In response to the current debate over the auto industry "bailout" proposals, I sent the following letter to the Houston Chonicle:

re:  Health Care and Detroit's "Big 3"

In the current debate over the proposed "redistribution of wealth" (also known as "bailout") from American taxpayers to Detroit's "Big 3" automakers, some commentators have suggested that if only the US had a national healthcare system then Ford, GM, and Chrysler would not be in such bad straits.  As evidence, they cite the enormous healthcare expenses they have by nature of their labor contracts.

Such a position requires ignoring two glaring facts.  The first:  if government healthcare is a prescription for successful automotive manufacturing, it would seem that we'd be overwhelmed by the abundance of French, British, and Canadian cars on the road.  This doesn't seem to be the case.  The second:  companies such as Mercedes, Toyota, and Nissan all manufacture cars in the United States yet are subject to the same lack of government healthcare as the Big 3; if healthcare were the problem, their success would seem unlikely.

Sincerely,
Dave Smith

In various discussions of free market capitalism and the perceived "need" for government intrusion on the economic self determination of consumers, there are two "problems" in particular that seem to engender the most skepticism:  price gouging, and outsourcing of American jobs overseas.  But neither is necessarily a problem, and both are made more likely through government interference rather than less.

In an open, competitive market, "price gouging" is a difficult proposition to undertake successfully because of the competition that exists for the consumer's dollar.  When "you can get it cheaper at Walmart", it makes it hard for the corner store to raise the price too much.  Of course, the convenience store charges a little more than the full service grocery store, but if they try to charge too high a premium, too many shoppers will decide that it's worth a little more of a drive -- the benefit of convenience simply isn't worth the cost.

Obviously, during a time of shortage (or an anticipated shortage), price gouging can actually serve a beneficial function.  A hotel dramatically raising the price of hotel rooms encourages frugality, meaning more people per room; this means more rooms for more families.  If the hotelier were unable to raise prices (by the presence, for example, of "anti-price gouging laws"), then families might decide to have fewer people per room, leaving more families with no room at the inn.  Increasing the price of gasoline makes it less economical to top off the tank, leaving more gasoline for those who truly need it.

The easiest way to achieve price gouging is not through a free, open market but rather with the assistance of government.  The government has great ability to restrict the marketplace, removing competition and clearing the way for price gouging by favored special interests.  There are many ways for government to accomplish this. 

The most direct way is for the government to set a minimum price for a good or service -- a price "floor" below which no seller is allowed to go, regardless of the market for a product at the price; an example of this form of legalized price gouging is the dairy market, through the Dairy Price Support Program administered by the Department of Agriculture.  The winners are the milk producers who get to charge higher prices and reap bigger profits; the obvious losers are, of course, families paying more for milk than they would under a free market.  There are other losers too, however.  Consider a producer who discovers an innovation that greatly lowers his cost of producing or delivering dairy products; he is now banned from increasing his market share by lowering prices.

Another such way is either to bar the importation of foreign made goods outright, or to raise the prices of those goods through the imposition of tariffs.  Domestic sugar and ethanol markets utilize this system, as the government taxes importation of both; thus, we pay more for sugar and fuel than we otherwise would under a free market.  The winners and losers are the same as in the previous example, plus another potential downside:  the health of the environment.  One reason that domestic sugar needs assistance from the government to compete with imported product is that the growing conditions -- weather, soil, etc. -- are more conducive to sugar production in some countries than in the US.  To grow and refine sugar in the US thus requires more fertilizers and pesticides, which can have negative impacts on environmental quality.  The taxpayer then foots the bill for the cleanup, of course.

Another method for enacting government-assisted price gouging is to impose steep licensing or permitting requirements on providers of goods and services.  An example of this is taxi services:  often cities charge exorbitant fees for taxi licenses, thus restricting the smaller businesses from having the ability to enter the market.  The governments often also restrict the number of licenses or permits that are available for purchase, meaning fewer taxis on the street than a free market would support.  Fewer providers means less competition, and high licensing costs means more expensive overhead; once again, the consumer -- the person actually looking to purchase a taxi ride -- is the loser.  There could perhaps be a further loser, as the artificially high price of taxiing could provide enough incentive for an impaired driver to get out on the road with tragic results.  The barrier to entry by competitors also can stifle innovation; perhaps a company decides to implement a "green" fleet of electric cabs, as is the case in Houston.  The entrenched system of licensing and permitting makes it hard for the innovative entrepreneurs to get their chance to compete for our dollars.

Contrast these examples with some from sectors with less government interference in the free market.  Consider cell phones and computers:  over the past 20 years, prices have come down on both, while product quality, availability, and features have increased exponentially.  Government didn't decree that cell phones needed to have cameras or internet access or walkie-talkies or flexible minutes; rather, companies innovated and people rushed to get these products voluntarily, rewarding companies who provided them and punishing the companies that didn't.

In each case, it is government interference that makes the price gouging possible, not the free market.  In the marketplace, the business must provide goods and services that people are willing to voluntarily exchange their money for; in the political realm, the businesses provide campaign contributions and other benefits to politicians, who then force consumers to pay higher prices, in some cases for products they find less attractive or desirable.  The free market innovation provides more, better options; government interference promotes inefficiency and stagnation.

Ultimately, I trust the person who wants me as his customer more than the person who wants to control my choices.  I'll take my chances with the free market.

The past several years have not been pleasant for those who believe in free market capitalism and individual liberty.   The election of 2000 brought to the office of the Presidency a committed free market conservative, right?  Well, that's how some of the rhetoric went, and what the Republican brand was supposed to represent:  lower taxes.  Smaller government.  Freer markets.  Less intrusion.

Based on the performance of the Republican Congress that was ushered into power in the election of 1994, it seemed a reasonable branding.  While not all of its "Contract With America" was enacted (notably:  term limits), the Congress cut taxes, passed trade agreements, reformed welfare, and reduced the size of government compared to the GDP to a point where the budget was actually in surplus.  All this, we were told, in spite of a Democratic President whom they had to fight along the way.  Ushering a Republican into the executive branch seemed like turning a key in a lock to open a door to an even more dramatic reduction in the size and scope of government, allowing families and individuals an even greater degree of self-determination.

Someone forgot to tell President George W. Bush this plan, and then the Congressional Republicans forgot about it altogether.

Over the 7 years of the Bush Presidency, only the past 2 of which with Democrats in control of the legislative branch, the opposite of a free market Golden Age has occurred, in spite of the conventional naming of Bush as some sort of "unfettered capitalist".  The federal government has grown as a percent of GDP from 18.4% in Clinton's last budget to 22.5%.  The federal budget has gone from a surplus of $128 billion to a predicted deficit of $732 billion for the coming fiscal year -- this before the Obama health care plan and other proposed spending programs advocated by the President-Elect during his campaign.

As reported by the Washington Times, a conservative paper, "[t]The House Committee on Oversight and Government Reform reviewed 700 projects and found $1.1 trillion in spending from 2002 to 2008 that was plagued by "significant waste, fraud, abuse or mismanagement."  Over more than $5 trillion was spent on wars abroad and anti-terrorism efforts at home; obviously, we all want to be safe from terrorist attacks and to win our wars, but $5 trillion?!? 

Along the way, Bush presided over the introduction of a new entitlement program, the Medicare Drug Benefit, that "redistributes wealth" from working taxpayers to senior citizens -- regardless of their own income or assets -- to pay for prescription medications.  He greatly expanded federal education spending (and intervention) with "No Child Left Behind", signed not one but two new expensive, statist farm bills, an "energy plan" (you guessed it:  also expensive and laden with government controls on the energy industry, particularly "alternative energy" sources).  While mostly a free trader, he nevertheless slapped a protectionist tariff on steel imports. 

Then came 2008; with the housing bubble bursting and the subprime contagion spreading, Bush found a way to make FDR look like a capitalist.  Over the past several months, he has orchestrated over $1 trillion in federal "bailouts" of financial and insurance firms, with the government taking a shareholder position in financial institutions.

As the deficits and the national debt pile up, critics like to point to the "Bush tax cuts" as the culprit.  Not so:  federal income tax receipts rose by 20% from 2001 to 2007 even as the average tax rate fell by 11% over that same period.  Capital gains tax receipts grew by 50%, even as the rate was cut.  The problem was not a lack of revenue, but rather spending restraint by Bush and his allies in Congress.

Now, as the Bush Administration is winding down, word comes that the bailout bug has caught on in Detroit:  the automakers see the cash that Wall Street has gotten, and they want a piece as well.  Never mind that while the "Big Three" automakers languish, other automakers -- with factories in the US -- have captured nearly 50% of the US market.  Whether its Toyotas being manufactured in Texas, Mercedes-Benz in Alabama, BMWs in Mississippi, or Nissans in Tennessee, other automakers have succeeded in producing cars that consumers want to buy.  But forget competition, Detroit wants to see the money.  Does anyone doubt but that Bush and Congress will provide it?

During the 2008 Presidential campaign, winner Barack Obama promised a government health care program, more government energy policy, further government intrusion into "alternative energy", and to "spread the wealth around".  He promised higher taxes on the rich, and more entitlements for the "workin' people".  He promised an overall expansion in the government intervention in the economy; rightly, the term "Socialism" began to be used to describe an agenda that would make the late French President Francois Mitterand proud.  But the term didn't catch, and it certainly didn't deter people from nearly every income and educational segment preferring Obama as there President:  he won handily, carrying even normally reliable Republican states like Indiana.

Why did the country not respond with fear when Obama called for a statist agenda of government intrusion that smacks of European social welfare states?  Because President George W. Bush paved the way.

A few of my collected thoughts on the political scene and the elections...


I saw an interesting clip (you can view it here) of Chris Matthews saying that his "job" is to help Barack Obama have a successful presidency:  "I want to do everything I can to make this thing work, this new presidency work."  When pressed by an incredulous Joe Scarborough, Matthews basically said that the nation has problems and needs a successful president; therefore, his job as a journalist was to help make that happen.  Not to report the news, not to hold politicians accountable, but to promote the success of the his chosen politician.  This encapsulates perfectly much of the mainstream media's approach to coverage of Obama's candidacy and likely his presidency.  Get ready for a long honeymoon.
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It has been confirmed that Rahm Emmanuel will be the Chief of Staff in the Obama White House.  I think this is a smart choice for Obama.  Emmanuel was a competent staffer in the Clinton Administration, and he has shown himself to be a very adept leader in the Congress.  Further, he not only has White House experience, but he's a great link to the Clintons and to the House Democratic leadership.  He is also, like Obama, from Chicago, so there's trust there.  When President Clinton took over the presidency in 1993, there were a string of incompetent blunders that hampered his performance; with Emmanuel running a tight ship, blunders by the White House staff and a lack of focus by a President Obama are unlikely to provide similar travails.
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Other prospective cabinet positions are being floated, including the retention of Robert Gates as Secretary of Defense.  If this is true, it is truly an incredible decision and an incredibly good one.  Sec. Gates has shown to be an excellent SecDef.  One of Bush's worst mistakes was keeping Donald Rumsfeld as long as he did; had he brought Gates on earlier, many of the blunders of the Iraq War might have been avoided, and we might even be talking about President-elect McCain instead.  Also mentioned for the post is Colin Powell.  His endorsement of Obama notwithstanding, Powell would also be a good choice and a good influence on the Obama Administration.
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One name we're hearing for Secretary of State is John Kerry.  It would make sense politically:  John Kerry essentially launched Obama's meteoric rise to the presidency by naming him the Keynote Speaker at the 2004 Democratic National Convention, and he would have no problems sailing through the Senate nomination process.  However, Obama would be better served by picking someone of more foreign policy stature, and someone less annoying.  Kerry seems to be a gaffe just waiting to happen.
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Although Obama was obviously not the incumbent in this election, there are some striking similarities between this election and the 1996.  A few are obvious:  the young, charismatic Democrat versus the old, white Senator who happened to be a war hero.  But it goes beyond that.  Bob Dole, like McCain, was highly distrusted by the conservatives in his party.  In 1996, the party coalesced around Dole because of fear that Pat Buchanan was gaining momentum; in 2008, the party coalesced around McCain in part because of fear that Mike Huckabee was gaining momentum.  In 1996, Dole excited conservatives by choosing a running mate, Jack Kemp, that excited the party and even made people think (if for a short time) that there might be a chance; in 2008, McCain excited conservatives by choosing a running mate, Sarah Palin, that did the same.  In the case of Kemp and Palin, the choice united Republicans but seemed to do little with independent voters.  Both Dole and McCain offered tax cut plans that neither seemed comfortable discussing.

The lesson?  Perhaps Republicans will stop giving the presidential nomination to old senators whose time seems to be passed by and who are more in line with the heart of the party.
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Both McCain and Obama have, rightly, been praised for the substance and the tenor of their respective speeches.  McCain was classy and gracious in defeat, while Obama struck the right chord in victory.  For all the whining by the press, this campaign was probably less "negative" than most of the past few (except for the treatment of Sarah Palin, more on which below).  There were some very ineffective commercials, and some that stretched accuracy.  Nothing, though, that merited extended scorn.
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Speaking of Sarah Palin, my gut feeling is that she's been "Quayled".  I think she could've been a very good Vice President.  She certainly fired up the Republican "base" like no other candidate could have, resulting in McCain being able to unite the party at the Republican Convention.  The way the campaign sequestered her, though, was not just damaging but bizarre.  It built up nearly unreachable expectations that she was ultimately unable to live up to.  She was, in some ways, "not ready for prime time", but she was also the subject of some ridiculous press coverage and scrutiny.

Her future in the party?  She'll be a great fundraising draw for sure, and no doubt an effective advocate for the pro-life issue and for special-needs children.  I don't, however, see her as a viable national candidate again.  I'm guessing that she'll face a well-funded candidate for the next governor's race in Alaska should she decide to run again.

Some of the criticism she faced was unbelievable; I never thought I'd hear a woman candidate for office criticized for campaigning that took her away from her children, and the piling on she's facing now is unprecedented at least in its scope and fervor.

Palin might have hurt McCain among independents, but there's no way he could've consolidated his base nearly as effectively without her on the ticket.  McCain owes her his thanks and gratitude, and his staffers should show more class.
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Exit polling showed some interesting things about the election.  First of all, the groundswell of new voters yet again did not materialize.  First-time voters went nearly 70% for Obama, but comprised only 11% of the electorate.  It seems like every election cycle, we're told that a new swarm of voters is

The spread in the popular vote was roughly the same as the spread between voters who self-identified as Democrats and those who self-identified as Republicans.  McCain ran with a 7-point deficit from the beginning, and that's hard to make up.  McCain and Obama got roughly the same support from their own party, but independents broke for Obama.

While Republicans are tagged in the conventional wisdom shorthand as the party of "the rich" and Democrats the party of "the working man", McCain won among earners making between $50-75,000 per year, while Obama won among voters making more than $200,000 per year.  Obama won among those with less than a high school diploma, and among post-graduates.

Obama was able to win even though only 24% gave Congress a favorable rating; even among the 73% who disapprove of Congressional performance, Obama won 51-47.

Interestingly, while 34% of the voters consider themselves "conservative", only 32% identify themselves as Republican.  Between the conservatives and the 44% who consider themselves "moderate", there should be some room for growing the party.  Only 22% identified themselves as "liberal".

Among the 60% that said the choice of Sarah Palin was a factor in their decision, McCain won 56-43%.  Obama won 2-to-1 among those that said she was not a factor.  This data would seem to put a nail in the coffin of those blaming the Alaska Governor for McCain's loss, but that ignores the self-preservation instinct of campaign workers.
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And to end on a note of brevity; one of the strangest and funniest political songs ever:  "There's No One As Irish As Barack Obama" by Hardy Drew and the Nancy Boys.

The use of economic sanctions is a fairly commonly-used tool of diplomacy.  The idea is fairly simple:  provide a direct economic disincentive towards a nation undertaking an action considered undesirable, such as unfair trading practices, support for terrorism, treaty violation, etc.  The methods can vary, but tend to involve enacting trade restrictions, tariffs, freezing of economic assets, and overall raising the cost of doing business.  The thought is that if an act is made more expensive then an incentive is provided to change behavior.

What, then, to make of a plan that seeks to impose financial penalties on American businesses?  Raising taxes on payrolls would seem to provide a disincentive for companies to increase payroll.  Raising taxes on capital investment would seem provide a disincentive for investing in capital improvements.  Raising the minimum wage provides an incentive to hire fewer low-skill workers.  Increasing tariffs on imported goods provides an incentive for other countries to raise tariffs on American goods and services, reducing their marketability abroad.  Raising the amount a company must provide in health insurance provides an incentive not to provide it at all (and an incentive for healthy people not to invest in insurance at all).  And so on.

But this is exactly Barack Obama's plan:  tax increases on businesses and payrolls, income, dividends, and investment.  Mandates for health care plans provided by employers, regardless of the needs and desires of employees, or else face even higher payroll taxes.  A "moratorium" on free trade agreements that open up markets to American goods and services worldwide, along with a "renegotiation" of current free trade agreements such as NAFTA.  A cap-and-trade system that would result in a "dramatic increase" in electric bills.  What would be considered "economic sanctions" if imposed on the United States by others is considered mainstream politics when imposed by American politicians on itself, and advocated as somehow being good for the American economy.