the Jane Galt weight loss plan

So how did I lose those 20 pounds from my Ground Zero time so quickly? Is there a Jane Galt Weight Loss Plan?

Why, yes, my friends, there is. It's called "Lent". I gave up sugar for Lent, and was positively astonished at how quickly the pounds melted off.

Now, I didn't just give up candy and desserts. I gave up all sorts of dessert-disguised-as-food things: granola bars (aka Oatmeal Cookies), muffins and fruit breads (aka "Cake"), energy bars (aka "candy"), all manner of coffee, yogurt, and fruit smoothie drinks (aka "milkshakes").

Interestingly, I discovered at the end of six weeks that I wasn't particularly interested in sugar. It's a discovery I now make every year, when I give up sweet things. (Note: I'm not particularly religious; Lent is, for me, a cultural ritual I enjoy, not a religious one. If you're religious, dieting is not, I believe, a good substitute for a Lenten sacrifice. On the other hand, I find the asceticism of forgoing as ubiquitous a thing as added sugar very good for the soul.) If you can stick to a no-sugar diet for six weeks, you won't find it hard to get yourself on a routine where you have a nice dessert, say, once a week, instead of constant cravings for sugary treats. I know this seems impossible to believe, but you really will, in a relatively short time, reach a point where you prefer apples to candy bars.

Over the year, I find my sugar consumption going up, but then it falls back again at Lent. I'm much healthier for it.

If you can also cut out just one more food category, deep fried things, I believe that most people will find they lose a considerable amount of weight pretty quickly on the Jane Galt plan. But I'm no registered dietitian, so take my advice for what it's worth.

From the desk of Jane Galt:

Was Berger covering up

This Matthew Yglesias post is more than a little misleading. All Sandy Berger did, he says, is remove copies from the archives. He's not destroying anything of value! Er, my understanding is that what he removed were drafts. With the writing of various Clinton administration members all over them. Which could certainly be something embarassing that he wanted to destroy.

From the desk of Jane Galt:

Fit or fat?

A number of you have interpreted my remarks about getting fatter to mean that I am in need of weight loss advice.

I thank you for your concern. But while I am no longer the wafer-thin youngster that I once was, I'm still on the lean side; I'm 6'2, and I weigh somewhere in the neighbourhood of 150 pounds. Now, that used to be 135, once upon a time, but most doctors characterise the fifteen pounds I've added as "well needed" rather than "excess". These days, I'm walking upwards of 3 miles a day to save the outrageous fares on the Tube, and while my diet does contain more saturated fat than a truly heart-healthy programme, overall, I'm in pretty good condition.

When you're tall and skinny, talking about weight problems in others can sound pretty cruel. Most people who struggle with their weight tend to assume either that I simply hit the Pick 6 in the genetic lottery, and have no idea at all about dieting; or that I diet like a stylite, and am trying to impose my puritan routine on them. And indeed, a lot of skinny people talking about weight gain in others do sound like this, and I think it can get pretty mean. There's no moral dimension to weight gain, or loss, and if you've never been seriously overweight, lecturing someone else who is on their lack of self control is unwise.

Neither is true for me, however. I have to eat sensibly like everyone else, or I gain weight, and while it takes rather longer for weight gain to show up on a frame like mine, it takes me just as long to lose 20 pounds as it takes anyone else, which means that I have to be careful not to get fat, or else I'll stay fat a lot longer than your average 30-something. It is weird, but true, that most skinny people have to be careful about what they eat, and yet most people prefer to be thought of as naturally skinny, as if this were somehow superior to watching your diet and excercising. (And indeed, I do know people like this. But not many. Most of the women I know who are "naturally" very skinny turn out to be "naturally" living on steamed vegetables and grilled fish). But I am not going to pretend. If I eat too much fat, starch, and sugar, I will get fat. The reason I am not fat is that I try to ensure that I don't eat too much fat, starch, and sugar.

On the other hand, I've never gained more than 20 pounds, and that only when I was sitting in a trailer 12 hours a day at Ground Zero, scarfing free candy from the Red Cross and the Salvation Army with both fists. It is, I assume, harder for me to gain weight than it is for friends of mine who struggle much more; for one thing, every spring and summer I tend to lose interest in heavy foods, and become obsessed with eating vegetables and fruit and lean meat to the exclusion of nearly everything else. That craving is, as far as I can tell, entirely natural, but it also results in my losing the five pounds I gain most winters without any effort.

But as one, quite skinny coworker once said to me, "You know, I say I can eat pretty much whatever I want, but I seem to have trained myself to want--an apple." I grew up in one of the most weight-conscious subcultures in the world, and the fact is that I don't know whether what I eat is what I naturally want, or whether I, and the girls around me in school, simply trained our bodies to want apples instead of donuts, asparagus instead of french fries. On the other hand, my mother is skinny, my father is skinny, and neither of them grew up with much pressure at all to stay thin. So maybe I did hit the lottery, though not the Pick-6; more like one of those scratch-off games.

I'd also point out, to all those superior skinnies, that it's a lot easier to stay skinny than to get that way. For one thing, to stay skinny, you have to eat 1800-2000 calories a day; to get that way, you have to eat, like, 1200 calories a day, which would certainly make me grumpy. For another, fat has weird effects on the endocrine system, pumping out hormones that tell your body to produce more fat. Also, your body has what's called a "set point" that tells it how much it wants to weigh; this controls appetite and so forth. It only takes 6 months of being overweight for most people to reset their set point upward; it takes more than three years of weighing less to reset it downwards again. And of course, the more you diet, the more aggressively your body, which thinks you're in the middle of a famine, tries to hold onto calories. So lecturing someone on how they'd be just fine if they'd just eat less and excercise more is a little bit rich.

Anyway, what I was trying to do with that throwaway line ("I'm getting fatter") is to point out that I, too, am engaged in the struggle to eat healthy and stay fit. But perhaps this was a little dishonest, because I'm not struggling the way people who are overweight are; I'm struggling the way relatively lean people who want to live to be 100 despite a family history of heart disease are. Which is really not the same thing at all.

On the other hand, the underlying message that I was trying to send--that I don't think that fat people are somehow morally or mentally lacking--is true. Keeping fit is hard, even for someone with a good genetic and environmental start. For someone who doesn't have those things, I imagine it must be very difficult indeed.