South Dakota: Not North Dakota but Waaaaay Better than California and Just About Everywhere Else!

I gave this speech yesterday morning at the Westward Ho! Country Club in Sioux Falls, SD at the first annual commercial brokers meeting.

South Dakota: Not North Dakota but Waaaaay Better than California and Just About Everywhere Else!

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College
As you are probably aware, North Dakota is doing pretty darn well economically. In a sense, it is a much closer, slightly warmer version of Alaska. It isn’t as visually stunning as Alaska and it has many fewer bears, especially of the larger and scarier varieties, but like the Last Frontier state, North Dakota is blessed with ample energy resources. The massive Bakken Oil field, which may hold more oil than in Saudi Arabia, extends into North Dakota as well as Montana and Saskatchewan. Unfortunately, a lot of that black gold is trapped in shale but for now the bigger pockets, some two miles down, are being profitably tapped and technology improvements may help our northern neighbor surge past Alaska in terms of oil production by the end of this decade.

Thanks in part to its western oil fields, and oh yeah its 800 year supply of coal, North Dakota has the lowest unemployment rate in the country, just 3.7 percent in August of this year, the most recent month available as of Monday of this week. South Dakota’s unemployment rate was about 21 percent higher than that but was still second lowest in the country, just a hair ahead of Nebraska. At 4.5 and 4.6 percent respectively, those two states look like employment heaven compared to almost everywhere else. New Hampshire, number 4 on the list, is at 5.7 percent, followed by neighboring Vermont at 6 flat. But it is pretty much all downhill from there, with California, Michigan, and Nevada in the ditch at the bottom of the hill, at 12.4, 13.1, and 14.4 percent respectively. And remember those rates are for people still looking for work. They don’t count people who have given up trying to find work, a number that probably grows exponentially with the official unemployment rate. In other words, those places are much worse off than the government statistics suggest.

The unemployment rate is a good proxy for economic growth, or per capita increases in the output of final goods and services. North Dakota’s economy grew by a scorching 7.3 percent in 2007 and 2008, the most recent years available. Wyoming was second at 4.4 percent and South Dakota third at a respectable, if relatively plodding 3.5 percent. Those were years when the economies of numerous states, including those of Michigan, Indiana, Ohio, Georgia, Florida, Nevada, and Arizona shrank and a slew of others grew anemically at less than 1 percent.
Finally, population growth in both Dakotas from 2008 to 2009, while hardly breakneck, was a respectable 1 percent flat here and .8 percent up there, ranking South Dakota 20th in population growth rate and North Dakota 23rd. Wyoming, by the way, grew fastest of all at 2.1 percent but still remained our least populous state with only slightly over half a million souls. Yes, I do believe that most Wyomingites have souls, probably a higher percentage than many other parts of the country in fact, but the Census Bureau doesn’t track that, just bodies.
But I digress. What I am trying to say is that instead of lamenting North Dakota’s advantages, the denizens of South Dakota ought to first take pride in what they have accomplished already and then seek to make further improvements, partly by intelligently emulating successful policies in North Dakota and elsewhere but also partly by striking off on its own, unique projects.

For example, North Dakota has a government-owned bank that is attracting considerable interest. Even the Minnesota Fed has looked at it. It acts as a correspondent bank that strengthens North Dakota’s network of community banks and it actually contributes to the government’s coffers. Colonial Massachusetts, New York, Pennsylvania, and some others had a similar institution. South Dakota should look into it, than if for no other reason we’ll have a bank capable of issuing fiat paper money when the dollar collapses. I think we should call that money SOTAs and the symbol will be a bison -- with two lines running through it because all the best currency symbols have two lines running through them. [When will I learn to never, ever make monetary policy jokes? -OR- I’m happy to see some of you share my bitterly cynical and sarcastic sense of humor.]

What does South Dakota have going for it? As the title of this talk suggests, its economy is really quite vibrant compared to that of every other state except those of some its immediate neighbors, especially the one to the north. The explanation for South Dakota’s relative success is relatively straightforward. Rob Oliver, Augustana College’s president, likens South Dakota to the tortoise in the famous tortoise and hare Aesop fable. That’s the one where the tortoise wins the race because the rabbit is busy showing off and napping while the tortoise plods steadily along. In slightly more sophisticated parlance, some places take big risks and take seemingly insurmountable economic leads until they inevitably collapse from some malady or misfortune or another brought on by their hubris. Other places, like the Ota states, play it safe and steady and hence don’t suffer when economic calamities strike.

There’s a lot of common sense in taking the slow road. South Dakota was not a hotbed of subprime mortgages or mortgage defaults and most of our banks and other financial institutions held firm. But it might make even more sense to try to develop what I’ll call – extending Rob Oliver’s animal analogy -- a raccoon economy. Yes, I know that dead raccoons litter South Dakota’s highways and byways but that carnage, believe it or not, is an integral part of a successful raccoon economy. Follow me here: the companies that are slow afoot and/or slow upstairs [point to head] need to get run over so as to free up resources for the more nimble and quicker raccoons. Due to that selection process, raccoons as a species are amazingly successful, managing to thrive in a wide range of environments, from forests to prairies to cities. The mischievous critters get into closed garbage cans and chow down, then sneak undetected into heated attics or crawl spaces in winter. In other words, I’m talking about developing an economy that is adaptable and clever, though not nearly as crafty as a Wall Street fox, about emulating a critter that isn’t as fast as a rabbit but works hard and smart and is much faster than a damn turtle and a lot nicer than a Wisconsin badger. We just have to be careful not to turn the economy into a skunk in the process. We have more than enough of those back East, out West, and down South. And in Michigan, the stinkiest of them all.

Fiscal policy is a good place to start. South Dakotans have to keep the state government not “lean and mean” but “nice and lean.” Not having a state income tax is a great feature but only if taxpayers don’t instead get pecked to death by a thousand little duck taxes. It’s not that bad here – yet – but eternal vigilance is the price of liberty as somebody famous – not Thomas Jefferson – once wrote. I have some other suggestions about taxation too but I am not going to make them as I don’t feel like getting shot at today. [Pause] Seriously, tax policy is very important but it’s a political minefield and a very complex area because of what’s called tax incidence. Just because somebody doesn’t get handed a tax bill doesn’t mean that they aren’t ultimately paying the tax. The so-called employer contribution to Social Security, for example, is pretty much pure bunk as most economists agree that workers almost always foot the full bill, half from their explicit contribution and half from a lower wage. Similarly, taxes on large businesses often fall largely on employees and consumers rather than on the owners. So you sometimes find people supporting taxes that will gore their own ox or fighting taxes that will actually be paid mostly by others.

Oliver Wendell Holmes was right when he said that taxes are the price we pay for civilization but most Americans, and almost every South Dakotan I’ve met to date, thinks we’re quite civilized enough already, thank you very much. If so, what we might all be able to agree on is the desirability of government making a credible commitment to limit the size of the state or, better yet, the state and municipal governments, to some percentage of state GDP. That would essentially force South Dakota governments to 1) not pass stupid, growth negative laws and 2) to concentrate their efforts on core areas, like law and order, and outsource the rest to the market.

South Dakota is ahead of the country here but could move even further ahead. I was pleasantly surprised to learn, for example, that private companies can pick up garbage in Sioux Falls. Believe it or not, in some parts of this great nation of ours municipal governments monopolize household garbage collection. It’s totally absurd but so well-entrenched that when I suggested privatizing the system at a public meeting when resident in one of those places many of my neighbors retorted with claims like “that couldn’t possibly work,” or “it would be chaos,” or “Duh, look at me, I’m a dumb ass Socialist.” Okay, I made the last one up but the rest of the story is true.

I broach it because there is a movement afoot to privatize roads in the U.S.A. For more on that, check out Clifford Winston’s new book, Last Exit, published by the Brookings Institution, a Washington-based think tank. Yes, occasionally a good idea comes out of that place, mostly from think tanks. In any event, when people first encounter the notion of road privatization, what most hear is “they want to charge me tolls to drive anywhere” and while that is true what folks tend not to grasp is that the tolls would be lower and fairer than the taxes they currently pay at the pump and elsewhere. Private companies would have incentives to make much better, longer-lasting and less congested roads than the government does so in-kind taxes like construction delays and traffic jams would be much lower too. The first state to privatize its road system – or I should say re-privatize its road system in the case of the eastern seaboard states, which were first crisscrossed by private toll roads -- would of course spawn the creation of start ups that would be eager to expand operations into other states once they too jump onto the privatization band wagon.

Schools are also ripe for privatization. The process here is on-going and taking baby steps with charter schools and vouchers. If South Dakota were to go whole hog and privatize its entire system, K through graduate school, it would foster start ups and also entry by existing for-profits. But again, such proposals must be pitched so that they can be heard by voters as “increased efficiency” rather than “those som’ beeches wanna take away our free schools.” Let’s face it, public schools are not free, they are very costly, especially for what some of them produce, which are people who know little and can’t do much. Others of course do a superb job but they could do an even better job with the same personnel provided with a more robust set of incentives. Among other things, I discuss the rationale and possibilities of privatizing higher education in more detail in my recent book, Fubarnomics.

Speaking of education, I attended a conference called the Innovation Expo last week at the Ramkota Hotel where there was much discussion of leveraging the state’s higher education assets for economic development. North Dakota has a great student-run venture capital outfit called Dakota Venture Group that has already helped to launch at least six new businesses: three software companies, a medical technology company, a furniture manufacturer, and a night club on wheels. And that last one is no joke!

Augustana College is starting something similar. I mean a student-run venture capital fund not a mobile Sodom and Gomorrah. The fund will help in the short term by funding start ups and in the longer term by increasing South Dakota’s human capital venture network. We hope our graduates will stick around and start their own funds in other words.

Many of us are also trying to fire up students about entrepreneurship. I taught a class in the history of entrepreneurship at Augie last spring, for example, and at the Innovation Expo last week many students from USD and SDSU were in attendance and the Enterprise Institute announced the winners of a student idea competition. Encouraging young entrepreneurs is really promising because entrepreneurship suffuses the air and water out here. What it tends to lack is direction. Some explanation may be necessary here. Entrepreneurship is generally great for economic growth but it’s not a monolithic thing. There are bad varieties of entrepreneurship where firms, or “families” or gangs, engage in rent-seeking or illegal activities. You know, the sort of stuff that thrives in Tony Soprano’s part of New Jersey. And Washington DC. Except for the drug trafficking, which apparently mostly takes the form of drug traffic, we don’t have too much of that out here and of course don’t want any more.

Another variety of entrepreneurship, called common or replicative entrepreneurship by some, is the type that thrives in South Dakota and other tortoise-esque economies. You know, micro to small businesses and franchises of regional or national chains. It’s good and it’s important but a raccoon-quality economy requires more, it requires some innovative entrepreneurship that leads to new goods and services, things that South Dakotans can export to other states, regions, countries, or continents.

As I learned at the Expo, we have some of those. There is an outfit selling wine made from South Dakota grapes – that’s not an oxymoron it turns out – South Dakota grapes into a nice business by stressing the marketing rather than the quality of the wine per se, which most people find less than extraordinary until third or fourth glass. Anyway, each bottle sold by this homegrown winery comes with a removable charm around its neck and sports some interesting looking labels, some of which were designed by Augie students I should add. There’s another startup out in Mitchell making fishing rod holders that can be installed without wrecking your nice fiberglass boat. Another dude figured out how to test beef cattle for certain genes that affect the marbling and texture of their muscles within a few minutes, right in the field, so that the ungulates can be sorted and fed accordingly.
That’s all great, even freaking great, but South Dakota could use more. We don’t want a rabbit economy so we don’t need entire warrens of innovators, especially schemers contemplating projects of dubious social merit. Rather, we need a nice steady stream, a Big Sioux rather than a Missouri River of innovators, or at least a Skunk Creek the way it looked after the rains last month. [What, nobody here from the West Siiiide? -OR- I’m happy to see there are others from the West Siiiide here.]

Increasing innovative entrepreneurship is no easy task and I think it a major mistake to try to plan it in any specific way. The economy is just too complex, the connections between industries and individuals too multifarious, for any one person or group to fully grasp it enough to implement a plan likely to succeed for reasons other than pure luck. For example, who in 1820 could have predicted that my hometown, Rochester, the one in New York, would have developed into an optics center, the home of companies like Kodak, which used to make cameras, Xerox, which used to make copy machines, and Bausch & Lomb, which used to make contact lenses? But it did, because it had water driven mills designed for grinding grains and millers and engineers smart enough to figure out how to change up and begin to grind glass. You’re probably all familiar with how Silicon Valley became Internet Valley and how Wall Street stole the nation’s financial center away from Philadelphia’s Chestnut Street back in the 1830s. Oh no? Well I have a book about it you can read sometime called The First Wall Street.

My point here is that even as one industry loses strength it can spawn others in a process that economist Joseph Schumpeter famously called “creative destruction.” When and where creative destruction exists, where slow and dull-witted raccoon companies are allowed to get run over by the Mack truck that is a competitive market, economies experience ups and downs but communities live on because the people within them find new things to do. Pittsburgh is a good example. It used to be all about steel, then stealing, but now it has a nicely diversified post-industrial economy similar to ours: healthcare, education, tourism, finance, and even some ag and some military, at least before their King of Pork, John Murtha, perished. Where creativity is lacking, we’re left with just the destruction and ghost towns -- like Youngstown or Detroit. Unlike those dismal places, South Dakota isn’t reliant on just one industry, just like the raccoon isn’t reliant on just one food source.

But the South Dakotan economy could use yet more diversification. As Nevada learned to its great pain, tourism depends a lot on conditions elsewhere, the credit card business increasingly relies on regulations set in Washington, and agriculture and construction are very fickle pickles. Healthcare and higher education costs have grown year after year but that does not always translate into higher levels of growth. According to Sid Goss, a demographer at the School of Mines out West River, South Dakota’s higher education sector is going to face a serious demographic shock in a few years that could spell trouble not only for local schools and their employees but also for all businesses that cater largely to students.
On the bright side, Obama’s healthcare reform isn’t going to stop healthcare costs from rising. For more on that, see Fubarnomics or Google up some of my op eds on the matter. The gist of the story is that health care costs will continue to rise as long as health care providers are incentivized to treat patients rather than to restore them to health and as long as health care costs are hidden behind employer-provided group insurance.

The really happy news is that potential sources of innovation and growth abound here. Now one of the speakers at the Expo, a college professor and an adherent of extremist urban-philes like Richard Florida and Jane Jacobs, argued that South Dakotans are too few to have a raccoon economy. To that I have only two words: bull puckey. Or is that one word? In other words, I think the notion that you need to be in a big city to be innovative is an idea that passed through the digestive system of male cattle, if you catch my drift. In case I am not being clear here, I’m skeptical of the notion that we can’t lead in at least some areas. The professor’s argument is based on what are called spillovers. People live in cities or technology areas, like the one in North Carolina, because there are dense networks of like-minded people in those places and they cross-fertilize each other with ideas, connections, and money. That is certainly an important point but isn’t the whole story because it’s not necessarily the case that you have contact with others close by or that you can’t communicate with others who are far away. Plus the culture in cities is less open than here. People are not as nice or open – and I know because I lived in such places much of my life. For example, I barely spoke to anyone outside of a narrow circle in my decade and a half in Philadelphia but out here a guy I had never met previously took me out pheasant hunting on opening day, made sure I got my three, and then fed me afterwards. And that was made possible by the fact that my new neighbor -- a man I had just met 5 minutes before -- fixed my shotgun for me, and for free! That sort of interaction just doesn’t happen much east of the Appalachians anymore.

And let’s not forget – I know I never will – that in more densely populated areas even a few miles can be a nearly insurmountable barrier to easy face-to-face contact. I’d rather drive from Sioux Falls to Vermillion or Brookings than from one side of Philadelphia to the other. No joking there. And don’t even get me started on New York.

The egg-headed critic also failed to see that we have comparative advantages over people in more populous places that we can leverage. Besides the fishing boat guy at the Expo there was a fellow selling pickup truck bins with solar panels on them to run coolers, drills, and so forth. Now is a Bostonian going to come up with that? Or some software engineer in San Fran? No siree, says Bob.
And who else but a pheasant hunter who can’t seem to shoot straight would come up with a shotgun that uses optical recognition software to differentiate hens from roosters and that uses radar to direct number 4 steel shot only to the head and neck of the latter? Okay, that one I made up but it would be wicked kewl. In short, we can come up with stuff that we can sell to other rural folk worldwide, not to a bunch of latte-sipping, turtle-neck sweater wearing urban elitists.

Not that we should entirely give up on urban markets. Although South Dakota has little coming in the way of oil windfalls, there is a lot of wind and sunlight here just waiting to be turned into electricity. The big breakthroughs in energy storage and transmission may not come out of South Dakota universities or companies. But then again they might. A South Dakota scientist recently invented a type of paint suffused with an anti-microbial agent that will make the lives of people with compromised immune systems a lot better. But of course we don’t have to invent everything ourselves and we surely will be able to capitalize once somebody, somewhere figures out a cost effective way of transmitting the electricity created with our ample renewable sources. It would be nice if our little prairie breezes and generally sunny disposition could not only light and heat the Twin Cities, KCMO, and “““STL””” but also run the cars of the people in those places. Ours too of course. Then North Dakota can lick our boots. Just kidding, they got a lot of wind up there too.

But that’s somewhere off in the future and conceivably may never take place. In the meantime, we need more tangible routes to further diversification. Even if credit cards go the way of the dodo bird, or rather the way of layaway, the physical infrastructure and human capital employed in the industry here could be turned to other, similar uses, like call centers for other types of financial products, maybe even ones that essentially replace credit cards with less heavily regulated alternatives. That’s one of the big lessons of financial history – regulations can and will be subverted, out maneuvered, and outflanked. With a credible promise from Pierre not to interfere too much, South Dakota could become a hotbed of financial innovation, a testing ground for new ideas. I mention several in Fubarnomics and Yale’s Bob Shiller published some great ideas about 5 years ago in a book called the New Financial Order. And of course it would be natural for any company that developed a new product in South Dakota to keep its headquarters here to take advantage of the local expertise in back office operations and such.
Now I know what you are thinking – how can Pierre promise not to interfere too much? Maybe by decreasing the frequency of its meetings? I’m thinking once every four years would about do it. And oh yeah, to meet no more than one week at a time, once each quarter or season, with a very loud bell that goes off precisely at 5 p.m. each Friday to close the session. No more putting coats over clocks. That’ll give legislators some time to think about bills before they pass them and give their constituents some time to think and chime in too.

Here’s another idea. Let’s pass a constitutional amendment that requires all regulations to be thoroughly tested before being implemented or, where that is infeasible, to have sunset clauses that will automatically repeal any new regulations unless the legislature thoroughly reviews and formally reinstates them? In most states east of the Mississippi, audience members would be laughing hysterically at this point but out here those or similar ideas could stick and become a real competitive advantage for the state.

To attract and retain the innovative entrepreneurs that we don’t grow at home in our colleges and universities, South Dakota needs to be an attractive place to live. Not much can be done about the weather, at least at present, but entrepreneurs could strive to make the place more palatable and make some scratch on the side. For example, many of us ride our bicycles on Sioux Falls’s wonderful trails all summer. But what are we supposed to do with our bikes the other 11 and a half months of the year? … Yes, that’s a joke. Besides cluttering up the garage, say half the year, what about an indoor cycling range that could be used as, I don’t know, an indoor shooting range in the summer when hunters want to zero their scopes without a 30 mile an hour crosswind? An indoor water park might be a big draw too. The sun rides low here in the winter but it’s out a lot and could be magnified to allow those interested in having that “I went to the Bahamas look” to get natural tans. Maybe a retractable glass roof over the Wild Water West? It would be a way to avoid that new tax on artificial tanning booths in the Obama healthcare bill.

Speaking of healthcare, the rise of medical tourism means that Sanford and Avera McKennan could grow to enormous proportions by providing fairly routine procedures on the cheap to people from all over the continent. Yes, even some Canadians might prefer to pay out of pocket rather than wait in a line up there, especially when the looney is strong against the greenback. Of course it would be helpful if it was cheaper to fly from New York to Sioux Falls than to fly from New York to India, which also has a thriving medical tourism industry. I’m not disrespecting the local airport, which has to play the hand it was dealt by distant policymakers. I’m just pointing out a constraint that could be overcome, albeit probably only with much lobbying effort. Or a high speed train line to Minneapolis. Or Omaha. Or maybe Southwest. I mean the airline, not the cardinal direction.

Speaking of Minneapolis, I had to drive there in early September to be on the Dylan Ratigan show for 5 minutes, 5 stinking minutes. No, I was happy to do it as it boosted sales of Fubarnomics for a week or so but c’mon, it is 2010. How will the rest of the world know that there are smart people here in South Dakota if it remains so isolated? When I say South Dakota to my friends back east their responses belie the fact that they believe the entire state remains like Deadwood as depicted in the HBO series. Or at least like Humboldt, that “small town with a big heart.”

The various chambers of commerce do a good job of asserting that all of South Dakota, and not just Ellsworth, is “da bomb” but they need all the help they can get proving that such assertions have a basis in reality. Outside of the Upper Midwest, misperceptions about South Dakota abound and are as difficult to dislodge as an impacted wisdom tooth. On a polecat.

To sum up, North Dakota is up at the ceiling. South Dakota is only here [reach up as high as possible] but California and a lot of other places are down here [point to the floor] with the ant excrement. Although relatively strong at this point, South Dakota’s economy may be under performing its long-term growth potential. It could ramp up from tortoise to raccoon status if one, the government credibly committed to staying as small and inconspicuous as possible and if two, more innovative entrepreneurs can be homegrown or imported and then induced to stay by leveraging the state’s many strengths -- its great faces and open places and its fairly consistently amenable business climate.

For folks in your business, turning our tortoise economy into a raccoon one could mean retiring comfortably at age 50 or 55 instead of at 65 or 70, which I’d hope would be enough inducement to get you interested in these important big picture issues and maybe get a little more involved in state economic policymaking in a positive and proactive fashion.

I thank you for your time and attention and will now entertain questions.

The Fight Against Hospital Infections

I've made no bones about it, America's healthcare system is very FUBAR. I concentrate on rising costs in Fubarnomics but in this post want to stress the quality issue, or rather the lack of it. Under our current system, many people die or suffer serious complications from infections they contract while in the hospital. It's a tragic (and extremely expensive) problem.

There is some hope, however. Today at the Innovation Expo in Sioux Falls an entrepreneurial start-up outfit from suburban Minneapolis, Minn. called Pursuit Vascular won not one but two prizes for a new medical device that promises to significantly reduce catheter-related infections for dialysis patients. Basically, it is an expandable tube coated with an anti-microbial that effectively seals the catheter and kills most of the nasty bugs inside it.

It was also mentioned at the expo that an anti-microbial paint is being developed here in South Dakota. Applied to hospital walls and such, the paint could also work to reduce the infection rate.

My only concern is that private insurers don't seem to have much of an incentive to force HCPs to adopt these technologies and in fact the in-hospital infection rate could be reduced pretty substantially simply by adopting and following better sanitary procedures.

Readers interested in learning more about the fight against hospital infections are encouraged to visit Kimberly-Clark's "Not on My Watch" website.

The Irony of Constitution Day

Every 17th day of September (or adjacent week day), schools across the nation that receive federal monies (to wit, almost all of them) must celebrate Constitution Day or face loss of their federal funding.
See
http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=108_cong_public_laws&docid=f:publ447.108
then search for "Each educational institution"
and http://www.law.cornell.edu/uscode/36/usc_sec_36_00000106----000-.html.

Don't get me wrong, I love the U.S. Constitution. So much so, in fact, that I find Constitution day, well, as ironic as that little ditty by Alanis Morissette. I'm not a Con lawyer (that's slang for Constitutional attorney, btw, not a redundancy) so I won't go so far as to say that the Constitution Day law is unconstitutional but I will assert that the Founding generation would not have approved. I know that because they didn't pass the legislation though they could have. In fact, they were almost all completely opposed to the federal government providing funds to educational institutions. J. Q. Adams tried and failed to establish a national university in the 10 mile square (Washington, DC). Thomas Jefferson established the University of Virginia because government funding of education was supposed to be left to the several states.

Do I want to see the federal government stop funding education? Of course not, dummy, I'm a college professor. But I would like to see the following:
1) the federal government to stop using its money, which is after all OUR money, as a weapon, even if it is for a "good" cause like promoting Constitutional awareness, because it sets a precedent that could be used for darker purposes;
2) more controversially, to stop funding colleges and universities directly. Subsidies should be paid to students just like Adam Smith argued, in 1776 ironically enough.

See my Fubarnomics for details.

Los Angeles Loves Me!

In addition to my recent appearance on an L.A. radio show, Fubarnomics was recently reviewed, fairly favorably at that, in the L.A. Times.

I have no current plans to visit the place again, though I might be singing a different tune come January-February!

Wright v. Krugman!

In my never ending quest to spread the word about Fubarnomics, I've taken on Paul Krugman. That's a lot easier than it sounds these days:
http://dailycaller.com/2010/08/17/paul-krugman-and-the-real-problems-with-social-security/

I also had an op ed in the Sioux Falls Argus Leader and soon will be on a radio talk show in Los Angeles.

Fubarnomics

Fubarnomics is out and keeping me very, very busy!

For my views on the

state of the economy, click here:
http://dailycaller.com/2010/07/19/economic-pause-or-paws/

recent financial reform, click here:
http://allfinancialmatters.com/2010/07/19/deformed-reforms-the-new-financial-regulations/

sexy state of historiography, click here:
http://hnn.us/articles/129001.html

I was also on the John Batchelor Show on Saturday night ... the podcast isn't up yet but when it is:
http://johnbatchelorshow.com/podcasts/

I have several more pieces coming out in the Sioux Falls Argus Leader, the Readex Report, and the McKinsey Quarterly that I'll keep y'all updated on when I can.

REW

Kaiser Permanente

The Economist had (May 1, 2010 pp. 67-68) a very nice article called "Another American Way," on Kaiser Permanente, an integrated American health care company similar to those in the Sioux Falls area that I blogged about in "Practicing What You Preach" (posted 2/4/10). Its success is not about "culture," as health economist Alain Enthoven supposedly told The Economist. Cultural "explanations" are the biggest cop out going because culture follows incentives. Integrating HCPs, health insurance, and life insurance (as described in Fubarnomics, which should be out in August) is the way to go because it aligns (almost) everyone's incentives towards longer, healthier lives and lower costs.

$13 trillion and counting

Yes, I know the ND > $13T now. What I want to know is when will the rate of growth vs. the size of the economy slow and will it ever reverse? These are difficult questions because they are essentially political in nature and hence about as predictable as the Powerball. Hey, there's an idea. How about a big global lottery for GOVERNMENTS?

Yeah, I'm joking.

Our Cursed Blessing: The Power and Folly of America’s National Debt

America joined the first rank of nations in early March 1797, when for the first time in history U.S. government bonds traded at higher prices than comparable British government bonds did in London. The inversion occurred because British investors feared invasion; the French had botched an incursion into Wales in late February but remained a potent threat to the Home Islands. Frightened investors from London to Liverpool swapped their own government’s bonds for those issued by the U.S. government, which since the early 1790s had proven itself highly creditworthy. Prices soon again reversed but the differential between British and American bonds remained close through the next century and more of peace and war, exhilaration and depression, prosperity and recession, a tribute to both the Mother Country and her upstart offspring. A nation’s greatness, after all, is usually directly proportional to its credit. Those with superior credit, like Holland, Great Britain, and the United States, long reigned as world super powers. Tiny Holland defeated the Hapsburg Empire because it could borrow large sums for long periods at low interest. The sunny British Empire was likewise built on the backs of bonds issued by a government that investors knew would pay its obligations punctually. And the U.S.A. won the Civil War, both World Wars, and the Cold War by borrowing sums so vast that its enemies could not hope to compete.

The close historical connection between credit and geopolitical might is why some observers were alarmed by the mid-March 2010 announcement that Moody’s, one of the largest, hoariest, and most respected credit ratings agencies, might downgrade its rating of U.S. Treasuries. With its bonds long accorded the highest rating, Aaa, the U.S. government has been able to borrow as much as it wanted from investors worldwide at the lowest rates available. If its rating was downgraded, the federal government would find itself in a position analogous to that of an individual with a credit score of 800+ who ran up credit card debt at low rates only to be hit suddenly with a much lower score and consequently much higher interest rate payments. A downgrade would negatively impact every American, from newborns to centenarians, unskilled workers to professionals, homemakers to home builders, prisoners to pensioners, students to teachers, and voters to politicians. Collectively, American taxpayers owe bondholders almost $13 trillion and much of that needs to be repaid or refinanced within the next 5 years. Interest rates are currently low, so “only” about 10 percent of the federal budget goes to pay interest on that debt. If budget deficits (which of course entail additional borrowing) stay high and interest rates rise, however, a larger percentage of the federal budget will have to be paid out in interest. That means that American tax dollars increasingly will go to China, Japan, and other bondholders instead of into education, transportation infrastructure, research, Homeland Security and the armed forces, and conceivably even Social Security and healthcare. Or, taxes will have to increase, perhaps considerably.

Barring a politically-motivated budget impasse like that of 1995, the U.S. Treasury will not outright default on its obligations. The government’s bonds are denominated in dollars, after all, and the government via the Federal Reserve can create dollars at will. More likely therefore is a “soft” default whereby the government meets its obligations by creating so much money that inflation results, as it did during the 1970s. (Oil embargoes didn’t help, but most of the rise in prices that decade was due to loose monetary policy.) Interest rates rise during inflationary periods because investors buy bonds in order to reap real returns, or in other words to increase their purchasing power, not to see it eroded by ever higher prices. Inflation also tends to weaken the dollar in international markets, causing foreign bondholders to seek higher interest rates as well. If the dollar weakens too much, the U.S. government may have to begin borrowing in foreign currencies like the euro, yen, or yuan, which could ultimately lead to a “hard” default, much like those in Argentina in 2001 and Russia in 1998.

America’s fiscal situation at present looks more dire than a wolf but the nation might be able to learn something from the experience of its founding generation, which faced a much more pressing fiscal problem but eventually found a politically palatable solution that worked wonders for the economy. The United States was born bankrupt. Even after the end of the Revolutionary War, its national and state governments could not find the means to repay the enormous debts they had racked up fighting for independence. (In fact, had the British not gone so far into debt fighting the French over the course of the eighteenth century, the rebels would not have prevailed and may never have rebelled in the first place. But that’s a different story.) Fearful that the young republic could disintegrate into warring factions or perhaps again be colonized by a European power, a small group of reformers pushed for the creation of a benign but relatively powerful national government. The story of how they wrote and ratified a new frame of government has been oft and well told. That the reformers followed up by establishing the new government’s credit is less well understood and often recounted, when discussed at all, through the lens of partisan politics. In fact, partisan differences were relatively unimportant compared to the broad consensus that the United States had to repay its debts and grow its economy. Squabbles there were, but mostly over details.

To establish its credit, Federalists (the party of George Washington and Alexander Hamilton) and Democratic-Republicans (the party of Thomas Jefferson and James Madison) agreed, the national government’s revenues had to exceed its expenditures. Federalists wanted a somewhat bigger government than the Democratic-Republicans sought but both sides believed that the government’s proper scope was extremely limited. Both thought that tariffs (taxes on imported goods) and tonnage duties (taxes on international trading ships) should be the national government’s major sources of revenue but they bickered a bit over technical issues like tariff levels on specific goods and subsidiary sources of revenue, including excise taxes on whiskey, which the Federalists thought necessary lest the tariff on foreign spirits do nothing more than encourage domestic whiskey production and consumption.
Because the national government laid exclusive claim to the tariff, traditionally a major source of revenue for the states, the Federalists thought it necessary to assume responsibility for the state’s wartime debts as well. To ensure that the national government could borrow large sums quickly if it ever faced a revenue shortfall, the Federalists also wanted to establish the Bank of the United States. The Democratic-Republicans pushed back on both assumption and the bank using the rhetoric of states’ rights and strict limitation of the national government’s powers under the Constitution but conceded both issues in exchange for locating the permanent capital on the Potomac.

The Democratic-Republicans also made a loud ruckus about who should receive the new government bonds created by Hamilton’s funding system, the original holders of IOUs issued during the war -- typically represented as soldiers, farmers, and patriots -- or the current holders -- usually described as grasping speculators. It’s an old canard that Hamilton and his Federalist minions wanted a large, perpetual national debt while Jefferson and his virtuous Democratic-Republican followers sought the opposite. Yet the plan espoused by Madison to discriminate against current holders of the debt would have actually increased the national debt in no small measure. Moreover, Hamilton believed that the national debt would be a blessing only if it wasn’t “excessive,” or too large a proportion of the total economy (gross domestic product or GDP in modern parlance). Hamilton therefore wanted to pay the debt off slowly so as not to jeopardize economic growth by burdening innovators with high taxes.

Jefferson and many of his followers accused Hamilton of merely copying British institutions, a bad omen in their Anglophobe eyes. In fact, Hamilton created the perception of European fiscal orthodoxy while simultaneously innovating around the edges, adapting Dutch and British precedents to American circumstances. The Bank of the United States, for example, was more sophisticated than the Bank of England because it had numerous district banks (called “branches”) and engaged in lender of last resort activities (a type of “bailout”) in March 1792, at least a year before its British predecessor did. Hamilton also innovated by building into some U.S. government bonds an option that allowed the government to repay up to 2 percent of the principal annually, much like a modern amortized mortgage. Finally, Hamilton realized before most that ownership of government bonds wedded prominent citizens to the new government. Only a small percentage of the population owned government bonds at any given moment, but holders were spread pretty widely geographically and tended to be local civic and business leaders.

Hamilton’s financial program established the new government’s credit as its bonds rose in price from a few pence on the pound to over 100 cents on the dollar and soon rivaled British bonds in Amsterdam and, as noted above, even in London. The Bank of the United States also proved a rousing success. Parts of Hamilton’s tax program caused political difficulties but his tariffs provided ample revenue in most years and were as popular as taxes can be. (Numerous uninformed claims to the contrary, he did not implement a protective tariff. That he wanted to is based on a misreading of his Report on Manufactures.)

Despite playing politics at times, Jefferson also helped to establish the nation’s creditworthiness. His administration tweaked the tax code but left Hamilton’s bank and funding system in place, allowing it to purchase the Louisiana Territory by selling bonds, something unthinkable just 15 years before. Until recently, subsequent administrations were also careful to maintain the national government’s creditworthiness. Time again, as the accompanying graphic shows, the debt to GDP ratio increased only during wars and recessions but quickly receded in the face of budget surpluses and economic growth.

One of Jefferson’s worst fears, a runaway national debt, may now be upon us, however. Politicians face an unquenchable urge to borrow and spend and of late have been unable to slake that thirst. During the administrations of George W. Bush and Barack Obama, the national debt has rapidly outgrown the economy, forcing the debt to GDP ratio towards 100 percent, a level achieved only once before, while fighting a two-front world war on the heels of the worst economic debacle in the world’s history. Two minor wars and sharp but short recessions in 2001 and 2008 have been used to cloud the trend, but voters appear to be catching on. Unfortunately, politicians have turned to accounting legerdemain designed to put off the pain until after the next election. Such tactics may work for a time but in the end bondholders and credit rating agencies will not be denied. What America needs now is the same as it needed in 1790, economic statesmanship, budget controls, and a vibrant economy.

Robert E. Wright has authored Fubarnomics, One Nation Under Debt, and 10 other books on U.S. business, economic, and financial history and holds the Nef Family Chair of Political Economy at Augustana College, SD.

Bailouts, the Supreme Court, and a Tax on Lobbying

In Citizens United v. Federal Election Commission (http://www.supremecourtus.gov/opinions/09pdf/08-205.pdf), the U.S. Supreme Court overturned existing law and precedent and ruled in a 5-4 decision that for-profit corporations can spend as much money as they like on political advertisements at election time. Some see the decision as a great victory for free speech while others claim it will spell the end of the republic itself. Both extreme views are extremely wrong, rooted, like the Court’s decision, in hackneyed readings of tired secondary sources. What the decision should do is encourage Americans to reconsider the role that political influence plays in their material well being.

Instead of Homo sapiens, it might be wiser to think of humans as Homo ereptor, or man the thief. Given the chance, most humans like to get something for nothing, or to engage in “rent seeking” as economists term the activity. When directed at the government, rent seeking by individuals is generally ineffective and hence innocuous. When individuals with similar economic interests combine efforts, however, they often manage to obtain substantial favors from the government, including tariffs, subsidies, and favorable regulations.

For that reason, the Founders feared that “moneyed corporations” threatened the existence of the Republic. It was not that corporations would sway public opinion through advertising or publicity but rather that they could directly buy or coerce votes, a viable threat in a land where viva voce and other forms of open voting held sway and where landlords, employers, and creditors traditionally leveraged their economic power on election days.

By essentially eliminating direct corporate influence on voters, the “Australian” or secret ballot reforms of the late nineteenth century destroyed the threat that businesses would elect their own slate of candidates. The Court’s decision, however, makes it easier for corporations to co-opt whichever politicians the electorate happens to vote into office by allowing them to promise substantial resources when they are needed most, just before the next election. Money can’t buy happiness or elections, but it sure helps!

In other words, lobbyists just got a lot more powerful and that is not likely to be a good thing. Lobbying is nothing new and is generally considered a form of free speech that should be protected under the First Amendment. But does that mean it should be strengthened? I think not. In fact, lobbying should be taxed. The “free” in free speech does not mean gratis: the government has long taxed newspapers, TV stations, book publishers and authors, protest permits, and other forms of speech.
Tax is a dirty word but there is a very good economic rationale for imposing a tax on lobbying and other activities that create what economists call “negative externalities” and everyone else calls “pollution.” By definition, negative externalities impose costs on third parties not reflected in the market price, leading to a more than socially optimal level of output. Unsurprisingly, almost all Americans not directly benefited from lobbying activities believe that too much lobbying is produced, a good sign that such activity does in fact create negative externalities as palpable as belching smokestacks. The most efficient way to reduce such pollution is to tax it, thereby imposing appropriate costs on its producers.
The recent financial crisis and subsequent rash of bailouts is a good example of the pollution created by untaxed lobbyists. As shown in Bailouts: Public Money, Private Profit, the most recent addition to the SSRC/Columbia University Press Privatization of Risk series, statistical evidence that government bailouts since 1970 have sped economic recovery after financial panics is lacking. Historical case studies suggest that government interventions were sometimes successful, as in 1792, but at other times, like in the mid-1760s, they clearly made matters worse and the New Deal was a mixed bag at best. The book also demonstrates that most financial crises were not caused by market failures, like asset bubbles, alone but rather stemmed from hybrid failures, or complex combinations of market and government failures. Throughout history perverse incentives, most created at the behest of lobbyists on behalf of special interests, constituted a leading form of government failure and the most recent financial cataclysm was no exception to that rule.

Venal investment bankers (actually, bankers rewarded for maximizing personal short term returns due to a change in bank ownership structure from partnerships to joint-stock corporations), incompetent rating agencies (like Moody’s), distortionary tax incentives (mortgage interest deduction plus pre-tax 401K contributions), weak financial and economic education (don’t get me started), homeownership initiatives (like the Community Reinvestment Act), degeneration of creditors’ rights (non-recourse loans and silent second mortgages), low interest rates (due to the Federal Reserve and GSEs), and most of the other major causes of the housing bubble and subsequent subprime securitization crisis were the direct results of special interest lobbying, not widespread public opinion or the labored conclusions of a benign technocratic bureaucracy. The form (and size) of the bailouts was also largely a product of special interest pressures. Those bailouts may not cost taxpayers as much as once feared but clearly resources were redistributed from the many and innocent to the few and culpable. The bailouts also increased moral hazard, or risk-taking at another’s expense, and hence the probability of future troubles.
Giving lobbyists yet more power therefore seems an unpromising way to improve the quality of already dubious public policies. So why not tax the pollution created by lobbying activities? Give every U.S. citizen and organization the right to lobby anyone in the federal government tax free up to, say, $100 per year (indexed to inflation), more than enough to cover the cost of phone calls, letters, and emails made by typical individuals and small businesses. Beyond that, impose on lobbying activities a tax approximating the size of the rents sought after. Reduce the expected benefit of rent seeking and we’ll see less of it. Homo ereptor will not go extinct but we can then at least make a case to keep our species name as is.