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May 2010 Archive for Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

'Boot' on 'Throat'? How American is That?

May 29, 2010
By Matt Bogard

Recently our political leaders have been using some very harsh and vitriolic language in reference to citizens and private corporations, such as “we will keep our boot on the throat of BP” (YouTube video). Of course BP is a foreign company, but many Americans work for BP and depend on its products. Of course BP is in the middle of what could be one of history’s worst environmental disasters, but is that sort of language appropriate considering the government’s contributions both leading up to the disaster and the sluggish response?

By recently giving that very oil rig an award for safety, capping liabilities for drillers, and subsidizing the cleanup (funded by a 1 cent per barrel tax funded by oil companies) the government once again set up a roulette game encouraging risky behavior. And just like the financial crisis, when businesses respond to the governments risk taking incentives we get a crisis on our hands. And, just like with the financial crisis, it looks like the government’s response is going to be more corporate handouts and incentives for more risk taking. We saw the same thing in the auto industry as well.

From Breitbart “Responding to the massive BP oil spill, Congress is getting ready to quadruple—to 32 cents a barrel—a tax on oil used to help finance cleanups. The increase would raise nearly $11 billion over the next decade.”

They are again incentivizing more risky behavior, except with a much higher tax that will likely be passed on to you and me- so now if this goes through the government will be putting its boot on our throats every time we fill up.

But let’s not stop with BP. In recent headlines we see that government is putting its boot on the throat of a farmer near the Canadian border through eminent domain, taking a portion of land critical to their dairy operation.

“We have a buyer holding a gun to our head saying you have to sell or else.’’ “It’s like taking a leg off a stool. If you reduce the hay, you reduce the herd; if you reduce the herd, you immediately affect the viability of the farm,’’ Brian Rainville said. “Last year, the farm lost money. Right now, we are hanging on by our fingernails.’’ (Boston Globe)

With proposals like cap and trade, legislation like the Clean Water Restoration Act ( which hasn’t passed as far as I know but keeps reincarnating itself under different names), attacking farmers for obesity, proposed tax increases on thousands of farms, and the continual onslaught of biotech regulations, eventually it looks like the government’s boot is going to come down on one American farmer after another. It may not happen publicly though until they have taxed and regulated the industry into bankruptcy or some crisis occurs, so just like with the auto industry, the financial industry, and the oil spill, they can walk in and act like they had nothing to do with it and say 'we'll keep our boot on their throat until this is fixed.' How American is that?


David Filipov, Globe Staff / May 17, 2010 Vt. farmer draws a line at US bid to bolster border (link)

Oil tax increase would help pay to clean up spills
May 24 04:20 PM US/Eastern
Associated Press Writer

Beef Magazine (online) Nov 2, 2008 By: Joe Roybal

AP IMPACT: Fed'l inspections on rig not as claimed
By JUSTIN PRITCHARD, Associated Press Writer Justin Pritchard, Associated Press WriterSun May 16,

Are We the Government?

May 19, 2010
By Matt Bogard
Commentators recently have made the common mistake of criticizing critics of government policy because "we are the government." This is based on the idea that because we elect people to represent us in Congress, and we elect the President, that we are in essence the government.
To be clear, we are the government in all those areas where the government acts in accordance with the specifically enumerated powers of the Constitution. However, no matter what the majority in Congress, no matter how large the margin for a presidential election, there is no mandate for any policy that lies outside the scope of government defined in the Constitution. In those cases, we are not the government. In fact, politicians (or Supreme Court justices that have made wild and complicated reckless interpretations of the Constitution) in these cases are transferring power away from the people to themselves. We cease to become a constitutional republic or a free society where government gets its power from the consent of the governed. We succumb to the “diseases most incident to republican government”  that Madison warned us about in Federalist #10.
As a reminder, those diseases involved “a rage for paper money, for an abolition of debts, for an equal division of property, or for any other improper or wicked project” – basically, many of the very things that created the financial crisis, the reason for the bailouts, and our runaway debt.
This is what is meant when people refer to "taking our country back." It’s not about a partisan agenda against one party or one particular politician or another. It is about restoring a government that respects constitutional principles. That is why this week’s primaries across the country did not represent a referendum on just incumbents, but on anyone in office that has associated themselves with this form of corruption. It is also about propelling candidates into office (like Rand Paul in Kentucky) who understand these basic principles and are promising to give people a voice and an opportunity to restore a government of the people, for the people, and by the people.

The Gulf Oil Spill and the Role of Government

May 05, 2010
By Matt Bogard

In the context of the current oil spill disaster in the Gulf, have we learned anything about disaster response since Katrina? Is one administration more to blame than the other? Are there parallels between the two scenarios?

Many of the major problems with the government’s response to Hurricane Katrina were not administration specific. In the Journal Public Choice, Russel Sobel and Peter Leeson point out that many of the problems that plagued the government’s response to hurricane Katrina are endemic to government in general. They pointed out 6 major issues ( summarized below)

1) The tragedy of the anti-commons ( layered bureaucracy)
2) Type II error bias (over cautiousness)
3) Political manipulation of disaster relief
4) Information Deficiencies- getting timely and accurate info about peoples preferences and needs
5) Glory seeking by government officials
6) Short sightedness effect and bias in government decision making

Public Choice theory involves the application of the tools of economic analysis to government and non-market behavior ( for a more detailed description of these problems and public choice analysis (see here Government and Public Choice )
How does this relate to the current gulf coast oil spill? Was the accident the result of negligence on the part of the privately owned company BP? There is no need to harp on this issue, because according to previous law, BP will be held responsible for any damages they are found responsible for.More importantly, what about relief efforts? Despite well laid out response plans, why was the government so delayed in their response (see Despite plan, not a single fire boom on hand on Gulf Coast at time of oil spill- Mississippi Press) ? Can the delayed and faltered response be due to the same problems that plagued us after Katrina?
) Many public choice economists would agree that these problems are not easily corrected over night, and are such a part of government- as-usual that we should not be surprised to see the same failures repeated over and over. A major problem plaguing government is lack of information. Markets take partial bits of disaggregated information, based on tradeoffs related to the knowledge and preferences of millions of individuals, and utilize that information and provide incentives for individuals to produce results. Government on the other hand, has to rely on poor incentive structures (pointed out by items 1-6 above) and bases decisions on the limited knowledge and preferences of a few voters, elected representatives, policy ‘experts’ or appointed bureaucrats or 'czars'. Government’s capacity to make quick decisions or carry out complex non-defense related operations is severely limited by a large deficit of information compared to the private sector. This largely explains the superior response of the private sector (like Wal-Mart and Home Depot) to disaster relief after Katrina compared to government agencies.

The resources that need to be brought to bear for a hurricane response are probably much more vast and broad than an oil spill. It seems likely that an oil spill would require very technical and specific knowledge to mitigate. Who possesses this knowledge and has command of the resources necessary to bring to bear relief? Typically markets solve these resource and information coordination problems every day via the price system. Are there regulatory barriers in place that would prevent a private sector response?
We have seen with the financial crisis that government actually played a major role by distorting the self correcting and disciplining signals of the market. We found that the government is pretty good at encouraging excessive risk taking and feeding corporate greed. Is it possible that we are seeing another instance of government failure in the oil spill response efforts or possibly even in the root cause of the spill?
There is some inclination that this may be true- from the coordination problem blog post 'Oil Spills, Incentives, and the Economic Way of Thinking':

"Walker's implication, and it's probably right, is that with a liability cap (beyond the clean up costs), the costs of any spill are less than they would be otherwise, giving firms reason, at least on the margin, to be willing to tolerate more risk of such a spill and reducing their expenditures on prevention measures, again at least on the margin."
These are questions to consider prior to recklessly embracing wild regulatory solutions. (already some people have begun attacking the 'Drill Baby Drill' mantra without considering all of the evidence) As we have seen with the response to the financial crisis- bailouts, financial reform, stimulus- without considering the evidence over emotional rhetoric, we are likely just setting ourselves up for 'disaster.'

But emotional rhetoric seems to take precedence in our national debates, whether it comes to EPA blog posts attacking family farms, regulating salt in our diets, banning sustainable pharmaceutical technologies in livestock production, or raising taxes on farms and small businesses.
Despite plan, not a single fire boom on hand on Gulf Coast at time of oil spill
By Ben Raines
May 03, 2010, 12:09PM Missisippi Press

Government’s response to Hurricane Katrina: A public choice
Public Choice (2006) 127: 55–73
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