Today’s Wall Street Journal carries a news report on how the Obama administration, after more than two years of pursuing damn-the-costs government control over the private sector, is finally developing more internal debate about whether and when zealous regulations are worth the cost. In particular, Office of Information and Regulatory Affairs chief Cass Sunstein, known as skeptical about some costly rules, has now acquired an important sometime ally in White House Chief of Staff Bill Daley, who played a role in getting EPA to table some very expensive new air-quality standards the other day.

All well and good, but I was stopped short by a paragraph that shouldn’t pass without comment:

The same day, Mr. Daley met with industry groups, who gave the White House a map showing counties that would be out of compliance with the Clean Air Act if the stricter standards were put in place. The map showed that the rule would affect areas in the politically important 2012 election states of Florida, Pennsylvania, Virginia, and Ohio.

Even by Washington standards, isn’t it appallingly cynical to evaluate environmental rules that could (critics have argued) cripple wide sectors of the economy according to whether the worst damage falls on politically vital states like Florida and Ohio, or just ho-hum non-swing states like Oklahoma, North Dakota and Tennessee? True, the article doesn’t say who was cynical enough to draw the connection here — the business groups giving the presentation? The White House listeners? Some third party whose viewpoint this is all being filtered through? But whoever’s being the cynic here, one of the costs is to feed the alienation of citizens of Texas in particular, whose officials and businesses have been complaining for more than a year of being singled out for hostile attention by the Obama EPA. For everyone’s good, I hope someone in the White House at this moment is writing a sharp letter disclaiming any special intent to help Pennsylvania, Virginia et al. And I hope after drafting that letter they will be cleared to send it off for publication in the Journal, not just keep it in the desk to show outraged delegations of Texans.

My last blog on bank capital requirements concluded that the push to implement Basel III, which mandates increases in bank capital-asset ratios, is a deadly cocktail to ingest in the middle of an economic slump.

Shortly after, the Chairman of Deutsche Bank Josef Ackermann weighed in during a Frankfurt speech with a blistering attack on raising capital-asset ratios in the middle of a slump. He was armed with heavy artillery – namely, “The Cumulative Impact on the Global Economy of Changes in the Financial Regulatory Framework,” a 123 page Institute of International Finance report that was hot off the press.

Today, the Financial Times reports that Jamie Dimon, Chief Executive of JPMorgan, has gone even further than Ackermann. Indeed, Dimon suggests that the new Basel III capital requirements are “anti-American” and that the U.S. should consider pulling out of the Bank for International Settlements in Basel, Switzerland.

Both Ackermann and Dimon are right. The cheerleaders for the imposition of higher bank capital requirements in the middle of a slump – like U.S. Treasury Secretary Timothy Geithner and Fed Chairman Ben Bernanke – are wrong.

We can demonstrate the validity of this conclusion with ease. Higher capital-asset ratios are “deflationary.” If we hold the level of a bank’s capital constant, an increase in its capital-asset ratio requires that the level of its assets must fall. This, in turn, implies that the banking system’s liabilities – demand deposits – must contract. Since the money supply consists of demand deposits, among other things, the money supply must, therefore, contract.

Alternatively, if we hold assets constant, an increase in the capital-asset ratio requires an increase in capital. This destroys money. When an investor purchases newly-issued bank shares, for example, the investor exchanges funds from a bank deposit for the new shares. This reduces deposit liabilities in the banking system and wipes out money.

It’s no surprise that Sir John Hicks – a high priest of economic theory and 1972 Nobelist – thought there was nothing more important than a balance sheet.

If Geithner, Bernanke and other members of the official chattering classes insist on higher bank capital-asset ratios, the U.S. might, unfortunately, revisit 1937. It’s time to listen to Ackermann and Dimon.

The flap over whether Social Security is a Ponzi scheme reminds me of two passages about Social Security’s sister program, Medicare, from Cato adjunct scholar David Hyman.

The first is from his book Medicare Meets Mephistopheles, which remains the best (and only) satire ever written about Medicare:

Consider what happened when I presented some considerably less pointed remarks at the conference at Washington and Lee University School of Law. One of Medicare’s most enthusiastic supporters responded by making an impassioned speech that it was improper to describe Medicare as a “Ponzi scheme,” and the program should not be judged by the standards that would apply to a private pension because it was actually a “sacred bond” between the generations. (Leave aside the fact that I never used the word “Ponzi” in my remarks. I did note that the Medicare program bore certain similarities to an inter-generational pyramid scheme, which is something quite different. Of course, it is possible that the use of this term by the commentator was a Freudian slip.) His words brought enthusiastic applause from those members of the audience who had heard enough bad news of the sort found in this book and were more than ready to ignore Medicare’s problems on the basis of empty political sloganeering.

The second is from Hyman’s response to a critic of Medicare Meets Mephistopheles:

Finally, my reply is titled “Cooling Out the Marks, Medicare Style.” This is a reference to a well-known article by a famous sociologist, on con games and the social process of adaptation to failure:

“Sometimes, however, a mark is not quite prepared to accept his loss as a gain in experience and to say and do nothing about his venture. He may feel moved to complain to the police or to chase after the operators. In the terminology of the trade, the mark may squawk, beef, or come through. From the operators’ point of view, this kind of behavior is bad for business. It gives the members of the mob a bad reputation with such police as have not yet been fixed and with marks who have not yet been taken. In order to avoid this adverse publicity, an additional phase is sometimes added at the end of the play. It is called cooling the mark out. After the blowoff has occurred, one of the operators stays with the mark and makes an effort to keep the anger of the mark within manageable and sensible proportions. The operator stays behind his team-mates in the capacity of what might be called a cooler and exercises upon the mark the art of consolation. An attempt is made to define the situation for the mark in a way that makes it easy for him to accept the inevitable and quietly go home. The mark is given instruction in the philosophy of taking a loss.” Erving Goffman, “On Cooling the Mark Out: Some Aspects of Adaptation to Failure,” 15 Psychiatry 451, 451–52 (1952).

The occupational hazard for Medicare’s defenders is the tendency to become coolers on the program’s behalf. Professor Horwitz largely avoids this temptation, although she is not (yet) willing to concede how hot things actually are in the place in which we find ourselves. The same cannot be said for Medicare’s more ardent defenders, who routinely justify and excuse Medicare’s pathologies on the grounds that it is a “sacred inter-generational trust,” and not just another mediocre government program. Yet, even these ardent defenders may eventually find themselves wondering, in the dark of night, how it came to pass that they became coolers, giving instruction to the poor and working classes on the philosophy of taking a loss at the hands of a program that was supposed to help them, but ended up treating them as marks. With friends like that, who needs enemies?

Washington Post reporters write a few thousand words on capital gains taxes today, and they somehow forget to mention the key economic factors in favor of a lower rate.

One factor is that the double taxation of corporate equity under an income tax system creates a serious economic distortion. Corporate profits are taxed at the business level and then again at the individual level by taxes on dividends and capital gains. Providing a lower rate for dividends and gains at the individual level is one way to partly alleviate the distortion.

Another factor is that inflation causes investment returns to be overtaxed in an income tax system without special rules to compensate. If someone buys a stock for $10 and sells it a few years later for $15, some portion of the tax paid will be tax on inflation. The effect of taxing people on inflationary gains is to reduce real returns and distort the tax code against investment.

These problems have led virtually every industrial nation to adopt special rules for taxing long-term capital gains. Most countries have either a reduced individual rate or a partial exclusion. About a dozen advanced economies — for example, the Netherlands and New Zealand — have long-term capital gains tax rates of zero. The Post managed to miss this international reality in its reporting.

The following chart from Global Tax Revolution shows capital gains tax rates in the high-income nations of the OECD. The chart is a little dated now, but it makes the point that our federal capital gains tax rate of 15 percent is pretty average — it is not some sort of unique right-wing giveaway to rich people, as the Post story implies.

Can people on one side of a political debate understand why others disagree with them? Sometimes it doesn’t seem so. Take Adam Gopnik’s article about “declinism” in the September 12 New Yorker. (Online for subscribers only, alas.) It’s an interesting review of new books about the decline of America and/​or the West by Ian Morris, Niall Ferguson, and Thomas Friedman and Michael Mandelbaum. In the course of it Gopnik explains that there is “another side” in American politics from the good and decent side of President Obama and such people as Friedman and Mandelbaum. And that side is “inexorably opposed to these apparently good things.”

The reason we don’t have beautiful new airports and efficient bullet trains is not that we have inadvertently stumbled upon stumbling blocks; it’s that there are considerable numbers of Americans for whom these things are simply symbols of a feared central government, and who would, when they travel, rather sweat in squalor than surrender the money to build a better terminal. They hate fast trains and efficient airports for the same reason that seventeenth-century Protestants hated the beautiful Baroque churches of Rome when they saw them: they were luxurious symbols of an earthly power they despised.

This is the sort of place where it’s a good idea for an author to stop and think: Is that really what advocates of smaller government think? They actually hate the very idea of fast trains and efficient air travel? They’d rather sweat in squalor than pay for better service?

He goes on:

We don’t have a better infrastructure or decent elementary education exactly because many people are willing to sacrifice faster movement between our great cities, or better-informed children, in support of their belief that the government should always be given as little money as possible.

Sure, he’s claiming, we small-government folks would like our kids to learn to read. But not if it means giving up one solitary dime to the predatory state. Gopnik might have added that we crotchety libertarians would rather a hundred guilty men go free than a single innocent be jailed. Or that we’d rather see the people of Iraq suffer under Saddam Hussein rather than send a single American to die in the desert. Except that those are “ideological convictions” that New Yorker writers share. In those cases they understand that there are trade-offs, that benefits come with costs, that the end does not always justify the means.

And having identified those concepts, I wonder if Mr. Gopnik might try again to understand why some Americans oppose an array of government spending programs. Is it really that they “simply” fear good schools and fast trains? Or is it possible that they — we — have actual arguments? That we have actually enunciated those arguments in blog posts, op-eds, essays, and even books? And that few of us have said we’d rather sit in traffic than “give too much pleasure” to liberals?

Let me suggest to Mr. Gopnik a few reasons that some us oppose the various spending programs that concern him:

1. We know that vastly increased government expenditures often don’t achieve their intentions, such as the 190 percent increase in both inflation-adjusted federal education spending and school infrastructure spending that hasn’t budged test scores.
2. We know that many wonderful things, perhaps including truly fast trains, could be created at massive cost, but that you always have to weigh costs and benefits. Children say, “I want it.” Adults say, “How much does it cost, and what would I have to give up to have it?”
3. We believe that people spend their own money more prudently than they spend other people’s money. So goods and services produced in the competitive marketplace are likely to be produced more efficiently and with more regard for real consumer demand than goods produced by government, and thus we should try to keep as many aspects of life as possible outside the control of government.
4. We believe that you’ll get better schools, trains, and planes if they’re produced privately than if they’re created by government. And thus, since we want good schools and good transportation, we want them produced by competitive enterprise.
5. We believe that the burden of taxes, spending, debt, and regulation is already reducing economic growth, and that our society would have more wealth for more people and better technology if it had a government smaller in size, scope, and power. Try plotting government spending vs. the increase in the speed of human mobility; I think you’d find an inverse relationship, with very little increase in the past generation of massive government spending.
6. Yes, we have a philosophical preference for freedom. Not freedom at all costs, not anarchy, but liberty and limited government as the natural condition for human flourishing. We believe that liberal society is resilient; it can withstand many burdens and continue to flourish; but it is not infinitely resilient. Those who claim to believe in liberal principles but advocate more and more confiscation of the wealth created by productive people, more and more restrictions on voluntary interaction, more and more exceptions to property rights and the rule of law, more and more transfer of power from society to state, are — perhaps unwittingly — engaged in the ultimately deadly undermining of civilization.

And you know, when I think about Mr. Gopnik’s point that my Scottish Protestant ancestors “hated the beautiful Baroque churches of Rome [because] they were luxurious symbols of an earthly power they despised,” it occurs to me: Those churches are beautiful. So are the pyramids. But if President Obama or Paul Krugman or the AFL-CIO proposed to tax productive working people to build beautiful churches and pyramids, I would oppose it. Even if I wanted more beautiful churches, I would not be willing to force my fellow citizens to contribute to my satisfaction. And the same principle applies to faster trains between Washington and New York, which I absolutely do want. And which I believe the market would deliver, if we had a market in transportation and if faster trains are in fact a good use of our economy’s scarce resources.

Bryan Caplan recently challenged Paul Krugman and other intellectuals to an “ideological Turing test” — a test to see who could state an opposing view as clearly and persuasively as its proponents could. I think Gopnik would fail that test. Assuming that he has in this article stated as fairly as possible what he actually believes his opponents believe, then he seems far off the mark. Would he like to try again, to explain and then criticize the views laid out above or in books by Hayek, Nozick, Friedman, and Epstein?

In the meantime, I found much of his article interesting, and I agreed with many of his conclusions about the achievements of Western liberalism. But as he wrote, after taking issue with some of Niall Ferguson’s analyses of the French Enlightenment, Darwinianism, and the sixties, “when someone gets the sixties Beatles this wrong you have to wonder how well he really is doing with the sixth-century barbarians.” And when somebody gets the argument for limited government this wrong, you have to wonder whether he’s accurately described the books under review.

Doctors and researchers regularly perform blood tests to determine the effectiveness of various drugs. The resulting correlations between the test results and patient health have recently become the subject of numerous “process” patents. That these patents have been upheld by the U.S. Court of Appeals for the Federal Circuit represents a dangerous expansion of traditional patent law.

This expansion threatens to stifle free markets and infringe on individual liberty. In Mayo v. Prometheus, the Court will address the important question of whether someone can patent the process of observing correlations between blood test results and patient health. The primary legal issue here is whether naturally occurring correlations are patentable as “process” patents simply because the methods used to administer prescription drugs and test blood may involve “transformations” of body chemistry.

On Friday, Cato filed an amicus brief, joined by the Reason Foundation and the Competitive Enterprise Institute, arguing that these patents are not “processes” as the term was originally understood in the Patent Act of 1952. We liken medical-diagnostic patents to other abstract-process patents—such as software and business-method patents—that have resulted in financial losses for firms and discouraged innovation, and argue that enforcing these patents “will only serve to further slow the economy, retard technological innovation, distort the free market, and place human health at risk.”

Moreover, upholding the patents at issue will impermissibly restrict public-domain activity because the final step in a medical-diagnostic patent is an entirely mental one that will be violated whenever a doctor performs a previously public-domain medical test after learning about the patented correlation. Our brief thus closes by arguing that the Court should also consider the profound First Amendment implications in allowing processes whose final step is entirely mental to be patented.* “The Court has repeatedly recognized that the First Amendment protects freedom of thought as well as freedom of speech.” Unlike copyrights, patents lack traditional free-speech safeguards (such as exceptions for “fair use”) and, therefore, the Court should reject medical-diagnostic patents as impermissibly restricting the freedom of thought.

Mayo v. Prometheus will be argued late this year or in early 2012. Here again is Cato’s brief.

*Recall Judge Gladys Kessler of the D.C. federal district court, who found Obamacare’s individual mandate constitutional under the Commerce Clause because it regulates “mental activity.” Combining this theory with the theory of patentability at issue here, federal courts could sustain lawsuits based on a defendant’s making the same “patented” decision (or non-decision) as a plaintiff.

In his September 8 lecture to Congress, President Obama promised that “every proposal I’ve laid out tonight will be paid for.” How? By raising tax rates on “the wealthiest Americans and biggest corporations.” In other words, the President is proposing a $447 billion tax increase.

When the details are revealed on September 19, the President will be proposing large and permanent increases in the highest income tax rates − mainly to “pay for” a small and temporary cut in payroll taxes (which accounts for 54 percent of his $447 billion package). The plan is likely to contain elements of the September 7 proposal of Congressional Democrats to the super-committee — such as a draconian “super-Pease” phase-out and cap on itemized deductions, and a top marginal tax rate of 48.8 percent in 2013.

Temporary payroll tax cuts and extended unemployment benefits are bait the President set out to trap House Republicans with their own debt ceiling demands.

“The agreement we passed in July,” said the President, “will cut government spending by about $1 trillion over the next 10 years. It also charges this Congress to come up with an additional $1.5 trillion in savings by Christmas. Tonight, I am asking you to increase that amount so that it covers the full cost of the American Jobs Act.” But the $447 billion budgetary hit can’t be spread over 10 years without triggering another debt ceiling calamity. Either the debt ceiling has to be promptly raised by an extra $447 billion or tax receipts somehow raised by that amount in fiscal 2012–2013. Any “modest adjustments to health care” will be too distant and nebulous to help.

Using permanently higher tax rates on income to pay for temporarily lower tax rates on payrolls is no “stimulus” under either Keynesian or empirical economics. Neither is a tax-financed extension of unemployment benefits, which clearly raises the unemployment rate by 0.8 to 1.8 percentage points. Yet the one-year extension of payroll tax cuts and 99-week unemployment benefits is being held out as irresistible bait to gullible legislators.

By inviting House Republicans to stumble into this trap, the president is also hoping to preempt the congressional super-committee’s option of reducing deficits by trimming tax loopholes. President Obama is trying to lay claim to any potential revenues from cutting loopholes (or legitimate deductions) for his own pet projects, which include grants to hire more state and local government workers and extended unemployment benefits for the private sector.

This is no “jobs plan.” It’s a tax-and-spend plan, and a bad one.