Month: July 2010

On Tuesday, July 13, the Sixth Circuit Court of Appeals struck down most of Kentucky’s Judicial Cannons of Conduct which banned judicial candidates from claiming party affiliation and from direct fundraising. The Opinion, by Judge Jeffrey Sutton, said banning campaign fundraising and party affiliations violated the First Amendment’s guarantee of free speech. “Elections are elections, and the same First Amendment applies to all of them…”

The full opinion can be found at:  http://www.ca6.uscourts.gov/opinions.pdf/10a0199p-06.pdf

The Herald-Leader story can be found here: http://www.kentucky.com/2010/07/13/1347246/court-strikes-ban-on-judicial.html

This ruling is interesting because many judges, including former Supreme Court Justice Sandra Day O’Connor are actively trying to get politics out of judicial elections. There is no doubt that this ruling will increase the partisanship of judicial elections, and also inject partisanship into the courts in a way that has not been seen in Kentucky before.

This partisanship will have a price. If a judicial candidate says, for example, that he will be tough on crime, and then gets elected, it seems extremely likely that criminal defendants will seek to recuse that judge from the case. I suspect that this will become increasingly common. This will increase the cost of criminal trials and will also shift the workload among judges. If the defendant is unsuccessful in the recusal motion and the judge issues an unfavorable ruling, the Judge’s campaign statement will be the bases of an appeal. This also seems likely in some (but certainly not all) civil cases. Where a judge has said something as a candidate during the campaign, his or her words will be fair game to future litigants. And the cost of litigation and the cost of the court system will go up.   

That is the immediate problem with this case, but there is a deeper issue that I would like to explore. There is a tendency to think that because something is good, everything that emanates from it is also good.

The First Amendment is an important foundation of our democracy. It allows us to exchange ideas and debate issues, and allows our democracy to function. It is vital to our system of government, and therefore is good. True, but everything that emanates from the First Amendment is not automatically good. A perfect example is pornography. The Supreme Court has said that obscenity is not allowable under the First Amendment, but pornography is. Now a purist, like the litigants in this case, would argue that the First Amendment says that “Congress shall make no law … abridging the freedom of speech” and a restriction on obscenity is a restriction on speech, so therefore it must be struck down. But most reasonable people have no problem with preventing obscenity because of the harm it can do to society. A judicial political free for all, which conceptually is allowed under the First Amendment, is similarly not good for society.

The bottom line is that simply because the First Amendment (or any other right) allows something it is not necessarily good for society. There must be some attempt to weight the good and the bad, and where appropriate restrict the bad.      

Title: The Dumbest Idea in the World

Abolish the Fed? Really?

In the land of dumb ideas, some stand head and shoulders above the rest. Like abolishing the Federal Reserve.

The idea is gaining credence because it is part of Rand Paul’s campaign for US Senate in Kentucky. Rand Paul is now talking about strict oversight of the Federal Reserve, but in the past he has discussed complete abolition of the Fed. This proposal is essentially the same as his father’s proposal to abolish the Fed and return the U.S. currency to the gold standard.

The idea is born of frustration with current conditions, but the cure would be far worse than the disease.

There are two basic problems with abolishing the Fed: history and reality. The Fed was established to prevent the wild swings in the value and supply of money in the 18^th century. Without it there is no telling what would happen to the money supply. The other problem is that without the Fed the “market” would establish the value of money. But the market it no longer some pastoral vision from Adam Smith, with the exchange rate established by the farmer, the butcher and the greengrocer. Today the “market” is the international financial market, which is dominated by the central banks of major economic players and sovereign wealth funds of major economies. Abolishing the Federal Reserve would mean that the value of the American currency would be set by entities like the European Central Bank, the People’s Bank of China (which has more financial assets than any other public institution on earth)and Saudi Arabia’s sovereign wealth fund.  

Those who advocate abolishing the Federal Reserve say that the value of money would be more stable because it would be based on the gold standard. But the value of gold is not fixed; it is based on the value set by the commodities markets. People flee to gold for a sense of stability, but its value is set by supply and demand. If one nation or large fiscal entity wants to drive up the price, it could. Just look at what the Hunt brothers did to the price of silver in the 1980’s. While the United States has the world’s largest gold reserves, the Chinese and the Russians also have large gold holdings. If either decided to liquidate their gold reserves it could drive down the price of gold and essentially devalue the U.S. Dollar. And China has enough other assets (including U.S. Treasuries) that it could easily start buying gold, driving up its value and the price of the U.S. Dollar.      

I recognize the problems with the Federal Reserve, and the frustration over its opacity, but abolishing it is one of the dumbest ideas I have ever heard.

Some background data:

History of the founding of the Fed:

http://www.newyorkfed.org/aboutthefed/history_article.html

See also:

http://meganmcardle.theatlantic.com/archives/2007/12/the_good_old_days_werent_alway.php

http://meganmcardle.theatlantic.com/archives/2007/09/theres_gold_in_them_thar_stand.php

According to a news report in the Lexington Herald-Leader, demand for coal is down considerably in the United States. (“Coal rebounding—in Asia, November 4, 2009) The article was primarily about increase demand for metalurgical coal, which is used in steelmaking. The increase demand is primarily in China, which apparently has recovered from the recession and is starting to build again, and since construction requires steel, and certain types of coal are used in steel-making, the demand for that coal has increased.

Demand, however, is much lower in the United States. According to the article, electric companies, which are the main consumers of coal in this country, have stockpiles of coal that are 40% larger than last year. The reason for this is that there is less demand for electricity due to a relatively cool summer and the impact of the recession. Also cited is the low price of natural gas. As a result, “producers have now idled enough U.S. mines to trim about 100 million tons of coal – roughly 9 percent – from production this year.”   U.S. coal producers say that they don’t see much potential for a rebound in demand this year.

So, apparently, the demand for coal is set by the free market. And coal production is a product of demand. As demand goes down, production goes down as well. This is an important piece of information in the debate over coal and the mining of coal here in Kentucky. My impression from the general debate, and from the “friends of coal” was that all the problems in the coal fields are due to environmentalists. Clearly that is not the case. I don’t know the numbers (the article did not provide that level of detail), but it would be interesting to know if more coal jobs have been lost due to the free market, or due to environmental restrictions.  

In discussing the Tea Party movement, David Adams, campaign manager for Rand Paul, said that the guiding principles of the Tea Party movement are “distinctly Kentuckian: balanced budgets and getting government out of the business of picking economic winners and losers.”

If Adams and the Tea Party want to suggest as a matter of economics or of political philosophy that government should not be in the business of picking economic winners and losers they are free to do so. But it is simply wrong to suggest that this is the historical norm or historical reality. The government has been in the business of picking economic winners and losers since George Washington sided with Alexander Hamilton and chartered the First Bank of the United States.  The government picked economic winners and losers in when it granted the charter to provide steam ship service on the Hudson River to Robert Fulton rather than John Fitch, James Rumsey, or John Stevens. 

The Government picked economic winners and losers when it funded canals to open up the interior. The government program to fund canals, by the way, was one of the main programs of Henry Clay, the powerful Whig Speaker of the House from Lexington, Kentucky.

The government picked economic winners and losers when it built the Transcontinental Railroad. It picked winners and losers when it granted Edison the first contract to build electric service in New Jersey. It picked winners and losers when it bought planes for the Army and the Postal Service at the dawn of aviation. It picked winners and losers when it let the contracts to build ENIAC, the first digital computer. It picked economic winners and losers when it decided where to build the interstate highway system. It picked winners and losers when it selected IBM to build computers for the space program. These are just a sampling, but the point is that government involvement in picking economic winners and losers is pervasive through our economy and our history.

Whether this is right or wrong as a matter of political philosophy is an interesting question. Perhaps it is wrong for government to become as involved as it is. This is an issue that certainly should be discussed.

But whether it is right or wrong as a matter of economics is another matter. Perhaps government should have no role in the economy, but is has since the dawn of government. (Recall Joseph’s involvement in Egyptian agriculture, see Genesis 41:37 – 57.) Government and the economy are so intertwined that it is difficult to know where one starts and the other ends.

To suggest, as Mr. Adams does, that government should have no role in “picking economic winners and losers” is an interesting philosophical theory. But it is little more than a theory.

There is a term in political philosophy for people who suggest that government should be run based on untested theories, and it is not “conservative.” The soul of conservativism is the idea that human affairs should be governed by time tested and practical methods. Conservatives have long opposed “liberals” whom they castigate for trying to reform society based on untested social theories. But now some want to restructure society based on untested economic theories. The term for someone who wants to try to reshape society based on untested theories is not liberal or conservative, but radical. The reality is that the theory of the totally unconstrained free market is neither liberal or conservative but radical.

In an article in National Affairs, Jim Manzi, a senior fellow at the conservative Manhattan Institute says that the world’s economy has changed dramatically in the last twenty years or so, and neither American political party knows how to deal with the new economic reality. He says that basically Republicans have become free market fundamentalists, but fail to appreciate that the free market can create a variety of unfavorable conditions that have a negative impact on society. He says that Democrats, in contrast, are far too focused on maintaining social cohesion, often at the expense of a vibrant economy. It is a fascinating article that I recommend to anyone interested in understanding the changes and problems of the modern world. It is currently available on-line at: http://nationalaffairs.com/publications/detail/keeping-americas-edge

I want to address one of the issues that Manzi discusses. He notes that modern businesses need to be flexible to compete in the world economy. If a business is not flexible it will lose out to more flexible competition from other countries. Flexibility means that a company must be able to quickly shift production, merge with other companies or spin off certain production lines, close unprofitable lines of business and nimbly open others. It also needs to be able to find and hire the best people, and on the flip side, let unproductive people go. This flexibility is fundamental to competition and vital to success.

But this flexibility for business equates to lack of stability of workers. The papers are full of stories of companies cutting workers, many due to the recession, but others in order to compete with foreign competition. Downsizing and outsourcing were common throughout the last decade. Some studies indicate that the average worker today will change jobs ten times in his or her career. Companies must be flexible, and so too must be workers. But this flexibility equates to a lack of stability. Polls indicate widespread anxiety among workers as they contemplate company bankruptcies, mergers, layoffs, and outsourcing.

Workers are citizens and voters. And polls indicate widespread concern among the voting public. One recent poll I saw indicated that 60% of the respondents felt that their children would not enjoy the same quality of life and lifestyle that they did. This economic uncertainly leads to political uncertainty. I personally believe that the recent interest in new and untested politicians (including both Barack Obama and Sarah Palin) is due in no small measure to the believe that the old politicians did not do well by the economy and the public.

That is one issue, but the more fundamental issue is that what is good for business is, in this case at least, not good for politics. A modern economy needs – truly and fundamentally needs – flexibility. But that flexibility leads to social and political anxiety.

People entering the workforce in America today know and understand that they will not work for a single company their entire career. They will not work forty years of GM, or Sears, or IBM, or AT & T, and retire with a gold watch and a nice pension. They will change jobs frequently, and as a result they are largely responsible for planning and saving for their retirement. They have no sense that loyalty to a company will result in the company protecting them, not because the company is venal, but because the company is fighting for its own survival in the uncertain seas of the world economy. That is the new economic reality. It is unsettling for workers, and since workers are voters, it is creating political uncertainty as well. And that is the new political reality.