Too Big to Be Privatized

There has been buzz for the past several days that the federal government would move to bail out Fannie Mae and Freddie Mac, and now appears the rumors have proven correct. This follows not so long after the bailout of Bear Stearns. I don't know enough about the banking market to say whether the government has made the right moves with respect to these bailouts, but it strikes me as odd that any private entity should be considered "too big to fail". It seems there two potential routes around this: either ensure that no single firm in a given market obtains enough market share to make its collapse catastrophic, or simply put the critical functions under public control. The former option is problematic in that a) it would require a far more robust (and I mean FAR more) and aggressive type of antitrust regulation than we currently have, and b) it is easy to imagine that, even with a larger number of firms, intense competition might lead the firms to adopt similar approaches such that numerous firms would teeter on the edge of collapse at the same time, and a bailout would be required anyway. The latter option is problematic for the obvious reason that markets are generally more efficient than government management. But this system where private companies are free to reap really impressive profits (as the investment banks have), but the public ultimately bears the downside risk seems untenable.

This problem has always been at the foundation of my opposition to any sort of privatization of social security. In fact, it's worse for social security than for the banking system, because with social security you've got two levels risk to deal with--the institutional and individual. Because even if whatever private institutions we hand the system over to don't fail, if a significant number of individuals managed their risk poorly and get cleaned out, I find it inconceivable that the government wouldn't step in to rescue them. That is, after all, the entire point of the program. It's social security. And once that happens, of course we'd expect everyone else to try to shoot the moon with their investments, because what's the downside? This is the sort of risk we don't want to be distributed. It only works when the risk is pooled. Look for similar problems with some sort of hybridized public/private health insurance. Once we've made a social decision that some service is necessary, for whatever reason (economic stability, national security, moral obligation), handing it over to private entities will necessarily create serious problems with risk management and moral hazard.

I'm not necessarily arguing that, for example, our entire banking system or health care system should be government run. But I do think that in terms of structuring the mix of government and private management of such critical functions we need to try to identify key breaking points and either put them under direct government control or develop some clever system to ensure that private entities approach these functions with the right set of incentives.

Update (7/14): Sebastian Mallaby appears to have a similar take on the issue to mine.

Score One for Edwards

After Russ Feingold dropped out of the '08 sweepstakes I was a little bit surprised how quickly liberal bloggers (the Kossacks in particular) hitched themselves to John Edwards's wagon. I didn't care terribly for Edwards in '04, and I'm not that excited about his candidacy this time either. However, Edwards scored points with me when he made waves recently by stating that he would raise taxes to support his universal health care plan. I haven't seen much critical discussion of his plan, and the details I've seen reported are fairly vague. In other words, I don't know if his numbers are realistic or if the plan is a good one. But the mere fact that the man is willing to admit that it will cost money, and that those costs will have to be offset with higher taxes speaks highly to me of Edwards. We've been hearing about health coverage as a major issue for many election cycles at this point, but nothing has been accomplished (nor we have even come close to making progress), because delivering on health care promises will be expensive and painful, and while voters have expressed their desire for health care reform, they've never ratified any willingness to make sacrifices (in terms of taxes or other spending cuts) in order to make it happen. Of course, voters have never had a chance to do so, because politicians (on both sides of the aisle) are content to promise reform while pretending no sacrifice will be necessary. If real progress is to be made, we need to have a serious and frank discussion about what it will cost and how to pay for it. Edwards is the first candidate I've seen who seems to be willing to take part in that discussion. Kudos to him. I'm a long way from jumping on the Edwards bandwagon, but I'm now willing to start taking him seriously.

A Healthy Immigration Dialogue?

I find immigration to be an exceedingly difficult topic to discuss. It's an important topic in America, and even more so in Europe, and one that critically needs to be addressed. Yet it tends to morph economic and cultural insecurity into ethnic and racial prejudice such that it can become difficult to sort real policy concerns out from the age-old appeal of virulent immigrant-bashing. America has a singular record with respect to immigration, having been built on the back of waves of European immigration, yet even here hatred and discrimination against immigrants has a long and deep history.

We all need to be concerned with the problem of integration, as discussed in this CSM column today. As my Fallows post noted below this relates, among other things, to security issues. In Europe, awash in Muslim immigrants while the white population declines, it also calls national identities and the basic social fabric into question. So here's the challenge: we need to start to identify what constitutes healthy integration, and what factors influence it, and how to promote it, without descending into irrational discrimination, and hopefully without creating an overly adversarial relationship with our immigrant populations. And America needs to lead the way and create an example for Europe. As hot a topic as immigration is here, it is far worse in Europe, and that difference will only be exacerbated as time goes on.

Right now I have little faith in the people driving the dialogue in the US. The people with passion on immigration today (think Sensenbrenner) tend to walk a fine line with respect to anti-immigrant prejudice, generally not displaying it openly, but pandering to it in their supporters. I would very much like to see a counterpoint, acknowledging the seriousness of the issue, willing to act on it, even if some of the steps are difficult, but promoting an inclusive dialogue that respects the interests of immigrants and the unique cultures and viewpoints they can contribute to society.

The Promise of Nuclear Energy

For a country that is "addicted to oil", there is surprisingly little discussion of a readily available and potentially safe form of energy: nuclear fission. Concerns about fission have been understandable, namely long-lived, hazardous waste products, the potential for use of nuclear waste in developing weapons for terrorists, and reactor safety.

In the recent article Scientific American: Smarter Use of Nuclear Waste [ ENERGY ], authors Hannum, Marsh, and Stanford detail a combination of new technologies that would essentially obviate these concerns. The approach involves a combination of fast nuclear reactors and pyrometallurgical processing (pyro). Currently, thermal nuclear reactors are typically used. These reactors use only about 5% of potential energy from nuclear fuel and create waste that requires some 10,000 years to decay to safe levels. Furthermore, the plutonium in the used fuel can be used to create nuclear weapons.

In contrast, fast reactors (already in use in Europe) burn a much greater percentage of the uranium/plutonium nuclear fuel, leading to a dramatic reduction in waste products. The real revolution will be pyro processing. A new technology, it involves reprocessing nuclear waste from thermal plants, separating unused nuclear fuel from waste products. The reprocessed fuel can then be used by fast reactors (not usable in the conventional thermal reactor). Unlike current reprocessing strategies, the reprocessed fuel is not suitable for nuclear weapons. Furthermore, the waste left over from this process requires only some 500 years to decay to safe levels, a dramatic reduction from current methods. Using this combination of technologies, some 99% of potential energy from nuclear fuel would be used.

In combining pyro with fast reactors, we would effectively have unlimited nuclear energy with minimal generation of waste products. Plutonium trafficking would be markedly reduced due to different processing methods. As far as safety is concerned, there are many ways to ensure a reactor is very safe (as an example, the authors detail building the whole reactor into the ground).

The authors estimate that, if we started now, the first such reactors combining these technologies would come online in 15 years. I am amazed that we haven't heard more discussion of this. I think there is a such a kneejerk negative reaction to the concept of nuclear power that politicians are afraid to approach it. Yet, this technology is already available and needs only to be expanded to a commercial scale.

Time Warp

Following politics recently, I'm starting to feel that we've been time warped back to August, 2001. As you may recall, at the time, after passing a flurry of bills that he had campaigned on, President Bush had largely stalled out, and Republicans were beginning to wonder if the President's critics were right. Bush spent the next three years riding support for his anti-terror agenda. But at this point, the public has gotten the sense that the war on terror will be a long, hard (and often dull) slog. The insurgents in Iraq are back in full force after a post-election lull. Global terror attacks are up significantly in the past year. The new Iraqi government has been slow moving and is mired in conflict.

With foreign policy no longer providing a safe refuge, Bush has had to return to domestic policy. He's now simultaneously trying to prop up Tom Delay against ethics charges, support his nomination of John Bolton, push his social security program, and back Senate Republicans in eliminating the filibuster, all issues on which he has little public support and on which Democrats feel they can capitalize. Add to that the failed and unpopular gambit to intervene in the Schiavo affair, and the Bush presidency appears to be a key setback or two from descending into irrelevance. His party is wavering and beginning to drift. This looks much more like Bush the bumbling amateur politician of mid-2001 than Bush the avenging war hero of more recent times.

Undoubtedly the Bush team still has a few tricks up their sleeve. In political cycles it's a long time until 2008 and Bush will have ample opportunity to try to reinvent himself. I can't even speculate which direction he might turn, but it does seem that much of his difficulties are related to his stubborn, hard-line approach to policy and his close relationship with the Religious Right, and I have a hard time picturing him compromising on either point. Time will tell. Perhaps the best hope of the administration at this point is that the Democrats will fumble the ball, as they did in the election last year. I can't say I have a great deal of confidence in them, but the Democrats can't screw up all the time. They'll get it right eventually. Everything is set up for them right now. All they've got to do is bring it home. I've got my fingers crossed..

A Backdoor Entrance For Legal Marijuana

Slate has an article by Tim Wu (the guy I had hoped to work for this summer) on the possibility that the WTO could find U.S. drug policy to be an illegal barrier to free trade. He builds a fairly strong legal case for WTO intervention, but for political reasons I can't imagine it happening until Canada and other like nations go from mere nonenforcement of anti-drug laws to outright legalization.

Look At the Numbers

Robert Samuelson has an excellent piece in the Washington Post analyzing both numbers and the press coverage of the Bush social security plan. He finds them both lacking, and draws parallels to coverage of the medicare drug plan and the subsequent shock at its high costs.

Partisanship at its Worst

The two hot topics these days, Social Security and the budget proposal, serve to illustrate the crippling partisanship gripping the federal government. There are real problems to be addressed, but both the Bush administration proposals and the Democratic responses are geared almost entirely towards partisan posturing with no apparent concern about results.

Social Security is not in a good state. There really should not be a great dispute about this. It is not an urgent crisis, but neither is everything fine and dandy. The real onset of problems is still years away, but this would be a great time where we could make relatively painless adjustments to get things back on a sound footing before things get too far out of whack. Unfortunately the Bush proposal for private accounts, while interesting, does not really appear to address the real problems. The issue of whether this system should be a pay as you go social welfare program or a government-supported private investment program is a good philosophical question. But for now the immediate problem is that future outlays exceed income. The basic issue is whether we will reduce benefits or increase revenues or some combination of the two. Meanwhile, Democrats, who until recently were willing to discuss and consider this issue, are now locked into deep denial that there is a problem at all. This is a silly tactic when there is, and for some time has been, a powerful public perception that there is a real Social Security problem. At this stage in the game, denial comes off as disingenuous and out of touch. And while both sides are brawling over this on the public stage, nobody is talking about the much larger problem that looms in Medicare.

Then comes the budget proposal which takes the shocking step of reducing 1% of a third of federal spending. We're running record deficits here, such a minor reduction in spending should not be a big deal. Unfortunately these cuts have been precision targeted to produce peak outrage among Democrats. I read somewhere that last year's budget proposed cutting 65 programs, only 5 which actually ended up being cut. Both sides understand how this game is played. The administration wants to come out and say they tried to cut spending, but were obstructed by congress. Congress wants to say that Bush tried to kill all their state's pet programs, but they valiantly save them from the axe.

The disheartening thing is that our long-term budget outlook (including the Social Security and Medicare impacts on the same) is a critical problem, one that I think should be the top priority for the federal government. It's sad to see so much effort spent by politicians, the press, and the public fighting over these issues when it all amounts to sound and fury, accomplishing nothing. And when everyone is exhausted from the fight, these issues will be returned, unresolved, to the back burner to simmer away until they explode into an all-out crisis that will threaten to crash the dollar and destroy the U.S. economy.

Re: Securing Their Gains

I've heard the claim all too frequently over the last week that President Bush received "the largest number of votes ever received for president," and I am disappointed to see it echoed by Newt in his article. As Josh Marshall notes, John Kerry got the second larges number of votes in history, followed by Ronald Reagan and Al Gore. It has nothing to do with popularity but has everything to do with population. A better measure of "mandate" is the number of electoral votes, and in that department, according to this post (again, Josh Marshall), President Bush obtained the lowest number of those since Woodrow Wilson beat out Chales Evans Hughes (a lifetime member -- dikaia upotheke).

I agree that health care reform presents one of the biggest challenges this country faces on the domestic front, and if Republicans are perceived as making strides that will help in the mid-terms. But health savings accounts alone will accomplish squat. Those who can already afford decent health coverage have the funds to take advantage of such a program, while the rest will be left to fight over the HMO scraps. Only a fundamental restructuring of America's health industry will cause real change -- and that just won't happen under Republican leadership (especially with Frist running things at the Senate).

In my view, the lasting Republican control depends more upon what happens outside the Republican party. The Democrats is adrift so I don't expect much from them until they can straighten up their act. The biggest immediate challenge comes from the growing discontent among fiscal conservatives that may lead to a formation of a viable independent or libertarian candidate in '08.

Some are waiting to see whether President Bush tries to reach out to the moderates to secure a lasting Republican legacy. I predict the only "reaching out" will be with fear -- fear of terrorists and fear of those who are different from the "mainstream" America. That agenda will succeed or fail depending on whether any other party presents a better message. A message of hope rather than despair.

"F.C.C. Clears Internet Access by Power Lines"

This news story (NYT) discusses teh newest entry into the high speed internet world, Broadband Power Line ("BPL"). I have never heard of this before, but if consumers are indeed able to get 1 to 3 megabits per second of data over power lines, that will facilitate broadband access in rural marketplaces and help put competitive pressure on cable and DSL.

Dodgeball: It's More Than Just A Crappy Movie

The Washington Post has an editorial pointing out how Kerry and Bush ducked the hard questions in the final debate. It continues to amaze me how easily these guys get away with offering no plans on balancing the budget and addressing the social security/medicare crisis, which are really the most pressing issues facing our federal government. It's appalling.

The Next Bloated Lobbyist-Feed Bill

The Washington Post editorial board put on their pork police hats for this editorial against the corporate tax bill, which follows in the grand tradition of the energy and medicare bills of handing out many billions of dollars to corporate allies while accomplishing little or nothing of any value. If I recall correctly, there is also a similar transportation uber-bill also winding its way through congress...

Moving Past the Fluff: Health Care

The Washington Post has another column from Robert Samuelson, part of what appears to be a series, shedding non-partisan light on the bullshit campaign rhetoric of our presidential candidates. Up this time: health care policy. Samuelson has, through these columns, done better than anyone else I've seen in covering the election the way it ought to be covered.

Praising Welfare Reform

There's a column on Christian Science Monitor by a couple of Harvard professors praising the 1996 welfare reforms based on an extensive study they've done of the results. Not to say that I haven't seen plenty of Harvard folks pushing questionable agendas, but this looks like a fairly well done study, although I haven't read through all of it (there's a link at the bottom of the article). It's always nice to see relatively unbiased research on hot-button political issues. The authors feel that the government did a nice job of supplementing the reduction in welfare support with new programs to provide support for low-wage working people, creating a carrot and stick effect. While they feel the 1996 bill has been a success, they are wary of any further efforts to reduce welfare supports.

Re: Fair at Work?

There is one point that I want to get out there before getting to the meat of your question: If individuals were afforded special consideration for family life, then it must apply equally to dads as it would to moms. I see no reason to favor women in that regard over men in similar circumstances. Indeed, providing unequal treatment in that regard would most likely be judged to violate the Equal Protection Clause of the Fourteenth Amendment.

As to whether the government should afford some special protection to parents in the workplace, I have two problems. First, the free market is generally a good thing and unless there is a demonstrated market failure, if workers provide valuable skills and demand greater flexibility in the workplace so that they can better balance a family, one could argue that the market would provide such opportunities. Second, there is the potential that government regulation along the lines that you propose would end up hurting those people who decide not to have kids and instead focus on work. I do not see any good reason why government should weigh in and favor parents over non-parents in the workplace.

That being said, I do think there is a market failure. Often, "non-traditional" workers are discriminated against in the workplace. And every workplace I have observed firsthand comes in the "one-size-fits-all" variety, although that size does not in fact fit all. Workers who propose nontraditional working arrangements are generally not well received, even though they may offer value to that employer and be tremendously happier as a result. So there is room for the government to step in and encourage innovation (tax incentives might be one way to approach the problem).

One difficulty that exists in encouraging flexibility is that it is really hard to measure the value of any given employee. Because workers cannot easily weed out the lazy workers from the really valuable employees, it is hard to create different working conditions to suit different workers. Another problem is that workers just do not have a lot of market power to demand changes. Realistically, a job applicant cannot sit down with a prospective employer and propose his or her own hours and workplace conditions. If the government were to step in, I suggest they do so in a way that gives workers more power to demand flexibility--but only to the extent that those changes would be a positive for the worker and offer greater profitability for the employer.

Re: Law Enforcement and Illegal Aliens (Part II)

I agree with Joe's contention that turning cops into INS agents will discourage the "invisible" illegal immigrants from seeking police protection, and that is a bad thing. But I place greater emphasis on the point that Joe only glosses over--how we should address illegal immigration in the first place. Enforcing immigration laws would not be so hard if we were serious about doing it. If the Government imposed strict penalties on anyone employing an illegal alien, then those seeking a better life in America simply would not find the better life they were looking for, and go home. But several industries are dependent on the low-wage labor that illegal immigrants provide, so the Government looks the other way.

Joe approaches the question from the perspective that illegal immigrants are here, and argues that we must find a way to deal with them until better immigration enforcement is put in place. From that standpoint, I agree that all individuals within our borders deserve certain rights and police protection is certainly a basic right. But what about education? And health care? I see those as tougher issues because people might cross into our country just to receive the basic entitlements afforded to everyone within our borders, even if they could not secure employment. So long as the grass is greener, people will come. So we would need to monitor our borders in conjunction with imposing strict penalties on employers of illegal immigrants if we are really serious about keeping those people out that we don't want here.

What I find missing in most discussions of illegal immigration is the point that our nation is made up of immigrants (mostly). We have wrongly turned our back on those seeking a better life, instead of trying to find ways to give them that better life. How do we accomplish that goal while maintaining a high quality of life for those of us already here? That to me is the real challenge.

Re: Law Enforcement and Illegal Aliens

First off I understand the term "the wall" in a far more limited way than discussed in the CSMonitor article to which you refer, as well as your discussion suggests. I want to turn to the issues that you raise about the need to separate immigration and criminal enforcement functions as a policy matter, but that is different than the issue raised by the 9/11 Commission (at least as I understand it). Before getting to your points, then, let me offer a few points on the current debate related to "the wall."

FISA and "The Wall"
As Commissioner Jamie Gorelick used the phrase in her WP commentary, and as Andrew McCarthy did in his criticism of Gorelick [National Review Online], (not to mention several.other.commentators on the same topic), "the wall" addresses the legal barrier that was built specifically in response to the 1978 Foreign Intelligence Surveillance Act ("FISA"). That Act permits intrusions into the liberty of "foreign powers" and agents of foreign powers under different rules than normally apply to searches and seizures.

A special appeals court (appointed specially for the purpose of evaluating issues arising under FISA) ruled that FISA was constitutional as applied to foreign powers and their agents even if the information obtained was used for criminal prosecution. Up until that ruling, some were concerned that the FISA procedures may suffice for purposes of obtaining foreign intelligence information but not sufficient for criminal prosecutions. Therefore, lawyers for the DOJ thought that the two functions needed to be separate--thus, a wall between the two functions was put in place.

Various groups, including the ACLU and the Electronic Frontier Foundation ("EFF"), raised constitutional challenges to the lowering of the wall between criminal functions and foreign intelligence-gathering. The thrust of their argument as I understand it was that the Fourth Amendment requires (1) probable cause, (2) reasonableness in relation to the stated purpose of the search or seizure, and (3) particularity of the place or person to be searched, and FISA as applied to criminal prosecutions does not meet those three requirements (see this FAQ from the EFF explaining the issues). The Court rejected that argument, finding that FISA procedures were constitutionally adequate.

My concern with the Court's ruling is that FISA now permits the government to intrude upon a non-citizen's liberty interests far too easily--under the rubric of national security. As long as the DOJ shows that foreign intelligence-gathering is a "significant purpose" of the search or seizure (rather than the "primary purpose"), a warrant will be issued under FISA. The government must meet a far greater burden to obtain a warrant under normal criminal investigations. That "burden" goes to the heart of the Fourth Amendment's protections. Yet some, like Andrew McCarthy, appear to view those protections as nothing more than a nuisance:

It is, of course, a reality that in the law-enforcement realm, because it is hopelessly lawyerized and hyper-vigilant about civil liberties, we actually are forced to worry about such things as the privacy rights of drug dealers. Thus, we do find ourselves litigating ad nauseam such commonsense matters as whether, just because you properly heard something, you should be allowed to use it to protect the public.

Where national security is at stake, McCarthy contends that we can entirely abandon all procedural protections because they are just "theoretical" concerns. I wholeheartedly disagree. The Fourth Amendment extends equally to all persons in the United States and although I recognize that genuine threats to national security deserve a different approach than a garden-variety criminal investigation, the government should not be able to dress up a criminal case in "national security" cloth to escape the procedural protections provided by the Fourth Amendment. Unfortunately, because our nation is so terrorized by terror, we allow that to happen with little or no scrutiny.

Call me a cynic if you must, but I believe that we all must scrutinize government conduct as closely and as often as possible or we risk losing the rights upon which our great country was founded. The FISA warrants provide an ideal illustration--in the roughly 25 years that the Act has been in place, the DOJ itself has documented 75 material misstatements made to the FISA court to obtain warrants under that Act (see Dahlia Lithwick's commentary [Slate] for more details). Before 2002, of the 10,000 applications for FISA warrants, not one request was turned down.

Surely we should not ignore the threat that terrorism poses to our personal security. But at the same time I hope we do not cease to fear tyranny.

FAIR AT WORK?

I Would like to hear your input on if working moms should get "special treatment" on scheduling, time off, and other family "excuses". Do you think other employees should get ahead on promotions since they put more hours or as some people put it "put all their heart" into work?

Law Enforcement and Illegal Aliens

A CSM editorial today praises work done to eliminate the wall, which they refer to as "old and needless", between law enforcement and immigration control. I can't say that I entirely agree with their sentiment. There is a reason for the wall, and not as CSM suggests, in order to prevent racial profiling. There are millions of illegal immigrants in the US, many of them living in relatively concentrated areas. Whether they should be here and how we should deal with them from an immigration standpoint is a good question, the answer to which we haven't quite figured out yet. But the point is they are here. Bringing local police into the immigration enforcement business means that none of these illegal immigrants will go to the police for help. And it's not secret that crime and exploitation flourish in situations where there no legal means to address them. This move will create communities rife with lawlessness, havens for criminals, sweatshops, drug traffickers, and possibly even terrorists. In my opinion local law enforcement should have an open door for illegal immigrants, no questions asked, so that they don't get shut out from these communities. Let the feds deal with immigration. If at some later date we are able to substantially reduce the number of illegals in the US, the wall may not need to exist, but while illegal aliens number somewhere over 10 million, for our own sake and theirs, we can't afford to cut them all off from the protection of law enforcement.

Corporate Tax Evaders

CNN has this article reporting that more than 60% of U.S. Corporations did not pay any federal taxes from 1996 through 2000, according to a GAO report released April 2 (the report may be accessed here). The report studied the tax liabilities of both foreign and domestic corporations presumably to determine whether foreign corporations were evading their tax liabilities. The two most interesting factoids from the report: (1) fully 94% of all corporations reported tax liabilities of less than 5% of their total income, even though the federal tax rate is 35%; (2) there is nothing new about these numbers--corporations have long taken advantage of tax loopholes to escape paying.

In doing some quick research on the topic, I came across Warren Buffett's annual letter to his shareholders. In it, he has this to say on the topic:

Corporate income taxes in fiscal 2003 accounted for 7.4% of all federal tax receipts, down from a post-war peak of 32% in 1952. With one exception (1983), last year’s percentage is the lowest recorded since data was first published in 1934.

Even so, tax breaks for corporations (and their investors, particularly large ones) were a major part of the Administration’s 2002 and 2003 initiatives. If class warfare is being waged in America, my class is clearly winning. Today, many large corporations – run by CEOs whose fiddle-playing talents make your Chairman look like he is all thumbs – pay nothing close to the stated federal tax rate of 35%.

In 1985, Berkshire paid $132 million in federal income taxes, and all corporations paid $61 billion. The comparable amounts in 1995 were $286 million and $157 billion respectively. And, as mentioned, we will pay about $3.3 billion for 2003, a year when all corporations paid $132 billion. We hope our taxes continue to rise in the future – it will mean we are prospering – but we also hope that the rest of Corporate America antes up along with us.