DRI-102 for week of 11-22-15: Fantasy Regulation Trumps Fantasy Sports in New York

DRI: 102 (Brought to you by Access Advertising)A few days ago, New York Attorney General Eric Schneiderman announced that he was issuing a “cease and desist” order against the two titans of daily fantasy sports, Draft Kings and Fan Duel. The order prohibited the companies from accepting wagers from residents of New YorkState. This amounted to an elimination of roughly 10% of their business. Ironically, both firms have large administrative offices in the state, and these would be unaffected by the order.

AG Schneiderman purported to have discovered that daily fantasy sports constituted illegal gambling under New York state law. He also claimed to have consulted experts in health, human behavior and economics, on the basis of which he deplored the “economic and social harm” done by the companies.

The cease-and-desist order allowed five days for the companies to show why their operations should be allowed to continue. Both companies took issue with the AG’s actions and predicted they would be vindicated in court.

Although opponents of fantasy sports commonly depict the issue in moral terms, habitués of this space will not be surprised to learn that it is better understood in economic terms.

The Background: A Brief History of Fantasy Sports

Two somewhat different kinds of activity have fallen under the heading of fantasy sports. Both of them cater to sports fans who gain satisfaction from activity involving sports without literally playing the sport themselves. In the first type, the fan simulates games by using statistical data on actual players as well as actuating mechanisms such as spinning dials or rolling dice. Although the idea for this type of fantasy sport goes back to the immediate post-World War II era, it was executed by companies such as Strat-O-Matic and Negameco starting in the early 1960s. (The most successful, Strat-O-Matic, still operates today.) It was first applied to baseball and spread to football, basketball and hockey. While this type of fantasy sport tests the fan’s sports knowledge and mental acuity to a limited degree, its pleasure is really observational rather than participatory. The success of the game derives from the company’s skill in accurately reproducing the skills of the players in the statistical categorizations it provides. The more accurate its depictions, the more representative will be the simulated games and the more pleasure the fan will gain. Indeed, hard-core players of tabletop games like Strat-O-Matic have sometimes spoken reverently of the greater appreciation of the sport given them by the game.

The second type of fantasy sport is participatory rather than observational and tests the player’s mental acuity to a much higher degree. Like the first type, though, the fan does not actually play the game – the proper analogue would be to the manager or coach rather than to a player. The fan chooses (or “drafts”) a team of players from the roster of actual players. The performance of this “team” in actual games provides the raw material for calculating its performance on behalf of the fan. Fan-performance is calculated according to certain pre-selected metrics than correlate closely with sporting success in individual and team terms. (For example, a baseball fantasy sport might award a certain number of points for a player’s home run or a run batted in; a football fantasy sport might award points for a player’s touchdown scored by running, passed for or received.) The number of players is limited by the rules, as is the duration of the contest. At the end, the fan whose team scores the most points wins.

This second type of fantasy sports contest also began in the early 1960s. An Oakland businessman named Wilfred “Bill” Winkelbach, who later became part-owner of the Oakland Raiders, is credited as its originator. An early version of this type of league met at a New York City restaurant called La Rotisserie Francaise, giving the sport the nickname “rotisserie sports.”

In the beginning, the metrics rewarded were simple and basic enough to allow one individual to compile and compute them. This person came to be called the “commissioner” of the fantasy “league.” Over time, though, two factors combined to replace the commissioner with a computer. First was the work of legendary sports statistician Bill James, whose BaseballAbstract was first widely published in 1982. James himself was not a fantasy participant, but his book became the veritable bible of fantasy sports. James revealed the hidden meaning behind baseball statistics, devaluing some of the most revered ones and raising the stock of other hitherto-unappreciated data. His work was just the thing fantasy gamers needed to prosper in their esoteric pastime. Before long, James’s insights provided grist for the metrics governing success in fantasy baseball, thereby complicating the calculations required to determine winners and losers. Second, the improvements in and omnipresence of computer technology came along just in time to serve the needs of fantasy sports. The fantasy-league commissioner became more of a figurehead than a prime mover.

It was in the 1990s that fantasy sports took off like the proverbial rocket. By 1988, USA Today estimated that 500,000 people participated in fantasy sports in the US. The rise of the Internet and proliferation of desktop computers in the 1990s drove the fantasy market through the roof. Successful websites were created to facilitate the creation of teams and leagues. Two of these were Commissioner.com and Roto News.com. In 1999, a year in which Commissioner.com was sold to Sports Line for $31 million, a survey estimated that 29 million people 18 and over played fantasy sports in the US. This figure was questioned when it became known that it may have included those choosing brackets in NCAA Final Four office pools. Still, a subsequent survey in 2003 estimated 15 million US participants in fantasy football alone. More recently, the Fantasy Sports Trade Association estimated in Sept., 2015 that 56.5 million people 12 and over played fantasy sports in the US and Canada, 33.5 million of those in the US alone.

Law and Legalism

It is a sign of the times that many – perhaps most – Americans are confident about the legality of fantasy-sports wagering whereas the subject is actually shrouded in mystery. The interpretation of the 2006 Unlawful Internet Gambling Enforcement Act (hereinafter, UIGEA) illustrates this confusion beautifully. The operative word in its title is “enforcement.” The provisions of the act relate to money and banking, not to delineations of which online activities are and aren’t illegal. Because the UIGEA contains a provision exempting fantasy sports, the belief was fostered that fantasy sports – including the daily fantasy games sponsored by Fan Duel and Draft Kings – had been ruled legal. In fact, the legislation does not even define the concept of sports gambling; it deals only with money transfers for the purpose of defining illegal money laundering.

The definition of gambling is up to individual state law. And this definition hinges mostly on the concept of a “game of chance.” Some states introduce the element of “skill” to differentiate between games of chance and skill. Other states prefer to differentiate between “substantial” and insubstantial degrees of chance. AG Schneiderman bases his accusation of daily-fantasy-sports’ illegality on dual grounds – the fact that the outcome of real sports contests lies outside the sphere of fantasy participants’ control and the fact that wagers are a “contest of chance.”

By any rational standard, participation in fantasy sports is a game of skill rather than chance. In statistics, a chance occurrence is a random event. Textbooks often use a coin flip to exemplify this, but this would be a theoretical coin flip, in which the flipper makes no conscious effort to influence the result (or the coin if flipped by a random mechanical device). The lack of control exerted by participants over sports events is irrelevant, since the wager is not over the outcome of the sports events themselves but over the skill with which participants can gauge the skills being applied in the sporting events. Another way to view this is to realize that fantasy-sports wagering is a game of skill for the same reason that the sports being wagered upon are games of skill. This holds true even more for the kinds of “daily” contests that particularly trigger the ire of AG Schneiderman than it does for the allegedly innocuous seasonal, or “intramural,” contests in which participants follow the fortunes of their chosen team for an entire season. After all, participants were originally attracted to the game in the first place because it played to their fantasy of stepping into managerial/executive shoes and picking winning lineups. Would Schneiderman et al really pretend that the originary sports – baseball, football, basketball, and hockey – are not games of skill and real-life field managers and general managers are merely engaged in blind, random choice? If actual managers of sports teams are skillful to a greater or lesser degree, how can this not also apply to the derivative fantasy sports? The information available to both groups of people is of exactly the same type, albeit not exactly the same quantity. (Real-life managers have the advantage of seeing and talking with the participants while fantasy players don’t – but these two groups don’t compete against each other so this differential doesn’t affect the relevant sets of results, which are teams versus each other and fantasy-sports participants versus each other.)

Schneiderman wants to parse the definition of terms like “material element of chance” to make a legal case that daily fantasy sports are gambling. But this is legalism rather than law. Apart from the issue of skill, there are other longstanding principles of common law that tell against New York’s AG. One is the principle that a plaintiff cannot sit on his rights indefinitely; that is, he cannot neglect to pursue a valid claim for so long a time that a defendant’s rights are compromised. In this case, many millions of Americans have pursued daily fantasy sports for years, building up substantial emotional and – in some cases – financial investments in this form of entertainment. If the New York government had a valid claim against daily fantasy sports on principle, it should have been able to state it without waiting a decade or more. “Silence gives assent” is a common-law principle dating back many centuries. Fantasy-sports fans had every right to believe that the silence of government betokened assent toward their avocation.

The distinction between law and legalism may be lost on most New Yorkers, but they have no trouble grasping the surrealism of AG Schneiderman’s declaration. All they have to do is look around them. New YorkState plays host to legal gambling in the form of state-licensed casino games, state-sanctioned pari-mutual betting at horse tracks and a state-run lottery. The misnamed “social losses” stemming from these forms of betting are far more pronounced, simply because the odds favoring the house are so much steeper. The glaring contradiction between allowing – and, in the case of the lottery, promoting – these state-sanctioned forms of wagering and prohibiting daily fantasy sports is so obvious that even Democrats can’t miss it.

What’s In It for AG Schneiderman?

What new sunburst of enlightenment motivated this sudden action by AG Schneiderman? What counterweight does he offer to the sound arguments marshaled above? Actually, it is clear that AG Schneiderman’s motives are anything but lofty and uplifting. Rather, they are as base and ignoble as those of any politician.

As a practical matter, we can assume that the $350,000 won by a Fan Duel employee in a rival Draft Kings contest was the precipitating factor in the AG’s decision to go after the two companies. True, an independent investigation uncovered no wrongdoing by the employee – that is, no use of proprietary information that conferred undue advantage to the winner. But the episode somehow sounded illicit, like a widow marrying her deceased husband’s best friend. It gave the AG a visceral pretext for launching an “investigation” that – lo and behold! – revealed a heretofore unsuspected conspiracy of immense proportions that was fleecing an unsuspecting public.

Of course, it is purely a coincidence that this shocking discovery follows in short order the equally shocking discovery that led the AG to sue Exxon: Exxon’s purported conspiracy to defraud its shareholders by hiding the fact that it has known all along that man-caused global warming is settled scientific fact. And this follows still another coincidence: the AG’s discovery of the shocking on-call policies followed by some retail sales companies operating within New YorkState. Thanks to AG Schneiderman, New York will henceforth be known as the State of Serendipity.

A cynical observer, such as an economist, might suspect AG Schneiderman of following the same strategy that elevated former New York AG Eliot Spitzer to the governor’s office; namely, terrorizing corporate targets for the delectation of the political left wing. (Those not yet singled out for indictment may choose to contribute to the AG’s future political campaigns in hopes of avoiding that fate.) Observe the tell-tale signs of vainglory in Schneiderman’s rhetoric: “Our investigation shows…Today we have sent a clear message: not in New York and not on my watch.” The incautious variation between the royal we and the self-absorbed first person is not merely bad writing but a dead give-away as to Schneiderman’s obsession with his career.

There is a variation on the theme that Schneiderman’s motives are political and self-seeking rather than noble and altruistic. In October, 2015, the state government of Nevada announced that it had suddenly discovered that daily fantasy sports constituted “sports gambling” under its state law. This did not make them illegal in Nevada, but it did mean that operators like Fan Duel and Draft Kings would have to obtain state licenses, just as the state’s casinos do. In other words, the state was forcing the fantasy-sports companies to split their takings with state government. Speculation is rampant that Schneiderman may be angling for this sort of negotiated outcome with the fantasy-sports companies. The AG’s pointed refusal to blackball their business operations in New York City points to this.

Public Reaction to AG Schneiderman’s Actions

AG Schneiderman’s actions may provoke cynicism, but the public’s reactions provoke dismay. Nobody really believes the AG’s central contention that the two companies have operated a conspiracy to fleece their customers. If they did, the reaction from over 30 million Americans would be widespread shock and outrage. Instead, people have reacted with surprise. They are surprised that even a state attorney general would peddle such blatant falsehoods. The other emotion they express is resignation – because most people think there is nothing they can do to stop him.

The only part of his indictment they are prepared to accept is his claim that the fantasy-sports industry produces “social” losses in the form of gambling addiction and misdirected expenditures. Here, AG Schneiderman himself has tapped into one of America’s favorite fantasy sports – the spectator sport of telling the other guy how to live his life. The admittance fee to this pastime is zero and nearly everybody is a player. Thus, people who do not participate in fantasy sports themselves are quite willing to look down on those who do. What a waste of time and money! There oughta be a law!

The large segment of the public that is simply resigned to getting pushed around by big government, combined with the segment that secretly longs to tell other people how to run their lives, is enough to more than counterbalance the 30-million-plus fantasy sports participants who are mad as hell at AG Schneiderman. Why 30-million-plus when only 3 million or so actually live in New York? Because the rest are beginning to see handwriting on the wall and they don’t like what it says.

If New York joins Nevada in extorting money from the fantasy-sports companies, other states will not be long in following suit. At best, this will drive up the cost markedly to participants. At worst, the AG may be able to make a ban stick.

To appreciate the fears of fantasy-sports fans, we need only cast our minds back a few years to recall the history of online poker. In 2003, a participant in the World Series of Poker, Chris Moneymaker, qualified for the live final round via an online tournament. He won the lucrative title, triggering not only a huge boom in popularity for the sport but also a tremendous surge in online poker participation. Dozens of websites sprang up offering money gambling. In the decade since then, several states (beginning with Washington) have ruled online poker illegal. Three states (Nevada, New Jersey and Delaware) have ruled it legal – but only if licensed and regulated. A former U.S. senator (Alphonse D’Amato) signed on as lobbyist for poker interests. And the legal ambiguity in the other states has pretty much squelched the online poker boom in the U.S. Notice that it wasn’t necessary for every single state, a majority of states or even a plurality of states to literally pass laws declaring online money poker illegal. A combination of bans in one or two states, the imposition of higher costs of licensure in a few key states and threatening rhetoric and continuing legal uncertainty elsewhere was sufficient.

This is the specter haunting fantasy-sports fans today.

Government Gone Wild

Economists are familiar with the atmosphere of an economic boom, when the animal spirits of businessmen run high, optimism prevails, employment grows like weeds and income spirals upwards. What we have experienced under the Obama administration is best described as a “government boom.” While this government boom lacks the proliferation of agencies and growth of government employment associated with the late Kennedy, Johnson and early Nixon administrations, it has exhibited a frenzy of administrative regulation and control exceeding any seen heretofore. That frenzy has affected not just government administrative agencies, but also federal and state prosecutors. Regulators at every level have sensed blood in the water and have reacted like schools of piranha.

Among those targeted in this government boom have been: bankers, truck drivers, stockbrokers, car dealers, nail-salon operators, bakers, insurance-company owners and employees, financial planners, doctors and innovators in the so-called “sharing economy.” Since the end-in-view behind all economic activity is consumption, consumers have been harmed indirectly by all of the adverse actions referred to above. AG Schneiderman’s latest foray is only one more in a punishing series of body blows to the abdomen, kidneys and solar plexus of the body economic.

Why should there be an ebb and flow of government regulatory activity? What accounts for a cyclical pattern of government advance and retreat? If nothing else, regime change probably signals an end to the incumbent philosophy and a return of old ways. In any event, that has been the pattern ever since big government became a fixture in our lives. (In this context, “regime” denotes ideological rather than political identity; “Kennedy/Johnson/Nixon” was liberal, “Reagan” was conservative and George H. W. Bush was somewhere in between.)

In our case, the regime change was a gradual shift leftward after Ronald Reagan left office, culminating with a sharp left turn coinciding with Barack Obama’s ascension to the White House. It has become more and more apparent over the seven years of the Obama administration that it represented a golden opportunity to centralize power in the hands of the regulatory and administrative state. Moreover, this opportunity came with a probable expiration date – either November, 2016, or the date of U.S. economic collapse. Any bureaucrat wishing to stake a claim had better file it soon.

That is why the juridical Klondike is overrun with prospectors like AG Schneiderman, forehead damp with gold fever and eyes wide with dreams of power.

They Call It Fantasy Sports For a Reason

Both contending parties to the debate over daily fantasy sports should spend a little more time thinking about the logic underlying the pastime. The word “fantasy” denotes something ardently wished for but not realistic and hence likely unattainable. It stands to reason, then, that the pleasure gained from it will probably derive from the pursuit rather than the actual achievement.

Fantasy sports play on the fantasy of the sports fan that he or she can be a big-league manager. Fantasy management combines the managerial and general-managerial functions of a real-life sports team while leaving out what may be the most difficult part of both jobs – managing people. As with almost any job or pastime, it involves an element of luck as well as a high degree of skill. There are very few highly successful real-life managers and general managers, just as there are relatively few highly successful fantasy-sports participants. In both, luck can produce success in the short run.

Fantasy sports is no different than any other avocation. Most hobbies entail pecuniary costs and some are very costly. Fantasy sports offer the possibility that the hobby may pay for itself or – in a few cases – turn an avocation into a vocation. The attempt by government to distort the true nature of fantasy sports and profit from the distortion is both typical and despicable.

DRI – 118 for week of 10-18-15: How the Fed Saved the Economy – NOT

How the Fed Saved the Economy – NOT

Nobody’s education in economics is complete until the subject of Fedspeak is mastered. Unfortunately, this comes under the heading of “advanced topics.” Knowledge of basic economics is not nearly sufficient to the task – the full range of political economy is required. Some abnormal psychology wouldn’t hurt, either.

“Fedspeak” is the idiom unique to occupants of the chairmanship of the Federal Reserve Board of Governors. It implies much while saying little as indefinitely as possible. Fedspeak comes by its economic content honestly, since the Federal Reserve is the “banker’s bank” to the nation’s nationally chartered banks and charts the course for monetary policy. The political content is a different story. Officially, the Federal Reserve is independent from politics. Nonetheless, Fedspeak is permeated with political meaning. Just as the allegedly independent justices of the Supreme Court cannot be prevented from reading the election returns, the Federal Reserve’s conduct of monetary policy cannot be divorced from politics.

The recent Wall Street Journal op-ed, “How the Fed Saved the Economy,” (WSJ, 10/5/15) by Ben Bernanke, is a perfect case in point. Bernanke is no longer Fed Chairman, having served from 2006 – 2014. But once a Fedspeak-er, always a Fedspeak-er; the accent is unshakable.

The Headline

We begin with the headline. It catches the reader’s eye and sets the tone. What many people may not know is that standard journalistic practice allows the newspaper, not the author, the right to compose the headline. Eminent authors may, or may not, be given the privilege of approving the paper’s choice. The liberties taken by this headline make us wish we knew who composed it.

Presumably, the headline refers to actions taken concurrent with, and immediately subsequent to, the financial crisis of September/October, 2008; namely, the bailout of Bear Stearns, failure to bail out Lehman Brothers, bailout of AIG and massive purchases of securities by the Fed. But Bernanke’s op-ed says nothing about those actions, focusing instead on the “extraordinary monetary policies” (Bernanke’s own term) pursued during Bernanke’s tenure “to help the economy recover from a historic financial crisis.”

The choice of words is contradictory; it puts the headline at odds with the op-ed. Saving the economy is one thing. Helping it recover is another. The latter implies that it would recover on its own, but helping speeds the recovery and/or makes it more robust. Saving the economy implies that otherwise it might never recover, or at the very least that the recovery would be a long time coming.

The headline leads the reader to believe that what follows will explain how the Fed’s policies saved the economy; e.g., rescued the economy from utter destruction or from a truly dire fate. That doesn’t happen. Bernanke refers to the financial crisis as “historic,” but otherwise leaves it to his readers to imagine what fate was in store for us in the absence of the Fed’s (also unnamed) policies.

Thus, it is by no means clear that the economy needed saving or, if it did, that the Fed’s actions saved it. Bernanke doesn’t tell us what we were ostensibly saved from or what the Fed did to save us. Instead, he refers rather sweepingly to “extraordinary measures” taken to “help the economy recover.” What did we recover from? Well, we actually suffered a recession that began nine months before the financial crisis (in December 2007). But the extraordinary measures Bernanke refers to were taken in response to a “financial crisis.”

The best reason for thinking that Bernanke may be responsible for the headline is that it is classic Fedspeak. It implies something grand, glorious and vast – but says nothing definite or comprehensible, since there is no definable economic meaning to “saving the economy.”

There’s no getting around the fact that this headline does not belong on this op-ed. It is only fair to admit that Bernanke himself may not be responsible for the headline. But somebody, whether intentionally or inadvertently, has perpetrated a serious act of journalistic misrepresentation. Either Ben Bernanke wants us to believe that the Fed saved the economy but doesn’t want to go to the trouble of proving it or somebody at the Wall Street Journal does. Or thinks Bernanke does. Or thinks Bernanke has proved it in this op-ed… somehow.

Bernanke on the Fed’s Role

In his second paragraph, Bernanke seizes his chance to perform a classic Fedspeak maneuver. He performs an exercise in definition. An exercise in definition might be defining terms, defining a task or a defining a policy. What makes it classic Fedspeak, though, is that the Fedspeak-er does not perform the exercise in a logically correct way. Instead, he performs it for his own convenience; e.g., to make him and his actions look good even when they are bad. In this case, Bernanke’s exercise in definition concerns the nature of monetary policy.

Bernanke’s implicit distinction between recession and financial crisis would make sense – if he were treating the Fed as purely a financial regulator and monetary steward with power to affect inflation but not the real economy of goods and services. That would probably be the logically correct view, or at least the consensus view among academic economists. Bernanke, employing Fedspeak, imbues the Fed with greater powers.

After Bernanke declares it “essential to be clear on what monetary policy can and cannot achieve,” he states that “the Fed has little or no control over long-term economic fundamentals – the skills of the workforce, the energy and vision of entrepreneurs, and the pace at which new technologies are developed and adapted for commercial use.” The words “little or” have a special significance in Fedspeak. An ordinary economist would simply admit that the Fed has no control whatsoever over these things. But flat categorical limitations on the Fed’s powers are taboo in Fed-Speak. To be sure, a Fed Chairman must avoid claiming absolute control over things, for that would leave him stuck with responsibility for too much of what actually happens. But he must claim some control over practically everything in order to justify the steadily increasing money and power that is given to him and his agency.

Sure enough – in the next paragraph Bernanke has the Feb “mitigating recessions” and forestalling the “tragedy” of “high unemployment,” as well as “keeping inflation low and stable.” In other words, the Fed – which can only control the quantity of money and indirectly affect interest rates – is supposed to bear responsibility for the rate of employment. This gives the Fed power to control the annual rate of economic growth. In turn, this means that the central bank will fight unemployment by printing money. As recently as a decade ago, this statement would have generated a mixture of anger and hilarity among the world’s economists.

Of course, “low” is a relative term. Bernanke identifies 2% as the proper inflation target. Why not, say, “as close to zero as is practicable?” After all, this was the standard chosen by many eminent economists for many years. Bernanke cites “the economic risks posed by deflation” without identifying the risks or their relative magnitude. He says the 2% target is “similar to that of most other central banks around the world.” Bernanke has defined the optimal rate of inflation in order to suit his (or, more precisely, the Fed’s) convenience. Choosing a positive rate of inflation as optimal allows the Fed to err on either side of its target rate, while avoiding inflation is an asymmetric standard that allows only error on the positive side – and not much at that.

Having set his own standards, Bernanke now proceeds to grade himself (and his successor as Fed Chairman, Janet Yellen). The 5.1% unemployment rate “is close to normal,” although there may be “some distance left to go.” “Underlying” inflation is “around 1.5%,” which is “somewhat below the 2% target, a situation the Fed needs to remedy.” Why the uncertainty associated with the unemployment rate is any less troubling than that associated with the inflation rate is a mystery that Bernanke does not unravel for us. But on this one point, Bernanke is categorical; the Fed cannot tolerate an “underlying” inflation rate of “about 1.5%” when its target rate is 2%.

Once again, Bernanke has chosen his definitions – of “normality” in unemployment and “intolerability” in inflation – to suit his (and the current Fed’s) convenience. He wants us to believe that his policies were correct and have led to the return of relative prosperity, so 5.1% unemployment is defined as virtually normal without further discussion. He wants the Fed to continue to hold interest rates low by printing more money, so 1.5% “underlying” inflation is defined as intolerably low.

Bernanke’s Response to His Critics

Before concluding, Bernanke cannot resist a rhetorical chortle at the expense of Fed critics who have predicted for years that the Fed’s policies of “quantitative expansion” would produce “hyperinflation, a collapsing dollar and surging commodity prices.” He replies: “None of that has happened.”

Another unique feature of Fedspeak is that fluent practitioners acquire facility in observing only those facts favorable to their side of an argument. Unfavorable facts are disregarded or simply go unseen. In the current online issue of Forbes Magazine, Brian Domitrovic points out that Bernanke is – at best – one for three. During Bernanke’s tenure, “the dollar depreciated… to a greater degree than at any point in the 43-year history of the statistic” [e.g., than during the era of flexible exchange rates]. Oil and gold, the two commodities most sensitive to monetary policy, both appreciated dramatically during Bernanke’s tenure (Feb., 2006 – Feb., 2014). Oil rose from a then-record $68 per barrel to $96 per barrel. Gold rose from $560 per ounce to $1300 per ounce. As regards inflation, Bernanke says nothing about the trillions of dollars in excess bank reserves created by the QE program or about the Fed’s own balance sheet, which is sagging from the weight of the over-valued securities it has purchased from member banks over the last few years. He omits any mention of the Fed’s payment of interest on excess reserves or hyperactive regulatory program, which have induced banks to hold reserves in preference to making loans. These facts would explain why inflation may merely have been deferred for a time and why the prosperity he touts may be illusory.

Bernanke does not confine his score-settling to domestic economic disputes. He still holds a grudge against German finance minister Wolfgang Schaeuble, who labeled round two of the Fed’s QE program “clueless.” To the sound of axes grinding in the background, Bernanke takes his revenge. “At the time,” Bernanke reminds us, “the unemployment rates in Europe and the U.S. were 10.2% and 9.4%, respectively. Today the U.S. jobless rate is close to 5%, while the European rate has risen to 10.9%.” Bernanke attributes the relative stasis of Europe to “Europe’s failure to employ monetary and fiscal policy aggressively after the financial crisis,” causing “Eurozone output [to be] about 0.8% below its pre-crisis peak” whereas “the U.S. economy is 8.9% above the earlier peak.”

Here, Bernanke employs one of the most effective tools of Fedspeak – the selective comparison. The rules of logic say that meaningful comparison requires that we compare like with like. But Fedspeak allows the speaker to tailor the comparison to his personal needs; he need only pretend to compare like with like. So Bernanke compares U.S. national economic policy with that of “Europe” because the Eurozone is “a major industrialized economy of similar size.”

Bernanke’s comparison satisfies the demands of Fedspeak because the U.S. and the Eurozone are indeed alike in size. But it makes no sense to compare overall U.S.economic policy with Europe’s because the U.S. is one unitary country with a single national economic monetary policy and fiscal policy, while Europe is a confederation of many countries of widely varying sizes and fiscal policies, united only by a common currency and similar monetary policy. Even if we were to aggregate the net effect of (say) all European countries’ fiscal policies, the comparison still wouldn’t make sense because that net effect wouldn’t result from one policy stance.

Bernanke clearly feels the need for more supporting evidence that his QE program really works – that the central bank really can print its way to prosperity. He contends that “the United Kingdom is enjoying a solid recovery, in large part because the Bank of England pursued monetary policies similar to the Fed’s in both timing and relative magnitude.”

At this point, Bernanke is availing himself of another convenient property of Fedspeak; namely, that the speaker can say anything he wishes at any point without worrying about contradicting anything he said in the past or might say in the future. Sure enough, Bernanke closes the op-ed maintaining that “monetary policy can accomplish a lot, but… it is no panacea…Fiscal policymakers in Congress need to step up.” In other words, Keynesian deficit spending is needed to complement money printing. Bernanke doesn’t cite the UK as his exemplar here, because the country of John Maynard Keynes has been virtually the only one on the other side of the Atlantic to exert serious fiscal restraint since the Great Recession. And clearly this is wildly at odds with his previous citation of the UK’s “solid recovery.” If the UK had a solid recovery despite violating his precept about fiscal policy, why should we need to observe it? And how do we know that recovery was, indeed, due to monetary ease rather than fiscal rectitude?

It’s Good to Be the King – or the Fed Chairman

This op-ed illustrates might be called “Brooks’ Theorem”: It’s good to be the king – or the Fed Chairman. Bernanke’s status as Fed Chairman emeritus has given him entrée to the Wall Street Journal’s op-ed pages. It may have given him control over the headline on his op-ed. And it has given him vast rhetorical license in the tone and content of his prose.

We tend to view flat statements with suspicion and assume that people who qualify and hedge their statements are being reasonable and truthful. But would you really admire a scientist who said, “Some people say that if I throw a ball up in the air, it’s bound to come back down. I agree, at least on one level”? Bernanke agrees “on one level” that the Fed can’t print our way to prosperity; disagreeing outright would make him look like a madman. But he qualifies his agreement to gain wiggle room for the greatest episode of money creation in the history of the United States. By the insertion of just those three words “on one level,” he has driven a wedge between his policies and economic logic wide enough to accommodate a super tanker. The thrust of monetary economics since its inception – and particularly over the last five decades or so – has been to refute the inflationist fallacy. That is, there is no long-term gain in productivity of goods and services from increasing the quantity of money – there is only an increase in the general level of prices proportional to the growth in money. Bernanke blandly asks his audience to believe the contrary on his say-so.

Even more dangerous than Bernanke’s policy is the deception in which it is cloaked. He doesn’t explain that his policies are extraordinary not merely for their magnitude, but also for contravention of accepted logic and doctrine. (As you might expect, he is somewhat more straightforward when speaking to his professional peers, where he has been quoted as saying that QE doesn’t work in theory but does work in practice.)When a non-economist reads Bernanke’s op-ed, he sees a headline advertising the Fed as an economic savior and accompanying prose couched in familiar-sounding, reassuring, equivocal, non-categorical terms. This is just the way the general public is used to hearing policymakers talk. Most people lack the training necessary to realize that what seems to be safe, sane, middle-of-the-road dialogue from a high-level public official is really the rationalization of an utterly unsound doctrine devised to further a big-government agenda.

Post hoc, ergo propter hoc (“after this, therefore because of this”) is a venerable logical fallacy. Bernanke calls the Fed’s “extraordinary monetary policies” the remedy for a “historic financial crisis.” He then assumes – and asks us to accept – that everything good that happened since that episode was the result of the Fed’s measures. Yet Bernanke himself insists that monetary policy cannot be “the only game in town” and demands that Congress step up to the plate with fiscal policy. But didn’t Congress do just that in early 2009 with nearly $900 billion worth of stimulus spending? Why did Bernanke overlook this example of fiscal policy, as well as the earlier Bush stimulus? Of course, if he brought up examples of fiscal stimulus that occurred in 2008 and 2009, he might feel compelled to explain why unemployment took years to respond. After all, it has long been a key principle of macroeconomic theory that stimulative government policies are necessary because they restore full employment so much more quickly than do free markets. That transition from over 10% unemployment in 2009-2010 to 5.1% unemployment today didn’t come quickly; it took years of additional money printing and continual purchases of securities by the Fed, which virtually crowded the private sector out of the market for government bonds.

He also assumes that the good things he cites were in fact good and that nothing bad happened. It’s true that we ordinarily view a decline in the unemployment rate as a good thing. But when the decline is due to continual withdrawal from the labor force, producing the smallest ratio of employed in nearly forty years, that decline cannot be viewed in the same favorable light. When an unusually large proportion of the employment gains that do occur consist of part-time jobs, and when much part-time employment is involuntary in nature, that isn’t good either. When business investment languishes far below its pre-recession peaks in 2006 and 2007, we have reason to doubt whether the policy of zero-interest rates (ZIRP) is really living up to its billing a la Bernanke.

When Bernanke implicitly takes credit for everything good that has happened since 2008, we have to wonder if he isn’t trying to personally sop up all the excess liquidity that his policies have caused. Basic economic logic tells us that the tremendous productivity increases caused by the North American shale boom, due to innovative technologies like horizontal drilling and fracking, must account for widespread increases in real income and employment. Sure, Bernanke says that monetary policies can’t affect entrepreneurship, technological innovation and adoption. But that doesn’t stop him from claiming all the credit for the difference between U.S. and European output or chalking up the 5.1% unemployment rate as a victory for monetary policy – in flagrant disregard of fundamental economic principles.

What’s In It for Bernanke?

Readers are entitled to wonder – Why should a former Fed chairman go to the trouble of wangling an op-ed in the world’s leading financial publication for the purpose of deceiving its readers? It’s not as if he had to worry about hanging onto his chairmanship, which is now held by Janet Yellen. Economics says that people act purposefully to achieve their ends. Very well. What are Bernanke’s ends? What’s in it for him?

Ben Bernanke serves his short-term, medium-term and long-term goals with this op-ed. The Wall Street Journal’s readers learned from the tag line of the op-ed that “Mr. Bernanke… is the author of ‘The Courage to Act: A Memoir of a Crisis and its Aftermath,’ out Oct. 5 (W.W. Norton).” In show business, movie stars who write their autobiographies promote them by appearing on talk shows. That would be déclassé for an ex-Federal Reserve chairman, who instead promotes his book with an “advertorial,” a disguised promotional piece masquerading as an editorial. That is the immediate, short-term purpose of his op-ed – to maximize the sales of his book by publicizing it for the audience most likely to purchase it. It is worth noting that Bernanke’s lapses of logic may stimulate some people to buy his book, if only to find out if he is really as crazy as he seems.

Bernanke’s medium-term objective is to solidify his current position as an “advisor” to a Wall Street hedge fund. When Bernanke left his job as Fed Chairman, he had to find some way to make money. A return to academia would have represented a demotion both in terms of salary and status. Wall Street was the logical career path for a high (quasi-) government official because it could offer lifetime financial security in exchange for the use of his name and contacts in government. There was only one catch. Bernanke’s value on Wall Street (his “stock,” as it were) would drop like a stone if he were to suffer the same fate as did Alan Greenspan after Greenspan retired as Fed Chairman. During his tenure, Greenspan was lionized as a maestro who presided over the “Great Moderation,” a long period of prosperity interrupted by only one mild recession. But when the financial crisis of 2008 hit, Greenspan was excoriated as the man whose easy-money policies early in the millennium laid the foundation for the disastrous real-estate bubble and ensuing crisis. He has struggled to rehabilitate his reputation ever since. It is reasonable to suppose that Bernanke, Greenspan’s protégé, is determined not to follow in his mentor’s footsteps. For the remainder of Bernanke’s working life, this is a matter of financial self-preservation; were Bernanke’s reputation to nosedive, he would suddenly be “DK’ed” by his Washington contacts. (That is brokerage-business slang for customers who “don’t know” you when it comes time to pay up). Prospective customers of Bernanke’s firm would no longer be queuing up for the privilege of rubbing elbows with him. His value to his firm would plummet and his income would fall with it. That is another reason for Bernanke to defend his actions as Fed Chairman even after his departure from the post.

The long-term purpose behind Bernanke’s op-ed is that Bernanke wants to make sure his name is venerated by historians rather than hated. And the more insecure Bernanke feels about the correctness of his actions, the more frantic will be his efforts to forestall the unfavorable verdict of history. Bernanke’s professional specialty was the study of the Great Depression. He was constantly exposed to the vitriol heaped upon President Herbert Hoover’s supposed devotion to laissez faire and failure to prevent widespread unemployment. When Bernanke became Fed Chairman, it can hardly be surprising that, when confronted with a financial crisis, he viewed it in the worst possible light. In retrospect, it is clear that Bernanke would never err on the side of inaction, only on the side of overreaction. Financial crises are commonplace in U.S. economic history, not rare. There is no reason to suspect that economic Armageddon awaited the U.S. or the world in 2008. Indeed, there is no such well-defined concept in the vocabulary of economics. The Great Depression of the late 1920s and 1930s is the only historical period that calls to mind such images. For decades, economic textbooks have assured their readers that a recurrence of the Depression was unlikely or impossible. We have only Ben Bernanke’s word for it that bailouts, massive stimulus, price-supports for securities and QE were required to “save the economy.”

The philosophy of science has acquainted us with the Law of the Instrument. Loosely translated by one humorist, it means that when you give a small boy a hammer, he will find that everything he encounters needs pounding. Economics departments in American higher education created an instrument in Ben Bernanke’s mind and he found the temptation to use it irresistible. He will now pay the penalty for his policies. Although he held down the Fed chairmanship for only eight years, he will remain a figurative Fed chairman, condemned to communicate in Fedspeak while spending the rest of his days defending his actions.

DRI- 128 for week of 10-11-15: The U.S. Government Vs. the Public


The U.S. Government Vs. the Public

Find an easy chair. Sit down and lean back. Close your eyes and take a deep breath. Exhale slowly and breathe rhythmically. Think pleasant thoughts. Now that you’re in a receptive state, give the first answer that comes to mind to this question: “What is the function of government?” Ordinary people will quickly blurt out answers like “To do the right thing,” “Protect the public” and “Make us safe.” A political economist wouldn’t be satisfied with such vague generalities, but they capture the visceral appeal that government action holds for us.

Now, respond off the top of your head to this: “Why can’t we rely on our own voluntary activities to do the right thing, protect us and keep us safe?” And the answer will come back: “Because we are selfish and act in our own interest; we need government to act in the public interest for all rather than the selfish interest of one or a few.” Again, this wouldn’t satisfy any rigorous student of political economy, but it is seems to summarize the inchoate feelings of the general public.

Accepting these feelings as our baseline for public expectation of performance by government, consider the following incident.

The Discovery of Kennewick Man

Two college students were spending a summer day in 1996 wading in the Columbia River near Kennewick, Washington. They noticed what appeared to be a human skull in shallow water and called police. The police notified Benton County coroner, Floyd Johnson. Johnson quickly realized that this was no ordinary skull. He brought in local archaeologist, James Chatters, who quickly returned to the location where the students had found the skull. Working in the twilight, Chatters painstakingly unearthed nearly an entire skeleton from the sandy, muddy water.

Upon examination in his laboratory, the skeleton dealt Chatters a succession of shocks. First, the archaeologist noted that the bones were obviously quite old. But they did not appear to belong to a Native American or American Indian. (As we will see, there is good reason for equivocation in usage here.) Second, they were apparently not those of a white pioneer or trapper, either, because the teeth were not only cavity-free but also worn down to the roots. This suggested a prehistoric origin. When Chatters found a stone spearpoint stuck in a hip joint, this confirmed that suspicion.

When carbon-dating estimated the age of the skeleton as over 9,000 years old, it established “Kennewick Man” as an archaeological find of historic proportions. Physical anthropologist Douglas Owsley of the Smithsonian Institution told writer Douglas Preston of Smithsonian Magazine (Smithsonian, September 1994, pp.52-63) that “you can count on your fingers the number of ancient, well-preserved [North American] skeletons there are.” This is “one of the oldest skeletons ever found in the Americas.” It goes without saying, then, that scientists were frantic to get their hands on Kennewick Man for study.

Before this could happen, though, there was a legal question that had to be answered. Who had ownership of the bones? Or, more properly, who had legal jurisdiction over the bones – a question whose answer might well determine who owned them and whether or not the bones would be examined prior to burial.

It seemed that the U.S. Army Corps of Engineers was the legal custodian (manager) of the land on which the bones were found. The publicity attendant to the find and radiocarbon dating alerted them and they claimed jurisdiction over the bones. This would give them the right to make all decisions relating to handling of, and access to, the bones.

Stop right there. Is it right for government to involve itself in the questions of possession, handling and access to the bones? What do we want government to achieve by its involvement?

Answer: We want government to do the right thing. What is the right thing? Uh… well, this is obviously one of the great scientific finds of all time, so we want government to make sure that the bones are safe, properly cared for and scrupulously examined by our leading scientists. And we want government to make sure that the bones are not … uh… exploited by one person or a comparatively small group of persons for their private gain when they could benefit “the country as a whole.” Yes, that sounds like what the man or woman on the street would say. OK, on with our story.

The Fight Over Possession of Kennewick Man

County Coroner Johnson objected to the Engineers’ claim, saying that he had jurisdiction. And his argument had one very practical aspect – he had physical possession of the bones in an evidence locker in the county sheriff’s office. When the Corps of Engineers weighed in, Johnson decided to enlist a heavy hitter for his team. He called in Douglas Owsley, curator at the National Museum of Natural History. Owsley may be the leading expert in the field of physical anthropology, having performed over 10,000 examinations for institutions ranging from the CIA, FBI and State Department to local police departments. He has reassembled skeletons from mass graves, from the fire that consumed the Branch Davidians in Waco, Texas and from the terrorist attack on the Pentagon on 9-11.

Owsley knew the enormous scientific implications of this finding. He put together a team of scientists to study the bones. Unfortunately, attorneys for the Corps of Engineers persuaded county lawyers that federal law superseded local jurisdiction. The Corps took possession of the skeleton and stored it with another federal agency, the Department of Energy at DOE’s Pacific Northwest National Laboratory. That laboratory takes its name from the Battelle Corporation that operates it.

Why was this “unfortunate?” Isn’t this precisely what we want and expect – the federal government taking possession of the skeleton in order to make sure that it is in safe hands and properly stored prior to its study by qualified scientists?

Had the skeleton remained in county custody, it would have been handed over to Douglas Owsley, probably the country’s leading physical anthropologist. In his care, it would have been studied carefully by the country’s leading – that is to say, some of the world’s leading – scientists. But when the federal government’s Corps of Engineers took possession of the skeleton, bad things began to happen. First, portions of both femurs disappeared somewhere in transit between Benson County and Battelle. To this day, the disappearance remains mysterious. Second, the skeleton was improperly stored, according to Owsley’s panel of scientists. “Substandard, unsafe conditions” were the words they used to describe the excessive variations in temperature and humidity at Battelle and subsequently at the Burke Museum of Natural History and Culture in Seattle, Washington, where the skeleton was later transferred. The skeleton suffered damage due to this mishandling.

The FBI was called in to investigate the case of the missing femurs. Its leading suspects were country coroner Floyd Johnson and archaeologist James Chatters. Despite intensive search and questioning, neither the culprit(s) nor the femurs were found. Years later (remember, the find occurred in 1996), the femurs mysteriously reappeared in the country coroner’s office.

OK, OK – but at least the scientists eventually got to examine Kennewick Man, didn’t they?

We haven’t come to the end of our story. This is just its beginning. The fight that wounded Kennewick Man was perhaps less fierce and definitely much shorter than the one waged over his remains 9,000 years after his death.

The Fight Against Premature Burial of Kennewick Man

The Corps of Engineers wasn’t the group with a special interest in Kennewick Man. While the Corps was sharpening its legal claws to acquire the skeleton, a group of American Indian tribes native to the Columbia River basin lodged a claim for the skeleton. They based their claim on a 1990 federal law called the Native American Graves Protection and Repatriation Act (hereinafter, NAGPRA). This is how Smithsonian’s Douglas Preston rationalized NAGPRA: “In the 19th century, anthropologists and collectors looted fresh Native American graves and burial platforms, dug up corpses and even decapitated dead Indians lying on the field of battle and shipped the heads to Washington to study. Until NAGPRA, museums were filled [sic] with American Indian remains acquired without regard for the feelings and religious beliefs of native people. NAGPRA was passed to redress this history and allow tribes to reclaim their ancestors’ remains and some artifacts.”

Both Smithsonian Museum and Owsley himself had participated in such repatriations in the past. But, as Preston pointed out, this case was different. This skeleton had nothing to link it with any particular one of the Columbia River Basin tribes. In fact, it had none of the characteristic features of American Indians.

The statement issued by a tribal spokesman made it clear that ceding Kennewick Man to the tribes would kiss goodbye to any hope of further scientific study. “Scientists have dug up and studied Native Americans for decades. We view this practice as desecration of the body and a violation of our most deeply-held religious beliefs. From our oral histories, we know that our people have been part of this land since the beginning of time. We do not believe that our people migrated here from another continent, as the scientists do.” Upon receiving the skeleton, the tribal coalition declared, they would bury it in a secret location to prevent any future study by scientists.

What do you suppose would happen if Christian fundamentalists decried scientific study of human fossil remains as a desecration and called for the reburial of all uncovered skeletons without subjecting them to tests or examination? Uh… the government would allow scientific research to proceed. And the fundamentalists would be publicly excoriated.

In this case, though, the Corps of Engineers said that after a standard 30-day period for public comment, the skeleton would be “returned” to the tribal coalition.

Well… perhaps the Corps didn’t appreciate the magnitude of the scientific value represented by Kennewick Man.

Owsley phoned the Corps and left messages expressing his disbelief and chagrin at the huge loss that science was about to suffer. So did the members of his team. Owsley stressed that he and his colleagues would themselves bear the expenses of any study of the skeleton.

The Corps of Engineers didn’t return any of the phone calls.

Members of Congress tried to intervene on Owsley’s behalf. They got nowhere. Owsley and his colleagues hired an attorney, Alan Schneider. They pointed out to Schneider that the law seemed to be on their side. The terms of NAGPRA seemingly required that a study of the skeleton be made in order to verify that the bones really were those of a “Native American.” Otherwise, the law would simply give tribes carte blanche to seize any skeleton they chose. Schneider made the usual legal overtures to the Corps of Engineers.

The Corps of Engineers ignored him.

The decisive moment had arrived. From a legal standpoint, the next move would be to file a lawsuit against the Corps of Engineers and seek an injunction against the release of the skeleton to the tribes. But, as Schneider forcibly told his clients, this involved suing the federal government. As he put it: “If you’re going to sue the government, you better be in it for the long haul.”

Owsley had collected an impressive panel of scientists from leading universities and museums. He hoped they would join him as plaintiffs in the lawsuit. Now he got his first taste of what Schneider meant. All of those prestigious institutions took a pass on the suit. Why? First, suing the government was bound to be more than just expensive. The government has resources that are virtually unlimited. It wins lawsuits simply by outlasting opponents, regardless of the merits of the action. Second, almost all universities are creatures of government since they get funds from governments, and “governments” means the federal government since it supplies funds to lower governments. Third, museums get funds from donations and a lawsuit against the government generates bad publicity, which tends to repel donors.

And if all that wasn’t enough to discourage plaintiffs, Schneider explained what the long haul entailed. A plaintiff “had to be strong enough to stand the heat, knowing that efforts might be made to destroy their careers. And efforts were made.”

Owsley went ahead with the lawsuit because “this [study of Kennewick Man] was one of those extremely rare and important discoveries that come once in a lifetime.” To lose that chance would be “unthinkable.” Undoubtedly that was what persuaded his colleagues to stand with him purely as private citizens, without the backing of their employers.

Sure enough, when the suit went public the Society for American Archaeology opposed their efforts. Censure rained down on them from all sides. They really knew what it felt like to sue the federal government when the Justice Department sent a letter to the Smithsonian Institution suggesting that Owsley might be guilty of a criminal conflict of interest by violating the federal statute prohibiting federal employees from making claims against the U.S. government. Despite an advisory by his general counsel, Owsley’s boss Robert Fri backed the lawsuit.

Eventually, the scientists were required to broaden the scope of their action to include not merely the Corps of Engineers but also the Army, the Department of the Interior and individual officials. Schneider and his co-counsel were forced to do much of the work pro bono in order to see the case through to completion. In order to recover their fees, they would have to not only win the case but recover attorney’s fee as well. This rarely happens; judges only grant attorney’s fees when the other side is deemed to have acted in bad faith.

The federal government apparently employed as many as 93 different attorneys against the scientists. The case took years to work its way through the courts.

The first victory for Owsley, et al, came just before the expiration of the public comment period. With only hours before the skeleton was scheduled to be awarded to the tribes, a judge stayed that event until the litigation was resolved. In 2002, six years after the college students found Kennewick Man awash in the Columbia River shallows, a court ruled that the skeletal remains were not related to any living tribe, thereby invalidating any claim based upon NAGPRA. The federal government appealed to its most friendly venue, the Ninth Circuit Court of Appeals. In 2004, eight years after the discovery, the Ninth Circuit reaffirmed the lower court’s finding for the scientists. And that wasn’t all. Presiding Judge John Jelderks ruled “that the Corps on multiple occasions misled or deceived the court. He found that the government had indeed acted in ‘bad faith’ and awarded attorney’s fees of $2,379,000 to Schneider’s firm. Counting the government’s own attorney’s fees, Schneider estimated that the case had cost the taxpayers a minimum of $5 million. An economist, reckoning the true cost in opportunity-cost terms, would undoubtedly put the cost much higher.

But this story has been told from the perspective of a hostile, unfriendly observer of government. Surely the Corps of Engineers had good reasons for acting as they did.

Here is the response by the Corps of Engineers to Smithsonian magazine’s query about its actions: “The United States acted in accordance with its interpretation of NAGPRA and its concerns about the safety and security of the fragile, ancient human remains.”

It doesn’t take a hostile observer to recognize that this rationale is insanely illogical. The actions of the Corps of Engineers make a mockery of NAGPRA for the reason already stated; namely, to grant the tribes’ claim without scientific verification of it allows them carte blanche. The actual result reinforces the necessity for scientific study and validates the lawsuit. The claim that the Corps of Engineers acted to preserve the skeleton is equally absurd because (1) the skeleton suffered damage due to their improper handling and its transfer away from the care of Owsley, et al; (2) parts of the skeleton were lost or stolen during the transfer of the skeleton from the country coroner to the Corps; and (3) the Corps resolved to prevent scientific study and secure the skeleton for burial by the tribes, which would make “the safety and security of the fragile, ancient remains” superfluous. Why was the Corps ostensibly safeguarding the safety and security of the skeleton – so it would hold up better underground after it was buried?

Since the scientists won their lawsuit in 2006 and it is now 2015, I assume they finally got to perform a full examination of the skeleton. What were their conclusions?

You’re showing more scientific curiosity than the U.S. government did. Yes, the long-delayed scientific examination did finally take place. And it’s safe to say that its findings justified the trouble and expense that everybody endured.

The Scientific Significance of Kennewick Man

When the case was first decided in 2002, Owsley’s band of scientists presented a plan for study to the Corps of Engineers. It proposed that the scientists be allowed to examine Kennewick Man for a limited period before the skeleton was relinquished to the Corps. The Corps -following a pattern that was by now all too familiar – took its own sweet time about responding to the proposal. Finally, after the government’s appeal was heard and denied, the scientists were given 16 days to examine the skeleton. The first examination took place in July, 2005 – nine years after Kennewick Man’s discovery. The second and last examination occurred in February, 2006. The results of these studies are presented in detail in Kennewick Man: The Scientific Investigation of an Ancient American Skeleton (Texas A&M University Press, 680 pages; October, 2014). The book credits 48 authors and 17 researchers as contributors to the project. Smithsonian called it “the most complete analysis of a Paleo-American skeleton ever done.”

Kennewick Man was about 5 feet, 7 inches tall and weighed about 160 pounds. He was right-handed. His age at death was approximately 40 years. From markings on the bones of his shoulders, we know that he often threw something with his right arm. Presumably, it was a spear. This hypothesis is reinforced by the fact that his left leg was apparently stronger than his right leg. He also spent much time raising and lowering something in front of him, as he would if spearing fish or seals in water. He often waded in shallow water and had “surfer’s ear,” caused by swimming underwater. He subsisted on a diet of marine animals and glacial meltwater – such as might have been found in latter-day Alaska.

Douglas Owsley believes that Kennewick Man believes that Kennewick Man traveled to what is now North America by sea from another continent. His people were the original settlers of our land, not the people now known as Native Americans. If Owsley is correct, that means that the stylized plaint of Native American about having been displaced from their original ancestral homeland by barbaric European intruders is somewhat quaint – the Native Americans themselves displaced at least one other race of peoples who arrived here before them. What we know of Indian life tells us that the vast majority of the tribes lived as hunter-gatherers who befriended some tribes and warred endlessly with others. This suggests that they displaced the Polynesian competitors primarily through warfare and annihilation.

High-radiation CT scans of Kennewick Man’s bones verify that he does not belong to any living human population. His closest relatives among contemporary humans seem to be a Polynesian people, the Moriori of the Chatham Islands. They are located about 420 miles southwest of New Zealand. The Ainu people of Japan are another close relation.

Kennewick Man belonged to the class of people who originally populated both Polynesia and Japan. The modern-day Ainu have light skin and light-colored eyes and sport heavy beards. The reconstruction of Kennewick Man in Owsley’s office is built on this model.

Kennewick Man alters the traditional view of North American prehistory. Previously it was thought that the original settlers of North American traversed the Bering Strait to reach what is now Canada and, later, the U.S. (The Bering Strait was then a connecting land mass that is referred to as the “Bering Land Mass.”) These humans came from Central Asia. Now it appears that the first humans to settle North America came from what is now Polynesia by sea in boats made of wooden planks, following the coastline down from what is now Alaska to today’s Pacific Northwest. This migration may have occurred some 15,000 years ago. (In emulation of Kon-Tiki, an American daredevil paddled a kayak from Japan to Alaska beginning in 1999 and finishing in 2000.)

Owsley believed that the Polynesian migration came first, followed by the Asian migration. But the Asian migration was larger. The Asians eventually overcame the Polynesians. Owsley claims that there is a tiny, but detectible, strain of the Polynesian DNA remaining in some North American tribes today. It seems highly likely, though, that the victory of the Asians was primarily martial rather than cultural; that is, through war rather than intermarriage and assimilation. The DNA material is so small and weak, according to Owsley, that we cannot call possessors “descendants” of the Polynesians.

Ever since the discovery of Kennewick Man, the field of physical anthropology has been buzzing with activity. In Mexico, the bones of a teenage girl found in an underwater cave have been dated at approximately 13,000 years old. Her skull appears to be similar to that of Kennewick Man but she shares DNA features with North American Indians.

At this point, it seems likely that the discovery of Kennewick Man will turn out to be one of the momentous scientific discoveries of the 21st century. To be sure, that conclusion is premature. Time is the only sure test.

This is the scientific discovery that the U.S. Army Corps of Engineers spent years trying to bury forever.

Why was the Corps of Engineers desperately anxious to prevent scientific study of Kennewick Man and bury the skeleton forever?

Lawyer Alan Schneider was asked by writer Kenneth Preston to explain the behavior of the Corps of Engineers toward the scientists. Schneider noted that the Corps “was involved in tense negotiations with the tribes over a number of thorny issues, including salmon fishing rights along the Columbia River, the tribes’ demand that the Corps remove dams and the ongoing, hundred-billion-dollar cleanup of the vastly polluted Hanover nuclear site.” According to Schneider, “‘They weren’t going to let a bag of old bones get in the way of resolving other issues with the tribes.'”

Summing Up: A Theory of Government

Previously we tentatively advanced a “theory” of government. Actually, it is better called an emotional, heartfelt wish that government behave in a certain way. That wish was for government to (a) do the “right thing” – whatever in the world that might mean; (b) “protect the public and make us safe;” and (c) “act in the general or public interest rather than the selfish interest of one or a few.” The Nobel Laureate James Buchanan, co-originator of the Public Choice school of economic thought, referred to this line of (wishful) thinking as the “romantic” theory of government. Smithsonian writer Douglas Preston is apparently an adherent of this view. In commenting on his article, he says, “What shocked me the most in my research was the illogical resistance of the government.”

This is what shocked Preston. The federal government – specifically, the Corps of Engineers, backed by the Department of the Interior and the Justice Department – blatantly violated all of the above tenets. The Corps did the wrong thing by spending years thwarting scientists in their determination to unearth of the notable scientific discoveries of the young century. The Corps harmed the public by suppressing scientific knowledge and acting in bad faith in legal proceedings. It made the world unsafe for science by storing Kennewick Man under unsuitable conditions. It acted in its own selfish interest by putting the interests of its dams ahead of those of science, by putting the financial interests of the government ahead of those of science and by putting the anti-scientific bias of the American Indian political movement ahead of the legitimate advance of science. In pursuit of these selfish interests, the Corps was willing to completely distort the meaning of the law.

All I can say is that this is only one isolated case.

Students of government and regulation can attest that this is how every government agency behaves. It is not atypical. This is the typical case. It varies only by degree, not by kind. The true theory of government is that of a self-interested body promoting “its” own interests at the expense of the interests of its citizens. What remains to be fleshed out is the content of the word “its.” What can be said is that it includes politicians, bureaucrats and the people who depend on government for their livelihood. People like Douglas Preston, who apparently view government in the hazy light of Buchanan’s “romantic” theory, are living in a fool’s paradise.


As of late last year, Kennewick Man lay in storage in the Burke Museum, under the control of the Corps of Engineers. Owsley and the scientists would like to perform a few more tests to narrow down Kennewick Man’s age more precisely and pin down his geographic origin. Meanwhile, the tribes continue to insist that Kennewick Man be buried with no further testing.

The Corps of Engineers continues to deny the scientists’ requests for more tests.

DRI-141 for the Week of 8-30-2015: Did China’s Sneeze Give Wall Street a Cold? No, Just the Sniffles

An Access Advertising EconBrief:

Did China’s Sneeze Give Wall Street a Cold? No, Just the Sniffles

Suppose you kept a chart designed to keep track of your physical condition. Each day, you recorded the number of push-ups, sit-ups, jumping jacks and leg lifts you performed. Over the period of one month, the number of each exercise performed rose every day. You would rightly conclude that your physical condition was improving.

Suppose, though, that you spent the next month in the hospital recovering from a serious operation. You emerged from the hospital twenty pounds below your normal weight. For your first month following the hospital stay, your exercise log recorded much lower numbers of each exercise performed than before your hospitalization. Would you now consider your physical condition “below normal?”

No, you would adjust your expectations for normal physical performance to account for your weight loss and hospital stay. Factors other than exercise affect your physical condition. These constitute the “parameters” of the relationship between your physical condition and the level of exercise you perform. Ceteris paribus (all other things constant), we would expect the ability to perform exercise to vary directly with physical condition; e.g., the more exercise performed, the better the physical condition. When one of the “other things” changes, this change produces a greater or lesser level of physical condition associated with any level of exercise performed.

Economists recognize the importance of distinguishing between functional change and parametric change. Last week, we were handed a golden opportunity to apply this principle when world stock markets collapsed on Monday, August 24 – only to revive again two days later.

The “Black Monday” Stock-Market Collapse of Monday, August 24, 2015
“Markets Reel in Global Selloff,” screamed the headline in the August 25 Wall Street Journal. “Concerns about China’s economy intensified, accelerating the selloff across global markets as investors tried to assess whether the rout was just a short-term pullback or a signal of deeper trouble,” wrote reporter Corrie Dreibusch. “The Dow Jones Industrial Average fell 1,089 points Monday morning – the worst intraday drop in its history – then popped back up like a cork and fell again in a jagged line to finish 588.40 points down, extending a slide that has left the blue-chip index off 11% this year… European and Asian shares suffered even deeper declines, with the Shanghai Composite Index tumbling 8.5%, entering negative territory for 2015, having risen as much as 60% at its peak in June…”. In Japan, the Nikkei Stock Average fell 4.6%, while Australia’s S&P/ASX 200 Index fell 4.1%. “Meltdown was the only word that can be used to describe price action in equities…,”according to ANZ economist Mark Smith. And the carnage occurred amid heavy trading volume – the NYSE saw trading volume of almost 6.6 billion shares, nearly twice the daily average.

To be sure, there were the usual complaints about such computer-activated trades as “automatic selling” tied to stop-loss orders, which apparently contributed to the size of the initial selloff. The flood of sell orders engulfed many brokerage houses, making it difficult for smaller investors to execute their customary exit from the market in the face of price declines. One individual, on the verge of retirement, was quoted as saying, “I felt this was on a roll now and not going to stop for a while, so it’s just time to move” [emphasis added]. The speaker was explaining the reasoning that had induced him to reduce his portfolio’s stock composition from 50% to 5% just at the time when stock prices were plummeting. Ironically, however, it was apparently the much-maligned high-frequency trading firms like Virtu Financial, Inc. and Global Trading Systems LLC that stemmed the tide of the decline and produced the midday price recovery. By day’s end, the Dow Jones Industrial Average finished down 3.6% at 15871.35.

Meanwhile, the Euro and the U.S. dollar benefitted from their status as (relatively) safe havens. The dollar appreciated relative to the currencies of Russia, Indonesia, South Africa and Brazil; that is, relative to countries heavily dependent on commodities (oil, coal, metals and sugar, respectively) whose prices have been battered by a declining Chinese economy. The dollar’s appreciation came on the heels of a rise that has taken it back to the peak it reached at the start of the year, when it was perched at the highest level it has enjoyed in years.

Naturally, the first thing on everybody’s mind when they regained their breach after the market roller-coaster coasted to a stop at day’s end was: What’s going on? Is this the Armageddon that so many of us have secretly feared and expected for the last seven years? Or is it yet one more false alarm in an economic environment that is increasingly coming to resemble a high-crime urban landscape in the wee hours of a weekend, with car alarms going off unheeded and fires smoldering in abandoned buildings?

The Niall Ferguson Explanation: Chimerica at Work
The eminent and popular British historian Niall Ferguson quickly weighed in with an explanation (“‘Chimerica’ and the Rule of Central Bankers,” The Wall Street Journal, 08/28/2015). In order to understand recent events, we must appreciate the combined effects of policies undertaken by the U.S. and China. Ferguson and his collaborator, economist Moritz Schularick, have referred in recent years to “Chimerica” to stress the – often unintended – interrelationships of these policies.

Prior to 2008, the Chinese government’s policy of promoting exports and discouraging household consumption (thus promoting saving) complemented the U.S. tendency to import heavily and save sparingly, financing consumption via portfolio investment from abroad. Ferguson and Schularick claim that Chinese saving was so massive that it held U.S. interest rates unduly low and helped feed our housing bubble.

Subsequently, China “reformed” its economy by encouraging consumption, financing it with budget deficits and overspending by its national government. It reduced its interest rates, came to rely in a “shadow banking” sector similar to ours and created its own investment bubble. At this point, the two countries’ policies were no longer complementary and they created dangers for the world economy. If both nations went into recession simultaneously, it could foster worldwide depression.

Now Ferguson and Schularick see the makings for just such a calamity. The U.S. Federal Reserve has been setting the stage for an increase-rate increase in September 2015 ever since last year. Meanwhile, a Chinese recession is in prospect. Economists have recently expressed doubts about the veracity of official Chinese-government claims of 7% economic growth in the most recent quarter. The Chinese government has instituted frantic attempts at economic stimulus. (These, we observe parenthetically, have ranged from the quixotic [trying to rig higher stock-market prices by encouraging their institutions to buy stocks but threatening potential sellers!] to the depressingly conventional [lowering interest rates in an attempt to increase investment] to the alarmingly provocative [lowering reserve-requirement-ratios on bank reserves].)

Ferguson sees the current problem as the result of both the Chinese and U.S. economies “try[ing] to exit easy money at the same time.” Fortunately, “China took the first step” toward remedying this flaw by reversing its course in a stimulative direction. Now the U.S. must coordinate its monetary policy with China’s by steeling its resolve to raise interest rates and holding fast to its determination to “normalize” its interest rates at last. Only one country can kick the easy-money habit at once, the two believe. That country should be the U.S.; China should return to easy money.

Thus, Ferguson and Schularick feel that the latest Wall Street “Black Monday” was the result of “Chimerica,” the “symbiotic relationship increasingly dominating the world economy.” The unfavorable developments in China threatened recession there at the same time as a U.S. interest-rate hike loomed. “For the first time in financial history,” Ferguson claims, “a sneeze in Shanghai gave Wall Street – and almost every other stock market in the world – a cold.”

Are they correct?

The “Dudley Effect:” How an Interest-Rate Increase Can Affect Economic Events Without Actually Happening

In order to put the impact of Chinese economic dislocations upon Wall Street in their proper perspective, consider the effect of a statement made by William Dudley, late of the New York Federal Reserve and notorious economic and monetary insider. On Wednesday, August 26, Dudley remarked publicly that China’s downturn and its apparent effect on stock markets had made the case for the U.S. Fed’s scheduled September interest-rate increase “seem less compelling.” To a layman, this might see like a casual, off-the-cuff reaction. But the public vernacular of monetary policy consists of subtle hints and vague suggestions. By the standards of the craft, Dudley’s use of the muscular adverb “compelling” practically constituted a thundering declaration. His words landed on the investing world with oracular force. Not surprisingly, they were seconded by a host of pundits and familiar celebrity economists such as Lawrence Summers.

By the end of the week, the U.S. stock market had recovered virtually all the ground it had lost on Monday and Tuesday.
What inferences may we draw from this stunning sequence of events? The beginning of the week seemed to herald the return of 2008 – or worse. By week’s end, financial markets had backtracked completely. Without the benefit of training, experience and context, it would be impossible for even an intelligent layman to make sense of this. But economic logic can do it.

First, we must recall that Dudley formerly held the top policymaking position at the New York Federal Reserve, and that the New York Fed was the action arm of the Fed’s Open Market Committee and the Chairman. Dudley has long been viewed as the eminence grise of America monetary policy, the policy insider who knows all the secrets and the propensities of policymakers. Thus, his words are viewed in the same light as those of Warren Buffett on the topic of value investing. Like Buffett, Dudley is a man who can move markets with a single carefully chosen sentence.

Second, we recall that markets have passed through a long period of adjustment after the Fed’s original announcement of eventual intent to raise interest rates (more precisely, to raise its benchmark rate and cause ripple effects that will affect other short-term rates). Originally, the first increase was to have come in June. Then the date was pushed back to September. The long lag between announcement and execution not only allowed time for the effective date to be pushed back, it also allowed time for the markets to digest the effects of the higher rate in advance of its actual occurrence. The practice of adjusted to an event before it occurs is referred to in financial circles as “discounting” the effects of an event. This is one of countless cases in which economists use a familiar word in an unfamiliar, specialized sense. Here, “discounting” does not mean ignoring or disregarding. It means incorporating the expectation of the event into one’s current behavior. The effect of this is to mute or perhaps even to fully negate the impact of the event once it actually occurs. If (say) Apple were to suddenly declare bankruptcy tomorrow, the surprise announcement would cause consternation and tremendous change and dislocation throughout the world. But if Apple were to announce tomorrow that it would declare bankruptcy on a date exactly three years from tomorrow, by the time the bankruptcy date arrived, very few dislocations would occur. Advance knowledge of the event would allow everybody to adjust their behavior accordingly, so on the actual bankruptcy date, there would be little reaction – all the big reactions would already have happened. That is what “discounting the future” implies.

And that is what markets have been doing ever since the Fed announced their intention to increase interest rates sometime in mid- or late-2015. U.S. interest rates have gradually risen somewhat higher. The U.S. dollar has been appreciating slowly and steadily since 2014. In effect, people began behaving as though interest rates were already slowly rising as the anticipated date of the rate rise drew gradually nearer.
That fact, coupled with the immediate aftermath of the Dudley announcement, puts the issue of the Chinese economy and the U.S. financial markets in a whole new light.

At issue is the effect of developments in China on the U.S. economy – specifically, on the U.S. financial markets. But there are certain givens, certain parameters that must be kept in the background in such an analysis. One of those is the status of U.S. interest rates – which, as we have seen, includes not merely actual interest rates but also interest rates that are expected to hold in the future. And the sledgehammer losses of Black Monday and the following Tuesday occurred before William Dudley’s momentous comment on Wednesday – when the investing world expected U.S. interest rates to rise when the Fed Open Market Committee met in mid-September. Thus, we can label this result “September Rate Hike = Dow down 588 points (3.68%).”

After Dudley’s statement, everybody in the world “knew” that the September rate hike was dead in the water. As Reason Magazine put it, “December is the new September” – December being the next scheduled Open Market Committee meeting. And, wouldn’t you know it, in the following week, more bad economic news came out of China. (The news was that China’s manufacturing sector was showing weakness.) But this time, the background against which that economic news was placed didn’t seem quite so unfavorable to participants in the financial markets. Why? Because they were contemplating an interest-rate rise further in the future, over three months instead of only a couple weeks away. Consequently, the fall in the Dow wasn’t as pronounced as before. The Dow Jones Industrial Average fell 470 points (2.8%) to 1601 instead of falling over 1000 points before settling at down over 588 points as it had on Black Monday. This result is labeled “December Rate Hike = Dow down 470 points (2.8%).”
Deferring the rate hike by a mere three months had the effect of reducing the fall in the Dow by nearly a percentage point (.88%). What this tells us is that, while it is clear that financial markets take developments in China seriously indeed, it is really the background against which those developments occur – specifically, the height of current or expected U.S. interest rates, that governs the strength of that so-called symbiotic relationship linking “Chimerica.”

Experiments in the Social Sciences Compared to the Physical Sciences
Ferguson and Schularick present us with a hypothesis about the relationship between the Chinese and U.S. economies; namely, that the two are so closely intertwined that changes in each have large repercussions in the other. They go even further than that, maintaining that policymakers can and must manipulate economic events to prevent this mutual interdependence from producing adverse outcomes. This implies that both governments have the knowledge, ability and motivation to take the appropriate actions – an implication that economists and political scientists have been taking for granted for most of the 20th century and all of the 21st.

Ferguson tells the story of the recent Black Monday episode using a colorful metaphor: Shanghai sneezed and Wall Street got a cold. We can put this metaphor in quasi-scientific terms, enabling us to view recent events as a kind of laboratory experiment. The Chinese economy (or, more precisely, changes or developments therein) is the independent or causal variable. U.S. financial markets, for which we can use the Dow Jones Industrial Average as a proxy variable to simplify matters, is the dependent variable. And the level of current or expected U.S. interest rates represents a key parameter affecting the dependent variable – a parameter of paramount interest in this case.

The events of recent weeks have allowed us to observe something that happens only rarely – a controlled experiment in which successive changes in the independent variable and a key parameter while the dependent variable was held roughly constant have produced revealing results.

Normally, economists have to hold key variables constant statistically because in real life economists can acquire date only over fixed intervals and the relevant variables refuse to hold still for our benefit – they change because people insist on living normal lives instead of participating in a grand experiment to further the interests of social science. But in this case we saw a combination of two unusual, fortuitous occurrences: successive weeks saw two significant changes in the Chinese economy sandwiched around the remarks by William Dudley (and others) that shifted expectations about when the U.S. Federal Reserve would begin normalization of U.S. interest rates.

When we carefully observed the results of each change, we determined two things. First, Dudley’s suggestion that the September interest-rate hike should not occur was sufficient to virtually reverse the effects of Black Monday and Tuesday. Second, when a Chinese “shock” occurred under a somewhat more favorable interest-rate environment – the expectation that interest rates would rise in December instead of September – this reduced the effect on the Dow by almost one percentage point (specifically, by .88%). Taken together, these results suggest that internal parameters generally and interest rate expectations specifically are more causative of changes in U.S. financial markets than are developments in the Chinese economy.

Seldom does life present us with the opportunity to observe an economic experiment in the laboratory of reality. Here, we were able to observe a change not only in the dependent variable (the Chinese economy), but also a change in a key parameter affecting the dependent variable (U.S. financial markets). And the result warns us that, however, tempting a grand thesis (“Chimerica”) may sound, we should keep our wits about us and subject it to a common-sense test.

As it happens, we can say more about the Ferguson-Schularick hypothesis. These additional comments do not derive from good fortune but from sound theory.

Why Should Central Banks Stop Monkeying Around With Money?
Niall Ferguson was not the only prominent personality to weigh in on the subject of Black Monday. Former Council of Economic Advisors Chairman Martin Feldstein wrote in The Wall Street Journal about “The Fed’s Stock-Price Correction” (8/26/2015). Feldstein believes that the Fed’s easy money policies after the 2009 stimulus were aimed at herding investors into the stock market by depressing yields on fixed-income assets. (This is called a “portfolio substitution” strategy.) When stock prices rose, the resulting effect on real incomes would make households feel wealthier. In turn, this would make them spend more, and this increase in consumer spending would stimulate more production and spending via a multiplier effect.

According to Feldstein, the strategy worked – too well. It produced a bubble in the stock market that is now beginning to burst. He expects the bubble to continue deflating (or “unwinding,” as he puts it) “for several months.” Whereas Ferguson and Schularick regard the interrelation of the Chinese and American economies as the decisive factor posing danger to the world economy, Feldstein sees the “mispricing of assets” caused by easy money policies as “enough to make the downturn inevitable.” A “variety of events” lit the match, but the tinder had already been placed by central banks.

Oddly, while Feldstein holds central banks accountable, Ferguson and Schularick believe that only central banks can prevent disaster. Feldstein does not trust central banks, but he strongly believes that fiscal policy – that is, policies involving government taxation and spending – are necessary to “stimulate the economy without increasing the national debt.”

These commentators call to mind the parable of the blind men who encountered an elephant, each one fondling a different part and each one concluding that he grasped a different animal. They have each grasped a portion of the truth. In particular, Feldstein’s concern for mispricing of assets is well-founded but insufficient. It is not only stocks that are mispriced – investments of all kinds and durations are mispriced by a policy that does not allow interest rates to perform their fundamental function of coordinating the actions of savers and investors through time. Moreover, each of these commentators is blind to the fundamental fact of economic life: government runs the economic show today despite the fact that regulators lack the knowledge, expertise and motivation to do the things that they claim the ability to do.

The worst offender in government today is the central bank. Their worst offense is the control of interest rates. Normalization is the first step on the road back from economic serfdom. It should begin immediately and proceed uninterrupted.


DRI-134 for week of 8-23-15: Is the Purpose of Government to Eliminate All Sources of Discontent?

An Access Advertising EconBrief:

Is the Purpose of Government to Eliminate All Sources of Discontent?

If we took every action taken by government at face value, we would be forced to conclude that its central purpose is to eliminate all sources of discontent. And that is exactly the goal set for it by a long-forgotten Labor Party parliamentarian in early 20th-century Great Britain. Is that really what motivates politicians and bureaucrats? Should it be?
Actions taken by state-government regulators in New York raise these questions. Earlier this month, state Attorney General Eric Schneiderman announced that retailer Abercrombie and Fitch was the most prominent of 13 companies to end a work practice known as “on-call scheduling.” The Attorney General (hereinafter, AG) cited pressure by his office as the motivating force behind the change. The practice requires workers to be “on-call” for work in the sense that they must be prepared to show up or stay home on very short notice of as little as one hour. As noted in The Wall Street Journal (“Abercrombie Agrees to End On-Call Scheduling,” 8/7/2015, by Lauren Weber), “workers whose shifts are canceled don’t receive pay, even if they had blocked out that time and made child-care  or other arrangements.”
Abercrombie’s general counsel, Robert Bostrom, described the company’s capitulation by stating that workers will henceforth receive their schedules one week in advance and can choose to receive word about additional shifts that become available on short notice. The new policy, intended to “create as stable and predictable a work environment as possible” for Abercrombie’s employees, will become effective in September in New York and eventually be phased in nationwide.
Why did the Attorney General of New York state choose to intervene in the work-scheduling policies of a baker’s dozen retailers? “Unpredictable work schedules take a toll on all employees, especially those in low wage sectors,” commented Schneiderman, adding that other companies should follow Abercrombie’s “important step.” In April, the AG had claimed that Abercrombie’s policy “potentially” broke a New York law. That law states that staffers who report for scheduled work must receive at least four hours’ pay at minimum wage even if sent home. (Several other states have similar laws.) As the Journal points out, the law was passed before the advent of text messaging and e-mail made it easy to reach most people on short notice. Despite its change of policy, Abercrombie admitted no violation of law.
To an economist, the regulatory action taken by the New York Attorney General’s office and the explanations accompanying it seem utterly inexplicable – unless we are willing to believe that the inherent purpose of government is to eliminate all sources of human discontent.
Why Oppose – That Is, Regulate – On-Call Scheduling?
AG Schneiderman has chosen to regulate on-call scheduling by issuing an unfavorable opinion of this particular work practice, then pressuring firms behind the scenes to drop it. The question is: Why?
According to the Journal, “a number of current and former Abercrombie store associates nationwide left complaints about the scheduling policy on the employer-review site “Glassdoor….” (Parenthetically, we should note that the ghastly use of “a number of” could denote anything from one to infinity and is the kind of elementary error that freshman journalism students are taught to avoid.) Let us stipulate that some workers find the practice of on-call scheduling objectionable. So what? Is the purpose of government to act as a sort of all-purpose complaint department? Or is there something unique, perhaps, about the situation of retail employees – or human labor in general – that requires complaints to be addressed by government rather than directed to management?
As a matter of fact, why don’t workers who find the practice of on-call scheduling objectionable adopt the great American solution open to all workers in a free society; namely, quit and find a different job with working conditions more to their liking?
The Great Fried-Chicken Dilemma
To clarify this problem, consider a much easier problem posed in a much more familiar context.
Consider the problem of consumers confronted with a product they don’t like. Suppose a diner visits a fried chicken restaurant and finds the main course unpalatable. Should the diner complain to management? Well, many restaurants encourage this; it may or may not produce a refund for the diner. Conceivably, it might even result in alteration of the restaurant’s recipe or staff. But chances are that the diner will simply shrug and go somewhere else. After all, there are untold numbers of competing fried-chicken restaurants.
Should we demand that the Federal Trade Commission monitor consumer websites for customer complaints and “crack down” on restaurants that sell “inferior” fried chicken? No, there are huge flaws with this approach to the problem of maintaining restaurant quality. One drawback is that consumer tastes in fried chicken differ; one man’s inferior chicken is another man’s delight. Requiring government to enforce a quality standard in fried chicken will inevitably result in the production of “government quality” fried chicken; that is, one kind of fried chicken that diners of all tastes will have to eat or else. In this case, “or else” means they will have to prepare their own fried chicken. Since they previously had that alternative but rejected it in favor of dining out, this clearly makes them worse off than they would be if they could find a fried chicken to their taste. Of course, we could pretend to solve this problem by having government set up a different quality standard for each different flavor of fried chicken – one for extra crispy, one for spicy, and so on. But this would only create a host of new problems. And it assumes that government is just as responsive to consumer desires as producers are in free markets, whereas our experience tells us that government is quite insensitive to the desires of constituents and tends to impose a “one-size-fits-all” standard on the public whenever it can.
Another obvious drawback is the vast number of fried-chicken restaurants and diners, which would force government to employ huge numbers of people and spend ungodly amounts of time checking out complaints. (Lack of resources also argues against having government set up multiple quality standards for fried chicken, since it would hardly have sufficient time and manpower to enforce one standard, let alone multiple ones.)
Still another drawback would be the inducement sellers would have to file complaints against their competitors. Not only would this tie up government resources in investigating bogus complaints, it would also imperil the workings of competitive markets. If sellers could use government as a tool in falsely branding their competitors’ products as inferior, this would vitiate the very purpose that regulation is intended to serve.
Just think about all the problems we don’t have because we don’t force government to regulate fried-chicken quality in free markets. We don’t have to worry about how many different flavors of fried chicken to allow – are regular, extra-crispy, spicy, and Cajun-style enough, too many or insufficient to satisfy us? Should the number vary in different cities? Counties? States? Regions? Should it change over time, and if so how often? We don’t worry about any of these things. In fact, we take the answers to these questions completely for granted without ever realizing that they might be a problem in the first place. The market takes care of the answers without any of us ever giving the matter a moment’s thought.
Upon consideration, we realize that the mere fact that somebody doesn’t like fried chicken at a restaurant doesn’t necessarily mean that a market failure calling for government regulation has occurred. It might simply mean that the consumer has tasted fried chicken prepared in one of the various ways that don’t suit him; he needs to visit a restaurant better suited to his tastes. Of course, this could be styled a failure of information, but it is certainly not clear that government regulation could have prevented it or could solve it for other consumers. Markets, not governments, are collators and transmitters of information.
If we tried hard enough, we might envision a role for government in such a situation. Maybe the consumer didn’t like the chicken because it was tainted by salmonella. But we have government regulation of health standards in restaurants and preparation standards in chicken plants – and salmonella cases still happen. In reality, markets solve the problem of food poisoning in restaurants by turning restaurants that serve tainted food into commercial pariahs – a disincentive that exceeds any penalty government offers.
The Great Fried-Chicken Dilemma offers vast insight into the problems of labor markets in general and the regulation of on-call scheduling in particular.
The Potential Efficiency Benefits of On-Call Scheduling
Neither Wall Street Journal article nor Attorney General Schneiderman – nor, for that matter, Abercrombie itself – said anything to suggest that the practice of on-call scheduling might actually be beneficial for retail sellers, for consumers and for workers themselves. That omission is startling. There was a reason why Abercrombie and 12 other retail businesses employed this business practice.
Every consumer has patronized a retail seller and knows that these businesses are sometimes bustling with business and sometimes nearly empty. At some point, every consumer has experienced the frustration of seeking a sales clerk in vain. Businesses strive to keep exactly the right number of staff on the floor – not too many, not too few. Depending on the particular good(s) sold, human labor may be the most expensive cost incurred by the business, so it behooves managers to manipulate their “inventory” of sales staff to best advantage.
Just as businesses want to manage their inventory of sales staff optimally, so they also want to keep just the right amount inventory of goods on their shelves. For centuries, this was one of the biggest headaches facing the average business. Economists even identified the phenomenon called an “inventory recession,” caused by too many businesses simultaneously overestimating the need for future inventories and producing far more goods than were needed – only to find shelves and warehouses full to overflowing when consumer demand did not keep pace with expectations. Recent technological innovations in transportation, logistics and computers have allowed business to employ an inventory scheduling practice called “just in time” inventory management. This allowed businesses to postpone restocking until the last minute, letting them gauge demand much more accurately and avoiding the necessity for accurate long-distance forecasting of inventory needs.
If we view a retail business’s roster of employees as its staffing “inventory,” it is clear that on-call scheduling is a kind of “just-in-time” program for staffing. It allows retail managers to postpone determination of their final staffing schedule until the point when they can gauge the demand for retail staffing much more accurately. This allows them to avoid paying superfluous clerks when the store is virtually empty while having extra clerks on hand when demand is unexpectedly strong. It is crystal clear that on-call scheduling is potentially very beneficial for a retail business.
Moreover, it should be equally clear that on-call scheduling benefits consumers, too. This is a case where the interests of consumers and those of the business are directly aligned. Consumers want to have extra clerks on hand at busy times but don’t benefit much, if at all, from the presence of superfluous clerks in slack times. In the long run, competition between retail businesses will insure that the benefits of lower costs are passed along to consumers in the form of lower prices, so the efficiency gains from on-call scheduling really go to consumers, even though we associate the concept of business efficiency with productive advantage and gains to business owners.
What obviously failed to occur to AG Schneiderman, the Wall Street Journal and (from outward appearances) even Abercrombie and its spokesman is that on-call scheduling is also a potential source of benefits to retail employees. Just as consumers in our fried-chicken example derive benefits from product differentiation, so also may workers derive benefits from different terms of employment and work environments. Retail sales work is generally viewed as a form of low-skilled labor. Economists treat low-skilled labor as homogeneous; that is, as indistinguishable. But on-call scheduling allows workers the chance either to accept employment or, alternatively, earn a higher wage by competing on the basis of willingness to work – or forego work – on short notice. Since the decision to work for a particular employer is voluntary, nobody is forced to take this offer – just as no consumer is forced to eat fried chicken they don’t like. There are countless retail sellers, so workers who don’t relish the practice of on-call scheduling can work for a business that doesn’t follow the practice – just as consumers who don’t like one variety of fried chicken can patronize one of the many other competing brands extant.
So Why Regulate On-Call Scheduling?
On-call scheduling offers potential benefits to retail businesses, consumers and even to retail workers – just as different types of products offer potential benefits to consumers. Nobody is forced to endure on-call scheduling if they don’t like it, since the large number of retail businesses competing for workers gives workers a wide choice of employment – just as consumers have wide choices of different products and aren’t forced to put up with a particular brand. If it would be incredibly wasteful and a huge mistake to regulate brand variety and quality of consumer goods – and it would – wouldn’t it be just as big a mistake to regulate the practice of on-call scheduling for analogous reasons?
The answer is yes. There is no earthly reason for government at any level – municipal, state or federal – to regulate the practice of on-call scheduling. Only bad can come of it. The implication of AG Schneiderman’s actions is that government has a duty to prevent human beings within its jurisdiction from experiencing even momentary discontent. The AG must consider workers to be either too stupid to act in their own interest or too helpless to do so even if they had the wit to perceive it. Left unspecified, however, is how or where the AG acquired the superior wisdom and knowledge to substitute his judgment for those of the workers whose interests he claims to represent.
Free Markets vs. Regulation
We have shown that various ways of producing goods and services (such as utilizing on-call scheduling to staff retailing establishments) and various types of goods (such as different varieties and flavors of fried chicken) offer potential benefits to consumers. How is that potential actuated; that is, how do we cross the bridge from “potential” to “actual?”
Apparently, there are two ways. We can give the processes and products a trial in the free market and see how they work, keeping the ones that succeed and discarding the ones that fail. The failures will lose money for sellers because consumers will reject them, either because they do not like them or because they are too expensive. That makes it easy for producers to discard them. Alternatively, regulators can accept or reject them on an a priori basis. In order for this method to succeed, regulators must know as much about technology and costs as the producers of the affected goods and services do. Regulators also must know as much about consumers’ tastes and preferences as the consumers themselves do – as well as knowing what is “good” for consumers to consume in a physiological and moral sense. In other words, regulators must be well-nigh omniscient. (Where input markets are directly affected, as in this case, we can treat workers as the “consumers” of the relevant process.)
Put in this way, the choice is as clear as two-way glass. Free markets work vastly better and are less expensive than regulation. Given this, why do governments leap to regulate at every opportunity?
Why Governments Almost Always Choose Regulation
The New York State Attorney General chose to regulate on-call scheduling for a reason. Based on our analysis, we might suppose him to be perverse – deliberately choosing a result that makes everybody worse off than before. But that is not so. Economics tells us that somebody has to be better off, and the first place to look for the beneficiary or beneficiaries would be the AG himself and his sponsors and constituents.
The AG is a bureaucrat, a denizen of state government. He benefits when his domain grows larger and his power over it increases. When the number of firms he regulates increases, the AG’s power increases and his budget increases or, more properly, his basis for demanding a budget and staffing increase strengthens. When the AG’s office regulates the processes employed by retail firms, preventing them from using innovative means to compete with other firms, state government is cartelizing what would otherwise be a competitive market. The result of this will be less output and higher prices in the retail-sales sector. This creates a constituency of business owners and managers who are beholden to the AG and state-government politicians. (In the broad sense, this is what happened for over four decades when the old Civil Aeronautics Board cartelized interstate airline travel in the United States between the 1930s and 1978.)
Notice that the list of beneficiaries from regulation of on-call scheduling is small compared to the roster of potential beneficiaries from unregulated on-call scheduling. Regulation benefits government bureaucrats, workers and politicians directed involved with the affected industry, along with business owners who gain from market cartelization. It harms everybody else, most notably the consumers of the good involved and (in this case) almost certainly the workers affected as well. The gains of business owners are probably temporary, but the gains accruing to government will last as long as government regulation continues.
The best way to visualize the actions of government vis a vis markets is by thinking of government as entrepreneurship in reverse. Politicians and bureaucrats are always alert for opportunities to expand their domain. But whereas the invisible hand of competition and voluntary exchange insures that free-market entrepreneurship creates broad, mutual benefits, the coercive, visible hand of government subtracts net value from almost all of its interchanges with markets.
Is the Purpose of Government to Eliminate All Sources of Discontent?
Now we understand the heretofore inexplicable contention that the purpose of government is to eliminate all sources of discontent. How could anybody be so naïve as to think that government has the ability to remedy all unhappiness? Doesn’t the speaker realize that his statement is a recipe for fiscal insolvency? Writing a blank check to government is a fruitless quest for a non-existent nirvana.
Alas, the author of those words didn’t particularly care whether government actually succeeded in eliminating any discontent or not. He was not striving for universal bliss. Rather he sought an unlimited warrant for government intrusion in order to benefit his own special interest. The more power government has, the larger it grows. The larger it grows, the more its servants prosper. And the more the servants of government prosper, the more the rest of us suffer.