Reason Magazine - Contributors

Making a Killing in Business

mwlynch@reason.com (Michael W. Lynch) — Tue, 01 Oct 2002 00:00:00 EDT

The reason there are so many murders in Washington, D.C., is that people can get away with it. In the 1990s D.C. police caught fewer than four people for every 10 murders in the District. At the end of 2000, two in three individuals who killed in 1999 were free. Considering these odds, killing for some becomes simply another dispute resolution tool. There's a similar explanation for America's outrage du jour: the market-tumbling revelation that during much of the 1990s a few corporate chieftains pushed the bounds of honesty in financial reporting.

Is the comparison between executives and murderers too harsh?

Downgrade it to thieves. The reason someone burglarized my apartment in San Francisco several years ago is that he figured he would get away with it. In 2000 a dot-com executive defrauded me of $2,000 in article fees for the same reason. Both thieves were right.

Even when they aren't the same person, chief financial officers, thieves, and masters of the short con are cut from the same cloth: the cloth of humanity. And all human beings respond to incentives. Increase the cost of something, and there will be less of it. Lower the cost, and there will be more.

The inverse holds for rewards. Until recently the rewards for massaging financial data, structuring finance to make debt disappear from books, and engaging in sham trades to increase revenue were huge. The companies that facilitated the deals -- Citibank, Merrill Lynch, J.P. Morgan -- pocketed millions in fees, with the promise of millions more. Executives received millions in compensation for their companies' superior performance.

Just as important, the punishment for not playing could be devastating. "The equity market put enormous pressure on management to manufacture good earnings," says Robert Barbera, chief economist with Hoenig & Company. "That's not to say that fraud is a reasonable option. It simply describes the system that would push many in the direction of creative accounting." The system, like my open window, was irresistible for some.

As one who believes in both the morality and the efficiency of the free market, I think it's important to recognize that markets aren't pristine institutions handed down by God that make people fair and trustworthy. They are systems framed by rules that foster cooperation among individuals and organizations that are seeking to maximize their happiness, which usually translates into money. Over the long term, markets reward honesty. Over shorter periods, scammers can do very well.

The recent business scandals remind us that two forces police markets. One is cops or regulators, who seek compliance with written rules and punish those who break them. The other, more powerful force is customers, who withdraw their money from companies in which they lose confidence. This phenomenon is obvious in financial markets, where companies like Enron and WorldCom are severely punished by investors. But it also happens in consumer markets. Who do you think the manufacturer of Tylenol feared more when it was discovered in 1982 that someone had laced its product with cyanide: regulators or customers?

If either of these forces slacks off, one can expect more people to bend and even break rules. That's what happened in the late stages of the boom. Investors not only failed to scrutinize business plans or read the footnotes in financial statements, they also demanded perfect performance, at least on paper. Many investors were lusting after growth stocks at any price. Not all investors and analysts were fooled; there were plenty of people who sat out the runup. It doesn't take a genius, after all, to know that when someone goes on TV and says a stock will double they are just talking smack, and it's time to sell off one's position in tulips.

But there were also plenty of people who chased the returns. Many lost big. No one likes to lose money, and when people do they usually want to blame someone else. Since the market peaked in early 2000, its decline has wiped out $7 trillion, $70,000 per household, which is a lot of blame to allocate.

All this brings us back to Washington, where, in late July, Congress passed and the president signed a corporate reform package. Like much of what passes for work in D.C., the spectacle featured plenty of absurdities. To hear a lecture on proper accounting from Congress -- whose favorite financial tool is shuffling liabilities off its balance sheet, in the form of either unfunded mandates or unfunded promises such as Social Security -- is a joke.

Our first MBA president declares, "The business pages of American newspapers should not read like a scandal sheet." But like Congress on financial management, Catholic priests on sexual morality, or Jimmy Carter on military tactics, George W. Bush has a credibility problem. The only thing remarkable about his business career was his ability to parlay one failure into the next based on his family connections. Serious investors included him in the deal that made him a millionaire -- the purchase of the Texas Rangers -- as a hood ornament. Even his ceremonial role was possible only because he played financial games worthy of Enron CFO Andrew Fastow.

The corporate reform package, which will on balance probably do harm, is really a sideshow. Old-school liberals such as American Prospect Co-Editor Robert Kuttner blame deregulation for the market's slide and boldly assert that it's time for regulators to save capitalism from itself once again.

But it wasn't lack of regulation that caused the financial bubble, and it won't be increased regulation that will help asset prices rise from their lows. That's a job for investors, who will be a bit more circumspect about the next new things and perhaps won't ignore cover stories in Fortune and elsewhere that expose large companies as Ponzi schemes.

So when Congress sets up a new regulatory body to police accountants and forbids firms from auditing and consulting for the same company, its actions are redundant. These are properly issues between investors and management. Instead of putting D.C. in charge of accounting standards, a better reform would be to repeal the Depression era law that requires public companies to be audited and gives public accountants a lock on the business. If audits add value, investors will reward companies that pay for them with higher stock prices. If an accounting firm becomes known for catering to management, companies that hire it will suffer a lower valuation.

That's not to say there isn't a role for the cops. Markets are imperfect, and investors are limited in the justice they can mete out. Investors brutally punish companies in which they lose confidence. Much is made of WorldCom's collapse after it disclosed its $3.8 billion mistake. But that merely snuffed the company out. Its stock was already down 99 percent, from a high of $61.47 in June 1999 to 83 cents a share at the time the creative accounting became known. That news simply took it from 83 cents to zip.

But as harsh as investors can be with companies that misbehave, they cannot bring misbehaving individuals to justice. That's the role of the cops. Executives who crossed the line that separates creative finance from fraud -- a fact that can be established not by the press but only by a court of law -- need to pay with not only their wealth but also their freedom.

After all, if committing murder in D.C. or burglarizing apartments in San Francisco meant losing one's freedom, there'd be far fewer killers and burglars. And if defrauding investors meant going to jail rather than moving on to the next lucrative job or easing into a comfortable retirement, there would be a lot less of that as well.

The Experimental Economist

gillespie@reason.com (Nick Gillespie) mwlynch@reason.com (Michael W. Lynch) — Tue, 01 Oct 2002 00:00:00 EDT

When Reason interviewed George Mason University economist Vernon L. Smith back in May, one of the first questions we put to him was, "You're always mentioned as a short-lister for the Nobel Prize in economics. What do you think of that?" The 75-year-old Smith, the founding father of experimental economics, responded with a hearty laugh. "It's nice, but whenever I hear that, I always ask, 'Do any of the people saying that have a vote on the selection committee?'" It turns out that they did. Today, the Royal Swedish Academy of Sciences awarded Smith the Nobel "for having established laboratory experiments as a tool in empirical economic analysis, especially in the study of alternative market mechanisms."

What do experimental economists do? "We take propositions of economic theory and we test them with real people in controlled settings," explains Smith, who's also a research scholar in the Interdisciplinary Center for Economic Science and a fellow of the Mercatus Center, both affiliated with George Mason. "Take the idea that there's a tendency for markets to achieve price levels at which they'll clear-at which buyers and sellers agree with one another and no money's left on the table. I'll run experiments where I motivate buyers to buy low and sellers to sell high." Smith helps keep living, breathing human beings at the center of a discipline notorious for transforming flesh and blood into impersonal theoretical equations.

"We're less interested in what people think than in what they actually do in specific situations," says Smith. "The thing that's not very explicit in much of economics is what the rules of trading are and how they affect outcomes. Experimental economics asks how the performance of a market is influenced by its rules."

Over the past 50 years, Smith has overseen thousands of experiments, with everyone from school kids to business tycoons to congressional staffers. He also has been instrumental in developing policies that create true markets where they've never existed, such as in electricity sales.

Smith has found that even when people have no clear idea of how or why markets work, they nonetheless tend to be both savvy and surprisingly generous. "I think we're born traders," he says. "We're social animals, very much into social exchange. This propensity of humans is very likely what led ultimately to trade and markets that produce wealth. The benefits of market exchange are easy to see in personal interactions, where you do something for me and I do something for you. Out there in 'markets,' though, they're not always clear. If the price goes up, the oil companies get more money and I have less. That's the average person's perception and experience. Experimental economics helps put a human face on markets."

Smith's professional odyssey began at Caltech, where he studied electrical engineering before getting a master's degree in economics at the University of Kansas in 1952 and a Ph.D. at Harvard in 1955. Prior to joining George Mason's faculty in 2001, he taught at the University of Arizona, Purdue, Brown, and the University of Massachusetts. En route to winning the Nobel, he served as president of the Public Choice Society and the Economic Science Society, received countless awards, and published widely (Cambridge University Press has published two volumes of his papers in experimental economics).

Smith's ideological journey has been no less wide-ranging. He started out as an avowed socialist who believed that the good society was one in which a few wise men made most social, economic, and political decisions. Over the years, he gravitated toward a libertarian position that holds that individuals should be as free as possible to make their own tradeoffs. "Whether we're talking about politics or economics, or even social interaction," says Smith, "the best systems maximize the freedom of the individual, subject to the constraint of others in the system."

Contributing Editor Mike Lynch and Editor-in-Chief Nick Gillespie interviewed Smith at his George Mason office and a nearby restaurant in late May. This interview will appear in the December issue of Reason.

Reason: Experimental economics stresses the importance of institutions-the rules and regulations of markets and systems of exchange. Yet people often talk about the "free" market and property rights as if they exist in nature the same way a mountain or lake does. Your work suggests that these rules are created for specific people in specific situations.

Vernon Smith: I think a lot of market conventions and property rights come from norms that emerge through people's interactions. Often the state comes along later and codifies them.

Robert Ellickson's book Order Without Law (1991) documents this. He went and looked at what fence law is in Shasta County, California. The law makes it clear that you're liable for the damage your cattle does, so you have an incentive to build fences. But that's not quite the way it works. The reality is that people share fences. If you're a guy who gets known in the community as careless, as someone who doesn't keep your fences up and whose cattle keep getting out, your neighbors are much harder on you than if it's just a one-time-only mistake. Most of these disputes don't even go to court. There's pressure on you to pay up and settle out of court at a more expensive level.

It's interesting because people work out exchange systems that are not necessarily related to formal law. If you read [economist] F.A. Hayek, you know that the early lawgivers were not people who made law. They just wrote down the existing practices. This is what people are doing in Shasta County. It's "discovered law." "Made law" starts to come in later.

Of course, not every transaction is local or face-to-face. That's why you need more formal markets and property rights. What's the old saying? "Everything for a friend, nothing for an enemy, and the law for strangers." Property rights and markets help to extend the gains from trade to strangers by ensuring payment or ensuring delivery.

Reason: People are more likely to cheat people who live far away.

Smith: Definitely. But even then, perhaps not as much as we'd first think. Consider the Internet. What's remarkable about Internet markets is not that some people don't deliver or pay, but that it's so few. There's practically no way to enforce a lot of the commercial activity. The amazing thing about it is how much of what goes on does so on the basis of trust.

Reason: What are the policy goals of experimental economics?

Smith: We know markets are efficient. We'd like to see if we can come up with market mechanisms that can be applied where they've never been used before. In electric power, for example, or in landing and takeoff slots in airports.

My colleagues and I have developed techniques to design market mechanisms that are likely to work in the real world. But we don't trust ourselves without doing experiments. The experiments are the means by which we test our knowledge. We use the laboratory to make our mistakes at low cost-and we make plenty of them. We always learn stuff and end up making changes to our model institutions, to our rules, and to our payoffs.

The next step is to bring in the people who will actually be using the system. They put design elements in, and then we run experiments with them. When they're comfortable with it, we go out in the world with it.

Here's an example dealing with electric power. Let's say you're creating a market for wholesale electricity. You have buyers and sellers of power at different nodes in an electric power network. People put in location-specific asking prices to sell power; they've got to be location-specific because power grids leak, and depending on where you are on the network, your costs will be different. If you're a wholesale buyer, then you put in a bid schedule at which you're willing to pay for power to be delivered to your node. These are all computer-assisted markets. A computer essentially takes all the asks, all the bids, and all the location costs and it maximizes the gains from trade. It does that by finding prices that clear the markets so there isn't any money left on the table.

We did experiments for this sort of system in Australia in 1993 and again in '96. We ran experiments and had a seminar a day for two weeks, and the participants got really good at it. Australia ended up deregulating its electric power industry, and I think they did a pretty good job.

What's interesting is that it's still not all privatized-that varies from state to state. Victoria, for instance, took all its generation assets and sold them off to private industry. In New South Wales, they're still held by public entities. But the important thing is that all power providers have got to get their money in the market. And all new capacity is completely private in Australia.

Reason: So experimental economics can be a tool to show regulators and industry types how truly price-sensitive markets could and would work?

Smith: It is a tool. In 1995 the Progress and Freedom Foundation sponsored a series of workshops at the University of Arizona, where I was at the time. We brought in 25 executives who were high up in their organizations-Florida Power, Duke, Ohio Edison, Mohawk, Pacific Gas & Electric, Southern California Edison, and so on.

They participated in experiments, and they could see and experience what it was like to make a real market in power. One of the things we emphasized was the importance of demand-side bidding, where wholesalers are able to interrupt power flow to some of their customers to try and keep prices down. We had a client in Ohio that took demand-side bidding very seriously. In fact, they're having customers save money by agreeing to undergo voluntary power interruptions in certain circumstances. There are gadgets available that allow individual users to figure out what appliances they want to keep running at different price levels. Customers can decide, "If the price gets up above a certain place, cut off lower-priority uses-air conditioners, hot water heaters, etc." If you do that even 15 minutes an hour, you can really cut peak demand.

The main problem in electric power is that there's almost no capability of interrupting demand in a selective way below the substation level. If you're in an elevator, if you left the porch light on in the daytime, if you've got a toaster running-those are all the same priority in terms of getting electricity in the current system. There's no way to pick and choose which gets cut off when demand surges, prices spike, and supply gets tight.

Both government and investor-based utilities have this huge supply-side bias: They provide whatever electric power people want all the time at a single, constant price. The reality is that the cost to produce and consume electricity fluctuates all the time because of changes in supply and demand and other conditions. It's like anything else, but it's hard to realize that without a visible market.

Reason: It's pretty easy to see how people will respond to observable fluctuations in price: I'll turn off my soothing water fountain at 25 cents a kilowatt, but I'll keep my iron lung going at $100 a kilowatt. But it's easier said than done to create a functioning market, isn't it?

California's famously botched restructuring of its power market underscores that. Not only did power suppliers help set up the market rules to begin with, they must have known that they would be bailed out if they could make a credible case that they couldn't supply power at the "deregulated" price. The state says sellers manipulated the market in all sorts of ways.

Smith: Sure, they're going to try to game it. That's why it's important to have the right set of rules in place. Nobody knows where exactly demand is going to come out, and sellers have an interest in trying to make that price come out as high as possible.

But the main problem is that inability to interrupt demand. You're talking about an industry in which the way they think about their problem and the way the regulators think about the problem is that all demand has to be served all the time. No one should ever lose their lights, and a fair price is a constant price over time. You always meet all demand. Well, it's impossible. You can't always meet all demand. You can't meet it in storms. You can't meet it when supplies are tight.

A big barrier to change is the local electric wires, which are franchise monopolies. For nearly 100 years, companies have been tying in the sale of energy with the wires. There's no reason the provider of the wires has to be the provider of the energy. Do you remember when Ma Bell wouldn't let you connect any telephone unless she produced it? They argued that they had to protect the "integrity" of the network: We just can't let anyone go in and connect whatever they want! It's silly. Why would anyone produce a telephone that wasn't compatible with the system?

That's all changed for phone service providers, but not for companies in the electric power industry. They're saying, "Why should we give access to our wires to alternative energy providers, especially ones who want to put in an interrupt device?"

What we need is a system where entrepreneurial types can come in and compete and try out different things, including the demand-interrupt system. Some will lose money and go broke. Some will hit it big. That's what's happening in telephones, and it's not happening in electric power. It won't happen until those barriers are removed.

Reason: What are other areas where experimental economics is playing a role?

Smith: We're doing work on creating a market for the exchange of landing and takeoff slots at airports. In normal circumstances, those rights have been fully allocated among the airlines at a given airport. But let's say a bad weather front moves in, so there's a ground delay. They've been doing maybe 60 landings and takeoffs per hour, but now they've got to reduce that to 30. What airports tend to do is just stretch out the existing schedule, which leads to cancellations and other problems. What you need is a market mechanism so that the flights that have higher priority get out. What would be a higher priority? Bigger planes, probably, but also full planes and planes with a lot of passengers who have connecting flights.

Suppose we're talking about planes leaving LaGuardia in New York. If a plane's going to Los Angeles, it's probably the final destination for a lot of the passengers. Planes going to Chicago or Dallas probably have a lot passengers who are catching connecting flights. Maybe those flights should have a higher takeoff priority in bad weather. In any case, you need a market mechanism where the airlines can compensate one another-and their passengers-to cancel their flights and trade takeoff slots.

Such a system doesn't exist now. First, the airlines have to be convinced that's the way to go. Then the Federal Aviation Administration has to cooperate. And you really need Congress to approve this, since it gave the original allocation of slots. The danger is that Congress will say, "Wait a minute, we don't like this because they're buying and selling these slots. We gave them to you, and now they're making money by reselling them."

Another area for experimental economics has to with NASA. We worked on the Cassini mission [which in 1997 sent 800 pounds of scientific instruments on a small spacecraft to Saturn to conduct experiments]. We used a trading system to allocate the resources that each separate experiment got to use on board.

Each experiment used three basic elements: energy, mass, and volume. The idea was to come up with the most efficient use of these three resources. We allocated a set amount for each resource. Participants were given tokens that were essentially money that they could trade among themselves. When the bidding started, the price of mass started out very high relative to volume and energy. Then people started to conserve it and, by the end, it collapsed. The price of mass collapsed!

That was the first space mission that came in without a big cost overrun. But they never did that sort of market allocation again. Why? Because there's lot of people that like things the way they are. They can run the current system and they don't care about waste. NASA's space station is now about $5 billion over budget. We've proposed selling enough space on that station to earn $5 billion. I don't know whether there's a market for that, but why not take a look at it?

We met with someone in the White House and there was some interest in it, but it takes a political entrepreneur to change that sort of thing, and it's very risky. If it doesn't work, you're going to get all the blame. If it does work, then everybody's going to claim to have been behind it.

Reason: You started out life as a socialist but now call yourself a libertarian. What do you mean by that?

Smith: For me, libertarianism is tied to a certain set of recognitions: that all organizations have the problem of decentralized information, that decentralized mechanisms are the best way to organize that information to produce good outcomes, and that the best results come when the individual is free to make his or her own tradeoffs while aggregating information. That's true whether we're talking about politics or economics or even social interaction. The best systems maximize the freedom of the individual, subject to the constraint of others in the system.

I was born and grew up in Wichita, Kansas. My parents were socialists and our friends were socialists. We were supporters of the Socialist Party. My mother's first vote when she was 21 was cast for Eugene V. Debs, when he was in jail for opposing the First World War. My mother's father was an engineer on the Missouri Pacific Railroad. He was a great lover of Debs, who had organized the railroad workers. My mother ran for state treasurer on the Socialist Party ticket in Kansas more times than I can count. My first vote was cast for [Socialist] Norman Thomas in 1948, when I was 21. The two votes that I've felt the most comfortable about casting were for Norman Thomas in 1948 and [Libertarian Party candidate] Ed Clark in 1980.

Reason: What happened in between?

Smith: My socialist tendencies were starting to fade as I learned more about economics, first at the University of Kansas and then at Harvard. Then I began teaching at Purdue in 1955 and starting doing experiments in 1956. That really changed completely the way I thought about markets.

At Harvard I had been taught by Ed Chamberlain, the author of The Theory of Monopolistic Competition. He had a little classroom demonstration he did the first day of his class. It was designed to show that competition was not in fact workable.

In the fall of 1955, I was teaching principles of economics at Purdue. One night I woke up and I got to thinking about Ed Chamberlain's experiment. If you wanted to show that markets don't work, I thought, you ought to give them a fairer shot than he did. I thought I'd find out how they trade on the New York Stock Exchange, because if there's a competitive market anywhere, that ought to be it. I got a book on the stock market that contained all the details on how the trading took place.

The following spring, I conducted my first experiment, which lasted about six minutes. I offered no real payoffs. I just told students to think of themselves as making money-the difference between the value and price if you're a buyer and the difference between price and the cost if you're the seller. It converged on a competitive equilibrium. I repeated it and the same thing happened.

I thought there must be something wrong with the experiment. How can this be? There's not complete information, and at that time we all knew you needed that for efficient markets. Every semester after that, I'd do experiments with more and more students, and I'd change some of the parameters.

When I gave talks away from Purdue about what I was up to, I could see there were a lot of people who questioned whether this was even economics. "Why would anyone do this?" they'd say. You certainly couldn't make a living doing experimental economics. You had to do the sort of work that would get you promoted. That's when I learned something important. In economics every paper begins with a previous paper, not with a problem of the world. No one questions your right to do something if it's already been done. I did my first experiment January 1956, and the first paper about it was published in 1962.

These days, experimental economics is a growing subfield with international scope. Even Harvard and Yale have some people doing it. They've been very late to get on board, of course. If it's at Harvard and Yale, you've got to wonder if maybe it isn't time to get out, if it isn't over.

Wine Fine

mwlynch@reason.com (Michael W. Lynch) — Thu, 01 Aug 2002 00:00:00 EDT

A fed-up consumer calls it "socialism." A fed-up retailer calls it "state-sponsored gouging." They're referring to an Ohio law that requires vintners, distributors, and retailers to jack up the price of a bottle of wine a total of 135 percent before it hits the shelf. As a result, wine costs up to 50 percent more in Ohio than in other states, translating into $100 million a year that Buckeye State residents could spend on something else.

"I don't know how this could possibly benefit the public," Tom Jackson, president and chief executive officer of the Ohio Grocers Association, told the Cleveland Plain Dealer, which documented the stupidity of the state's wine control regime in early March. The paper claimed Ohio is the worst among 17 states that regulate the price at which wine is sold.

It may be the worst, but all 50 states have a strictly enforced three-tier regime to regulate the sale of alcohol. Vintners must sell to wholesalers, wholesalers to retailers, and retailers to the public. Twenty states allow vintners to sell directly to consumers, through either mail order or the Internet. Not one state allows small vintners to bypass the first middlemen and sell directly to retailers.

The protectionist regimes are generally safe in state legislatures, but they are coming under increasing attack through the courts and the Internet. The Institute for Justice, a Washington, D.C.-based nonprofit legal group, is challenging a New York law that prevents direct wine sales from other states. Wine lovers can also take matters into their own hands. In Ohio, for example, wine enthusiasts buy direct from out-of-state stores. The law requires them to register these purchases and pay the markup. But as The Plain Dealer notes, "many bypass that step."

Road Show

mwlynch@reason.com (Michael W. Lynch) — Thu, 01 Aug 2002 00:00:00 EDT

The recent African poverty safari of U2 frontman Bono and Treasury Secretary Paul O'Neill taught the world many things. Chief among the lessons: Publicity stunts still work.

True, the Odd Couple comparisons, all that starched shirt vs. blue wrap-around sunglasses stuff, quickly grew tired. But the stunt had its uses, including starting a discussion about the efficacy of foreign aid, the causes of poverty in Africa, and the effect American domestic policy has on the poor abroad.

Many people believe that a simple recipe produces wealth. Take a bit of capital, add labor, and stir. Bake at 350 degrees for a year or so, and out pops an increase in goods people both want and are able to consume. In this view, poor countries merely need a supply of missing ingredients, usually the capital, which can be provided by wealthy countries with dough to burn. The favorite example is the Marshall Plan. "You still find people my parents' age in Europe who talk about the Marshall Plan," Bono told Time. "Can we do something that people will be proud of in generations?"

The Marshall Plan, however, is more a model of successful public relations than of successful economic aid. Tyler Cowen, an economist at George Mason University, has studied the postwar economic performance of the plan's purported beneficiaries and found a tenuous relationship between aid and economic growth. Some countries, such as Germany, France, and Belgium, were already growing before the aid arrived. Others, such as Austria, only started growing only after it was trickling off.

The Marshall Plan stunted growth in important ways. For every dollar in U.S. aid that a European government received, it had to spend a dollar of its own currency. This sucked money out of the private sector and increased state planning and control over the economy. Other aid conditions distorted trade and punished exporters. In at least one country, Greece, the aid increased corruption. "The so-called dollar shortage was not the critical problem facing Europe at the time," writes Cowen. "Bad economic policy was the true culprit."

The Marshall Plan was a screaming success, however, when compared to development aid to African countries. In Africa as in Europe, the cause of economic problems is bad government policy. For evidence, examine World Bank insider William Easterly's masterful book, The Elusive Quest for Growth (2001).

Easterly has both an exceptional understanding of academic theory and the scars from trying to apply it over many years. The leading lights of the development aid industry, he reports, don't know much about economic growth. To this day, they use a Soviet-inspired growth model that was acknowledged as useless by one of its own developers way back in 1957. (Its chief virtue is that it always tells them to spend more money.) More to the point, they systematically refuse to accept what they do know: that what's missing in developing countries is not something that wealthy donors can easily bestow, such as a wad of cash or a boatload of high-tech equipment. What's missing are the institutions that make economic activity possible.

Easterly stresses that structural incentives matter. When people can benefit from investing in the future, they do so. Where investment is likely to be destroyed by corrupt governments, they don't.

One might think that this would be a nearly universally accepted view, especially in a profession supposedly based on the insight that people rationally pursue their self-interest. Certainly, it isn't a fresh idea. The recently deceased economist Peter Bauer trumpeted it for years. Bauer spent the early years of his professional life in Malaysia and West Africa, where he saw both the entrepreneurial productivity of local farmers and the deadening effects of government policies.

"Where people's abilities, motivations and social and political institutions are favorable, material progress will occur," Bauer wrote in 1972. "Where these basic determinants are unfavorable, development will not occur, even with aid."

Yet this hasn't been the standard view among development economists, who practice a discipline that owes its very existence to the aid it champions. "We must recognize that there are few, if any, truly universal principles or 'laws' of economics governing economic relationships that are immutable at all times and in all places," the economist Michael P. Todaro writes in the 1997 textbook Economic Development.

In this view, the key is government planning: "A larger government role and some degree of coordinated economic decision making directed toward transforming the economy are usually viewed as essential components of development economics."

Which brings us back to the starting point of both Easterly's book and Bono and O'Neill's tour: Ghana, where the fruits of "coordinated economic decision making" are on dismal display. Easterly opens The Elusive Quest for Growth in 1957, the year the country gained independence from Britain, a separation that left the former colony with new roads, health clinics, and schools.

At the time, Ghana produced two-thirds of the world's cocoa. It also had many development economists to help it grow, and both the Soviet Union and the United States were eager to kick in cash and advice. Ghana's new leader used foreign money to construct a giant dam, a project that was supposed to provide power for an aluminum plant even as it created a domestic fishing industry and brought transportation and irrigation to the farmers. In total, aid enthusiasts figured it would power growth of up to 7 percent per year.

Only the aluminum plant came through. Writes Easterly, "The saddest part was that the Volta River project was the most successful investment project in Ghanaian history."

Ghana's new government was far more gifted at destroying wealth. Successive leaders regarded cocoa producers not as successful businesses to be nurtured but as a bank to be robbed. The government forced the farmers to sell to the state at fixed rates -- at one point a mere 6 percent of the world price.

Officials then sold the cocoa on the world market and pocketed the difference. The farmers soon quit producing, and cocoa exports dropped from 19 percent of gross domestic product to 3 percent. Today, Ghana remains poor.

Undeveloped countries are plagued with leaders who pursue their narrow interests at the expense of those who live in the territory they control. Consider one current crisis, a famine in southern Africa produced by bad weather and terrible public policy. The Malawi government, whose citizens are currently starving, actually sold 167,000 tons of emergency grain last year but can't account for the money. The agricultural sector in Zimbabwe, which typically kicks off surplus food, was decimated when President Robert Mugabe, facing a difficult election, played the race card and redistributed white-owned farms to blacks. Food production dropped 40 percent.

None of this is to say that the African leaders whom Bono and O'Neill encountered don't have legitimate beefs with U.S. and European policy. The recently passed farm subsidy bill will depress world prices of grains, soybeans, and cotton. That hits Africa's agriculture-based economies particularly hard.

Meanwhile, Ghana's finance minister points out that his country's farmers can sell all the raw cocoa they want to Europe. But if they produce cocoa butter or chocolate, they are hit with high tariffs.

The World Bank estimates that the protectionist farm policies of the developed world cost African farmers $2.5 billion a year. The U.S. lowered trade barriers to African producers last year with the African Growth and Opportunity Act. But some domestic interests, such as textile producers, are still protected.

Yet contrary to Bono and many devotees of aid, it's not the developed West that's doing the most to frustrate trade in Africa. Most African countries maintain much higher tariffs against each other than the developed world does against them. If African leaders are serious about ending poverty, they ought to get their own policy houses in order by lowering barriers to trade -- and forming governments that protect wealth rather than confiscate it.

Data

mwlynch@reason.com (Michael W. Lynch) — Thu, 01 Aug 2002 00:00:00 EDT

That housing prices have held up in the midst of the stock market downturn is considered a blessing by many economists -- and by the nearly seven in 10 families that own their homes. But it's a cause of concern for local pols and academics who worry for a living -- and seek federal subsidies as a solution for every problem.

In May, the U.S. Conference of Mayors descended upon Washington, D.C., in an effort to call attention to a purported housing crisis. From 1991 to 2001, the mayors fretted, household income increased by 45 percent while the price of homes jumped 52 percent. "We have to be able to answer the question, where are our children going to be able to live?" Nicolas Retsinas, head of Harvard's Joint Center for Housing Studies, told USA Today.

If the mayors get their way, those kids will be living in federally subsidized housing. Yet no crisis exists. Over the same decade that housing allegedly became less affordable, homeownership rates increased in every region of the country.

[Ran with graph, "A Home of One's Own," showing the percentage of households owning a home, 4th quarter of each year from 1992-2001]

Political Economy

mwlynch@reason.com (Michael W. Lynch) — Thu, 18 Jul 2002 00:00:00 EDT

President George W. Bush is calling for a corporate reform bill that, among other things, would double the sentences of corporate officers found guilty of lying about the conditions of their companies. Some of the most aggressive members of D.C.'s press corps ought to be thankful their coverage of the corporate collapses isn't held to the same standard.

"The last time we faced a hangover like this one, the president didn't just talk, he acted," writes Newsweek columnist Jonathan Alter. "In 1934 Franklin D. Roosevelt created something called the Securities and Exchange Commission to regulate Wall Street." Alter went on to transcribe DNC's talking points, dutifully copied by The Wall Street Journal's house liberal, Al Hunt, and NBC's Tim Russert, among others, noting that current SEC Commissioner Harvey Pitt was unfit for the job because he "came in talking about a 'kinder, gentler SEC.'"

That Alter would compare 2002 to 1934 indicates that he's about as grounded in reality as a WorldCom financial statement. The stock market is not the economy. And the economy of 2002 is not the economy of 1934.

In 1934, one in five Americans were unemployed -- and one in three for those who didn't work on farms. The real economy had contracted by 37 percent from 1929 to 1934. Although it's still disputed, many believe that it wasn't the stock market crash of 1929 that caused the Depression, but the government's response to it. A restrictive monetary policy caused banks to fail and businesses, starved for money, tanked in massive numbers.

Today, unemployment stands at 5.9 percent. There's talk of a double-dip recession, but even the first dip is now being disputed. We've only actually experienced one quarter of negative economic growth. The stock market hasn't crashed, as it did in 1929 or even 1987, when it collapsed 22 percent in a single day. Sectors that were blown up by investors who didn't much care about such things as customers, revenues, or profits have deflated over many months. The tech-heavy Nasdaq appears to be tracking the Dow of the Depression. The S&P 500, an index of 500 large companies, is way down.

But, as Newsweek's Wall Street reporter Allan Sloan notes, the pain is selective. Nearly half of the S&P's stocks were in the black for the year as of June 30. Even at this level, the S&P is very likely overvalued. Since 1929, the price-to-earning ratio -- the amount of money it costs to buy a dollar of profits -- of the S&P has ranged from under 6 to nearly 30. Today it stands at roughly 21. No one can say what the proper number is, but right now it's still on the historical high side. Over the past two decades, the price of stock has increased at three times the rate of corporate earnings. That can't, and won't, go on forever.

D.C.'s professional weather vanes have been tacking back and forth for almost a year now in search of someone to blame for the burst. No one likes to lose money, and when people do, even when it's their own fault, they go in search of scapegoats. By now we've completed the cycle: greedy executives, dull analysts, lap-dog accountants, conflicted and underfunded regulators, arriving back at executives. Perhaps, just perhaps, investors -- caught up in a bit of greed themselves -- had something to do with it as well.

Enron's collapse was predicted long before it happened by analysts and even denizens of Internet chat groups who happened to read its financial statements carefully. WorldCom finally collapsed after it got caught claiming $3.8 billion in expenses as revenues. But by that point, its stock had already dropped 99 percent, from a high of $61.47 in June of 1999 to $.83 a share. That news simply took it from $.83 to zip. The lying may have been a result of the company's collapse, not its cause.

Watching the self-important political press cover this business story offers no lack of entertainment. On Wednesday, CNN anchor Leon Harris actually asked the network's Wall Street reporter how the market could react to Greenspan's speech, as it wasn't being covered live on CNN.

The press in general, and the D.C. press in particular, is not only ignorant but often mendacious. For nearly a year, many members of the press have been treating the business story as a political story. This is especially true of those like Alter who want to stick Bush and Republicans with the business scandal. The attack has been multi-pronged, focusing on Bush's Enron connections, Bush's past business dealings, and SEC Commissioner Harvey Pitt.

Pitt, whose job it is to regulate financial markets, didn't actually call for a kinder, gentler SEC, even though Alter, Hunt, Russert, and many others reported it that way. The article that started it all was an editorial in The Washington Post that claimed, "Mr. Pitt told an audience of auditors that the SEC would henceforth be 'a kinder and gentler place for accountants.'"

But as Pitt told Russert, who admitted that he hadn't bothered to read Pitt's speech, he said no such thing. He said the SEC had not always been such a "kinder and gentler" place for accountants. That's a big difference. He also told them that while he wanted to work with them on modernizing accounting practices, "practices that reflect venality and disservice to public investors, however, will not be tolerated."

As I said at the outset, good thing such standards don't apply to the partisan, I mean, political press.

Incriminating Documents

mwlynch@reason.com (Michael W. Lynch) — Tue, 02 Jul 2002 00:00:00 EDT

Never put it in writing is standard advice for shady operators. Yet sometimes it's the combination of what's written, and what's not, that trips people up. Martha Stewart, embroiled in an insider-trading investigation that has already seen her CEO buddy of ImClone Systems Inc. cuffed, stuffed, and released on bail, has a story and she's sticking to it. A stop-loss order at $60, not insider information, triggered the sale of her ImClone stock a day before word of an adverse FDA ruling caused it to collapse. To back it up, her broker, who may face charges of insider trading, has produced a piece of paper with "$60" on it, but no date. Investigators note that this note falls way short of being exculpatory, especially considering other, harder evidence. The broker's assistant says that there was never such an order, for example, and adds that his boss told him to lie and say there was.

Speaking of undated paper, investigators are looking into whether that giant fraud factory known as Enron illegally manipulated the California electricity market in 2000 and 2001. Here, too, written evidence is playing a role. In a memo dated December 6, 2000, outside attorneys for Enron prepared a memo that explained the firm's strategies of arbitrage and some outright fraud that were making it money in California. "In order to short the ancillary services," the lawyers wrote of an Enron strategy called "Get Shorty," "it's necessary to submit false information that purport to identify the sources of the ancillary services." In other words, traders have to lie to regulators. Sensing the danger that such a frank memo might find its way into the wrong hands, Enron enlisted lawyers from two other firms to follow up with another memo, this one undated, that is an obvious effort at spinning the unspinnable.

There's also the role documents played in the unfortunate fate of one-time accounting giant Arthur Andersen. At the outset of the trial, legal eagles thought that the firm's last-minute shredding operation that would be the firm's downfall. The firm's fate, however, ended up turning on the removal on an attorney's name from a memo discussing Enron.

With securities markets approaching 9/11 lows, the consensus is that such shenanigans have caused investors to lose trust in American business writ large, if not Martha Stewart's recipes writ small. That may or may not be the case. But businessmen, and women, can find solace in knowing that the American public's confidence in them has not been shaken too badly by recent events.

According to a recent Washington Post-ABC News poll, the same proportion of Americans expressed a "great deal" or "quite a lot of confidence" in big business in 2002 as in 1991.

The bad news? It's only 23 percent of the public.

Green Grants

mwlynch@reason.com (Michael W. Lynch) — Mon, 01 Jul 2002 00:00:00 EDT

The Environmental Protection Agency (EPA) is legendary for tangling up businesses in red tape. Yet when it comes to passing out millions in taxpayer money, it exhibits a casual, devil-may-care attitude. In 1999 the agency passed out $1.3 billion of its $7.5 billion budget in grants and contracts, often in complete disregard of the federal government's competitive bidding process.

A May 2001 report from the EPA's Office of the Inspector General (OIG) discovered that the "EPA often awards non-competitive assistance agreements to recipients based on the unsupported belief that those recipients were the only entities capable of performing the work." That's bureaucratese for, "It gave the money to friends." To justify the awards, the envirocrats retreat to the boilerplate retort that recipients were "uniquely qualified." In March 2002 the OIG returned to find that sweetheart deals accounted for "1 out of every 5 dollars of the $1 billion" the EPA awarded in 1999 and 2000.

Suspicious that the agency was using taxpayer money to fund groups that were "uniquely qualified" to lobby for more money for the EPA, the Landmark Legal Foundation took the agency to court in September 2000 to force it to disclose grant recipients. Some highlights of the $2 billion awarded noncompetitively since 1993 included $47,000 to help the Seattle Mariners start a recycling program at their new $500 million ballpark, $1,500 for academics to design a solid waste board game called the "Can Man Game," and $379 million to senior citizen groups to recruit and pay senior citizens to work for the EPA. The agency even funds its ostensible enemies, providing $2 million in grants to the National Association of Homebuilders and $4.9 million to the Natural Resources Defense Council, both of which have sued the agency in the past.

The EPA claims to be on the road to reform. "The agency has become much more sensitive of the need for competition in grants," Howard Corcoran, head of the EPA grants office, told the Associated Press.

Taxed Happy

mwlynch@reason.com (Michael W. Lynch) — Mon, 01 Jul 2002 00:00:00 EDT

Life in Connecticut got a whole lot happier in April. More joy has descended on New York, and it will soon spread to Maryland, Utah, and Nebraska. No, nobody's slipping Prozac into the water supply. This bliss is sponsored by state legislators, some of whom have just jacked up the tax on a pack of smokes and others of whom are about to do the same. According to a March study by two Massachusetts Institute of Technology (MIT) economists, the 61-cent-per-pack bump should decrease unhappiness among Connecticut's potential smokers by nearly 10 percent.

Economists like to play the role of academic bad boys, making proposals that spark controversy and reveal shocking truths. If you want to minimize traffic accidents, according to a typical economist's reasoning, you shouldn't look to the latest in bumper and airbag technology. By reducing the cost of accidents, these innovations only encourage reckless driving. Instead, install a knife pointing outward from the center of every steering wheel. Before long, traffic cops would have to start enforcing the minimum speed requirement.

You can decide for yourself whether examples like that reveal the power of economic thinking, its estrangement from the reality of daily life, or both. But first, you may want to take a look at the analysis that predicts an outbreak of happiness in my New Haven neighborhood. (The study is available online at econ-www.mit.edu/faculty/gruberj/papers.htm.)

One might expect smokers to dislike a cigarette tax hike, as they'll end up either shelling out more cash or giving up smoking to avoid the hit. One economic theory holds that this is precisely the case. Smokers, even if addicted, figure the pleasure derived from smoking today is more desirable than the beneficial future health effects of giving up the coffin nails.

Another theory, however, says that even if smokers are happy in the present with cigarettes in their mouths, they'd be even happier in future years if they were tobacco-free. Economists would say that smokers' preferences are characterized by "time inconsistency." In the future, they'd like to be nonsmokers. But in the present, they prefer to smoke.

The idea is more easily understood in financial terms. Offer a person the choice between $100 today or $150 tomorrow, and he may refuse to wait the extra day for the extra $50. But give him a choice of $100 25 days out or $150 on the 26th day, and the same person may happily wait the extra day to grab the $150. If people take the long view, they'll be happier waiting the day for the extra dough. But their short-term behavior prevents them from achieving the highest levels of happiness. From the outside, it appears to be rational for people to restrict their freedom in the short term in order to maximize happiness days, months, or years down the road.

The MIT paper makes this argument, positing that there are "self-control benefits of taxation." The authors test this hypothesis with survey data on the self-reported happiness of Americans and Canadians. The Americans were first interviewed in 1973, the Canadians in 1985. In the U.S., the study finds, unhappiness among potential smokers (the data didn't allow assessment of actual smokers, so the economists had to profile) declines by 0.156 percentage point for every penny increase in excise tax.

This study is quite innovative. Traditionally, economists have restricted their inquiries to the consequences of policies on human action, not human happiness. They have built models and analyzed the world based on many assumptions, one of which is that once a person determines what she wants, she will pursue it rationally. The desirability of her goal is generally regarded as outside the purview of the profession. Who knows why someone watches the Oxygen channel or attends church on Wednesday night? The very fact that someone does these things is taken to mean that it adds to her happiness.

"Human action is necessarily always rational," wrote the seminal free market economist Ludwig von Mises, who included in that category acts, such as smoking, that detract from your health but enhance your life in other ways. "The ultimate end of action is always the satisfaction of some desires of the acting man. Nobody is in a position to decree what should make a fellow man happier."

It is dangerous for economists to expand into measuring happiness among "potential smokers" and other groups, given the profession's penchant for palling around with legislators and bureaucrats. The government's job is to provide the framework in which free individuals can pursue their own happiness. It's a giant step backward when government tries to restrict our freedom in order to increase the happiness of a subset of the population -- in this case, smokers who want to quit sometime and need the financial push.

Not that the legislators' goal would be to make smokers happy. Smokers are being hit because the legislators want more money and smokers are an unpopular group whom they can tax. That it may increase their happiness is simply another argument legislators will deploy in their effort to gather more revenue.

Just consider what one of the study's authors, Jonathan Gruber, told The New York Times. Gruber is a former Treasury Department official in the Clinton administration who was embarrassed to tell other bureaucrats that adults should not be coerced into not smoking, so long as they are hurting only themselves. Now that he's back in academia, he has produced a paper that arms his former colleagues with one more argument to limit freedom.

"We all know smokers who really want to quit, but there's nothing in the private market that can force them to quit," Gruber told the Times. "The government can provide that."

Actually, the government can't force them to quit either. And free individuals do indeed come up with mechanisms to align their short- and long-term happiness. Automatic savings plans, from Christmas club accounts to prearranged transfers from checking accounts, are examples of dealing with time inconsistency in the financial arena. Flat-fee health club memberships, which may increase the average cost of exercising even as they reduce the marginal cost to only time and transportation, are an example of individuals choosing to bind themselves in the short term to achieve long-term health ends.

Smokers bind themselves by announcing to friends and loved ones that they are quitting, which raises the stakes of lighting up. If time inconsistency were a serious problem for individuals, they could tax themselves for smoking by paying a fine to a worthy cause if they slipped up.

The idea of legislators helping people deal with self-control problems is laughable. But those chuckles will turn to tears when one considers those "self-control benefits of taxation," especially when budgets get tight, which is just about every year.

Commuters' happiness may correlate with staying home, for instance, so why not increase gas taxes to $10 a gallon and improve their lives? I'm sure exercise correlates with happiness, so why not ding activities that grow couch potatoes? Put a big tax on daytime movies, and force people to pay for time in coffee shops during prime workout hours.

If those possibilities seem ridiculous, consider this one. Suppose you want to eat healthy but lack the self-control to pass up a bag of Fritos for a banana. Why not put special taxes on "unhealthy food"? This is actually a goal of two national pressure groups that claim to be making progress in state capitals.

The smoker, the driver, the couch potato, the junk food fan: Each, as Mises would predict, is maximizing his happiness. Alas, they have neglected to consider the happiness of the tax-hiking state legislator and the activist toiling to coerce the rest of us into changing our lives.

Data: Can't Give It Away

mwlynch@reason.com (Michael W. Lynch) — Mon, 01 Jul 2002 00:00:00 EDT

The decentralized U.S. approach to health care financing and provision -- a mix of public and private payers and prurier"> -- irks many who would prefer universal taxpayer-financed insurance. In 2000, 38.7 million Americans were not covered, with one in eight of the uninsured under age 18.

But an Urban Institute study released in March indicates that lack of access to taxpayer-funded health insurance isn't the problem. In 1999, three out of four uninsured kids in families of all income levels were eligible for either Medicaid, the federal-state insurance program, or the State Children's Health Insurance Program, the product of the 1997 Balanced Budget Act. And of the 6.5 million uninsured low-income children in 1999, 85 percent were eligible for taxpayer-financed insurance. All their parents had to do was sign up. The study's authors note, "Lack of eligibility for public health insurance is no longer the reason for uninsurance for most children; therefore there must be other barriers." And indeed there are: Parents of one in five of the eligible but uninsured children said they neither want nor need the programs.

Railroading Congress

mwlynch@reason.com (Michael W. Lynch) — Thu, 27 Jun 2002 00:00:00 EDT

"No one wants to see Amtrak die," U.S. Secretary of Transportation Norman Mineta declared Tuesday. "We're very, very close to coming to a solution to help Amtrak."

That statement reveals a bureaucrat very out of touch with America. Plenty of people want to see Amtrak die, even if they want to see some of its routes survive. And forget about Mineta, Congress, or anyone else actually solving Amtrak's myriad problems of low ridership, deteriorating physical plant, uneven service, and an unbroken record of annual losses. The best he'll come up with is a way to take $200 million more from taxpayers and hand it to the railroad so that it can pay its bills until it gets its next big subsidy in October.

Mineta's save-Amtrak-at-any-cost mentality is exactly what David Gunn, the recently installed chief at Amtrak, is counting on. Shortly after taking the controls, Gunn discovered $160 million in covered-up losses. The railroad's lenders are refusing to give it any more money. Last year, it had to mortgage parts of New York's Pennsylvania Station for $300 million to cover operating losses. Out of money and with nothing left to pawn, Gunn says he'll be forced to shut Amtrak down if Congress or the Bush administration don't come up with $200 million before members head home for July 4^thcook outs.

Gunn promises to make the shutdown hurt. The Northeast Corridor from D.C. to New York to Boston is heavily traveled. Amtrak carries more people from D.C. to New York each day than all of the airlines combined. Idle trains mean congested airports and clogged highways, especially at the numerous tollbooths that make I-95 so special.

Gunn is intent on maximizing the pain in other ways. Shutting down Amtrak means shutting down the rails it owns and manages. This will halt service on MARC's Penn line, which runs from Baltimore to Washington and transports many a congressional staffer and federal bureaucrat to work. It'll shut down the Virginia Railway Express and hobble commuter systems in Philadelphia, New Jersey, New York, Boston, and Chicago.

Gunn can't be blamed for demanding action from Congress, which shares much of the blame for Amtrak's sorry state. Its members ask the impossible. They insist that Amtrak maintain a profitable national route structure, and they heap buckets of grief on any executive who tries to shut down routes. If Congress wants a national railroad, that means subsidizing it forever. Congress and members of the administration must acknowledge this. Fortunately for future taxpayers, we don't need a national railroad.

This being the case, Congress ought to thank Gunn for his candor and call his bluff by throwing the railroad into bankruptcy, a more effective version of a restructuring plan that Mineta himself proposed last week. Companies in bankruptcy don't disappear; either they operate while they reorganize or they sell their assets to companies that can put them to productive use. Liquidation is the ideal fate for Amtrak. Long-distance lines will be a thing of the past, unless some entrepreneur or a consortium of state governments figure there's a buck to be made offering land cruises. Amtrak loses money on 41 of its 43 routes. The largest dogs are horrendous. It loses $347 per passenger on the Sunset Limited, which runs from Orlando, Florida, through New Orleans en route to Los Angeles, and $292 per passenger on the Pennsylvanian, which runs from Philadelphia to Chicago.

But there's at least one population corridor -- D.C. to New York -- where private companies, or decently managed public rail lines, could operate in the black. Even Amtrak claims to make $17 a head on its flagship Acela Express route. Finding a private buyer of these assets, even while the government gives Amtrak the money or loan guarantees necessary to keep trains running while the deal is put together, is doable. And there are other assets that companies are eager to take over. Amtrak recently rebuffed a Virginia Railway Express offer to take over the expense of running some tracks in the capital area. Amtrak has said no to numerous offers from other organizations to take over East Coast routes.

Gunn dismisses these approaches. He ridicules the notion that anyone would want to purchase Amtrak's assets. And he refuses to cut any long-distance routes, figuring that would only make him more enemies on the Hill. That's a decision based on politics, not business. Such decision making has brought Amtrak to its current state, a $1-billion-a-year loser. And it's exactly the reason why many of us will be happy to see Amtrak die.

Free to Choose

mwlynch@reason.com (Michael W. Lynch) — Thu, 27 Jun 2002 00:00:00 EDT

In a long-awaited decision, the U.S. Supreme Court gave the green light to publicly funded school-choice programs, ruling that such programs don't violate the constitutional prohibition against state support of religion. "The only preference in this program is for low-income families, who receive greater assistance and have priority for admission," wrote the majority, paving the way for many more experiments in school choice in districts where public schools aren't getting the job done.

In a country that relies on publicly funded vouchers to help pay for higher education and pre-school, the only question people will have decades from now is why First Amendment concerns were ever an issue. Few worry that the state is supporting religion when a college kid spends a Pell Grant at Georgetown or Notre Dame. And government granted child-care vouchers are spent at religiously run daycare centers and preschools with nary a second thought.

The issue of extending choice to low-income families will baffle as well. Most middle- and upper-income Americans already exercise school choice. Most typically, they exercise it when deciding where to purchase a home (just ask any real estate agent). They also exercise it by reaching into their pockets and paying for private schools when the government-run institutions don't meet their needs.

Few groups exercise it more than elected officials and public school teachers, who are in the best position to judge the quality of the schools. A 2000 survey of members of the U.S. House of Representatives found that 40 percent send or have sent their children to private schools; the figure for senators was nearly 50 percent. In Cleveland, where the teachers union banded with others to fight choice, 40 percent of public school teachers send their children to private schools. In Boston, 45 percent of public school teachers send their children to private schools; so do 36 percent of public school teachers in Chicago and Philadelphia.

For too long, the only parents lacking choice have been those whose incomes are too low to pay for private school and too low to make the higher house payments required in areas served by moderate- to high-quality public schools. Education advocates have addressed this in a variety of ways. Private scholarship programs, such as the Washington Scholarship Fund, raise private donations that they turn into tuition grants for low-income families. Similar programs are running in at least 44 cities. The Children's Scholarship Fund alone awards partial scholarships to 44,000 children.

Through decades of political work, people have been able to start limited public scholarship programs. By removing legal doubts about such programs, today's decision should lead to many more experiments modeled on those already underway. For example, more than 10,700 needy children are now attending private school in Milwaukee. Two out of three scholarship-supported students attend religious schools and so could have been expelled had the Supreme Court ruled against the Cleveland program. In Florida, students in chronically failing schools are eligible for public scholarships. That program is under judicial challenge, though the outcome now seems certain: The Florida Supreme Court had put its decision on hold, awaiting for guidance from the U.S. Supreme Court. Arizona and Illinois give taxpayers state tax credits of $500 for money donated to private scholarship organizations. These too could have been affected if today's ruling had been hostile. And there is of course the Cleveland program that provides scholarships of up to $2,250 for students to attend private schools. 4,400 students are currently using the scholarships, 96 percent of whom attend religious schools.

As important as clarifying the legal status of such programs, today's court decision also clarifies the real issue at stake: Money and control. Public schools control $347 billion a year in spending. This money supports 2.9 million teachers, 70 percent of whom pay dues to a union, and 2.14 million people who support the teachers. It also pays the mortgage for 133,000 school administrators, 55,000 school district administrators, and 384,000 people who support them. Combined, these forces constitute an education establishment that dreads sending control over the money to parents.

Yet school choice will not destroy public schools. Most people already enjoy a modicum of choice and most Americans therefore will not suddenly flee their schools. Where people have choice, consumers are in charge, and the schools, predictably, are higher quality. Publicly funded scholarships extend this control to low-income Americans. With money in hand, thousands of more people will be empowered to demand better performance from their public school, or take their business elsewhere. And after today, no one can argue that such a state of affairs is unconstitutional.

The education establishment understands this. That's why they've feared this day. Low-income parents understand it, because they live the reality. "School choice means that my children will no longer be ignored or taken for granted," says Roberta Kitchen who sends children to private schools in Cleveland with the help of the scholarship program. "If my children aren't getting the education they need, we have the power to choose something better. We can now vote with our feet."

And a majority of the U.S. Supreme Court understands this. That's all it takes to provide thousands of more Americans a shot at a better education and a better life

Derailing Amtrak

mwlynch@reason.com (Michael W. Lynch) — Tue, 25 Jun 2002 00:00:00 EDT

By tomorrow, Americans may have to hit the highway, board a bus, or settle on to a plane if they plan to take an intercity trip. Actually, that's what 997 out of 1,000 Americans already do. For them, the demise of Amtrak, our national passenger rail service, will take only a psychic toll: the knowledge that another government enterprise failed miserably.

But for those other three citizens--who are concentrated in the D.C.-New York power corridor--Amtrak's shut down is a real loss. And, thanks to a cause-as-much-pain as possible strategy by Amtrak's new head, David Gunn, the shutdown may well strand thousands of other rail commuters, as Amtrak clogs up New York's Pennsylvania station with idled trains and shuts down tracks that are also used by regional commuter railroads.

With nothing left to mortgage, and no more credit lines to draw down, Gunn threatens a complete shutdown of the system unless Congress, the president, or a big-hearted philanthropist comes up with $200 million immediately. In threatening to halt large segments of the East Coast rail network, Gunn shows that he's better at playing politics than at running a railroad. Instead of shutting down long-distance routes that lose hundreds of dollars per passenger and building up lines that people actually use, he's going to the brink with what's known as the Washington Monument strategy.

Congress and the president should call his bluff. Sunk costs are sunk, and the fact that we've wasted $25 billion on Amtrak since its creation three decades ago is no reason to keep sending it billions more. The railroad should be thrown into bankruptcy, where a federal judge and trustees could ensure that the routes people actually use stay open while the railroad sells off its assets to organizations and companies that may actually be able to run a business. Gunn is a declared foe of such privatization and shutting down any long-distance routes. He's ridiculed the notion that anyone would be willing to buy Amtrak's assets. Yet there are plenty of companies willing to attempt to succeed were Amtrak consistently fails. Politicians in Washington ought to give them a chance.

Flying Fat

mwlynch@reason.com (Michael W. Lynch) — Fri, 21 Jun 2002 00:00:00 EDT

Southwest Airlines recently demonstrated why it's one of the few profitable airlines: It puts its customers first. That's the motivation -- and the effect -- of Southwest's recent announcement that it will start systematically enforcing its 22-year-old policy of requiring passengers whose girth places them in more than one seat, to pay for the extra space.

Fat activists (yes, in a country where everyone's a victim-and every conceivable victim has a self-anointed professional advocate, there are such people) are blasting the policy. "It's just discriminatory and it's mean-spirited," Morgan Downey, executive director of the American Obesity Association complained to the Associated Press.

These activists ought to get back to complaining about the calories in a super-sized Big Mac combo meal-or passing out dieting tips-because their objections are unfair and utterly misguided.

I've suffered through an agonizing cross-country flight where my oversized neighbor took up his entire seat, plus a quarter of mine. Southwest's policy is fair and just. And unlike its quick turnarounds, low fares, and profitability, it's not even unique to the industry. (American, Continental, and Northwest quietly ask customers who overflow their seats to purchase extra space. Delta and United are fat friendly.)

"If you consume more than one seat, you will be charged for more than one seat," says Southwest spokesperson Beth Harbin.

But even that understates the extent to which the airline is willing to go to accommodate all of its passengers-including its large ones. News reports claim that fat folks have to pay double to fly. That's wrong. Under the policy, those who buy a discounted ticket, and as a frequent Southwest flier I can assure you those tickets are deeply discounted, can buy their second seat at the same low fare, even if they buy it one hour before boarding the flight. Full-fare customers will only have to pay the discounted child's fare for their second seat, as if that extra 100 pounds they have accumulated is the equivalent of a 30-pound two year old. So unless they take up three seats, passengers will never have to shell out double the full fare. Even better, in the event that the flight isn't full, Southwest will assume the expense and inconvenience of refunding the extra fare. Sounds more than fair to me.

"The policy is intended to promote the safety and comfort of all customers onboard and to ensure that no customers are deprived a portion of the space they have purchased," Southwest's policy states.

This is the core of the issue, and the reason the policy is not only fair, but will prove wildly popular now that its widely known. Fat activists act as if the an airline trip is akin to an all you can eat buffet spread, where everyone pays the same entrance fee and those who eat less subsidize those who pile up their plates. "You are buying passage from point A to point B," says Marilyn Wann, who wrote the book, FAT!So?. "You are not buying real estate."

She couldn't be more wrong. Passengers are paying for real estate, a well-defined seat bordered by two armrests that is barely sufficient to provide a tolerably comfortable flight. Overweight people have no right to eat off another person's plate in a restaurant and they have no general right to occupy part of the seat that another person has purchased on an airplane. That's why 90 percent of the complaints Southwest receives come from passengers such as myself, who have been denied the space they purchased on a flight because of an oversized neighbor.

An overweight woman sued Southwest for its policy two years ago, but a judge threw the case out of court. It's not even a subjective decision -- if a passenger requires that the armrest be raised and needs an extended seatbelt -- they should have to purchase the extra space.

It's not the fault of the person sitting in seat 3C that her neighbor in 3B is too large for his seat. To the extent that he consumes even a small portion of her seat, he ought to pay for it. Whether or not he gets an extra bag of peanuts, well that's between him and the flight attendant.

Calling it Quits

mwlynch@reason.com (Michael W. Lynch) — Thu, 20 Jun 2002 00:00:00 EDT

Minnesota Governor Jesse Ventura has finally succumbed to politics. When he announced that he didn't intend to run for reelection, he used the most tired, cliched politician's rhetoric imaginable: "I will always protect my family first," he told Minnesota Public Radio.

One could celebrate Ventura's exit from public life and call for more pols to follow his lead. After all, he's done a lot for America as a private citizen (and also as a Navy Seal, an example of non-political public service). Even during his four years in office, he's kept his show on the road with an interview in Playboy, appearances on Tim Russert's Meet the Press and David Letterman, and a tell-all book. He miffed Garrison Keillor (another important public service) and even found the time to moonlight, appearing in an episode of the soap opera The Young and the Restless, refereeing for wrestling, and providing commentary for an upstart, and now defunct, football league.

Ventura could be seen as a good-time governor, who, like stock pickers in the bull market, couldn't go wrong as long as the money kept rolling in. When times got tough, he didn't make tough choices on taxes and spending and work with the legislature to get them enacted. Instead he threw a fit (after the press reported that his son threw parties in the governor's mansion) and has now quit rather than develop a program and take it to the voters.

Ventura was elected in 1998 with 37 percent of the vote. He ran as a middle-of-the-road, common-sense libertarian, a remarkable jumble of contradictions. He mused openly about legalizing prostitution and drugs and explicitly announced "I'm a libertarian" to Jonathan Rauch in a Reason interview. "I've taken the libertarian exam and scored perfect on it."

There are plenty of things that exam didn't cover, however, such as government monopoly schools and public transit--both government expansions that Ventura championed. He discovered this omission at a Cato Institute-sponsored event in Minneapolis. "Isn't it the government's job to provide transportation?" he asked rhetorically, only to be met by a heckler saying "no."

"He then went on the air and said he wasn't a libertarian," says Minnesota state Libertarian Party chair Kevin Houston, who later adds, "If anything, he's a libertine."

Ventura did hew to a balanced-checkbook conservatism, the common-sense notion that says pay your bills with cash on the barrel, avoid credit card balances, and return any extra money to those who sent it. "The knee-jerk temptation is to either cut taxes immediately in permanent ways or make a commitment to new spending," Ventura wrote in a post-election op-ed. "Both are mistakes."

This wait-and-see approach to fiscal policy upset conservatives, who wanted tax cuts to take the money off the table, and liberals, who wanted to spend, spend, spend. His first year, his policy led to no taxpayer rebates. In the next two years taxpayers received rebates dubbed "Jesse checks." This year he faced a yawning deficit, and submitted a proposal that split the difference between tax increases and spending cuts. The legislature ignored him, enacted its own plan, and overrode his veto.

Ventura took hits for failing to take politics seriously and apply himself to the tasks of governing. "He was going to provide an alternative to the two major parties and carve out an identifiable position that he thought most people held, socially liberal or libertarian and fiscally prudent," notes Joseph Kunkel, a professor of political science at Minnesota State University at Mankato. "He really didn't help build a movement. His lack of political experience and interest in politics and the political process meant that he failed to build that third party position and represent it in a coherent way."

Ultimately that may be his legacy. "He really hasn't done anything," says Houston. "Usually when politicians get in office they build something or enact a policy that becomes their legacy. But Jesse hasn't really been a proactive governor. He's been more of a reactive governor, saying no." That alone makes him better than most.

Stink Bomb

mwlynch@reason.com (Michael W. Lynch) — Thu, 13 Jun 2002 00:00:00 EDT

"The concern we'd like to pursue is what's the substance of this," a congressional source told the Los Angeles Times after emerging Tuesday from an administration briefing on Jose Padilla, a.k.a. Abdullah al Muhajir, the alleged dirty bomber. "We're all for sticking bad guys in the hole, but you've got to have evidence."

But these days, the executive branch is making a neat end run around that tired old principle of "evidence for crimes." If it lacks such evidence -- or insists on keeping it secret -- the president can simply call a person an "enemy combatant" and ship him off to the custody of the armed forces, leaving the suspect with no counsel and no constitutional protections.

The United States has always prided itself on being governed by a written rule of law, not the arbitrary dictates of its momentary leaders. But the imperatives of the War on Terror are eroding that principle.

The dirty bomb story smelled bad from the outset. The FBI and CIA are under fire for lack of information-sharing, among other things. The president promised "pre-emptive action" during a speech at West Point on June 1. Worried talk of dirty bombs has filled the air for months. Presto, Attorney General John Ashcroft is live from Moscow announcing Padilla's custody shift from Justice to the Defense Department, and praising the FBI, CIA, and other federal agencies for their "close cooperation."

Still, elements of the press remained skeptical. Articles appeared questioning the suspicious timing. Democrats and civil libertarians frustrated with the highly selective release of information accused the administration of news-cycle management. But the truth turns out to be even worse: The administration's hand was forced because it was scheduled to have to justify itself before the courts.

If the administration had its way, we'd never have heard of Padilla and his alleged plans to construct a dirty bomb. It was only when it was threatened with having to present evidence of such a plan in court that the government squeezed those lemons into lemonade, took credit for thwarting, in Ashcroft's words, a "terrorist plot to attack the United States by exploding a radioactive 'dirty bomb,'" and pushed Padilla into the never-neverland of military custody.

This is where the rule of law comes in. Padilla is a U.S. citizen. The military tribunal system, at Bush's insistence, is for non-citizens. The administration points back to a 1942 U.S. Supreme Court decision under which U.S. citizens who were also German saboteurs were tried by a military court and executed two months after their capture. But the government is not interested in trying Padilla for a crime; it just wants to hold on to him indefinitely. Deputy Secretary of Defense Paul Wolfowitz told CBS's Early Show, "He's an enemy combatant and as in earlier wars, you can hold an enemy combatant until the end of the conflict." His two bosses -- Donald Rumsfeld and George W. Bush -- have made the same point. "Our interest, really, in this case, is not law enforcement," said Rumsfeld. "It is not punishment." Declared Bush, "This Padilla's a bad guy and he is where he needs to be -- detained."

Some congressional leaders support the administration. "If you aid and abet the enemy, whether you are a citizen or not, you’re not entitled to the rights of due process," says New York’s senior Senator Charles Schumer (D). But how do we know he aided and abetted the enemy? It’s due process -- the very thing the administration is denying Padilla -- that would determine this. This rights-denial is justified by our undeclared war on terrorism -- which is a declared war on anyone the government says is a terrorist.

The Padilla case is part of a pattern of government abuse of power. The government has detained hundreds of individuals in the aftermath of 9/11, holding some on violations of federal law, including immigration law, and others as material witnesses. The American Civil Liberties Union and other groups have sued under the Freedom of Information Act to get such basic information as the detainees' names and names of their counsel. A New Jersey state court ruled against the government's policy of secret arrest and detainment. Some of the cases are deeply troubling. Nabil Almarabh, a former Boston cab driver and terrorist suspect, was kept in solitary confinement without access to either a lawyer or a judge for eight months. If the Bush administration gets its way, Padilla could find himself in the same position for much, much longer.

Rolling Lad

mwlynch@reason.com (Michael W. Lynch) — Thu, 13 Jun 2002 00:00:00 EDT

"Nobody goes there anymore," said the great American philosopher Yogi Berra. "It's too crowded." A similar sentiment reigns in the world of print media: Nobody reads any more because there are just too many books, magazines, and Web sites. That's how the coming makeover of Rolling Stone is being reported. Rolling Stone pledges not only to decrease the length of its articles to keep the short-attention-span crowd happy, it boasts a new editor from the world of so-called Lad Mags, who promises to pack even more pictures into the mix.

At the very least, the shift will provide a new opportunity for gripes about the Dumbing of America. Perhaps uber-sophisticate Dave Itzkoff, fresh off a stint at Maxim and a coming-of-age tale about his time at the hottest lad mag of them all, will get a job at the revamped Rolling Stone, thereby setting the stage for his next unconvincing journalistic confession.

Dangers lurk when one tries to become something one is not, as Mariah Carey's film debut in Glitter and Ivy League academic Cornell West's hip-hop career illustrate all too well. Closer to home, Penthouse, once a relatively sedate if unabashed "Magazine of Sex, Politics, and Protest," started its spiral into bankruptcy when it decided to go down market and introduce the hard-core spreads that got it evicted from newsstands. Rolling Stone, famous for its lengthy profiles, interviews, and investigative pieces, may well drown in the shallower waters to which it is swimming.

I'll miss the old version, but that might just be the lament of an old fogey who has time to read 7,000-word features while gleaning a bit of info on today's acts while my baby girl sits glued to her Baby Mozart DVD.

Secret Agent Scam

mwlynch@reason.com (Michael W. Lynch) — Thu, 06 Jun 2002 00:00:00 EDT

After the 9/11 attacks it seemed, well, unseemly to play the blame game. It was clearly a massive government failure. But it's just as clear that if anyone could have thwarted the attack, they would have.

When attention finally turned to U.S. security and law enforcement agencies, they did what comes natural: They shifted the blame. The FBI blamed the CIA. The CIA shot back at the FBI. That got them nowhere; each new revelation made them look more ridiculous. So they turned on those who would limit their authority.

The problem with the FBI, according to the Department of Justice, is that its special agents are unjustly restricted by punctiliousness over civil liberties. Agents aren't allowed to surf the Internet or even read the newspapers in search of crimes. They aren't allowed to collect information on people who aren't likely to commit a crime. In a great preemptive move, Attorney General John Ashcroft announced that the FBI would no longer follow these restrictive rules and issued new ones.

The new rules seek to broaden the FBI's ability to collect information on Americans and people living in the United States. Positive coverage of the changes would have us believe that the old rules were only in place because of "post-Watergate paranoia," as author Mark Riebling wrote in the Wall Street Journal. That was paranoia based on the fact that the FBI, as Nat Hentoff notes, "monitored, infiltrated, manipulated, and secretly fomented divisions within civil rights, anti-war, black, and other entirely lawful organizations who were using the First Amendment to disagree with government policies." The changes are also supported by the claim, made in yesterday's Wall Street Journal, that the old rules kept FBI agents from reading newswires during the Danny Pearl kidnapping.

Think about that. The FBI, while tracking a kidnapping in a foreign country, is restricted from essentially reading the newspaper? It sounds absurd and it is. If it didn't have access to the wires, it's because government managers chose not to spend a portion of its $3.7 billion budget on such access. Is it breaking news that Dow Jones & Company, whose job it is to break news, has better access to information than a government agency?

But there's plenty of reason to believe that it was pure screw-ups, not restrictive rules, that prevented our intelligence agencies from being more useful regarding 9/11. The CIA got information about a January 2000 al Qaeda meeting in Kuala Lumpur, Malaysia, through a wiretap in Yemen, so foreign surveillance wasn't a problem. It either didn't or did hand off information on two participants who had U.S. visas to the FBI. If it didn't, the problem wasn't hand-tying rules from civil liberties whiners restricting the CIA's access to phones or pens and paper.

The FBI didn't track the two individuals once they were in the United States. This, too, wasn't a conscious decision based on restrictive rules that prevented it from watching suspected foreign terrorists. It was an oversight. The FBI didn't need new money-laundering laws or wiretapping or web-surfing authority to track these folks. Agents could have used the San Diego phone book. The FBI admitted as much, when it produced a chart that showed how, had they known the two terrorists were in the country, it could have thwarted their efforts. When the CIA reminded the FBI it did know about the pair, it declined to comment.

What about the famous memos? The FBI agent in Phoenix had the authority to dig up the info on the suspicious flight school students and write it down. The warning just didn't make it through the FBI's D.C. bureaucracy. The same D.C. bureaucrats thwarted the Minnesota effort to search the computer of alleged 20^th hijacker Zacarias Moussaoui. As the letter from FBI agent Coleen Rowley maintains, this could have been done under the old standards. There are issues of coordination: If the two offices had been aware of each other's work, higher ups might have taken it seriously. But that's not a problem of rules. Nothing other than competence and other priorities prevents the FBI from coordinating its efforts.

Indeed, the rule change is nothing more than a heroic effort to change the subject while grabbing more powers, as New York Times columnist William Safire noted on Monday. The Center for Democracy & Technology (CDT) analyzed the new guidelines and government claims about them. CDT noted that the FBI already can and does make abundant use of private information sources, the Internet, and keyword searches (such as "anthrax," the example CDT gave). The change is that it will no longer only do so after it has a "reasonable indication" that a crime has or may be committed, a standard that, by its own claims, is much lower than "probable cause." It'll be able to use searches and data mining to generate the "reasonable indication."

The CDT also found that, although allegedly justified by the threat of terrorism, the lower standards of the new guidelines apply to all FBI investigations and activities, everything from anti-drug to anti-porn efforts. The CDT notes that the FBI operates under two sets of guidelines -- one for domestic investigations and another for international terrorism, which covers the domestic activities of foreign terrorist suspects such as the two individuals who the FBI didn't watch once they were in the United States. Interestingly, the FBI changed the domestic, not international, guidelines.

There has been at least one high-profile call to turn a part of the FBI into a domestic CIA -- a change that would require us to allow surveillance, rather than crime solving. It appears the FBI is already attempting to do just that.

With a Friend Like This...

mwlynch@reason.com (Michael W. Lynch) — Mon, 03 Jun 2002 00:00:00 EDT

Principled Republican and free-market activists can't be pleased with President George W. Bush, at least if they are looking past his war on terrorism to the domestic issues they've been pushing for years. To give him Dubya his due, he kept his promise to hammer through a tax cut.

But he has bowed to political expediency at every opportunity. He's pursued protectionist policies on textiles, lumber, and steel. He signed the awful McCain-Feingold campaign finance regulation bill into law. Last month he pandered to rural America by doing the same for the massive farm-subsidy bill.

The policy area that reveals Bush to be more of a cave-in conservative than compassionate conservative is that of civil rights. Activists, including U.S. Solicitor General Ted Olson and Attorney General John Ashcroft, have worked long and hard to restore the principle of anti-discrimination to the practical application of anti-discrimination laws. So it must have stung with extra sharpness when the Bush administration filed a brief in support of a Department of Transportation set-aside program that was threatened by years of litigation.

Last week, the Bush Administration slammed the National Wrestling Coaches Association to the mat when it weighed in against a lawsuit to stem the effort of promoting women's sports by merely cutting men's teams. At issue is a Clinton Administration interpretation of a Carter Administration bureaucratic rule that establishes a gender-based quota regime in college athletics. That the Bush Administration is unwilling to do the right thing on this issue indicates that the next three years are likely to be disappointing ones for those who thought they were Bush's friends.

Data: Government Wages

mwlynch@reason.com (Michael W. Lynch) — Sat, 01 Jun 2002 00:00:00 EDT

The relative wages of top-tier presidential appointees are in decline, frets a Brookings Institution study released in March. In 1969, top government officials earned 5.6 times what the average American family took home. By 2000, the $121,600 to $166,700 annual salary taxpayers pay these public servants had fallen to only 2.6 times what the average family earned.

There's no need to write a check to the undersecretary relief fund. Careful readers of the study will discover that low compensation is hardly a problem for our premier bureaucrats. Typically, the appointees are workers already living in Washington, D.C., and the political job approaches or surpasses the highest paying gig they've ever had. And far from being self-sacrificing detours from lucrative careers, the stints -- which usually last about two years -- are akin to graduate programs that propel people into even higher-paying posts.

Soundbite: Immigration Advocate

mwlynch@reason.com (Michael W. Lynch) — Sat, 01 Jun 2002 00:00:00 EDT

Critics of immigration argue that today's newcomers are changing the character of America for the worse. Sure we're a nation of immigrants, they'll allow, but the past waves of immigrants came from European stock and were assimilated. Today, they're convinced, the melting pot has gone cold.

Journalist Michael Barone, America's leading applied political scientist, disagrees. "Many savants predicted a hundred years ago that the immigrants of their day could never be assimilated," he writes in his recent book The New Americans (Regnery). "History has proven them wrong."

Barone, who rejects fixed notions of race and ethnicity, notes that earlier waves of immigrants from Italy, Ireland, and Eastern Europe were no more considered "white" or "American" than are today's sojourners from Latin America or Asia. Just as the Irish somehow managed to become "white," today's immigrants will transform themselves and change America for the better.

National Correspondent Mike Lynch talked with Barone in March.

Q: How is the war on terror affecting immigration as a political issue?

A: It has put proposals for change in immigration rules, particularly with respect to Mexico, under a cloud. What it has not done is create a huge political demand for shutting down immigration.

Q: Does that surprise you?

A: No, because I don't think the country is as anti-immigrant as some people believe. We have seen proposals to change the way we handle immigration, particularly from Middle Eastern countries, and proposals to keep better track of people with student visas. All of those make sense to some degree. But the country hasn't been swept by a demand for a "time out" on immigration.

Q: Will immigration be an issue in the 2002 elections?

A: It won't be a big issue in most elections because there's not a sharp partisan difference on it. Bush's proposal to allow immigrants to reapply for legal status in the United States instead of having to return to their home country got more support in the House from Democrats than from Republicans.

Q: Are immigrants still assimilating?

A: On the whole, immigrants are assimilating, as they did in the past. To some extent they encounter less overt bigotry than they did in the past. In some respects we are not doing as well as a society in promoting assimilation. In particular, so-called bilingual education programs that keep kids in Spanish classes and out of English classes have made it harder for many Hispanics to assimilate.

Some on the left would say that promoting assimilation is a form of bigotry. That's baloney. On the contrary, it's opening up a culture and opportunities to people who come here.

Ethnic Engineering

mwlynch@reason.com (Michael W. Lynch) — Sat, 01 Jun 2002 00:00:00 EDT

An elementary school in the small Sierra Nevada town of Colfax, California, entered the era of educational accountability this year when the state withheld $31,000 in special funds on the grounds that 69 American Indian students had failed to measure up academically. Under California's accountability law, schools must improve the test scores of minority "sub-groups" in order to earn reward money, even if the overall test scores would merit a cash reward. Colfax's overall scores made the grade, but the scores of its Native Americans, 20 percent of its student body, didn't improve.

This penalty struck teachers and parents as unjust, most notably because they claim the "Native Americans" are actually white. "We looked at the census and the Native American population was right around 1 percent," says Steve DePue of the California Teachers Association.

But that didn't stop the town's only elementary school from claiming up to 99 American Indian students in order to secure $14,695 in federal funding from the U.S. Department of Education Office of Indian Education. To get that windfall, some of the parents signed forms vouching that their children are part American Indian. Those same parents were then outraged when their low-performing "Indian" population led to the loss of the state's $31,000. Apparently, they don't feel there is a discrepancy in claiming Indian ancestry for their children in order to get federal money even while they consider them to be white for the purposes of grabbing state dough.

The white Indians caused a stir when the story broke in The Sacramento Bee in late February. But it appears to be ending well. Two officials from the Office of Indian Education made the trek west, examined the paperwork, and found it in order, according to the school's principal, Gayle Garbolino-Mojica.

"When the form is filled out, it's not necessarily the schools or the U.S. Department of Education, or anyone else's privilege to go and counteract what the parent is saying," says Ms. Garbolino-Mojica. "In all legalities, that parent is saying that child, parent, or grandparent has a tribal affiliation and that is the end of the story."

Family Matters

mwlynch@reason.com (Michael W. Lynch) — Sat, 01 Jun 2002 00:00:00 EDT

Lately, I've been questioning why I'm not an enthusiastic modern liberal, a real let's-call-in-the-government-to-do-good-things progressive. After all, I relish the world that the forces of liberalism seem to have produced. The liberationist movements of the 1960s and '70s have enriched my life immeasurably. I was free to marry whom I wanted thanks to a U.S. Supreme Court decision made two years before my birth that abolished state laws banning interracial marriage. My 6-month-old daughter has an openly gay godfather, a man who'll no doubt provide her with a moral foundation less disturbing than the one given to hundreds of children by certain Catholic priests. My wife has a better job than I do, if such things are measured in money and cultural prestige. I have no interest in trading this world for any that has gone before, even if the feds neither taxed personal income nor published the Federal Register back in the supposedly good old days.

Then the mailman brought the April 8 issue of The American Prospect, a magazine dedicated to presenting a "practical and convincing vision of liberal philosophy, politics, and public life."

This special double issue calls on assorted social policy mavens to enlighten us on "The Politics of Family." The issue (available online at www.prospect.org/issue_pages/children) is in part a reaction to George W. Bush's welfare reform package. Bush is calling for $300 million in taxpayer spending to promote marriage among people unfortunate enough to be dependent on the federal government.

"The federal government is suddenly very interested in marriage," says the Prospect. "The principal target of this matchmaking is the welfare population, though many traditionalists would turn the marriage movement into a generalized crusade. It adds up to something that most conservatives ordinarily abhor -- social engineering, and in the most intimate of human realms."

There's plenty to lambaste "pro-family" right-wingers about, and the Prospect scores many points against the conservative marriage counselors. For instance, if marriage is the cornerstone of civilization, then why not allow gays and lesbians access to wedded bliss? Furthermore, contrary to the hippie-hating right, family breakdown didn't start in the 1960s. Historian Stephanie Coontz, author of the important book The Way We Never Were: American Families and the Nostalgia Trap, shows that marriage has been in "crisis" at least since the 1920s, when everyone began to demand more from matrimony than simple economic security.

Yet the Prospect's contributors don't limit themselves to critiquing conservative foibles, exposing ideological inconsistencies, and providing an overview of the health of contemporary American families. As good liberals, they too are keen on using the state to create exactly the sort of families -- and larger society -- they want, regardless of the invasiveness such programs inevitably entail. Worse, they apparently believe that such an overhaul can be achieved via the easy implementation of bossy policy. They must have missed the day at school when the rest of the country learned that Great Society programs were most successful at creating more social problems, not fixing existing ones.

It all sounds so authoritative. The contributors give the impression that good-hearted planners can easily achieve their intended aims. They also throw around amorphous terms such as we and society, obscuring the real actors in the welfare state: local civil servants who are accountable to federal civil servants, who are accountable to political appointees, who are accountable to Congress.

"Our goal should be to help less-educated women follow a similar path," writes Isabel Sawhill, a senior fellow at the Brookings Institution. The path to which she refers is the now common practice of holding off marriage and mommying until the late 20s. "The [conservative] alternative -- to encourage girls in their teens or early twenties to marry -- is not consistent with society's interest in encouraging people to acquire the skills needed in the new economy or with the job opportunities available to today's young women."

Why exactly it's up to "us" to set goals for less-educated women and to slot them into their proper role in promoting that great fiction of "society's interest" is left unsaid. Maybe even less-educated women are smart enough to get by without conservatives shoving them to the altar -- or liberals shoving them into classrooms.

Sawhill has nothing on Theodora Ooms of the Center for Law and Social Policy. People "lack access to jobs that pay decently," writes Ooms, as if workers are barred from the elevator that reaches the executive suite. In fact, they don't have the skills to convince anyone to hire them for a decent-paying job.

Ooms likes to speak of the U.S. as one big family domiciled in D.C. "We should reach out to young parents to help them achieve their desire to remain together as a family," she argues, referring to young parents dubbed "fragile families" by creative researchers. These are unmarried couples who have children and who are still sleeping together with some frequency. Ooms never says why such couples can't achieve their desire to stay together -- perhaps the office handing out marriage licenses is on the same floor as the executive suite.

As for the "we," Ooms and her friends are of course free to provide the services she recommends. Or, same thing, to create a nonprofit to do so. She already has a suggested curriculum, a "combination of 'soft' services -- relationship-building and marriage-education workshops, financial management classes, and peer support groups -- and 'hard' services -- job training and placement, housing, medical coverage, and substance abuse treatment, if necessary." Perhaps she can pass out advanced degrees in being poor to the few people who complete this patronizing gauntlet. (Few will, as versions of this course plan have been offered for years with little effect.)

Most Americans who've survived at least two years of college are familiar with the gripe that the U.S. government doesn't live up to Europe when it comes to tucking citizens snugly under a safety blanket of taxpayer-funded social services. But the Prospect wants to make really sure you know it. "In Sweden and France, 80 percent to 95 percent of children ages three to five are in publicly supported day care," writes University of Pittsburgh sociologist Karen Christopher.

The European benchmark is especially intrusive when combined with a call for the government to promote equality inside marriages -- think of bureaucrats drawing up the household chore list. Janet Gornick, a political scientist at the City University of New York, is not content for the government to transfer massive resources from the two-thirds of U.S. households without children to the one-third with them. (That is, after all, what her proposals for a mandated maximum work week of 37.5 hours, extended paid maternity and paternity leave, and universal taxpayer-supported child care would do.) She understands full well that even when American men are given every option to embrace the role of Mr. Mom, they may still need a push.

Writes Gornick, "Policy makers in Europe have learned that parental-leave benefits that can't be transferred to female partners and that include high wage-replacement rates encourage fathers to take the leave to which they're entitled." Translation: It's not enough to pass a law forcing employers to provide paternity leave. Fathers must be paid nearly their entire salaries to stay home and be prevented from transferring the leave time to mothers. But even here, the progressive social engineer's task is not complete. Planners can't be sure that men will make good use of their mandated leave. So we need a taxpayer-supported propaganda campaign urging men to pitch in around the house. The usually sensible Swiss have allowed their government to bombard them with a "Fair Play at Home" campaign that, Gornick notes approvingly, "is aimed at 'nudging married men' to share the work at home."

Tax me to pay advertising agencies, newspapers, and television stations to tell me to change more diapers, make a better dinner salad, and empty the dishwasher? That's reason enough to reject modern liberalism. Thanks to The American Prospect for refreshing my memory.