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The Boston Globe's Case is Even Worse than Scott Sumner Says, by David Henderson

Fri, 30 Sep 2016 12:52:28 -0500

Yesterday, co-blogger Scott Sumner wrote an excellent post taking on the Boston Globe columnist Renee Loth's weak case against marijuana legalization. (Her column is from April, but it's still relevant.)

The case is even weaker than Scott says.

Consider this segment of Loth's case:

As with legalized gambling, the states are in a competitive frenzy to hatch these golden geese before the market is saturated. It's beggar-thy-neighbor time, and no one wants to miss out. States are salivating at the prospect of easy revenue without the pain of raising taxes.

But marijuana revenues, like gambling income and other forms of "voluntary taxation," are a cheap, fractured way to fund public services. Instead of people contributing equitably to the common good, a smaller subset foots the bill. Sure, some people will smoke pot whether it's for sale at the 7-11 or not. But does the state need to endorse it, or -- worse -- come to depend on it?


Scott writes: "The endorsement comment is just silly." And he's right.

But notice something else: her discussion of taxes.

Loth rightly recognizes that legalizing gambling would raise tax revenues. And although the payers from whom these tax revenues would be taken would rather not pay them, they would prefer to pay low or even medium taxes on legal low-price marijuana than to pay high risk-freighted prices on illegal marijuana. Numerical example: Imagine that when marijuana is illegal, the price is $200 per ounce. Then it's made legal, with the kind of entry of firms that Loth envisions (in her words, the market is "saturated") so that the price falls to $100 per ounce. Then even a hefty $50 per ounce tax, even if all of it is passed on to consumers (as it would be if the supply curve is essentially horizontal), would cause the price to be $150 per ounce. So the buyers gain and the government gains.

But nooooo, we can't have that, says Loth. Why? Because people aren't contributing "equitably." In other words, she would prefer to purposely make some other people worse off with higher taxes on what they buy (sales taxes) or earn (income taxes) than to raise the same amount of revenue by raising no taxes but instead legalizing a good so that the revenues are taken from people who are better off paying the revenues than buying in an illegal world.

That's either ignorant or cruel, or both.

(6 COMMENTS)



Missing moods at the Boston Globe, by Scott Sumner

Thu, 29 Sep 2016 17:17:21 -0500

Polls show that 58% of Americans favor the legalization of marijuana. Even Texans support it. But an initiative to legalize pot in (very liberal) Massachusetts may fail. One reason is anti-legalization editorials like the following, in the highly influential Boston Globe. When I think about the prospect of legalizing marijuana in Massachusetts, I surprise myself by sounding like my father. Cannabis tourism? THC-infused lip balm? "Budz and sudz" crawls? What is the world coming to? . . . Like most Massachusetts citizens, I voted for legalization of medical marijuana when it was on the ballot in 2012. But the chaotic rollout of that measure is a cautionary tale. Recall that within weeks of the election, implementation of the new law was on its way to becoming a fiasco of falsified license applications, shoddy background checks, allegations of corruption and influence-peddling, voided licenses, and lawsuits galore. Communities objected, and licensing stalled, as dispensaries were sited in residential neighborhoods instead of clinics or pharmacies, where they might have maintained at least the patina of therapeutic purpose. Meanwhile, thousands of deserving patients suffered until the first dispensary finally opened in Salem last June. If the state can't handle a nonprofit medical marijuana market for a limited number of patients, can we reasonably expect it to establish an all-cash, profit-driven buzz bazaar without a hitch? . . . The editorial continues on in the same vein, with lots of minor bureaucratic points. Notably missing is any discussion of the 400,000 Americans currently serving in prison for drug violations, or the millions more whose lives have been scarred by their criminal record. One might have expected some acknowledgement of the vast racial inequities, the fact that whites are as likely to use pot as blacks, but far less likely to go to prison. After all, Black Lives Matter has become a hot topic at liberal papers like the Globe. But when it comes to drug legalization, minorities are almost invisible. Instead we get this: As with legalized gambling, the states are in a competitive frenzy to hatch these golden geese before the market is saturated. It's beggar-thy-neighbor time, and no one wants to miss out. States are salivating at the prospect of easy revenue without the pain of raising taxes. But marijuana revenues, like gambling income and other forms of "voluntary taxation," are a cheap, fractured way to fund public services. Instead of people contributing equitably to the common good, a smaller subset foots the bill. Sure, some people will smoke pot whether it's for sale at the 7-11 or not. But does the state need to endorse it, or -- worse -- come to depend on it? Possession of small amounts of marijuana has been decriminalized in Massachusetts for seven years. Before we embark on this billion-dollar bender, maybe we should just take a breath. The endorsement comment is just silly. Massachusetts has legalized the sale of cigarettes---does anyone seriously believe the state is endorsing the use of cigarettes? The comment about decriminalization is telling. It's a signal to affluent suburban moms, "don't worry, if your teenage son gets caught buying pot, he won't get a criminal record. Instead we'll send the sellers of pot to prison, and those are mostly minorities." Back in January, Bryan Caplan did a brilliant post on "missing moods". Here's a sample: 2. The immigration restrictionist. Immigration from the Third World to the First World is almost a fool-proof way to work your way out of poverty. The mechanism: Labor is more productive in the First World than the Third, so migrants generally create the extra riches they consume. This doesn't mean that immigration restrictions are never justified. But the reasonable restrictionist mood is anguish that a tremendous opportunity to enrich mankind and end poverty must go to waste - and pity for the billions punished for the "crime" of choosing the wrong parents. The kind of emotions that flow out of, "Th[...]



Economic Growth and the Policy Debate, by Amy Willis

Thu, 29 Sep 2016 14:03:10 -0500

(image) In a campaign season here in the United States that seems more like a shouting match than politics, this week's EconTalk episode raises an interesting question. According to guest John Cochrane, a.k.a. The Grumpy Economist, the main issue that we should be concerned about is economic growth. Indeed, "...nothing matters as much as reestablishing or improving on the traditional growth rates." So why don't we hear more about this? (And is Cochrane right regarding the primacy of growth?)

Cochrane is concerned that ever-increasing regulatory burdens are rendering US economic growth sclerotic. His solution- a more "simplified" public life and a renewed focus on the rule of law. But what exactly does this mean? Cochrane offers some policy suggestions throughout. The one most developed focuses on decreasing the debt leverage in banks and turning their holdings to equities as a means of avoiding regulation. He also advocates dispensing with corporate taxes. To what extent might such changes have saved us trouble leading up to 2008? Going forward?

To me one of the most interesting threads is early in the interview as Roberts and Cochrane discuss inequality. Cochrane acknowledges people's concerns about it, and toward the end of the conversation even laments the way he perceives America as turning into a class-based society defined by income. Yet when worrying about inequality, Cochrane says what people are really concerned about is not inequality per se, but rather people's ability to "get ahead." Again, later in the interview, he suggests that in terms of social welfare programs, we should be more generous financially, but this generosity should be paired with more limited time. The problems with social programs today, he says, are with the disincentives they create rather than the amount of money that is spent on them.

If you haven't listened yet, head over to EconTalk and do so. Or read the Highlights. However you approach it, why not let us know what questions this conversation raises for you? (And stay tuned for our EconTalk Extra on this episode, too!)

(4 COMMENTS)



Angelo Codevilla on Freedom of Association, by David Henderson

Thu, 29 Sep 2016 12:16:24 -0500

In a very pessimistic essay about America's future, my former Hoover colleague Angelo Codevilla writes: What goes by the name "constitutional law" has been eclipsing the U.S. Constitution for a long time. But when the 1964 Civil Rights Act substituted a wholly open-ended mandate to oppose "discrimination" for any and all fundamental rights, it became the little law that ate the Constitution. Now, because the Act pretended that the commerce clause trumps the freedom of persons to associate or not with whomever they wish, and is being taken to mean that it trumps the free exercise of religion as well, bakers and photographers are forced to take part in homosexual weddings. A commission in the Commonwealth of Massachusetts reported that even a church may be forced to operate its bathrooms according to gender self-identification because it "could be seen as a place of public accommodation if it holds a secular event, such as a spaghetti supper, that is open to the general public." California came very close to mandating that Catholic schools admit homosexual and transgender students or close down. The Justice Department is studying how to prosecute on-line transactions such as vacation home rental site Airbnb, Inc., that fall afoul of its evolving anti-discrimination standards. If I had to name one of my main disappointments about libertarians, it would be the failure of some of them to defend, and even the outright hostility they show towards, freedom of association. I have written here and here, for example, about Mike Munger's and Gary Johnson's rejection of freedom of association. Here are some excerpts on freedom of association from my book The Joy of Freedom: An Economist's Odyssey, published in 2001. On freedom to choose a roommate: Imagine that you're a homosexual and would like to live with a homosexual roommate. Or imagine that you're a heterosexual and would like to live with a heterosexual roommate. Guess what? Some governments in the United States claim that you don't have the right to make such a choice. In Madison, Wisconsin, recently, the government fined a woman for refusing to accept a lesbian roommate. The woman took her case all the way up to the U.S. Supreme Court, which, in May 1997, refused to hear the case. By doing so, the Supreme Court upheld this extreme intrusion on the freedom of association. Is freedom to choose your friends the next area that, with the Supreme Court's blessing, governments in the United States will assault? On sexual freedom and romantic freedom: Freedom of association also applies to dating and sex. People are free to say no to those who ask them out on dates or who ask them for sex. In fact, everyone knows the word for the violation of another's freedom to say no to sex. We call it rape. My impression is that governments in the United States completely respect half of the freedom of association in sex, the freedom to say no. It was not always so. In the nineteenth century and before, when a man raped his slave, the courts did not step in and punish him. Back then, judges, and indeed most people, believed that rape did not violate a slave's freedom of association because they didn't consider slaves human beings with rights. Governments still, however, don't consistently respect the other half of freedom of association in sex, the freedom to say yes and to act on it. In some states, certain forms of sex are illegal. Georgia's government, for example, says that a "person commits the offense of sodomy when he performs or submits to any sexual act involving the sex organs of one person and the mouth or anus of another." If you find this language distasteful, welcome to the club, but don't blame me. Instead, put the blame where it properly falls, on the Georgia state legislators who felt the need to define sodomy so they could ban it, and backed their definition with a prison sentence of up to 20 years. And, remember, we're talking about consensual, not forced, sex. In 1986, incidentally, the U.[...]



Charles L. Schultze RIP, by David Henderson

Wed, 28 Sep 2016 18:42:54 -0500

Charlie Schultze, Brookings Institution economist and former economic adviser to President Jimmy Carter has died at age 91. Charlie was old-school in the best sense of that term. From what I could tell at a distance, he believed in using economic analysis the best way he knew and then giving the information to the politicians he worked under. Like many economists at the Council of Economic Advisers and elsewhere in presidential administrations, he spent a lot of his time arguing against bad ideas. While not in the government, he was more outspoken against bad ideas, arguing strongly, for example, against industrial policy when that was all the rage in the early 1980s. In the article on Industrial Policy in the first edition of The Concise Encyclopedia of Economics, economist Richard B. McKenzie quoted Schultze's case extensively, writing: Probably the most outspoken Democratic opponent of industrial policy was Charles Schultze, an economist at Brookings who was chairman of President Carter's Council of Economic Advisers. Schultze, in the Brookings Review, undercut the political and intellectual case for industrial policy with these salient points: The United States does have some old-line heavy industries with deep-seated structural problems--especially the steel and automobile industries--but they are not typical of American industry generally. There is no evidence that in periods of reasonably normal prosperity, American labor and capital are incapable of making the gradual transitions that are always required in a dynamic economy, as demand and output shift from older industries to newer ones at the forefront of technological advances. One does not have to be a cynic to forecast that the surest way to multiply unwarranted subsidies and protectionist measures is to legitimize their existence under the rubric of industrial policy. The likely outcome of an industrial policy that encompassed some elements of both "protecting the losers" and "picking the winners" is that the losers would back the subsidies for the winners in return for the latter's support on issues of trade protection. In an insert to McKenzie's article, "Industrial Policy: Democratic Economists Speak Out," I quoted Schultze as follows: The first problem for the government in carrying out an industrial policy is that we actually know precious little about identifying, before the fact, a "winning" industrial structure. There does not exist a set of economic criteria that determine what gives different countries preeminence in particular lines of business. Nor is it at all clear what the substantive criteria would be for deciding which older industries to protect or restructure. Here's what I wrote about economist Ron Hoffman in my book The Joy of Freedom: An Economist's Odyssey, and it's an example of Charlie and his staff working behind the scenes to fight bad policy proposals: During my summer at the CEA, I met a senior economist at the Council named Ron Hoffman. His short stature and facial features made him look as if he could be Dustin Hoffman's brother. In fact, he is. That summer, Hoffman helped me find a good lawyer when I got in trouble with the Immigration and Naturalization Service. As a result, I kept in touch with him, visiting him a few times in the late 1970s and early 1980s, after he had moved over to the U.S. Treasury. Hoffman told me of an internal fight within the Carter administration in the late 1970s, when Joseph Califano, the secretary of the department of Health, Education, and Welfare, proposed draconian controls on health care spending, an early version of Hillary Clinton's 1993 proposal. Hoffman, working a few layers beneath Treasury Secretary Michael Blumenthal, analyzed Califano's proposal, found it to be a bad one, and argued forcefully within the Treasury that Blumenthal should oppose it. Blumenthal was persuaded and gave Hoffman the job of writing memos on the issue for his signature. Hoffman recounted for me t[...]



The Biggest Loser: Lester Holt, by David Henderson

Tue, 27 Sep 2016 14:17:54 -0500

Although Donald Trump is a very close second. And, I agree with Paul Krugman but he left something out. I tried to watch last night's "debate" between Hillary Clinton and Donald Trump. I really did. Unfortunately, I lasted only about 50 minutes. I thought they were both horrible but I thought that in the time I watched, the Hill dominated the Don. But let's go beyond that to the issues. I want to highlight two. First, with his first question, Lester Holt led the two contestants on a tangent. Here's what he asked: So, let's begin. We're calling this opening segment achieving prosperity and central to that is jobs. There are two economic realities in America today. There's been a record six straight years of job growth and new census numbers show incomes have increased at a record rate after years of stagnation. However, income inequality remains significant. And nearly half of Americans living paycheck to paycheck. Beginning with you, Secretary Clinton - why are you a better choice than your opponent to create the kinds of jobs that will put more money into the pockets of American workers? No. Central to achieving prosperity [I take as given that we have prosperity and that he, and everyone else, understood that he meant increased prosperity] is not jobs. Central to that is economic growth. How do we achieve more than 2 percent growth in real GDP? So he gets them off-track from the get-go, talking about jobs instead of growth. Granted that neither candidate seems to understand basic economics, and so they would both would have probably gone to jobs instead of growth anyway. But Holt shouldn't have been an enabler. Second, free trade took a horrible beating last night. Here's how Paul Krugman put it: More broadly, Trump's whole view on trade is that other people are taking advantage of us -- that it's all about dominance, and that we're weak. And even if you think we've pushed globalization too far, even if you are worried about the effects of trade on income distribution, that's just a foolish way to think about the problem. So don't score Trump as somehow winning on trade. Yes, he blustered more confidently on that subject than on anything else. But he was talking absolute garbage even there. But you know who else talked mainly, though not absolutely, garbage? Hillary Clinton. She started off well, saying: Well, I think that trade is an important issue, of course. We are five percent of the world's population - we have to trade with the other ninety five percent. I could nitpick and say that it's not literally true that we "have to." But we certainly should be allowed to. Then the Hill went downhill. She didn't defend free trade and, like virtually all mercantilists, judged trade deals by whether they increase exports without taking account of the other half of benefits: lower prices and higher quality on imports. *By the way, if you want to see an unintentionally hilarious piece on the debate, check out NPR's transcript with fact checks at various points. When they fact check the Don, they do it generally accurately and sometimes with a lot of attitude. E.g., There is no truth to the charge that the Clinton campaign or Hillary Clinton started the birther movement, as we've written. Donald Trump, however, for several years was the chief spokesman for it and the principal person pushing the falsehood. And Trump still has not apologized to the president of the United States for an effort that many African-Americans saw as an effort to delegitimize the first black president. Undoubtedly, Clinton and Obama fought a bitter 2008 primary campaign. Fringe supporters and advisers did go after Obama's "otherness." One of Clinton's informal advisers, Sidney Blumenthal, told a McClatchy bureau chief based in Africa to look into Obama's birthplace, according to that McClatchy bureau chief. But Clinton certainly did not take the show on the road. The false equivalence Trump is trying to d[...]



Who is Peter Navarro?, by Scott Sumner

Tue, 27 Sep 2016 10:27:10 -0500

Tyler Cowen linked to a paper by Peter Navarro, which discusses Trump's economic plan. To put it simply, it's a complete mess. Here are just a few examples: Under WTO rules, any foreign company that manufactures domestically and exports goods to America (or elsewhere) receives a rebate on the VAT it has paid. This turns the VAT into an implicit export subsidy. At the same time, the VAT is imposed on all goods that are imported and consumed domestically so that a product exported by the US to a VAT country is subject to the VAT. This turns the VAT into an implicit tariff on US exporters over and above the US corporate income taxes they must pay. Thus, under the WTO system, American corporations suffer a "triple whammy": foreign exports into the US market get VAT relief, US exports into foreign markets must pay the VAT, and US exporters get no relief on any US income taxes paid. The practical effect of the WTO's unequal treatment of America's income tax system is to give our major trading partners a 15% to 25% unfair tax advantage in international transactions. This is a very basic error. International economists almost universally agree that a VAT is neutral with respect to trade. An across the board 10% import tax, combined with a 10% export subsidy, offset each other, leaving no net impact on trade. Instead they convert the tax from a production tax to a consumption tax. But it's a consumption tax that applies equally to all goods, whether made domestically, or imported. This is not even a tiny bit controversial. Navarro continues: In 2015, the US trade deficit in goods was a little under $800 billion while the US ran a surplus of about $300 billion in services. This left an overall deficit of around $500 billion.9 Reducing this "trade deficit drag" would increase GDP growth. I suppose there might conceivably be some policy that would reduce the trade deficit and also increase growth, but I can't imagine what it would be. Navarro's confusion about the effect of VATs doesn't inspire confidence that he knows either. Trump proposes eliminating America's $500 billion trade deficit through a combination of increased exports and reduced imports. Again assuming labor is 44 percent of GDP, eliminating the deficit would result in $220 billion of additional wages. This additional wage income would be taxed at an effective rate of 28 percent (including trust taxes), yielding additional tax revenues of $61.6 billion. Actually, eliminating the trade deficit would have no first order effect on wages. Any second order effects might lead to higher wages, but more likely wages would fall. According to textbook theory, balanced trade among nations should be the long-term norm, and the chronic and massive trade deficits the US has sustained for over a decade simply should not exist. This textbook state of balanced trade would exist because freely floating currencies would effectively adjust differences in national domestic cost structures to bring about balanced trade. The problem, however, is that not all currencies freely float. Many are actively managed, and some are pegged to another currency or currency basket. This hybrid international monetary system makes it impossible for market forces to bring about balanced trade and thereby fairly distribute what the textbooks promise us will be the "gains from trade." A poster child for this problem is China and its narrowly pegged currency. In a world of freely floating currencies, the US dollar would weaken and the Chinese yuan would strengthen because the US runs a large trade deficit with China and the rest of the world. Where does one start? No, China is not intervening to lower the value of the yuan; they are intervening to raise its value. And no, textbook theory does not say that exchange rates should adjust in the long run to balance trade in goods and services, unless long run means 1,000,000,000[...]



Apolitical Reasons to Hate Politics, by Bryan Caplan

Tue, 27 Sep 2016 00:04:35 -0500

I hate politics.  Part of the reason, to be honest, is that I'm a libertarian, and libertarian views have almost no influence in the world of politics.  Libertarians don't just lose every election; policy-makers normally summarily reject our position.  Libertarians don't just fail to control a major party; "successful libertarian politician" is almost an oxymoron.

But perennial defeat isn't the only reason I hate politics.  On reflection, I'd loathe politics even if my policy views matched Clinton's or Trump's word-for-word.  Indeed, I'd loathe politics even if I thought prevailing policies were the pinnacle of wisdom.  Why?  Because I hate the way people think about politics, independent of the ultimate outcome.

I hate the hyperbole of politics.  People should speak literal, measured truth or be silent.

I hate the Social Desirability Bias of politics.  People should describe reality as it is, not pander to wishful thinking.

I hate the innumeracy of politics.  People should focus on what's quantitatively important, not what thrills the masses.

I hate the overconfidence of politics.  People shouldn't make claims they won't bet on, and shouldn't assert certainty unless they're willing to bet everything they own against a penny.

I hate the myside bias of politics.  People should strive to be fair to out-groups, and scrupulously monitor in-groups, to counteract our natural human inclination to do the opposite. 

I hate the "winning proves I'm right" mentality of politics.  Winning only proves your views are popular, and popular views are often wrong.

Last but not least:

I hate the excuses people make for each of the preceding evils.  While I'm open to consequentialist arguments for doing evil that good may come, most of the arguments in this genre are deeply tainted by innumeracy and overconfidence.  If you calmly weigh the social benefits of political hyperbole, carefully crunch the numbers, and grudgingly and sorrowfully conclude that it's justified in specific cases, I'm all ears.  But if you defend hyperbole with casual, undiscriminating delight, life's too short to listen to you.

P.S. While I hate how people act in politics, I emphatically don't hate the people themselves.  Politics is only a small sliver of most people's lives, so the apolitical good normally far outweighs the political bad.

(20 COMMENTS)



Bernanke on the Bank of Japan, by Scott Sumner

Mon, 26 Sep 2016 10:45:01 -0500

Here's Ben Bernanke on the recent moves by the Bank of Japan: The most surprising, and interesting, part of the announcement was the decision to target the ten-year JGB yield. As I noted in a previous piece on targeting longer-term rates, there is a U.S. precedent for the BOJ's new strategy: The Federal Reserve targeted long-term yields during and immediately after World War II, in an effort to hold down the costs of war finance. Targeting a long-term yield is closely related to quantitative easing. In a quantitative easing program, the central bank specifies the quantity of financial assets (such as government bonds) that it plans to buy, leaving the price of those assets (the yield, in the case of bonds) to be set in the market. Pegging a long-term yield, as the BOJ now plans to do, amounts to setting a target price rather than a target quantity. The central bank posts the price at which it stands ready to buy or sell bonds, but the quantity actually purchased depends on how much market participants offer to sell at that price. In that regard, it was puzzling that the BOJ retained its 80-trillion-yen quantity target for JGB purchases; one of these two targets is redundant. I presume that the BOJ was concerned that dropping the quantity target would lead market participants to infer (incorrectly) that the Bank was scaling back its program of monetary easing. Over time, assuming that the BOJ does adhere to its new rate peg, the redundant quantity target is likely to become softer and to recede in importance. The BOJ's communication will accordingly begin to emphasize the yield on JGBs, rather than the quantity of bonds in the BOJ's portfolio, as the better indicator of the degree of monetary policy ease. Technically, Bernanke is correct; if you target a price then the money supply becomes endogenous. But I believe this misses the bigger picture. If the BOJ wants to reflate the Japanese economy, then it makes more sense to "cap" rather than "peg" the 10-year bond yield. Indeed the Financial Times initially reported the new policy as a "cap", although Japanese commenters tell me that it is actually a peg. Time will tell, and I'm a bit dubious of the claim that the BOJ will not allow negative rates on the 10-year bond. Why is this distinction important? Return to the recent boom in "NeoFisherian" macro---the view that a policy of very low interest rates is disinflationary, exactly the opposite of the Keynesian view. I've argued that both sides are wrong; whether low rates are inflationary or disinflationary depends entirely on whether they are implemented by an expansionary monetary policy or a contractionary monetary policy. Using the M*V=P*Y framework, a fall in interest rates is deflationary, holding M constant, as it tends to reduce velocity. The Keynesian argument against NeoFisherianism is that central banks create lower rates by increasing M, and that the combined effect of more M and less V is more M*V. I think the Keynesians are right on that narrow point, but only if the low rates are indeed created by more M. Bernanke is suggesting that M could be taken out of the equation, and low rates would still be expansionary. But that's making the opposite mistake that the NeoFisherians are making. It ignores the fact that low rates can also be produced by a contractionary monetary policy. Indeed the BOJ has been doing exactly that since the mid-1990s. So a promise by the BOJ of near-zero rates for as far as the eye can see could just as well be interpreted by the markets as "more of the same deflationary policy that we've been getting since 1993". That's how I'd interpret it if I were Japanese. This conundrum can be avoided if the BOJ were to switch to a less ambiguous indicator than interest rates. Thus they could peg the yen at 130 to the dollar. This would dramatically boost inflati[...]



Binding Arbitration: The Radical Implications, by Bryan Caplan

Mon, 26 Sep 2016 00:09:47 -0500

Contracts often require signatories to submit to binding arbitration.  If a dispute arises, the parties don't go to court; they go to a private arbitrator.  This arbitrator, in turn, makes a definitive ruling neither party can refuse.  The whole point of binding arbitration is to bar parties from playing, "Heads I win, tails I break even": If the arbitrator rules against you, you can't appeal the decision to a conventional government court.Binding arbitration has thrived in recent decades.  But on reflection, fully binding arbitration would nullify a vast swath of regulation.  Every government effort to shift the terms of trade would be in grave danger.  Imagine, for example, an employment contract specifying that alleged minimum wage violations will be resolved via binding arbitration.  Any employer who wanted to offer less than the minimum wage could contractually specify an arbitrator who invariably rules in his favor.  And any worker ready to work for less than the minimum wage would willingly sign.  After all, what's the difference between the absence of a minimum wage and a minimum wage that's never enforced?The same principle applies to all regulation of capitalist acts between consenting adults: safety regulations, discrimination laws, product liability, and so on.  Want to work for me?  Fine, as long as my brother adjudicates all our disputes.  Parties who can contractually outsource enforcement to anyone they like can informally gut the law.So why hasn't this already happened?  Transactions costs are part of the reason; getting every trading partner to sign a contract is a pain in the neck.  But the fundamental reason is that governments refuse to recognize fully binding arbitration - probably because its officials recognize, at least subconsciously, that fully binding arbitration would strip them of much of their power.  The Legal Dictionary explains:The FAA gives only four grounds on which a court may vacate, or overturn, an award: (1) where the award is the result of corruption, Fraud, or undue means; (2) where the arbitrators were evidently partial or corrupt; (3) where the arbitrators were guilty of misconduct in refusing to postpone the hearing or hear pertinent evidence, or where their misbehavior prejudiced the rights of any party; and (4) where the arbitrators exceeded their powers or imperfectly executed them so that a mutual, final, and definite award was not made. In the 1953 case Wilkov. Swan... the U.S. Supreme Court suggested, in passing, that an award may be set aside if it is in "manifest disregard of the law," and federal courts have sometimes followed this principle. Public policy can also be grounds for vacating, but this recourse is severely limited to well-defined policy based on legal precedent, a rule emphasized by the Supreme Court in the 1987 case United Paperworkers International Union v. Misco...The Legal Dictionary's tone suggests that these are but mild impediments.  But they're huge.  If the government can overrule binding arbitration because the arbitrators are "partial" or "manifestly disregard the law," arbitration's radical potential stays hidden.  Long ago, I interviewed the CEO of an arbitration firm.  When I asked him about the radical implications of binding arbitration, he got nervous.  His words were libertarian: "If you don't like the arbitration contract, don't sign."  But he clearly wanted to change the subject.  One of his key services was helping clients skirt the law - and the best way to continue providing such services was to pretend they didn't exist.  I suppose I could have thanked him for mitigating the harm of a multitude of unjust and inefficient laws, but I think that just would have spooked him further[...]