Conflict minerals are goods that come from sources that use the revenues to fund civil wars and other atrocities. CEI Founder and President Fred Smith talks about why restricting conflict mineral trade can mean more violence, not less. He also discusses why the Gibson guitar company was unjustly raided by the federal government for importing wood that may or may not have been illegally harvested by its suppliers.
fred smith
Charles Koch provides a strong defense of economic freedom and an attack on crony capitalism in an opinion piece in The Wall Street Journal today. Koch, chairman and CEO of Koch Industries, Inc., and his brother David have been vilified by the left for their contributions to organizations that defend the free market, most notably in a hit piece last summer in The New Yorker magazine. More recently, the Kochs have been accused of being the power behind the Tea Party and the Wisconsin union initiatives.
Koch Industries is the one of the largest privately held companies in the U.S., and the two brothers are billionaires who have a long history of donations to libertarian groups as well as philanthropic and cultural causes.
CEI President Fred Smith and I have an article in The Daily Caller expressing cautious optimism about yesterday’s election results. Our main points:
-We are (cautiously) optimistic because voters turned out in droves to make a statement against big government, not to endorse GOP policies. But no reforms will happen unless people keep fighting for them.
-Activists have a lesson to learn from the Bush-era anti-war movement. Anti-Iraq War protestors vanished into thin air almost the moment President Obama was elected. They gave up. That’s one reason there are still 50,000 troops in Iraq and America’s presence in Afghanistan has doubled. The next few years will be the true test of the tea party movement. Will it grow complacent in victory?
-GOP politicians have a lesson to learn from their 1994 victory and subsequent fall from grace. The 1994 Republicans gave up as reformers after about six months. Voters kept them around because they did a tolerable job of checking Clintonian excesses. But six years of one-party rule under Bush were more than enough to show that Republicans were far more concerned with staying in power than with shrinking government. Federal spending roughly doubled under Bush, and that was enough to give them the boot.
It will be interesting to see what happens. The 2010 election might be nothing more than a blip on the radar. Or it could be the start of a genuine reform movement that will take on the coming entitlement crisis. We’re hoping for the latter.
Scott Brown’s decisive victory in the Massachusetts Senate race has upturned the Democrats’ Progressive agenda. Brown, “the people’s seat” senator, had a resonant message that tapped into the electorate’s disenchantment with ever-increasing government (with the health care proposals figuring strongly), huge deficit spending, and increased taxes to pay for the trillions of dollars in new government programs. Jobs and the economy were an overarching issue.
It was a populist victory that carried many of the themes of the “Tea Party” movement, which, so far, haven’t been promoted by either party. If the Republicans don’t latch onto those themes with an agenda of their own, they really are the “dumb Party.”
What’s a cause for concern, however, is how the Democrats are likely to embrace people’s fear and anger by taking up their own populist cudgel to even more vigorously attack capitalism, consumer choice, and any and all Big Business entities.
There indeed is fierce popular anger at bank bailouts and big bonuses – Wall Street has become a synonym for greed and arrogance that caused the financial meltdown, with little recognition that government and quasi-government entities like the Federal Reserve and Fannie and Freddie contributed to the financial problems.
Though some banks deserve much of the public disapprobrium because of their mismanagement and sellout on TARP funds, even those banks that were healthy or fought their own way back to solvency are being asked to pick up the tab for their less-responsible brethren. Expect the Democrats to exact more such retribution from banks — in the name of the people.
In addressing the big issues of jobs and the economy, the Democrats will have a hard time spending more money on stimulus packages that seem to evaporate before any jobs are created. But there will probably be an even bigger push for “green jobs.” Democratic leadership may decide that a massive and economically destructive cap-and-trade bill isn’t feasible in this political climate. They may look to more “green jobs” and “alternative fuels” boondoggles through taxes and fees on fossil fuel industries as a better way to sell the idea of restrictions on and higher costs for energy use. Yet those subsidized jobs themselves are costly, as the Wall Street Journal noted in mid-December 2009 about the 253,000 of direct jobs created:
The 253,000 direct jobs works out to a cost of about $90,000 a head-just for one year. Clean-energy manufacturing jobs are even more expensive to create, costing about $135,000 per job.
It will be difficult to relate the Democrats’ health care proposals to jobs and the economy when the costs are projected by the Congressional Budget Office at $1 trillion in additional federal spending over the next 10 years. But that figure – while astronomical — doesn’t include the states’ mandates, which will cost $25 billion more over 10 years or the unknown costs of the mandates for individuals and employers to buy insurance. Those costs will be paid for by increased yet hidden taxes – and not just on the so-called rich.
Plus, the closed-door negotiations on the bills have resulted in deals that most people consider unfair and outrageous, for instance, Nebraska is the only state that won’t have to pay future unfunded Medicare and Medicaid mandates; Louisiana gets $300 million for agreeing to support the Senate bill; and union members don’t have to pay “Cadillac-plan” taxes on their generous health care plans. These proposals will actually hold back job creation by causing uncertainty among both small and large businesses and thus reluctance to expand jobs. And taxpayers rightly understand that they will bear the increased costs.
In the wake of Scott Brown’s election, whether the Democrats will continue their shenanigans on their health care proposals isn’t yet clear. Right now, they’re damned if they do and damned if they don’t.
Recently, CEI’s president Fred Smith wrote an article titled “Change we can really believe in,” which sets out a blueprint to stimulate the economy by liberating it. Fred must have been prescient when he wrote this on January 4 — before the surge for Scott Brown:
This year holds promise for a new start for America. As 2010 begins, we may be teetering on a cliff, but Americans aren’t lemmings. Support for statist policies is dropping, and taxpayer anger is growing. There is a renewed understanding that the limitations on government of the Constitution are the best protections of our liberties. Their restoration should be the primary hopeful change advanced by all friends of liberty.
Today’s excerpt from CEI’s film, Policy Peril: Why Global Warming Policies Are More Dangerous Than Global Warming Itself, rebuts the argument that regulatory climate policies can’t be bad for the economy because so many big businesses support them.
This is an odd argument coming from people who are usually suspicious of big business, or even hostile to corporations. When did they decide that corporate support is some kind of good-housekeeping seal of approval?
To watch today’s film excerpt, click here. To watch the entire movie, click here. The text of today’s film clip follows.
Narrator: Some big corporations call for caps on CO2 emissions. Supposedly, this proves such policies won’t harm the economy. In fact, all it proves is that special interests can make windfall profits from energy rationing schemes.
Remember that $5 trillion loss the Lieberman-Warner bill would inflict on the economy? Well, that’s only half the story.
Dr. David Kreutzer (Heritage Foundation): The Lieberman-Warner bill also enacts a huge transfer from the consumers of energy to groups that are picked out–special interest groups–that Congress would designate. So after America has lost $5 trillion in income, there will be another $5 trillion taken and transferred from energy consumers.
Commentary
A corporation may lobby for cap-and-trade for various bottom-line reasons unrelated to environmental concern:
- In a carbon-constrained world, a company like GE, which makes nuclear reactors and wind turbines, can expect to sell more of its products.
- Utilities like PG&E that generate most of their electricity from hydro-electric dams, natural gas, or nuclear power can make a killing in the carbon market if the emission allowances are allocated for free based on a firm’s historic electricity output rather than historic emissions.
- Conversely, utilities like Duke Energy that generate most of their electricity from coal can make a killing if the emission allowances are allocated for free based on a firm’s historic emissions.
- Wall Street firms like Goldman Sachs salivate at the prospect of a new, multi-trillion-dollar market in carbon permits, futures, and derivatives. They can make big bucks as brokers and carbon portfolio managers.
The last bullet merits additional comment, because if there ever was a policy issue that pits Wall Street against Main Street, cap-and-trade is it. The Breakthrough Institute summarizes the key finding of a non-public Goldman Sachs report titled “Carbonomics: Measuring impact of US carbon regulation on select industries”:
In a section titled “Carbon exchanges — build it, and they will (must) come to trade,” it estimates the bill [Waxman-Markey] would grow the global carbon market to become one of the biggest in the world, with trading volume of 175 to 263 million contracts per year – larger than the oil and gas markets combined and approximately the third-largest commodity market in the world after U.S. interest rates and stock indexes. The analysts estimate the profit margin for financial firms resulting from the new carbon market could reach $2 billion annually.
Baptists and Bootleggers
Corporate support for cap-and-trade should really come as no surprise, because nearly all “public-interest” regulation depends on marriages of convenience between the high-minded (or lofty-talking) and the narrowly interested–between those who seek regulation based on some moral, religious, or ideological concern and those who seek regulation to rig the market in their favor.
Economist Bruce Yandle of Clemson University was among the first to develop the theory of the Baptist-Bootlegger coalition as an explanation of public policy change.
“The theory,” says Yandle, “draws on colorful tales of states’ efforts to regulate alcoholic beverages by banning Sunday sales at legal outlets. Baptists fervently endorsed such actions on moral grounds. Bootleggers tolerated the actions gleefully because it limited their competition.”
Baptists provided the moral justification–the public-interest rationale–for restricting the sale of alcoholic beverages. Bootleggers provided the filthy lucre–the campaign contributions to politicians supporting the restrictions (known as ”blue laws“).
Nothing better illustrates the “bootlegger” role of big business in advancing the climate policy agenda than Enron’s lobbying and PR campaign for the Kyoto Protocol.
Enron, that poster child of corporate fraudulance, was a leading advocate of cap-and-trade in the climate treaty negotiations culminating in the Kyoto Protocol. Enron was a natural gas distributor, and Kyoto would suppress (or kill) electricity production from coal, boosting demand for Enron’s core business. Carbon controls would also pump up the market for Enron’s wind turbines and energy management services. In addition, Enron’s energy traders expected to make juicy commissions on the purchase and sale of emission allowances.
On December 12, 1997, the day after the Kyoto conference, Enron environmental affairs director John Palmisano, in a memorandum to colleagues, enthused:
If implemented, this agreement [the Kyoto Protocol] will do more to promote Enron’s business than almost any other regulatory initiative outside of restructuring of the energy and natural gas industries in Europe and the United States. The potential to add incremental gas sales, and additional demand for renewable technology is enormous. In addition, a carbon emissions trading system will be developed.
For both its high-profile and behind-the-scenes lobbying for Kyoto, Enron became the darling of green groups (a fact many prefer to forget). Palmisano elaborated:
Through our involvement with the climate change initiative, Enron now has excellent credentials with many “green” interests including Greenpeace, WWF [World Wildlife Fund], NRDC [Natural Resources Defense Council], German Watch, the U.S. Climate Action Network, the European Climate Action Network, Ozone Action, WRI [World Resources Institute], and Worldwatch. Such praise went like this: “Other companies should be like Enron, seeking out 21st century business opportunities” or “Progressive companies like Enron are…” or “Proof of the viability of the viability of market-based energy and environmental programs is Enron’s success in power and SO2 [sulfur dioxide] trading.”
At the end of his memo, Palmisano exulted: ”I predict business opportunities within three years. . . This agreement will be good for Enron stock!!”
Many rent-seeking companies follow the trail that Enron blazed. For example, big-business lobbyists had a strong hand in crafting the Waxman-Markey cap-and-trade bill, the American Clean Energy and Security Act (ACES, H.R. 2454).
All the distinguishing features of the Waxman-Markey cap-and-trade provisions were spelled out months in advance of the bill’s introduction by the United States Climate Action Partnership (US-CAP), in a January 2009 report called A Blueprint for Legislative Action. Core US-CAP proposals incorporated into Waxman-Markey include:
- Year 2020 emission reduction targets significantly less stringent than those called for by the European Union (17% below 2005 levels instead of 20%-30% below 1990 levels).
- Generous provision of free emission allowances (energy-ration coupons) rather than 100% auctioning as called for by President Obama (the Heritage Foundation’s August 6, 2009 analysis, p. 4, estimates that 85% to 101% [!] of the coupons will be given away in the early years of the program).
- Generous ”carbon offset” provisions authorizing regulated U.S. firms to pay non-regulated entities to reduce, avoid, or sequester emissions in lieu of reducing emissions themselves (the Breakthrough Institute estimates that the Waxman-Markey offsets will allow U.S. emissions to increase through 2030).
A Carbon Cartel
In February 2007 testimony before the Senate Environment and Public Works Committee, CEI President Fred Smith noted that cap-and-trade “is an ugly combination of two of the greatest ills to affect the market economy over the past two hundred years–cartelization and central planning.” The emissions cap, which determines how much CO2-emitting energy society may use, is set by the government–that’s the central planning element. The provision of emission allowances under the cap effectively creates a cartel.
The emissions allowances (energy-ration coupons) function just like the production quota allocated among members of OPEC (Organization of Petroleum Exporting Companies), the only difference being that the ration coupons can be bought and sold. The economic effect, though, of both oil production quota and emission allowances is the same: restrict energy supply, raise energy prices, and create monopoly profits for a favored few. Fred commented:
As a result of this cartelization, energy costs rise, real wages fall, and output and employment fall. We know these are the effects of cartels, which is why we used to put the people who set up cartels in jail. Yet the Climate Action Partnership wants legal blessing for this new cartel. Any legislation enacting cap-and-trade would actually ennoble a new generation of robber barons and provide legal protection for their profiteering activities.
A key point to bear in mind is that the amount of wealth transferred from consumers to cartel members can greatly exceed the overall loss to the economy. See the diagram below.
Figure description: 1.5 gigatons of carbon (GtC) is the hypothetical amount of CO2 emissions society produces in the absence of a cap. When there is no cap, the right to emit CO2 costs zero dollars per ton of carbon. The hypothetical cap requires a 20% reduction in emissions from 1.5GtC to 1.2 GtC. The right to emit CO2 now costs $50/tC. That increases the cost of energy, which then reduces economic output (the dark shaded triangle). However, the amount taken and transferred from energy consumers–the additional dollars they must spend for home heating oil, natural gas, electricity, and gasoline (the lightly shaded square)–can be much larger.
Think again of OPEC. As long as oil prices don’t get so high that they depress the global economy, the wealth transferred from consumers to OPEC members will exceed the overall reduction in global GDP.
In the European Emissions Trading System (ETS), utilities made out like bandits during the first two years of the program. Governments gave the utilities more free ration coupons than they needed. The utilities then passed their imaginary costs onto their customers by raising rates. Then they sold the surplus coupons they didn’t need to manufacturers whose electric rates they had raised. Thanks to the ETS, the utilities achieved a two-fold (albeit short-lived) windfall profit. Open Europe, the British free-market think tank, provides the gory details in this hard-hitting report.
In the run-up to Waxman-Markey, cap-and-trade proponents repeatedly said that they had learned from Europe’s mistakes, and here in the USA all emission allowances would be auctioned in competitive bids. Yes, your electric rates would “necessarily skyrocket,” Barack Obama said, when campaigning for the White House. But, he assured us, the revenues would be returned somehow to taxpayers. Cap-and-trade would become cap-and-dividend.
That, however, was unacceptable to US-CAP, and in the sausage factory known as the legislative process, they carried the day. The Heritage Foundation’s August 6, 2009 report describes what happened:
In order to get the Waxman-Markey cap-and-trade bill through the House Energy and Commerce Committee . . . Members of Congress promised generous handouts for various industries and special interests. In the near-term, the legislation promises to distribute 85-101% of the allowances to various interest groups at no cost . . . The biggest winners are the electric utilities, receiving 43.75% of the emission allowances in 2012 and 2013.
To read previous posts in this series, click on the links below.
Below see CEI President Fred Smith’s comments on Jonathan Hillel’s piece in the San Jose Mercury News:
Hillel’s piece raises the very interesting question of whether the use of copyrighted materials must forever remain out of reach of most people. The vast majority of creative works disappear from public view within a very short time of their release. Few books or records are best sellers, many magazines (especially specialized magazines and journals) go out of existence in a decade or so. Yet, the information and enjoyment value of these works might enrich millions of people in our new e-world. Currently, the length of copyright and the reluctance of any one to devote the resources to bring them back into view mean they’ve been taken from the world’s “library” and “record/CD/DVD” shelves.
One way to think through this topic is to consider how real (as opposed to intellectual) property that has been “abandoned” is treated. Land, for example, remains in the hands of the original owners unless (as is very often the case) no one has paid the property taxes for a number of years (in political jurisdictions without property taxes – there must be some – I have no idea what is done) and then these lands are sold to compensate the jurisdictions for the unpaid taxes. In another case, individuals may open a financial account in some institutions and then for some reason (death, forgetfulness, small balance) simply abandon it. Since some costs are incurred in maintaining such accounts, some private institutions will simply close the account and absorb whatever assets are in that account (airline loyalty programs, for example) although generally an effort is made to warn the user that such action is imminent. Banks, being regulated and subsidized, take various approaches to what, in that context, are called “dormant accounts.” After a period of inactivity, the banks post notices and, if no response is received, any funds (less management fees) are generally transferred to the state in which that account exists. (Depending on state law, one may be able to recover the funds even after this transfer if adequate documentation can be provided.) In some jurisdictions, however, the financial institution simply retains the funds and uses them as part of their reserves, while still honoring the obligation to repatriate the funds (perhaps with interest) if a qualified owner eventually turns up.
Whether the shift of “orphan” copyrights to the state or a creative party and, in either case, what obligations should exist if the owner does appear after some period of time, is an interesting question. The Google “answer” seems both equitable and fair.
CEI President Fred Smith talks about the recent passage of climate legislation in Congress. Read it here.
Earlier today, Competitive Enterprise Institute President Fred Smith delivered an informative but lively, entertaining speech about the role of NGOs. The speech was delivered at the Washington-based Atlas Economic Research Foundation, an umbrella organization that sponsors the creation of free-market NGOs worldwide.
Smith acknowledged that the libertarian movement, although weaker than its opponents, is gaining ground through the Internet, online video sharing and other peer-to-peer technologies. The latest example of the successful usage of such technologies is yesterday’s landmark Tea Party protests, a spontaneous action on Tax Day led by regular American citizens. CEI housed a supply of one million tea bags originally meant to be dumped at the White House, but a lack of adequate permission to legally make the delivery prevented the initiative. Read 1,000,000 Tea Bags Find a Home
CEI’s president also recommended that the private sector end the mea culpa and allow libertarian think tanks to be a friendly critic of their policies. “They spend $1 trillion trying to communicate with Joe and John citizens. But businesses spend nothing defending businesses. It is depressing how naïve the business community is with all their wisdom,” he asserted.
Other speakers at the April installment of Atlas’ International Thursday were Aleksandar Novakovic reporting on the rise of Liberty Camps in Slovenia, Feng Xingyuan of the Cathay Institute for Public Affairs and Marcos Victoria of the Argentinean Consultcom S.A.
In a letter in today’s Wall Street Journal, CEI’s Fred Smith references Steven Gjerstad and Vernon Smith’s earlier op-ed to point out that radical egalitarianism policies have been one of the driving forces behind the housing bubble and the resultant financial crisis. As Fred notes,
Steven Gjerstad and Vernon Smith suggest one unexplored aspect of our financial crisis: the role of egalitarian policies. To see this, note their distinction between the impacts of the $10 trillion loss in the 2000 stock market collapse and the $3 trillion loss of the recent housing collapse.
A driving force behind all this has been radical egalitarianism — the idea that something that can be afforded by some should be made available to everyone. Our universal housing-ownership passion transformed the housing market. Under the egalitarian promotional housing policies of the last few decades (the Democrat’s “affordable” housing goals; the Republican’s “ownership society” obsession), banks became institutions that would loan you money even if you were unlikely to be able repay it. The moral hazard problems created by our bipartisan egalitarians (the Community Reinvestment Act, the mandates on Fannie Mae and Freddie Mac) enticed far too many Americans into purchasing homes priced beyond their means. There is a critical distinction between the democratizing tendency of the market and the coercive egalitarian policies of politics.
When it comes to things such as environmental policy, the Progressives have been rather successful at promoting their world view. They realized that it would be futile to argue that property rights and human ingenuity could not solve anything – so they did not try (immediately) to socialize oil or other sub-surface minerals but they did succeed in derailing the evolutionary process by which institutions emerged to resolve emerging problems. The economist Ronald Coase noted this in an essay pointing out that the EMS (Emergency Medical Services) was well on its way to being homesteaded with rules for allowing multiple uses – and then the Feds created the Federal Communication Commission and the spectrum is still terribly managed to this day.
The environment is valuable and valued by many. The difficulty is that we have relegated its “protection” and “management” to bureaucrats – and suppressed the evolution of property rights in environmental resources (wildlife, groundwater, fisheries). These resources remain as common property resources – and we experience repeatedly the Tragedy of the Commons. However, the most distressing aspect of the debate over environmental policy, is that the view gaining prevalence from the Progressive side is decidedly anti-human, and anti-technology at its core.
There are many features of the growing anti-human-relevant-science campaign.
- One is the selection of the fearful – the Malthusian wing of this movement that sees “technology” as change, as a move into an untested future and, thus, to be slowed if not banned. These people champion the Precautionary Principle – a totally Luddite rule. Has there ever been a market innovation (one that we hoped people would buy) that created more harm than good?
- The Economic Rational wing, which has championed “comparative effectiveness” and so on. After all, they argue, it would be foolish and wasteful to approve a new drug or device that was not “cost effective for the median individual.” A wonderful capture of the rational language but, of course, that approach argues that we can know in advance that a specific innovation will or will not prove beneficial (the French minitel system comes to mind). Most – all – innovations appear first as clunky, expensive toys or (for a very few) necessities. The purchasers are the ‘Early Adopters’ – often rich or eager to “be the first on their block.” However, the freedom to create an infant market for a product that would be too expensive and too inefficient for most people made it possible for the thousand dollar 1940s television sets with tiny blurry pictures and very low quality to become the few hundred 34-inch flat screen marvels of today. We will suffer in many areas for this loss but the greatest losses may be in the medical innovation area.
- The Government Research Must be Dominant school is characterized by those who sought on “scientific” grounds for removal of any restraints on stem cell research – not because such research was banned (private parties were largely free), but rather because it meant that their approved source of scientific funding – the government – was kept from the field. Indeed, this group is much more ambitious – their effort to drive the market from the marketplace of ideas is one of the most threatening themes. Research that has been funded by a company, individuals who have done consulting or worked for a company, groups who’ve received support from a company – all inherently more suspect that a government-funded scientist. One can expect that such individuals and the research work they do will soon have to wear a yellow C (for corporate) patch on their clothes, appended on every page of their journal articles.
- The Science Good, Technology Bad sub-class. This refers to the observations of Joel Mokyr and others. That it has been the close link between (largely) non-economic driven science and (largely) economic-driven technology that transformed the slow progress of most of mankind’s history to the exponential growth we have experienced in the last several centuries. Brilliant individuals have popped up from time to time throughout history. They expand man’s knowledge and some small use is made of that knowledge to improve man’s welfare. In the Industrial Revolution, however, the growth of economic freedom created a more receptive and attentive audience for such knowledge. Electricity would be discovered and Edison and others would immediately begin to think, “What is it good for?” Then, in turn, they would go back to the science and note – “this worked OK but … why?” and those questions would both prompt and interest the science community in expanding knowledge in directions more likely to prove human beneficial. The resulting positive “feed back loop” is critical to progress. This group would sever that link — Science Good, Technology Bad!!
As I have stated above, the environment is valuable, and its preservation is valuable to many. Therefore, at CEI, one of the things we have tried to do in our work is not ridicule the environmentalists or argue that environmental values are irrelevant. We simply make the point that the Malthusian goals – less people, less consumption, less technology – is far less inspiring that the view of mankind as the Ultimate Resource.
I am proud of the work we have done, but we have much work to do to improve our marketing skills. The other side of this debate seems rather adept at garnering popularity, and is much better funded. My message to those who may share our views is that we needed to find ways to create a more effective and powerful alliance between the entrepreneurial elements of the business community and the free market community. We face many problems. Keep up the good work – and help find the scientist-entrepreneurs who have not succumbed to this insanity. There must be a handful of people who recognize that the politicization of science by conservatives was stupid, but the politicization of science by the Luddites is suicidal.
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