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Rand Paul is a doctor. Surely he understands the difference between the symptoms of a disease and the cause. Surely he knows that the only way to cure a disease is to treat the cause and not simply address the symptoms.

In a speech before the Kentucky Farm Bureau on July 22, 2010, Dr. Paul said that the budget deficit is the most important issue facing the nation. Specifically he said that the deficit was his “number one concern.”

Hopefully the fact that the deficit is Dr. Paul’s number one concern means he will address the cause of the problem and not just the symptom. But if you look at his stated positions, (see his web site: www.randpaul2010.com) he is focused almost entirely on reducing the deficit, and doesn’t even seem to grasp that it is part of a larger problem.

Make no mistake, the deficit is a symptom of a larger disease. The current national budget deficit is a product of the changing economy, it is not the cause of the changing economy. The deficit is the symptom, the disease is the changing world and national economy. The world economy has been changing dramatically for the last 20 to 30 years, and the pace of change just keeps getting faster. Computers have dramatically altered the marketplace in many ways, including my eliminating entire career fields. Secretaries, draftsmen, and bookkeepers are largely a thing of the past. When I first started practicing law about 15 years ago, most law firms, even sole practitioners, had at least one secretary for each lawyer. Today most solos don’t have a secretary, and the ratio of lawyer to legal secretary at big firms is one secretary for every three lawyers. Computers and word processing software have made legal secretaries obsolete. Automation has similarly changed manufacturing. Robots and computers have replaced workers in factories. Because of automation, most companies produce more manufactured goods with fewer employees, and make more money doing it. This is good for a company’s bottom line (and good for their investors) but it is bad for employees and bad for national employment. Foreign competition is also cutting into domestic manufacturing, and in many cases preventing domestic companies from raising prices or wages. All of this has led to a general economic slowdown. The overall economy was slower in the first decade of this century than at any time since the end of the Second World War. And the last ten years have seen almost no job growth.

The national economy has slowed and this means that government revenue has slowed. But unfortunately the size and scope of government has not slowed. If you chart the growth of the economy since the sixties and the growth of government during the same period you will notice that the two roughly parallel each other. But the line for the economy essentially flat-lined during the Bush Administration, but unfortunately the line for the government continued up on about the same slope as in previous years. And the difference between these two curves is partly responsible for the budget deficit. During the flush economic times we – government and business – made commitments that made sense at the time (health care benefits, retirement benefits) but that are no longer economically feasible.

Solving the budget deficit is definitely important, but it won’t bring back jobs lost to computerization and automation. Lawyers are not going to start rehiring legal secretaries and factories are not going replace robots with laborers if the federal budget is balanced. The Chinese economy is not going to stop growing if the Congress passes a balanced budget amendment. Certainly fiscal restraint will mean that more money can go into the private sector than the public sector, but that alone will not solve the larger systemic changes to the economy.

If Rand Paul’s prescription for the ailing economy is nothing more than ending the deficit, he is treating the symptom and ignoring the disease.  

The Rockefeller Institute recently published a study showing that the economic anxiety index is at an all time high.

The full report can be found at:

http://nw-assets.s3.amazonaws.com/pdf/ESI_report_embargoed_until_7-22_low-res.pdf

According to the report, the American people are significantly more anxious about their economic situation today than at any time since the study began in the early 1980’s. But according to the trends shown in the report, it is not just a spike caused by the current economic recession. The trend line has been up since the mid 1980’s (when the survey first began.)

There are many reasons for this increased anxiety but a major factor is the increase in job instability. Fewer people are working at large corporations and no longer have the expectation of career-long employment, which was common up through the 1970’s. Large companies are increasingly being replaced by small business and sole entrepreneurs. Being your own boss is great, you are free to succeed and fail based on your own efforts. But there is no safety net for poor performance. The same holds true if you are an employee at a small business. One bad month can mean the difference between employment and unemployment.

The demise of large, hidebound companies and the rise of more flexible small businesses means a more flexible economy, but this creates a need for more flexible employees. The cost of this flexibility is less security. Good for business, bad for employees sense of stability. And guess what? Employees are citizens. So economic flexibility can lead to a sense of employment insecurity, and a general sense of unease among the public.

This corresponds to the bigger problem: economic uncertainty leads to political instability. Politics have become more unsettled in the last twenty or thirty years as the economy has become more unstable. The public is increasingly worried about the economy, and not just about the problems caused by the current recession. They want stability, they want security, and most of all they want politicians that can bring this about. And increasingly the public is willing to try anything, to grasp for any solution, simple or silly.

Obama was elected, in large part because of the public’s dismay at the way the Bush Administration and the majority Congressional Republicans seemed to screw up the economy. And now that things are not getting better, the public is ready to throw out Obama and the Democrats. That is certainly understandable. The so called experts and supposed smart people who ran the economy (and the government) for the last ten or fifteen years sure haven’t done a great job, so why not try someone unproven? Why not Sarah Palin or some other new and untested leader? Given recent events, and the lousy job done by the old hands, how could inexperience be any worse?

But what if neither the Democrats nor the Republicans have a solution to the current problems? What if the national and world economy has changed so fundamentally that the old solutions are obsolete?

The Bush era tax cuts and de facto deregulation (which follow standard conservative theory) only made matters worse. And the Keynesian policies of the Obama administration haven’t improved things.

I suspect that this political instability will not go away until this high level of economic instability also goes away, or at least is significantly reduced. And neither party seems to know how to do that, so I think for the time being we are in for some interesting politics.   

I will assume that you know the story of Shirley Sherrod the USDA worker who was recently fired for allegedly making racists comments only to be rehired when it was revealed that her comments were part of a longer speech about overcoming racial prejudices. If not you can read the latest version of the story here:   http://www.nytimes.com/2010/07/22/us/politics/22sherrod.html?_r=1&hpw

I am not going to comment on the story itself, but rather discuss that the story tells us about how some conservatives (and in particular Andrew Breitbart) view the human nature and the American public. The Sherrod saga began when Breitbart posted on his web site a short snipped of a speech that Ms. Sherrod gave to a state NAACP gathering in Georgia. (Ms. Sherrod was an official with the US Department of Agriculture based in Georgia.) He then notified all of the usual right wing media outlets about the snippet, and implied that it proved that Ms. Sherrod was a racist, and by implication the NAACP condoned racism. Within a day the snippet was all over the news, starting of course with FoxNews, and within another day Ms. Sherrod was fired by the USDA. Then, within another day, the full tape came out, and it showed that Ms. Sherrod was really talking about overcoming racism.

This incident should bring into crisp focus what some conservatives think about human nature and the American people.

First they think we are idiots. They think that they can release heavily edited tapes and sway public opinion because we are all a bunch of shallow nitwits. And apparently they are right. Breitbart did it earlier this year with the selectively edited ACORN tapes which purportedly showed staffers from the community activist group ACORN advising a purported pimp about how to establish a prostitution ring. Subsequent state investigations showed that these tapes had been heavily edited to show things that had not actually happened. The problem with the ACORN situation is that the facts did not come out until months after the incident. Fortunately this time the facts came to light close enough to the incident. But the fact that Breitbart is perfectly willing to manipulate information proves that he thinks that the American public can be manipulated with phony information. This indicates that he thinks we are idiots.

Second they think that people are one dimensional. In the snippet first posted, Ms. Sherrod does say that she was reluctant to help a white farmer. But the entire speech was about how she learned to overcome her own prejudices. The speech shows the breadth and depth and complexity of human nature. It shows how people deal with situations based on preconceived notions, but also about how people can learn and change. But many conservatives do not see that. They think that people are simple and one dimensional. They think that a single racist statement proves that a person is a racist. It is a strange and constrained view of human nature, and one that is disproved by history and disproved by people daily. One good example of the lack of correlation between nasty words and actual beliefs comes from President Lyndon Johnson. He had a foul mouth, and frequently made racists comments. But he forced a number of civil rights laws through Congress, which changed this nation and put it on a path to be a fairer more tolerant country.

In any event, people are clearly not one dimensional. They can and do overcome past prejudices. They learn and grow and improve.

But Mr. Breitbart and his fellow travelers apparently don’t believe that because they think we (me and you, but perhaps me most of all) are idiots.   

 

President Obama signed the sweeping financial reform bill on Wednesday, July 21. One of the criticisms by Republicans and other opponents of the bill is its complexity. The bill itself is over 2000 pages long. This was a major complaint about the Health Care reform bill that Obama signed earlier this year.

It is certainly troubling that bills are so long that our elected representatives are not able to read them completely, and certainly not able to understand them fully. In many cases these complex laws are written by staffers in consultation with lobbyists. TIME Magazine recently had an article about how Lobbyists were helping draft the Financial Reform Bill. It was enlightening if not a bit scary. It is available here: http://www.time.com/time/politics/article/0,8599,2000880,00.html   

Many critics say that things were better back when Congress passed simple laws. Critics noted that the law establishing social security was only a few pages long. But is it really better to pass short and simple laws? The problem is that short and simple is not the same as clear. Short and simple often means broad and vague, and this leaves the law open to a variety of interpretations.

When Congress passes a broad law the matter moves to legislative agencies to create the rules necessary to administer the law. And this means that a second set of laws (make no mistake, Federal Rules are laws) are drafted by unelected government bureaucrats. Is that what we want? That is inherently undemocratic. (It should be noted that there is a detailed administrative rule making process that is supposedly designed to ensure public input on these rules, but the reality is that only interested parties (read lobbyists) get involved at this level.) So a broad law leads to undemocratic rule making by vested interests. Is this better than a detailed and complex law? Maybe it is, and maybe it isn’t.

The second problem with broad laws is that they leave lots of room for judicial interpretation: you know, legislating from the bench. Courts are generally bound by the laws that are enacted by Congress (the exception is when the law violates the Constitution). But where the law does not address a specific issue the Courts (by the long established judicial tradition known as the common law) fill the gaps. The more gaps, the more the courts write the law. And when Courts write the law they are engaged in an undemocratic process that is known as judicial activism or legislating from the bench. So broad laws lead to judicial activism. Is that better or worse than a detailed and complex law?

It is interesting that the people who complain the loudest about the complexity of these laws are also the same people who complain the most about legislating from the bench. It think it points to their naiveté about politics, law, government and the modern world.     

Not long ago I wrote about the problem likely to occur with of increased partisanship in judicial elections. Critics will say that the current “a-political” system also has its problems, and they are right. The fact that judicial candidates cannot talk about issues makes them either a blank slate, or disingenuous, neither of which is a good thing for a judge. There are two other options for putting judges on the bench, and both have their problems. In the Federal system judges are appointed for life by the President. This keeps them above petty politics during their tenure, but it can create problems if a judge is incompetent (a Federal Judge can be impeached for “high crimes or misdemeanors” but not incompetence). Perhaps the best system is the “Missouri Plan,” where the governor appoints judges from a slate established by a panel of citizens and lawyers, and where these judges must periodically stand for retention elections. This is a pretty good system, but even it has problems. In some cases a judge can make an unpopular (though legally sound) ruling which raises the ire of activist groups who seek to remove the judge, not for good cause, but merely for ruling in a way that angers that particular group. Retention elections, in those states that apply the Missouri Plan, are generally very low key, but every once in a while they are incredibly nasty and petty and a disservice to both the judiciary and the political process. .

 The problem is that we live in an imperfect world, so there can never really be a perfect system. Not for selecting judged for courts, nor for much else. People are imperfect beings, and unfortunately when you put them in a group you don’t overcome the imperfections, rather you tend to multiply them. And the world is an immensely complex place. Adding imperfection to complexity is not a formula for creating simplicity or perfection.

But we like simplicity. It is much easier to understand simple ideas and slogans than the complexity of the real world. But simple slogans, and simple solutions, are unlikely to solve complex problems. Sometimes they will, but more often than not they won’t.

Politicians and political commentators love to say “the solution is simple.” But unfortunately nothing is really simple. They might seem simple, but on further analysis they aren’t. Driving a car might seem relatively simple and straightforward, but the reality is that driving a car is dependent upon an incredibly complex system of roads, traffic laws, and fuel distribution networks, not to mention everything that goes into putting the car onto the road in the first place, which implicates everything from the mining of steel and aluminum (for vehicle parts) and coal (for steel production and generating power to run factories) to growing the rubber for the tires and educating the engineers who design the car in the first place.  

If you scratch below the surface of just about anything you will find complexity. And this can be quite madding. So it is understandable that people turn to the idea of simplicity, but it is a false hope.  

I think this misplaced desire for perfection and flawed belief in simplicity underlie many of our current political problems.  

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.