Monday, December 30, 2013

Top Six Broken Obamacare Promises

The Affordable Care Act (ACA), better known as Obamacare, is the biggest health care overhaul this country will have experienced since Medicare and Medicaid. Especially with the dismal launch of, Obamacare has rightfully come under a good amount of criticism and ridicule. To show just how much of a debacle Obamacare has been thus far, here is my compiled list of the top six broken Obamacare promises:
  1. "If you like it [your current health care plan], you can keep it. Nobody is forcing you to switch." This utterance of President Obama is so infamous that deemed it the "Lie of the Year." The federal government's midrange estimate was that more than half of employer-based insurance would be cancelled (Federal Register, June 2010, p. 34452-34453) due to the new law. Even the White House Press Secretary conceded that "only" 5 percent would probably lose insurance (which, for those doing the math, is about 15 million). We are already seeing these predictions come true. Obamacare has already caused the cancellation of five million individual plans, mine included. It is expected to affect 7-12 million Americans with individual insurance plans. HealthPocket, a healthcare consulting firm, points out that only two percent of individual health care plans qualify under ACA requirements. According to the Congressional Budget Office (CBO), seven million Americans will lose their employer-based insurance once the law goes into effect. 
  2. "In an Obama administration, we'll lower premiums by $2,500 per family." Obama promised savings that would translate into lower premiums for those who buy insurance through Obamacare. This claim applies to some, but not others. Lowering the premiums of some comes at the price of raising the premiums of others. If you had a pre-existing condition, odds are you're paying less. For a young healthy individual, they're most likely paying more. Those with employer-based insurance should also expect to pay moreHeritage Foundation found overall premium increases in most states. Even if the premiums are slightly lower "than expected," does it do much good if deductibles substantially increase
  3. "I absolutely reject that notion [that Obamacare is a tax]." Americans are not too keen about tax increases. A lack of tax increases was one of the primary promises Obama made in order for the bill to get passed. Let's start off with the fact that the Supreme Court ruled that the individual mandate in the ACA is indeed a tax. The revenue side is being handled by the Internal Revenue Service (IRS), the organization that is responsible for tax collection and tax law enforcement. Aside from the tax on the individual mandate, there is the employer "mandate" that requires employers with fifty or more employees to provide health insurance, as well as a plethora of tax hikes courtesy of Obamacare
  4. "I will not sign a plan that adds one dime to our deficits, either now or in the future." Yet another promise President Obama could not keep. A Government Accountability Office report (p. 19) shows that Obamacare increases the deficit by about $1T over the next decade. The Congressional Budget Office (CBO, Table 2) puts it at about $1.3T for the next decade, which is a higher amount than Obama promised. Obamacare provides coverage to more people. Furthermore, it covers more treatments, such as preventative care, maternity and newborn care, chronic-disease management, and many other types of treatments. With more coverage for more individuals, how can one intuitively expect costs to decrease? But let's look at numbers. Proponents like to argue that Obamacare has been responsible for lowered healthcare costs over the past few years. Aside from the fact that the law is not fully in effect, there is the issue that the single largest factor in the decrease for healthcare costs in the past five years is the Great Recession. What about moving forward? The CBO shows that health care costs as a percentage of GDP will increase. The Center for Medicare and Medicaid Services shows similar upward trends (Table 1), whether in terms of percentage of GDP, nominal dollars, per-capita spending, or inflation-adjusted dollars. 
  5. "I will sign a universal health care bill into law." Obama promised coverage for every American, but Obamacare will not deliver on this promise. According to the Congressional Budget Office (Table 1), there will still be 31 million uninsured Americans in 2023.
  6. "That means that no matter how we reform health care, we will keep this promise to the American people: If you like your doctor, you will be able to keep your doctor, period." This promise is tenuous at best. What Obama should have said is "if you like your doctor, you can keep your doctor if you can afford to do so." Both CNN and the New York Times already realize that any of Obamacare's "cheaper costs" (See Points #2 and #4) come at the cost of a more constricted network of providers. Let's combine that with the fact that if you cannot keep your plan (See Point #1), which decreases the probability that you will be able to keep your doctor. Furthermore, let's go to what Left-leaning Ezra Klein calls the "healthcare trilemma." This trilemma exists between accessibility, comprehensiveness, and affordability. According to Klein, Obamacare provides more comprehensive and accessible health care. The problem is that comprehensiveness and accessibility come at the expense of affordability. Wasn't the premise of the Affordable Care Act that healthcare could be more affordable? What good is it to have comprehensive and accessible healthcare in which you "keep your doctor" if the deductibles are so high that you cannot afford to pay the bill? If this has taught us anything, it's that the Affordable Care Act is nothing more than a misnomer that will adversely affect the healthcare of millions of Americans.

Friday, December 27, 2013

China's Renminbi Will Not Receive Global Reserve Status for a While

Since its Open Door Policy in 1978, China has seen considerable progress made in its economic growth, development, and integration into the global economy. It has become the world's second largest economy. Even so, is the renminbi (人民币) strong enough where foreign central banks want to hold Chinese currency reserves, or does China need to improve first before acquiring this "soft power?"

For a currency to be internationalized to the point of becoming a global reserve currency, both private and public institutions would need for it to be comparably convenient to use a foreign currency in economic transactions. In the case of the renminbi, that would mean that its macroeconomic and monetary policy needs to be in order, or at least compared to other major economies. China has already attempted to internationalize its currency by creating a separate offshore renminbi market known as the CNH. According to the International Monetary Fund, Hong Kong is having marginal success with integrating the CNH into its economy. If China is to internationalize its currency, it will help bring greater global financial stability. However, if China is going to become an international currency on par with the United States dollar or the euro, China will need to focus on liberalizing its monetary policy.

One of the issues with the renminbi is that it is not completely convertible, which means that the currency can converted into liquid stores of value (e.g., commodities, foreign currencies). Due to the East Asian Financial crisis of 1997, China has yet to make capital accounts (especially securities and assets) convertible because the Chinese government believes that a "repeat of history" would cause hot money to cross the borders rapidly and cause economic decline. Even so, the Chinese government hopes to have a fully convertible currency in the upcoming quarters. Having these capital controls in place are problematic because removing capital controls is a prerequisite of internationalization. However, since China still has a fragile financial system (Bank of International Settlements, p. 8), these controls will not be removed for at least a few years.

If China is going to be an international currency, it needs to deal with its exchange rate issues. For one, it needs to take the renminbi off the managed floating exchange rate. Although it is an improvement from a fixed exchange rate, the renminbi needs to be able to be in a purely floating exchange rate to become more internationalized. There is a matter of China's currency manipulation. While it does exist, we have to remember that China is hardly the only country that manipulates its currency. Even so, it will need to continue its trend to curtailing that manipulation, and allow for the renminbi to appreciate to its market value. With the opening of capital markets, China will have a more difficult time managing the exchange rate.

Much like the Federal Reserve Bank, the People's Bank of China (中国人民银行) likes to keep its interest rates artificially low. Although there is an improvement of relaxing interest rate controls, China could relax them a bit more. China could replace its current interest rate mechanism with a more liberalized one, which will be difficult because China's use of the interest rate is an essential monetary policy tool (Shen, 2013).

Aside from monetary issues, there are other issues China would need to overcome. There is the matter of the prestige effect, which is to say that the United States dollar has seignorage in terms of being the "globally recognized currency." China would also have to run some massive trade deficits to increase its international money supply, which goes against their export-growth model. China does not have deep or wide enough financial markets because capital controls make it nigh impossible for a non-resident to acquire renminbi assets. The same goes for China's fixed income security markets.

It might not be happening as quickly as some would like, but China's markets are becoming more liberalized, which is a prerequisite for acquiring full currency internationalization. Although the renminbi is becoming more prominent in trade and has some currency-swap agreements within the region (BIS, Table 3), China will need to implement various monetary and banking policy reforms at home before the renminbi fully can become a global currency.

Wednesday, December 25, 2013

Parsha Va'eira: Our Responsibility Towards the Suffering of Others

The Pharaoh was a relentless ruler. He enslaved the entire Jewish people, and made the Jews work long, arduous hours and live in poor conditions. But why did Moses have to worry? He grew up in the Pharaoh's palace and was sheltered from the suffering of the Jewish people. Even after helping a fellow Jew from getting beaten to death (Exodus 2:11) and fleeing Egypt, Moses was under no obligation to help the Jewish people. Nevertheless, G-d directed Moses back to Egypt to help free the Jewish people. Why? What was the importance of G-d's guidance? Why couldn't G-d just let Moses live in peace?

G-d wants us to learn an important lesson here: there is more to life than the self. We do not live in a bubble, and our actions have effects on other people. The Hebrew word for responsibility is אחריות. Looking at the root of the word אחריות, which is אחר, there are two things we can learn about the root. One possibility is the origin of the word אחריות is from the word achrei (אחרי), which means "after." When we do something, there is always an "after" in the sense that our actions have consequences. After all, who is wise? He who foresees the consequences of his actions (Pirke Avot 2:14). It is important that we understand foresight and the impacts of our actions. However, it is incomplete with the other interpretation. Acher (אחר), which means "other," completes the interpretation. In Pirke Avot (6:6), there is a list of 48 ways to acquire Torah. One of those ways is to share a friend's burden. What does this have to do with this week's Torah portion?

G-d heard the outcry of the children of Israel (Exodus 6:5). According to R. Moshe Sofer, not only did G-d hear this outcry, but so did the people of Israel. In spite of the fact that the entirety of the Jewish people were enslaved (with the exception of Moses), they were not supposed to forget the plight of their fellow man.

Although the Jewish people were responsible for their fellow man, Moses had an even bigger responsibility. Moses acted as a diplomat for the Jewish people, and had to persuade the Pharaoh to "let his people go." G-d told Moses to "rise up early in the morning and stand tall before the Pharaoh (Exodus 9:13)." Moses, a humble man who was "slow in tongue" (Exodus 4:10), was supposed to stand up to the Pharaoh. This was a man who had to really step out of his comfort zone to stand up to injustice. Without a sense of responsibility for others, the Jewish people would have never been freed from the bonds of slavery.

"Every man for himself" reflects a selfish egoism that brings about moral decline.Without caring about others, we rob individuals of their essential humanity. What Moses realized is that responsibility is what removes apathy of what goes on around us. Responsibility instills a sense of humility within us. Responsibility is the very thing that helps transcend the individual from focusing on the self to making a positive difference in the lives of those who need help.

Monday, December 23, 2013

The Federal Reserve at 100: How Fed Up Should We Be?

December 23, 1913, the date would change American currency and monetary policy. The nineteenth century brought about financial panics. However, the most severe financial panic to date was the Bankers' Panic of 1907. On Monday, October 21, the Knickerbocker Trust Company experience financial difficulties, and a "run" on the bank forced the bank to close the following day. The panic spread to other banks. Customers wanted to withdraw money, but the banks restricted these requests so they did not run out of money. Although the crisis was short-lived, it scared politicians enough to figure out how to solve the problem. As a result, the Federal Reserve Act was passed by Congress on December 23, 1913, which allowed for a central banking system to be created. The Federal Reserve Bank went through the transition from a true gold standard to a weakened, post-WWI gold standard to the Bretton Woods system to a fiat monetary system. For being around for a century, the Fed has seen its fair share of economic challenges. The question is whether we should view the Fed as a force of good monetary policy or one of good intentions with bad results.

One of the mandates of the Fed's dual mandate is price stability. I am more than skeptical about the Fed's ability to quash unemployment by printing more money and buying mortgage-backed securities and Treasury debts through quantitative easing. However, even I have to question the Federal Reserve's ability to deal with price stability. For quite a few years, the Federal Reserve has kept interest rates artificially low, something I would argue that helped lead up to the Great Recession. Even during the Great Recession, the Fed kept the interest rates low to incentivize consumer spending (a.k.a. increased aggregate demand) to boost the economy. Consumer spending has never been an issue in this country. More to the point, the Fed has disincentivized savings, which messes with retirement savings; the Fed has also severed the tie between interest rates and supply and demand (i.e., consumption vs. savings). The current interest rate does nothing to reflect the supply and demand for loans and credit.

Price stability was not an issue with the enactment of the Federal Reserve Act. Why? In spite of the short-run price volatility with the gold standard, there was that long-term price stability that evened prices out, i.e., long-term inflation was essentially non-existent. That would be why the Fed initially dealt with financial stability. Now we live in an era where inflation outpaces the money supply, which is why since 1971, 2 percent inflation has become the new norm. (This norm might be extolled by some, but in fact, is bad for society). As a result, the purchasing power of the dollar has decreased dramatically (see BLS Inflation Calculator; also see here), which given the monopoly status it has on the money supply, makes sense. The erosion of purchasing power is perturbing. Although the dollar can theoretically be in good shape as long as its value does not drop drastically relative to other major world currencies, the last thing we want is to print so much money that the paper it is printed on has more value than the dollar. There have been enough times where central banks have printed so much currency that it meant economic suicide. It would be nice to avoid that here in America.

Monetary policy in this country is discretionarily determined by political appointees who essentially have no guidelines. The Fed kvetches about NGDP targeting because "the economy is too complex to be summarized by a single rule." On the plus side, they're not completely discretionary; they try to follow the Taylor Rule. Aside from that, it's quite discretionary. Although the Fed says the quantitative easing would stop with unemployment less than 6.5 percent [or higher inflation], there is no foreseeable end date in sight. This is hardly surprising. The Federal Reserve does not possess clairvoyance. Their macroeconomic models have not been able to predict economic recessions. The Fed misallocates credit and keeps interest rates artificially low. The Fed has gone well beyond being the lender of last resort. It now has the expectation of fixing all economic woes. If the Fed is under the impression that it can keep prices stable while maintaining low unemployment, it has another thing coming. To summarize my blog entries on the Fed and monetary policy, in hindsight, creating the Fed was a mistake.

However, we don't have a time machine. We cannot change history. The question remains: where do we go from here? The Federal Reserve Bank, much like any other political institution, requires change if the situation is going to ameliorate. Do we reform the Fed or should we replace it with a different banking system?

My initial reaction is "liberalize the market." One possibility is through synthetic commodity money (Selgin, 2013). There is the possibility of private digital currencies, such as Bitcoin (Dwyer, 2013). We can even do something which I suggested a few days back, which is use a commodity standard which is reflective of a given country's wealth. Another option is to trade out the Federal Reserve Bank for a system of free banking, which entails replacing the central bank with competitive firms in free markets. This would be nice because it would be next to impossible for a private bank renege on its contractual obligation and get away with it. A free banking system might sound odd at first glance, but remember that a bank is like any other business in the sense that a bank's product is money. Free banking also has quite a few precedents, including Scotland (1716-1844), Canada (1817-1914), Switzerland (19 c.), and late 19th century Australia. Congress has tried with the Federal Reserve Board Abolition Act (H.R. 1094), but has not panned out.

Even if the liberalization of banking were deemed desirable, it would still have to be done in a more gradual manner. There are some reforms that can be carried out in the interim. The Fed has a major issue with opacity. If there is going to be massive expansions of balance sheets and this much discretion, there should be transparency, which is why the idea of the Federal Reserve Transparency Act to audit the fed was a good idea. Moving the Federal Reserve under the auspices of the Treasury Department would subject the Fed to Congressional oversight and the checks and balances system. There are the ideas of changing the dual mandate to a single mandate, adopting different macroeconomic targets (e.g., real GDP, balance of payments equilibrium, exchange rate), changing the fractional reserve rate, or we can create a fiat system subject to market forces by implementing NGDP futures contracts.

Regardless of what is done, one has to reduce the size of government and its insatiable appetite to fund its various, gargantuan projects. If the government does less, that would create a restraint on money creation. If there is to be any scaling back of the Federal Reserve, the levels of government spending have to be addressed first. Only then can there be true monetary policy reform.

Sunday, December 22, 2013

Phil Robertson's Anti-Gay Remarks: Yes, He Got What He Deserved

I had to take a break from commenting on the Federal Reserve and monetary policy to weigh in on this issue. Last week, Gentlemen Quarterly published an interview with Phil Robertson, who is a TV personality on the A&E TV show Duck Dynasty. Robertson made incendiary comments, including how African-Americans were happy "pre-entitlement" and how a "lack of Jesus" brought about such things as Nazi Germany and the attack on Pearl Harbor. As offensive as those were, the comments for which Robertson received the most flack was his comments on homosexuality and gay people. These comments have resulted in A&E suspending Robertson from the show, although that suspension might be short-lived.

Conservatives would have you believe that Robertson is being punished for exercising his free speech and talking about Christian values. Ian Bayne insultingly analogized Robertson as the "Rosa Parks of our generation." If Robertson simply opined that "homosexual behavior is unambiguously prohibited in the Bible" (an opinion with which I vehemently disagree) and left it at that, he would have been fine. However, his comments about homosexuality went well beyond his interpretation of the Bible. Exhibit A. When asked the question "What in your mind is sinful," Robertson's response was the following:

Start with homosexual behavior and just morph out from there. Bestiality, sleeping around with this woman and that woman and that woman and those men. Don't be deceived. Neither the adulterers, the idolaters, the male prostitutes, the homosexual offenders, the greedy, the drunkards, the slanderers, the swindlers, they won't inherit the kingdom of G-d. Don't deceive yourself. It's not right.

The first thing that comes to Robertson's mind about what constitutes as sin is not avarice or injustice. It's the sexual acts committed by consenting, homosexual adults. And how in the world does homosexual behavior lead to bestiality?! The man's ignorance about homosexuality shows that he does not have the faintest idea of how sexuality functions. Furthermore, his statement of "they won't inherit the kingdom of G-d" also contradicts his later statement of "We never, ever judge someone on who's going to heaven, hell." But wait a second. You just said that you shouldn't judge people, but you managed to judge a whole group of people in a previous statement in the same interview. Whatever happened to "do not judge lest ye be judged (Matthew 7:1)?"

Exhibit B of just how disparaging Robertson's remarks were:

It seems like, to me, a vagina, as a man, would be more desirable than a man's anus. That's just me. I'm just thinking: There's more there! She's got more to offer. I mean, come on, dude, you know what I'm saying? But hey, sin: It's not logical, my man. It's just not logical.

Here's another example of "whatever happened to not judging people?" And how is such vulgar language about vaginas and anuses "Christian-like?" I thought the Christian Bible said such things as "let no unwholesome word proceed from your mouth (Ephesians 4:29)," "if anyone thinks himself to be religious, and yet does not bridle his tongue but deceives his own heart, this man's religion is worthless (James 1:26)," and "every careless word that people speak, they shall give an accounting for it in the day of judgment (Matthew 12:36)." Would this sort of language be acceptable in church? I doubt it. Also, regardless of whether you agree with Robertson's remarks, his remarks were hurtful towards other people, especially when it comes to ignorantly reducing homosexuality to a single sex act. Jesus taught that after "love G-d," the most important commandment is "love your neighbor as you love yourself (Mark 12:28-31)." Robertson should have had this in mind before he began the interview. No one is perfect, but if you're going to become an advocate for Christian values, you can't be chiding someone for sinning while sinning in the same breath. Such behavior is hypocritical, but should I be so surprised that conservative Christians in this country are defending his behavior rather than condemning it?

Robertson clearly made ignorant and insulting remarks. The fact that Robertson is more obsessed with the "sin of homosexuality" is reflective of how out of whack the prioritization of "Christian values" are in this country. However, was it so bad that Robertson should have been suspended in the first place?

Sarah Palin jumped in and said that Robertson's free speech was being violated. What conservatives conveniently forget is that the First and Fourteenth amendments apply to the government's infringement of free speech. As already illustrated, Robertson's comments went well beyond the opinion of "the Bible says homosexuality is a sin." Since Robertson is being suspended for specific comments that had nothing to do with religious belief, he can't even claim that A&E is violating Title VII of the Civil Rights Act.

More to the point, A&E, which is a private entity, made the decision to suspend Robertson after his interview violated the morals clause in his contract, a contract which he voluntarily signed. Robertson was not expressing his private views with his closest buddies at the bar. He was doing an interview promoting his show. The comments he made reflected poorly on A&E, and A&E thus had the right, nay, the obligation to enforce the contract.

Briefly, a word about being persecuted for his religious beliefs. Robertson is only being suspended. Anyone who is thoughtless or brainless enough to even think that "this is a sign that Christians are persecuted in this country" or there is a "war on Christianity" needs to pick up a book on the history of the Jewish people. Christians aren't being barred from celebrating Christmas or Easter. The government is not shutting down churches or forcing Christians to live in ghettos or to work in certain professions. There are no pogroms or inquisitions against Christians in this country. This is not a sign of Christian persecution. There is no inalienable right to be on A&E. This is a sign that people are becoming more accepting of homosexuals. Get over it, Religious Right!

Also, I love how conservatives clamor about how dissenting opinions are being punished in this country. However, do you think this is the first time someone has gotten punished for saying something offensive or idiotic? Alec Baldwin was just fired for homophobic slurs. What about Paula Dean, Helen Thomas, Michael Richards, Ozzie Guillen, the Dixie Chicks, and Don Imus? We now live in a society that is more accepting of the LGBT community. Saying such comments is comparable to any other racial slur. Actions have consequences. Speech is a form of action, and Robertson was most definitely exercising his freedom of speech when making his remarks. When you say something offensive, you pay for the consequences. Isn't personal responsibility a key feature of conservatism, or does that not apply to homophobic statements?

When the Chick-fil-a incident happened last year, the standard conservative response to naysayers was "this is the free market at work, deal with it." The shoe is now on the other foot. A private company is now making a decision that conservatives do not like. If conservatives are unhappy with the decision, they can either boycott A&E or petition to have Duck Dynasty aired on another channel that tolerates homophobic sentiments. Otherwise, conservatives are only showing that anti-gay bigotry is more important of a value of conservatism than free markets or personal responsibility. Much to the Religious Right's dismay, Robertson's suspension was well within the realm of free markets. Employers need to be given some freedom to run their business they way they see fit if there is to be a society built on freedom (see my take on anti-discrimination laws).

In spite of the progress that has been made with LGBT equality, Robertson's remarks are a reflection of how this country still has a long way to go in terms of shaping people's views of LGBT individuals. I hope that A&E doesn't cave into pressure and sends a message about how anti-gay statements do not belong in civil society.

Saturday, December 21, 2013

Does the Federal Reserve Need to Continue with Its Dual Mandate?

Ever since 1913, the Federal Reserve, which is the central banking system in America, has been responsible for the country's monetary policy. The Federal Reserve has evolved and expanded its role over time. Presently, the Federal Reserve's role can be summarized in its "dual mandate" of maximizing unemployment and stabilizing prices. Given the power of "lender of last resort" that the Federal Reserve has been delegated, it makes me wonder whether permitting the Federal Reserve to have two mandates is too burdensome.

The dual mandate originated when the Phillips curve was popular. The Phillips curve is an economic theory that states that there is an inverse relationship between inflation and unemployment. The higher the increases in real wages, the lower the unemployment, and vice versa. This does not seem to make intuitive sense because if a group of people went to ask their employer for double the wage, many would be out of a job. Even so, the Phillips curve had some decent empirical backing, at least until the stagflation of the 1970s. Ever since, the correlation has been questionable, to say the least (see Figure below from the Richmond Federal Reserve). I would theorize that monetary policy had something to do with the breakdown of the Phillips curve in the long-run because prior to the severance of the connection between gold and currency, prices were pretty stable. Regardless, Janet Yellen, the impending Chairwoman of the Federal Reserve, still believes in this relationship and that it should dictate policy.

Let's assume this correlation does not exist and that the non-existent correlation does not provide a carte blanche to fine-tune deficits and government spending where we can maximize employment without high levels of unemployment. Let's also assume that the Fed should drop one of its mandates. Which mandate should it drop?

There is next to no evidence that the Fed can affect the unemployment rate. If there were a link between unemployment and monetary policy, the link would not show up immediately because the effects of monetary policy are long-term. Also, there are multiple factors that determine the unemployment rate, including taxation, regulation, and fiscal policy, that make it exasperating to determine the net effects. The more probable culprit is in the labor market, which is something the Fed cannot control with monetary policy. Considering that market conditions vary from state to state, it becomes even more difficult to implement a "one size fits all" solution. Using the unemployment rate is not an absolutely sound metric, either. The unemployment rate can be dropping because more people have jobs. However, when considering the labor participation rate, it can mean that the U-3 unemployment rate dropped because more citizens left the labor market discouraged (see U-6 unemployment rate). Also, let's take a look at how well the Fed has handled its unemployment maximization mandate:

Multiple rounds of quantitative easing have not helped with unemployment reduction. The Fed seems to have better success with price stability than with employment maximization (see CPI from Bureau of Labor Statistics), although let's not confuse correlation with causation. This non-relation between monetary policy and employment would explain why Congress has attempted to amend the dual mandate (H.R. 245) by reducing it to a single mandate of price stability. Even former Fed Chairman Paul Volcker agrees with a single mandate. Doing one thing well is preferable to two half-hearted policies. However, as the Congressional Research Service (CRS) brings up in its research of the dual mandate, as long as the Federal Reserve is given discretion to dictate monetary policy, it really doesn't matter whether there is one or two mandates (p. 23). I disagree with the CRS because the Fed is using the unemployment rate as a metric for success, which is unwise since monetary policy does not really affect the employment rate. If the Fed is going to have a mandate, it should focus on metrics it can influence, which means the dual mandate should become a single mandate.

Wednesday, December 18, 2013

Should We Return to the Gold Standard or Is Paper Money as Good as Gold?

In honor of the Federal Reserve's100th anniversary on December 23rd, I am planning on dedicating the next few blog entries to the Federal Reserve and monetary policy.

A policy alternative that Republicans occasionally toy with, and one that is especially popular with those within the Austrian school of economics, is a return to the gold standard. A gold standard is a monetary system in which the economic unit of account is based on the quantity of gold. A gold standard is not about a standard of value. Under a true gold standard, the monetary unit is a specific weight of gold. Furthermore, any paper currency that does exist needs to be readily convertible into gold, and vice versa. Although some countries might have sizable gold reserves, there is not a single country that currently use the gold standard as the basis of its monetary policy. Were countries correct in changing out the gold standard for a fiat monetary system, or should there be a reestablishment of the gold standard?

In the United States, there was not a true gold standard for much of America's history, although gold did play a role in monetary policy prior to 1971. From 1792 to 1862, America was on a bimetallic standard, which was currency valued both in silver and gold. Once the Civil War broke out, the country was on fiat currency until 1879, after which the United States adopted a true gold standard. This didn't last because World War One had a deleterious effect on monetary systems, particularly that of Great Britain. By 1925, the gold bullion standard replaced the gold specie standard. The interwar gold standard would be in disarray until the end of the Second World War. After WWII, the Bretton Woods system dominated the scene. Under this post-war system, currencies were not pegged directly to the gold, but rather the US dollar. Even so, the currency would still retain its convertibility [into gold]. It was not a completely flexible monetary system, but it attempted to conserve the best aspects of gold and fiat monetary systems. The compromise system would not last. The strain of the Vietnam War pressured Nixon to close the "gold reserves window" in 1971, in which Nixon severed the last tie between gold and currency by declaring that dollars held by foreign countries could no longer be converted into gold. Ever since, the dollar became a fiat currency that has solely relied on the "full faith and credit" of the United States government. Although the history lesson might have been tedious, it is important to answering our question because we need to determine economic success before and after the implementation of a fiat system.

One of the primary complaints about a gold standard is that there is more price instability under a fiat system. There is some truth to this. An influx of supply (e.g., the California Gold Rush, 16th century Spain) or warfare (e.g., the Civil War) cause some high inflation levels. However, since the money supply can only grow at the rate at which the gold supply increases, hyperinflation is essentially impossible. That is why the inflation rate for fiat money is higher than that of commodity (Rolnick and Weber, 1997, p. 1317). Even the Bank of England (p. 7) recently found that there was higher inflation now than there was during the Gold Standard. The Bank of England also found a lower incident rate for banking and currency crises during the Gold Standard (p. 8). Historically speaking, gold prices were more stable before 1971 (see below). Although the gold standard has long-term price stability, its short-run price volatility is problematic (Bordo et al, 2003). Conversely, since the inception of central banks in the eighteenth century, there has not been a central bank that has had the pleasure of price stability for at least 30 years. That price stability also comes at the price of higher trade deficits.

An argument against the system is that the principle of "full faith and credit" means that the dollar has no backing [of commodities]. With the gold standard, at least currency was backed by gold reserves. Gold might be shiny, divisible, portable, and scarce, but the faith in gold is as much of a social construct as fiat money. The only reason why I deem this argument in favor of gold is because gold has a longer precedence than fiat money, which strengthens its reliability.

Under a gold standard, the value of the dollar would be determined by the markets. Under a fiat system, the supply of money is determined by political appointees in the Federal Open Market Committee. There is nothing to stop the Federal Reserve from printing more money, as can be seen in quantitative easing and the M1 money supply. Combined with the income tax, the government can now fund unprecedented amounts of government programming. Such expansion would not happen under a gold standard because new money could be printed only if there were a corresponding amount of gold. There is the issue of there not being enough gold, which is true with the current gold definition of the dollar. If gold were allowed to be a transactions demand instead of a speculative, then this would not be an issue.

Neither monetary system is perfect. Monetary systems were never meant to be perfect. They each have their tradeoffs. Do you want to eliminate short-term volatility for longer recessions? Do you want smaller deficits for greater autonomy for the Federal Reserve to have sovereignty when times get rough, at, which point they can attempt price stability?

Economists generally think the gold standard is a bad idea. I think the gold standard has lots of appeal. Even if we were serious about reverting back to the gold standard, we do not have the same economic conditions that allow for a gold standard to succeed. It would have been much easier to have maintained a gold standard than it is to return to a gold standard. How so? One, we are currently in a flexible exchange rate system. The transition would need to take place in a fixed exchange rate system, but virtually every major economy has a flexible exchange rate. For this to work, all major economies would need to be in agreement. Two, private citizens own gold. Three, there is no intrinsic connection between gold and standard of living. Finally, there is no link between the central bank's gold holdings and the money supply. A change to the gold standard would be more advantageous for those with larger gold reserves, as well as screw over countries that do not have as many reserves. A return to the gold standard would not be reflective of a country's wealth. Basing the currency on a basket of commodities would be more reflective, but gold, not so much.

For a gold standard to work, the transition back to a gold standard would have to be multilateral. The current macroeconomic conditions make the gold standard untenable. Like it or not, this country will not return to a true gold standard anytime soon. Perhaps there could be a return to convertibility, which would be nice because it would show that the dollar can be traded for more than just other forms of paper money. At this point, I think the best reform is to have the Fed create NGDP futures contracts. That way, monetary policy could automatically adjust the money supply while creating macroeconomic stability.

Monday, December 16, 2013

Software Patents Are Patently Absurd

Patents are a set of exclusive rights granted to an inventor over the given invention for a limited amount of time. The primary premise behind patents are to incentivize people to innovate because without that exclusivity, the inventor would not receive any "due benefit" from the invention because of the free-rider problem. Since the 1980s, the United States Supreme Court has ruled in Diamond v. Diehr (1981) and State Street Bank and Trust Co. v. Signature Financial Group (1998) that allowed software to be patentable. For over thirty years, America's legal system has recognized, to one extent or another, that software is covered under §101 of the U.S. Patent Act, as well as Article 1, Section 8, Clause 8 of the Constitution. This past Friday, the certiorari for the case of Alice Corporation Pty. Ltd. v. CLS Bank International was granted by the Supreme Court. If the defendants are successful, it very well could mean the beginning of the end of software patents in this country. Rather than look at this case through the lens of constitutional law, I would like to analyze the implications of the policy that has de facto been in place for over three decades for software. Are software patents an obstruction of innovation or do they open a new pathway to innovation? Would a decision by the Supreme Court to curtail software patents do more harm than good?

Patents in general are implemented with the intention of spurring innovation. However, reality tells a different story, particularly when it comes to software patents. Software is too abstract to be patentable because a software algorithm is "an abstract description of a general way to solve a problem," not to mention that coming up with a legal definition of "software" is not simple. If software were not considered to be too abstract (look at the Church-Turing thesis), then, as the Economist points out, "all manner of harmful monopolies would spring up based on common ideas found in everyday life, such as boiling water to make tea, that could feasibly be used to prevent others from doing the same, or at least require them to pay a license fee."

In theory, software patents are supposed to protect people's intellectual property rights, but in practice, software patents are another example of the government imposing a law that sticks it to smaller companies, particularly those that are trying to enter the market. In order to comply with a patent, a third party needs to know what they are in danger of infringing. Software can easily have thousands of lines of code. Because of the broadness of patent law (GAO, 2012), a company can cry "infringement" on the usage of a few lines of code simply because "it's an innovation." With about 40,000 software patents granted each year, which translates into millions of lines of code, i.e., millions of "ideas", how can you expect a small company to sift through all that data and not infringe on a patent?

There are not only costs of compliance, but also with the patent application itself. Time and labor are rare resources for service-based companies. Having them focus on patent law detracts them from actual innovation. Furthermore, since software development has low initial costs (e.g., a single computer, an Internet connection, relatively low level of training), software development is a low-risk industry, which is yet another reason the government does not need to intervene with its protectionism. Look at Microsoft, Apple, or Google. They managed to topple software companies significantly larger than them. By creating a perceived obligation of acquiring a patent, the government has inadvertently created a significantly larger barrier to entry.

The moment that a company infringes upon a patent is when things get ugly. Patent trolls, which are non-practicing entities (NPEs) that buy abstruse patents and pounce on any business who allegedly violates the patent, create a litigative nightmare, mainly due to the fact that patent litigation is exceptionally expensive. According to the Government Accountability Office, 46 percent of patent lawsuits have to do with software (GAO, 2012). Although NPEs win less than ten percent of their cases (Allison et al, 2010), NPEs brought forth 61 percent of software patent cases. Patent trolls have cost nearly half a trillion dollars in losses from 1990 to 2010. In 2011 alone, the cost that these trolls on society was $29B. These trolls are not necessarily looking to win the case, but pay a settlement to avoid the even more expensive cost of a trial.

Software technological development moves at a much faster pace than the patent system. According to Moore's Law, computer powering doubles about every two years. The patent process takes an average of three years, and that does not include the time it takes to enforce the patent in court. Also, patents shouldn't last for 20 years, but something like the World Trade Organization's TRIPS agreement (Article 33) gets in the way of having the market adapt to technological advancement.

Software patent reform is necessary, especially if the patent system stays intact. One option would be to make the patents indexable (Mulligan and Lee, 2012). There is the possibility of functional claiming, which is the idea that patent is only on the the method of achieving the function, not the function itself (Lemley, 2012). As mentioned above, the patent period should not be twenty years. Shortening the patent period would clear up some of the inefficiencies. Even so, when the patent application process is so long to begin with, it is difficult to implement that change. There is the possibility of being more lax on the "obviousness clause" of the Patent Act (Abramowicz and Duffy, 2012). A bit of tort reform might help here. If the patent is invalid or there is no infringement, the trolls should have to pay the legal fees. Given that they represent a disproportionate amount of the trials, fee-shifting would create a disincentive to file frivolous lawsuits.

There is the idea of an innovation defense, which is problematic because a) it is a damning indictment of software patents because it illustrates the burdensome costs, and b) with all those software patents, how is one to perform cost-benefit analyses at that pace? There is the possibility of creating Defensive Patent Licensing (DPL), which would use the Prisoner's Dilemma to solve patent infringement issues (Schultz and Urban, 2012). However, there are issues with getting people to opt in, as well as enforcement issues. One can implement a maintenance fee to reflect the true social cost of patents. I find the maintenance fee to be amusing because it deals with a negative externality that is ironically caused by the government.

If the America Invests Act has illustrated anything, it is that patent reform is excruciating.
Even the Left-leaning website Mother Jones realizes that patents have "evolved into little more than virtual armaments that big companies use to fight virtual wars with each other." It's hard for proponents of software patents to advocate on the notion of "intellectual property" when the property system is so convoluted where it becomes nigh impossible to define the property. Software patents are much less effective than other patents because information processing is about as decentralized of a process as one can have.

Removing software patents would not only not impede software growth, but would likely accelerate it because companies don't have to deal with all the costs that come with software patents. Innovation took place during the advent of the software industry at an astounding rate from the 1950s to the 1980s, and did so without software patents. Microsoft DOS, the World Wide Web, Linux, and email were all created without patents. History shows us that software innovation can take place without patents in place. As assertive as proponents are about software patents, there is no empirical evidence showing positive effects of software patents. If anything, the data show that these patents ironically either create a negative or neutral net effect (Boldrin and Levine, 2012Torrance and Tomlinson, 2009; Bessen and Meurer, 2008; Pollock, 2006; Bessen and Hunt, 2004; Jaffe, 2004).

Software patents emulate and amplify the worst aspects of patent lawNew Zealand recently did away with its software patents, and I think America should follow suitCopyright law is sufficient because it is simpler than patent law, not to mention less expansive. As long as the programmer creates his code from scratch, the odds of copyright infringement are minute. Tinkering with the software patent system will not adequately eliminate these economic barriers and transaction costs, but making software patents nonexistent would do the trick quite nicely.

Friday, December 13, 2013

Why Amtrak Is Such a Train Wreck

People have an affinity towards trains, whether it's due to nostalgia or a desire for having a more scenic way of traveling. Trains have been a part of American infrastructure for many years, and for those who advocate for a public rail system, it constitutes as "an invaluable public good." In 1970, the government stepped in and created the entity known as Amtrak, which was created as a publicly funded, for-profit company to provide intercity passenger rail service to American citizens. From its inception, Amtrak was rightfully criticized as Big Government subsidizing Big Railway. Rather than hail Amtrak as a ingenious step in transportation policy, we should be steamed that Amtrak has a lousy track record.

In spite of being a for-profit corporation that has received approximately $40B in government subsidies, Amtrak has not managed to create a profit since its inception. Take a look at Amtrak's audited financial statements from the past year: it generated a net loss of $1.2B (p. 4). Pew Research found that back in 2008, Amtrak generated a loss of $32 per passenger. I'm sure proponents would argue that Amtrak doesn't have enough money to fund and maintain the infrastructure, but when compared to other forms of intercity transport, Amtrak receives more subsidies per passenger-mile (O'Toole, 2012, p. 5).

Amtrak does not get animus simply for running a net deficit. It also produces other inefficiencies, which would make sense because it acts as a de facto monopoly. Without direct competition, Amtrak has very little incentive to improve upon its operations. For instance, Amtrak's food and beverage service has had the ongoing problem of losing approximately $80M per annum, which has totaled to nearly $1B in losses in the past decade (Office of Inspector General report here, as well as Congressional testimony). Restaurants, fast foods, and other food service entities can make a profit. It is reasonable that Amtrak should be able to create profit, as well.

According to the Department of Transportation [DoT] (Table 3-16), the average cost per passenger-mile for Amtrak is significantly higher than air or bus travel. Rather than become an inexpensive alternative to other modes of intercity travel, the government has made traveling via Amtrak a more expensive option. Not only that, the government meddling has actually caused prices to increase. This doesn't even count the rate at which Amtrak trains are late (DoT, 2012, Figure 1), something which I have personally experienced. And why can't Amtrak update its locomotives more often? An average age of 20.6 years per locomotive is not flattering.

There is also the matter of how employee salaries match up to comparable private sector jobs. A Global Insight Inc. study (p. 20) shows that although wages are 4% below the private sector, the benefits are 81% higher than the private sector, which more than makes up for the wage differential. No wonder the Amtrak quit rate is lower than the private-sector equivalent (p. 21)!  

This past fiscal year, Amtrak had a "record-breaking" ridership of 31.6 million passengers. Since 1970, there have been less total railway passenger-miles (DoT, Table 1-40). On top of that, consider that the total amount of railway passanger-miles was actually decreasing prior to 1970 (Census, series Q 307-308), which is to say that government subsidies perpetuated a form of passenger transport that was antiquated.

My issue with Amtrak is not that it is a leading driver of the federal debt. In the "grand scheme of things," Amtrak is only four one-hundredths of the federal budget. The federal government greatly subsidized Amtrak under the guise of "Big Government knows best." The end result? Rather than be an example to emulate, our rail system is a laughing stock amongst developed nations.

We need to stop this public-private partnership and create policy to start the process of privatizing our passenger railway system, much like Japan and the European Union have. New entrants should be allowed to gain access to the intercity transit market. If railway trains cannot make it in the private market, buses are more than adequate to fulfill the demand. As the growth of Coach USA or Megabus illustrates, a return to intercity buses would be prudent because intercity buses are showing to be more efficient, including lower fares, lower per-passenger costs, and decreased carbon emissions. As was so eloquently put in a Freakonomics quorum, "trains are a 19th century technology that we are attempting to apply to a 21st century problem." The federal government needs to end the coddling of the railway industry and remove regulations over the intercity bus system. Only then can our transit system get back on track.

11-22-2016: In 2016, Amtrak has done little to nothing on improving upon its efficiency, and this Cato Institute article nails it on the head. Not only are they happy that they have "the lowest operating costs ever," but passenger miles, ticket revenue, and the average length of a trip have all declined.

Sunday, December 8, 2013

Raising the Retirement Age on Social Security Is Good Policy, But It Should Still Raise Some Objections

Let's face it. Social Security is not in good shape. If reforms are not passed, Social Security disability is projected to be depleted in 2016, and the Social Security Trust Fund itself will exhaust its funds in 2033 (SSA 2013 Trustees Report). As much as I do not like the program, I still think that if the program is going to be in existence for some time, something needs to be done to improve it. I was reading an article from the Manhattan Institute entitled Four Reasonable Social Security Reforms, and the first reform that popped up on the list was raising the retirement age, which is the more formal way of saying "let's find a way to cut Social Security benefits." People can currently collect partial retirement benefits at the age of 62. For those born after 1958, the full retirement age (FRA) is 67. I have to ask myself: would raising the retirement age to something like 70 years actually help Social Security solvency woes?

The rationale behind this policy alternative, whether it is in the form of raising the early retirement age (ERA) or the FRA, is that since the Social Security retirement age increase in 1983, the average lifespan has increased from 74.6 years to 78.4 years. Without an increase in retirement age, the program is paying for longer benefit periods, which is something that the government cannot afford. The increase in retirement age would compensate for longevity by adjusting for that previous benefit period elongation, not to mention that the life expectancy is only expected to rise over time. Raising the retirement age would come with benefits. One is that it would incentivize workers to work longer and save more money before retiring (Butrica et al, 2006; Rust and Phelan, 1997; Gorry and Slavov, 2012), which I like. In "Working Longer: The Solution to the Retirement Income Challenge" (p. 57-58), it is pointed out that setting the retirement age plays a vital role in diminishing the willingness of workers to work longer. According to a McKinsey Report (2008), this policy would add $13T to the economy over 30 years due to the economic productivity of those who would stay in the workforce longer. Work is also less physically demanding than it used to be because we went from a manufacturing-based to service-based economy. The decrease in physically demanding labor makes it easier for workers to work longer (Johnson, 2007). A National Institutes of Health (NIH) report, which gathered data from 15 government agencies, shows that the health and overall quality of life for older citizens has improved over the years, which would dispel notions that older workers are pushed too hard.

One of the complaints of raising the retirement age is that it will hit poor and minority workers the hardest because they do not experience the life expectancy gains in the same way that rich and/or white workers do (Weller, 2005, Rosnick and Baker, 2012). However, the lifespan differential between races closes considerably once the life expectancy is measured at 65 (Census) [as opposed to being measured at birth], as can the differential between socioeconomic classes (CBO, 2008, p. 2). It can also be argued that older people have a harder time finding a new job due to ageism, and even if they did find work, they would not get paid as much. I would conjecture that the demographics are much different than they were in the past. In the 1970s, Baby Boomers had to be integrated into the workforce, which displaced some older workers. With the pending retirement of Baby Boomers, there will be droves of experienced workers looking to retire while there are not as many younger workers with comparable skills to replace them. This structural demand issue should mitigate worries about more elderly workers not getting paid at market value. And if the worry is still not abated, Congress can pass a Social Security payroll tax exemption for workers in their sixties so that employers would be incentivized to hire or retain more elderly workers. Furthermore, it's nice that the work is less physically demanding, but does little good if the worker has prior health problems that impede further work, which could very well qualify the worker for disability. Not only could those costs be transferred over to the Social Security Disability program, which is in even worse shape than the retirement program, but it would provide workers approaching retirement an incentive to apply for disability (CBO, 2013). On the other hand, although 18 percent of workers retire by age 65 due to health issues (Munnell, 2006, p. 8), it should be safe to assume that health care quality will improve over time, thereby decreasing the number of those who require such assistance.

There could be reforms to the disability program to close the loophole or to protect disadvantaged workers in their early sixties, but still, how much money would be saved by raising the retirement age? Raising the full retirement age to 70 would only decline by 0.4 percentage points of the GDP in 2040 (CBO, 2010, p. 31), which is less than ten percent of the overall Social Security spending. In 2012, however, the CBO estimated that it would reduce overall outlays by 13 percent. Raising the full retirement age to 70 would reduce overall returns by fifteen percent, which could be devastating for those who are more dependent on Social Security. Aside from raising the FRA, there are other ways to create incentives for workers to retire later (Templin, 2013, p. 1250-1252).

Even so, this comes with a couple of concerns of mine. The first is that raising the retirement age will not be sufficient to deal with the looming federal debt crisis. It's rare that a single policy can effectively change the course of governance, and it's not expected to do so. If raising the retirement age can help mitigate some of the fiscal concerns, I am all for it. This leads into my second concern, which is even more gargantuan than the first. Whether it is in the form of increasing payroll taxes or cutting benefits, both of these policy alternatives deal with Social Security quantitatively. Nothing is done to ameliorate the quality of the program itself or even overall retirement prospectives for Americans. Since Social Security is a) financed by taxing wages, and b) the benefits are linked to wages, the benefits will increase at about the same rate as wages. This would certainly explain why Social Security provides such a lousy rate of return. Alternative retirement options are linked to savings and investment in capital markets, which is why they produce a higher rate of return. Although I think raising the retirement age is a good idea, it does nothing to address the quality of retirement in America. Until we approach Social Security by addressing root problems, the state of Social Security will be as stagnant as ever.

Thursday, December 5, 2013

Fast-Food Workers Playing Fast and Loose by Protesting for a $15 Minimum Wage

One-day labor walkouts were planned at fast-food restaurants in over a hundred cities today. Those who work at fast-food restaurants were protesting the low wages they receive. By increasing the minimum wage to $15 per hour, it would provide these workers with a "living wage" so they can make ends meet. At first glance, it seems hard to argue against it. You'd have to be heartless to ignore a plea for higher living standards. But is that really the case? Is increasing the minimum wage to $15 per hour a good idea, or is it merely a feel-good policy with unintended consequences?

I've tackled the issue of minimum wage before (see here and here), and truth be told, I am not a fan of minimum wage. The vast majority of economic literature shows that minimum wage causes a non-negligible increase in unemployment. Minimum wage also makes it more difficult for unskilled workers to acquire work experience so they can escape their current economic situation.

Let's look at how minimum wage affects those specifically in the fast food industry. Looking at elasticity of demand, which is the responsiveness of the customer to consume more or less based on shifts in prices, fast food has higher elasticity than food consumed at home or even at your average restaurant. This both makes intuitive sense and is backed up by the data (also see NIH study), which is something that even the Left-leaning Economic Policy Institute has to concede (EPI, p. 2). Let's combine that with the fact that an unskilled labor supply is going to be more elastic than skilled labor, which means that a wage hike such as the one suggested is going to cause an even larger surplus of labor, i.e., unemployment. With relatively high elasticity of demand and an elastic supply of labor, such a price increase will be unpropitious.

This all harkens back to a point of productivity of a fast-food worker. Under a competitive market system, wages would be determined by supply and demand of labor. In spite of government interventionism, supply and demand still play the primary role in determining wages, and not the ill-conceived notion that a "money-grubbing employer who wants to maximize profits" arbitrarily sets his own wages. All of that notwithstanding, it's safe to assume that the marginal value of labor for fast-food workers is not worth $15 per hour, especially in comparison to other jobs. This would mean that an employer that decides hire a fast-food worker at a wage of $15 per hour would be doing so at an economic loss.

If there is a minimum wage of $15 per hour, you better believe that employers are going to adjust their business practices accordingly. As already mentioned, laying off workers is one of many ways to adjust. Cutting hours and/or benefits is another way. One could theoretically cut the wages of middle and upper management, but not only does this go back to marginal value of labor, it also touches upon bargaining power, which makes sense. Unskilled labor would have less bargaining power because unskilled labor is, well, unskilled. Alternatively, the employer can decide to pass the cost on to the customer, but given the elasticity of fast food (see above), this will most likely result in decreased profits, which does nothing to help the fast-food worker because the customer will most likely respond by eating elsewhere, not to mention that increased costs would defeat the purpose of the low-cost business model upon which the fast food industry is built. Another form of adaptability is having production more automated. If you think having machines replaced by human labor sounds like science fiction, take a look at fast-food restaurants in Europe. Europeans have started to install machines that are capable of taking food orders and vending the food. Granted, there are certain tasks that only a human can perform, but increasing the cost of unskilled labor by more than double will translate into decisions that will adversely affect the fast-food worker.

Ultimately, the issue here is not wages, but bargaining power, costs on the employer, and the cost of living for unskilled labor. Bargaining power is an issue for unskilled labor because they do not possess the education or the skills to ask for more. The whole premise behind minimum wage jobs is to gain work experience that will allow for greater leeway in bargaining. Raising the price floor of minimum wage by twofold during economic hard times, which will only make it more difficult for unskilled labor to acquire skills, is not the way to go. Education reform is great topic to address with regards to bargaining power because let's face it: if a K-12 education in this country has a difficult time creating a skilled labor force, then we know something is wrong.

It's not only a matter of bargaining power. There are government policies that get in the way of employers being able to maximize productivity, whether that is in the form of high levels of taxation, premium costs mandated by Obamacare, costs that come with occupational licensing, zoning restrictions that prevent people from using their homes for commercial purposes, or other onerous regulations. Removing unnecessary regulations, which would be most regulations, is a good start. Even dealing with cost of living is important when discussing poverty issues because making goods and services cheaper will increase one's purchasing power. We should look at policies that distract from that very notion. Some examples are food stamps (see here and here), rent controls that create substandard housing, or zoning laws that separate residential areas from commercial areas, thereby increasing the cost of transportation. Minimum wage laws are like putting a bandage over a cold. Only by addressing root issues will we ultimately be able to help those currently trapped in poverty.

Tuesday, December 3, 2013

Liberty versus Security: Does Privacy Trump the NSA Collecting Metadata?

Edward Snowden leaked various documents from the National Security Administration (NSA) back in May 2013, which made Americans realize the extent of NSA surveillance that was done in the name of national security. Some have called Snowden a hero and a whistleblower, and others a traitor. Ever since, the NSA has been under scrutiny for overreach of its surveillance. Congressman Jim Sensenbrenner (R-WI) is at the helm of NSA reform, and is trying to pass the USA Freedom Act (H.R. 3361) in hopes to curtail NSA surveillance and to bring transparency to the process. This brings us to determining whether there can be some reasonable tradeoffs made between security and privacy, or if Benjamin Franklin was correct in asserting that "those who surrender freedom for security will not have, nor will they deserve, either one."

Let's address the standard argument of "if you have nothing to hide, why worry?" Let's start off with a need for privacy. Freedom is a vital part of a democratic society. We should be able to develop our ideas, personalities, beliefs, and lives without fear of government intervention or oversight. The vast majority of people in the developed world have a deep desire to keep aspects of their life private (that includes Facebook), even when that information or what they have done is moral and righteous. For argument's sake, let's give the NSA a benefit of a doubt and assume the information is used strictly for national security reasons, and the information gathered is not leaked. Even so, it still ends up being an invasion of privacy because the information is extracted without an individual's consent. Some famous Supreme Court cases dealing with the issue of privacy include Griswold v. Connecticut, Roe v. Wade, Cruzan v. Department of Health of Missouri, and Lawrence v. Texas. The right to privacy is also implied in the First, Third, Fourth, and Fourteenth Amendments. Furthermore, given all the laws and regulations on the books, even if you think you are not violating something, there are so many criminal laws that you very well are without knowing it, and the NSA could easily exploit obscure laws as a justification to spy on anybody and everybody.

Proponents of NSA surveillance might opine that data mining of phone records, like that of Verizon, is harmless. Before determining whether it is innocuous, we should ask what sort of data is being mined. The NSA is not listening in on phone conversations and acquiring the content of those conversations, which is a good thing, mind you. However, they still know who you called, how long the call lasted, and the location of where you made the call. If the information was so "useless," like proponents state, then why collect it in the first place? From this metadata, the NSA can glean information about people's relations, beliefs, and activities, which, once again, is private information unless the NSA obtains a warrant and extracts the information with due process.

There is little to no evidence that extracting warrantless metadata works (It very well could have just been used to foil one plot, and even in that one plot, using PRISM was unnecessary). Such surveillance makes us less safe, and furthermore, it is also estimated that using PRISM will cost US cloud computing industry up to $35 billion over the next three years. And this does not even take Bullrun into account, which was a highly classified NSA program that allowed the NSA to hack into targeted computers and catch encrypted messages before being encrypted.

There are other ways of gathering intelligence without warrantless data extraction. There is a reason why our government has a system of checks and balances, and warrants are a check on the government to make sure they do not abuse their power. With the development of technology, it is easier than ever for the government to spy on its citizens without us even knowing it, which is why there needs to be oversight (e.g., increased inspections) and transparency. If the government is to be entrusted with national security, it needs the trust of the people. Engendering reform and requiring warrants for metadata is the very sort of oversight that provides accountability, as well as avoiding the erosion of the confidence of the people and the social contract. Liberty is much more fragile than security. Even after a terrorist attack like 9/11, the American people showed that they can overcome it, rebuild, and move forward. If liberty takes a hit like that, it is significantly more difficult to recover that liberty.

The odds of an American dying in a terrorist attack is one in 3.5 million, which is really low compared to other causes of death. Considering the improbability of a terrorist attack, we should ask ourselves if throwing away vital liberties is worth preventing such a statistical improbability. There are ways the government can acquire information without resorting to warrantless searches, and I sincerely hope the government can implement methods to gather data and intelligence without violating the Constitution and trampling our right to privacy.

12/12/13 Addendum: The President's NSA review panel recently published this report on NSA reform. Let's hope there is some follow-through.