Tuesday, July 12, 2011

What I Read Today - Tuesday July 12, 2011

From: The New York Times

The Magic Lever

By DAVID BROOKS


The world economy is a complex, unknowable organism. Most of us try to diversify our investments and balance risk and security to protect against the unexpected.

But a few years ago a group of bankers thought they had the magic tool to help them master financial trends and predict the future. Sophisticated risk assessment models would enable them to rewrite the rules and make more money.

Their arrogance was soon exposed. Along came the financial crisis.

In the middle of the crisis another group emerged, believing it had the magic lever to alter the economy’s trajectory. Democrats argued that through gigantic deficit spending, they could bring unemployment rates down sharply and produce a “summer of recovery.”

The spending they began must have done some good to cushion the recession, but either through a failure of theory or a failure of implementation, their lever was not as powerful as they promised. Federal spending rose from 19.38 to 24.91 percent of gross domestic product, but the economy refused to rebound and the world is awash in oceans of debt.

Now a third group has emerged, also claiming that it has the magic lever to control the economy. Staunch Republicans argue that taxes are central to determining economic growth. Tax cuts, they argue, have huge positive benefits and tax increases have disastrous negative effects.

In the middle of the current budget negotiations, these Republicans argue that the tax increases the Democrats are proposing — ending some deductions for the affluent, hitting oil and gas companies — would be terrible for the economy. These unacceptable increases would be worse than the threat of national default, worse than a decade of gigantic deficits.

Not many Americans have this expansive view on the power of tax policy. According to the Gallup Organization, only 20 percent of Americans believe the budget deal should consist of spending cuts only. Even among Republicans, a plurality believes there should be a mixture of tax increases and spending cuts.

Yet the G.O.P. is now oriented around this 20 percent. It is willing to alienate 80 percent of voters and commit political suicide because of its faith in the power of tax policy.

These three groups — bankers, Democratic Keynesians and staunch Republicans — have one thing in common: They all believe they have identified the magic lever. They believe they can control their economic fate.

Some of us do not believe there is a magic lever. Deficit spending stimulates growth, but not by that much. Tax increases are bad, but they are not disastrous. We believe that there are a thousand factors that go into economic growth, and no single one is dispositive.

We look at the tax cuts of 2001 and do not see tremendous gains. We look at the tax increase of 1982 and do not see a ruinous disaster. We look at high deficit eras and low deficit eras and do not see an easy correlation between deficit spending and growth. On the contrary, if you look around the world there’s a slight negative correlation between government size and prosperity.

We believe that if you rest everything on a single lever (Increase deficits! Cut taxes!), you give people a permission slip to be self-indulgent. They will spend or cut to their hearts’ content and soon you’ll be facing national bankruptcy. We believe that even if you are theoretically right, your policies will be distorted by human frailties and special interests.

The people in my group (you might call us conservatives) are more likely to embrace a low and steady approach to fiscal policy. Control debt. Control entitlements. Keep tax levels reasonable and the tax code simple. Work on the economic fundamentals: human capital, productivity, labor market flexibility, open trade, saving and investment. Don’t believe you can use magic levers to manipulate growth month to month.

People in my camp form a silent majority. But we have been astonishingly passive during these budget negotiations. The tax cut brigades and the Medicare/Spending brigades are well organized. The people who believe in balance and the fundamentals sit piously on the sidelines.

The tragedy is that in Barack Obama and John Boehner we have leaders who would like to do something big. They seem to know that you need bipartisan cover if you want to really cut spending. They seem to know circumstances for deficit reduction will only get worse in the years ahead.

But they are bracketed on all sides — by the tax cut and Medicare brigades, by the wonks hatching budget gimmicks that erode trust, by political hacks who don’t want to lose their precious campaign issues: tax cuts forever, Medicare spending without limit.

Mostly, they are buffeted by the proud, by those who think they have a magic lever to control human destiny and who will not compromise it away. This is the oldest story known to man.

Thursday, July 7, 2011

What I Read Today - Thursday July 7, 2011

From: The Wall Street Journal

Casey Anthony: The System Worked


Even if it is 'likely' or 'probable' that she committed the murder, she must be acquitted. The standard is proof beyond a reasonable doubt.

By ALAN M. DERSHOWITZ

'This case [is] about seeking justice for Caylee . . ." So argued the prosecutor in the Casey Anthony murder case. He was wrong, and the jury understood that.

A criminal trial is never about seeking justice for the victim. If it were, there could be only one verdict: guilty. That's because only one person is on trial in a criminal case, and if that one person is acquitted, then by definition there can be no justice for the victim in that trial.

A criminal trial is neither a whodunit nor a multiple choice test. It is not even a criminal investigation to determine who among various possible suspects might be responsible for a terrible tragedy. In a murder trial, the state, with all of its power, accuses an individual of being the perpetrator of a dastardly act against a victim. The state must prove that accusation by admissible evidence and beyond a reasonable doubt.

Even if it is "likely" or "probable" that a defendant committed the murder, he must be acquitted, because neither likely nor probable satisfies the daunting standard of proof beyond a reasonable doubt. Accordingly, a legally proper result—acquittal in such a case—may not be the same as a morally just result. In such a case, justice has not been done to the victim, but the law has prevailed.

For thousands of years, Western society has insisted that it is better for 10 guilty defendants to go free than for one innocent defendant to be wrongly convicted. This daunting standard finds its roots in the biblical story of Abraham's argument with God about the sinners of Sodom.

Abraham admonishes God for planning to sweep away the innocent along with the guilty and asks Him whether it would be right to condemn the sinners of Sodom if there were 10 or more righteous people among them. God agrees and reassures Abraham that he would spare the city if there were 10 righteous. From this compelling account, the legal standard has emerged.

That is why a criminal trial is not a search for truth. Scientists search for truth. Philosophers search for morality. A criminal trial searches for only one result: proof beyond a reasonable doubt.

A civil trial, on the other hand, seeks justice for the victim. In such a case, the victim sues the alleged perpetrator and need only prove liability by a preponderance of the evidence. In other words, if it is more likely than not that a defendant was the killer, he is found liable, though he cannot be found guilty on that lesser standard.

That is why it was perfectly rational, though difficult for many to understand, for a civil jury to have found O.J. Simpson liable to his alleged victim, after a criminal jury had found him not guilty of his murder. It is certainly possible that if the estate of Caylee Anthony were to sue Casey Anthony civilly, a Florida jury might find liability.

Casey Anthony was not found innocent of her daughter's murder, as many commentators seem to believe. She was found "not guilty." And therein lies much of the misunderstanding about the Anthony verdict.

This misunderstanding is exacerbated by the pervasiveness of TV shows about criminal cases. On television and in the movies, crimes are always solved. Nothing is left uncertain. By the end, the viewer knows whodunit. In real life, on the other hand, many murders remain unsolved, and even some that are "solved" to the satisfaction of the police and prosecutors lack sufficient evidence to result in a conviction. The Scottish verdict "not proven" reflects this reality more accurately than its American counterpart, "not guilty."

Because many American murder cases, such as the Casey Anthony trial, are shown on television, they sometimes appear to the public as if they were reality television shows. There is great disappointment, therefore, when the result is a verdict of not guilty. On the old Perry Mason show, the fictional defense lawyer would not only get his client acquitted but he would prove who actually committed the murder. Not so in real life.

The verdict in the Casey Anthony case reflected the lack of forensic evidence and heavy reliance on circumstantial inferences. There was no evidence of a cause of death, the time of death, or the circumstances surrounding the actual death of this young girl. There was sufficient circumstantial evidence from which the jury could have inferred homicide. But a reasonable jury could also have rejected that conclusion, as this jury apparently did. There are hundreds of defendants now in prison, some even on death row, based on less persuasive evidence than was presented in this case.

Juries are not computers. They are composed of human beings who evaluate evidence differently. The prosecutors in this case did the best they could with the evidence they had, though I believe they made a serious mistake in charging Casey Anthony with capital murder and introducing questionable evidence, such as that relating to the "smell of death" inside the trunk of Casey Anthony's car.

The defense also made mistakes, particularly by accusing Ms. Anthony's father of sexually abusing her. Although they leveled this unfounded accusation in an effort to explain why Casey had lied, it sounded like the kind of abuse excuse offered to justify a crime of violence. But a criminal trial is not about who is the better lawyer. It is about the evidence, and the evidence in this case left a reasonable doubt in the mind of all of the jurors. The system worked.

Mr. Dershowitz is a law professor at Harvard. His latest book is "Trials of Zion" (Grand Central Publishing, 2010).

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What I Read Today - July 7, 2011

From: The New York Times

Taxes and Billionaires

By NICHOLAS D. KRISTOF


The House speaker, John Boehner, suggests that the Republican threat of letting the United States default on its debts is driven by concern for jobs for ordinary Americans.

“We cannot miss this opportunity,” he told Fox News. “If we want jobs to come to America, we’ve got to give American businesspeople the confidence to invest in our economy.”

So take a look at one of the tax loopholes that Congressional Republicans are refusing to close — even if the cost is that America’s credit rating blows up. This loophole has nothing to do with creating jobs and everything to do with protecting some of America’s wealthiest financiers.

If there were an award for Most Unconscionable Tax Loophole, this one would win grand prize.

Wait, wake up! I know that “tax policy” makes one’s eyes glaze over, but that’s how financiers have gotten away with paying a lower tax rate than their chauffeurs or personal trainers. Tycoons have bet for years that the public is too stupid or distracted to note that in many cases they’re paying just a 15 percent tax rate.

What’s at stake is the “carried interest” loophole, and President Obama is pushing to close it. The White House estimates that this would raise $20 billion over a decade. But Congressional Republicans walked out of budget talks rather than discuss raising revenues from measures such as this one.

The biggest threat to the United States this summer probably doesn’t come from Iran or Libya but from the home-grown risk that the nation will default on its debts. We don’t know the economic consequences for America or the world, and some of the hand-wringing may be overblown — or maybe not — but it’s reckless of Republicans even to toy with such a threat.

This carried interest loophole benefits managers of financial partnerships such as hedge funds, private equity funds, venture capital funds and real estate funds — who are among the highest-paid people in the world. John Paulson, a hedge fund manager in New York City, made $4.9 billion last year, top of the chart for hedge fund managers, according to AR Magazine, which follows hedge funds. That’s equivalent to the average per capita income of 184,000 Americans, according to my back-of-envelope calculations based on Census Bureau figures.

Mr. Paulson declined to comment on this tax break, but here’s how it works. These fund managers are compensated mostly with a performance bonus of 20 percent or more of the profits they make. Under this carried interest loophole, that 20 percent is eligible to be taxed at the long-term capital gains rate (if the fund’s underlying assets are held long enough) of just 15 percent rather than the regular personal income rate of 35 percent.

This tax loophole is also intellectually vacuous. The performance fee is a return on the manager’s labor, not his or her capital, so there’s no reason to give it preferential capital gains treatment.

“The carried interest loophole represents everyone’s worst fear about the tax system — that the rich and powerful get away with murder,” says Victor Fleischer, a law professor at the University of Colorado, Boulder, who has written about the issue. “Closing the loophole won’t fix the budget by itself, but it gets us one step closer to justice.”

At a time when the richest 1 percent of Americans have a greater collective net worth than the entire bottom 90 percent, there are other ways we could raise money while also making tax policy more equitable. The White House is backing some of them in its negotiations with Congress, but others aren’t even in play.

One important proposal has to do with founder’s stock, the shares people own in companies they found. Professor Fleischer has written an interesting paper persuasively arguing that founder’s stock is hugely undertaxed. It, too, is essentially a return on labor, not capital, and shouldn’t benefit from the low capital gains rate.

Likewise, Europe is moving toward a financial transactions tax on trades made in financial markets. That is something long championed by some economists — especially James Tobin, who won a Nobel Prize for his work — and it would also raise tens of billions of dollars at a time when it is desperately needed. It makes sense.

The larger question is this: Do we try to balance budget deficits just by cutting antipoverty initiatives, college scholarships and other investments in young people and our future? Or do we also seek tax increases from those best able to afford them?

And when Congressional Republicans claim that the reason for their recalcitrance in budget negotiations is concern for the welfare of ordinary Americans, look more closely. Do we really want to close down the American government and risk another global financial crisis to protect the tax bills of billionaires?

I invite you to visit my blog, On the Ground. Please also join me on Facebook, watch my YouTube videos and follow me on Twitter.

Tuesday, July 5, 2011

What I Read Today - Tuesday July 5, 2011

From: The New York Times

The Mother of All No-Brainers

By DAVID BROOKS


The Republicans have changed American politics since they took control of the House of Representatives. They have put spending restraint and debt reduction at the top of the national agenda. They have sparked a discussion on entitlement reform. They have turned a bill to raise the debt limit into an opportunity to put the U.S. on a stable fiscal course.

Republican leaders have also proved to be effective negotiators. They have been tough and inflexible and forced the Democrats to come to them. The Democrats have agreed to tie budget cuts to the debt ceiling bill. They have agreed not to raise tax rates. They have agreed to a roughly 3-to-1 rate of spending cuts to revenue increases, an astonishing concession.

Moreover, many important Democrats are open to a truly large budget deal. President Obama has a strong incentive to reach a deal so he can campaign in 2012 as a moderate. The Senate majority leader, Harry Reid, has talked about supporting a debt reduction measure of $3 trillion or even $4 trillion if the Republicans meet him part way. There are Democrats in the White House and elsewhere who would be willing to accept Medicare cuts if the Republicans would be willing to increase revenues.

If the Republican Party were a normal party, it would take advantage of this amazing moment. It is being offered the deal of the century: trillions of dollars in spending cuts in exchange for a few hundred million dollars of revenue increases.

A normal Republican Party would seize the opportunity to put a long-term limit on the growth of government. It would seize the opportunity to put the country on a sound fiscal footing. It would seize the opportunity to do these things without putting any real crimp in economic growth.

The party is not being asked to raise marginal tax rates in a way that might pervert incentives. On the contrary, Republicans are merely being asked to close loopholes and eliminate tax expenditures that are themselves distortionary.

This, as I say, is the mother of all no-brainers.

But we can have no confidence that the Republicans will seize this opportunity. That’s because the Republican Party may no longer be a normal party. Over the past few years, it has been infected by a faction that is more of a psychological protest than a practical, governing alternative.

The members of this movement do not accept the logic of compromise, no matter how sweet the terms. If you ask them to raise taxes by an inch in order to cut government by a foot, they will say no. If you ask them to raise taxes by an inch to cut government by a yard, they will still say no.

The members of this movement do not accept the legitimacy of scholars and intellectual authorities. A thousand impartial experts may tell them that a default on the debt would have calamitous effects, far worse than raising tax revenues a bit. But the members of this movement refuse to believe it.

The members of this movement have no sense of moral decency. A nation makes a sacred pledge to pay the money back when it borrows money. But the members of this movement talk blandly of default and are willing to stain their nation’s honor.

The members of this movement have no economic theory worthy of the name. Economists have identified many factors that contribute to economic growth, ranging from the productivity of the work force to the share of private savings that is available for private investment. Tax levels matter, but they are far from the only or even the most important factor.

But to members of this movement, tax levels are everything. Members of this tendency have taken a small piece of economic policy and turned it into a sacred fixation. They are willing to cut education and research to preserve tax expenditures. Manufacturing employment is cratering even as output rises, but members of this movement somehow believe such problems can be addressed so long as they continue to worship their idol.

Over the past week, Democrats have stopped making concessions. They are coming to the conclusion that if the Republicans are fanatics then they better be fanatics, too.

The struggles of the next few weeks are about what sort of party the G.O.P. is — a normal conservative party or an odd protest movement that has separated itself from normal governance, the normal rules of evidence and the ancient habits of our nation.

If the debt ceiling talks fail, independents voters will see that Democrats were willing to compromise but Republicans were not. If responsible Republicans don’t take control, independents will conclude that Republican fanaticism caused this default. They will conclude that Republicans are not fit to govern.

And they will be right.