City Journal‘s Steven Malanga writes at RealClearPolitics about the possibility of a municipal bond bailout on the horizon. The canary in the coalmine is the SEC’s cease-and-desist order to New Jersey for misleading investors by omitting key information in their bond offerings between 2001-2007. Specifically, the SEC charges that New Jersey misrepresented the state’s pension liabilities. The state indicated it was taking actions to ensure the solvency of its pension funds when in fact pension deferrals were frequently undertaken.

What’s interesting is that the day after this announcement, New Jersey easily sold an offering of short-term notes to banks. The state didn’t have to pay a premium to attract investors. Why aren’t investors more cautious? And why wasn’t New Jersey fined?

As Malanga noted earlier this week in the Wall Street Journal, for years states have been hiding the true size of their fiscal problems behind a range of fiscal manipulations (for a catalog of those, see my latest paper on Fiscal Evasion). Yet the signal sent by the SEC is that there is no penalty or risk for bad behavior. The question Malanga asks: do politicians and muni bond holders simply expect that in the event a state can’t pay its bondholders a federal bailout will pick up the tab?

The Wall Street Journal reminds us of the musical dénouement from The Life of Brian.

[In the] 1979 comedy from the Monty Python team, the hero ends up whistling the song “Always Look on the Bright Side of Life” despite having his hands nailed on each side of a cross.

It seems British Petroleum took that lesson to heart. Fortunately, the company found the bright side of the oil spill, which sounds a lot like Bastiat’s broken window fallacy. Planet BP, an online internal publication sent “reporters” to the gulf, and interviewed some locals who still love the big sunflower. From the WSJ:

“Much of the region’s [nonfishing boat] businesses — particularly the hotels — have been prospering because so many people have come here from BP and other oil emergency response teams,” another report says. Indeed, one tourist official in a local town makes it clear that “BP has always been a very great partner of ours here…We have always valued the business that BP sent us.”

Milton Friedman called this the most persistent economic fallacy in history. Moving money around isn’t the same as growing the economy. The broken window fallacy lauds simple currency exchanges to replace senseless destruction, instead of focusing on growing the total productivity. It’s like running in place, but believing you’ll win a race.

Greg Mankiw has a long article in National Affairs on the proper way to align incentives and stimulus spending:

Economists will no doubt long debate whether Cash for Clunkers passed a cost-benefit test. (Some early results, from Burton Abrams and George Parsons of the University of Delaware, suggest not.) But the fact that people responded to the incentive as they did — nearly 680,000 cars were purchased — suggests that a broader, more comprehensive program of incentives, such as an investment tax credit, might have stimulated spending even more.

Of course, not all tax cuts or credits are created equal, just as not all direct government spending is. One popular idea in recent years, for instance, has been a tax cut for businesses that make new hires. Indeed, the jobs bill signed by President Obama in March put in place a targeted payroll-tax exemption for some small businesses that hire people who have been unemployed for two months or more; several members of Congress have proposed broader tax cuts for businesses that hire new employees. The premise behind these policies is that, because unemployment is so high even as the economy begins to recover, we should create incentives for businesses to place unemployed workers into jobs.

There is a case to be made for a broad-based payroll-tax cut that might have this effect, but a narrower tax cut for new hires suffers from some major flaws. The basic problem is that we do not know how to properly define — or enforce a definition of — a “new hire.” Presumably we do not want a business to hire Peter by firing Paul and to then call Peter a new hire; this would cause a great deal of inefficient churning in the labor force (not to mention a great deal of unpleasantness for all the Pauls).

In this video from Mercatus’ Capitol Hill Campus, Dr. Bruce Yandle, Dean Emeritus at Clemson University’s College of Business and Behavioral Sciences, points out the faulty premise that stimulus spending increases demand. Instead, he shows that cash for clunkers and the recently expired first-time home-buyer credit simply shifted demand in time.

In short, for an incentive to actually stimulate an increase in demand, it would have to cost significantly more than the benefit created by increased economic activity. Mankiw himself explains that uncertainty is a recurring problem in economic planning:

The negative effects are even more challenging to trace. For example, if people observe the government issuing substantial debt (required to finance a stimulus), they may anticipate higher future taxes and therefore cut back on their current consumption. Increased government borrowing may also drive up long-term interest rates, which could make it difficult for people to borrow money and could therefore reduce spending today. Obviously, recovery.gov has no way to take account of these consequences, either.

Dr. Yandle presents the counter-point that economic uncertainty is not just an unfortunate side-effect of directed planning and incentives. Uncertainty is a prime driver of economic stagnation, both fiscally and psychologically. When economic rules and incentives change rapidly, private investors and business owners have to question their entire rational decision-making process.

Suddenly, planning a business is like building a house on quicksand. The point of stimulus spending is to offset a drop in aggregate demand, and hope that economic growth offsets the cost of the spending.

However, aggregate demand drops, as it did in 2008, because asset values become skewed. Aggregate demand needs time to reset, while consumers and producers determine the appropriate level of supply and demand under new conditions. The market seeks to correct uncertainty. By introducing new rules and incentives, stimulus spending time-shifts this realignment, but doesn’t supplement it. It adds more uncertainty to an already infuriatingly complex puzzle. That’s why such massive spending hasn’t had any noticeable effect on unemployment; it’s probable that Washington, with the best of intentions, has made hiring people more difficult for a longer period of time. It’s the same reason cash-for-clunkers was such a dismal failure, and the home-buyer credit shows the same symptoms.

Far from being a momentary side-effect of stimulus spending, uncertainty is a systemic problem with interventionist economic policy. The poison is worse than the medicine.

As oil continues to spill into the Gulf or Mexico, the states around the slick face many tragic consequences including damage to ocean life, the threat of oil washing onto land, and lost tourism.

One of the greatest economic effects will come from damage to the area’s seafood industry. Market Watch reports:

“Looking back at the Exxon Valdez spill, there were significant fishery declines,” said Jackie Savitz, a senior scientist at Oceana, an environmental advocacy group. “There is no question that fishery populations are going to be set back.”

She noted that fish larvae are especially susceptible to oil and that the Gulf is a breeding ground for some of the country’s most commercially valuable species, including bluefin tuna, grouper and snapper.

While an unprecedented supply shock like the BP spill would hurt any industry, Gulf Coast fisheries were in an unenviable position before disaster struck.

The lack of property rights in these fisheries left the area highly susceptible to a Tragedy of the Commons. Without being able to profit from the long-term health of a fishery, fishermen have incentives to overfish in the present.  Gulf Coast fishing is currently regulated primarily by Individual Fishing Quotas, a blunt tool which relies on government command and control rather than market incentives to preserve fisheries.

While oceans often suffer from the Tragedy of the Commons, Elinor Ostrom’s Nobel Prize for her work on common pool resources reminds us that there are solutions.

In Fencing the Fishery, Donald R. Leal explains the importance of allowing commercial fishermen to have a stock in a population’s long-term health, aligning profit incentives with the preservation of fisheries.  Gulf Coast regulators should allow for such market-based solutions to help the region’s economy recover.

I met a man last weekend who had built a house in Japan in the 1960s. He and his wife then returned to the US for a few years while he finished graduate school. He told me that he had left the house abandoned for two years and that they had been eager to get back to it.

“Why didn’t you try to rent it?” I asked. “The law was different there,” he said.

“If I had rented it, then it might not be easy to regain possession. Even if I had signed a lease with the tenants for a defined period, I might have had to sue them in order to get them out. And the judge might have looked at my salary and at that of the tenants, and he might have concluded that they needed the house more than I.”

Curious to see if this is still the case, I Googled Japanese landlord law. I found this site which seems to indicate things have changed.  Any readers out there with more context?

In the meantime, the story nicely illustrates a few points:

1. As first-year law students learn, property rights are best thought of as a “bundle.” One does not simply acquire all the rights to use a piece of property in any way one chooses. Instead, one acquires certain rights to use property under certain circumstances. In this framework, property rights configurations are best considered as a continuum: under some regimes, they are far more comprehensive than under others. In this case, the 1960s Japanese landlord doesn’t seem to enjoy the same level of rights as, say, a U.S. landlord today. On the other hand, I’m sure that he still retains some rights (presumably, squatters could not barge in and take over) and these were, no doubt, more comprehensive than those enjoyed by others elsewhere in the world.
2. My Googling found that Japanese law had previously been considered quite “pro-tenant.” But that’s a relatively simplistic way to think about it. No doubt, the laws were intended to help the tenants, but there were probably many potential renters who had to either pay higher rents or sleep on their friend’s couches because of it. Moreover, a great deal of property must have gone unused—just like my friend’s house—leading to widespread underutilization of resources throughout the economy.
3. Lastly, if I understand my friend correctly, it sounds like the judge had some level of discretion. This means that there was further waste as landlords and tenants duked it out in court to determine the use of the property. Notice that this (no pun intended) rent-seeking loss would not be present, if it were clear that property abandoned by the landlord always went to the tenant (no one would rent and no one would waste money on court battles). And those who have studied Tullock will also note that it would just be a transfer if bribing were legal and the judge were completely secure in his job. That is, the rent wouldn’t be dissipated because the litigants would just pay bribes equal to the expected value of winning the case and the value of the bribes would sum to the value of the economic rent.

How does law enforcement finance operations? Increasingly, police departments across the country pay for their activities, equipment and supplies by seizing the assets of people who have never committed a crime. It’s a process called civil forfeiture, and it’s at best, controversial. At worst, it provides direct monetary incentive for states and the federal government to steal property from innocent citizens. Gives a whole new meaning to Bastiat’s “legal plunder.”

Radley Balko explains how civil forfeiture perverts the “protect and serve” motto by introducing a profit motive:

“The Crime Control Act did a few things,” says the Virginia-based defense attorney David Smith, author of the legal treatise Prosecution and Defense of Forfeiture Cases. “First, it corrected some poor drafting in the earlier laws. Second, it created two federal forfeiture funds, one in the Justice Department and one in the Treasury. And most important, it included an earmarking provision that gave forfeiture proceeds back to local law enforcement agencies that helped in a federal forfeiture.”

This last bit was key. “The thinking was that this would motivate police agencies to use the forfeiture provisions,” Smith says. “They were right. It also basically made law enforcement an interest group. They directly benefited from the law. Since it was passed, they’ve fought hard to keep it and strengthen it.”

[...]

Some police agencies come to view forfeiture not just as an occasional windfall for buying guns, police cars, or better equipment, but as a source of funding for basic operations. This is especially true with multijurisdictional drug task forces, some of which have become financially independent of the states, counties, and cities in which they operate, thanks to forfeiture and federal anti-drug grants.

In a March report, the Institute for Justice examined the various states’ forfeiture laws. Only Maine received an A-, because Maine pays forfeitures into the state’s general fund, not directly to law enforcement agencies. This reduces, but doesn’t eliminate, the perverted incentives. Particular low lights from the report:

•    Six states earned an F and 29 states receive a D for their laws alone.
•    Lax federal laws earn the federal government a law grade of D-.
•    Eight states receive a B or higher for their laws:  Indiana, Maine, Maryland, Missouri, North Carolina, North Dakota, Ohio and Vermont.  But extensive use of equitable sharing pulls down the final grades of five of those states:  Indiana (C+), Maryland (C+), Missouri (C+), North Carolina (C+) and Ohio (C-).
•    The lowest-graded states overall, combining both poor laws and aggressive use of equitable sharing, are Georgia, Michigan, Texas, Virginia and West Virginia.  Each received overall grades of D-.

There’s plenty more procedural nonesense wrapped around this issue, like the names of cases (for example, U.S. v. One 1987 Jeep Wrangler), but the main issue is that policy has perverted the relationship between the public and public servants. It’s the same problem facing taxpayers and unions, or politicians and the electorate. When the government is an interest group, it’s only the government interests that get served.

Last week, two state legislatures voted on smoking bans. The bill in Kansas passed, but a similar bill in Indiana failed. With the new Kansas law, 38 states now restrict smoking in some public places, and 28 states forbid smoking in bars.

Proponents of anti-smoking legislation argue that second-hand smoke is dangerous and that state residents have a right to breathe clean indoor air. While medical evidence demonstrates that in fact second-hand smoke is a risk, these activists ignore that individuals are free not to patronize businesses that allow smoking, and businesses are free to ban smoking if they choose to do so.

A Michigan restaurant owner explains:

“Eleven years ago, there were 2,200 smoke-free restaurants in the state,” Deloney said. “Now there are more than 6,000. That’s a 174 percent increase.

“They know exactly what their customers want,” he said. “It’s not rocket science. To believe that because there is no state law there are no choices for smoke-free dining is ignorant.”

A study conducted by the National Restaurant Association suggests that smoking bans significantly hurt sales for many restaurants. This finding is unsurprising, since presumably restaurants design policies to maximize their profits. If they think that the majority of their profits come from people who prefer non-smoking areas, restaurants would voluntarily adopt such a ban. In Ohio, some taxpayers are disturbed that the state has spent over $2 million to enforce smoking bans in a time of massive state budget shortfalls.

Smoking bans limit options for smokers and profits for those who wish to serve them. A current debate is raging in Brooklyn about whether or not bars should allow parents to bring their babies in. At present, this decision is left up to bar owners and market forces. Hopefully it will not be the next issue taken into the hands of state lawmakers.

Richard Epstein has a great new article in Forbes detailing his New Year’s resolutions for public policy. Despite the scuttlebutt on a second stimulus, health care, and all the other looming federal issues, he takes time to examine the local and regional policy problems that have proliferated recently; a sort of death-by-a-thousand-cuts:

On real estate, change the culture so that getting permits for yourself and blocking them for everyone else is no longer the preeminent developer’s skill. The government can still prevent buildings from falling down and fund infrastructure through general taxation. But don’t let entrenched landowners and businesses raise NIMBY politics to a fine art. Today our dysfunctional land-use processes too often build thousands of dollars and years of delay into the price of every square foot of new construction. The instructive requirements on aesthetics and handicap access should be junked, along with the crazy-quilt system of real estate exactions that asks new developments to fund improvements whose benefit largely belongs to incumbent landowners. And for heaven’s sake, learn the lesson of Kelo and stop using the state’s power of condemnation for the benefit or private developers.

On labor, state and local governments have to junk the progressive mindset in both the public and the private sector. State and local governments should never, repeat never, be forced to negotiate with local unions. The huge pensions garnered by prison guards in California or transportation workers in New York present the intolerable spectacle of requiring ordinary citizens to pay huge subsidies to union workers far richer than themselves. On the private side, don’t force developers to hire union workers on construction sites or to block the construction of new facilities that hire nonunion labor. If unions are really efficient–and they aren’t–let them compete like everyone else.

(H/T Matt Welch at Reason)

We’ve recently covered the real estate problem. Eileen and I have a forthcoming paper paper on just how monumentally screwed up public pension systems are.

The past year, California experienced its lowest population growth rate in over a decade. Furthermore, the state’s positive growth was maintained by foreign, rather than domestic migration. The San Francisco Chronicle reports:

Since [2005], more than half a million more people have left California than have moved to the state. They mainly have moved to neighboring Western states, said Mary Heim, chief of the demographic research unit at the Department of Finance. In past years, more of those people moved to Nevada, but last year saw an increase in people moving to Oregon and Washington, she said. Texas also attracts a large number of Californians.

The article quotes state policy analysts who suggest that the Golden State’s regulatory climate is driving jobs and residents to other states. Contrarily, a Newsweek article from earlier this year explained that California’s CO2 regulations, the strictest in the country, could help the state’s businesses:

California has led the way in demonstrating how market-savvy regulation, instead of stifling growth, can jump-start innovation. For instance, the state has revolutionized the way utilities are regulated: instead of making profits by building more power plants, the California Public Utilities Commission links utility profits to efficiency gains—and leaves it up to the utilities to decide how to do it most cost-effectively.

However, potential Republican gubernatorial nominee Meg Whitman sees the situation differently. She said of Governor Schwarzenegger’s energy regulation:

I applaud the goals of AB 32 and our Governor for forcefully advocating for a clean environment.  However, three years ago when the bill was signed, the unemployment rate was 4.9 percent with 883,000 Californians unemployed.  Today, we have 12.2 percent unemployment, with 2.2 million Californians out of work.  Simply, jobs must come first.

Whitman’s views are in line with the ALEC-Laffer analysis of the states’ business environments, which suggests that Americans are moving from states with higher regulatory burdens to those with more economic freedom.

Since the European’s Union establishment in 1993, the organization has taken steps to protect local and traditional culinary traditions.  This practice has reached a new heights in the United Kingdom, where the town of Stilton is challenging a ban against producing the cheese named after it.

The Wall Street Journal reports:

The EU’s protected list of more than 800 foods and drinks includes famous names like Champagne and Parma as well as lesser-known delicacies such as Moutarde de Bourgogne, Munchener Bier and a Spanish chili pepper called Asado del Bierzo. It even covers Foin de Crau, a hay for animals from the fields of Bouches-du-Rhône in southern France.

But to the chagrin of locals, no cheese made here can be branded as Stilton. That’s because a group of outsiders, called the Stilton Cheesemakers Association, raised a formal stink.

The association, whose members have been making the cheese for more than a hundred years, in 1996 sought to protect the “Stilton” name by applying for a Product Designation of Origin from the EU. In its application, the group wrote that “the cheese became known as Stilton because it was at the Bell Inn in this village that the cheese was first sold to the public.” The 17th-century inn, which still stands in the main street, is the village’s oldest.

In recent memory, Stilton cheese has been produced outside of the village, but the Journal explains, a historian recently found evidence of the cheese being made within the eponymous municipality in the 18th century. The record failed to sway current cheese producers who assert that the recipe has most likely changed since then. This suggests the question — in their effort to preserve historical practices, how far back should bureaucrats look?

Advocates of limiting food production suggest that it protects gastronomic quality and heritage. The darker, unseen consequences, however, are government-sponsored monopoly food production and quantity restriction.  Paradoxically, earlier this spring, the EU increased enforcement of its antitrust regulations. The international governing body is becoming increasingly involved in the private sector by taking it upon itself to decide politically acceptable business practices.

New York’s highest court recently decided two separate cases that centered around eminent domain abuse and the Fifth Amendment. In late November, the court allowed basketball tycoon Bruce Ratner to appropriate a good sized section of a Brooklyn, furthering his plan to move the New Jersey Nets franchise to a new arena. Last week, the intermediate appeals court stopped Columbia University’s attempt to gobble up much of the Manhattanville neighborhood north of Midtown. [Corrected 12/08.]

These cases highlight just how much of a mess eminent domain proceedings are in the wake of 2005′s U.S. Supreme Court decision Kelo v. City of New London. Supreme Court decisions are no stranger to controversy, but the outrage surrounding Kelo transcended party or ideology, and led to forty-three states adopting restrictions on their own eminent domain powers.

In the Brooklyn case, the issue is identical to Kelo. Bruce Ratner wants to tear down a significant portion of a vibrant neighborhood, and replace it with private economic developments including office towers, a shopping complex, and a basketball arena, which will likely be financed with a significant public subsidy.

Reason Magazine‘s Damon Root has an excellent analysis of the private property rights that Ratner and the Empire State Development Corporation trampled over:

Not only does this disastrous 6-1 decision put every property holder in the state at risk, it represents the court’s utter failure to serve as an independent tribunal of justice. Rather than judging the facts and, if necessary, voiding an illegal state action, the court punted, arguing that determining whether or not the properties in question were actually blighted—as New York dubiously asserts—is not “primarily a judicial exercise.”

[...]

In his excellent dissent, Judge Robert Smith takes a very different view of the court’s role, reminding his colleagues in the majority that they have a fundamental responsibility to protect individual rights from state abuse:

The right not to have one’s property taken for other than public use is a constitutional right like others.  It is hard to imagine any court saying that a decision about whether an utterance is constitutionally protected speech, or whether a search was unreasonable, or whether a school district has been guilty of racial discrimination, is not primarily a judicial exercise. While no doubt some degree of deference is due to public agencies and to legislatures, to allow them to decide the facts on which constitutional rights depend is to render the constitutional protections impotent.

That is exactly right. It’s also essential to remember that the Empire State Development Corporation (the state agency empowered to seize property via eminent domain) didn’t even start talking about blight until two years after the project was first announced. By that point, developer Bruce Ratner had already acquired many of the properties in the neighborhood (thanks to the state’s threat of eminent domain) and then left them empty, thus creating much of the unsightly neglect visible today. Moreover, the ESDC’s highly controversial blight study cited things like “weeds,” “graffiti,” and “underutilization” in the holdout properties, none of which actually constitute blight.

The majority’s reliance on the ESDC study is quite controversial, because it’s quite possible that the ESDC has significant conflicts of interest, if not outright corruption.  These problems came to light in the Columbia University case.  Again from Root:

[T]here is overwhelming evidence that the Empire State Development Corporation (ESDC) actively colluded with Columbia in order to produce the very conditions that would then allow ESDC to seize property on the university’s behalf. At the time of ESDC’s 2006 blight study, for instance, Columbia owned 76 percent of the neighborhood and was thus directly responsible for the overwhelming majority of blight that the report alleged, ranging from overflowing basement trash heaps to major roof and skylight leaks. As numerous tenants have reported, the university refused to perform basic and necessary repairs, which both pushed tenants out and manufactured the ugly conditions that later advanced Columbia’s long-term interests. Preliminary findings delivered to the ESDC admitted as much, noting “Open violations in CU Buildings” and “History of CU repairs to properties” among the “issues of concern.”

Thankfully, the New York court recognized this shameful mess for what it is: eminent domain abuse. As Justice James Catterson wrote for the majority:

“the blight designation in the instant case is mere sophistry. It was utilized by ESDC years after the scheme was hatched to justify the employment of eminent domain but this project has always primarily concerned a massive capital project for Columbia. Indeed, it is nothing more than economic redevelopment wearing a different face.”

Ratner ‘s case is likely headed to the Supreme Court and it will be interesting to see how the findings of ESDC collusion in the Columbia case affect that decision. The Court could use the case to repair some of the damage the Kelo decision has caused to private property rights and the rule of law.

The French bureaucracy is notorious for being one of the most onerous and challenging to navigate of developed countries. Those in favor of the current system explain that it helps to maintain tradition and the French way of life, known for its emphasis on fine wine and food — the country where the Slow Food movement was instituted.

However, in the ultimate of unintended consequences, Susan Stamberg on Morning Edition reports that the complex legal environment may be pushing many of France’s best chefs and restaurateurs to take their services to countries that are more hospitable toward businesses. Author Michael Steinberger explains:

Bread, wine and cheese makers have all faced problems, and high taxes and bureaucracy make running a restaurant so difficult that many of Paris’s top young chefs have defected to London or New York.

Instead of the traditional haute cuisine for which French chefs are known, many of the country’s entrepreneurs are instead moving toward bistronomy in restaurants that serve quality food in a more casual and affordable setting. Rather than protecting the French way of life, bureaucrats may be helping their traditions spread to other parts of the world and creating opportunities for new, less “French” businesses at home.