Libertarian Writers' Bureau: Eric Schansberg

Subsidies do little to enhance Hoosier economy

2005-10-26T00:07:00.000-07:00

by D. Eric Schansberg

A recent front-page article in the Courier-Journal illustrates the continuing interest in government offering subsidies to businesses at the state and local levels. Governor Daniels wants to tweak the award process of Indiana's '21st Century Research and Technology Fund". Instead, he should end the program. Although the Fund is named for the 21st century, the thinking behind it is more in line with 18th century mercantilism and 20th century central planning.

Local governments in Indiana often seek to subsidize specific manufacturing interests through targeted tax abatements. Meanwhile, the state government is trying to promote high-tech industries. The problem is the same in either case. Do the subsidies result in long-term net economic activity that outlives the corporate welfare and outperforms the alternate uses of that money in the private sector? And why would we imagine that the State has more knowledge than the Market in consistently picking winners in the business arena?

With these policies, there are four possible outcomes. First, the government can subsidize that which will be unsuccessful despite the subsidy. In this case, taxpayer money is thrown down a hole. Second, the government can subsidize that which will operate while receiving the subsidy but cease operations afterwards. In this case, taxpayer money is wasted since it is used to subsidize a short-term, inefficient project. Third, the government can subsidize that which would have been successful anyway. In this case, taxpayer money simply goes in the pocket of the business. Fourth, the government can subsidize that which could only start with the subsidy and continues to operate without subsidies afterwards. This is the only category that can be considered an economic success.

In practice, this is challenging to assess. Sufficient time is needed to determine whether the business endeavor will survive the length of the subsidy. Beyond that, it is difficult or impossible to determine when success was caused by the subsidy. But how many examples could there be in the fourth category? And what is the likelihood that the victories in that category outweigh the losses in the other three categories?

Proponents point to the economic activity generated by the grants and abatements—plus the ripple effects. But in each case, the results should be compared to what would have happened in the absence of the income transfer. For example, if taxpayers had $75 million more in their pockets, they would create $75 million worth of economic activity—plus the ripple effects of that money. As such, this mostly reduces to a shell game—where resources are shifted from taxpayers to connected business interests and where inefficiency is often subsidized by the general public.

That's the economics of grants and tax abatements. What about the politics? Like most forms of income redistribution, these policies have concentrated benefits and small-per-person costs. So, it is easier to see the benefits and more difficult to see the costs. This means that policy makers are likely to overestimate the impact of such policies and likely to overstate the impact to their constituents. We can also count on recipients of the benefits to tell us how wonderful the program is! Meanwhile, the general public is unlikely to catch either error or deceit because the costs are so small per person. At the end of the day, this is largely about redistribution from average Hoosier taxpayers to the upper-class (those in universities and the 'higher-paying jobs" the government is trying to attract), from the general public to the politically connected.

At the local level, most Democrats and Republicans support targeted tax abatements. And at the state level, most Democrats and Republicans support grants to targeted businesses. Democrats have more faith in the government as a central planner and Republicans are 'pro-business", so it's a convenient marriage. In contrast, Libertarians are 'pro-market"—a position frequently confused with pro-business, but more objective and ultimately friendlier to the general public as consumers and taxpayers.

It's not particularly sexy and it isn't as useful for winning elections, but a more equitable and efficient program for economic growth would focus on making the general environment for business as friendly as possible—for example, through lower taxes for all businesses. Instead, we have bureaucrats investing in what one observer called 'highly speculative projects". Why take the gamble? Similar to what they like to say about the lottery: someone's got to lose, it might as well be the taxpayer.

D. Eric Schansberg
Professor of Economics
Indiana University (New Albany)
Adjunct Scholar: Indiana Policy Review and The Acton Institute
(812) 941-2527dschansb@ius.edu

Wal-Mart: The Yankees of the Retail World

2005-08-23T18:50:00.000-07:00

In sports, many people love to hate a successful team. The Yankees, Cowboys, and Lakers have a large number of avid fans, but they also have the most vocal opposing fans. It reminds me of Wal-Mart, its fans, and its critics. Wal-Mart is a company with more than a million satisfied workers, millions of eager owners (shareholders), and hundreds of millions of avid customers. But it's also a company with a lot of enemies who have a surprising level of venom for it.

One key difference with athletics: sports is a 'zero-sum game"—if your team wins, my team loses. With Wal-Mart or any standard market activity, the result is a positive-sum game—as consumers, workers, suppliers, and Wal-Mart engage in untold billions of voluntary, mutually beneficial trades.

I've also become convinced that part of the hatred toward Wal-Mart is elitism. Ironically, Wal-Mart is both a huge corporation and a tremendous friend of the poor. Its stores are disproportionately staffed by relatively low-skilled people. Its products are bought disproportionately by those with below-average incomes. And its longer lines favor those for whom money is more valuable than time. But for many of its critics, Wal-Mart is a convenient target because they are snobs who would never set foot in such a 'low-brow" shopping environment. Going back to sports for an analogy: Wal-Mart is similar to bowling and NASCAR—immensely popular activities that wealthier people often sniff their noses at.

While some of the complaints about Wal-Mart may have merit, most are based on a failure to recognize the workings of competitive markets. Wal-Mart is accused of exploiting workers in a variety of ways. But how can they maintain an active labor force with that reputation? Wal-Mart is accused of seducing the poor to buy their product. But are poor people being attracted by low prices or allured by some magic formula they're piping through the ventilation? Wal-Mart is accused of forcing American communities to accept box-like buildings. But cities are free to negotiate more suitable arrangements with Wal-Mart—and many have done so. Wal-Mart is accused of making huge profits. But it's also a huge company with prolific sales and its 3.6% profit margin is well within the norm.

The newest complaint is that workers at Wal-Mart rely on government welfare programs—from Food Stamps to Medicaid. The complaint is expressed as Wal-Mart depending on the government and bilking taxpayers. But this purposefully confuses the welfare recipient with his employer. In fact, Wal-Mart should be praised for giving employment opportunities to less-skilled workers. How would the worker (and taxpayers) be better off if Wal-Mart didn't employ that worker? The cause of the low earning power is the worker's relatively low productivity—not some grand conspiracy to keep wages, somehow, artificially low.

Of Wal-Mart's enemies, unions understandably want a piece of this (huge) pie. But Wal-Mart would not be nearly as competitive if they had to pay the artificially high wages demanded by unions—or to deal with the inevitable inefficiencies associated with union representation. Besides, workers are voting with their feet by exhibiting their willingness to work for Wal-Mart every day.

Likewise, the most recent protests have come from the teachers' unions—as they encouraged people to boycott Wal-Mart at the start of this school year. Of course, the teachers' unions want Wal-Mart to become unionized. And they're upset that Wal-Mart's foundation has financed charitable scholarships for the poor and has supported publicly-funded vouchers. The former is most amusing. When you see people getting upset at charity, you know their selfish interests are being harmed!

Forcibly eliminating or restricting Wal-Mart—or any retail store—would hurt consumers, workers, and suppliers who would be deprived of legitimate opportunities to buy, to work, and to sell. The beneficiaries of such restrictions are the retailers who would not need to compete with Wal-Mart. Producers always benefit from restricting their competition—whether farmers or textile companies, whether the post office or the public schools.

While professional golfers would love legislation that prohibited Tiger Woods from entering tournaments—or allowed him to play with extra weights strapped to his legs—the better answer is not working to eliminate or reduce Tiger, but rising to his level.

Unions, Unite!

2005-07-26T17:03:00.000-07:00

by Eric Schansberg
Libertarian Writers' Bureau

This week, the AFL-CIO is supposed to celebrate the 50th anniversary of the merger between the AFL and the CIO. But there isnâ€™t all that much to celebrate, given a half-century of declining union membership and, in recent decades, diminished political power.

To add insult to injury: a maverick group, the â€œChange to Win Coalitionâ€, has decided to compete with the AFL-CIO. In doing so, they imagine better strategies and promotional efforts. Unfortunately, this will not be the pivotal moment they hope for, but simply a blip in the long decline of private sector unions.

Why have private sector unions declined over the last 50 years? In a nutshell, the answer is increased competition. The problem for unions has not been a failure to recruit workers, to organize drives, or to promote unionism. Rather, private sector unions are doomed to diminish in an increasingly competitive marketplace.

Unions are a labor market cartel whose members bind together as one bargaining unit to artificially increase wages and compensation. Like a cartel in a product market (e.g., OPEC), they hold the cartel together by promoting solidarity among members and limiting competition from outsiders. The busy legislative agenda of unions underlines their commitment to restricting their product and labor competitionâ€”from trade protectionism to â€œprevailing wageâ€ laws. Unfortunately, their political market activity benefits themselves at the expense of consumers and competing workers.

As a cartel seeking greater compensation, unions can thrive in arenas with limited competition and the relatively high profits that follow. In those cases, unions are splitting the booty with the owners of the firmâ€”as both benefit at the expense of consumers who have few options. But when competition is intense, companies can neither afford to pay the compensation premiums that unions demand nor tolerate the inefficiencies that unions encourage.

In recent decades, a number of economic factors have combined to undermine the success of traditional unions. For example, our economyâ€™s transition from manufacturing to service has made life more difficult for unions. Given the large fixed costs required to start most manufacturing endeavors, it is relatively difficult to enter those industries. As a result, such markets are dominated by fewer firms with more monopoly powerâ€”a market structure that economists call â€œoligopolyâ€. In contrast, service industries typically have lower fixed costs and are thus marked by a greater number of firms, tighter profit-margins, and a more competitive environment.

Beyond that, increased regional and global competition in manufacturing has been exceedingly difficult for unions. These days, manufacturing firms face much greater competition from other parts of the United States and the rest of the world. Again, such firms can scarcely afford artificially higher costs. Moreover, many firms can often avoid the higher costs associated with unionsâ€”since it is increasingly easy for them to operate in non-union environments in the United States or in foreign countries.

Perhaps the largest factor in private sector union decline was the deregulation of the communications and transportation industries under Presidents Carter and Reagan. First, the increased competition in those arenas dramatically increased the capacity of people and firms to engage in trade, increasing competition between firms. Along with important technological advances in communications such as the Internet, lower communication and transportation costs were the catalysts for the globalization we see today. Second, deregulation introduced significant competition into key union strongholds. Previously, the unions had been dominant forces within these regulated monopolies (e.g., Ma Bell) and heavily-regulated industries (e.g., airlines).

If competition is the cause of union woes, then reducing competition is the only remedy. But absent dramatic policy changesâ€”for example, massive trade protectionism or re-regulationâ€”private sector unions will have little or no opportunity to enjoy a renaissance.

Ironically, todayâ€™s union movement is built on the idea that competition is a bad thing. So, the efforts of the Change to Win Coalition are built on hypocrisyâ€”as they seek to compete with the AFL-CIO instead of remaining united. Beyond that, their efforts are built on futilityâ€”in trying to push back the clock to an era when consumers were in far less competitive markets.

D. Eric Schansberg
Professor of Economics
Indiana University Southeast
Adjunct fellow, Indiana Policy Review Foundation
Author, Turn Neither to the Right nor to the Left: A Thinking Christianâ€™s Guide to Politics and Public Policy

You Can’t Take It With You

2005-07-02T03:40:00.000-07:00

by D. Eric Schansberg

It has been said that the only sure things in life are death and taxes. It seems that Democrats are fond of combining the two-- especially for the wealthy and the working poor.

Opposition from national Democrats to "estate tax" reductions is well-established. Their political savvy combined with a lack of political resolve by Senate Republicans resulted in a bizarre set of changes to the federal estate tax in 2001. Under the "reform", the estate tax will be reduced from 2002 to 2009-- as exempted wealth increases dramatically (from $1 million to $3.5 million per person) and as the top marginal tax rates gradually decreases (from 50% to 45%). Then, the estate tax will be completely repealed in 2010 before reverting back in 2011 to the exempted wealth amount we had in 2002 and the top marginal tax rate we had in 2001. It's enough to make one wonder whether the War on Drugs is being waged effectively within the halls of Congress!

Unfortunately, estate taxes are inefficient. Those looking to avoid estate taxes routinely spend tens of thousands of dollars for "estate planning"-- legal, accounting, and financial-planning services to limit their exposure to the tax. This has become more absurd since 2001. The wealthy now need many different such "plans"-- many to deal with the nearly annual changes in the law and one more to deal with the one-year (and perhaps future/permanent) repeal.

Beyond that, there are legal and accounting costs of tax compliance at death. Note that these costs also extend to those who must merely convince the IRS why they don't have to pay any estate tax. (More than half of estate-tax returns are filed to prove no tax burden.)

In addition, there are a number of other important considerations that impinge on small business. Both planning and compliance are more complex (and expensive) for small businesses. And a number of small business owners buy (taxable and expensive) life insurance policies to cover future estate taxes-- since estate taxes are based on assets but must be paid out of income.

Of course, all of this also harms the economy-- in terms of job growth, productivity, standards of living, and so on. Beyond the diversion of resources from productive uses toward tax evasion and tax avoidance, estate taxes also create disincentives to work and to save. Although estate taxes are not a trivial component of the federal budget (raising $24.8 billion in 2004-- 1.3% of federal revenues), given the disincentives and their drain on the economic growth, economists have estimated that overall tax revenues would actually increase without this tax.

Estate taxes are also, in most people's minds, inequitable. First, an estate tax is "double taxation"; earned income has already been taxed once in life and then is taxed again at death. Second, the burdens described above are more likely to fall on-- and be relatively less burdensome for-- those with tremendous wealth and those whose wealth is not tied into the assets of a small business or a farm.

On the other side of the income distribution, "contributions" to Social Security could represent the vast majority of assets for the working poor and the lower-middle class. Yet Democrats are fond of defending the status quo on Social Security, including its brutal 12.4% tax on every dollar earned up to $90,000. At least, they're consistent. For those who die relatively early, Social Security is the ultimate estate tax-- a 100% tax on what would otherwise be a huge asset for the working poor. And it turns out that the poor and especially the uneducated die earlier than average and are less likely to receive survivor benefits from Social Security. (For example, college graduates live, on average, ten years longer than high-school dropouts.)

The Republicans are the party of social conservatives and the wealthy. And I think I understand why Democrats proclaim themselves to be "friends of the middle class". They enjoy taxing the wealthy and the working poor. And they enjoy promoting a complicated estate tax that increases the demand for the services of middle-income and upper-middle income lawyers, accountants, and financial planners. Only Libertarians emerge as serious proponents of reduced taxation-- at least for small business, the poor, and the dead.

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D. Eric Schansberg

Professor of Economics at Indiana University Southeast

Adjunct Scholar for the Indiana Policy Review and the Acton Institute

Author of Turn Neither to the Right nor to the Left: A Thinking Christian's Guide to Politics and Public Policy

It's a Wonderful Retirement?

2005-05-25T18:43:00.000-07:00

By Eric Schansberg, Ph.D.

In the movie, "It's a Wonderful Life," an angel shows a frustrated George Bailey how life would have been different had he never lived. We in the Midwest, spiritual descendents of the good Mr. Bailey, still like to break things down to their basics.

It is often the best way to address life's most complex problems. For instance: How would life be different if we didn't have Social Security? What would be the public reaction if it were proposed for the first time today?

For starters, try to imagine the political reception for a plan that would cause a single parent with two children and an income at the poverty line to lose more than $2,400 to a new 12.4 percent tax.

Under this "new" proposal, a household with $40,000 in income would lose nearly $5,000 and a household with $90,000 in income would lose more than $11,000. And the amount of the tax would not increase any further for those earning more than $90,000 or so.

Any modern politician who dared advocate any of this would be shouted down as a heartless oppressor of the poor. But this in fact is the structure of Social Security taxation.

Imagine next that legislation is proposed requiring lower-income and middle-income workers to save a significant proportion of their income, since many people lack the discipline and foresight to voluntarily save enough money for their own retirement. (Upper-income workers would only be forced to save a smaller proportion of their incomes.)

Assume further that Congress wants to mandate that these savings only be allowed to go into a single investment vehicle, one with a puny 1 percent rate of return at that. Keep in mind that a person who worked from age 18 to 64 for 40 hours per week, earning only the minimum wage but investing the equivalent of the Social Security tax at a rate of return equal to the historic average of the stock market, would have a nest egg of $600,000 in current dollars.

A modern politician trying to defend the comparatively miserly return of the Social Security tax could expect only scorn.

Or what if George Bailey and his wife had died before drawing a Social Security check? George's family would not have benefited at all from his 'contributions" to Social Security. Moreover, some public-policy analyst would make the point that people in groups who tend to die early — for example, African-Americans — would be penalized by this provision. Yet, this is the current arrangement under Social Security.

Why, then, was Social Security ever attractive?

The answer is that any such pay-as-you-go system can work for a generation or two. Instead of a retirement plan where workers finance their own retirements, Social Security transfers income from current workers to current retirees. For the first generations within such a system, retirees contribute relatively little but reap a lot when compared with later generations.

However, once the system reaches maturity, it is unlikely to provide an impressive rate of return. It also becomes vulnerable to demographic changes that alter the number of workers or retirees, as we are now seeing.

Our friends in Washington tell us it's too late to take this idea behind the barn and shoot it. The only options are to tweak a bad system (change the retirement age, reduce benefits or increase taxes) or attempt some form of privatization (with a potentially thorny transition).

At the least, policymakers should relieve the oppressive Social Security taxes imposed on George Bailey's most socially insecure neighbors — the working poor. Also, the pathetic rate of return should be increased and the inequities in the payouts addressed.

Without these meaningful reforms, life in the retirement years will not be as wonderful as it ought to be.

D. Eric Schansberg, a professor of economics at Indiana University Southeast, is an adjunct scholar for the Indiana Policy Review and the Acton Institute. He is also the author of Turn Neither to the Right nor to the Left: A Thinking Christian's Guide to Politics and Public Policy (Alertness Books).

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Legal Disclaimer: The Indiana Policy Review Foundation is a nonprofit education foundation focused on state and municipal issues. It is free of outside control by any individual, organization or group. It exists solely to conduct and distribute research on Indiana issues. Nothing written here is to be construed as reflecting the views of the Indiana Policy Review Foundation or as an attempt to aid or hinder the passage of any bill before the legislature or to further any political campaign.

Competition will best serve state hospitals

2005-04-26T18:24:00.000-07:00

In recent months, there has been considerable discussion about moratoriums on building hospitals in Southern Indiana. In Clark, Floyd, and Harrison counties, local government officials have been listening to the competing interests of existing county-run hospitals and those who would like to enter the market for hospital services.

On the surface, it's difficult to imagine why one would want to prevent a hospital from opening. A hospital is not a porn shop or a toxic waste dump. Building and operating a hospital is not much of a zoning issue; one could seemingly find a suitable place to allow a hospital to operate somewhere within a county.

The best explanation is a common one in the intersection between economics and politics: no supplier enjoys competition for the goods or services they sell-- and they may find government a cooperative ally in restricting their competition.

Unfortunately, restricting competition is only in the interests of the provider who wishes to maintain or extend monopoly power. Consumers and society as a whole will not benefit from having fewer options and less competition in a market.

Because the general public is intuitively aware that restricting competition is not a good thing, the producers and their politicians must tell "good stories"-- rationales to explain why less of a good thing is supposedly better. In Harrison County, they're worried about "sky-rocketing health care costs".

But how would a lower supply and less competition keep costs down? They've also expressed concern that another facility will "undermine the health, welfare, and economic well-being of county residents". But how would more health care options be a detriment to county residents? Even health care employees would benefit-- with more employment alternatives.

The best of the good stories is that a moratorium would "prevent unfair competition". Private-sector hospitals are accused of "cherry-picking" and "skimming profits" by avoiding less-profitable patients-- in particular, the indigent and those in prison. Doubtless, this is true to an extent and some cause for concern.

But a more direct way to deal with this issue is to directly subsidize the care of those who cannot pay-- wherever they receive their care-- rather than setting up an arbitrary monopoly. Moreover, proponents of the moratoriums fail to mention that county-run facilities have lower tax burdens. A truly "level playing field" would also eliminate such subsidies.

In a sense, it is comforting to see politicians be so consistent. Most of them work to foster the monopoly power of government-run schools and the post office. Many of them vote for tariffs and quotas to restrict competitors in product markets. So, why should the market for hospital care be any different?

Likewise, the business community proclaims its love for "the free market". But its love is often fickle-- wanting competitive markets for the inputs they purchase and open access to foreign markets, but clamoring for restrictions on competitors in the particular domestic markets where they sell product.

Perhaps the most ironic thing in the discussion about hospitals: the county hospitals are fighting to maintain their local turf while seeming to ignore the far larger market. At present, hospitals in Southern Indiana already face their most significant competition from hospitals across the river in Louisville.

What difference would it make to have a few more facilities in Floyd, Clark, and Harrison counties? To note, despite all of the competition in Jefferson County, Louisville has a robust market for hospital services. In a word, moratoriums on hospitals are not exactly what the doctor ordered.

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D. Eric Schansberg
Professor of Economics, Indiana University Southeast
Adjunct Fellow, Indiana Policy Review

Two cheers for Governor Daniels

2005-02-28T18:22:00.000-08:00

by Eric Schansberg • February, 2005

Emerging from a stint as the first budget director in the Bush administration – a group both fiscally liberal and quite willing to use public policy to score political points at the expense of the economy – it wasn't clear how Mitch Daniels would approach policy decisions as governor.

When he faced such a choice, would he craft good economic policy or try to please political constituents?

His most famous proposal has been to (temporarily) increase taxes on those with relatively high incomes. Although it'd be difficult to describe a tax increase as good economic policy, it's an interesting proposal because it would seem to irritate one of his stronger constituencies. Since then, Daniels' comments in two smaller areas continue to signal his willingness to forsake political gain – this time, by embracing good economic policy.
First, Gov. Daniels has insisted on competitive bidding for licenses to operate slot machines, if the legislature approves the expansion of gambling.

His stance on this issue is nuanced and impressive. Daniels is not advocating an expansion of gambling and even seems to be signaling mild opposition, whether out of economic or moral concerns.

But he also recognizes that the legislature could insist on additional gambling over his veto. He is wisely seeking to shape policy in this area by encouraging a competitive-bidding process rather than automatically awarding lucrative gambling licenses to existing providers in the horse-racing industry.

Second, Gov. Daniels recently announced that he will not support a continued federal subsidy for Amtrak, in line with the recent Bush budget that proposes its elimination.

The inefficient train line has enjoyed public subsidies of $29 billion since its inception 34 years ago, taking the average family of four for a $400 ride in higher taxes over that time period. But eliminating this welfare program would risk 640 Amtrak jobs in Beech Grove, an Indianapolis suburb.

Support for the subsidy is nearly universal within both major political parties. But Daniels has distanced himself from the political pack, embracing good economic policy while alienating a local constituency.

Not surprisingly, Gov. Daniels' two policy proposals are not popular with the relevant interest groups nor their politicians.

Mike Brown, a spokesman for the horse-racing industry, said they're "not big fans of the [competitive-bidding] concept".

Likewise, Lawrence Buell (R-Indianapolis) said, "Over the years, I've worked pretty hard to keep Amtrak afloat. Some subsidy is really necessary."

While enhancing competition and eliminating subsidies of inefficient enterprises are clearly good for the economy as a whole, special-interest groups are especially interested in what serves their own interests. Likewise, the two policy proposals benefit consumers (in the case of gambling) and taxpayers (in the case of Amtrak).

But the benefits to them are difficult to see, whereas the benefits of opposition to the Daniels proposals are obvious for the interest groups and their politicians.

This is the nature of much government activism: Impose small-per-person, subtle costs on the general public and society as a whole while enhancing the wealth of a politically connected special-interest group. The interest group passionately pursues the policy while the general public is "rationally ignorant and apathetic" of that which costs them relatively little per person and hurts the economy overall.

On these two policy matters, Governor Daniels can expect the support of Libertarians and fiscal conservatives. Because this is only a small subset of the population, impassioned interest groups are likely to trump a largely indifferent general public.

The governor has taken a principled but difficult political stand. At the least, he deserves kudos for his courage.

“The Arrogance of Power”—in Kentucky today and about Indiana 20 years ago

2005-01-24T13:07:00.000-08:00

The Kentucky State Senate seat representing the 37th District. What a strange tale! And so many questions remain.

• Why would Dana Seum Stephenson file for the seat if she didn’t think that her candidacy was legitimate?

• Why did Virginia Woodward wait until the day before the election to register her complaint?

• Why did Stephenson and David Williams fail to appeal the decision of the Jefferson Circuit Court judge?

• Why did Stephenson live in Indiana when she could have had in-state tuition at IUS under the reciprocity agreement between Indiana and Kentucky which began in 1995?

• Can one be a “resident” of one place and live somewhere else?

• And if Stephenson is not deemed to be a legitimate candidate, then what do you do?

• Can you award an election to a loser? Under the law, how can there be an arbitrary special election?

Independent of all that, my favorite quote so far about this episode is from a Democratic state senator, Gerald Neal, referring to the Republican leadership in the Senate: “They exhibited the arrogance of power.” I’m not sure whether Senator Neal meant it this way, but his comment didn’t limit “the arrogance of power” to one political party—a wise choice of words.

Is there much doubt that the events in the 37th District would be very similar if all of the actors in the drama were switched to the opposing major political party? If the seat in dispute was won by a Democrat of questionable residency and the relevant body of the legislature was controlled by the Democrats, wouldn’t we be surprised if the Democratic leaders were not making the same sorts of arguments we hear from David Williams today?

It’s almost always this way within politics these days—and not just among politicians. Pundits and partisans of all stripes often seem to see the facts and interpret the evidence in a manner strangely favoring their own interests. Bill Clinton is a man of regrettable moral lapses to one party and something just short of the Devil to the other. To one group, George Bush is a war-mongering ignoramus who deceived us about WMD; to the other group, he is somewhere short of the Second Coming. One party exploits the foibles of Armstrong Williams and Tom DeLay, while the other side holds their noses and offers a half-hearted defense. One party points to Dan Rather and James McGreevey while the other side looks away. In elections, each side talks about the data and the proposals so selectively, simply trying to make the case for their candidate. And each side “holds to the rule of law” only as long as it’s convenient. What a mess! In addition to having a coherent political philosophy, another advantage of being a Libertarian is that I don’t need to worry about major-party partisanship and defending what is, objectively, indefensible. It allows me to sleep better at night.

Returning to Gerald Neal’s quote, it’s important to recognize that the practice of governance is all about the “legitimate” use of power—not legitimate in the sense of moral or ethical, but legitimate in the sense that it is, by definition, legal. Sometimes the use of power is relatively innocuous (e.g., law enforcement of stop signs); sometimes the use of power is quite popular (e.g., redistributing money to certain interest groups); sometimes the power is embraced out of humility or some sense of compassion (e.g., taxation to provide disaster relief). Nonetheless, the practice of government is still the exercise of power over other people—getting some people to do what they would not otherwise do (or not to do what they would otherwise do).

In a republic, we choose representatives who then decide how to use this power. In a democracy, as with a referendum, voters choose how the governing authorities are allowed to use this power. For example, when voters in Jefferson County approved the merger a few years ago, some of the victorious proponents of merger proclaimed that Louisville was unified and one community. But the reality was that 51% got what they wanted, while 49% were forced to accept the alternative they didn’t want.

By itself, this should incline us away from government solutions. All things equal, it is preferable to let people choose their own way—as long as they’re not harming others—rather than forcing them to go another way. Ethically, when should government use its force? To redistribute money to the poor and the non-poor, to tax you for eating too much fast food, to prevent you from smoking pot? Practically, when will it be effective for the government to try to force people to change their behavior? Among other practical problems, using force on people is likely to stir up animosity and resentment. Beyond that, using political power to baldly benefit a small group—or the perception of such—is likely to be met with hoots of indignation from the ones without political power. As such, any political party which is perceived to be taking advantage of its majority position will come under legitimate scrutiny for the way in which it wields power.

When considering the Stephenson/Woodward episode and the perception of the raw use of political power, a more important legislative race from 20 years ago comes to mind. In 1984, the Democratic incumbent for the U.S. House from the 8th District of Indiana, Frank McCloskey, was in a tight race with his Republican challenger, Richard McIntyre. McCloskey won the initial count by 72 votes, before two subsequent recounts showed McIntyre to be the victor by 34 and then 418 votes. As a result, the Republican Attorney General of Indiana declared McIntyre the winner. (By some accounts, this is also the origins of controversial chad-counting methods!)

But Article 1, Section 5 of the U.S. Constitution says that the U.S. House is the final judge of its own elections (a position that the Supreme Court has refused to modify). The process is that the Committee on House Administration makes a recommendation on the matter to the full House which then decides. In this case, the Democratic-controlled Committee (interestingly, chaired by Leon Panetta—later, a chief-of-staff for President Clinton) determined, along party lines, that McCloskey had won by four votes. The Democratic-controlled House followed suit and voted, again along party lines, to grant the victory to McCloskey. Not surprisingly, many Republicans were furious, especially after 30 years of Democratic control of the House—often with a large majority and often with at least the perception of abusing their power.

Going into that election, the Minority Leader had been the affable Robert Michel. There were, of course, Republicans who were less conciliatory—among them, a young representative from Georgia named Newt Gingrich. But this event galvanized the mavericks and they were able to wrest control away from Rep. Michel and the establishment-oriented wing of their party. Apparently, seeing Michel shake McCloskey’s hand just moments after the Republicans had walked out of the chamber in protest was interpreted as a clarion call for leadership change. From there, Gingrich was a feisty Minority Leader, forcefully arguing for Ethics violations against the Speaker of the House, Jim Wright, before engineering the “Contract with America” and the takeover of the U.S. House by the Republicans in 1994. (Perhaps fittingly, Rep. McCloskey lost his seat that same year.)

Oftentimes today, people wonder about the rank partisanship of national government—and they hearken back to some yesteryear when politicians were more refined and less vicious in their dealings with each other. Some people point to the attacks on Robert Bork’s nomination to the Supreme Court or the Willie Horton advertisements of the 1988 campaign. But arguably, given the way history has unfolded, the McCloskey/McIntyre race is a better choice as the key catalyst.

But in another sense, if there are two dominant political parties that are highly competitive, can it really be any other way? Going into the mid-1960s, government did relatively little and what it did, it did relatively well. Partisanship makes less sense in that context. From the mid-1960s forward, government has become increasingly active—in terms of taxation, spending, and regulation—increasing the stakes of political activity and the usefulness of partisanship. In a time of narrow victories in the Electoral College and narrow majorities in both houses of the Congress, what else should we expect when so much is at stake?

What can the Kentucky Republican leadership learn from the McCloskey/McIntyre episode? Be careful in how you use your power—or at least, how its use is perceived. What can the rest of us learn? Government is a powerful entity and its force can be wielded in a capricious manner. Before we ask government to spend money or change behaviors, we would do well to wrestle more completely with the contexts in which the exercise of government power is both ethical and practical.

D. Eric Schansberg
Professor of Economics
Indiana University Southeast
Author of Turn Neither to the Right nor to the Left: A Thinking Christian’s Guide to Politics and Public Policy

Worse than tsunami, trade protectionism hurts third world citizens

2005-01-20T15:17:00.000-08:00

by Dr. Eric Schansberg
Libertarian Writers' Bureau
http://www.writersbureau.org

Last Thursday, I was heartened to read the news that my church, Southeast Christian Church in Louisville, KY, had collected $732,000 from its members (beyond its weekly giving) for tsunami relief in Southeast Asia. That partially offset the news I had read the previous Thursday-- as reported in the Wall Street Journal-- that tariffs imposed on Sri Lanka were nearly $250,000,000 in 2003.

Nearly all of that amount was taxes imposed on the Sri Lankan textile industry. And the amount imposed on that one foreign industry exceeded all of the tariffs imposed on all trade with all six Scandinavian countries-- despite the fact that those countries export nearly 12 times more to the U.S., have about 10 times more GDP than
Sri Lanka's, and have people whose per capita incomes are far higher than those in Sri Lanka.

Why does this occur?

The textile industry in this country is one of many special interest groups that benefits from having their competition restricted. They and their politicians find it favorable to impose discriminatory taxes on foreign producers and American consumers.

In contrast to the obvious benefits for politicians and the protected industry, the costs imposed are subtle. How many consumers know that they pay significantly higher prices for clothing because of these laws? How many voters care that foreign workers and investors in poor countries are impeded in their ability to sell product within the wealthiest market in the world?

Because Christians tend to pay almost exclusive attention to relatively few (albeit important) issues, they often ignore other important policies. The passions of the Religious Right flair on issues of social morality and abortion, but they rarely think about issues of economic justice. The Scriptures, especially through the
prophets, give a more balanced picture. The interests of the Religious Left are centered more tightly around the fate of the poor.

But their policy attentions in that realm are relatively narrow, focusing mostly on welfare and foreign aid. Pragmatism would seem to warrant discussion of a wider set of issues. Christian Libertarians are excited about voluntary displays of charity, but saddened that political shenanigans can so easily swamp the efforts of ompassionate people.

All that said, care for the poor and oppressed is not a strictly Christian exercise. And very few people-Christian or not-are informed about the primary and secondary consequences of significant policy issues. Although Southeast Christian Church can be pleased and honored to pay part of Uncle Sam's tax bill for the Sri Lankans,
perhaps all of us should pay more attention to the larger issues of trade protectionism and the mechanics of economic justice.

Eric Schansberg
Professor of Economics
Indiana University Southeast
author of Turn Neither to the Right nor to the Left: A Thinking
Christian's Guide to Politics and Public Policy