Make sure you watch and share this video revealing the actual conduct of New York City’s stop-and-frisk policy.
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Iran’s Lying Exchange Rates
On September 24th, the Iranian government announced that it would adopt a three-tiered, multiple-exchange-rate regime. This wrong-headed attempt to exert more control over the price of domestic goods and combat inflation has failed (and will continue to fail). Since the rial began its free-fall in early September, international observers and the Iranian people have struggled to understand the implications of this exchange-rate regime.
Iran has a history of implementing a variety of multiple-exchange-rate regimes – with mixed results, to say the least. Indeed, at its peak of currency confusion, the Iranian government set seven different official exchange rates. As the accompanying chart illustrates, the story of Iran’s hyperinflation has been one of divergence between the official and black-market (read: free-market) exchange rates.
This divergence is a product of the declining value of the rial – freely traded on the black market. In consequence, prices are rising dramatically in Iran – by almost 70% per month, according to my estimates. That said, in order to make sense of this phenomenon, it is necessary to understand the system whose failure we are witnessing.
Currently, Iran has three exchange rates:
- The Official Exchange Rate: 12,260 IRR/USD
- Available only to importers of essential goods, such as grain, sugar, and medicine
- The “Non-Reference” Rate: 25,480 IRR/USD
- Purportedly 2% lower than the black-market rate
- Available to importers of important, but non-essential goods, such as livestock, metals and minerals
- The Black-Market Exchange Rate: Approximately 35,000 IRR/USD
- The last freely-reported black-market rate was 35,000 IRR/USD (2 October 2012). The most recent anecdotal reports confirm this number as the current exchange rate.
- The Iranian government (read: police) has recently cracked down on currency traders and has also censored websites that report black-market IRR/USD exchange rates.
This complex currency system results in lying prices that distort economic activity. By offering different exchange rates for different types of imports, the Iranian government is, in effect, subsidizing certain goods – distorting their true price. In consequence, any fluctuations in the black-market exchange rate – and, accordingly, in the price level – will be amplified to different degrees for different goods. The end result for Iranian consumers is confusion and mistrust, which, as we have seen, are feeding the panic that has been driving the collapse of the rial and Iran’s hyperinflation.
For the latest news on Iran’s hyperinflation, follow my Twitter: @Steve_Hanke
Want Privacy Choice? Papa’s Gonna Give You One
I was interested by the title of a paper called “Behavioral Advertising: The Offer You Cannot Refuse” by a small coterie of privacy activist/researchers. I love the Godfather movies, in which the statement, “I’m going to make him an offer he can’t refuse,” is a coolly tuxedoed plan to threaten someone with violence or death. I don’t love the paper’s attempt to show that government “interventions” are superior to markets in terms of freedom.
Behavioral advertisers are no mafiosi. They are not in the business of illegal coercion. They’re not in any kind of illegal business, in fact. The choice of title suggests that the authors may be biased toward making targeted advertising illegal. (The lead author argued in 2004 that Gmail should be shut down as a violation of California law.)
What was most interesting, though, was the paper’s unspoken battle with lock-in, or path dependence. That’s the idea in technology development that a given state of affairs perpetuates itself due to the costs of changing course.
The QWERTY keyboard is a famous example of lock-in. The story with QWERTY is that keys on early mechanical typewriters were arranged so that commonly used letters wouldn’t strike one another and jam together. The result was an inefficient arrangement of keys for the fingers, but it’s an arrangement that has stuck.
The reason why it has stuck is because of switching costs. Everybody who knows how to type knows how to type on a QWERTY keyboard. If you wanted to change to a more efficient keyboard, you’d have to change every keyboard and everyone’s training. That’s a huge cost to pay in exchange for a modest increase in efficiency. So we’ve got QWERTY.
Since as close to the beginning as I know of, Web browsers have been designed to store information delivered by Web sites and to return it to those sites. Cookies are the best known form of this, tiny files that allow a Web site to recognize the browser (inferentially, the user) and deliver custom content. There are also “Flash cookies,” more accurately called “local shared objects,” which can store information about users’ preferences, such as volume settings for Internet videos. Flash cookies can also be used to store unique identifiers to use in tracking. These things provide value to Internet users, and most Web sites make use of them to deliver better content.
The authors of the paper don’t like that. The path of Web browsing technology is not privacy protective, and they would call on regulators to fix that with a pair of interventions: preventing Flash cookies from “respawning” cookies (that is, recreating them when they have been deleted) and regulation of consumer-data markets to prevent marketers from learning information about consumers. This would uphold consumer choice, they argue. And they argue dubiously that their work “inverts the assumption that privacy interventions are paternalistic while market approaches promote freedom.”
Now, ask yourself: If the government came in and required everyone to train for and use the more efficient Dvorak keyboard, would that be a paternalistic step? The end result would be more efficient typing.
Of course it would be paternalistic.
So let’s be frank. This is an argument for paternalistic intervention, attempting to allay the authors’ concern about what a favorite technology of Internet users is doing to privacy.
And it is the authors’ privacy concerns, not Internet users’ at large. Opinion surveys in the privacy area are notorious for revealing that consumers will state a preference for privacy no matter what their true interests are.
The good news is that there is far less lock-in in the Internet browser area than in keyboards. Technologists can and do build browser modifications that prevent tracking of the type this article is concerned with.
Their real problem is that few people actually care as much as the authors do about whether or not they receive tailored advertisements. Few people want to use a browser that is essentially crippled to gain a sliver of privacy protection to which they are indifferent.
Paternalist? It sure is. And unlike a paternally driven switch to a better keyboard, this policy wouldn’t obviously make consumers better off.
Thoughts on Little America and Afghanistan
I recently finished reading Rajiv Chandrasekaran’s Little America: The War within the War for Afghanistan. The entire book is terrific. I highly recommend it. But one chapter in particular—Chapter 7, “Deadwood”—spoke to some of the things that my colleagues and I have written over the years concerning America’s nation-building problems.
Most Americans have by now moved on from the war in Afghanistan (even though the U.S. military has not) and are focused on, in President Obama’s words, “nation building here at home.” But we still haven’t closed the book on the theories of nation building that arose after 9/11, including the belief that the United States needs to repair failed states, or rescue failing ones, lest terrorists from these states travel thousands of miles to attack Americans. Last month, for example, Mitt Romney’s senior foreign policy adviser Richard Williamson praised Bill Clinton’s nation-building adventures in Bosnia and Kosovo. Williamson told NPR’s Audie Cornish that the U.S. government must “help in reconciliation, reconstruction, helping institutions of law and order, security be built” after authoritarian regimes collapse. From the belief that we must repair failed states flows logically the belief that we can.
These beliefs are, in fact, myths. Cato has published many different papers, articles, and book chapters challenging the claim that fighting terrorism, or preserving U.S. security generally, requires us to engage in nation building abroad. We have been equally emphatic on the point that our efforts are likely to fail, no matter how well intentioned. Little America provides additional evidence to support that argument, although I doubt that was Chandrasekaran’s object.
Take, for example, the case of Summer Coish, the striking and extraordinarily motivated woman who wanted to go to Afghanistan so badly that she appealed directly to Richard Holbrooke. She got her wish—eventually. Despite the fact that the president’s designated point person on Afghanistan and Pakistan had marked her for the fast track, it took 14 months before she was cleared to travel to there.
Once she arrived, Coish’s dream of helping the Afghans emerge from decades of war and desperate poverty crashed against the reality of a soul-crushing bureaucracy. Security regulations made it nearly impossible for Coish and other civilians to regularly interact with Afghans, and few embassy staffers exhibited any desire to do so. “It’s rare that you ever hear someone say they’re here because they want to help the Afghans,” Coish told Chandrasekaran after she had been there a few months. Instead, Chandrasekaran observes, “everyone seemed bent on departure.”
The work itself was painfully dull. Coish concluded that most of it could have been accomplished in Washington, at far less cost to the taxpayers. The reason for the costly in-country presence? The need to count them as part of the vaunted “civilian surge.”
Coish and a handful of other dedicated civilians that Chandrasekaran writes about—including Kael Weston, an experienced political adviser to Marine General Larry Nicholson, and Carter Malkasian, the State Department’s representative in Helmand’s Garmser district—could not make up for the lack of ability (or desire) on the part of many other civilians (i.e. the deadwood). “It seems our best and brightest have burned out long ago and we’re getting the straphangers these days,” Marc Chretien, a senior State Department official in Helmand province, wrote to the embassy. “Or, as one wag put it, ‘they’re just along for the chow.’ No need to go into details here—let’s just say that there’s enough deadwood here that it’s becoming a fire hazard.”
At times, Chandrasekaran’s assessment of the civilian surge exhibits an oddly optimistic tone. I say “odd” because this is the same person who brilliantly documented the dysfunction of the Bush administration’s nation-building fiasco in Iraq (in Imperial Life in the Emerald City), but who can’t bring himself to say that Obama’s mission in Afghanistan couldn’t possibly succeed. Despite everything that he has seen, Chandrasekaran often reflects a belief that it all could have worked out (or that it still might) were it not for the “lack of initiative and creativity in Washington.”
Instead of scouring the United States for top talent to fill the crucial, well-paying jobs that were a key element of Obama’s national security agenda, those responsible for hiring first turned to State Department and USAID officers in other parts of the world. But the best of them had already served in Iraq or Afghanistan. Many of those who signed up were too new to have done a tour in a war zone or too lackluster to have better career options.
Pray-tell, where would the government have found such people? Or, more precisely, how would the government convince those already gainfully employed to set aside their careers, homes, and families to embark upon an Afghan adventure? What additional incentives—or threats—might have sufficed to mobilize the vast army of talented agronomists, lawyers, biologists, teachers, doctors, civil engineers, etc. who were not already motivated (as Coish, Weston and Malkasian were)?
Several years ago, I co-authored with Ben Friedman and Harvey Sapolsky a paper on the lessons of Iraq. Our research was informed by Chandrasekaran’s narrative from the Iraqi Green Zone, and a number of other books on the Bush administration’s signature foreign policy initiative. Here is what we said (the prose in this case is almost certainly Friedman’s; I’m not this clever) about the American people’s disinclination to embark on nation-building missions abroad.
A concerted effort to improve our collective nation-building skills would require “a foreign policy at odds with our national character.”
Reading through the proposals for rapidly deployable bureaucrats to help run failing states, one usually searches in vain for the pages where the author justifies the creation of an empire and a colonial service to run it. Whatever else changed after September 11, [Americans]…are ill-suited for stabilizing disorderly states and achieving success in protracted foreign wars.
The State Department’s budget, including the U.S. Agency for International Development (USAID), we explained, “is tiny because its aim is to relate to foreign nations, not to run them.”
National security organizations are formed by decades of budgets and decisions. Their organizational politics…reflect…lasting national interests, namely a disinclination to subjugate foreign peoples and lose unnecessary wars.…Americans have historically looked askance at the small wars European powers fought to maintain their imperial holdings, viewing those actions as illiberal and unjust. Misadventures like Vietnam are the exceptions that make the rule. It is no accident that U.S. national security organizations are not designed for occupation duties. When it comes to nation building, brokering civil and ethnic conflict, and waging counterinsurgency, we are our own worst enemy, and that is a sign of our lingering common sense.
To repeat, Little America is a first-class read, and I hope that the book receives the attention it deserves. The anecdotes about Coish, Weston, and Malkasian, as well as countless stories about brave soldiers and Marines trying their best every day to make Afghanistan a better place, are heartwarming. We honor their service, and we should find other avenues for these people to perform their work, chiefly through NGOs, unencumbered by the massive federal bureaucracy.
But good intentions cannot distract us from the bleak reality: building a functioning nation-state in Afghanistan would require hundreds of thousands of equally dedicated civilians, to go along with a massive troop presence to protect them, tens of billions of dollars every year, and a commitment to remain in country for decades.
We aren’t going to do that. We should stop pretending that we will.
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New Video Shows that Obamanomics Is a Failure
I’ve narrated a video on why Keynesian economics is bad theory, I’ve also narrated a video specifically debunking Obama’s failed stimulus, and I’ve put together a post with data from the Minneapolis Fed showing how Reaganomics worked far better than Obamanomics.
But this video from the Center for Freedom and Prosperity Foundation does all that—and more—in only about six minutes.
By the way, for those who like gory details, a previous video in the CF&P Foundation’s Economics 101 series looked at how the so-called stimulus was a rat’s nest of waste and corruption.
Not that anybody should be surprised. Big government facilitates corruption in the same way that a dumpster attracts rats and cockroaches.
My concern is long-term trends. Politicians should be complying with Mitchell’s Golden Rule, which means reducing government spending as a share of GDP (to put it in terms that make economists feel warm and fuzzy, gov’t exp/GDP should be decreasing).
What irks me about Obama is that he wants to increase the burden of government spending, which means the numerator in the equation is going in the wrong direction. And he wants class-warfare tax policy and more red tape, which makes it even harder for the denominator to move in the right direction.
And if that ratio continues to deteriorate, as both the BIS and OECD are predicting, then it’s just a matter of time before the United States becomes Greece.
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Obama, Romney, Teachers, and Choice
Jay Greene has an excellent piece in the Wall Street Journal this week revealing that the teacher workforce has grown dramatically over the past forty years—and at enormous cost—without improving student achievement by the end of high school. And he rightly disparages President Obama for arguing that even more teachers would somehow do the trick. Even better, Greene notes that American education will not reverse its productivity collapse and become efficient until we allow it to benefit from the freedoms and incentives of the marketplace.
But then Jay cites Governor Romney’s goal of “voucherizing federal education funds so that parents can take those resources and use them to send their children to schools of their choice,” and he does so with apparent approbation. Even ignoring the fact that the Constitution does not empower Congress to run education programs, this is a very dangerous idea.
There has been no civilization in the history of humanity in which governments have paid for private schooling without ultimately controlling what was taught and who could teach, erecting barriers to entry and thereby crippling market forces.
For that reason, I recommended against a federal voucher program under the Bush administration. Since then, additional evidence has come to light. When I studied the regulatory impact of U.S. private school choice programs last year I found that even the small existing U.S. voucher programs do indeed impose a heavy and very statistically significant additional burden of regulation on participating private schools.
Perhaps a way will be found to enact and maintain minimally regulated voucher programs in the coming years. Until that time comes, it would be the height of folly to introduce a federal voucher program whose regulations would suffocate educational freedom from coast to coast.
In my statistical study of choice program regulation, I found that K‑12 tax credit programs do not impose a statistically significant extra burden of regulation on private schools. But even a national K‑12 tax credit program would be far too dangerous. By leaving education policy to the states and the people, we can see which programs flourish and which become sclerotic. We must encourage and learn from that policy diversity, not squelch it with federal programs or mandates.
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Huawei, ZTE, and the Slippery Slope of Excusing Protectionism on National Security Grounds
Those who would give up essential Liberty, to purchase a little temporary Safety, deserve neither Liberty nor Safety. —Benjamin Franklin
Chinese telecommunications companies Huawei and ZTE long have been in the crosshairs of U.S. policymakers. Rumors that the telecoms are or could become conduits for Chinese government-sponsored cyber espionage or cyber attacks on so-called critical infrastructure in the United States have been swirling around Washington for a few years. Concerns about Huawei’s alleged ties to the People’s Liberation Army were plausible enough to cause the U.S. Committee on Foreign Investment in the United States (CFIUS) to recommend that President Bush block a proposed acquisition by Huawei of 3Com in 2008. Subsequent attempts by Huawei to expand in the United States have also failed for similar reasons, and because of Huawei’s ham-fisted, amateurish public relations efforts.
So it’s not at all surprising that yesterday the House Permanent Select Committee on Intelligence, yesterday, following a nearly year-long investigation, issued its “Investigative Report on the U.S. National Security Issues Posed by Chinese Telecommunications Companies Huawei and ZTE,” along with recommendations that U.S. companies avoid doing business with these firms.
But there is no smoking gun in the report, only innuendo sold as something more definitive. The most damning evidence against Huawei and ZTE is that the companies were evasive or incomplete when it came to providing answers to questions that would have revealed strategic information that the companies understandably might not want to share with U.S. policymakers, who may have the interests of their own favored U.S. telecoms in mind.
Again, what I see revealed here is inexperience and lack of political sophistication on the part of the Chinese telecoms. It was Huawei—seeking to repair its sullied name and overcome the numerous obstacles it continues to face in its efforts to expand its business in the United States—that requested the full investigation of its operations and ties, not anticipating adequately that the inquiries would put them on the spot. What they got from the investigation was an ultimatum: share strategic information about the company and its plans with U.S. policymakers or be deemed a threat to U.S. national security.
Now we have the House report—publicly fortified by a severely unbalanced 60 Minutes segment this past Sunday—to ratchet up the pressure for a more comprehensive solution. We’ve seen this pattern before: zealous lawmakers identifying imminent threats or gathering storms and then convincing the public that there are no alternatives to their excessive solutions. The public should note that fear imperils our freedoms and bestows greater powers on policymakers with their own agendas.
Granted, I’m no expert in cyber espionage or cyber security and one or both of these Chinese companies may be bad actors. But the House report falls well short of convincing me that either possesses or will deploy cyber weapons of mass destruction against critical U.S. infrastructure or that they are any more hazardous than Western companies utilizing the same or similar supply chains that traverse China or any other country for that matter. And the previous CFIUS recommendtions to the president to block Huawei acquisitions are classified.
Vulnerabilities in communications networks are ever-present and susceptible to insidious code, back doors, and malicious spyware regardless of where the components are manufactured. At best, shunning these two companies will provide a false sense of security.
What should raise red flags is that none of the findings in the House report have anything to do with specific cyber threats or cyber security, but merely reinforce what we already know about China: that its economy operates under a system of state-sponsored capitalism and that intellectual property theft is a larger problem there than it is in the United States.
And the report’s recommendations reveal more of a trade protectionist agenda than a critical infrastructure protection agenda. It states that CFIUS “must block acquisitions, takeovers, or mergers involving Huawei and ZTE given the threat to U.S. national security interests.” (Emphasis added.) What threat? It is not documented in the report.
The report recommends that government contractors “exclude ZTE or Huawei equipment in their systems.” U.S. network providers and systems developers are “strongly encouraged to seek other vendors for their projects.” And it recommends that Congress and the executive branch enforcement agencies “investigate the unfair trade practices of the Chinese telecommunications sector, paying particular attention to China’s continued financial support for key companies.” (Emphasis added.) Talk about the pot calling the kettle black!
Though not made explicit in the report, some U.S. telecom carriers allegedly were warned by U.S. policymakers that purchasing routers and other equipment for their networks from Huawei or ZTE would disqualify them from participating in the massive U.S. government procurement market for telecom services. If true, that is not only heavy-handed, but seemingly strong grounds for a Chinese WTO challenge on the grounds of discriminatory treatment.
Before taking protectionist, WTO-illegal actions—such as banning transactions with certain foreign companies or even “recommending” forgoing such transactions—that would likely cause U.S. companies to lose business in China, the onus is on policymakers, the intelligence committees, and those otherwise in the know to demonstrate that there is a real threat from these companies and that they—U.S. policymakers—are not simply trying to advance the fortunes of their own constituent companies through a particularly insidious brand of industrial policy.