Streetwise Professor

With 5 weeks and a day until the election, the vacuity of the campaigns is manifest. What is particularly disturbing is that two seismic issues–the US government’s parlous fiscal state and the broken American military–are not even mentioned, let alone addressed.

With respect to Harris, this is not surprising. Her campaign is refusing to discuss any issue whatsoever. And maybe not surprising with Trump either. He has his hobby horse issues and little time for anything else.

With respect to the US government’s finances, what is striking is that they were once a centerpiece of US political discussions and campaigns. Reagan made deficits a major part of his campaign in 1980, and did so to a somewhat lesser degree in 1984. If memory serves, budget issues were also actively discussed in the 1976 campaign: Jimmy Carter advanced “zero based budgeting” as a means of getting government spending under control. Even Clinton took budget issues seriously, if grudgingly. Remember Carville’s remark: ” I used to think if there was reincarnation, I wanted to come back as the president or the pope or a .400 baseball hitter. But now I want to come back as the bond market. You can intimidate everybody.”

Now US budgetary woes are far far far worse than in 1980 or the early-1990s. But nary a peep from either candidate, or either party generally. This despite the facts that (a) inflation is a major issue, and (b) as hard as the Democrats try to deny it, the most likely cause of the inflationary spurt at in the first couple of years of the Biden administration was the huge spurt in spending. (And yes, some of this was Trump’s doing–which may be why his is silent on the issue).

The US is on an unsustainable fiscal course. The longer it remains on this course the more disastrous the grounding will be. The only real question is how the government will structure the inevitable default unless spending growth is cut dramatically: future inflation is the most likely way. The hear no-see no-speak no deficit approach of both parties will lead to catastrophe.

With respect to the military, the list of structural problems is large, but two stand out: recruiting and procurement.

Trump sometimes talks about one thing that is a source of recruiting woes: the insidious penetration of wokeness and DEI into the military. Harris will of course never talk about that, least of all to say that it is a problem. But the recruiting crisis had multiple causes, and at the very least a responsible presidential candidate would (a) recognize the problem, and (b) pledge the creation of a red team task force from outside the Pentagon to analyze the problem, identify causes, and recommend fixes.

Insofar as wokeness is concerned, a West Point graduate wrote a stinging article about how it has taken over West Point. In response, the PR flack at USMA (a full colonel no less) wrote that the critical article was “problematic.” Problematic is a verbal tic with the woke, and its use in this context adds “QED” to the critical article.

Procurement is also a dire problem, especially in the Navy. Just today it was announced that there may be a serious bad welds issue on subs and carriers built at Newport News Shipyard. But that is just the latest in a series of failures in Navy shipbuilding. Everything is late and way over budget. And some of the things that have been built in the last 20 years (LCS and Zumwalt in particular) have proved to be misguided efforts that add modestly to hull count but not to combat capability.

Trump talks about the China threat. Harris not so much (of course) but the administration does. The military’s structural problems–severe enough that it may not be exaggeration to say that it is broken–seriously jeopardize the US’s ability to counter China and indeed may be an inducement for China to be more aggressive. Serious candidates would make this an issue. But we don’t have serious candidates.

Which will lead to serious problems down the road. And not too far down the road at that. Indeed, it may be the case that whoever wins in November 2024, they will regret it, because the “winner” will reap the whirlwind that has been sown on spending, on the military, on immigration, and myriad other matters over the past decade plus.

UPenn has penalized Professor Amy Wax for “a history of making sweeping, blithe, and derogatory generalizations about groups by race, ethnicity, gender, sexual orientation, and immigration status.” I presume this standard will be applied now to all Penn faculty. (I crack myself up sometimes).

Penn has suspended her for a year on half-pay, permanently eliminated her summer support, and stripped her of her endowed chair. It could have been worse: previously she was under threat of termination.

Wax certainly speaks forcefully. But this should not be disqualifying for a professor. In fact, it should be encouraged. Free marketplace of ideas and all that. Those who disagree can do so just as forcefully.

But without employing coercive force–which Penn has done. Probably because they realize she would give better than she gets if they actually dared to debate her.

So what has Wax said that offends Penn so?

One is her remark: “Here is a very inconvenient fact Glenn [Loury], I don’t think I’ve ever seen a Black student graduate in the top quarter of the class and rarely, rarely in the top half.” Note, she asserts this is a fact. Asserted facts can be verified or proven incorrect. If she was wrong, Penn would no doubt have been tripping over itself to prove her so. They have not, claiming that they don’t disclose grades–a patently bullshit excuse because it would be possible to refute her statement with anonymized data.

But they haven’t.

Qui tacet consentire videtur: “he who is silent is taken to agree.” So we can take her statement as true.

What is the sin in speaking the truth? Well, when it gores certain oxen and undermines sacred shibboleths.

The New York Times says that in another transgression Wax “derided as unrealistic television ads depicting ‘Black men married to white women in an upper-class picket-fence house.'”

So riddle me this: is it a representative, realistic depiction of the US? If so, what is the need for reparations, affirmative action, anti-racism, etc. etc. etc.? The incoherence here is obvious. On the one hand, the NYT and its fellow travelers fervently believe that blacks are oppressed and victimized and that this justifies aggressive state action, but it is apparently beyond the pale to say that ads that show the opposite are unrealistic. Both of those things cannot be true.

Some of her other statements are not strictly factual, but certainly well within the bounds of civil discourse and vigorous academic debate. Among those receiving the most attention are from an interview she did with Tucker Carlson:

Penn Law professor Amy Wax tells Tucker Carlson that "Blacks" and other "non-western" groups harbor "resentment, shame, and envy" against western people for their "outsized achievements and contributions." pic.twitter.com/jpQmOU554C

— nikki mccann ramírez (@NikkiMcR) April 11, 2022

I recommend you listen to the entire video rather than rely on the clip-quote summary in the post–which we will see is essential with virtually every media discussion of Wax.

These statements are in fact an example of what Michael Anton calls the “celebration parallax”:

In contemporary speech, on any “controversial” topic—or, to say better, regime priority—the decisive factor is the intent of the speaker. If she can be presumed to be celebrating the phenomenon under discussion, she may shout her approval from the rooftops. If not, he better shut up before someone comes along to shut him up.

The left validates, encourages, and teaches, and indeed celebrates, “resentment, shame, and envy” by “people of color” who were in their telling victimized and oppressed by the West: they think that these emotions are fully justified and should be employed to attack the west. Hell, that is basically Franz Fannon in a nutshell. (Just look at the excoriation of “colonialism” on campuses today: the alleged victims thereof are celebrated for speaking out).

Wax has observed the same phenomenon, but as an advocate for western civilization, objects to it, particularly among those who flock to and are embraced by western countries.

That is, since Wax does not celebrate this agreed-upon phenomenon, “someone” (Penn specifically) has come along to shut her up.

This Carlson interview is the source of another charge against Wax, namely (per the WSJ):

During the appearance, Wax asserted that “Blacks” and other “non-Western groups” harbor “resentment, shame and envy” against Western people for their “outsized achievements and contributions even though, on some level, their country is a shithole,” according to a decision published in 2023 by then-Penn President Liz Magill.

Listen to the interview. That’s not what she said. Yes, she said “shit-hole country” but in a different part of the interview, and did not apply it as broadly as the above quote implies (second post below):

Wax then attacks Indian immigrants for criticizing things in the US when "their country is a shithole" and goes on to say that "the role of envy and shame in the way that the third world regards the first world […] creates ingratitude of the most monstrous kind." pic.twitter.com/dUL9coinS9

— nikki mccann ramírez (@NikkiMcR) April 11, 2022

The relevant part: “Here’s the problem. They [Brahmin women from India] are taught that they are better than everybody else because they are Brahmin elites and yet, on some level, their country is a shit hole.”

Note the dishonest mashup of the quote from the WSJ, which is attributed to Magill–who by the way was forced to resign from her presidency for her, well, shameful handling of and testimony about anti-semitism at Penn. The mashup implies Wax applied the epithet “shit-hole” to the countries of origin of all “non-Western groups” when in fact she was referring to a very narrow group (some female Brahmin doctors at Penn Med) from one very specific country whom she has observed personally.

Wax was pointing out the ingratitude and hypocrisy of those who criticize the United States for poverty, racism, and inequality who (a) have reached the pinnacle of success in this country, and (b) come from a country that by all of these measures is far, far, far worse than the US. Wax is basically saying: “Physician, heal thyself” or “physician, heal thy country.” Or (to use another Biblical expression): “why beholdest thou the mote that is in thy brother’s eye, but considerest not the beam that is in thine own eye?”

And as for the pejorative “shit-hole”, pretty much everyone who has spent any time in India will say it is literally accurate.

Wax makes pains to say that she is not applying this to all Indians, all Brahmins, or even all Indian Brahmin doctors (thereby contradicting Penn’s claim that she makes “sweeping . . . generalizations about groups”). But I would note that I have long remarked on the fact that high status Indians in the United States are disproportionately leftist. (Another example of the celebration parallax, no doubt: the left celebrates fellow leftists).

In sum, Wax’s real crimes are: (a) pointing out truths (often uncontested and even acknowledged) that discomfit the left, and (b) defending the West generally and the US specifically from attacks by non-westerners/non-Americans who have actually been their beneficiaries. In a world where academic freedom and free speech were valued, these would not be crimes, but subjects for debate. But debate and argument is not something that the left can possibly abide–because they would lose. So instead they punish, censor, and silence.

And not just Amy Wax. This is a classic example of pour encourager les autres. Especially those who have not yet attained Wax’s record of achievement. (The treatment of Roland Fryer by another disgraced Ivy League president, Claudine Gray, is another).

The message: stay on the reservation, or else.

As the nation slouches the last seven weeks to the election, the stupidity metastasizes. We are approaching a singularity of stupidity.

Trump’s latest brainwave is to impose (by executive ukase, apparently) a “temporary” cap of 10 percent on credit card interest rates:

BREAKING: Trump announces that as president, he will immediately implement a temporary 10% cap on credit card interest rates

"We can't let them make it 25% and 30%."

Credit card interest rates are at a historic high under the Kamala-Biden regime. His simple plan will alleviate… pic.twitter.com/yENoVsqv1S

— George (@BehizyTweets) September 19, 2024

Where to begin?

First consider the embrace of executive fiat to implement major policies which undermines his main substantive virtue as someone who will restrain government power.

Then remember what Milton Friedman said about “there is nothing so permanent as a temporary government policy.”

But most importantly, er, controls on interest rates are price controls. And unless I’m hallucinating I remember Trump attacking Harris’ rather lame price gouging proposals (since abandoned, apparently) as full on socialist price controls. In fact, what Trump is proposing is far more socialist than what Harris did.

Maybe he’ll say he’s not a socialist but a convert to traditional Catholicism and therefore an advocate of usury laws. But regardless, his latest foray into off-the-cuff economic policy making completely undercuts his previous rhetoric and actually provides cover for Harris to propose real price controls just as she has aped other Trump policy ideas.

This is an example of the downside of economic populism, and a not immaterial one. And like many populist economic measures it would damage those it is intended to help (or at least, to appeal to). Such restrictions would essentially result in the loss of credit and credit cards by large numbers of low and low-middle income individuals.

Trump also said he will impose (again by fiat evidently) 200 percent tariffs on Chinese EVs imported from Mexico. This appeal to the autoworker vote (especially in Michigan) would be rendered completely unnecessary if he just eliminates EV mandates as he’s promised. He is right that EVs suck, and that no one will buy them unless forced to. So eliminating the mandate will mean EV imports from China–or Mars–for that matter will pose no threat to American autoworkers.

Just look at Europe, HQ for the EV Fluffers.

No need for tariffs on Chinese EVs if you don't force people to buy EVs. https://t.co/shkboR81cw

— streetwiseprof (@streetwiseprof) September 19, 2024

I would truly love to be evenhanded here and find some Harris policy proposal to bash. But I can’t. Because she hasn’t any. Her’s is a candidacy for the times, however–a drag queen story hour by somebody pretending to be someone they are not. A mash up between Mean Girls and Miss Congeniality:

You think I exaggerate? I think not!

This speech brought to you courtesy of the Department of Redundancy Department. https://t.co/FPRk9QlnNX

— streetwiseprof (@streetwiseprof) September 19, 2024

We have to hope that Bismarck (“There is a special providence for drunkards, fools, and the United States of America) and Adam Smith (“there is a great deal of ruin in a nation”) are both right.

Of course the other major news is the second assassination attempt on Trump. (Or as the regime and its media sockpuppets insist on saying the “apparent” assassination attempt). I have to admit that I was wrong about the effects of the first attempt: it did not stop the Democrats (and their media sockpuppets) from demonizing Trump. Indeed, the latest attempt has led them to ramp up their demonization, and to add to it by blaming the assassination attempt (sorry, sorry, “apparent” assassination attempt) on Trump’s and Vance’s rhetoric.

I can’t even.

The vampiric Mario Draghi dropped a big report on how to fix the European economy. It is one of the most ridiculous things I have ever read.

It starts out with a sober summary of how screwed the European economy is, but doesn’t even attempt to diagnose why it is screwed. By failing to do so, it offers prescriptions that will screw it even more.

Draghi is blunt in his assessment at the poor relative performance of the EU economy vis a vis the US over past decades–which is doubly damning because it’s not as if the US economy has grown like gangbusters. This is (correctly) linked to low productivity growth. Draghi attributes this poor performance to underinvestment and a lack of innovation.

But these are mere symptoms. Draghi utterly fails to answer the essential questions. Such as: Why is there underinvestment? Why is innovation so clearly lacking in the EU? What is the underlying disease that is causing these symptoms?

Could it be a heavy tax burden? Huge government indebtedness? Suffocating regulation? Extremely generous welfare and retirement benefits? Climate policies that substantially increase energy costs? If not these, then what?

These questions are not even asked, let alone answered.

It is insane to offer prescriptions–which Draghi does at scale–without first diagnosing the problem. But that’s exactly what he does.

And what prescriptions they are. In brief, a massive increase in investment on the order of $900 billion per year; since the private sector is unlikely (according to Draghi) to stump up this amount, extensive government funding of it; and in addition to government funding, government direction of the investment through industrial policy.

All of which involves more begged questions. The most important of which is if an increase in investment has the huge payoffs that Draghi asserts, why won’t (and why hasn’t) the private sector gladly make (and made) it? And: why must the government direct these investments? Why doesn’t privae capital flow to where it can earn the high returns that Draghi claims exist?

Draghi recognizes that industrial policy historically has largely failed. But again, there’s a failure to ask why in a serious way. Instead, in an echo of “communism has failed everywhere because real communism has never been tried,” he advocates doing industrial policy better. Real industrial policy would involve, for example, targeting sectors, not companies.

But again: why has industrial policy almost always and everywhere been targeted at companies? Draghi doesn’t ask, so of course doesn’t answer. Public choice forces obviously turn industrial policy into rent seeking opportunities which are exploited by companies (which are economic agents) rather than “sectors” (which are not).

Draghi makes the right noises about reducing the regulatory burden in the EU. But seriously–how will a plan that if implemented grant more powers to the centralized EU bureaucracy that is responsible for the existing crushing regulatory structure in Europe magically reduce the regulatory burden? Indeed, industrial policy is all about intervening to produce outcomes that differ from those that the market would produce, and such interventions are inherently coercive, regulatory, and bureaucratic in nature.

“We’ll solve the problem of too many rules by adding more rules” never works out well.

Another illustration of the cluelessness of this plan. According to Draghi, the ~$900 B in annual investment is necessary to achieve both competitiveness and climate objectives. Er, competitiveness and climate goals are inherently antithetical. Again, Draghi fails to consider whether the climate goals, and the policies adopted to achieve them, are one of the main drags on European investment, productivity, and growth.

In essence, Draghi is plumping for Europe to adopt the Chinese economic model. Leverage out the wazoo to spur growth through massive centrally directed increases in investment.

(In the UK this is being referred to as “supply side economics,” presumably because the government will intervene heavily on the supply side through state investment. That is an utter perversion and inversion of the term, which originally meant reducing government tax and regulatory burdens so as to encourage greater supply of capital and labor inputs by private individuals and firms).

Apparently Not So Super Mario hasn’t realized that China is now well and truly shtuped and its vaunted model is predictably (and as predicted by me and a few others) proving unsustainable. Not to mention that Europe definitely cannot benefit from factors that allowed this unsustainable model to persist for as long as it did (notably a vast pool of low wage labor). Indeed, Europe has the same demographic problems that are undermining China’s future prospects.

In sum, by failing even to consider the underlying drivers of Europe’s economic malaise and advocating that Europe implement a model that is becoming more discredited with each passing day to fix it, Mario Draghi is dooming Europe to accelerated decline, rather than offering a roadmap to recovery.

Perhaps luckily for Europe Draghi’s plan was declared DOA by Germany. No country has shown enthusiasm for it. But it’s not as if they are brimming with bright ideas–Germany in particular.

Meaning that if you are discouraged by American economic prospects–cheer up! Could be worse! We could be Europe.

A quick follow up on the implications of a national majoritarian system.

Under the Electoral College, the marginal value of a vote in a national election varies across states. At present, the marginal value of a vote in say California or New York or Texas is zero or close to it. The marginal value of a vote in a battleground state is higher. (Because Hillary was an idiot, she didn’t take this into account, and ignored Wisconsin and other places).

Under national majoritarianism, the marginal value of a vote is the same everywhere. This alone would tend to cause candidates to shift their efforts–and their promises–away from closely divided states, and those elected would adopt policies that disadvantage the closely divided states to reward California, etc.

I conjecture that the marginal cost of getting votes is lower in urban areas, especially for Democrats (particularly when fraud is taken into account). If correct, this would further shift electoral efforts and policies away from closely divided states to urban areas.

Relatedly, the median voter nationally is likely urban or very urban adjacent. The median voter in many closely divided states is not. Using the Median Voter Theorem as a crude predictive tool, this also means that policies in a national majoritarian system would skew heavily pro-urban.

Since progressives are overwhelmingly urban, it is no surprise comrades that they prefer this system.

But this analysis also demonstrates that the system would be inherently more divisive than the present one and lead to regional disagreements that could rise to the level of secession attempts or rebellion in a country with as much regional diversity as the United States. Since government is inherently redistributionist, and driven more by distributive goals than efficiency ones, a shift in power to the urban areas would lead to greater wealth extraction from the non-urban areas (and/or a reduction in benefits in these areas).

Distributive policies inherently create tensions and disagreements, and since their impact will vary substantially between urban and non-urban regions, this will create inter-regional tensions that can lead to calls for exit, since voice will be pointless under this system.

(And note that this diversity exists intra-state, consider states like California, New York, and Illinois with large urban centers and large rural areas. Or the “Greater Idaho” movement in Oregon with rurals wanting to get away from the coastals).

The main obstacle to concerted secessionist pressure will be that the regions disadvantaged under a national majoritarian system will be highly geographically dispersed, whereas the advantaged regions will be highly concentrated: the Red-Blue maps by county illustrate this clearly. The scattered and diffuse and itself heterogeneous area of net losers will find it hard to coordinate on collective action. Isolated and uncoordinated secessionist pressures are easily suppressed.

Contrast this to the pre-Civil War South. The opposition to the Federal government was geographically concentrated and had considerable homogeneity. (With exceptions like the mountainous regions of Tennessee, North Carolina, Georgia, and Alabama–which were often in quasi-rebellion against the Confederacy. The mountain region of Virginia did secede from it). This made collective action on secession feasible.

So I would predict the progressive national majoritarian constitution would lead to seething discontent over widespread areas of the country, but would be unlikely to result in widespread secession or rebellion precisely because the discontented areas would be so far flung.

Nonetheless, rising discontent, even if inchoate, would lead the security state to ramp up its repressive efforts. Meaning that an America under a progressive constitution would be far less free than the country is today.

The latest buzz from The Hive has been “kill the U.S. Constitution–it’s dangerous!”

(H/T Powerlineblog.com)

In addition to the NYT’s buzzing, there is a long article in The Atlantic, and a new book from UC Berkeley law dean Erwin Chemerinsky making the same case. (He’s a piece of work, but that’s a topic for another day).

In reality, this isn’t a new thing. At all. Progressives have always detested the Constitution. Woodrow Wilson, Eternal Torment Be Upon Him, was particularly adamant that the 18th century creation was an atavism that obstructed progress–his vision of progress, anyways. Progressive historians Charles and Mary Beard wrote prolifically about the defects of the Constitution, focusing particularly on its allegedly tainted origins as a scheme of the rich to dominate the common folk. That theme has been updated–and not for the better–by the recent anti-Constitutionalist focus on the document’s illegitimacy due to its supposed purpose to entrench and enhance slavery. (Neither the Beards nor the modern day slavery obsessed had/have any clue of what they were/are ranting about).

Progressives have two basic underlying problems with the Constitution.

First, that it is a deliberately anti-national majoritarian document. This causes them particular chagrin today because the Republican Party has only won a national majority of the popular vote once in the last six presidential elections, yet has won the presidency three times. And especially because Donald Trump was one of those winners.

Second, that it (especially the Bill of Rights) is based on natural law principles, which are an anathema to progressives. They believe in positive rights granted by the government, not natural rights emanating from Our Creator (to quote the Declaration of Independence). FDR talked about the Four Freedoms–positive rights like “freedom from want.” Obama repeatedly denigrated natural rights and pushed positive ones. Kamala Harris is parroting that today–she is hostile to free speech but touts “freedoms” that are positive rights.

These objections overlap to some degree, because the constraints on majorities in the Constitution impede progressives’ ability to achieve their positive rights ambitions.

As the NYT headlines demonstrate, a good deal of progressive ire stems from immediate, short-term political frustrations, namely the existence of Donald Trump, the fact he was president once, and the mere possibility he may be again.

This focus on the here and now makes the anti-Constitutionalists like monkeys with matches and gasoline. They clearly have not thought through what a dismantling of the Founder’s construction would cause.

Eliminating the Electoral College and/or dramatically altering the Senate (the two primary anti-national majoritarian elements of the Constitution) would lead to changes that are utterly unpredictable, and unlikely to result in the achievement of progressive dreams.

Simplistically, they think–Democrats almost always win the national popular vote, so if we move to a system that decides elections on that basis Democrats will be in power forever. No Donald Trump will ever exist again.

Such projections are idiotic.

With an entirely changed system, everything will change. Parties will change. Platforms will change. Electoral strategies will change. Candidates will be different.

The Democratic popular majority+periodic Republican Electoral College victories (and Senate majorities) outcome is an equilibrium in the existing system where the parties roughly optimize with respect to that system. Change the system, all the actors will adjust and only fools believe that the outcome will be a permanent Democratic popular majority resulting in permanent Democratic rule. (Ironically, long periods of single party dominance occurred under the existing system).

Far more concerning is that secessionist and rebellious tendencies would be much stronger in a system without the Electoral College. That system provides an incentive for parties and politicians to pay attention to parts of the country they would almost certainly ignore absent the Electoral College.

One conceivable electoral strategy is to concentrate on urban areas and let the rest of the country go screw. But there will come a point where the ignored will want out.

Remember, without the anti-majoritarian elements in the Constitution, the United States would never have come into existence in the first place, precisely because smaller states feared being ignored, powerless, and exploited in a national majoritarian system. That is, without the Electoral College, most states would have wanted to come into a union: without it, many states in it will want to get out.

Further, the Founders recognized that majoritarian systems are inherently unstable. (Game theory supports their intuition). This instability would be manifested in the changes in electoral strategies, policies, platforms, etc. alluded to above. And instability increases the odds of rebellion or secession.

In sum, if the progressives get their way, be afraid. Be very afraid.

And that’s what this is really about: progressives desperately want to get their way. Right now. And that’s why it’s no coincidence that the anti-Constitution movement is happening now, in the wake of a major shift in the Supreme Court.

When the left controlled the Court it could grudgingly accept the anti-majoritarian elements of the Constitution because they could get their way on major matters by having the Court bend and twist the Constitution like a Gumby. That allowed them to outflank an executive and Congress chosen on non-national majoritarian grounds on matters important to them.

Now that route is blocked, at least for the time being. The short term “fix” the ever impatient progressives have come up with is court packing–which is what FDR tried to do when the Court stymied him. But why limit their ambitions to changing the Court? Why not just change the whole damn system?

They want change and they want it now. And they are only thinking about the now, damn the future.

A Constitutional system that has endured for almost than two-and-a-half centuries is under grave threat, event absent a jettisoning of the Constitution. The dominance of the security state, with its inveterate hostility to natural rights like free speech and a right to bear arms that threaten its control, is the immediate threat. Changing the Constitution along progressive lines–and perhaps replacing it altogether–would guarantee the dystopian future towards which we are already slouching all too rapidly.

My web hosting service of the 18+ years of this blog’s existence is canceling me. The story is that “certain websites, including yours, will no longer be supported by our technical team due to outdated technology.” (Emphasis in original.). Well, maybe. But these days one never knows.

Regardless, the site will be migrating to a new hosting service. We will see how that goes.

As a precaution, I will start a Substack and cross post there. Depending on how that goes, I might migrate completely to Substack.

I’ll keep you all apprised.

Regardless of where this endeavor (which has lived far longer than I ever could have imagined) ends up, I very much appreciate those who have followed and read SWP over the many years of its existence, and I hope you continue to do so.

Cheers,

Craig Pirrong AKA The Streetwise Professor.

As a follow up to yesterday’s post. Upon consideration you can characterize the differences between Tyler Cowen and I as a dispute over which margins The Blob would adjust if cut down to size.

Cowen believes that the important margin would be the amount of “customer service.” That is, fewer regulators means fewer people to help guide the regulated through the regulatory labyrinth.

I believe that there would be other margins. Fewer rules, or less complicated ones–that is, a less gnarly labyrinth. And crucially, fewer regulators to obstruct and harass (rather than facilitate) companies endeavoring to do wealth-enhancing things.

Along these lines, the recent book by Supreme Court Justice Neil Gorsuch–Over Ruled: The Human Toll of Too Much Law–comes down firmly on the obstruct/harass side of the argument:

In one such story, an agent from the U.S. Department of Agriculture informed a young magician, Marty Hahne, that he needed a license for using his rabbit in the act he had just performed at a local library. Hahne subsequently learned he also needed an evacuation plan for the animal in case of a hurricane or some other disaster. This requirement originated in a federal statute, the Animal Welfare Act, which regulates the treatment of dogs, cats, rabbits, and other animals for research, teaching, testing, and exhibition. Congressional lawmakers called on the USDA to apply the law to such venues as “carnivals, circuses, and zoos.” USDA regulators interpreted those exhibitions to include magic shows.

There are other stories.

Of course, argument by anecdote (or parable) has its problems, most notably how representative the anecdotes/parables are. But the kinds of things Gorsuch describes cast serious doubt on the “we’re from the government and here to help you” theory, and support the alternative view that the real story is “we’re from the government and here to make your life miserable.”

In which case, cutting down the number of those with power to make you miserable has to be a good thing, even if from time to time they actually do help you.

Tyler Cowen is high variance. He can be very insightful, or annoying AF. His recent piece in Bloomberg on downsizing the Federal bureaucracy is in the AF category. (In the interest of balance I will cite to an insightful piece below).

The impetus for the article is Elon Musk’s statement that he would be willing to serve on a Department of Government Efficiency that would be tasked with cutting down the bureaucracy’s head count. Cowen refers to the fact that at Twitter Musk cut head count by 80 percent with no loss in output (and thus causing a 5-fold increase in productivity) and says it can’t be done with the bureaucracy.

Why? Sayeth Cowen:

Businesses need to make plans, and they frequently consult with regulatory agencies as to what might be permissible. The Food and Drug Administration needs to approve new drug offerings. The Federal Aviation Administration needs to approve new airline routes. The Federal Communications Commission needs to approve new versions of mobile phones. The Federal Trade Commission and Department of Justice need to give green lights for significant mergers. The Federal Deposit Insurance Corp. needs to approve plans for winding down failed banks. And so on.

There are so many problems with this argument. Where to begin?

Well, for one thing Musk’s Twitter experience demonstrates that even private business can have many zero marginal product (and indeed, zero average product) workers. But somehow the Federal bureaucracy doesn’t? It couldn’t be made more efficient by cutting the dead wood? Of which there is obviously a lot? Given that Cowen often writes about zero marginal product workers, it is rather remarkable that he implicitly argues that government workers are overwhelmingly positive marginal/average producers, especially given the extremely low power incentives and lack of accountability for poor performance that they are subject to.

In other words, identify the people who are actually performing the “customer service” to which Cowen refers, and get rid of the rest. Of whom there are likely a lot.

Moreover, these “customer service” functions represent only a fraction of what bureaucrats do. A good deal of it is administrative overhead which could be reduced if head counts and budgets are cut.

Another big part of it is writing rules and interpreting rules that were promulgated previously.

The number of pages of new rules added to the Federal Register is a common metric of increased regulatory burden. It is these rules (and their implementation, which I discuss below) that generate the deadweight costs of regulation. Fewer bureaucrats, fewer rules, greater economic efficiency. Without hitting “customer service,” and indeed, reducing the need/demand for customer service, since most of what Cowen describes as the essential function of the bureaucracy is helping business navigate a labyrinth of rules. Less bureaucrats, fewer rules, simpler labyrinth, less need for customer service (and the bodies necessary to perform it).

I would also argue that this customer service is chimerical, and is in fact a form of rent extraction that reduces wealth. That is, in supposedly “helping” business, bureaucrats’ produce bads, not goods.

I view regulation through the lends of property rights economics. Regulation is essentially an incomplete contract. Congress creates a really incomplete contract, bureaucrats craft regulations that make them somewhat more complete, but still wildly incomplete.

The allocation of residual control rights (rights not specified in the incomplete contract, or specified but non-verifiable) is vital in incomplete contracts. It is this allocation that affects incentives by affecting bargaining power. In regulation, it is the regulators who have the residual control rights. The “customer service” that Cowen describes involves negotiations with regulators who have residual control rights. They can say no to what you are asking for, or can add conditions, etc., etc., etc.

Property rights economics states that residual control rights (which in the literature basically involves control rights of access to assets) affect investment incentives because those with the rights have bargaining power. It is efficient to put bargaining power (and hence residual control rights) in the hands of those who can make non-contractible, value enhancing investments.

This is one reason why regulation, when viewed as an incomplete contract with a particular allocation of residual rights, is so likely to be highly inefficient: businesses, not government bureaucrats, are the ones who can make non-contractible, value enhancing investments but they don’t have the bargaining power. This is ass-backwards.

How do regulators use their bargaining power? To extract rents, which is what anyone with bargaining power does. Rents that do not incentivize wealth producing investments. They can’t receive these rents in monetary form (you can’t even take a regulator to lunch and pay for it). So they collect them in the form of justifying their existence, getting bigger budgets and staffs, empire building, implementing ideological objectives, ego and envy (feeling powerful by sticking it to those who make a lot more money), and creating obstacles so that they can sell themselves to the private sector as expert in working around.

(Again note the synergy between rule writing and bargaining with the regulated over implementation of the rules).

My experience with CFTC regulation, and in particular my short-lived experience as a consultant to the CFTC Inspector General, gives me an understanding of how this process works. One of the things I’ve written about over decades is the thicket of interpretations, no action letters, advisories, etc., that grew up in the aftermath of the passage of each major revision to the Commodity Exchange Act. The project I was working on with the IG was to document how extensive this practice has been, and how much the CFTC has relied on it.

The process by which this thicket is created is exactly the process that Cowen describes. “Consulting with regulatory agencies to see what might be permissible.” In essence, negotiation between the regulators and the regulated, with the bargaining power–and the ability to extract rents–resting in the hands of the regulators. (I do understand that sometimes information asymmetries give bargaining power to the regulated. My experience decades ago looking into the 1988 S&L bailouts showed me how this can work).

So, what would happen if the number of regulatory personnel was reduced? Cowen thinks it would reduce the output of successful negotiations, and that businesses would be stymied in the absence of such.

But is that really the case? For one thing, the zero MP/AP issue discussed above means that a reduced head count does not imply a reduction in output (the number of successful negotiations). But even overlooking that, if one views a major effect of these negotiations as rent extraction, reallocating bargaining power away from bureaucrats can improve efficiency.

Regulators with less capacity to negotiate have less bargaining power: the ability to string things along (which is easier when you have more bandwidth) enhances that power. Furthermore, more regulators typically means more fiefdoms within the bureaucracy that have a place at the bargaining table, hence more negotiations, more complicated negotiations (since more bureaucrats have effective veto power), and greater power to extract rents. The potential for multiple marginalization problems grows. (Think of when every local lord could extract tolls from those traveling a road that ran across their lands).

The real difference between Cowen’s view and mine seems to be that he believes that increasing the number of bureaucrats increases the output of wealth enhancing negotiations, whereas i believe that it likely increases the amount of wealth reducing rent extraction that occurs due to bureaucrats’ bargaining power.

A customer service model vs. an extortion racket model, if you will. Help with navigating through complex and confusing regulations (complex and confusing due to their incompleteness) vs. using that complexity and confusion to hold up wealth producers.

Starkly different views with starkly different implications. Cowen may not be all wrong, but his rosy “I’m from the government and here to help you” view clashes with the economics of bureaucracy, and certainly my personal experience with it.

So I say hack away. That’s the only way to find out which parts of the bureaucracy enhance wealth and which don’t. Hire back the ones that do and force those that don’t find an honest living.

Which is pretty much what Musk did at Twitter.

As promised, in the interest of balance, I recommend Cowen’s takedown of the insane idea to tax unrealized capital gains (and the companion piece by his co-blogger Alex Tabarrok).