Men and Woman of the Century Jude Wanniski

Memo To: Walter Isaacson, Time

From: Jude Wanniski
Re: My Picks

I was glad to see you did not go with Franklin Roosevelt as your "Man of the Century," Walter, although I know he was your personal choice. Albert Einstein is a few steps ahead of him, I think, and was a much better choice. Over the last dozen years, Polyconomics has selected a "Man of the Year," reflecting my own idiosyncratic tastes, but this year I decided to skip the year and follow your lead with the century. As far as the "Man of the Millennium," I go instantly to Abe Lincoln, for without him, I think we would still be two countries and it might have taken another century or so to repair the damage to popular democracy. Here, though, are the folks who come to mind as my personal favorites.

1. Winston Churchill. It was Winnie who cleaned up the mess left by Neville Chamberlain and essentially stopped Hitler long enough for the Russians, and Ike, to finish him off.

2. Albert Einstein. For all the reasons you cite, plus his gift to mankind of nuclear weapons. Before Hiroshima and Nagasaki in 1945, there were several tens of millions of people who died as a result of war in this century. In the last 55 years of the 20th, global leaders were much more careful about getting into hot wars, with mutually assured destruction hanging over their heads. The number of war deaths dropped by an order of magnitude.

3. Ronald Reagan. The U.S. economy and its leadership in the Cold War was in a tailspin when Reagan came along in 1980. Reagan set his sights on getting the economy going again on a non-inflationary track and also ending the policy of containment of the Evil Empire. He wanted to drive a stake through its heart, but without loss of life. Wow! He did all that, often dragging his Cabinet along. Most people forget he had a bachelor's degree in economics when classical theory was still taught, which is why he connected so well with supply-siders.

4. Pope John XXIII. The Catholic Church needed reform badly and John XXIII delivered with Vatican II. I was tempted to go with John Paul II, who really made the reforms work, and who has been a powerful force for global reconciliation right down to these last days of the century. But Vatican II did break the ice and from a personal standpoint was critical in getting me back into the church.

5. Francis Crick. The British partner in the double helix team with his sidekick Watson. Almost single-handedly, he showed that (1) All life -- plant and animal -- has the same genetic code which works the same way to tell the plant or animal cell which protein to make and (2) The principal difference between plants and animals is that plants can make -- from scratch -- all of the 23 amino acids coded for by DNA to make proteins -- and animals can't make any of them. How's that for an achievement by one man?? Time discarded Crick from consideration on the grounds that someone else was bound to make that discovery if he didn't. Hmmmm.

6. Franklin Roosevelt. FDR inherited one godawful mess from Herbert Hoover in 1932 and in many ways made things worse, which is why I'd argue strenuously against giving him the No. 1 spot. We know he goaded Japan into Pearl Harbor and there is even some question whether he actually knew Pearl was going to be hit when it was, but welcomed it in order to galvanize the nation into a war footing to help the Allied powers in Europe. His leadership in those dark days far outweighed the errors, and FDR was right in seeing that great risks had to be taken, and with many risky trials are bound to come many errors. He did not fear fear.

7. Mao Tse-tung. The longer I've studied China's history in this century, the more I've come to admire Mao for his achievements on behalf of the Chinese people. I don't put him in the Evil class with Hitler and Stalin, genuine monsters who enjoyed spilling blood. The most populous nation on Earth, China was in total chaos after WWII and the leaders we backed, Chiang Kai-shek and the Kuomintang, only made matters worse. There could have been tens of millions of lives lost when Mao came out of the woods and brought order, especially fixing the monetary system on sound Marxist principles. Mao also saw the futility of the communist experiment early enough to point China back into the world, with Nixon's help, and pave the way for Deng Xiaopeng in 1977.

8. Margaret Thatcher. Maggie actually brought the Tories back to power under a supply-side flag in 1979, before Reagan's victory in 1980. The Brits also had been in a tail-spin, having invented Keynesian economics. It was Maggie who brought down the ridiculous income-tax rates -- 96% at the top -- giving the "experiment" in the Laffer Curve a head start. I'd like to think Reagan could have achieved all he did without her, but something tells me she was a critical partner, both in rescuing the world economy and ending the Cold War on our terms.

9. George Gershwin. Where would we be without music? How awful to contemplate. And in the 20th century, who can top Gershwin for his contributions? There were plenty of black artists early in the century who fed into Gershwin's synthesis, but it was George who brought it to flower. How many rappers and rockers and jazz artists and pop artists -- even Elvis and the Beatles -- can trace back to the musical roots of this skinny Jewish kid from New York?

10. The Wright Brothers. For getting the 20th century off to a flying start.

Charter Communities

Arnold Kling

Robert Nelson, a public policy professor at the University of Maryland, gave me a copy of an argument he submitted on behalf of a Montgomery County neighborhood (his) that was attempting to incorporate in order to have jurisdiction over some services.

Some government functions, such as water and sewer, police and fire, major roads, the criminal justice system, and others are best provided by a wider unit of government such as the County. These would remain County responsibilities under the Rollingwood municipal incorporation proposal. Education would also remain at the County level.

Other local services have more of a neighborhood character such as leaf and garbage collection, snow plowing, street cleaning and repairs, social events, supervision of tennis courts and other common facilities, local parks, supplementary security patrols, and others. Rollingwood proposes specifically to provide services of this localized kind.

The County Council refused to allow the citizens of Rollingwood to bring this to a vote. It seems to me that the solution is for the citizens of the County to use the initiative process to amend our charter to take away the County Council's veto of incorporation proposals.

This set me to musing on what would happen if across the United States people were allowed to form charter communities, analogous with charter schools. Suppose that there were a mechanism by which I could band together with other citizens to form a unit that provides government services, and that we could reduce our tax payments by the amount that by which we thereby reduce the cost to the relevant government jurisdiction. Charter communities also could have some freedom to alter regulations. This would be a "bottom-up" way to get to competitive government.

What intrigues me about this charter-community concept is that it need not be limited to geographically contiguous areas. For example, in our County, some people might wish to belong to a charter community where trans fats are banned in restaurants, and others might wish to belong to a community where they are not banned. Both groups could be satisfied under a charter community concept. My neighbors could be in one community, and I could be in another.

Ultimately, perhaps the charter community concept could embrace people from different states. That way, one might be able to implement something like the Free State Project without having people physically move.

I have talked about this sort of virtual federalism before, and I cannot seem to resist coming back to it.

What Professor Nelson's story suggests to me is that virtual federalism might emerge naturally if we could remove some of the barriers to incorporation by citizen groups.

The Wrong (Trade) War

By Robert Samuelson

WASHINGTON -- Almost everyone wishes for a renaissance of American manufacturing, and none have said so more louder than the Democratic presidential candidates and Democratic members of Congress. The trouble is that their deeds don't match their words. They have blamed trade for almost anything that might ail the U.S. economy -- in particular, manufacturing -- when the opposite is now true: only through expanded trade can the economy thrive and manufacturing stage a comeback.

The latest evidence of the gap between political rhetoric and economic reality is the Democratic-controlled House's decision to set aside, possibly indefinitely, the free trade agreement negotiated with Colombia by the Bush administration. On economic grounds, there's no reason to reject the agreement. Colombia's exports already enter the U.S. market duty free under the 1991 Andean Trade Preference Act. Meanwhile, many U.S. exports to Colombia face stiff tariffs -- up to 35 percent on autos, 15 percent on tractors and 10 percent on computers -- most of which would ultimately go to zero under the agreement.

The tariffs dampen demand for U.S. exports by raising their price and putting them at a competitive disadvantage. Whirlpool exports about $50 million annually of refrigerators, washer-dryers and dishwashers to Colombia from plants in Ohio, Arkansas and Iowa. On a $1,000 refrigerator, a 20 percent tariff raises the retail price $200 in a fiercely competitive market with appliances also supplied by local firms and imports from Korea and elsewhere. (Why does Colombia want the agreement? Answer: Congress has to renew Colombia's present duty-free status periodically. The agreement would make it permanent.)

Yet, it's politically convenient to oppose the trade agreement because the popular imagery is that trade destroys U.S. jobs. The loss of almost 4 million U.S. manufacturing jobs since 1998 seems easy to explain by cheap imports or the flight of plants to Mexico, China and other poorer countries. The truth is murkier: although this has occurred, job losses also stem from greater efficiency (fewer workers producing more goods) and slumping domestic demand (for communications equipment and computers after the dot.com bust and for housing materials and vehicles now). Nor has falling factory employment crippled overall U.S. job creation.

Look at the numbers. From 1998 to 2007, total non-farm payroll employment rose 12 million, and unemployment averaged only 4.9 percent -- despite those 4 million lost factory jobs. In the same period, U.S. manufacturing output rose 22 percent.

No matter. Globalization and trade have become lightning rods for myriad grievances (job insecurity, wage inequality, eroding fringe benefits). But even if trade caused all the factory job loss, its impact is now shifting. The dollar's dramatic depreciation (down an inflation-adjusted 20 percent since early 2003 against a basket of currencies) has enhanced the competitiveness of U.S. exports. Their growth now looms as a major source of job creation and economic expansion.

The overall trade deficit is dropping and, except for higher oil prices, would be dropping faster. In 2007, manufacturing exports rose 10.9 percent, double the 4.9 percent for manufacturing imports. At some companies, the effect is already noticeable. Consider Bison Gear & Engineering, a medium-sized firm near Chicago that makes electric motors used for kitchen equipment, packaging machinery and medical devices. Since 2006, exports have increased from about 20 percent to 30 percent of total sales, says chairman Ron Bullock. Bison has hired about 50 new workers, bringing total employment to 250.

It is no longer necessary to rely on elegant theories of comparative advantage, more consumer choice or greater competition to favor open trade. Jobs and economic growth will suffice. Indeed, without export-led growth, the economy may face a sluggish future.

Even after today's slowdown (recession?) ends, the outlook is worrisome. Consumers are heavily indebted. Housing will recover but probably not, for many years, to previous highs. Government spending is constrained by growth in the rest of the economy, unless Congress sharply raises taxes or deficits. Exports and related investments are the best hopes.

What House Democrats did was particularly perverse. They suspended Trade Promotion Authority, which mandates that Congress vote up or down on trade agreements within 90 days of their submission. TPA gives other countries a reason to negotiate in good faith. They can make politically difficult concessions without fearing that Congress will ignore the agreement because it dislikes the U.S concessions.

Americans do have legitimate trade complaints: China manipulates its currency to aid exporters; other countries restrict imports. It's in the U.S. interest to dismantle these obstacles. Now the suspension of TPA can serve as an excuse -- symbolically and substantively -- for other countries not to negotiate, just when U.S. firms can most benefit from market openings.

What matters for workers and manufacturers is not what politicians say. It's the consequences of what they do. On trade, many Democrats -- and some Republicans, too -- are fighting the last war.

The Rise in the Price of Oil

The run-up in the world price of oil during the past several years, and especially the rapid climb during the last few weeks to over $120 per barrel, has fueled predictions that the price will reach $200 a barrel in the rather near future. Such predictions are not based on much analysis, and mainly just extrapolate this sharp upward trend in oil prices into the future. The price of oil in "real" terms (i.e., relative to general prices) will not reach $200 in this time frame without either terrorist or other attacks that destroy major oil-producing facilities, or huge taxes on oil consumption. I try to explain why in the following.

The two previous sharp increases in the world price of oil, in 1973-4 and 1980-81, were due to supply disruptions. The first one was the result of the formation of OPEC that led to output restrictions by members of this cartel, while the later one was due to the Iran-Iraq war that curtailed petroleum production in these two countries. Although the world price of petroleum rose by a lot in all three episodes, worldwide oil production went down in the two earlier ones, while production has risen during the current price boom. The present boom in oil prices has been mainly driven by increases in demand from the rapidly growing developing nations, especially China, India, and Brazil, although output growth in the US and European have added to world demand, and speculation on potential future price increases also contributed to the increased price of oil. To be sure, supply problems in Nigeria, Venezuela, Russia, and other major oil-producing states have contributed to accelerations in the oil price increases at times during the current boom.

Note the contrast between the major causes of the current explosions in oil and food prices. Although the sharply rising prices of different commodities are often lumped together, increases in the prices of corn and other foods have in larger part come from the supply side rather than from demand. The main supply culprits in the market for foods have been the diversion of corn acreage to the production of ethanol, and the increased cost of fertilizers and chemicals used in food production due to the rise in the price of oil (see my discussion of rising food prices on April 13 and 17).

The rapid growth of world oil prices during 1973-74 and 1980-81 contributed in a significant way to the world recessions during those years. Yet even though world oil prices in real terms are now above the prices in 1981, the previous peak in oil prices, and despite the sharp run-up in prices during the past couple of years, the world economy has not (yet!) been pushed into recession. One reason for the difference is that unlike the previous episodes, the current price rises have slowed rather than eliminated the boom in world output. Another difference from the previous episodes is that the share of oil and other energy inputs in GDP is down by a lot in the developed world since 1980, especially in Japan and Europe, but also in the US.

Of course, even with energy's smaller role in the production of output, any rise in oil prices to over $200 a barrel in the next few years would have serious disruptive effects on the world economy. To many persons who have commented on this prospect, such a high oil price seems plausible, given the expected continuation of the rapid growth in the GDP of China, India, Brazil, and other major developing countries. For the evidence is rather strong that the short run response of both the supply of and the demand for oil to price increases is rather small. The small elasticity of both the supply and demand for oil explains why the moderate reductions in world oil supply during the earlier price spikes, and the moderate increase in world demand during the current price boom, produced such large increases in price.

However, the long run response to price increases of both the demand and supply for oil and other energy inputs is considerable. For example, given enough time to adjust, families react to much higher gasoline prices by purchasing cars, such as hybrids and compacts, that use less gasoline per mile driven. They also substitute trains and other public transportation for driving to work and for leisure purposes. High energy prices, and hence the opportunity for large profits, induce entrepreneurs to work more aggressively to find fuel-efficient technologies, including the use of batteries as a replacement for the internal combustion engine.

Clearly, given high enough oil prices, many ways are available to increase the supply of petroleum, Explorations for additional supplies will be extended deeper into oceans and other remote places because the high cost of extracting oil from these sources would be offset by the high energy prices. Usable petroleum is also already being extracted from oil sands and oil shale, and high and rising oil prices will speed up and extend this process. The reserves of tar sands in Canada and Venezuela are huge; indeed, Canada is getting much of its oil production from this source. Oil shale is also abundant in several places, including the United States, and while extraction of petroleum from shale is expensive and complicated, the high prices have induced some countries to start doing this.

Rising prices of oil and other energy inputs will eventually be controlled by new technologies that greatly economize on the use of these inputs. Increased supplies of oil and other energy sources that become profitable to exploit only with prolonged high prices will also push these prices back.

How Much government Regulation to "Protect" Consumers?

Gary Becker

The consumer protection issue has been thrust into public attention by the housing debacle because many families have had lenders foreclose on their homes, while other home owners are in serious arrears on their mortgage payments. Ye neither consumer ignorance nor cognitive defects in consumer decision-making had much to do with the housing bubble. Many home owners with low education and earnings, and with limited financial acumen became homeowners toward the end of the bubble period. They tended to lose little from the bubble since they put almost no money down, and they were given low ("teaser") interest rates on their mortgages. They frequently walked away from their homes when prices dipped below the value of their mortgages, and lost little.

On the other hand, highly sophisticated lenders, including giant companies like Bear Stearns, Citibank and UBS, lost billions of dollars through paying too much for their mortgage-backed securities. Many top executives of these banks were out millions of dollars because they owned lots of shares of their companies, and they had generous options that went under water. Government regulators, not private incentives, created the important asymmetry between gains and losses to the executives of these companies. Financial leaders know that when many banks get into financial difficulties at the same time, the "too large to fail" principle of bank regulators would be applied, so that equity owners would be at least partially bailed out. Bear Stearns' equity investors lost a lot when JP Morgan purchased the company, but they would have lost more if the Fed had not guaranteed $29 billion of BS assets.

The consumer ignorance and cognitive defects stressed by Posner did not cause the housing bubble, for it was due to a belief that rising housing prices and the general good times would continue for much longer. Allan Greenspan, probably the greatest central banker of the past several decades, recognized that it is not easy to distinguish legitimate increases in prices from excessive price increases. The fact is that during price bubbles, regulators, including central bankers, usually get caught up in the same optimistic frenzy that drives participants. How would greater regulation have helped when commercial banks, one of the most heavily regulated of all industries, did so badly during this housing bubble?

I am not trying to deny that consumers often have very imperfect information about the products they buy, but they do not have to rely only on their own information. The advantage to companies of getting and maintaining their reputations as they compete for consumers is a powerful regulator of the quality of products that consumers receive. Shoppers, for example, rely on Whole Foods, Safeway, and other supermarkets to do much of the information processing for them, and consumers hold the supermarkets responsible for bad-tasting foods, and other products that do not live up to claims of their suppliers. It is not the diligence of regulators but the reputations of companies that are mainly responsible for all the high quality merchandise consumers purchase without having to know all the details.

I agree with Posner that companies do not want to "foul their nests", but still companies have had no hesitation in saying that they do not use trans fats-a purely voluntary provision of information to consumers not required by regulations- or that their cereals use oats that may be good for the heart, or that their products are lower than before in salt and fat, or that their airlines have better on-time records or more comfortable seats than competitors, or that their cars have better repair records or better hold their value as they age than cars of competitors, or that their drugs can prevent erectal dysfunction, lower cholesterol levels, treat pain better because of more powerful ingredients than in the past, or have other positive effects on the health and pleasure of consumers.

Posner seems to believe that consumers have less information than in the past because their time is more valuable and they are busier. Their time is more valuable in large measure because they have greater levels of human capital that increases their skills, and enables them to use and process information more effectively. The Internet has also made an enormous difference in enabling consumers to acquire information more easily, whether through offering comparisons of hotel rates and prices of cars being offered for sale, or through the provision of information about effectiveness and side effects of different drugs and medical procedures. The same factors that make time more valuable to consumers make it easier for them to acquire and process information about the products they buy.

Various groups have pushed in recent years for greater regulation of all types of consumer choices, including smoking, eating of fast foods, the ingredients allowed in foods, such as trans fats, the drinking of alcoholic beverages, and many other products and services. This pressure toward greater regulation of consumer choices is not the result of consumers finding it more difficult to get information about products and the consequences of consuming them. Nor have the cognitive defects referred to by Posner become more prevalent or harmful. Instead, the movement toward increased regulation of consumer choices reflects in large measure greater reluctance among some groups to accept these choices. It is unacceptable to many persons both inside and outside the medical profession that some individuals want to smoke or eat a lot and become overweight, even if they knew and possibly exaggerate the negative health consequences of smoking and overeating. The increase in weight of teenagers, for example, is not explained by cognitive biases, but by sharp declines in the cost of fast foods, and the development of Internet and other sedentary games.Increasing intervention in consumer choices also reflects the erosion of individual responsibility (see my discussion on March 16), so that consumers and their advocates blame others when consumer choices turn out to be harmful and costly.

I do not deny that regulations may be required when the consequences of mistakes are very serious, and when the forces unleashed by competition provide inadequate protection. One example is the permissibility of lawsuits against surgeons who make obvious mistakes during their surgeries, such as leaving sponges in a patient's body. Another possible example is the regulation of airline safety, although airlines suffer a lot when they have accidents, regardless of regulatory measures, and government safety regulations have often been inadequate and misleading.

Important exceptions notwithstanding, the overall trend toward greater regulation of consumer choices is disturbing. Consumers make worse decisions when they are not responsible for their decisions, or when they can sue or otherwise get compensated when they make bad decisions. Consumers make mistakes, but they learn from them when they have to bear the consequences of their decisions. They are generally far more competent to make decisions in their own interests than are regulators or lawmakers as long as consumers are the ones who benefit from good choices and are hurt by bad choices. This is why I continue to be a minimalist on government regulation, and greatly prefer the controls over behavior that stem from consumer responsibility and the discipline of competition.