JFK's tax cut

As I said earlier, conservatives have recently been invoking President John F Kennedy's tax cuts. JFK did indeed propose to cut taxes, but that's not the whole story - this Slate article by David Greenberg argues that JFK aimed the tax cuts across the board:

When Kennedy ran for president in 1960 amid a sluggish economy, he vowed to "get the country moving again." After his election, his advisers, led by chief economist Walter Heller, urged a classically Keynesian solution: running a deficit to stimulate growth. (The $10 billion deficit Heller recommended, bold at the time, seems laughably small by today's standards.) In Keynesian theory, a tax cut aimed at consumers would have a "multiplier" effect, since each dollar that a taxpayer spent would go to another taxpayer, who would in effect spend it again—meaning the deficit would be short-lived.
At first Kennedy balked at Heller's Keynesianism. He even proposed a balanced budget in his first State of the Union address. But Heller and his team won over the president. By mid-1962 Kennedy had seen the Keynesian light, and in January 1963 he declared that "the enactment this year of tax reduction and tax reform overshadows all other domestic issues in this Congress."

The plan Kennedy's team drafted had many elements, including the closing of loopholes (the "tax reform" Kennedy spoke of). Ultimately, in the form that Lyndon Johnson signed into law, it reduced tax withholding rates, initiated a new standard deduction, and boosted the top deduction for child care expenses, among other provisions. It did lower the top tax bracket significantly, although from a vastly higher starting point than anything we've seen in recent years: 91 percent on marginal income greater than $400,000. And he cut it only to 70 percent, hardly the mark of a future Club for Growth member.

Yet the Kennedy-Johnson team saw the supply-side effects of the bill as secondary, if not incidental, to its main goal of prodding near-term growth. "The tax cut is good for long-run growth," said James Tobin, another economist on JFK's team, "only in the general sense that prosperity is good for investment." The immediate boost to the economy was the main goal. In fact, Nixon's economic adviser Herb Stein noted that the 1964 plan led to a diminished output-per-person-employed—a fact that could argue against the supply-side tenet that lower marginal rates would unleash the productivity of workers deterred from working harder because of overtaxation.

If the JFK cuts increased the amount of the standard deduction, which is a flat amount that every taxpayer deducts from their gross income, this would have had a larger benefit to the low- and moderate-income people. The same is true for withholding rates - these are the amounts that are held back from each paycheck so that the Treasury gets a constant stream of money instead of one large payment on April 15.

Note also that while the top 12% of earners got 45% of the tax cuts, the taxes were cut from a confiscatory level. Bush's tax cuts benefitted the rich far more than that, and the rich were already taxed at a much lower rate. Conservatives should be very careful when invoking JFK.

Wall Street Journal: Indiana embraces property tax cap despite pain

The Wall Street Journal has an article about how Indiana is pushing for caps on property taxes. Compared to the other major forms of state taxes, such as sales tax and income tax, property taxes are normally the least cyclical - meaning that when the economy is down, they don't vary as much as the other two because property tends to hold its value (the bubble aside). Capping property taxes is dangerous for the state's tax base, and it forces the state to shift its tax base towards the other two types of taxes and to fees:


Indiana lawmakers are moving to enshrine property-tax caps in the state constitution, despite cuts in fire, police and other local services the limits have caused.

The push marks the latest round in a revenue tug-of-war between state and local governments amid plunging tax collections nationwide. States, forced to cut their budgets, have often held back funds pledged to local governments. In response, some cities, towns and school districts have raised property taxes—their main source of revenue—to partially fill gaps.

But property-tax increases started raising the ire of residents even before tax revenue fell off. A 2007 spike in Indiana's property-tax bills, just as the recession was gathering steam, led to a "tea party" protest, the ousting of the mayor of Indianapolis and a 2008 law limiting property taxes, which as of Jan. 1 may be no more than 1% of the assessed valuation for residential homes, 2% for rental properties and farms, and 3% for businesses.

The effective tax rate for homes in 2007 ranged from 0.19% to 3.13%, and the cap is expected to save homeowners $404 million statewide in the current fiscal year.

Cities already are laying off police officers and firefighters, as well as raising business fees, because the caps have reduced local tax revenues. The state Farm Bureau, which advocates for farmers, has raised concerns that homeowners are getting the biggest tax breaks despite using the most local-government services. Some companies dislike the caps because they set property-tax rates for businesses at three times the rate for homes.

Yet the proposed constitutional amendment is popular with Indiana residents, who will vote on the measure in November. A survey last month from Ball State University in Muncie, Ind., found that 64% of voters favor the amendment. Even the mayors of some cities hit hard by the measure support it.

...

Some legislators worry it is too soon to install the property-tax formula in the state constitution, because the caps only took full effect Jan. 1. "If we should find out three years down the road that the process needs to be changed, we will be at a great disadvantage," said state Sen. Vi Simpson, a Democrat from Ellettsville who opposed the amendment.

When lawmakers imposed the caps, they raised the state sales tax to 7% from 6%, directing that extra revenue be used to fund schools. But sales-tax revenue has declined so much during the recession that Gov. Mitch Daniels, a Republican, is ordering public schools to cut $300 million, or 3.5%, from their budgets.

The city of Muncie, with about 65,000 residents, was forced by the property-tax caps, disappearing industry and other revenue-shrinking factors to cut 32 firefighters—or about 29% of the department—and close two of seven fire stations. The city has stopped dispatching fire trucks to nonemergency medical calls.

Mayor Sharon McShurley, a Republican, said Muncie must cut $3 million to $8 million from its budget over two or three years because of the property-tax caps. Last year, Muncie's budget was $19 million, down $5 million from the previous year, as the caps were phased in.

Yet Ms. McShurley, who was elected in 2007, favors the caps. A shrinking budget has forced city hall to become more efficient, she said, by automating payroll deposits and giving all city employees email access. "It's a first for a lot of people, thinking about city government having to get smaller," she said.

Motley Fool: A story on private equity

Earlier, I asked readers for some of the good innovations the financial sector has given us. Here's one of the bad innovations:Jim Royal at the Motley Fool tells the story of how private equity firms basically suck the blood out of companies. Here's most of the article (snipped out the pitch for TMF's stock picking newsletter):


I love nothing better than finding a company that pours buckets of cash into my portfolio. Private-equity funds do, too, but often the cash they're angling for is yours. They love to make public companies into their own ATMs through a shrewd device that you should beware, and their plundering of companies offers a key lesson for investors like us.

Like an ATM, but better
One legendary private equity shop, Kohlberg Kravis Roberts (KKR), has perfected the ability to extract exorbitant sums of cash from companies in a perfectly legal way. Take a look at the recent stunt it pulled on Dollar General.

KKR and fellow investors Citigroup (NYSE: C) and Goldman Sachs (NYSE: GS) took Dollar General private in July 2007 at a cost of $7.3 billion. They released the company back to the public markets this past November, offering about 10% of the shares in an IPO and retaining the rest. Following its launch, the company was valued at $7.2 billion.

Now, it looks like Dollar General's investors lost $100 million on the deal, so where's all this profit I'm talking about?

For that, you have to examine how Dollar General was used while it was private. When KKR bought Dollar General in 2007, it and fellow investors put up just $2.8 billion and borrowed the remaining $4.5 billion. At that time, Dollar General had just $260 million in debt, the interest on which it could easily cover with its earnings.

Fast-forward to November 2009 and the IPO. Dollar General suddenly had about $4.2 billion in debt, and its ability to support its own debt is severely crimped. In fact, the business has to pay about 39% of its operating income just in interest. Ouch!

That sudden debt spike shows that KKR and its co-investors simply transferred their borrowings of $4.5 billion onto Dollar General's balance sheet. For their efforts, they took home a 150% paper profit (based on the IPO price), excluding fees and the costs of some rather minimal work they performed in reorganizing Dollar General -- much of which was charged to Dollar General.

As a final kick to the curb, just before making it a public company, the private-equity giant paid itself and other investors a fat dividend, to the tune of $239 million -- more than double what Dollar General earned in that quarter. As a public company, Dollar General doesn't even pay a dividend. And that's not the amazing part.

The amazing part
Of the IPO, Bloomberg quoted one analyst as saying, "It's a good price for investors." If by investors, he means KKR and its cronies, then this analyst is spot-on. But for individual investors like you and me, the deal is an awful mess.

What is utterly astounding, mystifying, and discombobulating about this whole process is that investors buy what KKR is selling. After all, no one's under duress to buy a second-tier retailer, and you could even more easily pick up shares in a slow-growing cash cow such as Verizon (NYSE: VZ) or Procter & Gamble (NYSE: PG) and be none the worse off.

But, again, why buy Dollar General? If you must have a retailer, there are quite a few financially sound organizations with good competitive advantages available at cheaper prices. Certainly, that's one reason superinvestor Warren Buffett bought shares of Wal-Mart (NYSE: WMT) instead of the latest IPO peddled by private-equity firms.

The key lesson: Beware not only what you buy, but from whom you buy.

When Dollar General hit the markets again, it sported a 26.9 P/E ratio -- a stunning 77% higher than that of Wal-Mart, the world's biggest retailer. Even after it reported substantially increased quarterly income, Dollar General still trades at more than 22 times earnings, still higher than the well-heeled and more secure Target (NYSE: TGT). That's expensive for such a leveraged deep discounter, especially one poised to lose its attractiveness as we pull out of our economic slump and customers return to full-price and "plain ol' discount" retail.

It's little surprise that KKR waited until November 2009 to unleash Dollar General. After all, private equity sells when it estimates the market is highest, and KKR is a private-equity leader for just that very reason. And the unattractive position of Dollar General likely explains why KKR did not spin out the entire company: Investors simply wouldn't stomach this stinky investment in one gulp. But there are still plenty of cheap, undiscovered companies.

Orszag and Stiglitz: Tax cuts are not automatically the best stimulus

The Center on Budget and Policy Priorities posted a 2001 article by Peter Orszag, currently at the Office of Management and the Budget, and Joseph Stiglitz, a Nobel prize-winning economist, who argue that tax cuts are not always the best thing to do in the recession. This is relevant because Scott Brown, who won the Senatorial election in Massachusetts, correctly pointed out that John F. Kennedy did indeed propose cutting taxes during the 1960 recession - albeit his tax cuts took too much time to have an impact and they mainly hit after the recession, and Kennedy seems to have wanted a spending program as well.

Orszag and Stiglitz argue in response to a 2001 Bush administration official who suggested tax cuts in response to the 2001 recession:

The principal reason that Mr. Hubbard's arguments are misguided — and the main reason the Administration's package would be relatively ineffective as a stimulus measure — is that they largely ignore the central feature of a recession: lack of demand. In a recession, the primary problem is that the nation's firms face a reduction in demand for their products — not that they lack available workers, equipment, or anything else needed to produce goods and services. Indiscriminately injecting cash into such firms through tax breaks, without linking the tax breaks to new business activity, would do little if anything to address the underlying difficulty.

Firms that are faced with reduced demand for their products lay off workers, regardless of how much cash they have. The managers of firms have a fiduciary responsibility to maximize their profits, and in the face of reduced demand for their product, firms therefore typically reduce costs by cutting back on production, which triggers layoffs. As the number of unemployed workers increases, a downward economic spiral can occur. Households with unemployed workers, facing a sharp decline in their incomes, cut back on spending and further reduce the demand for products. That, in turn, leads to additional layoffs. This harmful cycle, by which an economic slowdown can build into a more serious recession, can be arrested or broken by boosting demand for the goods and services that American companies produce. Only when a company faces renewed demand for its products will it end the process of shedding workers and begin to create new jobs. As a result, the primary objective of a stimulus package should be to spur spending on these products.

In other words, when you cut taxes to businesses unconditionally, they are more likely to save the money in a recession than to spend it. Business tax cuts should be tied to investment or hiring. When you cut taxes to higher-income households, they are also more likely to save the additional money than to spend it. These are supply-side interventions. Supply-side economics (hat tip to Wikipedia holds that economic well-being should be maximized by removing or minimizing barriers to producing goods and services - barriers such as taxes.

What is effective is spending measures that are immediate:

An effective stimulus package consequently should expand the aggregate demand for goods and services in a timely way. Mr. Hubbard notwithstanding, there is little question that increases in government expenditures can be quite effective in boosting aggregate demand and thereby stimulating the economy in the short run.

Temporary expansions in unemployment insurance, for example, would spur increased consumer spending. Households in which a worker is laid off experience a significant decline in income. They thus are likely to spend a high percentage of any additional income they receive while out of work. The extra spending on unemployment benefits that a temporary expansion of unemployment benefits provides thus has a direct economic benefit — it keeps more workers employed at firms that produce the products the unemployed workers purchase with their additional cash. Temporary expansions in unemployment insurance consequently are a "win-win" proposition: They are quite effective in helping more people keep their jobs during an economic downturn, and they also assist those who are unfortunate enough to have lost their jobs.

Increased funds for food stamps and Medicaid also fall into this category. These have been the fastest-acting parts of the most recent stimulus bill.

Conservatives will tell you that increased government debt crowds out private spending - in other words, one dollar of government spending which is financed through taxation prevents private industry from spending that dollar. The private sector might see a higher rate of return on that dollar than the government. This view has some validity when the economy's resources are being fully utilized, but not in a recession:

The notion that a dollar spent by the government "crowds out" one dollar of spending by private businesses is correct only when the economy's resources are fully utilized; in that case, additional demand on those resources by the government necessarily reduces the demands that can be placed on them by the private sector. But when the economy's resources — our workers and plants and equipment — are not fully utilized, government spending does not displace private-sector resources on a dollar-for-dollar basis. Indeed, during an economic downturn, government spending can "crowd in" additional private-sector activity by spurring overall demand and thereby making it more likely that firms will be willing to make new investments. Mr. Hubbard's argument about government spending fully crowding out business spending thus is puzzling; it would be valid only if the economy were fully utilizing its resources, which is clearly not the case now.

The latest data [Editor: remember, this is 2001, but the story is similar today], for example, show that the capacity utilization rate — the proportion of plant and equipment capacity being used in production — fell to 74.8 percent in October, its lowest level since 1983. Furthermore, any implication that the economy is fully utilizing its resources would be inconsistent with another statement Mr. Hubbard makes — namely, that "the economy needs help now."

In other words, to counter a recession, you have to get demand for goods and services back up - and the federal government is the last entity left standing with the power to buy stuff in a recession.

Not long ago, I believe that Rowan Williams, Archbishop of Canterbury, was wondering why the government was spending money to stimulate the economy so that people could buy more useless junk in a recession. Hadn't we learned enough from our materialistic past, he wondered (I'm paraphrasing). That is indeed a critically important question that the church needs to help our society explore. However, when the rich sneeze, the poor catch a cold - paraphrased from when America sneezes, African-Americans get a cold. Recessions always affect vulnerable groups more severely than everyone else, and we need to get out of the recession.

The New Republic: Why DC's Skinny Bag Tax Works So Well

Lydia DePillis writes for TNR.


Over the weekend, The Washington Post took a look at how D.C. residents are adapting to a new five-cent tax on plastic bags that went into effect on January 1. It turns out that shoppers are now taking extreme measures to avoid paying that extra nickel—even schlepping groceries in their arms if they didn’t bring a backpack. The fee may drive people crazy, and the Journal may grumble about “bureaucracy,” but it actually seems to work: Stores report giving out half as many bags as they did before they started charging for them. And the reason seems to be rooted in how our brains operate:

"When it goes from zero to even a very small charge, it can feel very bad," said Dan Ariely, an economics professor at Duke University. "It creates a very small financial burden but a very big emotional reaction."

This reminds me of a Tom Friedman column from back in the summer, when the Waxman-Markey bill was dragging its way across the finish line in the House. Friedman hated the "Rube Goldberg" contraption that survived after umpteen amendments and concessions, but said legislators should pass it anyway. "If the U.S. government puts a price on carbon," he reasoned, "even a weak one, it will usher in a new mindset among consumers, investors, farmers, innovators and entrepreneurs that in time will make a big difference—much like the first warnings that cigarettes could cause cancer. The morning after that warning no one ever looked at smoking the same again."

The reaction to the bag tax here in D.C. suggests Friedman might be onto something. You don't even need a large price signal to have an effect—indeed, getting too ambitious too early could engender a revolt. Last fall, for instance, Seattle voters rejected a 20-cent bag tax. If proponents had only aimed lower, like D.C. did, the measure might have passed, and they would have then gotten some impressive reductions in bag use. Instead, they got nothing—which is what we can expect if a climate bill fails to pass this year, as well.

To Mother Jones Magazine: Automatic IRAs em are not the same as privatizing Social Security

President Obama recently proposed to require most employers to automatically enroll their workers in IRAs, which are a secondary workplace retirement savings mechanism in the US. It used to be that workers had their Social Security benefits and a defined benefit pension that the employer automatically contributed to. 401ks and IRAs are tax deferred vehicles that allow you to invest on your own in the stock market or other assets. They were designed as supplements to pensions. With the decline of pensions, the 401k has become the primary private retirement savings vehicle. However, many smaller and/or low-wage workplaces don't offer them.

President Obama's proposed solution is to automatically enroll workers in IRAs, and to expand the Saver's Tax Credit so that it is refundable - people who owe no income tax would be able to get money back, whereas the status quo is that the STC only reduces your taxes up to $0.

The auto-IRA proposal is something that both the left and the right endorse. Oddly, though, Mother Jones Magazine issued a screed against the proposal, accusing it of being a back door to privatizing Social Security.

It is true that the primary conservative proponent, David John of the Heritage Foundation, was also a proponent of privatizing Social Security. However, just because Heritage endorses something doesn't mean it's wrong - the auto-IRA proposal would not replace Social Security and is eminently sensible. Coupled with a refundable Saver's Tax Credit, it could help millions of low-income Americans save additional dollars for retirement. Assuming that offsetting revenues can be easily found, this would be a boost for retirement security. Mother Jones needs to get their facts straight.

TNR: Frank Luntz On How To Pass A Climate Bill

Again, Jesse Zwick writes for The New Republic on Frank Luntz' instructions on how to pass a climate bill. Luntz is a well-known Republican pollster who helped the Republicans frame their anti-health reform message - his suggestions for framing climate change are eminently sensible and it is heartening to hear that he's on the right side of the climate change issue:


For a long time, GOP pollster Frank Luntz was mainly known as the guy who wrote a 2002 memo advising the Bush administration to "make the lack of scientific certainty a primary issue in the debate [about global warming]." So it was a little surprising to see him this morning at the National Press Club, teaming up with the Environmental Defense Fund on a new set of poll findings about climate legislation. Even Luntz couldn't help joking about it: "When [EDF president] Fred asked me to do this with him, I asked, 'Do you know who I am?' "

In any case, Luntz's findings themselves are notable—mainly because they show that, despite all the gloom among Democrats, there appears to be broad bipartisan support for climate legislation. At least as long as it's not couched in terms of climate change. After a series of studies conducted last November and December, Luntz concluded that most people do believe climate change is real, but aren't necessarily going to support sweeping legislation on that premise alone. "You're fighting the wrong battle," he told the assembled group of advocates. People want to hear about "energy dependence on the Middle East" and "creating jobs that can't be shipped overseas" rather than "melting glaciers or polar bears." Some other findings:

--“Cleaner, safer, healthier” is a more effective phrase than “sustainability.” Sustainability is about maintaining the present, while politicians have to be for something new and better in order to win support.

--Even more specific, enviros tend to focus on “clean” while Americans want to focus on “health.”

--Stop saying “green jobs.” Say “American jobs.”

--“Carbon neutral” conjures up “Hollywood types flying across the country and buying carbon offsets.” “Accountability for polluters,” on the other hand, conjures up good governance.

Luntz insists that Americans would support a cap on carbon emissions—80 percent of Dems, but also 43 percent of Republicans he surveyed are either definitely or pretty sure climate change is a problem that's caused in part by humans. But he doesn't believe cap-and-trade can pass as long as "it’s called ‘cap-and-trade,’ and all the messaging that’s been used against it. The title has become so demonized that they’ve got to come up with a new name.” Okay, but is that really all that's standing in the way? John Kerry already refuses to use the phrase "cap-and-trade" (he prefers the term "pollution-reduction bill"), and his climate bill's still facing an uncertain fate. Clearly there's more than shoddy messaging at play.

The New Republic: Old Senator, New Tricks What’s behind Robert Byrd’s surprising smackdown of Big Coal?

Jesse Zwick writes for TNR, corroborating Politico's earlier report that Sen. Robert Byrd may have finally gained some perspective on coal:


Blankenship's stunt created a backlash from some key quarters of the state. Massey is a notoriously anti-union firm, and the fact that the rally was being held on Labor Day didn't sit well with many in the United Mine Workers Association (UMWA), still a major political force in the state. Many of West Virginia's union members are already uncomfortable with mountaintop-removal mining, which is less labor-intensive than traditional methods and has led to a steep decline in the size of West Virginia's coal workforce—from 62,500 in 1979 to about 22,000 today. "I don't even like to compare what they're doing to what we're doing," says retired miner and UMWA member Terry Steele. Moreover, the event only underscored the fact that Blankenship has long tried to frame coal as a partisan issue. In a state where registered Democrats still outnumber Republicans by a wide margin, he's devoted more than $6 million to helping the GOP take over.

As Massey and other coal companies have become increasingly obstreperous, Byrd has begun to notice. At a public hearing on mountaintop-removal mining last October, members of the front group Friends of Coal packed the meeting and shouted down West Virginians trying to lodge their complaints. (Many of the citizens in attendance were convinced that employers had encouraged or paid their miners to show up and disrupt the proceedings. "I've been in unions, I know how the companies fight, and these guys were being stoked," says retired miner Joe Stanley, who was at the meeting.) A Byrd staff member was in attendance, and it appears that the industry's tactics grated. "I think those meetings did play a role [in Byrd's shift]," says one former mining official and close observer of state politics. "Everybody watched the debate and saw the vile nature of it." And the gap between the coal industry and Byrd only widened in November, when the West Virginia Chamber of Commerce called on the state's representatives in Congress to try to block health care reform until the EPA "backs down on its campaign against coal." In his December statement, Byrd called the demand "foolish" and "morally indefensible."

There's also the climate question. Byrd's not about to become an environmentalist; even in his op-ed, he insisted that coal was here to stay. But he seems to recognize that the realities of global warming will force the country to rethink how it uses coal sooner or later and that the state’s companies aren’t playing a constructive role. (Blankenship, for instance, has criticized coal-heavy utilities in other states, like Duke Energy, for working with Congress on climate issues.) Byrd's longtime mantra, according to political historian Robert Rupp, is that "It's better to be at the table than on the menu." And so he seems willing to spend what's likely his last term in Congress getting West Virginia to realize that, in the end, obstructionism won't serve the state very well.

The New Republic: Study: Carbon Price May Be Worth It On Health Grounds Alone

Bradford Plumer writes for The New Republic:

Debates about the costs and benefits of reducing carbon emissions usually get conducted along very narrow lines. First you add up the amount people will have to pay in higher energy bills and then compare that with the benefits of avoiding big temperature increases. Et, voila. Except the problem with this approach is that it ignores many of the indirect benefits (and, yes, indirect costs) of shifting to cleaner forms of energy. And some of those secondary effects might be very significant.

Case in point: Shifting away from fossil fuels helps cut down on other, more conventional pollutants that cause all sorts of medical problems: SO2 and NOx and mercury and particulates. And how much is that worth? That's what a new study from Gregory Nemet, Tracey Holloway, and Paul Meier at the University of Wisconsin-Madison tried to figure out. The researchers surveyed 48 studies on the subject and found that, while estimates of the health benefits can vary quite a bit, they average $44 per ton of CO2 in wealthy countries and $81/ton in developing countries. That's bigger than the expected carbon price under a U.S. cap-and-trade system (around $20-$30 per ton). In other words, the air-quality improvements alone could offset the cost of cutting carbon. A cap could be "worth it" for public health reasons, regardless of how one feels about global warming.

Now, this public health angle is especially likely to make a difference in the developing world, where creaky coal plants and noxious car fumes are rampant—in many poorer countries, the health gains could entirely pay for the price of tackling carbon emissions. Indeed, there have already been a few examples of governments thinking along these lines. In India, the city of Delhi recently announced that it would shut down all three of its coal-fired plants and switch to natural gas, even though electricity prices will likely rise as a result. The city's not doing it for climate reasons—officials are trying to chip away at all the smog choking the air. But it's going to have a big impact on greenhouse gases all the same.

Center on Budget and Policy Priorities: Changes to Excise Tax on High-Cost Health Plans Address Criticisms, Retain Long-Term Benefits

Dr. Paul Van de Water of the Center on Budget and Policy Priorities backs up what I said earlier about the modifications the unions arranged to make to the excise tax with the President before health reform fell apart.

He reiterates numerous well-regarded economic studies that show that firms which restrain the growth of healthcare premiums will pass the additional money to their workers in the form of higher wages. Moreover, the paper cites statements by union leaders where they explicitly say that they bargained for stronger healthcare coverage and lower wages - and one statement where teachers in Madison, Wisconsin were considering which side to take in the tradeoff between wages and health insurance. Again, I do worry somewhat about non-unionized firms with low-wage workers, but the public and Congress could monitor the situation.

Furthermore, he says that allowing unions a transition period is justifiable. Many unions whose plans would otherwise be subject to the tax are locked in collectively-bargained agreements for several years. They will be able to address the issue at their next round of negotiation, but will not be forced to do so before.

He further assesses the distributional effects of the legislation:

Critics of the excise tax also argue that it would be less progressive than some other possible sources of revenue, such as the high-income surcharge included in the House-passed bill.[12] This observation is correct, but it has been overstated.

MIT’s Gruber estimates that the excise tax will raise workers’ wages substantially over the next decade, and the bulk of these additional wages will accrue to middle-income households.[13] Under the Senate-passed version, for example, workers earning less than $100,000 would receive two-thirds of the wage increases, but they would pay only 49 percent of the tax. In contrast, workers earning more than $200,000 would receive 10 percent of the wage gains and pay 16 percent of the tax.[14]
More important, by limiting the existing tax bias in favor of employer-sponsored health insurance, the excise tax would curtail an inequity in the existing tax system. At present, a worker with a health insurance plan that costs $26,000 — for whatever reason — gets twice the tax break that goes to an otherwise similar worker whose insurance costs only $13,000. A worker without employer-sponsored insurance receives no tax benefit at all. The excise tax would reduce, but not eliminate, this disparity.

The excise tax also needs to be viewed in the context of the entire health reform legislation. The House and Senate bills are full of provisions that would create a fairer distribution of health insurance costs, not the least of which is the limit on age-based variation in premiums. Any final legislation that is comprehensive would likely include other tax provisions that fall primarily on very-high income people, such as the Senate’s increase in the Medicare payroll tax on high-wage earners. Any such legislation likely would also provide new health insurance subsidies that would make coverage more adequate and affordable for low- and moderate-income people who purchase insurance through the new health insurance exchanges. Thus, health reform as a whole would improve the progressivity of the federal tax and transfer system.

Last, Van de Water notes that the change would approximately halve the revenue collected in the first ten years, but in subsequent years, the tax would collect a good portion of the revenue originally planned for. Policymakers would obviously have to offset that amount, but basically, the tax is not being weakened significantly in the long run.

Rethinking the individual mandate

Through the health reform debate, the mandate for individuals to buy insurance has drawn fire from both the left and right. It does impinge on individual autonomy and the subsidies to ensure that people can afford insurance fall short of what is needed. Additionally, the U.S. has never forced people to buy a product from a private company as a consequence of basically being alive and in the U.S. - one could theoretically avoid buying auto insurance by not driving.

The technical reason to include an individual mandate is simple - without one, people will simply wait until they are sick before getting coverage. I recall hearing that in Massachusetts, there is some evidence that people are getting insurance, getting a whole bunch of procedures done, and then dropping the insurance. This activity will disrupt the market.

I initially never questioned the need for a mandate. However, now that health reform is being rethought, one has to wonder if dropping the individual mandate would get enough political support from both sides to pass something and while also being technically sound. Kaiser Health News has some quotes from Stuart Butler of the Heritage Foundation and Joseph Antos of the American Enterprise Institute. Both are deeply conservative scholars (Dr. Butler has done a considerable amount of bipartisan work in the past). Dr. Butler wonders if automatic enrollment could replace a mandate:

Butler at the Heritage Foundation and others say there are ways to encourage most Americans to buy coverage, short of a mandate. One way would be to automatically enroll people in coverage through their jobs. Employers would either sign up workers for employer-based coverage if they offer it, or enroll them in the lowest-cost plan offered on an exchange.

Workers could opt out, but Butler suspects many won’t. "If you don't have to do anything to be in something, you'll be in it,” he says, pointing to automatic enrollment in 401(k) programs as an example of how it could work.

He also suggests another way to prompt laggards: a "soft penalty." After an initial period of open enrollment, premiums would be higher for those who have been uninsured for an extended period. In addition, there could be high-risk pools for individuals who have serious illnesses.

Dr. Antos has similar thoughts:

Joseph Antos of the American Enterprise Institute, a conservative think tank, proposes an initial one-time open enrollment period during which all Americans could sign up for health insurance without facing higher premiums for their health status, and limited premium increases for their age. But if someone chooses to remain uninsured after open enrollment ended or has a lapse in coverage, Antos says, that person would face potentially higher premiums based on age, gender and health status.

There is a similar penalty in Medicare Part D (the prescription drug coverage) for those who enroll later than the time they first enter into the program. I think their premiums are raised by something like 1% per year. I would be very hesitant to charge laggards based on their health status, because they might genuinely be unable to afford insurance. However, if we placed limits on the variation in health status, or we simply assessed a flat dollar penalty, then this soft penalty would serve much the same substantive function as the original individual mandate, while also not forcing people into a choice they may not want to make.

It is very likely that adverse selection would be higher than without a mandate, even if the subsidy levels were identical. The stricter the penalty, the less adverse selection. Lawmakers will have to balance the need to combat adverse selection with the need to not unfairly penalize people. However, this could be one potential way to move the debate forward.

That said, Mitt Romney Central, which promotes the former Republican Governor of Massachusetts for a 2012 Presidential campaign, cites numerous conservative sources (AEI and the Ethan Allen Institute, a free market think tank in Vermont) praising the individual mandate requirement in Massachusetts' own health reform push. This seems a little inconsistent unless they've rethought things.

Heritage Founation: VAT - no easy fix for the deficit

The conservative Heritage Foundation highlights the ways that a value-added tax can be gamed:

1. False Claims of Taxes Paid. Businesses create false invoices for the purchase of inputs they never bought and get bigger deductions for taxes paid than they are entitled to.

2. Credit Claimed for Non-Creditable Purchases. Typically, VATs have a variety of rates and exemptions. For example, basic needs such as food, medicine, and clothing often receive preferential VAT rates or outright exemptions from the tax, as do certain industries considered economically vital or politically sensitive.

Businesses that sell both VAT-exempt and non-exempt items have an incentive to allocate the purchase of supplies they use to produce exempt items toward the production of non-exempt items. This improper shifting increases the business's tax refund because it allows them to claim deductions on their tax returns for the taxes paid on inputs where there should be none. This fraud is common because it is difficult for authorities to prove which supplies the business used to produce the different products.

3. Bogus Traders. Businesses are set up exclusively to produce VAT invoices so other businesses can claim refunds on taxes they never paid.

4. Hidden Sales. Professional service providers, such as doctors and lawyers, often engage in this kind of fraud. They offer relatively high-value services, but their purchases from other businesses are relatively low cost. They charge their unknowing customers full price and collect the proper amount of VAT on the sale. But to the authorities, they show that they charged a lower price. The service provider forwards to the government less tax than it collected from its customers and pockets the difference.

It is always hard for tax authorities to determine the actual sales of an intangible good like a service. Many state and local governments in the United States often forego levying sales tax on most services because of this difficulty. Moreover, service providers and individuals can circumvent the tax by agreeing to use cash or barter transactions. This avoids a paper trail altogether and makes it nearly impossible for authorities to prove abuse.

The shortfalls in the EU's VAT collections average 12%, or just a bit over the IRS estimate of the U.S.' tax shortfall under current law. The Heritage Foundation of course argues that this means the U.S. should not raise a VAT, but they would say that about any tax. I still think a VAT should be on the table, but advocates will need to ensure the integrity of the tax.

Has the financial sector actually done anything for us?

A columnist at Time magazine recently wondered, what, if anything, are financial markets good for? Clearly they enrich the stock brokers, but their utility for everyone else

I've been trying to come up with a list of the innovations that the financial sector has come up with in the last century or so that actually help people. More than that, they must be of benefit to the average user - for example, I believe that most active mutual funds are of benefit only to skilled users, compared to index mutual funds which are useful to everybody. Here's my list:

1) The ATM
2) The debit card
3) Relatively simple, well-structured, transparent insurance contracts (such as health and life insurance)
4) Index mutual funds
5) Immediate annuities (this is where you pay a lump sum for a guaranteed stream of income; technically, this could be considered insurance against old age)
6) The 30-year fixed mortgage

Are there any other suggestions?

Thoughts on health reform

It appears that House Democrats do not have the guts to pass the Senate bill. From the left, there is opposition to the excise tax on insurance - an eminently unwise opposition. There's also objection to the relatively low subsidies. Some of the moderates are spooked and say that we shouldn't have done this in the first place.

The New York Times reports that some consensus is emerging on a stripped-down bill. First, such a bill could cover all people under a certain income level in Medicaid; at present, almost all states exclude childless adults. This could cover a large number of new people, possibly 10-15 million. It would be good for the homeless, for example. Recent graduates might fare differently depending on whether or not asset limits are imposed.

Beyond that, the biggest reform would be to make grants to states to start insurance exchanges. This is good but problematic.

Massachusetts has an insurance exchange. To make the exchange system work and to get to near-universal coverage, you need guaranteed issue, community rating, a mandate and subsidies, as I've explained before. Massachusetts already had the first two before starting its exchange. It had a strong economy and high insurance coverage. Going from where they were to where we want the U.S. to be was a fairly small step - it was innovative, but it was not a huge change in terms of the insurance market. Other states are not in the same position. As I said earlier, I think Minnesota might be able to pull something similar off, due to their strong economy, high level of insurance and low medical costs. Most states will be unable to do this.

Additionally, insurance exchanges need market exclusivity to work. If you have heavily regulated coverage in the exchange and an unregulated market outside, then the insurance companies will direct the sicker people to the exchange and recruit healthier people outside it. For example, they might heavily market high-deductible health plans to young folks outside the exchange. This will undermine the exchange - coverage in the exchange will be more expensive, and the healthier people in the exchange will seek a better deal outside it, and the spiral will continue.

This won't happen if the exchange gets exclusivity over the individual market. However, some conservatives are complaining that "heavily regulated" exchanges are bad. I have to wonder if state policy makers will truly take the necessary steps to ensure that the exchanges are stable. Massachusetts is a very blue state, and they were mostly willing to do what was necessary, albeit they have a much less-regulated unsubsidized market for people who don't qualify for subsidies.

Incremental reform may get us part of the way to where we need to go. However, it is morally unacceptable that anyone should be uninsured and incremental reform does not do that. In addition, the previous reform bills at least set up a situation where it would be far easier to control costs. If costs continue to spiral up, then there will come a point where we need a public plan, open to everyone and paying Medicare rates, or something even more drastic than that.

Thoughts on long-term care

With the U.S. Congress now having moved away from a comprehensive health reform package, it is unlikely that the CLASS Act, which was a first step towards long-term care reform, will pass. The CLASS Act would have created an auto-enroll social insurance program (albeit people could opt out) that paid a small but actually quite meaningful cash benefit.

Human societies throughout history have used 5 methods to provide for long-term care financing and/or services:

1) Force women to do it
2) Leave it to welfare services
3) Be rich
4) Have individuals buy insurance against needing long-term care
5) Have the government insure the entire population or make them buy insurance

Number 1 used to work but it is unjust. I also have to wonder if women are being held back from advancement in the workforce, because they still provide about two-thirds of the unpaid long-term care services (to their spouses and parents). Number 2 is the default situation in the U.S. and it's a crappy one. Number 3 works great if you're rich. But you would want several hundred thousand dollars in cash to deal with LTC needs and inflation on top of regular retirement, so it's not for everybody - you have to be quite rich indeed.

Number 4 works, but only those able to afford insurance will purchase it. We need to move towards number 5.

The House must immediately pass the Senate bill

By now, people following health reform in the U.S. will have heard that Scott Brown, the Republican candidate, has won the special Senate election in Massachusetts. Martha Coakley, the Democrat, was widely expected to win the seat as little as a month ago.

The finger-pointing has already started. Blame is already being assigned. These activities are useless. The House must immediately pass the Senate version of the bill as written and send it to the White House for signature. The Senate bill has flaws, but it is workable and it is far better than the status quo.

There are some who might say, let's do this incrementally. Let's just pass the insurance reforms. The problem is that the insurance reforms alone are most of the bill and most of the spending. If you want insurers to stop discriminating based on health status and to issue insurance to all applicants (community rating and guaranteed issue, respectively), there must be a mandate to have insurance, or else people will wait until they are sick before getting coverage. This is what's happening in New Jersey, which has community rating and guaranteed issue but no mandate. If you pull just those two levers, you're just spreading the dollars around - it will be easier for older uninsured folks to get coverage, but more expensive for younger folks. There must be a mandate, and if you want a mandate, you have to give subsidies as well. You have to pull all the levers at the same time.

And furthermore, even if those reforms are applied, insurance companies will still have incentive to avoid enrolling sick people. Those that succeed in doing so will simply make it more expensive for the insurance carriers that fail to do so, and meanwhile none of the insurers are learning how to keep people healthy. So, you need risk adjustment, and defined benefit tiers, and a lot of other complicated stuff. Trust me, much of the package is inseparable. If you skipped the reforms in this paragraph, you'd get a situation where the marketplace could eventually unravel over time.

The other option is to go with the keep-your-hands-off-my-healthcare crowd and do nothing. The problem is that if nothing is done, healthcare will continue to get more and more expensive and the entire system will unravel. Then there will come a point when it will take drastic measures, such as implementing a single-payer system and/or strict price controls, to save the country's budget. The Senate bill both has some cost controls, such as the excise tax and the fact that insurance exchanges are allowed to reject plans that are too expensive. It also sets up the infrastructure for further cost controls.

House liberals hate the excise tax and they hate the fact that the exchanges are regulated by states. As to the former point, they do not have the facts on their side. As to the latter, it's workable. Federalizing the exchanges would also create problems of its own, such as how to synchronize federal and state regulation of insurance. The subsidies are clearly inferior in the House bill, but they're what we can afford right now. Besides, the subsidies can be increased, and the excise tax modified so that it is better targeted, at a later date.

As for leaving health reform to the states, I mentioned earlier that whoever wants to reform the insurance markets has to pull all four levers simultaneously. The states have a far more limited budget capacity, so asking them to pull the fourth lever is really hard. Massachusetts did it because they had very high insurance rates to begin with and a strong economy. Minnesota, I think, could potentially pull it off by themselves; I don't know if their political economy will allow it, but they have a strong economy and low uninsurance rates. I don't think many other states could do it. Furthermore, the smaller states don't really have enough size to start a properly running insurance exchange. You want a large enough pool that's relatively stable and can achieve economies of scale; Alain Enthoven and others estimated that you'd want a minimum of 100,000 people on an exchange, and Massachusetts' exchange is actually a bit smaller. So, leaving it to the states is definitely suboptimal.

So, again, the House needs to pass the Senate bill right now. The budget reconciliation process could be used for certain elements, but those elements need to be budget-related. Using the process would also worsen the existing ill-will between the two parties. The Administration needs to reform the financial system and the immigration system and to do cap and trade. Many Republicans will simply (and foolishly) oppose anything the Democrats suggest, but there are some who are far-sighted enough to cooperate on these issues - reconciliation could damage their prospects for cooperation.

Why investors may be deluding themselves

I was reading an article on Kiplinger's, a personal finance magazine recently. It suggested that people consider buying an immediate annuity with some of their 401k or IRA money. An immediate annuity seller gives you a guaranteed stream of income in exchange for a lump sum of money. One can add options like inflation protection and spousal death benefits. The rates you get with annuities do vary with prevailing interest rates (e.g. the federal funds rate, mortgage interest rates, etc), which are low now. However, immediate annuities can be a good way to insulate yourself from the vagaries of the stock market. In the past, most people had defined benefit pensions, but the situation is the reverse of that these days.

Oddly enough, few of the commenters for that article were positive. For one, few people liked the thought of giving up control of their money. One poster remarked that the problem with annuities is that half of purchasers die before the average age. This is true, but the problem with not purchasing annuities is that you might outlive the folks that did, and that you might run out of savings if you live too long.

There may be another problem: people may think they're hot investors and that they'll be able to invest such that they won't run out of money. A recent Wall Street Article discusses why investors may be deluding themselves:

A nationwide survey last year found that investors expect the U.S. stock market to return an annual average of 13.7% over the next 10 years.

Robert Veres, editor of the Inside Information financial-planning newsletter, recently asked his subscribers to estimate long-term future stock returns after inflation, expenses and taxes, what I call a "net-net-net" return. Several dozen leading financial advisers responded. Although some didn't subtract taxes, the average answer was 6%. A few went as high as 9%.

We all should be so lucky. Historically, inflation has eaten away three percentage points of return a year. Investment expenses and taxes each have cut returns by roughly one to two percentage points a year. All told, those costs reduce annual returns by five to seven points.

So, in order to earn 6% for clients after inflation, fees and taxes, these financial planners will somehow have to pick investments that generate 11% or 13% a year before costs. Where will they find such huge gains? Since 1926, according to Ibbotson Associates, U.S. stocks have earned an annual average of 9.8%. Their long-term, net-net-net return is under 4%.

All other major assets earned even less. If, like most people, you mix in some bonds and cash, your net-net-net is likely to be more like 2%.

The faith in fancifully high returns isn't just a harmless fairy tale. It leads many people to save too little, in hopes that the markets will bail them out. It leaves others to chase hot performance that cannot last. The end result of fairy-tale expectations, whether you invest for yourself or with the help of a financial adviser, will be a huge shortfall in wealth late in life, and more years working rather than putting your feet up in retirement.

Even the biggest investors are too optimistic. David Salem is president of the Investment Fund for Foundations, which manages $8 billion for more than 700 nonprofits. Mr. Salem periodically asks trustees and investment officers of these charities to imagine they can swap all their assets in exchange for a contract that guarantees them a risk-free return for the next 50 years, while also satisfying their current spending needs. Then he asks them what minimal rate of return, after inflation and all fees, they would accept in such a swap.

In Mr. Salem's latest survey, the average response was 7.4%. One-sixth of his participants refused to swap for any return lower than 10%.

The first time Mr. Salem surveyed his group, in the fall of 2007, one person wanted 22%, a return that, over 50 years, would turn $100,000 into $2.1 billion.

Does that investor really think he can get 22% on his own? Apparently so, or he would have agreed to the swap at a lower rate.

I asked several investing experts what guaranteed net-net-net return they would accept to swap out their own assets. William Bernstein of Efficient Frontier Advisors would take 4%. Laurence Siegel, a consultant and former head of investment research at the Ford Foundation: 3%. John C. Bogle, founder of the Vanguard Group of mutual funds: 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.

Meanwhile, I asked Mr. Salem, who says he would swap at 5%, to see if he could get anyone on Wall Street to call his bluff. In exchange for a basket of 51% global stocks, 26% bonds, 13% cash and 5% each in commodities and real estate—much like a portfolio Mr. Salem oversees—the institutional trading desk at one major investment bank was willing to offer a guaranteed rate, after fees and inflation, of 1%.

All this suggests a useful reality check. If your financial planner says he can earn you 6% annually, net-net-net, tell him you'll take it, right now, upfront. In fact, tell him you'll take 5% and he can keep the difference. In exchange, you will sell him your entire portfolio at its current market value. You've just offered him the functional equivalent of what Wall Street calls a total-return swap.

Unless he's a fool or a crook, he probably will decline your offer. If he's honest, he should admit that he can't get sufficient returns to honor the swap.

So make him explain what rate he would be willing to pay if he actually had to execute a total return swap with you. That's the number you both should use to estimate the returns on your portfolio.

There has been some discussion among the Obama Administration on promoting the use of annuities in retirement accounts(Businessweek). There seems to be no talk about mandating that consumers purchase annuities and to be sure, the Investment Company Institute (i.e. the mutual fund lobby) is bitterly opposed to any talk of a mandate. However, it definitely makes sense to take steps to make sure that annuities are more easily available.

It also further cements the case for Social Security. Social Security is paid as an annuity. It also comes with inflation protection, survivor benefits and disability insurance. That's a good deal for anyone, and it's a particularly good deal for the poor - they are cross-subsidized to some extent by the rich, so they get back a bit more than what they put in to the program.

Hate posters

The New York Times has a slideshow of European political posters that incite racial hatred.

Here are two Swiss posters that were used to promote the resolution that banned the building of minarets:



Here's one by the Northern League in Italy, which has been accused of racist rhetoric.

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I don't speak Italian, but with assistance from Babelfish, they're probably saying something like, "They [Native Americans] allowed rapid immigration, and now they live on reservations. Another poster in Lega Nord's Wikipedia article shows Chinese, Arab, African and Roma immigrants pushing a Piedmontese man out of the line for social services.

Organized labor mostly does the right thing re the excise tax

People who have been following the health reform debate will know that a) employer contributions to your health insurance premiums are completely excluded from your taxable compensation, b) this subsidy is ill-targeted, benefiting the rich more than the poor, and probably helps drive up health spending, c) the Senate proposed to put a cap on the exclusion - plans above a certain dollar value would be taxed and d) organized labor was bitterly opposed, thinking that all our tax problems can be solved by taxing the rich.

However, the cap is one of the relatively few things in the current bills that is likely to drive spending lower. It seems that the AFL-CIO and other unions have negotiated a compromise with the White House, according to this NYT article: the tax wouldn't kick in for collectively bargained plans until 2017, and the cap would be adjusted by age, occupational group and gender.

Republicans have sneered at this, calling it another back-door deal - as if they themselves never made any of those. However, the latter provision is what concerns me the most - it is what should have been in the bill all along. A study in the health policy journal that industry type and medical costs in the region explained more of the variation in premiums than the actuarial value (which is a measure of how rich the benefits are). Most of the variation in premiums was unexplained by the factors the researchers examined. I suspect that a big part of that variation is explained by how efficient the plans are - I would be intrigued if the researchers had factored in each plan's HEDIS score, which is a measure of their quality of care. We want to pressure health plans to be more efficient.

Before, the tax was being used as a pretty blunt instrument. I still supported it, because it is a poorly targeted tax policy and it will be difficult to finance health reform otherwise. However, these provisions make the exclusion a bit of a finer instrument. And they remove one more obstacle from passage of the bill.

Addendum: OK, so now that we've reached a point where we all know this is really a tax on health insurance, not on health insurance companies, and organized labor is somewhat willing to live with this, why don't we go back to an actual cap on the tax exclusion? Under a cap, any employer contribution to premiums over the cap would be taxable income. This would further sweeten the deal for labor, because they would be taxed at (presumably) 25% plus state taxes, not 40% (the amount we're taxing the insurers by). It would be a bit of a better deal for union members plus we'd be calling a spade a spade.

Times: "Wake up, gentlemen" - World's top bankers warned by Volcker

Patrick Hosking and Suzy Jagger have an article in the Times covering a banking conference on December 9, 2009 that contains a priceless quote from an ex-chair of the U.S. Federal Reserve:

One of the most senior figures in the financial world surprised a conference of high-level bankers yesterday when he criticised them for failing to grasp the magnitude of the financial crisis and belittled their suggested reforms.

Paul Volcker, a former chairman of the US Federal Reserve, berated the bankers for their failure to acknowledge a problem with personal rewards and questioned their claims for financial innovation.

On the subject of pay, he said: “Has there been one financial leader to say this is really excessive? Wake up, gentlemen. Your response, I can only say, has been inadequate.”

As bankers demanded that new regulation should not stifle innovation, a clearly irritated Mr Volcker said that the biggest innovation in the industry over the past 20 years had been the cash machine. He went on to attack the rise of complex products such as credit default swaps (CDS).

“I wish someone would give me one shred of neutral evidence that financial innovation has led to economic growth — one shred of evidence,” said Mr Volcker, who ran the Fed from 1979 to 1987 and is now chairman of President Obama’s Economic Recovery Advisory Board.

He said that financial services in the United States had increased its share of value added from 2 per cent to 6.5 per cent, but he asked: “Is that a reflection of your financial innovation, or just a reflection of what you’re paid?”

Businessweek: How Hospitals Can Slash Costs

Businessweek offers a slideshow on steps, some quite simple, that hospitals can take to slash costs. For example, just rigorously enforcing hand washing has lead to significant savings. Being more cautious in the use of diagnostic imaging (e.g. MRIs) could save the average hospital as much as $7.2 million. Better coordination of care and coaching for people with chronic diseases and for recently discharged Medicare patients could lead to much better outcomes.

The related article by Catherine Arnst is here.

Peter Coy, Michelle Conlin and Moira Hervst write on Businessweek about how the use of temporary workers in the U.S. has increased and about how worker tenure is eroding, and on the effects it has on the workforce. The first page:


On a recent Tuesday morning, single mom Tammy DePew Smith woke up in her tidy Florida townhouse in time to shuttle her oldest daughter, a high school freshman, to the 6:11 a.m. bus. At 6:40 she was at the desk in her bedroom, starting her first shift of the day with LiveOps, a Santa Clara (Calif.) provider of call-center workers for everyone from Eastman Kodak (EK) and Pizza Hut (YUM) to infomercial behemoth Tristar Products. She's paid by the minute—25 cents—but only for the time she's actually on the phone with customers.

By 7:40, Smith had grossed $15. But there wasn't much time to reflect on her early morning productivity; the next child had to be roused from bed, fed, and put onto the school bus. Somehow she managed to squeeze three more shifts into her day, pausing only to homeschool her 7-year-old son, make dinner, and do the bedtime routine. "I tell my kids, unless somebody is bleeding or dying, don't mess with me."

As an independent agent, Smith has no health insurance, no retirement benefits, no sick days, no vacation, no severance, and no access to unemployment insurance. But in recession-ravaged Ormond Beach, she's considered lucky. She has had more or less steady work since she signed on with LiveOps in October 2006. "LiveOps was a lifesaver for me," she says.

You know American workers are in bad shape when a low-paying, no-benefits job is considered a sweet deal. Their situation isn't likely to improve soon; some economists predict it will be years, not months, before employees regain any semblance of bargaining power. That's because this recession's unusual ferocity has accelerated trends—including offshoring, automation, the decline of labor unions' influence, new management techniques, and regulatory changes—that already had been eroding workers' economic standing.

The forecast for the next five to 10 years: more of the same, with paltry pay gains, worsening working conditions, and little job security. Right on up to the C-suite, more jobs will be freelance and temporary, and even seemingly permanent positions will be at greater risk. "When I hear people talk about temp vs. permanent jobs, I laugh," says Barry Asin, chief analyst at the Los Altos (Calif.) labor-analysis firm Staffing Industry Analysts. "The idea that any job is permanent has been well proven not to be true." As Kelly Services (KELYA) CEO Carl Camden puts it: "We're all temps now."

Peter Cappelli, director of the Center for Human Resources at the University of Pennsylvania's Wharton School, says the brutal recession has prompted more companies to create just-in-time labor forces that can be turned on and off like a spigot. "Employers are trying to get rid of all fixed costs," Cappelli says. "First they did it with employment benefits. Now they're doing it with the jobs themselves. Everything is variable." That means companies hold all the power, and "all the risks are pushed on to employees."

The era of the disposable worker has big implications both for employees and employers. For workers, research shows that chronic unemployment and underemployment cause lasting damage: Older people who lose jobs are often forced into premature retirement, while the careers of younger people are stunted by their early detachment from the working world. Even 15 years out of school, people who graduated from college in a recession earn 2.5% less than if they had graduated in more prosperous times, research has shown.

Diminishing job security is also widening the gap between the highest- and lowest-paid workers. At the top, people with sought-after skills can earn more by jumping from assignment to assignment than they can by sticking with one company. But for the least educated, who have no special skills to sell, the new deal for labor offers nothing but downside.

Employers prize flexibility, of course. But if they aren't careful they can wind up with an alienated, dispirited workforce. A Conference Board survey released on Jan. 5 found that only 45% of workers surveyed were satisfied with their jobs, the lowest in 22 years of polling. Poor morale can devastate performance. After making deep staff cuts following the subprime implosion, UBS (UBS), Credit Suisse (CS), and American Express (AXP) hired Harvard psychology lecturer Shawn Achor to train their remaining employees in positive thinking. Says Achor: "All the employees had just stopped working."

NY Times: Of individual liberty and cap and trade

Robert Frank, an economist, argues in a NY Times editorial that cap and trade is consistent with market-based thinking and is likely the most economically efficient way to reduce carbon emissions:

SOME people oppose measures to limit greenhouse gases because they believe that global warming is a myth. These denialists may have a little extra spring in their step during the current cold snap, but their influence has been steadily waning.

The biggest remaining obstacle is disagreement over the legitimacy of proposed solutions. At the heart of attempts to curb carbon dioxide emissions are two related proposals: taxation of those emissions and a system of tradable emission permits, also known as cap and trade. Both have been attacked as unacceptable restrictions on individual liberty. The attacks have come from both sides of the political aisle, but have been pressed with particular insistence by conservatives and libertarians.

It’s a puzzling objection, because both proposals are squarely consistent with the framework advocated by conservatives’ patron saint regarding matters related to private actions that harm others. That would be Ronald H. Coase, professor emeritus at the University of Chicago and the 1991 Nobel laureate in economics, who will turn 100 this year.

Mr. Coase (the name rhymes with “dose”) summarized his framework in a 1960 paper titled “The Problem of Social Cost,” which has become one of the most-often-cited economics papers ever published. He stressed that actions with harmful side effects — negative externalities, in economists’ parlance — are quintessentially practical problems. They are best solved, he argued, not by chanting slogans about rights and freedoms, but by steering mitigation efforts to those who can perform them most efficiently.

The pre-Coase tradition was to view externalities in terms of perpetrators and victims. The owner of a factory that emitted smoke was a perpetrator, for example, and those who were harmed by it were victims. The conventional view was that perpetrators should be restrained from harming victims.

Mr. Coase’s profound insight was that this view ignored the inherently reciprocal nature of externalities. Smoke harms others, yes. But preventing smoke causes harm, too, because smokestack filters are costly. Our shared interest, he reasoned, was to use the least costly means of reducing the relevant damage.

In some cases, that might involve filtering out much of the smoke. But in others, the cheapest solution might be for parties downwind to relocate. Mr. Coase argued that whenever it was practical for affected parties to forge private agreements among themselves, they would have strong incentive to use the least costly solution to the problem.

His paper provoked a firestorm of criticism, based on the impression that he was claiming that government didn’t need to regulate activities that cause harm to others. As a closer reading makes clear, however, this could not have been his view, especially with respect to activities like global pollution.

Some pollution damage is localized. But when it comes to global warming, people cannot escape damage by simply moving upwind. Because of the wide variety of activities involved and the large number of people affected, there is no practical way to negotiate private solutions. In such cases, Mr. Coase suggested, government regulators should try to mimic solutions that people would have adopted on their own if negotiations had been practical.

Climate scientists agree that the cheapest way to combat global warming is to curb carbon dioxide emissions. And economists agree that the cheapest way to do that is by changing emitters’ incentives, either by taxing emissions or requiring emission permits.

I chatted with Mr. Coase briefly last week, and he is still following these issues. He agreed that both taxes and tradable permits satisfy his criterion of concentrating damage abatement with those who can accomplish it at least cost. Those with inexpensive ways of reducing emissions will find it attractive to adopt them, thus avoiding carbon dioxide taxes or the need to purchase costly permits. Others will find it cheaper to pay taxes or buy permits.

Although both proposals pass muster within the Coase framework, conservatives remain almost unanimously opposed to the cap-and-trade proposal approved last year in the House and currently under discussion in the Senate. Much of this opposition is rooted in a passionate distaste for “social engineering,” which, according to the conservative columnist Henry Lamb, “always ends in disaster.”

But social engineering is just another term for collective action to change individual incentives. And unconditional rejection of such action is flatly inconsistent with the Coase framework that conservatives have justifiably celebrated.

According to Conservapedia.com, an online encyclopedia with a conservative orientation, Mr. Coase’s “extraordinary insight was that the free market always reaches the most efficient level of productive activity, in the absence of transaction costs.” Maybe, but as Mr. Coase himself also recognized, transaction costs are often prohibitive, and in such cases all bets regarding free-market efficiency are off. When negotiation is impractical, collective action can often improve matters.

In the case of global warming, markets fail because we don’t take into account the costs that our carbon dioxide emissions impose on others. The least intrusive way to have us weigh those costs is by taxing emissions, or by requiring tradable emissions permits. Either step would move us closer to the conservative/libertarian gold standard — namely, the outcome we’d see if there were perfect information and no obstacles to free exchange.

The Conservapedia.com entry on Mr. Coase continues, “To this day, liberals fail to give him the recognition he earned.” A fair point, perhaps. But while Mr. Coase has often been skeptical of government intervention, he is no ideologue. Conservatives, too, have sold him short.

Robert H. Frank is an economics professor at the Johnson Graduate School of Management at Cornell University.

Businessweek: Finding a Better Lifeline for Homeowners

John Gittleson and Prashant Gophal have an article Businessweek on how some banks are coming around to the idea of reducing the principal on distressed mortgages, instead of just offering the homeowners temporary solutions like cutting interest rates:


Despite encouragement from policymakers, many banks have moved slowly to aid distressed homeowners. When they do modify mortgages, the fixes—such as interest-rate cuts—often are temporary and only put off the day of reckoning.

With another wave of foreclosures looming as payments on risky loans rise and unemployment remains high, it looks as if banks may be forced to resort to a remedy they've been trying to avoid: principal reductions. Banks don't like principal reductions for obvious reasons. But many economists, policymakers, and homeowners see it another way. While interest-rate reductions or extending loan terms do reduce homeowners' monthly payments, they don't give much comfort to borrowers who owe more on their homes than their properties are worth. Borrowers who don't have a stake in their homes are more likely to hand over the keys when they run into trouble. "The evidence is irrefutable," Laurie Goodman, senior managing director of Amherst Securities Group in New York, testified before the U.S. House Financial Services Committee on Dec. 8. "Negative equity is the most important predictor of default."

The 25% plunge in residential real estate prices from their 2006 peak has left homeowners underwater by $745 billion, according to research firm First American CoreLogic—a number that tops the government's $700 billion bailout for banks. That's why Federal Deposit Insurance Corp. Chairman Sheila Bair is considering incentives for lenders to cut the principal on as much as $45 billion of mortgages acquired from seized banks. "We're looking now at whether we should provide some further loss-sharing for principal writedowns," says Bair.

The foreclosure crisis is likely to deepen this year in part because payments on many adjustable-rate mortgages are set to balloon. Unless there's a sharp recovery in property values or a change in lenders' willingness to cut principal, at least 7 million borrowers currently behind on their payments will lose their homes, estimates Goodman.
RIGHT-SIZING MORTGAGES

Some lenders may be coming around, grudgingly, to the idea of principal reduction. "If you can right-size the mortgage and return to an equity situation, the incentive is to stay," says Micah Green, an attorney at Patton Boggs in Washington, D.C., and a lobbyist for a coalition of mortgage bond investors. Banks can either forgive principal outright or defer it. In deferrals the borrower must pay back the full amount on the original mortgage when he sells the property; if the ultimate sales price doesn't cover the principal, the homeowner has to pay the difference, making it a less effective tool.

A principal deferral helped Marcus Beckett stave off foreclosure. The 42-year-old small-business owner couldn't afford his $2,413 monthly mortgage bill after his income dropped and his son, Riley, was born. In October, OneWest Bank agreed to defer $66,000 of the $423,000 debt on his two-bedroom condominium, which he'll have to pay back if he sells his Aliso Viejo (Calif.) home. The monthly tab on the house he bought in 2006 is now $1,314. "It's like I got a second chance on life," Beckett says. "I feel, mentally, I'm able to keep making payments."

While principal reductions remain rare, banks are doing them more often. In the third quarter of 2009, some 21,000 home loans—3% of the total modified mortgages—included a principal reduction or deferral, according to Mortgage Metrics, a government publication. That's up from 6,245 in the first quarter of 2009, the first time the U.S. reported the data.

Banks that negotiate principal reductions have seen positive results. Last year, Wells Fargo (WFC) cut $2 billion of principal on delinquent loans. After the modifications, the six-month re-default rate on those loans was roughly 15% to 20%. That's less than half the industry average. "We are very comfortable with what we've been doing," says Franklin Codel, chief financial officer of the bank's home-lending unit. "

We offer a principal reduction if that makes sense for that individual borrower's situation."

Many banks don't want word to get around that they reduce principal. They fear that homeowners who can afford their payments will demand better deals. John Lashley, a 44-year-old salesman in Huntersville, N.C., is making his payments. But he is thinking about walking away from his four-bedroom home unless his lender, Sun Trust Mortgage, agrees to cut the principal on his $345,000 loan. The house next door recently sold for $260,000, and Lashley doesn't see the point of pouring money into his house when he may never recoup the investment he made in 2007. "Why should I stay in my house?" he says. "It's not a moral decision. It's a financial decision."

The conflicting interests of mortgage lenders and home-equity lenders is a big roadblock to doing principal reductions. Banks, credit unions, and thrifts held $951.6 billion in home-equity loans as of Sept. 30, according to Federal Reserve data. Mortgage lenders don't want to cut principal unless the home-equity lenders agree to take a hit. Typically, though, the home-equity lenders are reluctant; much of the value of their loans would be wiped out. That could drive more banks into insolvency, says Joshua Rosner, an analyst at investment research firm Graham Fisher in New York.

The threat of lawsuits is also hampering principal reductions. In December 2008 money manager Greenwich Financial Services sued lender Countrywide Financial in New York State Supreme Court. Greenwich, which owns mortgage-backed securities, demanded 100 cents on the dollar for some Countrywide investments. The securities included loans on which Countrywide had agreed to cut $8.4 billion in principal and interest to settle allegations of predatory lending. Greenwich Financial's case is pending. Bank of America (BAC), which bought Countrywide in 2008, says: "We are confident any attempt to stop this program will be legally unsupportable." Greenwich says it's willing to accept loan changes that benefit borrowers.

So far the feds haven't put pressure on banks to forgive debt. President Barack Obama's $75 billion program to spur banks to alter loan terms doesn't require them to do so. But the FDIC and other regulators are looking at measures to promote the writedowns. Mark Zandi, chief economist for Moody's Economy.com (MCO) (who has testified before Congress on housing issues), proposes that banks receive a federal match of $1 for every $2 in principal reductions they offer to homeowners who were victims of predatory lending practices. "You're not going to wipe out all the borrowers' negative equity," he says. "This just gives them enough hope to get them committed again."

With Jody Shenn

NY Times: Walk away from your mortgage!

Roger Lowenstein writes for the NY Times about people choosing to voluntarily default on their mortgages when the value of their homes has dropped well below their purchase price. Many people find that they can rent a similar home for much cheaper. Christianity teaches fidelity in contracts - on both sides. However, Lowenstein argues that Wall Street firms are playing the voluntary default game and that they've also been unwilling to lower the loan principal for truly distressed borrowers - perhaps they are getting what they deserve.


John Courson, president and C.E.O. of the Mortgage Bankers Association, recently told The Wall Street Journal that homeowners who default on their mortgages should think about the “message” they will send to “their family and their kids and their friends.” Courson was implying that homeowners — record numbers of whom continue to default — have a responsibility to make good. He wasn’t referring to the people who have no choice, who can’t afford their payments. He was speaking about the rising number of folks who are voluntarily choosing not to pay.

Such voluntary defaults are a new phenomenon. Time was, Americans would do anything to pay their mortgage — forgo a new car or a vacation, even put a younger family member to work. But the housing collapse left 10.7 million families owing more than their homes are worth. So some of them are making a calculated decision to hang onto their money and let their homes go. Is this irresponsible?

Businesses — in particular Wall Street banks — make such calculations routinely. Morgan Stanley recently decided to stop making payments on five San Francisco office buildings. A Morgan Stanley fund purchased the buildings at the height of the boom, and their value has plunged. Nobody has said Morgan Stanley is immoral — perhaps because no one assumed it was moral to begin with. But the average American, as if sprung from some Franklinesque mythology, is supposed to honor his debts, or so says the mortgage industry as well as government officials. Former Treasury Secretary Henry M. Paulson Jr. declared that “any homeowner who can afford his mortgage payment but chooses to walk away from an underwater property is simply a speculator — and one who is not honoring his obligation.” (Paulson presumably was not so censorious of speculation during his 32-year career at Goldman Sachs.)

The moral suasion has continued under President Obama, who has urged that homeowners follow the “responsible” course. Indeed, HUD-approved housing counselors are supposed to counsel people against foreclosure. In many cases, this means counseling people to throw away money. Brent White, a University of Arizona law professor, notes that a family who bought a three-bedroom home in Salinas, Calif., at the market top in 2006, with no down payment (then a common-enough occurrence), could theoretically have to wait 60 years to recover their equity. On the other hand, if they walked, they could rent a similar house for a pittance of their monthly mortgage.

There are two reasons why so-called strategic defaults have been considered antisocial and perhaps amoral. One is that foreclosures depress the neighborhood and drive down prices. But in a market society, since when are people responsible for the economic effects of their actions? Every oil speculator helps to drive up gasoline prices. Every hedge fund that speculated against a bank by purchasing credit-default swaps on its bonds signaled skepticism about the bank’s creditworthiness and helped to make it more costly for the bank to borrow, and thus to issue loans. We are all economic pinballs, insensibly colliding for better or worse.

The other reason is that default (supposedly) debases the character of the borrower. Once, perhaps, when bankers held onto mortgages for 30 years, they occupied a moral high ground. These days, lenders typically unload mortgages within days (or minutes). And not just in mortgage finance, but in virtually every realm of our transaction-obsessed society, the message is that enduring relationships count for less than the value put on assets for sale.

Think of private-equity firms that close a factory — essentially deciding that the company is worth more dead than alive. Or the New York Yankees and their World Series M.V.P. Hideki Matsui, who parted company as soon as the cheering stopped. Or money-losing hedge-fund managers: rather than try to earn back their investors’ lost capital, they start new funds so they can rake in fresh incentives. Sam Zell, a billionaire, let the Tribune Company, which he had previously acquired, file for bankruptcy. Indeed, the owners of any company that defaults on bonds and chooses to let the company fail rather than invest more capital in it are practicing “strategic default.” Banks signal their complicity with this ethos when they send new credit cards to people who failed to stay current on old ones.

Mortgage holders do sign a promissory note, which is a promise to pay. But the contract explicitly details the penalty for nonpayment — surrender of the property. The borrower isn’t escaping the consequences; he is suffering them.

In some states, lenders also have recourse to the borrowers’ unmortgaged assets, like their car and savings accounts. A study by the Federal Reserve Bank of Richmond found that defaults are lower in such states, apparently because lenders threaten the borrowers with judgments against their assets. But actual lawsuits are rare.

And given that nearly a quarter of mortgages are underwater, and that 10 percent of mortgages are delinquent, White, of the University of Arizona, is surprised that more people haven’t walked. He thinks the desire to avoid shame is a factor, as are overblown fears of harm to credit ratings. Probably, homeowners also labor under a delusion that their homes will quickly return to value. White has argued that the government should stop perpetuating default “scare stories” and, indeed, should encourage borrowers to default when it’s in their economic interest. This would correct a prevailing imbalance: homeowners operate under a “powerful moral constraint” while lenders are busily trying to maximize profits. More important, it might get the system unstuck. If lenders feared an avalanche of strategic defaults, they would have an incentive to renegotiate loan terms. In theory, this could produce a wave of loan modifications — the very goal the Treasury has been pursuing to end the crisis.

No one says defaulting on a contract is pretty or that, in a perfectly functioning society, defaults would be the rule. But to put the onus for restraint on ordinary homeowners seems rather strange. If the Mortgage Bankers Association is against defaults, its members, presumably the experts in such matters, might take better care not to lend people more than their homes are worth.

Roger Lowenstein, an outside director of the Sequoia Fund, is a contributing writer for the magazine. His book “The End of Wall Street” is coming out in April.

This article has been revised to reflect the following correction:

Correction: January 10, 2010
An essay on Page 15 this weekend about underwater mortgages misstates the parties who believe their homes will go up in value quickly. It is the homeowners — not the “mortgagees,” who issue mortgages.

NY Times: Guantanamo Reunion, by way of BBC

Brian Stelter writes about reconciliation.

New to Facebook, Brandon Neely was searching the site for acquaintances in 2008 when he typed in the names of some of the detainees he had guarded during his tenure as a prison guard at Guantánamo Bay, Cuba.

Mr. Neely, an Army veteran who spent six months at the prison in 2002, sent messages to one of the freed men, Shafiq Rasul, and was astonished when Mr. Rasul replied. Their exchanges sparked a face-to-face meeting, arranged by the BBC, which will be shown on Tuesday. Mr. Neely, who has served as the president of the Houston chapter of Iraq Veterans Against the War, says his time at Guantánamo now haunts him, and has granted confessional-style interviews about the abuses he says he witnessed there. In a message to Mr. Rasul, Mr. Neely apologized for his role in the imprisonment.

Gavin Lee, a BBC correspondent, learned about the Facebook messages from Mr. Rasul, who lives in Britain, and thought the situation was incredible. Mr. Lee tracked down Mr. Neely — on Facebook, naturally — and asked, “would you consider meeting face to face?”

“He thought about it and he said, ‘I would love to,’ ” Mr. Lee recalled last week. “I would love to apologize in person.”

It took months to find a time, however, and Mr. Rasul was uncertain. He told the BBC that some members of his family had said to him, “Why do you want to meet someone like that for? The way he treated you, you stay away from him.”

The BBC paid for Mr. Neely’s flight to London last month, where a camera crew filmed him meeting Mr. Rasul and a second former detainee, Ruhal Ahmed, on a Saturday afternoon. (Both men have pursued legal action against former Defense Secretary Donald H. Rumsfeld.)

The cameras were there for a second conversation the morning before Mr. Neely’s flight home to Houston. “To see it happen was extraordinary,” Mr. Lee said.

In a segment that will be telecast on Tuesday’s “BBC World News America,” Mr. Ahmed is shown saying to Mr. Neely, “You look different without your cap.”

“You look different in jumpsuits,” Mr. Neely responds. BRIAN STELTER

Antiwar.com: In Defense of Avatar - Do savages have rights?

Not that I've watched the movie, but some conservatives seem to have condemned the movie based on its perceived bias towards socialism. David Henderson, a libertarian, argues that in fact the movie upholds property rights - in this case the property rights of the fictitious alien race being invaded. Henderson doesn't use this term, but some would classify this case of property rights as Indigenous people's rights.


Some writers who are generally my allies in favor of capitalism and free markets have been critical of the movie Avatar. Reihan Salam, for example, on Forbes.com, writes, "In a sense, capitalism is the villain of Avatar." Edward Hudgins, a fan of Ayn Rand, as am I, writes that Avatar is "loaded with tired, mind-numbing leftist clichés."

But I don’t think Avatar is an attack on capitalism. One could leave the movie and have no idea, based on just the movie, about James Cameron’s view of capitalism. And while it did have some clichés (most movies do), I didn’t find it loaded. So what is Avatar? In fact, Avatar is a powerful antiwar movie – and a defense of property rights. For that reason, I found it easy to identify with those whose way of life was being destroyed by military might. (Warning: slight spoilers ahead.)


Consider one of Salam’s main arguments against Avatar. He points out, correctly, that the tremendous economic growth that relatively free markets have led to in the last two centuries is responsible for the fact that humans have grown taller, stronger, and healthier. The Na’vi, by contrast, even without clearly visible means of support, "do seem pretty tall, strong, healthy, and well-fed." Point taken. But do we really look for realism in a movie that’s about people on a fictitious planet? I found many things implausible about the movie – start with the fact that people who are obviously American go to another planet and find people who speak English better than most Americans do. Surely, then, the size of the humanoids’ bodies is one of the least important implausibilities.

Ed Hudgins criticizes the movie on the grounds that Pandora, the alien planet, is a "Garden of Eden or lost paradise inhabited by noble savages." This myth, he writes, "has done no end of harm to humanity." I agree with him, both about how Pandora is portrayed and about how much harm the myth of the noble savage has done.

But here’s the crucial question, a question that neither Salam nor Hudgins addresses: Do savages, noble or otherwise, have rights?

If given a choice between high-tech, with all its creature comforts, and the jungle life of Tarzan, I, like Salam and Hudgins, will take high-tech every time. But that’s not what the movie’s about. It’s about people from a high-tech civilization using technology to make war on people from a more primitive society so that they can steal their stuff. That’s a very different choice. I would choose not to kill them and take their property. What would Salam or Hudgins choose? They don’t make their answers clear, although they show zero sympathy for the victims of the attack.

In fact, the defense of property rights in Avatar is so clear that, at one point in the movie, when the bad guys are justifying their war on the grounds that they need "Unobtainium," I turned to a libertarian friend and said, "This is the Kelo decision." Recall that the Supreme Court, in Kelo v. City of New London, decided that it was all right to take Suzette Kelo’s property from its low-tech use as a house so that a major corporation could use it for a "grander" project.

Which brings me back to whether this movie was an attack on capitalism. I think not. To the extent that it makes any statement about capitalism, Avatar is a defense of capitalism. Capitalism is based on property rights and voluntary exchange. The Na’vi had property rights in the crucial tree and various other properties surrounding it. Did they own it as individuals or as community tribal property? We can’t be sure, but probably the latter. They had refused to sell the property to the outsiders. There was nothing the outsiders could give them that would make it worth their while. What should we, if we are good capitalists, conclude? That, just as in the Kelo case, the people currently sitting on the land value it more than the outsiders. The land is already in its highest-valued use. Hudgins and Salam could argue that that’s implausible. Surely there would be some finite price that the Na’vi would take in return for the Unobtainium. Maybe, maybe not. But once the Na’vi have made it clear that they’re unwilling to exchange it, that should be the end of things, shouldn’t it?

And here’s the irony: no one understands that better than Ed Hudgins. Here are his eloquent words following the disastrous Kelo decision:

"This [taking property forcibly from some to give to others] is the philosophy that informs the paternalist political elites of New London and elsewhere. They see themselves as a new ruling elite who manifest the will of the people. ‘L’état, c’est moi!’ These planners either put the good of an abstract collective – the city – ahead of the rights of the individuals who make it up, or they abrogate the rights of some individuals in order to give the undeserved and the unearned to another group of individuals in the name of survival and ‘economic development.’"

Now, Hudgins could argue that the analogy with the Kelo decision doesn’t make sense because this is tribal property, not individual property. OK. So imagine that some civilization more technologically advanced than ours discovers that there’s a rare mineral below the hills and mountains of Yosemite, which, in a sense, is tribal property. Our government has refused to sell. To get at the mineral, this other "civilization" must blast and bulldoze Yosemite down to nothing. If that more advanced group comes in and uses violence to grab Yosemite, would Hudgins say that was fine? I think not.

And here’s the other irony. Hudgins already understands all this. Hudgins argues, quite credibly, that in Avatar, the private company Resources Development Administration is a stand-in for Halliburton and the private army represents Blackwater, and so what we have is "the evil military-industrial complex." In other words, Hudgins recognizes that there are entities in the real world that are much like the bad guys in Avatar. The crucial question for him is: Whose side are you on?

Hudgins argues that James Cameron is claiming, "That’s capitalism for you." As noted earlier, it’s not clear that Cameron is so arguing. But if that’s what Cameron believes, shouldn’t Hudgins’s response be, "No, that’s corporatism for you." In another excellent piece on Kelo, aptly titled "One Giant Leap Toward Fascist America," Hudgins writes:

"The U.S. Supreme Court is allowing a local government to kick out of the house in which she was born 87-year-old Wilhelmina Dery and her husband, who has lived there with her for 60 years. Why? Because the government wants to seize their property, bulldoze theirs and many other houses, and to sell the land to other businesses and developers for private uses. While one must take great care in choosing words in political discussions, one must not mince them either. This decision in the Kelo vs. New London case is another giant step towards classical corporatism or fascism in America."

He’s right. Hudgins tugs our heart strings by noting that Wilhelmina Dery had lived in her house for 87 years. That’s kind of like the Na’vi getting attached to a tree, don’t you think? It’s entirely appropriate for Hudgins to appeal to our sympathy, just as it’s entirely appropriate for James Cameron to do the same. Read through everything Hudgins has written on Kelo and you won’t find a wisp of discussion about how low-tech or high-tech, savage or civilized, Mrs. Dery is. And that’s because it doesn’t matter. People in high-tech societies have rights. So do savages. It would be nice if Hudgins showed even one tenth of the concern for the "savages" over whom the "non-savages" of the U.S. military and CIA roll as he shows for an old woman who lives (or used to live) in a house.

One other thing that makes me doubt that Avatar is an attack on capitalism is the music that’s played when the high-tech army advances on Pandora. It sounds as if it’s straight from the Soviet Union’s now-defunct Red Army.

Avatar is an eloquent defense of the right of people in other civilizations to live as they please. As I mentioned, Hudgins is a fan of Ayn Rand and, in fact, makes his living advocating her ideas. So I’ll put it in terms that Ayn Rand used. On the issue of Avatar, Hudgins is "concrete-bound." He fails to see the basic principle: people’s right to live their lives in peace.