impressivedetails, questionableeconomics · 2016. 10. 20. · 42 / regulation /fall 2016 in review...

42 / Regulation / Fall 2016

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Impressive Details,Questionable Economics✒ Review by Dwight R. Lee

In his new book, Door to Door, journalist Edward Humes providesthe reader a wealth of interesting information on transporta-tion, but with conclusions based on questionable economics.

His subtitle is fitting: The Magnificent, Maddening, Mysterious World ofTransportation. Our transportation system is magnificent in ways that

Dw ight R . Lee is a senior fellow in the william J. O’NeilCenter for global Markets and Freedom, Cox School ofbusiness, Southern Methodist University. he is a coauthor,with James gwartney, Richard Stroup, tawni Ferrarini, andJoseph Calhoun, of Common Sense Economics: What EveryoneShould Know about Wealth and Prosperity, 3rd edition (St.Martin’s Press, 2016).

Humes makes clear. Yet, in some places hedoesn’t fully appreciate how magnificentit is, and in other places he sees transpor-tation failures that most economists seeas successes. It is not clear what he findsmysterious about the transportation sys-tem, but gaps in economic understandingcan make the world seem more mysteriousthan it actually is.

In his introduction, Humes begins withan interesting but somewhat misleadingstory of “Carmageddon” becoming “Car-maheaven.” a 10-mile, 10-lane stretch ofInterstate 405 that carried 400,000 vehiclesdaily in los angeles was completely closedduring the weekend of July 15, 2011 toallow for the start of construction on anew lane. The predicted traffic jam thatwas expected to spread throughout the citywas dubbed “Carmageddon.” To the sur-prise of all, including “professional trafficczars,” smog decreased, traffic congestiondecreased citywide, no major traffic jamsoccurred, and accidents or deaths didn’tincrease for the entire weak. “Carmaged-don” was replaced by “Carmaheaven” inthe headlines. according to Humes, “Everytraffic truism held dear for the past sixtyyears had been turned on its head … whenclosing lanes lessens congestion instead ofcausing it.” He optimistically proclaims,“With Carmageddon, the lifeblood of oureconomy and way of life, the movement

of goods and people from door to door,had reached an unexpected tipping point.”

Yet, his optimistic tone falters beforethe end of the introduction. He tells usthat one year after the additional lane onI-405 was opened, it tookcommuters one minutelonger on average to travelthe widened 10 miles thanbefore. He doesn’t suggestclosing the added lane tosolve this problem. He alsoacknowledges that “the flowof goods [we depend on] hasbecome so huge that ourports, rails, and roads can nolonger handle the load” andwe “desperately need invest-ment in public capital thatthe nation does not seem tohave. Yet it’s an investmentthat must be made.” Severaltimes throughout the book,the importance of increasinginvestment in our transpor-tation infrastructure is men-tioned, but never the role of governmentregulation in diminishing, delaying, anddistorting this investment.

drinks and iPhones / Humes captures ourattention early on with three chapters onthe transportation that makes possiblethree ubiquitous consumer items: iPhones,canned beverages, and coffee. There areparallels here to leonard Read’s 1958 “I,Pencil” (which discusses the transporta-tion and processing required to produce a

wooden pencil) and economists will findthese three chapters impressive. Indeed,they will find them more impressive thanHumes does by virtue of their understand-ing the importance of market prices inorchestrating these goods’ production andmovement to market. This is particularlyclear in the case of canned beverages.

In Chapter 1 Humes, without mention-ing the cliché, proceeds to show that smartphones can be given only qualified credit forthe “death of distance” by considering thetravel of some of the parts that went intohis iPhone 6 Plus. The parts he considerstravel a combined 160,000 miles before theyarrive ready to be assembled into an iPhone.and that doesn’t include the miles traveledby the different metals in the iPhone frommining to refining to assembly, or the travel

of the chemicals and otheragents needed in the refin-ing, mining, and assemblyprocesses. He estimates thoseconsiderations would easilyadd another 160,000 miles oftransportation to the produc-tion of his iPhone, for a totaldistance equaling a trip to themoon and a third of the wayback. The iPhone deservessome credit for the death ofdistance since Millennials canuse it to conveniently arrangetheir meetings, including theone with the locavores talk-ing about the importance ofbuying local.

Humes sees the “realbreakthrough that makesthe iPhone possible—along

with most of today’s consumer goods,”as the shipping container. By significantlylowering the cost of shipping items longdistances, the shipping container has madethe iPhone commercially viable. Withoutfaulting Humes for not writing an eco-nomics book, it is worth noting that with-out the global specialization and coordi-nation made possible by market prices,the production process necessary for theiPhone would be impossible, no matterhow impressive the transportation system.

Door to Door: theMagnificent, Madden-ing, Mysterious worldof transportation

by edward humes

384 pp.; harperCollins, 2016

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ing out that regulatory agencies, the legalsystem, and advocacy groups are more con-cerned with recalls to check out possiblemechanical defects in cars that, comparedto human error, have a negligible effect ontraffic deaths and injuries. (See “WorkingPapers: auto Safety,” Spring 2016.)

Humes puts the safety issue largelyon hold during the next several chapterson ocean shipping, the logistics of get-ting ever-larger cargo ships into ports andunloaded, and then delivering the cargo toconsumers. He returns to traffic safety inChapter 12, in a discussion of self-drivingcars. He is enthusiastic about the safetypotential of these vehicles, as he should be.He also recognizes the difficulty of goingfrom a few self-driving cars to almost noth-ing but such vehicles on the road, but heis optimistic that it will happen. When itdoes, he sees tremendous improvementsin safety, which he explains with a list of“don’ts.” In his words, “Robots don’t drinkand drive, or get distracted, or get drowsy atthe wheel, or speed, or randomly cross thecenterline, or blow through stop signs orred lights.” The items on his list are impor-tant, but no such list can be complete.

One point that Humes should haveunderscored is that robot drivers have thepotential to remove the hazard of improvedsafety. By this I refer to the problem ofmoral hazard, which describes the generaltendency for people to offset improvedsafety with greater risk taking. This isalso known as the “Peltzman effect” afterUniversity of Chicago economist SamPeltzman who, in a 1975 article, foundthat people were responding to improvedvehicle safety by driving more recklessly.Because of the improvements, fewer occu-pants of cars die in traffic accidents, butthe number of accidents increases, as doesthe number of pedestrian, bicyclist, andmotorcyclist deaths. More recently, RussellSobel and Todd Nesbit found that saferrace cars result in more accidents but fewerinjuries to NaSCaR drivers.

I’m inclined to believe that Humes isaware of the importance of moral hazardto safe driving. When discussing ways toincrease traffic safety, he confines his rec-

and, of course, without the informationand incentives communicated throughmarket prices, the transportation systemitself would not be very impressive.

Chapter 2 takes us on the journeys thatgo into producing aluminum beveragecans, with a can containing one of Humes’lime-flavored seltzers making occasionalappearances. Without going into thedetails of the journeys taken by a numberof resources—particular aluminum ore andrecycled aluminum—that are part of theproduction of the cans, let me say they’reinteresting. So are the journeys of the dif-ferent ingredients that go into the widevariety of beverages and the shipping ofthe finished products to convenient loca-tions in the right quantities to satisfy thedemands of millions of consumers.

Interestingly, he states that “my can ofseltzer is worth far more than the beverageit holds.” This is understandable because, ashe emphasizes, it is important to be able totransport “massive amounts of single-servebeverages more efficiently and cheaply thanany other container type,” and he makesclear that today’s aluminum cans make thatpossible. at this point I thought he appre-ciated the importance of comparing thevalue consumers place on convenience andthe cost of providing it—and furthermore,that market prices are essential to makingthis comparison. But it becomes clear thathe misses those points entirely.

Instead, he finds it maddening that 94billion beverage cans, containing 95% to99% water, are being transported to ameri-can consumers each year. He sees ship-ping all that water as wasteful comparedto the good ol’ days when people eitherpurchased the concentrated syrup andmixed their drink at home or had it mixedfor them at a local soda fountain—withthe heaviest ingredient, water, being trans-ported very cheaply in both cases throughwater pipes. Over time, however, soda pro-ducers shifted to bottling their drinks, firstin glass bottles, then in plastic bottles, andnow primarily in aluminum cans. Whythe shift to what Humes considers a “lessefficient” practice? according to him theanswer is profits. But this ignores the role

of market prices and profits in informingproducers that the convenience value ofhaving ready-to-serve beverages availableat home or in a nearby vending machineexceeds the extra transportation costs.

Humes is more relaxed in Chapter 3,which considers the miles it takes to makea cup of coffee. Possibly, he is comfortedby the fact that coffee beans are typicallyshipped alone, with water added where thecoffee is consumed—at home or the coffeeshop—and he has no complaints based onnaïve notions about profits. Interestingly,he mentions, without explanation, that the“bottom grades [of coffee] are too poor tobe exported and are consumed locally, if atall.” Economists will appreciate this com-ment because they know the explanation.

Hazard of safety / It is not profits and trans-porting water that most trouble Humes;it is something far more upsetting. InChapter 4, after making the obligatorycomments about the carbon emissionsfrom automobiles, he gets really seriousby turning to traffic fatalities. He pointsout that they are so routine and scatteredthat they don’t command the attention ofother disasters. To underscore this, he com-pares traffic fatalities to tragic events thatdo compel attention, like wars and planecrashes. In terms of deaths and injuries,we learn that “one year of car crash inju-ries and deaths in the U.S. is greater thanall the dead and wounded from the entireduration of all [major wars in U.S. history]combined.” and the chapter title, “Fourairliners a Week,” emphasizes that everyweek as many people are killed on ameri-can highways as would be if four passengerjets crashed every week with no survivors.

In Chapter 5 he describes 27 differentfatal accidents that all occurred on Friday,February 13, 2015. He provides enoughinformation about the victims and circum-stances to have an emotional impact. It’s adisturbing chapter, and one can sense hisfrustration as he intersperses commentson the dangers of speeding, driving underthe influence, the distractions caused bydigital doodads, and not wearing seat belts.To his credit, he ends Chapter 5 by point-

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ommendations almost entirely to devicesthat limit the ability of drunks to starttheir cars, prevent cars from exceeding thespeed limit, and prevent cell phone usewhen cars are moving. He does point outwhen those who died in the 27 crashes hediscussed in Chapter 5 were not wearingseat belts, and mentions that a 1968 fed-eral requirement that seatbelts be installedin all new vehicles appears to have reducedtraffic deaths, while parenthetically not-ing it didn’t reduce traffic crashes, leavingopen the possibility that it might haveincreased them. But he never mentionsthe moral hazard of making cars safer foroccupants. His discussion of traffic safetywould have been stronger if he had.

conclusion / Humes comes across as obses-sively opposed to the automobile (moregenerally, to the internal combustionengine) as a social disaster for both safetyand environmental reasons. Not only isit responsible for a death of an americaevery 15 minutes, but

no part of our infrastructure and dailylives wastes more energy and, by exten-sion, more money than the modernautomobile…. Our cars and trucks spewtoxins and particulate waste into theatmosphere that … measurably decreaseour longevity—not by a matter of days,but years.

The indictment goes on to include, sur-prise, “the global climate crisis.” I mightoverlook Humes’ ignoring the conve-nience value of canned beverages, but notthe enormous convenience value of carsand trucks. Of course, there are costs tothat convenience, but the value we real-ize goes far beyond convenience. Doeshe really believe more people would havebeen born, and life expectancy would haveincreased as much as it has, without theincreased wealth the internal combustionengine made possible through improve-ments in transportation? He never con-siders that question. at least he doesn’tcomplain about the population growththat has occurred since 1900.

Interestingly, he considers some of the

tremendous advantages made possible bythe internal combustion engine in chap-ters I don’t discuss in this review. In par-ticular, he has an interesting chapter onthe incredible planning, calculating, andconstant adjustments that make it possiblefor 10,000 UPS drivers to deliver 1.2 to1.3 million packages on an average day inSouthern California. like a lot of amazingthings, he points out that the public takestwo-day delivery for granted, while hatingthe trucks that make it possible.

In another chapter Humes praises masstransit as an underappreciated opportu-nity to reduce our dependency on cars, andexpects many car owners to soon start dis-

covering that they will be able to save moneyby replacing their cars with Uber and lyftridesharing services. Curiously, he ignoresthe convenience advantage of these servicesover that provided by mass transit, and thestrong possibility that increased demand forthe former will reduce demand for the latter.

Despite what I see as its shortcoming, Ifound Humes’ book very informative, andI recommend it to those who are interestedin fascinating facts about transportation. Ifyou are interested in solid economic analy-sis of transportation, I recommend youalso read Gridlock: Why We’re Stuck in Traf-fic and What to Do about It (Cato Institute,2016) by Randal O’Toole.

ARt CAR DeN is associate professor of economics in thebrock School of business at Samford University.

A New Bet?✒ Review by ARt CARDeN

In Greening of Capitalism, John a. Mathews contributes a thought-ful analysis to an intellectual space—environmental policy—notknown for cool-headed, even-handed inquiry or rhetorical restraint.

Mathews, a professor of competitive dynamics and global strategyat both the lUISS Guido Carli University in Rome and Macquarie

sary, but I think the theory and evidenceare still on McCloskey’s side.

Greening of Capitalism is an ambitiouseffort. Where so many in the “end-is-nigh”literature are doing eschatology, Mathewsworks hard to do big-think social scienceby developing a perspective he causes“Schinskyan,” meaning “fundamentallyMinskyan, blended with the flavor ofSchumpeter, of Keynes, of Young, and ofHolling.” He characterizes his ambitiousundertaking as “neo-Schumpeterian” inthat he emphasizes creative destruction,“neo-Gerschenkronian” in that he high-lights the advantages of industrializingafter leaders like the United States andBritain have shown in some senses whatnot to do, and “neo-Olsonian” in that herecognizes the importance of breakingthrough dense thickets of special inter-est groups in order to enact meaningfulreforms. One might say that Greening ofCapitalism is McCloskeyan: Mathews is ask-

University in Sydney, sets up his investiga-tion by choosing a worthy implied inter-locutor, Deirdre McCloskey. at the verybeginning, Mathews writes:

I see this book as an imaginary dialoguewith a fine economist, Deirdre McCloskey.Her current magnum opus on what shecalls the virtues of capitalism, elaboratedin text after text, adopts a strikingly origi-nal position that capitalism has been anunalloyed triumph for humanity and thatso much of the opposition comes from afailure not just of imagination but also ofappreciation of the evidence.

as a McCloskey co-author, this compelledme to dive right into the book. Mathewswrites not to praise capitalism or bury it—rather, he writes to urge us to modify itwhere it seems to fail. When all is said anddone, he proves himself a worthy adver-

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ing big questions and bringing a lot of dataand different perspectives to bear on them.

Path dependence as discussed by theeconomists Paul David and Brian arthuris fundamental to Mathews’ analysis. Heidentifies the (Olsonian) forces keepingindustrial economies dependent on fossilfuels and argues that “it will only be throughsmart state intervention in theeconomy” that industrializerswill be able to avoid similarfates. Here is one of my mainpoints of departure withMathews’ argument. Somestate interventions are betterthan others, but I’m deeplyskeptical of governments’abilities to choose the “right”technologies and the “right”industries. Throughout, manyof his proposals sound likeold-school industrial policywith a green collar.

In discussions of envi-ronmental issues, all roadsshould lead to Ronald Coase,who argued in his classicessay, “The Problem of SocialCost,” that secure propertyrights and low transactioncosts can lead people to bargain to effi-cient outcomes. Surprisingly, Coase doesnot appear in the bibliography, and evenElinor Ostrom (who, following Coase andHayek, showed how institutions and rulesevolve to solve tragedies of the commons)gets scant treatment. These are contribu-tions that must be met head-on: as JohnNye wrote in these pages in 2008, ignoringgeneral equilibrium effects and implicitCoasean bargains creates a “Pigou Prob-lem” in that measured spillover costs fromdriving or some other activity may notreflect the kinds of bargains—indeed, someof which will be mediated by culture—thatinternalize these externalities. (See “ThePigou Problem,” Summer 2008.)

Beyond this, the externality problemis not a categorical problem recommend-ing that we replace this technology (fos-sil fuels) with that technology (wind andsolar) wholesale. If there is a problem, there

is a problem at the margin. How far arewe from the level of carbon emissions atwhich marginal social cost equals marginalsocial benefit? Do we need radical changes?Throughout, Mathews refers to “irrepa-rable” damage and “inevitable” wars overincreasingly scarce resources. Here, I thinkMcCloskey is right—it is from a failure of

(economic) imagination thatMathews and others drawthese conclusions.

resource peak? / The mostintriguing part of the book,in my mind, is Mathews’discussion of resourceprices, including the famedbet between Julian Simonand Paul Ehrlich. Mathewswrites, “Simon was writingand publishing prior to theliterature on peak oil (andpeak coal, peak everythingelse).” This strikes me as anodd claim because M. KingHubbert (of “Hubbert ’sPeak” fame) did his founda-tional work in 1956 and pre-dicted “peak oil” in the late1960s. But never mind that.

What really intrigues me is this passage:

There can be no expectation that thelong-term trend in the price of coal (andother minerals) will be anything butupward—and I would be prepared to beton this with Simon if he were still alive.

Simon, who passed away in 1998, is nothere to make such a bet, but I am. I herebyoffer to revisit the Simon–Ehrlich bet withMathews, but with a couple of small twists.First, we replicate the Simon–Ehrlichbet exactly with $200 each worth of cop-per, chromium, nickel, tungsten, and tin,and with settlement 10 years after the betbegins. Second, if Mathews is game, we doanother bet with energy resources. I proposea $1,000 basket containing $200 each worthof crude oil, coal, heating oil, gasoline, andnatural gas. Finally, I propose that we (orour estates) re-settle the bet every 10 yearsto capture 20-year, 30-year, 40-year, and so

greening of Capital-ism: how Asia isDriving the Next greattransformation

by John A. Mathews

368 pp.; Stanfordeconomics andFinance, 2014

on horizons. Simon himself said that hisvictory over Ehrlich involved a great dealof luck as his predictions were all over verylong terms. There are and have been many10-year periods over which Simon wouldhave won and many 10-year periods overwhich Ehrlich would have won. Revisitingthe bet every 10 years would be a way to bet-ter examine which theory is more broadlycorrect over ever-longer horizons. ShouldI win, I would ask Mathews to donate thedifference between the commodity baskets’prices and $1,000 to the Cato Institute,publishers of Regulation. Should I lose, I willdonate the difference to the research andeducation organization of Mathews’ choice.

In this light, the book’s weakest argu-ments are those based on supposedlyexhaustible energy and resources. I agreethat resource wars are a legitimate publicpolicy concern, but not because we are“running out” of resources in any mean-ingful sense. Rather, they are a concernbecause most policymakers are dealingwith deficient underlying theory. McClo-skey argued that having a rich resourceendowment (of coal, for example) didn’tcause the Industrial Revolution for tworeasons. First, the coal had been there formillennia and only became a resource in thelast few hundred years (hence, it wasn’t afundamental cause). Second, coal can beimported. Resources like oil, minerals, andso on can be bought and sold in world mar-kets. It’s not clear to me that “energy inde-pendence” is important or meaningful,and the fact that one can trade for oil oranything else means that going to war overit is simply tragic and wasteful. Mathewsargues that having to import oil creates “adisastrous dependence,” but again, I’m notat all clear on why “energy independence”is such an important political goal while(say) “coffee independence” isn’t.

beyond fossil fuels / I agree with Mathewsthatburningfossil fuels isa seriousenviron-mental problem, but I think the problem isnot too much capitalism, but too little. Thelargest petroleum concerns in the worldare state-owned oil companies and gov-ernments generally own power grids and


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An Alternative to the Dodd-Frank Resolution Approach✒ Review by veRN McKiNLey

SixyearsafterthepassageoftheDodd-Frankact, theargumentoverwhat would have been the most appropriate legislative responseto the massive bailouts in 2008 and 2009 continues. Making

Failure Feasible is a deep dive into the complex legal and policy issuesinvolved in ending a storied 40-year history of U.S. authorities propping

regulate power companies. Mathews notesthat it is illegal to build private power linesacross public streets. That restriction seri-ously limits the development of a privatemarket in energy at the local level whereone might imagine decentralized networksof power-generating entrepreneurs slowlyweaning people off fossil fuels. Further-more, given that burning coal to producepower generates pollution, monopolypricing for energy would have the salutaryeffect of reducing—perhaps sharply—theamount of energy that gets produced whilespurring people to economize on energy-consuming production processes.

a lot of the book is comfort food forpeople (like me) who enjoy TED talks, andMathews offers a message that is funda-mentally hopeful. While there is certainlyan enormous amount of waste in directedenvironmental policy, the idea of a worldwithout fossil fuels is tantalizing. Further-more, I’m optimistic because of our surfeitof tech zillionaires with gobs of money tothrow at things like backing up the planet.

Mathews extols the virtues of “a greendevelopment strategy involving circulareconomy initiatives (e.g., recycling, turn-ing wastes into inputs),” but he does notspecify exactly where there are big bills onthe sidewalk that no one is picking up.Industrial history—as for example in theChicago meatpacking industry and in thedevelopment of Kingsford Charcoal outof Henry Ford wondering what to do withthe scrap wood produced in auto manu-facture—is a history of turning trash intotreasure. Here again the relevant questionsconcern incentives at the margin: do weneed a wholesale replacement of the entireeconomic system or are there places whererights are poorly defined and enforced?

Mathews calls for “a revolution in eco-nomic thinking … to match the revolutionineconomicpractice,”but I’mnotconvincedthis is necessary. There doesn’t seem to bemuch in Greening of Capitalism that goodold-fashioned price theory can’t handle. Ifanything, the problems he identifies emergefrom stubborn refusals on the part of policymakers and others to internalize the lessonsthat price theory can teach us.

v eR N MCK iNLey is a visiting scholar at george washing-ton University Law School and author of Financing Failure: ACentury of Bailouts (independent institute: 2012).

up troubled financial behemoths.Making Failure Feasible is a collection of

nine essays predominantly focused on aChapter 14 of the bankruptcy code. Thereason you may not have heard of thatchapter before, as opposed to the morefamiliar Chapters 7, 11, and 13, is thatChapter 14 is not law—atleast, not yet. It is the prod-uct of a working group outof the Hoover Institution, theso-called Resolution Project,which was formed in early2009 while the after-effects ofthe financial crisis were stilllingering.

The most recognizablename associated with thebook is John B. Taylor, theformer under secretary of thetreasury for internationalaffairs during the early yearsof the George W. Bush admin-istration and developer ofthe Taylor Rule for monetarypolicy. His research makeshim a competitive candidatefor a Nobel Economics Prize.Taylor is one of the editors ofthe book and he also wroteits preface, which gives somebackground on the Resolution Project andthe books that have flowed from it.

The financial authorities have movedforward with the Dodd-Frank one-twopunch of Title I living wills and Title II

orderly liquidation authority (Ola) thatare at the core of the legislation. Theseprovisions would be applied to deal withthe approaching failure of a so-called “sys-temically important financial institution”(SIFI) if we had a repeat of a Bear Stearns–or lehman Brothers–type stumble in the

future.There has not been a reso-

lution of a SIFI under thisauthority as of yet and wemay have to wait for the nextfull-blown financial crisis forthat to occur. But, the moreentrenched the regulatoryframework gets, the moredifficult it becomes to makewholesale changes short of anew set of post-crisis reforms.The political outlook forRepublicans, whose vocalcriticism of Dodd-Frank wasa theme of a number of theirpresidential candidates thisyear, is not looking goodwhether one considers thepresidency or the congres-sional landscape. alterna-tively, Democrats tend tothink Dodd-Frank, passed byDemocratic majorities in the

House and Senate on a partisan basis andsigned by President Obama, was a step inthe right direction. They would only favorcomparatively modest adjustments to thelegislation, including to existing provisionsallowing the break-up of SIFIs.

The chapters in Making Failure Feasi-ble are a little uneven in their pace, likely

Making Failure Feasible:how bankruptcyReform Can end“too big to Fail”

edited by Kenneth e.Scott, thomas h.Jackson, andJohn b. taylor

301 pp.; hooverinstitution Press, 2015

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similar to the current debtor-in-posses-sion financing employed in bankruptcy.He speculates that Dodd-Frank regula-tory changes, such as increased capitaland liquidity requirements, mean less ofa need for such financing. Finally, he sug-gests some form of prearranged privatefunding mechanism, while at the sametime allowing the Fed’s emergency lendingpowers to carry forward. although Skeel’sproposal tightens up on the current open-ended government lending, his suggestionof leaving in place Fed lending, largely asit is, is troubling given the Fed shows nosigns of letting up on its present plenaryauthority to lend to any institution it seesfit to lend to.

The cross-border challenge / Under Chap-ter 14, could we resolve a massive cross-border institution? In 2008, so the stan-dard narrative goes, it would have beenimpossible to resolve a massive cross-bor-der institution like Citigroup, with itstrillions of dollars of assets spread acrossthousands of subsidiaries operating inmultiple-dozens of countries. The analy-sis of resolving cross-border institutionsin Making Failure Feasible is bifurcated,with one chapter by legal specialist SimonGleeson of Clifford Chance and anotherchapter by financial experts Jacopo Car-massi and Richard Herring of the Univer-sity of Pennsylvania’s Wharton School.The legal issues come down to whetherthe legal provisions are recognized inoverseas bankruptcy proceedings. Glee-son makes a convincing case that thisquestion is more clearly answered with aChapter 14 regime as opposed to a Dodd-Frank resolution regime.

The resolvability analysis by Carmassiand Herring details the challenge at hand:the average globally systemic institutionthat will be subject to resolution has about$1.6 trillion in assets, 42 percent of itsassets outside of its jurisdiction, and over1,000 subsidiaries to deal with in 44 coun-tries. They parse out the central issues withregard to resolvability of cross-border insti-tutions: international cooperation and therelated phenomenon of ring-fencing. as

the term implies, ring-fencing is a pro-cedure whereby local jurisdictions (hostcountries) “fence off” the assets withintheir borders, which gets in the way of aneffective resolution of the entire cross-bor-der institution. They conclude that “we donot yet have a reliable framework to under-take the orderly resolution of a [globalsystemically important bank].”

resolvability / The topic of making a bank“resolvable” is addressed by Thomas Huer-tas of EY Global. The argument made dur-ing the financial crisis was that SIFIs werenot resolvable because the process wastoo “disorderly” through existing bank-ruptcy. The standard narrative justifiedthis argument by presenting the case oflehman Brothers. In contrast, the objec-tive now when it comes to resolvability isto assure that the institution is “safe tofail” (orderly), defined as doing so withoutexpense to taxpayers and without massivedisruption. Huertas builds one exampleon top of another from the simplest case(unit bank in a single jurisdiction withno branches or subsidiaries) to the morecomplex cases (branches, parent holdingcompany with domestic and foreign sub-sidiaries).

William Kroener, former general coun-sel of the Federal Deposit Insurance Cor-poration, contributes a brief chapter on“living will” requirements. Those are theresolution plans that the large banks arerequired under Dodd-Frank to submit tothe Federal Reserve and FDIC. They testhow the bankruptcy law would be appliedas part of a resolution exercise.

reliving lehman / The chapters discussedthus far progressively lead to a chapterby attorney and Stanford economics doc-toral candidate Emily Kapur. Where muchof the book is theoretical in discussingwhat Chapter 14 might look like, Kapurattempts to determine how Chapter 14would have applied under a lehman sce-nario of a prototypical disorderly resolu-tion. although this may be a case of “gen-erals fighting the last war” in assumingthat a crisis will play out in the same way

attributable to the varied backgroundsof the authors. Over half of the chaptersare drafted by lawyers and law professorsand at least one of the chapters has thefeel of material you would find in a legaltextbook, which gave me some flashbacksto my law school years. The remainingchapters are drafted by finance specialists.Overall, the chapters are readable for a gen-eral policy audience, especially if the readeris knowledgeable about the financial crisisand its policy and legislative aftermath.Given the limitations on the length of thisreview, I will highlight select chapters thatI found to be particularly important to theanalysis of a Chapter 14.

The book’s first chapters are back-ground in nature, providing basic defini-tions on Chapter 14 topical areas (capital,debt, liquidity, due process, internationalcoordination, and systemic risk), followedby two proposed versions of Chapter 14(Version 1.0 released in 2012 and Version2.0 released in 2013). a chapter entitled“Building on Bankruptcy” notes thatChapter 14 “could be adopted either inaddition or as an alternative to the newresolution regime of Dodd-Frank.”

The financing conundrum / One cannotbroach the subject of resolving a largefinancial institution without consider-ing the topic of how that resolution willbe paid for. The issue of how a proposedChapter 14 would address the fund-ing of a SIFI is tackled by University ofPennsylvania law professor David Skeel,who writes regularly on bankruptcy inthe editorial pages of the Wall Street Jour-nal. Dodd-Frank provides for a line ofcredit from the U.S. Treasury and largelykeeps in place Federal Reserve lender-of-last-resort funding. That is the prob-lem. Government funding has been tooreadily available, the exhortations fromWalter Bagehot on central bank lendinghave been ignored, and the SIFIs take fulladvantage of these facts.

The current Chapter 11 does not pro-vide for any type of SIFI financing. Skeelargues that under Chapter 14 such financ-ing could be addressed through the market


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during the next crisis as it did during thelast, in some ways this is unavoidable.

For her case study, Kapur assumes thatDodd-Frank is in place with an overlay ofChapter 14. She also makes a simplify-ing assumption that foreign regulatorsdo not ring-fence assets, which appearsto be unrealistic, although it is not clearhow material this assumption is to hercase study. Under her counterfactual,lehman moves assets and liabilities toa “bridge” structure a full 10 days beforethe bankruptcy filing actually occurred in2008. In a section entitled “Business afterChapter 14,” Kapur traces through howshe envisions the newly structured “Newlehman,” primarily from a standpoint offinancing and any adverse systemic effectsfrom implementation.

conclusion / The Dodd-Frank resolutionframework has had its share of high-pro-file setbacks this year, between an embar-rassing slap-down by a federal judge whocriticized the means by which the finan-cial authorities designated SIFIs in theMetlife case, to the continuing inabil-ity of the banks to compose their livingwills in a way that satisfies the Fed andthe FDIC. Whether these setbacks are thebeginning of a slow collapse of the Dodd-Frank framework remains to be seen. Theproposed Chapter 14 offers an alternativeto continuing down the Dodd-Frank roadof granting expanded discretion to thefinancial authorities who failed in theirefforts to assure financial stability andavoid drawing on government fundingduring the last crisis.

Oh, Little Town of Bethlehem✒ Review by wiLLiAM A. FiSCheL

It is emblematic of a scholarly prejudice that Chloe Taft’s impres-sive book about Bethlehem, Pa does not mention the name of myhometown in its title. I can imagine why it’s not there. Sounds

too parochial, too place-specific, too wrapped up on a single city’sproblem. Professors compiling their reading lists in american Studies

w iLLi A M A . F iSCheL is professor of economics and thehardy Professor of Legal Studies at Dartmouth College.

(Taft’s graduate field and my shadow-major as an undergraduate) would bereluctant to include it for those reasons.

But the virtue of focusing on the expe-rience of a single place is that she can getbehind the statistical averages that nec-essarily dominate a more general studyof several cities. Her book is about howBethlehem’s workers and civic institu-tions fared in the city’s transition from aheavy-industry powerhouse to a service-industry knock-about player. The repre-sentative of the latter is the Sands casino,a full-scale gambling resort built in thecenter of the derelict steel works. a moredramatic emblem of the transformation ofthe american economy from the produc-tion of tangible stuff to ephemeral ser-

vices could hardly be found,and Taft deserves credit forseizing the opportunity toexamine the sociology of theeconomic transformation.She did have some familyconnections with the city, butshe could have studied otherplaces, and she did not fallfor the convenient charms ofNew Haven, Conn., where shegot her doctorate from Yale.

My wife and I grew up inthe Bethlehem area and wentto school with the sons anddaughters of steelworkers.We probably know many ofthe people Taft interviewedfor her ethnographic study. Iworked briefly for “the Steel,”

as everyone called it, in the corporate pub-lic affairs office before going to graduateschool in 1969, and my father worked asan engineer for the company during WorldWar II and later dealt with many of its mid-level executives in his contracting business.I can attest that the voices Taft recordssound authentic, even though she revealsthe names of only a few (mainly publicofficials) of the 76 people she interviewed.

Steel’s social contract / The weak point ofher book is economics. In my introductorymacroeconomics course, the economy ismodeled as a giant machine that producestangiblestuff. Idulypointout,however, thatmore than three-quarters of the americaneconomy, and the economies of almost allother affluent nations, consists of nontan-gible services: airline travel, internet service,doctor’s appointments, and entertainmentsuch as visits to casinos. Technical progresshas made producing commodities easier,allowing richer countries to produce andconsume more services. My excuse for usingproduction lines as examples—I sometimesuse steelmaking—is that it is easier to envi-sion the processes.

Taft makes much of the differencebetween the structural beams that theSteel once produced and the gamblingentertainment provided by the Sands. For

economists, though, the dif-ference between services andcommodities is immaterial.Gross domestic product isneither better nor worse forconsisting more of servicesthan commodities. Hers isnot unlike the distinction thatthe Physiocrats—the originaleconomists of France—madebetween agriculture and man-ufacturing, the former beingboth morally and materiallymore important than the lat-ter. Balderdash, say moderneconomists. Goods and ser-vices have the value that con-sumers put on them, period.a bag of groceries and a turnat the baccarat table get their

From Steel to Slots:Casino Capitalism inthe Postindustrial City

by Chloe e. taft

336 pp.; harvardUniversity Press, 2016

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value from the preferences of the purchas-ers. Other methods of valuation don’trespect the autonomy of ordinary people.

Fortunately, Taft has other insightsabout the shift from making stuff to pro-viding services. Her interviews and archivalresearch highlighted the strong sense ofcommunity that had developed aroundBethlehem Steel. Workers could invest inlocal social capital because of the appar-ent permanence of the Steel. They knewthat their neighbors and their children andother relatives were likely to be around tobenefit from their effort at creating a littleleague, a parish school, and public art proj-ect because the Steel would always be thereto provide good jobs. Steel executives felt thesame way. They led United Way fund drivesand supported much of the public decora-tion that illuminated (literally) Bethlehem’sself-appointed role as america’s ChristmasCity. Taft refers to this reciprocal commit-ment as a “social contract.”

The perceived permanence of the Steelalso affected local institutions. Taft’s stron-gest stories concern the development ofethnic churches that provided much of thesocial capital for workers and their fami-lies. The churches did not just supervise lifeevents. Priests and ministers also mediatedbetween the Steel’s executives and workersin their parish, often acting as labor recruit-ers in their home counties and quelling themore extreme labor disputes. (The Steel wasnonunion until World War II, when theRoosevelt administration leveraged the lar-gesse of government contracts to induce theindustry to accept unionization.) The bondsthat workers formed with their churcheswere stronger because of the permanenceof the major employer. Hungarian or Pol-ish workers could commit to local socialinstitutions allied with their church becausethey thought that their jobs would last forgenerations.

Transformation / But by about 1970, therewere reasons to believe that Steel’s prosper-ity and permanence would not last. Theprecipitating event was the 1959 industry-wide strike. It lasted almost four months,and the city was traumatized by it. Busi-

nesses that depended on the Steel andtheir workers’ expenditures suffered alongwith the strikers. The strike’s settlement,more or less dictated by federal mediators,was highly favorable to the labor unions.Management had wanted to change workrules to allow firms to reduce the num-ber of workers for each task, which wouldhave made it easier to take advantage ofthe technical advances that their inter-national competitors had adopted. Theunions would have none of it, and whatmany called “featherbedding” continuedwell into the rest of the century. The strikealso opened the door to steel imports, andbuyers of steel discovered that imported

beams and sheet metal were as good as thedomestic product and much cheaper.

Wages at the Steel continued to out-pace those of other local industries, andTaft mentions some of the resentmentby non-steel workers of the supposedlycushy jobs inside the plant. I had touredthe mills, though, and concluded that thehot, dangerous, and dirty work many didcertainly warranted higher pay. In any case,steel management was either unwilling orunable to renegotiate the terms of the 1959labor contract after it became evident thattheir industry’s prominence was at risk.

Top management was in no positionto lecture workers about excessive pay, asexecutive compensation at Bethlehem wasamong the highest in a high-paying indus-try. But apparently the paycheck wasn’tbig enough for them. In my six-monthstay in the Steel’s public affairs depart-ment, I discovered that the top executiveswere using the stockholders’ money to buythemselves honorary degrees from theiralma maters. My boss would write internalmemos justifying the business purpose—often hard to see—of the secret deals that

the executives made with their universities’fundraising offices. The donations wereburied in the public affairs department’sbudget, and shareholders would be nonethe wiser. My distaste for both sides ofthese transactions—the universities hidthem under the humble-sounding “anony-mous” donations—has ever since made melook a bit askance at honorary degrees.

Both of these ongoing dysfunctions—featherbedding by union workers and self-dealing by top executives—were symptomsof a prosperous industry whose stake-holders knew it was in decline. The socialcontract was eroded by a sense that steelpeople should take what they can while the

ship was still afloat. Thatattitude had its upside.My high school friendswhose parents worked forthe Steel were told to geta good education insteadof depending on a careerat Bethlehem Steel. Theadults thought that the

good wages were not likely to last anothergeneration. They were right.

Bethlehem’s civic elite also foresaw thedecline of steel. Starting in 1959—the bigstrike year—they systematically establishedindustrial parks to attract a more diverseindustrial base. When the Steel finally wentdown, Bethlehem’s civic leaders worked toestablish a diversified research and enter-tainment district in the shadow of the dra-matic symbols of the industrial past, themassive row of blast-furnaces. Bethlehemlanded the Sands in a competition withits neighbor, allentown. The Pennsylvanialegislature proposed to allow one casino inthe lehigh Valley, but it let cities make acase for its specific location. allentown, asI understand it, argued solely for its ownneeds. It had lost its Mack Truck plant toSouth Carolina, and it sought to replacethe lost tax revenues (and redeem itselffrom the Billy Joel song “allentown”) withcasino revenues. Bethlehem was foundedby communitarian-minded Moravians,and perhaps their traditions shaped itsresponse: Give us the casino, and we willshare the extra tax revenues with allen-

Goods and services have the value thatconsumers put on them. Other methodsof valuation don’t respect the autonomyof ordinary people.


I N R E V I E W

town. Bethlehem got the casino.The casino, though, is not the Steel. It

employs less than a tenth of the labor forcethat steelhad in its 1950s heyday.Bethlehemresidents are still a little embarrassed by itdespite the Sands’ clever ploy of adopting asteel-mill theme and preserving several steel-related structures. Even if gaming (the niceterm for gambling) were a larger presencein Bethlehem, it is unlikely that it wouldfoster the kind of social capital that the Steelonce did. Taft emphasizes that the Sands’major sources of revenue are its Macau andlas Vegas operations. Bethlehem is, in thiscontext, a minor locus of profit and doesnot command the company’s full atten-tion. Steel executives lived in Bethlehem andwere responsive to local opinion. Sands is aconscientious corporate citizen, but it is nota matrix for local social capital.

Taft points out that the Sands is partof the worldwide flow of financial capi-tal, just as Bethlehem Steel was. Both hadtheir most profitable operations in othercities. She is aware that capital mobilityis hardly new, and it cannot account forthe negligible influence of the Sands onBethlehem’s social capital. The difference,I would argue, is due to the special circum-stances that made the Steel so prosperous.World War II left america’s steel industrystronger than it was before the war, whilemuch of the rest of the world’s mills hadbeen destroyed by the same event (in somecases, surely, with armaments manufac-tured in Bethlehem). a recovering worldneeded steel, and Bethlehem and otheramerican steelmakers enjoyed a seller’smarket for several decades.

When the rest of the world caught upin steelmaking, america no longer hada comparative advantage in this messyindustry. and even if the Steel had won allthe protection from foreign competitionthat it sought (pursuant to which my Volk-swagen was banned from the corporateparking garage), it would have had to dealwith domestic demands for environmentalimprovements, which also raised costs andinduced buyers to find substitutes. Thecomputer revolution would have eventu-ally introduced the labor-saving technolo-

gies that have greatly reduced the demandfor labor in all manufacturing.

Taft does not address how the post-warera of steelmaking prosperity could havebeen extended. She often blames “neolib-eral” policies for the Steel’s decline withoutbeing specific about how alternatives tosuch policies would work. She complainsthat federal funding for urban programshas declined in the last 30 years, but Beth-lehem’s most prominent federal urbanrenewal project was a misconceived planthat decimated the city’s main shoppingstreet by attempting to turn it into a pedes-trian mall. and she neglects the home-grown bright spots. The flashy alternativeemployer—the Sands casino—is a colorfulhook for her study, but it overlooks jobswith new firms in the area’s industrialparks and the growth of such successfulBethlehem-based employers as Just Borncandies, the maker of marshmallow Peeps.

Bethlehem is like a lot of other medium-size cities that enjoyed a temporary prosper-ity and then had to fall back on a variety of

activities. The city’s Moravian heritage, dat-ing from the 1740s, perhaps made it moreadept in adjusting to the Steel’s demise,since the city had a history that predatedthe steel industry and knew that life waspossible after it was gone. The city’s prox-imity to New York and Philadelphia alsohelped it grow enough business to avoid thepopulation losses that have crippled othersteelmaking towns. The city does not lookin bad shape—I have visited regularly overthe years—and the air is a lot cleaner.

Taft does give voice to some of those sheinterviewed who were upbeat about jobswith the Sands, but she treats them in aslightly patronizing way. Her enthusiasm isgreatest in interviews with old-timers whowere nostalgic about the Steel. We Bethle-hem natives don’t begrudge the permanentresidents their nostalgia, but most of thoseI knew did not pretend that there was apath that could have preserved that brief erawhen the american steel industry ruled theworld. We need to get over the notion thatit can or should be recreated.

Man vs. Nature?✒ Review by geORge LeeF

Recently, I came across one of those fascinating side-by-sidephotographic comparisons, one showing a scene as it appearedin the 19th century and the other, taken from the exact same

spot, showing how it looks today. The two photographs were ofYosemite Valley, the early one taken in 1866 and the other in 2009.

geORge LeeF is director of research for the John w. PopeCenter for higher education Policy.

The striking difference between them wasthat trees were much more abundant inthe later shot. Most americans wouldprobably assume the reverse to be the case.

Why is it that one of america’s mosticonic places is now more wilderness-likethan it was before our great westward migra-tion and the beginning of the industrialera? You will find the answer to that ques-tion within the pages of Nature Unbound.authors Randy Simmons (professor ofeconomics at Utah State University), Ryan

Wonk (director of the Institute of PoliticalEconomy at Utah State), and Kenneth Sim(director of the Reliable Energy EducationNetwork) give readers a synoptic view ofamerica’s sprawling environmental pro-tection bureaucracy: its assumptions, itsnumerous players, its frequently perverseincentives and often bizarre results. Thebook, in short, is a valuable corrective tothe notion that the federal government hasdone a splendid job of protecting us fromenvironmental disaster.

Before going any further, what aboutYosemite?

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Back in 1866, Yosemite Valley wasinhabited by people who made use of theland. The Miwok Indian tribe had longlived there, growing their crops. Since the1840s, some whites had moved in, keepingsheep and prospecting for minerals. WhenJohn Muir saw the magnificent valley, hedecided that it would be still more mag-nificent if those people were removed sothe land could once again be pure. as theauthors write,

For Muir, it was more important tomaintain the balance of nature than toallow the Miwok Indians to live off theland. Muir’s ideology about the balanceof nature within national parks was soinfluential that (citing another source)“the Yosemite model spread to otherparks, including Yellowstone, whereforced evictions killed 300 Shoshone inone day.”

That’s why once-open meadows are for-ested today: the idea that man must bekept out to save nature.

If the book can be said to have a vil-lain, it is that “balance of nature” ideology,which holds that any sort of human inter-vention is harmful and dangerous, andthus must be minimized if not stoppedaltogether. The truth, argue the authors,is that nature is not so fragileas this ideology posits andhuman activity is not likeintroducing a cancer into it.Disturbance and change areconstants in nature; ecosys-tems are resilient. Humanscertainly can cause environ-mental damage, but “bal-ance of nature” thinking isan immense overreactionthat brings about resultsthat most of us would findundesirable.

laws and the environment /Just as nature has its ways ofresponding to environmen-tal change, so do we humans.We dislike pollution anddeveloped legal responses to

it centuries before the current environ-mental laws were written. English andamerican common law sided with thosewho suffered the effects of pollution. Theauthors provide illustrative cases goingback to the 19th century where judgesordered polluters to cease and pay dam-ages under common law rules of property.

No doubt, much pollution was deterredby those precedents and the authors sug-gest that we might be better off today ifwe had not veered away from commonlaw and instead started placing our trustin federal statutes and bureaucrats.

The great bulk of the book is aboutthose statutes and the officials who enforcethem: the Clean air act, the National Envi-ronmental Policy act, the Clean Wateract, the Endangered Species act, and theWilderness act. The authors also devotea chapter to the closely related subject of“renewable energy” laws, which gave us

Solyndra and other boon-doggles. The authors do notmaintain that all of thoselaws are failures, but arguethat the environmental bene-fits they have brought us havecome at a greatly inflatedcost.

Consider first the Cleanair act (Caa) of 1970. amer-ica certainly had sufferedfrom befouled air, such asthe hideous smog that killed14 people in Donora, Pa. in1948. What is little known,however, is that state, local,and private efforts (such asinnovations by the Big ThreeU.S. automakers that pre-vented crankcase hydrocar-bons from being vented into

the atmosphere, in use by 1961) had beensteadily reducing air pollution. But becauseof media sensationalism, most americanswere convinced by the late 1960s that thenation faced an air pollution crisis. Thatled Sen. Edmund Muskie (the top Demo-cratic contender for president in 1972) andPresident Richard Nixon to start compet-

ing to see who could bemore “green” in voters’eyes.

Nixon made use ofhis incumbency to pushthrough the Caa andsign it into law in 1970.Henceforth, the countrywould take a top-down,

bureaucratic approach to air quality, runfrom Washington, D.C. What was theresult? “Overall,” write the authors, “theClean air act and its amendments havebeen less successful in cleaning the air thanin allowing the Environmental Protectionagency to extend its reach.”

apropos of that point, the authorsdetail the protracted litigation over thequestion of the EPa’s authority (even duty)to regulate carbon dioxide, which is not apollutant as defined by the law. Ultimately,the Supreme Court ruled in Massachusettsv. EPA that the agency did have both thepower and the obligation to regulate car-bon dioxide discharges to help prevent“catastrophic harm” to Massachusettsresidents. The authors sum up the case,writing that it showed two fundamentalproblems with the law:

The first is the inability of the EPa topossess the knowledge or ability totackle all of the problems now deemedto require regulation…. The second isthat the expansion also increases thecomplexity of the Caa, which augmentsthe ability of interest groups to engagein rent-seeking behaviors.

The case demonstrates a point thatrecurs throughout the book, namelythat the words legislators put on paperare often interpreted by the courts orthe bureaucrats to mean something thatwas not originally intended. The level of

Nature Unbound:bureaucracy vs. theenvironment

by Randy t. Simmons,Ryan M. yonk, andKenneth J. Sim

287 pp.; independentinstitute, 2016

The words legislators put on paper areoften interpreted by the courts or thebureaucrats to mean something thatwas not originally intended.


I N R E V I E W

authority the legislators thought properfor regulators often grows exponentiallyunder the processes of administrative law.

bureaucracy and red tape / Such a concen-tration of power in bureaucratic handsis highly problematic, the authors argue.assuming that agency personnel wantto make the best decisions in the publicinterest, they confront Hayekian knowl-edge problems in that the informationnecessary to make ideal decisions aboutenvironmental conditions and responsesis widely dispersed throughout society.Worse, many of those officials are ideo-logues who are determined to imposetheir will no matter the costs to the restof us. The EPa, for instance, “consistentlyoverlooks important variables and twiststhe science to match its political agenda,”the authors write.

another serious problem the bookhighlights is the waste of time and moneyin getting projects done, given the mazeof environmental laws and the possibili-ties they offer for obstructionism. Underthe National Environmental Policy act(NEPa), for example, applications toundertake construction projects mustshow that all other possibilities have beenconsidered and that the current proposalis the one with the least environmentalimpact.

In one particularly risible case, thearmy Corps of Engineers refused toapprove a plan to improve a rural roadon the grounds that the state had notexplored all alternatives to the plan. Thealternative that had not been consideredwas the possibility of building an elevatedroad over the existing one. More time andmoney had to be spent in analyzing that“alternative.” The authors comment, “Theridiculousness of this alternative is obvi-ous, but it should be noted that reason-ableness under NEPa is subjective, andpolitical entrepreneurs will use whatevertools are at their disposal.”

Readers also learn that the EndangeredSpecies act creates some horribly perverseincentives that often lead to the needlessdestruction of wildlife. If an endangered

species is detected on private land, theowner may not use or develop the prop-erty in a way that could harm the crea-tures or their habitat. That amounts to ataking of the property, but one that thecourts don’t view as compensable undereminent domain. Therefore, owners whosuspect that a protected bird species likethe red cockaded woodpecker might takeup residence have an incentive to developor otherwise exploit the land immediately,and if the bird should appear, the mostrational response is to “shoot, shovel, andshut up.”

Some of the most distressing cases ofthe harm done by the balance of natureideology occur when the Wilderness act isinvoked to prevent sensible land manage-ment. This ideology insists that humansmust let nature run her course. So whatif thinning underbrush would reduce the

likelihood of devastating forest fire, or add-ing lime to a stream could offset acidifica-tion, or removing landslide debris wouldallow fish to swim upstream to spawn,or killing destructive beetles might savehealthy forests from being ravaged? Thewilderness must remain “pristine.” Zealotshave used the Wilderness act to stop suchhuman incursions, a triumph of ideologyover what almost all of us would think ofas common sense.

Students of regulation and publicchoice will find this book to be a feast.More encouragingly, environmentalistsmay find themselves rethinking theirviews on environmental policy after read-ing Nature Unbound. Someone might evensend a copy to the descendants of theMiwoks, who still live in California, butwhere they can’t “ruin” nature for theenvironmental purists.

Of Hedgehogs, Foxes,and Superforecasters✒ Review by veRN MCKiNLey

To begin the first chapter of Superforecasting, Philip Tetlock andDan Gardner make the point that “we are all forecasters. Whenwe think about changing jobs, getting married, buying a home,

making an investment, launching a product, or retiring, we decidebased on how we expect the future will unfold.” The stated goal of the

v eR N MCK iNLey is a visiting scholar at george washing-ton University Law School and author of Financing Failure: ACentury of Bailouts (independent institute: 2012).

book is to parse out of the general popu-lation those rare souls (roughly 2%) whoare amazingly good forecasters or, as theterm is coined by the authors, “superfore-casters.” It is the authors’ goal not only toexplain in detail why these forecasters areso good, but also to pass the knowledgeabout how they forecast on to others.

The secrets of superforecasters areunearthed in the old-fashioned way, bytracking thousands of predictions of thesuperforecasters—as well as the much morenumerous not-so-superforecasters—that

have been “dated, recorded and assessedfor accuracy by independent scientificobservers.” Secondarily, the authors wantto make the reader think about the integralrole that forecasting plays in our lives—both those forecasts we make ourselvesand those forecasts that others make thataffect our lives.

I agree that “we are all forecasters” basedon my own experience. I regularly under-take forecasting as part of my professionalwork in the field of finance and also as animportant part of my personal finances.less often, some of my policy work hasalso involved forecasting. But as Tetlockand Gardner describe in detail the fore-

R


casting process and developthe traits of superforecasters,it made me think a lot aboutthe methods I have used andabout how useful and accu-rate my own forecasting hasactually been.

Tetlock is a professor atthe University of Pennsylva-nia. In 2011, he launched theGood Judgment Project (GJP)with his research (and life)partner Barbara Mellers andinvited volunteers to sign upand forecast the future. Thisbecame the platform for theanalysis of forecasting in thebook based on the work ofmore than 20,000 partici-pants who volunteered forthe GJP. These participantsgave their best forecasts for a variety ofcurrent events since the initiation of theGJP, including “if protests in Russia wouldspread, the price of gold would plummet,the Nikkei would close above 9,500, warwould erupt on the Korean peninsula, andmany other questions about complex, chal-lenging global issues.” Gardner is a jour-nalist whose book credits include titles onthe intermingled issues of science, politics,and fear. Readers will note that the first-person narrative is often used in the bookand it appears to be from the perspectiveof Tetlock.

Hedgehogs and foxes / The authors, likelybased on a theme of one of Gardner’sprevious books, make a nice distinctionthroughout the book between “hedge-hogs,” who organize their thinkingaround Big Ideas and make high-profilepublic pronouncements expressed witha high degree of certainty; and “foxes,”who are more pragmatic experts whohave a range of approaches and talk aboutpossibilities and probabilities, not abso-lutes. The authors seem to hold a grudgeagainst the hedgehogs: “Despite my allbut begging the highest-profile punditsto take part, none would participate.”The authors proceed to cast aspersions on

such high-profile “experts”who make predictions,bluntly stating that “Foxesbeat hedgehogs” and cit-ing the “inverse correlationbetween fame and accuracy.”In particular, they skewersupply-sider and Reaganitelarry Kudlow of CNBCfame for his rosy predictionson the Bush 43 economycirca 2007 and 2008. Theyalso criticize Paul Krugman,although not for the qual-ity of his predictions (theydon’t pass judgement onthat), but for his boorishbehavior in engaging in pub-lic arguments that “lookedless like a debate betweengreat minds and more like

a food fight between rival fraternities.”

can you identify a superforecaster? / Sowhat are some of the characteristics ofthese so-called superforecasters that Tet-lock and Gardner spend so much timedissecting?

■ although forecasters in general haveabove-average intelligence (higherthan about 70% of the population),superforecasters are even more intel-ligent (higher than about 80% of thepopulation).

■ as you might guess, those with a quan-titative background would be goodcandidates for superforecasters: “I haveyet to find a superforecaster who isn’tcomfortable with numbers and mostare more than capable of putting themto practical use.”

■ They regularly update their forecastsas new information becomes available,poring over the news on topics relatedto their forecasts to discern nuggetsof useful information that might beapplied to improve their accuracy.They note, “Superforecasters updatemuch more frequently, on average,than regular forecasters.”

■ Superforecasters also have what

the authors call a “growth mind-set.” Unlike people who have a fixedmindset, displayed by a mentality ofsomeone who thinks he or she is badin math and that this is an immutabletrait, those with a growth mindsethave a completely different outlook.They believe that their abilities are“largely the product of effort—that youcan ‘grow’ to the extent that you arewilling to work and learn hard.”

■ Going beyond the realm of individualsuperforecasters, the authors alsodetermined that forecasting is a teamsport. “The results were unequivocal:teams were 23% more accurate thanindividuals.” This is the case for anumber of reasons, including the posi-tive traits of gathering and sharing ofinformation and sharing of perspec-tives, which outweigh any adverseinclination toward “cognitive loaf-ing” whereby team members slack offhoping that others will do the heavylifting that is needed to develop goodforecasts.

But Tetlock and Gardner do not leavethese superforecasters to wallow in ano-nymity. They get personal and “out”superforecasters like Doug lorch: “Helooks like a computer programmer, whichhe was, for IBM…. Doug has no specialexpertise in international affairs, but hehas a healthy curiosity about what’s hap-pening. He reads the New York Times. Hecan find Kazakhstan on a map.” lorchdeveloped forecasts for about 104 of theproject questions and got an overall Brierscore of 0.22 (on a scale of 0 to 2, whichmeasures the distance between the fore-cast and subsequent reality, so the lowerthe better). Devyn Duffy volunteered forthe GJP because he was unemployed: “Mymost useful talent is the ability to do wellon tests, especially multiple-choice. Thishas made me appear more intelligent thanI actually am, often even to myself.”

detour and dead end / Superforecasting takesa bit of a detour at one point and triesto be a management book. One chapter

Superforecasting: theArt and Science ofPrediction

by Philip e. tetlockand Dan gardner

341 pp.; Crown Pub-lishers, 2015


I N R E V I E W

PhiL R. MURRAy is a professor of economics at webberinternational University.

delves into the use of forecasting by lead-ers, particularly military leaders. It does soby demonstrating uncertainty where a sit-uation changes so dramatically that plansneed to be abandoned and improvisationtakes over: “No plan survives contact withthe enemy.” This discussion diverts atten-tion away from pure forecasting issuesand I don’t see how it fits within the con-fines of the superforecasting theme.

i am not a superforecaster / as for tryingto judge my own forecasts based on themethodologies set out in Superforecast-ing, the results are a mixed bag. In a CatoPolicy analysis (#293, December 1997) Ireferred to Fannie Mae and Freddie Mac,the government-sponsored mortgagegiants, as “financial time bombs” based onthe contingent liability they posed for thegovernment combined with their inherentmix of leverage, hidden off-budget status,and high-profile political engagement,combined with a long history of similargovernment bailouts. I was publicly androundly criticized by adolfo Marzol, asenior Fannie Mae official, for makingsuch a prediction.

Of course, Fannie and Freddie did goboom in 2008. although I have alwaysthought that mine was quite the impres-sive forecast, especially given that only ahandful of people publicly predicted it,Tetlock and Gardner’s method casts somedoubt on my positive self-assessment:“Forecasts must have clearly defined termsand timelines. They must use numbers.”So although what I predicted did ulti-mately occur, the fact that I made an open-ended forecast, without a certain date orestimated magnitude of the failure, makesit a much less impressive feat.

I think I have done a little better whenit comes to personal finance–related fore-casts. like superforecasters, I like to updatemy forecasts on a regular basis. I also get arange of advice from what might be called a“team” of forecasters who undertake simi-lar personal finance forecasts.

What a policy reader will like / althoughthe phenomenon of superforecasters

is interesting enough to keep a readerengaged, I think a policy audience willfind the hedgehog vs. fox distinction andrelated analysis the most interesting ofthe topics addressed. The aftermath ofthe Brexit vote early this year is consistentwith this useful lesson of Superforecast-ing. In the Brexit case we had the crazywhiplash of self-appointed “experts”shouting their disdain for the conceptand forecasting a market crash if Brexithappened—in some cases, one of lehmanBrothers proportions. Market lossesbecame a self-fulfilling prophecy in the

Safety at Any Price?✒ Review by PhiL R. MURRAy

Tracey Brown, director of the United Kingdom science edu-cation charity Sense about Science, and Michael Hanlon, alondon-based science journalist, begin their new book, Play-

ing by the Rules, with a story: Two “safety sentinels” paddling a canoein lake Michigan warned swimmers to return to the “safe swim-ming depth.” One swimmer protested thata lack of rain had reduced the water level,and asked for permission to swim outwhere the safety sentinels were paddling.a sentinel denied the request because “oneof our patrol canoes might run into you.”

Brown and Hanlon’s book is a string ofsuch anecdotes, which produce reactionsranging from incredulity, to laughter, toexasperation. What motivated the authorsis the reality that “many safety rules enjoyan authority they don’t deserve.” They argueagainst such rules on grounds that they:■ are a waste of time and money; they

look important but they just don’twork

■ have unintended consequences■ are used as excuses to shirk responsi-

bility■ are covers for vested interests■ distract from real danger and generate

cynicism about the measures that dowork

Safe skies? / Take air transportation. Naiveairline passengers may learn the hard waythat the United States’ TransportationSecurity agency (TSa) prohibits boardingwith “snow globes, bottles of aftershave,key rings, and a variety of artifacts andsouvenirs whose plane-hijacking potentialcould never have been anticipated by theirowners.” Britain’s equivalent of the TSaprohibits “toy guns, replicas, and imita-tion firearms capable of being mistaken forreal weapons.” Despite that qualification,an official at Edinburgh airport prohib-ited a boy from carrying on a Nerf gun.In one of the more bizarre anecdotes,an official at Heathrow airport stoppeda passenger from boarding because hisshirt had a picture of “a robot that washolding a gun.” The authors add, “Manyairlines have a contract of carriage thatincludes refusing to carry people wearingobscene or offensive clothing.” Howeverthat seems insufficient to rationalize theofficial’s action. “It appears,” the authorssuggest, “that the security guard merged

immediate aftermath. However, withina few days, with the exception of a selectfew sectors, the markets made up mostof those losses.

Based on Tetlock and Gardner’sresearch, if you see well-known experts at apolicy forum talking about what the futurewill hold, you can conclude that they arelikely not very good forecasters, notwith-standing their boasting to the contrary.as Tetlock and Gardner also found, youshould ask the experts for historical dataon their prior forecasts and in most casesthey will be at a loss to provide it. R


the prohibition on toy guns and the rulesabout clothing.”

Many rules that aim to make air trans-portation safe and secure are questionablefor various reasons. Brown and Hanlonask, “Would it really be any easier to hijackan airliner armed with a nail file than with,say, the jagged edge of a smashed whiskeybottle that you acquired after clearing air-port security?” alternatively, don’t breakthe bottle. “Fashion a handkerchief intoa wick,” instead, “and you could turn abottle of whiskey into a highly effectiveMolotov cocktail.” In addition to imag-ining how terrorists might select tacticsthat circumvent security rules, Brown andHanlon share strategic insights. They rec-ommend allocating fewer resources to stopterrorists from boarding a plane and moreresources toward intelligence. “Disruptingattacks much farther upstream, throughforeign policy and intelligence work,”they state, “has a far greater track recordof being effective, as the official report on9/11 made clear.”

although the unintended consequencesof rules loom large, officials and the publictend to ignore them. For example, rulesthat aim to make air transportation moresecure have significant costs in terms ofmoney and time. Travelers substitutemore risky driving for less risky flying. Theauthors cite risk analyst Gerd Gigerenzer’scalculation that the unintended conse-quences of additional rules, plus the pub-lic’s perception that flying became moredangerous after 9/11, resulted in about1,600 additional lives lost on highwaysduring 2002.

Think of the children / Foreseeing unin-tended consequences, or even identify-ing them after the fact, demands criticalthinking. The authors write about TimGill, a British writer who specializes inchildren and risk. according to Brownand Hanlon, Gill reasons that installing“rubberized playground surfaces” in theUnited Kingdom prevented up to twochildren from dying over approximately20 years at a cost of £350 million (about$450 million). Musing over whether each

of the two lives saved was worth the £175million spent to save them is difficultto do in public. Gill’s way of presentingcost–benefit analysis is easier for the pub-lic to accept: In the two decades that cushyground cover prevented two children fromdying on playgrounds, over a thousandchildren died in traffic accidents. Hadthat £350 million been spent on “traffic-calming measures,” it is likely that fewerdeaths would have occurred.Yet another alternative, Gillpoints out, was to devoteresources to building addi-tional playgrounds. Childrenwould have spent less timecrossing streets on their waysto and from playgrounds far-ther from their homes, andfewer would have died. Thereality, Brown and Hanlonspell out, is that the numberof playgrounds decreasedbecause of the more costly,higher playground safetystandards.

Brown and Hanlon objectto rules designed to avoidaccountability. They sharethe story of a mother in Pitts-burgh who took her son to apublic pool. She wanted theboy to wear water wings because he hascerebral palsy. a lifeguard told her thatwater wings were prohibited. When askedto make an exception, the lifeguard wasunwilling. Because the mother then defiedthe rule, police were called to the scene.a pool official claimed that the policeintended to clarify the rules without evict-ing the mother.

Despite what appears to be an alarm-ing escalation over pool rules, reasonand discretion eventually prevailed. Themother persuaded pool officials to makean exception with the ultimate leverage:a doctor’s note. From Brown and Han-lon’s perspective, “That doctor’s notemeant that the pool and the lifeguardshad managed to shift their responsibility,and probably also their legal liability.”The mother deserves praise for determina-

tion and resolving the issue for her son’sbenefit. How many children suffer whentheir parents back down in front of inflex-ible authorities? The doctor also deservespraise for taking responsibility. Brownand Hanlon condemn the pool officialsfor trying to evade responsibility. “Theenforcement of safety measures was ini-tially driven by a vague sense of liability,”in the authors’ view, “and then by the

pool managers’ relief thatresponsibility now restedwith someone else.”

In fairness to the poolofficials, safety did concernthem. lifeguards questionthe effectiveness of waterwings because they encouragea false sense of security. Thatpoint is legitimate. Floatationaids are not good substitutesfor real swimming skills, andparents themselves mightuse floatation aids to shirkresponsibility for instructionand supervision.

Some rules exist to serve“vested interests.” Recallthe “Y2K” problem. Expertsknew that some computerswould not correctly recog-nize the change from 1999

to 2000. an anxious public prepared forchaos. Brown and Hanlon blame threegroups for stoking the public’s anxiety:Information technology workers, such asprogrammers and network administrators,sold their services in return for “makingthe computer system ‘Y2K compliant.’”Politicians seized the “opportunity to beseen to be doing something importantabout an ideologically neutral problemthat was manifestly not their fault.” This isa stark reminder to those who view biparti-sanship as a good thing: politicians spendtaxpayers’ money on bipartisan effortswith little opposition. The media roundsout the groups that benefited from Y2Kmania. Writers could craft hair-raising talesof all that might go wrong because of Y2K,or they could ask probing questions tobetter estimate the real threat from Y2K.

Playing by the Rules:how Our Obsessionwith Safety is PuttingUs All at Risk

by tracey brown andMichael hanlon

321 pp.; Sourcebooks,2016


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according to Brown and Hanlon, “virtu-ally every reporter” chose the former. Theauthors report that global spending toavoid the Y2K problem ranged from a lowof $300 billion to a high of $1.4 trillion.after the turn of the century, of course,normalcy prevailed, even in countries thatdid not take precautionary measures. Theauthors draw this “valuable lesson” fromthe episode: “Politicians need to learn a bitof skepticism, and they should start ask-ing, ‘Cui bono?’ (Who benefits?)” Citizensshould ponder that question too.

asking for evidence / Rules are a means toachieve the goal of safety. Intuition sug-gests that more rules will make us safer.

But sometimes that intuition is wrong.There is such a thing as too many rules,and an additional rule at some pointreduces safety. Brown and Hanlon havea term for this: “rule fatigue.” althoughindividuals may flout rules on grounds ofcommon sense or rebelliousness, accord-ing to the authors, sometimes individualsfail to comply “because the rules, how-ever well meaning, can be so onerous andinconvenient that heeding them at allbecomes impractical.”

Hans Monderman, an entrepreneurialstreet designer, theorized that fewer trafficrules would increase safety where he livedin Drachten, Netherlands. He convincedauthorities to eliminate signs, signals,designated crosswalks, and more. Mon-derman’s insight shows that by keeping aspeed limit and scrapping rules that aim toherd people and their vehicles through citystreets, urbanites learn to “make eye con-tact” with each other. as a result, Drachtenresidents now experience “fewer accidentsand fewer deaths.”

In order to combat insensible safety

rules, Brown and Hanlon recommend thatcitizens “ask for evidence.” When frus-trated by an authority figure parroting aseemingly senseless rule, try asking thefollowing questions:

Why? On what basis does this rule exist?Where are the cases of people gettinginto trouble while doing this? Give usthe statistics. Is this rule really makingus safer? What is it costing us? Why dodifferent countries have different rules?

Posing effective questions is a forte ofthe authors. Here are two more: “Haveyou considered the other effects [therule] is having? Who really benefits fromit?” Questioning the authorities will not

quickly alter attitudestoward safety, but thepayoff may be large.lori leVar Pierce ofColumbus, Miss. let herson walk alone to soccerpractice. The sight of her10-year-old walking byhimself alarmed some-

one enough to call 911. although Piercebroke no law, a police officer scolded herand likened her parental discretion to“child endangerment.” Editorial writerslikewise expressed their disagreementwith her judgment for fear that the boymight have been abducted or hit by a car.Unintimidated by the criticism, Piercepublicized her experience and encour-aged other parents to let their kids walkto their destinations and play outdoors.Her effort changed both attitudes andinfrastructure: the same editorial pagerescinded its earlier condemnation andColumbus planned new sidewalks andbike paths.

Brown and Hanlon generally citesources, though not always. They informus, for example, that SWaT-team opera-tions have risen from 3,000 annuallyduring the 1980s to 50,000 per year thisdecade. Their source is the Economist. Butjust one page after that, they inform usthat “in 2012, armed law officers killed 587people in the United States.” They cite nosource for that. Nor do they, as they usually

do, help us put that number into properperspective by telling us numbers for otheryears and adjusting for population.

The authors do not oppose safety.“Sometimes we have found that a ruledoes make sense,” they admit. Considerdriving. “There is strong evidence,” theyproclaim, “that raising the minimum driv-ing age saves lives.” Some of this evidenceis international. Europeans start drivingat a later age than americans. Conse-quently, in Europe, “crash and death ratesare generally far lower than in the UnitedStates.” The authors point out that thefavorable European statistics could havemultiple causes. Traffic is lighter in Europe,the higher price of gas there discouragesteens from driving, and public mass trans-portation is a viable substitute. Other evi-dence that supports a lower minimumdriving age comes from New Jersey. Inthat state the legal minimum driving ageis 17 and newly licensed drivers are pro-hibited from driving in the wee hours ofthe morning. Based on research producedby the Insurance Institute for HighwaySafety, Brown and Hanlon report, “Sev-eral hundred young New Jersey citizens arewalking around in good health today as adirect result of these measures.” Teenag-ers, unsurprisingly, oppose an increase inthe legal minimum driving age. Politicianshesitate to initiate the change, perhapsbecause parents look forward to lettingtheir teens drive themselves rather thanchauffeuring them.

In sum, the authors aim to convince thereader that many unnecessary rules exist bylaying down a barrage of anecdotes. Theyfocus on telling good stories, one afteranother, without delving into technicaldetails. Their straightforward advice, thatwe persistently ask for evidence, pervadesthe book.

Rest assured that we are safer, even ifwe do not sense that we are safer. Brownand Hanlon are optimistic that attitudesare changing because they see that whencitizens demand evidence, officials act onit. a society with fewer rules is not neces-sarily riskier and, the authors lead us tobelieve, brings peace of mind.

Rest assured that we are safer, even ifwe do not sense that we are safer. Asociety with fewer rules is not necessarilyriskier and, the authors lead us tobelieve, brings peace of mind.

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in New York City. George Mason Univer-sity law professor F. H. Buckley uses thebook as a model for successful societies inhis new book, The Way Back. The americaof a century ago was a land where almostanyone could prosper through work,thrift, honesty, and foresight. It was a landof high income mobility, meaning thatpeople born into poverty often ended upwealthy—and vice versa.

Today, however, there is much lessincome mobility in the United States.Compared with many other industrializednations, we have become rigidly stratified.While it is still possible for an individual torise out of poverty, to a disturbing extentthe can-do spirit of Horatio alger has beenreplaced by defeatism combined with hos-tility and cultural decay among the poor.

The high price we pay for this is thenear death of “the american dream.” Mil-lions of our fellow citizens, rather thanemerging from poverty, find themselvesliving embittered lives, often turn to crime,raise children who are increasingly unableto thrive, and depend on governmenthandouts. Naturally, that has unhealthyconsequences. Buckley writes:

People feel better about each other whenthe game doesn’t seem to be riggedagainst them. They’re also happier andless likely to support demagogues whopromise greater equality but wouldrestrict political freedom and threatenthe rule of law to attain it.

Stagnancy and liberty / Weare, argues Buckley, trend-ing toward a caste societywhere a child’s economicprospects are pretty muchdictated by the status ofhis parents. He devotes fourchapters to explaining whyhe thinks that Republicans,conservatives, libertarians,and everyone else should paymore attention to this thanthey usually do.

Particularly interestingto most Regulation readers, Iassume, is Buckley’s case forlibertarians to take seriouslythe income immobility prob-lem. He writes:

The question is whether income inequal-ity and immobility can lead to the loss ofthe freedoms the libertarian prizes. That’san argument attributed to SupremeCourt Justice louis Brandeis. “We canhave a democratic society or we can have agreat concentrated wealth in the hands ofa few. We cannot have both.”

I happen to think that Brandeis wasmistaken: democracy and, more impor-tantly, liberty coexisted with concen-trated wealth before Brandeis and still dotoday, despite the apparent increase in the“wealth gap” that progressives constantlycomplain about. Nevertheless, Buckley hasa sound point that freedom is endangeredby zealots who appeal to the masses inthe name of “fairness.” He uses Venezuela

as a good example of a nation where anauthoritarian won election by appealing tothe desperately poor classes who believedthat they would never advance withoutdrastic political change. In the time sincethe book was written, the situation in Ven-ezuela has gone from terrible to tragic,further supporting his argument.

The United States is less fragile thanVenezuela, of course, but we have seen ourown populist rabble rousers gain a hugefollowing with the same basic messagethat put Chavez and Maduro in power.Therefore, we certainly should worry about

the decline of income mobilityand especially the perceptionamong poor people that thesystem is hopelessly unfair.

So, why is this economicstratificationhappening?Thereare plenty of bad explanationsfor it and Buckley usefully dis-misses a number of popularbut erroneous ones. amongthem is the contention thatwe are stuck with low incomemobility because our labormarket is so geared toward“skill-based technologicalchange.” Supposedly, the for-tunate few who learn the righttechnological skills use themto make a killing, but for thegreat majority who don’t, only

the crumbs remain. Interventionist-mindedeconomists make much of this, declaringthat we’re in a “winner-take-all” economyfor which the only solution is redistribution.

Buckley demurs. Skill-based technolog-ical change predates the onset of our eco-nomic stratification, he observes. He alsonotes that “new technologies can benefitfrom low-tech as well as high-tech work-ers.” In fact, today’s technological advancesspread the increasing wealth around justas technological advances did in the past.Furthermore, he observes, many of thesuper-rich didn’t get that way because ofany tech skills; they were just “risk takerswho got lucky” in finance.

What about two favorite whippingboys, globalization and free trade? Dema-

geORge LeeF is director of research for the John w. PopeCenter for higher education Policy.

Resuming theAmerican Dream✒ Review by geORge LeeF

Acentury ago, one of america’s best-known authors was Horatioalger, whose books celebrated the virtues that led to success:hard work, honesty, thrift, and foresight. In his book Ragged

Dick, for example, a boy who starts with nothing but his indomitablespirit works his way up from a bootblack to a respected gentleman

the way back:Restoring the Promiseof America

by F. h. buckley

359 pp.; encounterbooks, 2016


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gogues love to score points with voters whocling to their populist economics and fearanything foreign. If you listen to either ofour current presidential candidates, you’llhear that free trade and global economiccompetition are scourges that enrich afew while decimating the working class.although this pitch makes for an easy har-vest of votes, Buckley correctly says thatfree trade and globalization have nothingto do with our economic sclerosis.

buckley’s analysis / What are the culprits,then? The author identifies several.

First, there is our dismal education sys-tem. The public education establishment isfar more interested in maximizing its secu-rity and intake of tax dollars than in ensur-ing that all students learn. Wealthy peoplecan escape from the really terrible schoolsby living in exclusive suburbs and/or send-ing their children to private schools. Thepoor have no such options. Their children,lacking in fundamental skills even if theymanage to graduate from schools wherethe standards are low and discipline lacking,have difficulty finding any but menial jobs.

Buckley points out that in Canada (he’sa Canadian immigrant), school choice pre-vails, so the poorest parents don’t haveto settle for bad schools. Kids from poorfamilies are much more likely to climb theeconomic ladder in Canada than in theUnited States. Many people, including afew liberals, have been arguing for decadesthat the people most harmed by our educa-tion cartel are the children of the poor, buttheir case has gotten very little traction.Buckley offers this explanation:

If one wants to see people get ahead, aslincoln did, a good place to start is withthe public school system. Contrariwise,if the goal is to ensconce an aristocracy,one could scarcely do better than toweaken the public schools.

What he’s getting at is a major themeof the book, namely that the elite “NewClass” in the United States favors a host ofpolicies that, whatever their stated inten-tions, shield the aristocracy against compe-tition. an education system in which their

children can afford good schooling butthe rest of the country has to settle for thepoor offerings in the public system helpsaccomplish that objective.

Second, there is our increasingly unfreelabor market. People who want to rise abovepoverty find more and more governmentalobstacles in their way, including regulationsthat add greatly to the cost of opening anew business. another barrier is occupa-tional licensing laws that keep people fromdoing work they’re capable of doing (suchas barbering and cosmetics) unless they firstgo through a costly and mostly irrelevantstate-approved training program.

Buckley recounts one particularly offen-sive regulatory scheme in Virginia. Thestate demanded a $2,500 application feefor anyone who wanted to conduct yogaclasses. The proffered reason was that anunlicensed, improperly trained instructormight harm students. Overseeing this wasthe State Council of Higher Education forVirginia. That burden was lifted after a fewyears (and much ridicule), but similar licens-ing rules are still found in a great manyoccupations, preventing mostly poor peoplefrom having chances to better themselves.

another policy Buckley indicts is ourimmigration policy. He writes, “Consumers,particularly wealthy americans, are betteroff when their goods and services are pro-duced more cheaply by immigrants, butthese gains aren’t a blessing for the native-born employees who are displaced or whosewages are competed away by immigrantlabor.” He argues that the United Statesshould adopt an immigration policy morelike that of Canada, where “the system isgeared towards economic entrants likely tobenefit native-born Canadians.” We should,in other words, stop admitting so manypeople without highly valued work skillsand admit more who have them.

Of all the policy changes Buckley pro-poses, that is the only one I find dubious.Yes, we should admit anyone who hashighly valued skills, but I don’t think weshould try to keep out people just becausesome federal official doesn’t consider themto be valuable workers. Many immigrantswho wouldn’t have seemed destined for

success here nevertheless turned out to begreat entrepreneurs. I’m not sold on theidea that having the government pick win-ners and losers among those who want tocome here will have any beneficial effects.

Finally, Buckley observes that our wholelegal culture has shifted, adding innumer-able rules that waste resources and impedecompetition. a host of tax loopholes, cor-porate law rules, and other statutes work toprotect the wealthiest americans from com-petition from below. He points to a numberof laws that ought to be repealed, such asthe Williams act, which protects top cor-porate managers against takeover bids thatwould increase the wealth of shareholders.

removing perverse incentives / Buckley’sanalysis is almost always on target, butI think he has missed one huge aspectof the immobility problem: our welfaresystem. Its perverse incentives do at leastas much to deaden personal initiativeand keep the poor down as any other ofour misbegotten policies. We pay peoplea (barely) living wage if they don’t work,but quickly pull back the benefits oncethe individual starts earning. Millions ofpoor people are hooked on governmenthandouts and expect steady increases inUncle Sam’s vicarious generosity.

Buckley mentions in passing that ourwelfare benefits are not stingy even whencompared with such socialistic countries asNorway and Denmark, but he writes littleelse on the subject. If Ragged Dick couldhave just collected welfare and done someunder-the-table work to put a few extra dol-lars in his pocket, he might have turned outdifferently. The United States made someimportant reforms to welfare during BillClinton’s presidency and the results weregood, but we have backslid badly underPresident Obama. I’d say that reformingthe system so that it doesn’t trap people independency should be a top priority.

also, on the subject of omissions,Buckley doesn’t discuss the damage toupward mobility done by minimum wagelaws. Young people who’ve gone to lousyschools might be able to gain entry-leveljobs despite their weak abilities if they


could work for a low wage while learningand improving themselves. Federal andstate laws have eliminated that possibility,so the more ambitious kids turn to illegalactivities where they can make much bettermoney, but at the risk of going to prison.If we can get rid of occupational licensinglaws, we should also get rid of (or at leastliberalize) minimum wage laws.

Provocatively, Buckley says that hefavors “capitalist means to achieve social-ist ends.” That is, we will come much closerto the claimed socialist goal of economicequality if we adopt the capitalist ideals offree markets and minimal government. Hemakes a strong case and his book couldwin over liberals who want to see poorpeople make upward strides.

A Ghostly Chasm✒ Review by PieRRe LeMieUx

In Chicagonomics, lanny Ebenstein, an economist at the Universityof California, Santa Barbara, pursues a wide agenda and defendsthree theses: (1) there is a chasm between classical liberalism

and libertarianism; (2) the recent “Chicago school” of economicswas libertarian, not classical liberal; and (3) strong redistributionist

PieR R e LeMieUx is an economist affiliated with the De-partment of Management Sciences of the Université du Qué-bec en Outaouais. his latest book is Who Needs Jobs? SpreadingPoverty or Increasing Welfare (Palgrave Macmillan, 2014).

policies are needed in america. (Disclo-sure: Ebenstein is an adjunct scholar at theCato Institute, publisher of Regulation.)

Ebenstein argues that classical liberal-ism as defended by 18th- and 19th-centuryeconomists such as adam Smith and JohnStuart Mill was far from today’s libertari-anism and the Chicago school. Classicalliberals favored “a wide and appropriate areafor government activity in a prosperous andjust modern society.” Classical liberalism,Ebenstein writes, “is not ‘libertarianism’ asthe latter term is used today. It is importantto be crystal clear on this point.”

Contemporary libertarians, he contin-ues, are neoanarchists and governmenthaters. Many are “ideological crackpotsand even charlatans.” “Contemporarylibertarianism too often denotes crankyobscurantism, intolerance, irrelevance, and,frankly, poor scholarship and manipulationof data.” Murray Rothbard was “a crackpotideologically.” To be fair, Ebenstein onlyclaims that “many contemporary libertar-ians” are “too often” cranks (my italics).

He does not apply this diagnosis tomajor economists of the Chicago school.

But he does blame them for becomingmore libertarian than classical liberal.

cranky libertarians / We probably have toadmit with Ebenstein that there was anambiguity in classical liberalism. Classi-cal liberals wanted both individual libertyand (some degree of) government inter-vention. This ambiguity persists in ourown time. Today’s social democrats can beviewed as classical liberals who want moregovernment interventionand less individual liberty.Today’s libertarians can beseen as classical liberals whowant less government inter-vention and more individualliberty. The argument for atotal break between classicalliberals and libertarians doesnot quite work.

as much as he imagines achasm between classical lib-erals and libertarians, Eben-stein, on the contrary, sees asmooth continuity betweenclassical liberals and theirmore interventionist succes-sors. He tells us that “Keyneswas a classical liberal,” even

if Keynes himself did not accept that label(see his 1925 speech, “am I a liberal?”).Ebenstein also declares Paul Samuelsona classical liberal, but the author of Chica-gonomics also quotes the 1989 version ofSamuelson’s popular textbook Economicsas pontificating that the “Soviet economyis proof that … a socialist command econ-omy can function and even thrive.”

Chicagonomics suggests that classical lib-eralism has evolved only along the statistbranch of its divide. I think a better case canbe made that Chicago school economistswere the real heirs of the classical liberals.

Made up of all those who embrace thelaissez-faire strand in classical liberalism,libertarians are a diversified bunch. likesocial democrats, they have their fair share—and perhaps more than their fair share—ofcranks. Ebenstein’s criticisms must not bediscounted. Is he wrong in claiming (alongwith Milton Friedman) that austrian econ-omists have evolved little in decades (whichis not surprising if you think your wholesystem logically derives from self-evidentpremises)? “There hasn’t been an iota ofprogress,” Friedman said. But there is moreto libertarianism than a particular school ofeconomic thought.

The author of Chicagonomics explainsthat decades before the “Chicago school”appeared, the University of Chicago’sDepartment of Political Economy—rechris-

tened the Department ofEconomics in 1925—was aheterogeneous place. Its firstchairman, James laughlin,established himself, saysEbenstein, “as a strong clas-sical liberal” and “a staunchopponent of governmentintervention in the economyand as a proponent of laissez-faire,” which illustrates thatlaissez-faire is not inconsis-tent with classical liberal-ism. But the departmentalso harbored figures such asprogressive economists Thor-stein Veblen and far-left laboreconomist Robert Hoxy.

The department’s 1930s

Chicagonomics: theevolution of ChicagoFree Market economics

by Lanny ebenstein

304 pp.; St. Martin’sPress, 2015

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stars, such as Frank Knight and HenrySimons,wereclassical liberals intheambigu-ous sense of their forebears. Ebenstein alsolists Jacob Viner, whom Friedman appar-ently did not consider a classical liberal. Ofall these pre-war Chicago economists, Eben-steinemphasizes theirbelief incertain formsof government intervention. They favoredstimulative fiscal and monetary policies dur-ing the Great Depression: “They were moreKeynesian at times than Keynes himself.”But they viewed these policies as temporaryand opposed New Deal regulations. Vinerthought that the U.S. welfare state, coex-isting with a market economy, was “reallyworth fighting for and dying for as com-pared to any rival system.” Knight believedthat “every member of society has a rightto live at some minimum standard, at theexpense of society as a whole.” Of course,these Chicago economists were free traders.

Perhaps contradicting again his chasmbetween laissez-faire and classical liberalism,Ebenstein explains that Simons claimedto believe in both. Simons said that his“underlying position may be characterizedas severely libertarian or, in the English-continental sense, liberal.” according toJohn Hopkins University history profes-sor angus Burgin, Simons was the “firstsignificant economist to refer to himselfas ‘libertarian’” (quoted by Ebenstein). Yet,the author of Chicagonomics insists, Simonsfavored progressive taxation and govern-ment services. George Stigler, a later Chi-cago economist who was more libertarianthan Simons, thought that much of the lat-ter’s proposals were “almost as harmoniouswith socialism as with private-enterprisecapitalism.” as presented in Chicagonomics,Simons illustrated the continuity betweenclassical liberalism and libertarianism.

enter the chicago school / The Chicagoschool took off after the arrival of MiltonFriedman in 1946 and only got its label inthe 1950s. Friedman, who stayed at Chi-cago until 1976, “was the heart and soulof the Chicago school.” aaron Directorand allen Wallis also arrived at Chicago in1946. Other Chicago school economistsincluded Stigler and Gary Becker. The fact

that Friedman, Stigler, and Becker eachwon a Nobel Economics Prize illustratesthe remarkable intellectual contributionof the Chicago school.

The Chicago school also comprisedscholars outside the Department ofEconomics. Director and Ronald Coase(another Nobel laureate) held appoint-ments in the law School. Friedrich Hayek,who taught at Chicago under the aegis ofthe Committee on Social Though between1950 and 1962, was indirectly related tothe Chicago school and occupies a largeplace in Ebenstein’s book.

like Friedman himself, the Chicagoschool had two intellectual thrusts: oneacademic and methodological, the othermore normative and popular.

The methodological school was cen-tered in the Department of Economics andrevolved around monetarism, Marshallianneoclassical economics, the use of empiri-cal and statistical methods, skepticismtoward mathematical economic theory andperhaps especially large macroeconomicmodels, and the rejection of Keynesianism.Ebenstein is right to clearly distinguishbetween, on the one hand, mathemati-cal economics, which is the mathematicalmodeling of economic theory (which theChicago school was suspicious of), and onthe other hand the use of statistical mea-surement and empirical analysis (whichthe school embraced).

The popular face of the Chicago schoolwas the normative defense of free mar-kets. Its main representative was Fried-man, who played a major role as a publicintellectual, but Becker and others had animpact. Ebenstein criticizes “the FriedmanChicago school of economics” for being“more ideological than scientific, at leastin addressing the general public.” Thatqualification is important.

Hayek was on the normative side ofthe Chicago school. Ebenstein correctlyemphasizes how Hayek’s methodologydiverged from Friedman’s. a member ofthe austrian school of economics, Hayekdid not espouse Friedman’s positivism. Buthe defined himself as a classical liberal andwas a great defender of economic freedom.

Chicagonomics gives him a lot of attention,perhaps because the book is as much inter-ested in libertarianism as it is in economics.

Much of Hayek’s work dealt withpolitical philosophy. Friedman discountedmuch of Hayek’s work in economicsand claimed that his capital theory was“unreadable.” By a quirk of history, how-ever, Hayek earned his Nobel Prize (sharedwith socialist economist Gunnar Myrdal)in 1974, two years before Friedman got his.

Ebenstein makes much of the ideologi-cal evolution of Friedman and Hayek who,he tells us, both started as classical liber-als but became more and more libertar-ian as they grew older, up to espousing a“virtual neoanarchism.” It is unclear whatEbenstein means by that expression, otherthan that it is terminologically two stepsremoved from anarchism.

In the 1940s, according to Ebenstein,Hayek agreed with Simon’s brand of clas-sical liberalism. Hayek declared he was “infavor of a minimum income for every per-son in the country.” Ebenstein blames thelater Hayek for opposing compulsory par-ticipation in any sort of monopolistic gov-ernment program except for law enforce-ment and national defense purposes.

For Ebenstein, a similar evolution iseven more obvious in the case of Friedman.Friedman’s Capitalism and Freedom (Uni-versity of Chicago Press, 1962) “is clearly asuccessor to John Stuart Mill’s On Liberty,”but it already “displayed a largely anarchiststreak,” suggesting again a connectionbetween the two strands of thought. Capital-ism and Freedom approved many traditionalfunctions of the contemporary state, whilethe later Friedman, Ebenstein explains,came to favor a night watchman state, alow-level negative income tax, less govern-ment expenditure, and an almost totallyprivate education system.

Ebenstein may not be consistent in hisevaluation of the later Friedman. Quot-ing a personal letter that Friedman wroteone year before his death, Ebenstein writesthat “Friedman was, ultimately, a man ofthe left.” Or else, as I would argue, liber-tarianism is as much on the left as it is onthe right, like classical liberalism was. But


then, there is no real chasm between thetwo strands of thought.

a natural evolution / Friedman’s andHayek’s intellectual evolutions are easyto understand. From classical liberal-ism, one can easily move to libertarian-ism, especially with hindsight about theconsequences of following the do-gooderbranch of classical liberalism. looking attoday’s leviathan, it is quite understand-able that Friedman and Hayek outgrewthe naivety of their classical liberal fore-bears. The state is not so nice after all.

When he was (according to Ebenstein)still a classical liberal, Friedman explainedhow one can become more distrustful ofgovernment:

If, for example, existing governmentintervention is minor, we shall attacha smaller weight to the negative effectsof additional government intervention.This is an important reason why manyearlier liberals, like Henry Simons, writ-ing at a time when government was smallby today’s standards, were willing to havegovernment undertake activities thattoday’s liberals would not accept nowthat government has become so over-grown. (Capitalism and Freedom, p. 32)

as government continued to grow,Friedman thought that the cost of newintervention in terms of freedom was risingand he thus naturally became radicalized.

Classical liberalism is closer to anar-chism than Ebenstein realizes. a Frenchphilosopher, Raymond Ruyer, suggestedan interesting reconciliation in his 1969book Éloge de la société de consommation (InDefense of the Consumer Society): liberalism,he wrote, meaning classical liberalism, is“real anarchism, feasible and realized, asopposed to mere emotional declarations.”

Despite his obvious learnedness, doesthe author of Chicagonomics really under-stand libertarianism and current politics?He approvingly quotes George Nash, “thegreat historian of modern conservatism,”who claims that the mindset dominatingthe thought of “mainstream Republicanorganizations” is that of “radical libertarian

anarchists,” while anarcho-capitalist sloganshave become mainstream in the Tea Party ifnot in the Republican Party itself. This mustoccur in another dimension of the universe.andalthoughaynRand,whomEbenstein—not without justification—puts among thecranks, was influential in bringing a wholegeneration to question the politically correctjustifications of the state, she refused thelibertarian label and little of today’s liber-tarianism rests on her shoulders.

Pink elephant / Ebenstein is too knowl-edgeable to be “red” in the socialist sense.Yet, we can see a pink elephant in Chica-gonomics: an overwhelming concern foreconomic equality. Ebenstein constantlylaments growing inequality and repeatsthat higher marginal tax rates and govern-ment redistributive policies are needed tofight it. He blames libertarians for ignor-ing the problem. Without discussing theextent or evolution of income inequality,we can easily find flaws in his arguments.

Ebenstein does not seem interested inthe sources of inequality. He repeats somestatistics about unequal incomes andwealth, stressing that wealth has becomeeven more unequal than income. But howis that possible? Since income is the returnon wealth (including human capital), thedistribution of wealth correctly measuredshould parallel the distribution of income—or else the statistics are missing something.This something could be the depreciationof the human capital of the poorly educatedin the face of technological progress, cou-pled with unsatisfactory public education.

another possible source of inequality,which Ebenstein mentions in passing, isthe lower fertility of richer families. Stillanother factor is the change in the mar-riage market, where assortative marriagemeans that the rich (including in humancapital) are now marrying more amongthemselves: male physicians marry femalephysicians, instead of nurses as before.The human-capital poor are left to marryamong themselves, thereby increasinginequality. (See the work of Jeremy Green-wood, Nezih Guner, Georgi Kocharkov,and Cezar Santos on this.) Why and how

should inequality stemming from suchindividual choices be corrected?

a related point is that one should dis-tinguish clearly between formal equalityunder the law, which is clearly a classicalliberal ideal, and material equality, whichis probably not.

Ebenstein focuses on relative inequality,not on poverty. Even if “a rising tide liftsall boats,” he would still, I surmise, dislikeinequality. It is not clear whether the clas-sical liberals, living in an era where direpoverty existed, would have followed him.after all, 99% of american households owna TV set, and more than three-fourths ownmore than one.

Ebenstein underestimates the increase instate power that is needed to correct incomeinequality. as French political philosopherBertrand de Jouvenel wrote, “The more oneconsiders the matter, the clearer it becomesthat redistribution is in effect far less a redis-tribution of free income from the richer tothe poorer, as we imagined, than a redistri-bution of power from the individual to theState” (The Ethics of Redistribution, CambridgeUniversity Press, 1952).

adam Smith himself, even if he didargue for taxing the rich more and per-haps even for progressive taxation, saw thedanger. In The Wealth of Nations, he wrote:

The tax upon shops, it was intended,should be the same upon all shops. Itcould not well have been otherwise. Itwould have been impossible to propor-tion with tolerable exactness the taxupon a shop to the extent of the tradecarried on in it, without such an inqui-sition as would have been altogetherinsupportable in a free country. … Forthese reasons, the project of a tax uponshops was laid aside.

In his 1763 Lectures on Jurisprudence, Smithhad already noted: “No doubt the raisingof a very exorbitant tax, as the raising asmuch in peace as in war, or the half oreven the fifth of the wealth of the nation,would, as well as any other gross abuse ofpower, justify resistance in the people.”

I am not as sure as Ebenstein thatSmith, if he were to come back to life,


I N R E V I E W

Ban the Box“Ban the Box, Criminal Records, and Statistical Discrimination: A

Field Experiment,”byAmandaY.Agan and Sonja B. Starr. June 2016.

SSRN#2795795.

People who have been incarcerated have greater difficultyfinding subsequent employment. That, in turn, puts themunder economic stress and increases the likelihood that

they will commit new crimes and return to prison. This is costlyfor both the ex-convicts and society.

a currently popular policy remedy to this problem is “Ban-The-Box” (BTB)—prohibiting employers from asking about criminalhistory (the notorious “Have you been convicted of a crime?”checkbox) on initial job applications. The intent of such policies isto increase employment among black males, who have dispropor-tionately more criminal convictions than other applicant groups.

But a potential downside of this policy is that employers,fearing the risk of unknowingly employing a former criminal,will engage in more statistical discrimination because they areprohibited from eliminating criminals from consideration at theoutset. That is, employers will reduce their consideration of youngblack men, in general, because the employers are prohibited fromdetermining initially which of them have criminal records.

To test for this possibility, the authors of this paper sent 15,000fictitious online job applications to employers in New Jersey andNew York City before and after both jurisdictions enacted BTBlaws. They found that before BTB, white applicants received 7%more callbacks, while after BTB whites received 45% more callbacks.

Most black men do not have criminal convictions. UnderBTB policies they are not allowed to signal that fact to employ-ers. as a result of this well-intended policy, they are losing workopportunities.

Are Consumers Rational AboutEnergy Prices?“Are HomeBuyersMyopic? Evidence fromHousing Sales,”by Erica

Myers. July 2016. E2eWorking Paper#24.Available at http://e2e.

haas.berkeley.edu/working-papers.html

The regulation of the energy usage of automobiles,air conditioners, and furnaces is rationalized by thealleged inability of consumers to calculate and utilize

future energy costs in their decisions about how much to paynow for durable investments that have differing future energycosts. This rationalization has been challenged by a number ofempirical papers. For instance, the Winter 2015–2016 “Work-ing Papers” includes a discussion of a paper analyzing used carsales from 1993 through 2008 in which a $1 increase in thepresent discounted value of the fuel cost over the remaininglife of the vehicle resulted in a $1 decrease in the price paidfor the vehicle. That is, consumers were rational and took intoaccount future energy prices when they decided how much topay for used cars.

The current paper compares prices in Massachusetts from1990 through 2011 for houses that heat with oil versus housesthat heat with natural gas. Oil and natural gas prices divergefrom each other for exogenous reasons (hurricanes in the Gulfof Mexico, for example) and the paper asks whether consumerstake the differences in heating costs into account when theydetermine how much to pay for a house. The paper finds thatwhen the relative cost of heating increases by $1 per million BTUs,house prices decrease by $1,000–$1,200. This is consistent withthe full capitalization of the present value of the cost increase atan 8%–10% discount rate.

Do energy-using products require regulation because consum-ers are myopic? The answer once again appears to be no.

Working Papers ✒ by PeteR vAN DOReNa SUMMaRY OF RECENT PaPERS THaT MaY BE OF INTEREST TO REGULATION’S REaDERS.

PeteR vAN DOReN is editor of Regulation and a senior fellow at the Cato institute.

would not become a radical libertarian.On the problem of inequality, the author

of Chicagonomics makes 13 practical propos-als, which range from raising the federalminimum wage to steep increases in taxrates for the rich. From a Chicago-schoolviewpoint, a few of his proposals are good,but others are questionable or incompatiblewith his proposal to “reduce regulation.”

Ebenstein underestimates the role ofregulation in fueling inequality. and he doesnot mention the role of crony capitalism or

the fabrication of a large class of criminals(partly because of the vicious war on drugs)who, with their criminal records, often can-notearnanhonest living.Thesolutionseemstoreside in lessgovernmentpower,notmore.Mistrusting the state has its advantages.

conclusion / Chicagonomics is an instructivebook about the history of economics at theUniversity of Chicago. It raises interestingand challenging questions, but takes manyshortcuts. among the missing elements,

the reader might have liked to hear Eben-stein’s take on why the Chicago school aswe knew it seems to have vanished.

as I have tried to show, two of thebook’s main theses are overdone. Most ofcontemporary libertarianism is in continu-ity with classical libertarianism. and evenif (a certain sort of) equality is a classicalliberal value, a call for still more redistri-bution and government power ignoreshow far contemporary governments havedrifted away from classical liberalism. R

R

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