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.

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, 2012; Torrance 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 law. New Zealand recently did away with its software patents, and I think America should follow suit. Copyright 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.

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 19^th century technology that we are attempting to apply to a 21^st 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.

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.

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.

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.

So How Are the Netherlands in an Austerity Trap?

In response to Standard and Poor's decreased credit rating of the Netherlands, an Oxford professor wrote a blog entry about how the Netherlands was suffering from what is labeled as an austerity trap. The idea behind the austerity trap is that the government imposes [steadily] deeper spending cuts via pro-cyclical fiscal policy in response to large budget deficits. According to Keynesian economic theory, spending cuts during a recession beget an even higher debt-to-GDP ratio, in which the country can neither meet its deficit targets nor crawl out of its debt-ridden state. Much like with the case in Britain, I have to wonder if there was actually austerity or not. Looking at Eurostat data, I compiled government expenditure data:

If this theory is to be tested, there need to be spending cuts in the first place. Instead, what we have here is an overall upward trend both in expenditures in absolute euros and expenditures as a percent of GDP.  There is a bigger definitional issue here. For some, the definition of austerity is a combination of spending cuts and tax increases. If we do decide to include tax increases as part of the definition of austerity (as opposed as the definition solely including spending cuts), then yes, the Dutch government has increased taxes (Eurostat), which would make the fiscal-adjustment packages very much on the tax side.

If austerity is defined solely by spending cuts, then the austerity is non-existent. If tax increases are included in the definition of austerity (which they theoretically are), then yes, there is austerity because the taxes have a slight upward trend. For me personally, I prefer that the definition encompasses both spending cuts and tax increases because it better reflects the full extent of what government attempts to do to remedy debt-to-GDP ratios during a recession. I also prefer it because when there is a discussion about austerity with the tax increases, the austerity that has been taking place in European nations over the past few years usually do not entail actual spending cuts, but even when they do, the spending cuts are significantly smaller than the tax increases. For those who have read my blog, one can surmise that I am hardly an aficionado of tax increases, which is to say that with this definition of austerity, I would not be 100% for it as a remedy for mitigating an increased debt-to-GDP ratio.  

Economic theory and the usage of political buzzwords are two separate notions. For those who prefer the tax-and-spend method, which is popular for those on the Left, when the word "austerity" is used by economists like Krugman, it is code for "spending cuts," which are anathema to proponents of advancing stimulus packages to boost aggregate demand. Since the definition of "austerity" in political discourse typically refers to only spending cuts, it makes me wonder where the austerity trap is.

Do the Netherlands need to make some improvements? Fitch and Moody's seem to think so. Given that it's part of the Euro zone and the Euro zone has its issues, so do I. However, let's not blame the credit rating downgrade on non-existent spending cuts.