Finance: History and Policy

Reverse Eminent Domain, Again

2013-04-25T18:02:00.000Z

I've said it before, and I will say it again: we need to have a REVERSE EMINENT DOMAIN policy. In other words, we need to allow businesses to purchase government assets when they see fit. In the past I have argued that the right be extended to all non-military government assets and national parks. Given sequestration, I'd be willing to start smaller: any government service that stops functioning effectively (e.g. air traffic control) should be open to purchase by private entities. That will give policymakers incentives to keep the functions they really want to maintain under government control. As matters stand, they have incentives to make life as difficult as possible for ordinary Americans to extort more taxes from them. News flash: air traffic control can be privatized. Policymakers just have to allow it to be. Reverse eminent domain is a MARKET method for reducing the size of government: the government functions most easily privatized will be the ones that businesses bid for first and most heavily. Revenues from the sales can then be used to reduce the national debt.

The Throne of Games (and Other Academic Arcana)

2013-04-25T17:49:00.004Z

Once upon a time, a bold band of historians from France called the Annales tried to crown their discipline the Queen of the Social Sciences, but the Ivory Throne ultimately fell to the tribe called economists. Unity was one of their tools of conquest: although some economists considered themselves different, and identified with exotic realms like Austria and Heterodoxis, most fought under the newly restitched banner of a Scotsman who perished in 1790.

The neoclassicals, as the dominant caste of economists came to be known, frequently disagreed amongst themselves, such great believers in competition they were, about such important matters as how far away from the ocean they plied their black arts, but against outsiders they were as solid as the hoplite phalanx at Marathon. “We know better than all the pretenders to the throne,” they told the people of the realm, “especially that great bitch goddess Clio because we manipulate the same magical figures as the great Wizards Physicks and Chymistry do. We also know a bunch of clever games that are much more powerful than anything the Sociologists, Psychologists, or Political Scientists can concoct. Let us lead you and we shall all live happily ever after.” And then, in soliloquy, “though of course some much more happily and much longer ever after than others.”

Instead of uniting under the Annales, many historians bravely decided that they no longer wanted to live in the land of the Social Sciences. Their legends all say that most of their academic forebears took a gigantic linguistic turn towards the principality of Humanitas where, ironically enough, they had to pay homage to a more philosophical set of Frenchmen who bore names like Derrida, Foucault, and Habermas. There, generations of their graduate students did dwell, scribbling tomes of great erudition read only by each other and subsisting on the crumbs that trickled down from the feasting tables of the great Wizards and the Social Sciences.

Many historians accepted this sorry state of affairs as their lot in life but a few, called financial historians, came to believe that if they studied topics widely considered of importance to the realm they would find their just rewards and honors. Off they went to study the subjects the mighty Annales had, in particular economics and its cognates business and public policy. A few even deigned to develop clever games and to use the magical symbols of Physicks and Chymistry but in a more nuanced and perceptive way than most of the economists of the neoclassical caste ever could.

After the Great Misfortune that befell the realm five harvests ago, something the neoclassical caste emphatically stated could never happen, the new generation of financial historians have grown increasingly restless. Like their French forebears, they know that the realm would be better governed if they held the Ivory Throne, perhaps with the best of the Austrians and heterdox economists as trusted Hands of the Queen. The financial historians know how to improve corporate governance, reduce the number of people enslaved throughout the realm and across the seas wide and narrow, and how to judge the overall merits of different types of economic systems so that all may live as happily as they deserve to, for a very long time. They are still too few and too weakened by their association with Humanitas historians to seize control but their position grows stronger every day the reigning Queen proves herself incapable of responsibly financing her government, much less fixing the Great Misfortune she helped to create. The recent defeat of two mighty neoclassicals in battle against a mere apprentice, who slew them by pointing out elementary errors in their manipulation of some of the magical figures, bodes well for financial historians indeed.

"The World's Best Hope": The U.S. Founders as Development Economists

2013-04-23T15:50:00.002Z

China's Economy: A Long-Term, Incentive-Based View

2013-04-23T15:44:00.002Z

Global Climate Change Policy: Some of the Economic Issues Involved

2013-04-23T15:35:00.002Z

Global Climate Change Policy: Some of the Economic Issues Involved

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD for Greenfest, 19 April 2013

I’ve never understood why some people, mostly political conservatives its seems, push back so hard on claims that humans are changing the global climate. We’ve been doing it on a local scale for hundreds of thousands if not millions of years. Our buildings are mostly about climate control and in fact that euphemism is even used in the HVAC -- or heating, ventilation, and air conditioning -- business. A fire in a cave is a form of local climate control, as is a shelterbelt or hedgerow. Our cities are regularly several degrees warmer than the surrounding countryside, and the larger the city, the larger the differential. That several centuries of factories and a century of automobiles has caused larger scale changes is, therefore, not surprising to me. I don’t know if the claim is true or not as I am no expert in such matters but it does strikes me as quite plausible.

Of course simply because humans are changing the global climate – and specifically that we are making the climate warmer and more volatile – does not in and of itself necessitate any policy response. Policies should be implemented only when their total expected benefits exceed their total expected costs; policy proposals that would generate costs that exceed benefits should be rejected.

So first we need to know if the expected climatic changes will be positive or negative on net. If they are expected to be positive then clearly no policy action is necessary, unless it be to ask if we would benefit more by inducing even more global climate change. The net effect of climate change is a serious question, one that economists are better equipped to answer than scientists are because the latter typically do not understand how market economies adapt to changing circumstances. You might recall how an economist name Julian Simon schooled a biologist, Paul Ehrlich, who in 1968 predicted that we’d all be dead by now. Scientists and politicians tend to think that if things are different they are likely to be worse but economists generally show that different can be just different, with little to no net effect.

Higher sea levels, more violent storms, higher temperatures, stressed ecosystems, and so forth sound bad but if change is gradual and somewhat foreseeable they need not impose catastrophic costs. Robert Fogel won a Nobel Prize, for example, by showing that if railroads had not existed, U.S. economic growth would have been just three months behind where it actually stood in the nineteenth century. That sounds preposterous at first given the huge stress on railroads to economic development, but Fogel pointed out that without railroads, factories simply would have located along navigable rivers instead. Steel would still have been created but used in ships and buildings instead of for rails. And South Dakota would be more heavily populated in the middle and less heavily populated on each end. In the end, in other words, it doesn’t much matter if we have a fixed port at New Orleans or at Baton Rouge or at Vicksburg, or if we switch to a floating dock system. Where there is a will, which is to say a profit, there is a way.

More volatile weather looks like a loss all around and there is little to be said in favor of it, but the risks can be spread via global insurance markets and reinsurance. They can also be mitigated, with a little help from more enlightened public policies dissuading people from living in the most risk prone areas, like Fargo and parts of the Gulf Coast. They can also be mitigated by new construction standards and techniques like putting power lines underground instead of under trees. Bad things, like earthquakes, are going to happen anyway and better that they do so in a robust risk management environment than in a less developed one. Still, on net, it seems liked increased climatic variability will prove somewhat costly. How costly, though, I don’t know. And neither do you, or anyone else.

And here again economics has something important to say. How much should be willing to spend today to prevent, say, $1 trillion of damage in the future? If the future is tomorrow, then something up to like $999.99 billion. But what if the damage isn’t going to occur for, say, 30 years? The answer depends on how much money is worth and what the likelihood of the future damage is. If the damage is almost certain, money isn’t very valuable, and we are expecting no inflation, then we might use a discount factor of say 1 percent, in which case it would be rational to spend up to $742 billion today, if we compounded annually, to save the expense of paying $1 trillion in thirty years. If money is more valuable, some inflation is expected, and the savings of $1 trillion is somewhat uncertain, we might use an annual discount factor of 10 percent, in which case it would be rational to spend up to only $57 billion today to save $1 trillion in 30 years. If 20 percent is a better discount figure, then anything more than $4 billion expended today would be irrational.

Of course nobody knows what the expected costs of global climate change are, even if many suspect that the sign is negative. Nobody is quite sure when the costs will be borne. And the appropriate discount rate for any pre-emptive policy action is also far from certain. We can say, however, if the costs are distant and somewhat predictable, they will be minimized through market adjustments like those I just outlined. If the costs are imminent and largely unpredictable, we are all screwed already anyway. There is little that policymakers can do in either case, at least in the developed world. What we should focus on, therefore, are the world’s poorest and most vulnerable people as they will be hit far harder by climatic variability and their economies will be less flexible in their responses to gradual climatic change. So we should be concentrating our efforts on the world’s poor, a billion Latin Americans, a billion Africans, a billion Indians, and some 2 billion east Asians. But we should be doing that anyway, regardless of the state of the climate or the climate debate.

Wall Street on the Prairie: How Financial Innovation and Regulation Cajoled Citibank into South Dakota

2013-03-16T20:55:00.001Z

This is the speech that I delivered Tuesday, March 12, 2013 at 05:30 PM at the MUSEUM OF AMERICAN FINANCE at 48 Wall Street in New York, NY to a crowd of about 40-45.

Thanks to my dear friend, Museum president David Cowen, and the Augustana College Thought Leader Forum committee for inviting me to speak to you tonight. I have a foot in both Manhattan and the Great Plains and hence had a lot of fun completing the background research for this speech and writing it up in a way that avoids, or pokes fun at, technical terms like regulatory arbitrage and disintermediation. A more formal analysis of the Citibank episode and South Dakota’s other economic development efforts will appear in my forthcoming book, Little Business on the Prairie: Entrepreneurship and Prosperity in South Dakota, to be published by Augustana College’s Center for Western Studies soon after I complete the manuscript later this year. Or next. Or the year after that. Having achieved tenure and middle age at the same moment, time, like my middle section, has taken on an added dimension. Having thus sated the bragging East Coast and self-deprecating Midwest parts of my psyche, let me begin.

Sioux Falls is a vibrant, growing city of about 150,000 located in southeastern South Dakota near the borders of Iowa and Minnesota. It is the commercial center of a 4 county MSA with a population approaching a quarter million people and its stores, restaurants, hospitals, and colleges serve about 1 million farmers, ranchers, and small town dwellers in the tri-state region. It is also a national center for credit card operations and has been since the early 1980s, when the New York Times complained that quote homes across the land are flooded with mailings from South Dakota offering … Mastercards – at a $20 annual fee and finance charges of 19.8 percent. unquote Today, a half dozen major credit card issuers each employ at least 100 people in Sioux Falls, and several other issuers employ staffs that number in the dozens.

Unassuming Sioux Falls became a national credit card processing and call center because in 1980 Citibank decided to relocate its massive credit card operations, which included some 6 million Mastercard and Visa holders spread across all 50 states, to the little city on the Big Sioux river. Citibank’s decision attracted considerable attention nationally and soon several other banks, including First City Bank of Houston, First National Bank of Omaha, and Michigan National Bank, also moved card operations into the Sunshine State, some into Sioux Falls but others into Rapid City in the Black Hills or Yankton along the Missouri River. An abundance of physical and human capital adapted to the credit card business now keeps card issuers in the state in the same way that magnetism keeps calendars stuck to refrigerators. In 1980, however, the state enjoyed no such specific set of human capital, so it relied instead on the personal magnetism of South Dakota governor Bill Janklow.

I never met Janklow, who passed away in early 2012, but henceforth I’ll call him Bill because that is what we do in South Dakota, call our leaders by their first names, and usually in their most familiar form too. Bill was nominally a Republican but like New Jersey governor Chris Christie he was not a party stalwart and also on the heavyset side as we say in the Coyote State. Bill had his warts, the most infamous of which you can read about on his Wikipedia page if you want, but he also had his charms, one of which was to set aside partisan bullshit – which by the way in South Dakota is an actual thing and not just a figure of speech – and actually get things done for his constituents. And I don’t mean pork – also an actual thing in South Dakota – or in other words projects that took from one and gave to another. What Bill excelled at was implementing policies that bettered the lives of some, nay sometimes all or most, South Dakotans, without injuring the interests or pockets of others, others within the state anyway. Bill’s efforts to entice good paying, environmentally clean jobs to the state was the foremost of those policies, and they took on a fever pitch in 1979, the first year of his first term, because a nasty recession was crimping state revenues. Most of the state’s needful came from real estate and sales taxes and also a state-owned cement plant. But few wanted to buy cement during the downturn, which was characterized by unusually high rates of inflation and nominal interest rates as well as by reduced output. Tax receipts of course also declined, partly due to a decrease in tourism, another big component of the state economy.

Citibank was also hurt by the recession, which was initiated by the Iranian Revolution and the abdication of Mohammad Reza Pahlavi, the Shah of Iran, in early 1979. Due to civil unrest in Iran, short to intermediate term oil supply inelasticity, and panicky remembrances of the 1973 oil crisis, the price of crude oil jumped from about $16 to $40 per barrel. That, combined with the public’s inflation expectations and the Federal Reserve’s relatively easy, pro-cyclical monetary policy under chairmen Arthur F. Burns and G. William Miller, induced yet another bout of stagflation, or a period of high inflation rates and weak economic growth.

Enter Paul Volcker, who is a friend of the Museum and, in case you have yet to meet him, as tall as a short Sasquatch. After becoming chairman of the Federal Reserve in August 1979, Volcker raised the Fed’s overnight lending rates in order to wring inflation expectations out of the economy. He also allowed commercial banks, who were losing depositors in droves, to raise the rates they paid on checking and savings deposits. Since the New Deal, the Federal Reserve had tightly regulated the rates that commercial banks could pay on deposits, effectively cartelizing them to avoid the mass panics and waves of bank failures that had rendered the Great Depression so very depressing. Members of President Roosevelt’s Brain Trust who distrusted financiers and their institutions, men like Louis Brandeis, an associate justice of the U.S. Supreme Court who in 1914 had published a scathing indictment of Wall Street called Other People’s Money and How the Bankers Use It, were thrilled with the arrangement because it made commercial banking so tranquil as to give rise to the infamous 3-6-3 Rule by which bankers borrowed at 3 percent, lent at 6 percent, and left the office to play golf at 3 p.m. The interest rate regulations, called Fed Reg Q, rendered the banking system stable for decades but when market interest rates, driven ever higher by inflation, rose above the legal caps it caused all sorts of problems, including what economists called disintermediation and what television viewers called why are so many banks making commercials about giving away toasters?

Toasters or not, under Reg Q and stagflation it made sense for depositors to pull their money out of banks and to invest it elsewhere, like money market mutual funds, where larger returns awaited. It also made sense to borrow as much as possible in the expectation of paying back cheaper dollars later. Citibank’s credit card division soon felt the pinch because it was paying 19 percent for money, lending it for less than that due to state interest caps known as usury laws, incurring operating expenses of 5 to 6 percent, and eating numerous defaults caused by the unsettled economic situation and the bank’s own inability to discern good from bad credit risks. At one point, Citibank’s credit card operations were costing it more than $300 large every day, some $2 million dollars down the tubes every week, chump change today but a lot of cheddar back then. Rather than shutter the business, Citibank’s Charlie Long, on orders from aggressive CEO Walter Wriston, began looking for a state with a more favorable business climate than New York had to offer. Pinning their hopes on the Supreme Court’s 1978 Marquette decision, which allowed a bank to charge any rate of interest lawful in either its location or that of its borrowers, Long identified 6 prospects, California, Hawaii, Rhode Island, Nevada, Missouri, and South Dakota, but eventually dropped all but South Dakota due to their distance from New York, their high costs of doing business, or the hostility of their state politicians. That last mentioned variable was essential because, due to the Douglas Amendment of the Bank Holding Company Act of 1956, out-of-state banks had to be invited into a state before they could do business in it.

Missouri held in the longest but South Dakota turned out to be the best choice overall for reasons I’ll describe a little later. The Comptroller of the Currency approved Citibank’s move in November 1980. The Federal Reserve did likewise in January 1981. Citibank South Dakota began operations in rented space in February 1981 and moved into the first of the three new buildings it would construct in the city that June. The rest, as they say, is history.

Soon after the move, a myth sprouted that Citibank had paid South Dakota to drop its usury law, its cap on the rate that lenders could lawfully charge to borrowers. The myth proliferated widely because it offered an easy explanation for Citibank’s decision to invest in a state known more for harsh winters and a surfeit of ringed neck pheasants and red-necked denizens than for financial expertise. Easterners regularly conflated North and South Dakota, evidenced by the fact that quote unquote Bismarck, South Dakota was mentioned on the national news more than once. Even less excusable, some people conflated South Dakota with South Carolina. One Wall Street venture capitalist, for example, congratulated a South Dakotan entrepreneur seeking funding by noting that he hardly had a southern drawl at all.

To the extent that South Dakota was known nationally in 1980, its reputation was far from savory. Just a few years earlier, the state had made national news due to a standoff on its infamous Pine Ridge Indian Reservation called Wounded Knee II and the murder of two FBI agents there. That was a typical Saturday night in Washington Square Park but Russell Means, who I also failed to meet before he passed last October, was then far scarier to most Americans than any New York pimp or drug dealer. And high levels of racial tension persisted in the state, even if the American Indian Movement moved out of the national spotlight. In 1975, for example, some Yankton Sioux forcibly occupied a tribally-owned but white-managed pork processing plant in Wagner. A building at Augustana College was also occupied by disgruntled Native Americans for a time.

The myth of South Dakota’s capitulation to the emerging megabank also made for great political satire, including an infamous fake news story that claimed, Onion or Colbert Report-style, that the South Dakota state legislature had voted to become a wholly owned subsidiary of Citicorp. According to the faux article, the state was thenceforth to be called Dakotacorp and Bill was to be its highly paid president. South Dakota’s capital, Pierre -- yes, it is pronounced the same as the pressure that teens put on each other to do drugs – was to be renamed Wristonville. It’s funny now but at the time it mortified South Dakotans, who traditionally abhorred just two things: big government and big business.

In fact, South Dakota took steps to eliminate its usury cap before Citibank expressed any official interest in moving to Sioux Falls. The impetus for the change came from state bankers because in 1979 South Dakota banks were in the same sinking boat as Citibank, paying big bucks to borrow but facing the state’s usury cap when they went to lend. Since its inception, South Dakota had looked for ways to keep borrowing costs for farmers and ranchers from going too high. In the 1910s it even established a state loan office that lent to farmers at 5.5 percent but shut it down after it suffered $57 million in defaults and other losses. Instead of solving the problem of high interest rates for riskier borrowers, the state’s legislature, like many before and since, pretended to solve it by capping interest rates, first at 12, then 10, then 8 percent, where it stayed from 1933 until 1970, when rising inflation and nominal interest rates made it apparent to all that the 8 percent cap prevented many prospective borrowers from finding willing lenders. The legislature responded to those pressures by twice increasing the cap 2 percent for most loans and by more for some other, inherently riskier loan types.

Nevertheless, banks were still squeezed enough on the spread between the sources and uses of their funds and hurt by an economy wracked with stagflation -- high inflation, low growth, and numerous defaults – that the very existence of the state’s banks was soon threatened, as was that of their business customers. As Paul H. Nordstrom, president of the Security State Bank in Geddes, informed Bill in late October, 1979, his bank could no longer lend to anyone except a handful of its very largest and best customers. The state’s usury law was therefore hurting quote the very class of people that it was originally intended to protect. What a paradox. unquote Bill responded in early November:

Quote I agree that the interest ceiling in its present form is causing problems for citizens and our State-chartered financial institutions. This is the end product of years of federal, congressional and executive mismanagement and inflation. I can assure you that this problem will receive careful consideration during the forthcoming legislative session. Unquote

The legislature might have simply increased its usury ceiling a few percent to buy time as it and other states had done previously but Thomas M. Reardon, the founder and chairman of Western Bank in Sioux Falls, and his son T.J. Reardon, the bank’s president, had a better idea, do away with the cap entirely for regulated institutions like their bank. South Dakota bankers quickly signed off on the radical idea and the lower house, which was dominated by libertarian-tinged Republicans, did too. Citibank then expressed interest in moving to the state if the law stuck and that sealed the deal in the upper house.

What South Dakota did do explicitly for Citibank was to change a state law that prohibited out of state bank holding companies from owning South Dakota banks. To get the state bankers who felt protected by that law on board, somebody concocted a measure that allowed out of state bank holding companies like Citibank to form, own, and operate in South Dakota small, new banks that did not compete against existing South Dakota banks. Meanwhile, back at the ranch, Bill stressed the obvious need to diversify the state’s economy away from agriculture. In 1980, South Dakota’s per capita income was $7,800, 18 percent below the national average of $9,500 and everyone knew its heavy reliance on agriculture was the main culprit. The state’s bankers acquiesced and the law passed with a large bipartisan majority in what some say was record time.

It has to be noted that those two laws – the elimination of usury caps for regulated institutions and the bank holding company enabling legislation -- were necessary but not sufficient conditions for Citibank’s move to coyote country. Citibank needed its card business to be pushed out of New York while simultaneously being pulled to Sioux Falls, which contrary to popular belief is not in the middle of nowhere, but rather on its edge. California did not have a usury law and Delaware, the king of chartermongering and corporate whoring, as stooping to corporate interests was known in some circles, soon copied South Dakota’s usury and BHC laws. So South Dakota had to have had something else going for it, something that pulled Citibank to its bosom instead of to Delaware. Bill’s magnetism was certainly part of the pull but so too were the people of South Dakota and some peculiar attributes of the state itself. And that’s where Benjamin Franklin and Werner von Braun come in.

Franklin is known for many things, from philandering to flying kites during thunderstorms. He was also a first rate monetary theorist, the founder of America’s first mutual fire insurer, and a diplomat, politician, and, more to the point here, the new nation’s first postmaster general. The post office evolved in numerous ways after Franklin’s short stint but it remained an institution that provided uneven service over the large nation that it served. Circa 1980, Sioux Falls enjoyed a very efficient post office while that of New York was, like the city it served, kind of funky smelling. Bill and others claimed that a letter sent from one borough of the city to another arrived more quickly if sent via Sioux Falls, some 1,350 miles to the west, than if sent directly across the East River. That sounds incredible and is almost certainly apocryphal marketing hype but what mattered is that Citibank officials believed that payments and other correspondence sent from most places in the country would reach Sioux Falls before they would hit New York’s financial district. It has been demonstrated, Richard C. Kane of Citicorp Credit Services wrote, quote that the efficiency of the U.S. Postal Service improves considerably when you are not dealing with major cities on either coast. unquote By 1982, 32 percent of all the mail sent to Sioux Falls went to Citibank but the local post office’s performance did not waiver.

Thanks to Nazi rocket scientist Werner von Braun, South Dakota was well connected to the national telephone network and to newer satellite communications technologies. Von Braun helped to develop America’s moon rockets and also its intercontinental ballistic missiles, many of which the military stuck in the middle of South Dakota cattle pastures and cornfields to put them out of reach of Soviet bombers and to make the Ruskies, should they ever attack, waste their nukes on sparsely settled districts. The powers that be also put a nice bomber base in western South Dakota, partly to keep it safer from attack but partly to allow the pilots to quote unquote practice for Siberia by flying low over the region’s prairies. Of course the Reds eventually made faster bombers and enough nukes to destroy the entire earth many times over but the airports and missile silos were already in South Dakota and needed to be connected to Washington and NORAD in the awful event that the launch codes had to be sent. So South Dakota had excellent, redundant communication systems, quote one of the most progressive telephone switching systems in the country unquote according to one banker. So it was almost as fast and cheap for Citibank HQ to call Sioux Falls as it was to call an uptown branch. Plus Sioux Falls was in the central time zone, an hour behind Manhattan but the same time as Minneapolis, Chicago, Kansas City, St. Louis, and the rest of the densely populated Mississippi basin, the American bottomland as archeologists call it. Sioux Falls was also just two hours ahead of California. Perhaps most importantly, it was more expensive for customers to call New York than Sioux Falls, which is near the east-west geographical center of the country, from most points in the country.

Of course there had to be somebody in Sioux Falls to pick up the phone and monitor the mail, somebody who both needed a job and could adequately fulfill its duties. Thank John Froelich and tri-state school marms for supplying Citibank with the human capital it craved. Froelich was born in Iowa in 1849, undoubtedly surrounded by corn that had to be husked by hand and that grew out of fields prepared by horse drawn plows. By 1892, he had developed and successfully demonstrated in Langford, South Dakota a dual direction, gasoline powered tractor that saved numerous man hours, and many acres of fodder, by drawing threshers, plows, and other farm implements. By the end of World War I, agricultural equipment manufacturer John Deere had taken over the design. Soon the American heartland swarmed with the simple, efficient machines, driving first horses and then men out of work. As tractors and their sundry attachments and cognates grew more complex they also grew more expensive, creating economies of scale that spurred farm consolidation. Then Jimmy Carter’s grain embargo added to the general pressure by decreasing agricultural prices.

In the early 1980s, therefore, South Dakota was awash in un- and under-employed men and women who had once been farmhands or even owned their own farms, or who had been teachers, shopkeepers, or other types of service providers in the many little farm hamlets throughout the state that withered away as the rural population declined and the agricultural districts hollowed out. Many of those folks ended up in Sioux Falls and Rapid City where they proved themselves a hard-working, dependable, and intelligent labor force.

Yes, I said intelligent. When I left NYU for Augustana a friend of mine, who shall remain nameless, joked that the median IQ in both places would increase as a result. I laughed because I was still a typical eastern elite but now I know better! The median South Dakotan is very intelligent. People from rural backgrounds often display a good deal of what some still call horse sense, a common sense, git r done kind of pragmatic knowledge. For example, when people in Winner, which is in south central South Dakota near the Rosebud Indian Reservation, wanted a semi-pro baseball team, they financed one, called the Pheasants of course, with the house rakeoff from quote unquote smokers or community poker games.

That is not to say that South Dakota hasn’t made some boneheaded moves in the past. As I mentioned previously, in the 1920s it lost almost $60 million dollars, a huge sum for the time, on farm mortgages. Governor Peter Norbeck thought that the state could borrow on better terms than individual farmers could, then relend the money to those farmers, or voters in other words, on very favorable terms. He was right, the state government was capable of selling bonds and making loans. It turns out, however, that it wasn’t so good at inducing voter-borrowers to repay, especially after they were hard hit by the agricultural depression of the 1920s and the drought and dust storms of the 1930s. The state thought it had sufficient equity cushion but it turns out that having neighbors appraise each others’ farms does not lead to conservative valuations. Such missteps were rare, however, and state-owned businesses, including the cement plant and some rail lines, proved successful at times because the state outsourced their management.

More surprisingly, perhaps, than their abundance of good horse sense, many South Dakotans are also well educated in the formal, city slicker sense of the term. South Dakota spends relatively little on K through 12 education – it is right down there with Puerto Rico and Mississippi in per capita terms – but somehow its students score in the top quartile on national exams. Its eastern half anyway is part of the Midwest, which traditionally values education very highly. And outside the mighty metropoles at either end of the state, class sizes are often small, 50 or fewer. I’m talking graduating class sizes here, not the number of students in classrooms. Stories abound like that of Grace Fairchild, a Wisconsin-born tomboy who moved to Parker, South Dakota circa 1900 and soon after took up a homestead near Philip, about 90 miles southwest of Pierre. Despite facing all of the many hardships of frontier life and a few more besides, she managed to get her many children through not just high school but state college, all except for one n’er do well son and the daughter who was accidentally shot and killed by her sister when playing a game of coyote.

However they did it with the meager resources at their disposal, South Dakota’s school teachers done good, done real good. In the early 1980s, the state boasted the highest literacy rate in the country and had one of the nation’s most productive workforces. A surprisingly large percentage had college degrees and due to the state’s high level of religiosity, which for the most part is a genuine sort of spirituality based on service to others and not just ritualistic or perfunctory church attendance, call center workers were if anything too eager to help customers, a problem less frequently encountered in, say, employees from Brooklyn or Newark – no disrespect, I’m not saying, I’m just saying.

Citibank was thrilled with the quality of the available workforce, which it considered the most productive of any in the 40 states in which it did business. South Dakotans worked diligently and well but also came cheap. The state’s tax burden was very light, the 48^th lowest in the nation at the time. The bank franchise tax paid by Citibank in South Dakota, for example, was 6.5 percent of profits, compared to the 15 percent that prevailed in New York at the time. In South Dakota, Bill used to say, quote the only hand in your pocket is your own. unquote And South Dakota’s overall business climate ranked 11^th best in the country and employers enjoyed among the lowest rates for worker’s compensation and unemployment insurance in the nation.

The state’s wage structure was also low. In 1985, for instance, Citibank reported that it paid a temp agency $5.20 an hour per worker, who received only $3.80 of that sum. The federal minimum wage was then $3.35. Some, like Ben Radcliffe of the South Dakota Farmers Union, complained that Citibank viewed South Dakota as quote something akin to a third world country unquote but in fact the state’s low wages were a function of its low cost of living. Healthcare costs were a third cheaper than in New York. Housing was dirt cheap even though sod had long since been abandoned as a home construction material, and rents were a mere fraction of those in and around New York. Wages were also low due to South Dakota’s long tradition as a so-called right to work state, a euphemism for anti-union in case you were wondering. Meatpacking giant John Morrell, which had a big facility in Sioux Falls, and mammoth Black Hills gold mine Homestake were, unsurprisingly, the leading lights of the right to work movement. The state’s long right-to-work tradition was yet another inducement to employers like Citibank, which foresaw few labor relations headaches in the state. Bill loved to tell prospective entrants that South Dakota was the 50^th best state in the nation: for crime, energy costs, and time lost due to union work stoppages.

Citibank officials also lauded South Dakotans for having little discernible accent, for being quote pure vanilla … with but a few idiosyncracies. unquote South Dakotans pronounce a few words differently than elsewhere in the country, where ruff is the sound a dog makes, not the top of a house, and they use a few words in usual ways. I was taken aback, for example, when I was asked if I wanted a ticket at the end of my first restaurant meal in Sioux Falls … why, what did I do wrong, I asked? But for the most part South Dakotans all sound like television news anchorman Tom Brokaw, who hails from Webster, South Dakota in case you didn’t know. Sportscaster Pat O’Brien, Entertainment Tonight host Mary Hart, The Price is Right’s Bob Barker, January Jones, a.k.a. Betty Draper on Mad Men, Cheryl Ladd of Charlie’s Angels fame, David Soul from Starsky and Hutch, Catherine Bach, Daisy Duke from the old Dukes of Hazard TV show, and Ranae Holland, who tromps around the woods looking for Bigfoot every Sunday night on the Animal Plant network, are also all South Dakotans too, though perhaps slightly more attractive than the median denizen of the Blizzard State.

So South Dakota had a lot of things pulling for it: a sufficiently large, sufficiently educated workforce that worked hard and cheap. Despite living on the edge of nowhere, South Dakotans could handle calls from both coasts without working absurd hours and they were easily understood by callers from throughout the nation. Checks and correspondence arrived quickly and were not allowed to fester on the mailing room floor. And the state government was stable and pro-business. As Helen Wegner, a Pierre bureaucrat, explained to a senior vice president at the Bank of New York, which in 1983 considered moving some of its operations to Sioux Falls: quote South Dakota is a state where profit is not a bad word and where government views itself as a partner of business not its regulatory master. unquote In South Dakota, Bill once bragged to a Texas banker, quote Republicans and Democrats have come and gone, but our business climate has never been affected by the political weather. unquote

Sensing a big opportunity after Citibank’s move, Bill kicked the apparatus of the state government, such as it was, into high gear. State officials kept contact notes on prospective entrants similar to those maintained by corporate sales reps. Bill sent bankers engraved faux wedding invitations, complete with reply cards, to quote a Renaissance of Free Enterprise. unquote Not everyone, however, liked what they saw. The Bank of New York opted for Delaware instead and Sears, GMAC, and others jilted Bill after courtships of varying lengths and intensities. New York commercial banks Manufacturers Hanover and Chemical Bank also investigated the Mount Rushmore State but didn’t come. Seattle First National and Ranier, both based in Washington state, also looked hard at South Dakota, one going so far as to buy office space in Rapid City, but ultimately stayed away. Perhaps they did not believe that South Dakota’s quality of life was as high as the erstwhile New Yorkers who came with Citibank claimed it was. The biggest obstacle for many outsiders is the weather, which is much understood. It gets very, very cold and windy in the winter. When the jet stream dips deep into Dixie and it is fifteen degrees Fahrenheit in Manhattan with a zero wind chill, it is likely 10 below in Sioux Falls, with wind chills around fiddy below – yep, that’s five zero under zero. But Dakota’s freeze is usually a dry, sunny cold that lasts only a few months at most. The dry air and the fresh breezes of the spring and fall are invigorating, beckoning people outdoors to work, play, or enjoy the often spectacular sunsets and nightly gallery of stars. The air has such a delightful tang, one early twentieth century homemaker noted, quote It makes you want to work. unquote And while parts of the prairie are monotonously flat, the state has been nicknamed the land of infinite variety because of its beautiful Black Hills, its stark badlands, its plentiful riverine arroyos, its bountiful glacial lakes, and the series of huge manmade lakes that bisect it. Perhaps the bankers who didn’t come were never really interested in moving to South Dakota at all but rather sought to extract more favorable legislation at home, which most eventually received.

Indirectly, then, South Dakota pushed national and state regulators and lawmakers towards banking deregulation and helped to spread credit cards to a wider swathe of American consumers. Neither was necessarily a good thing as both were causes, though indirect ones, of the Panic of 2008. But if Bill and Citibank had not aligned in the early 1980s, surely other pressures would have led to the same outcome. I think that historians will soon begin to refer to the 1990s and the first decade of the 21^st century as the Pyrite Age, a sort of less violent repeat of the Gilded Age where powerful political and corporate interests dazzled Americans with fool’s gold instead of gold trim. I have a short essay about it that will appear shortly in ABC Clio’s Idea Exchange website that I urge you to check out but the gist is that Americans today are not as upset about inequalities in wealth and corporate welfare as they were a century ago, when powerful third political parties were almost as ubiquitous as bombs and assassination plots, because they conflate credit, the ability to borrow on easy terms, with actual wealth, or assets minus liabilities.

Further evidence that American history would have marched down the same path to financial Armageddon with or without South Dakota comes from a little known postscript to the Citibank in Sioux Falls slash Wall Street on the Prairie story. In March 1983, South Dakota, still led by Bill and fresh from rendering state usury laws a dead letter, again teamed up with Citibank to try to circumvent financial regulations, this time the regulatory wall that separated commercial banking and insurance. Citibank was interested in entering the insurance market because it believed it could prosper there. In fact, a decade previously it had tried to buy into the Chubb Insurance Group but was prevented from doing so by the Federal Reserve, the main regulator of bank holding companies. For his part, Bill was interested quote to gain more jobs for South Dakota unquote and to quote bring down the artificial economic barriers that really don’t do my state or America any good. unquote The entering wedge was again a new law, this one allowing South Dakota banks to engage in insurance activities. To gain the acquiescence of the state insurance industry, which at that time numbered over 60 insurance companies and some 750 active agents and brokers, the law stipulated that state banks active in insurance could not attempt to lure customers away from other South Dakota insurers or banks. Let’s not kid ourselves, Bill noted in a letter to concerned insurance men, quote no large national financial services company is going to risk jeopardizing its unique opportunity to do business in 49 other states by trying to attract even a small amount of extra business in this state. unquote In that same letter, Bill also adroitly pointed out that if South Dakota didn’t pass the legislation another state would and that it wouldn’t protect South Dakota insurers from competition.

Interest in the new law was intense. Within a few weeks of its passage, 15 bank holding companies had begun investigating the possibility of entering insurance markets via South Dakota. By the end of June 1983 Citicorp had purchased American State Bank of Rapid City, First Interstate Bancorp had scooped up Big Stone State Bank, and Security Pacific Bancorp had announced its intention to make an acquisition, all with the intent of beginning insurance operations. Those banks were optimistic because the Federal Reserve had for some years allowed the state-chartered bank affiliates of bank holding companies to engage in any activity which they were permitted to engage in under their state charters.

This time, however, Bill and Citicorp were up against Volcker, the insurance lobby, and common sense, not antiquated state usury statutes. An article in American Banker by Thomas E. Wilson called the theory behind the law quote utterly bankrupt, belied by the plain language of the BHC Act and the well-established principle of the law that federal law predominates over state laws when the two come into conflict. unquote Wilson also astutely noted that quote it would be extraordinarily unwise unquote to permit bank holding companies to engage in insurance because quote it is hard to imagine two industries more incompatible than banking and insurance. unquote

Despite renewed sarcastic references to South Dakota Inc., Bill and Citibank fought hard and in November 1984 actually received the blessing of the Department of Justice, which reasoned that quote there are substantial competitive benefits to be gained from permitting banking organizations to expand into new financial activities. unquote But in the summer of 1985 the Federal Reserve rejected Citicorp’s request to enter the insurance game because, as Wilson had noted, the law clearly differentiated between banking and related activities, which were lawful for bank holding companies or their subsidiaries to engage in, and insurance activities, which were not.

Volcker was adamantly opposed to allowing Citicorp or other BHCs from buying South Dakota banks as a mechanism for entering the national insurance market. In a May 1983 speech, he argued that a conservative approach to the matter was in order because it involved quote an area vital to the stability and prospects of the economy as a whole. unquote Federal Reserve governor Martha Seger was also opposed and pointed out that because South Dakota’s law prevented competition within the state it was clearly designed solely to circumvent federal law.

Volcker left office in 1987 and his successor, Alan Greenspan, harbored rather different views. Federal regulators later allowed commercial banks and insurers to merge and what the heck why not investment banks too? The result was rather disastrous as the resulting behemoths proved themselves too big to manage or govern and then too big to fail, but not too big to bail out with taxpayer money. Bill probably had some things on his conscience when he passed just over a year ago now, but the financial crisis of 2008 was not one of them. In the early 1980s analysts like John R. Dunne warned of a regulatory race to the bottom, led by states like South Dakota and Delaware eager to attract mobile, high-paying, low impact industries like finance to their states. Quote Such policies, like those already legislated in South Dakota, he warned, represent the bad side of deregulation and could lead to a deregulatory free-for-all. unquote A free-for-all did ensue but it focused on mortgage debt, not credit cards. And the deregulation wave of the 1990s and early aughts went on with no more significant input from South Dakota, which sailed through the housing bubble, financial crisis, and Great Recession with astonishingly little difficulty. In December 2011, three full years after the Panic of 2008 ended, South Dakota’s unemployment rate was, at 4.2 percent, the third lowest in the nation behind its neighbors Nebraska and North Dakota, which continued to experience an energy boom of Albertan proportions.

Mention of the recent bailouts brings me to the final person I promised to connect to this story, Alexander Hamilton. Hamilton has hung over the entire proceeding both literally and figuratively. The space we now occupy was once the private banking room of the Bank of New York, one of three banks that Hamilton helped to form before his life was snatched from him. A room bearing his name, likeness, and story lay just a few yards away. I interpret Hamilton as a civil libertarian, so I think he would have applauded South Dakota’s decision to abolish its usury cap, especially under an inflationary fiat currency regime. I also believe he would not have seen a problem with bank holding companies or interstate banking. He was the main mover behind the Bank of the United States after all, and soon accepted its directors’ decision to create branches in multiple states. He was far from a knee jerk advocate of deregulation, however, so I doubt he would have seen much merit in endangering deposits, especially after the advent of deposit insurance, by allowing banks to engage in insurance. And he surely would have opposed the Too Big to Fail doctrine that arose out of the Savings and Loan Crisis of the 1980s. In fact, David, Museum board chairman and financial historian Richard Sylla, and I recently published an article where we show that Hamilton espoused a lender of last resort rule that would later be named after Economist magazine editor Walter Bagehot. The rule, which saves solvent institutions, allows insolvent ones to fail, and doesn’t reward bad behavior, is one that South Dakotans steeped in horse sense would adopt for the entire country if they could. There are also a heap of Hamiltonian corporate governance reforms, described in my forthcoming book Corporation Nation, that would also be readily taken up if South Dakotans ran the show in Washington, as South Dakota natives Hubert Humphrey and George McGovern tried to do in 1968 and 1972, respectively, another dark time in the nation’s history. They both lost to Richard Nixon -- McGovern handily so -- which goes to show that while the majority rules it often isn’t very smart. Maybe, someday, the majority will be smart enough to follow the teachings of Hamilton and the horse sense of South Dakotans. Maybe, someday, we will have some of the prairie on Wall Street. Citibank N.A.’s recent decision to move its nominal headquarters from Nevada to Sioux Falls is a good start, though everyone knows that the real power is still at Citigroup holding company headquarters up on Park Ave. Maybe someday it too will move to Minnesota Avenue, or somebody from South Dakota will be running the show here in the Big Apple. Until then, keep your ass …ets safe. Thanks!

Sequester the Sequestration?

2013-02-26T19:43:00.001Z

I don't know the official reason that Washington elites give when asked why they decided to call automatic budget cuts "sequestration" but it sure is ironic because one of the meanings of the verb form, "sequester," is to remove property from the possession of the owner temporarily until a lawsuit or other dispute is settled. Could it be that the federal government thinks that taxpayers' money is its own property so when a dispute over its use arises in Congress the funds have to be "sequestered?" A more interesting question is why Congress remains deadlocked over the budget. The simple answer is that a significant percentage of Americans, but by no means all, believe that the federal government has grown too big.

Are they right? Well, that (too) requires making a valuable judgement. But they certainly have empirical reasons to be concerned, as the time series chart above suggests. What it shows is that the U.S. government was first tiny compared to the overall size of the economy (Remember, the dispute between Hamilton and Jefferson was over whether the government would be tiny or teensy weeny, not "large" or "small" as reported in too many textbooks ... see my One Nation Under Debt for details.). During major wars (1812, Civil, WWI, WWII, all clearly visible on the graph), federal expenditures grew as a percentage of GDP, only to subside after the war. (Note, though, that they never went back to their prewar level. This is what economist Bob Higgs has called the ratchet effect.) Since the Depression, however, government expenditures/GDP have trended upward, first due to the New Deal, then to a series of minor "wars" (Korea, Vietnam, Cold, Drugs, Terrorism) and "races" (space, missile).

The growth of federal spending as a percentage of GDP was not monotonic after World War II but rather exhibited ups and downs with a clear upward trend that was not attenuated until the 1970s and partially reversed in the 1990s. (It wasn't that the government shrank -- nominal expenditures have grown every year but one since 1956 -- but rather that the economy grew faster than government expenditures under Clinton.) Since Obama has taken office, however, government expenditures have surged while the economy has been stagnant. Expenditures over GDP is therefore at a peacetime high.

Americans might be quite happy to allow government expenditures to continue to expand faster than the economy if they believed that they benefited from it in a significant way. Most don't, however, as evidenced by the dismally low approval ratings for Congress and other federal institutions, like Social Security (which people like when it is paying them or relatives but despise when its Fubar characteristics are explained).

The best of all worlds would be for Congress to increase the government's efficiency, to have it do what it currently does well with fewer resources and to have it stop doing things it does not/cannot do well. That is not going to happen, however, because few in Congress have the requisite brainpower and none have the necessary incentives to make such decisions.

Second best will be to suffer the sequestration cuts, skimp through the growth slowdown/recession likely to follow, and prepare for the economic boom likely to begin a year or two out.

Worse will be for Congress to "kick the can down the road" yet again (enact more temporary measures). The worst measure would be for Congress to continue to force huge deficits down the throats of our children, grandchildren, and great grandchildren.

G Dub/AH on public credit

2013-01-14T20:52:00.001Z

Washington's Farewell Address, 1796 (drafted by Alexander Hamilton):

As a very important source of strength and security, cherish public credit. One method of preserving it is to use it as sparingly as possible, avoiding occasions of expense by cultivating peace, but remembering also that timely disbursements to prepare for danger frequently prevent much greater disbursements to repel it, avoiding likewise the accumulation of debt, not only by shunning occasions of expense, but by vigorous exertion in time of peace to discharge the debts which unavoidable wars may have occasioned, not ungenerously throwing upon posterity the burden which we ourselves ought to bear. The execution of these maxims belongs to your representatives, but it is necessary that public opinion should co-operate. To facilitate to them the performance of their duty, it is essential that you should practically bear in mind that towards the payment of debts there must be revenue; that to have revenue there must be taxes; that no taxes can be devised which are not more or less inconvenient and unpleasant; that the intrinsic embarrassment, inseparable from the selection of the proper objects (which is always a choice of difficulties), ought to be a decisive motive for a candid construction of the conduct of the government in making it, and for a spirit of acquiescence in the measures for obtaining revenue, which the public exigencies may at any time dictate.

[Emphases mine.]

NB: I published an extended discussion of this graf on Bloomberg here.

Reminders of my views on debt ceilings and deliberate defaults

2013-01-08T21:39:00.001Z

Due to the ridonculuous non-solution to the "fiscal cliff" issue, there has been all sorts of crazy talk about the debt ceiling ceiling, trillion dollar platinum coins, and what not so of course I have been fielding emails and phone calls instead of writing my book, Little Business on the Prairie. Here are some links to my previous writings on the subject, which seem pretty darn prescient (esp. the bit about needing to borrow to help a part of the country ravaged by a natural disaster). Enjoy ... again, or for the first time. And please, no more b.s. about trillion dollar platinum coins (or any other denomination for that matter).

On this blog:
April 21, 2011: The Debt Ceiling Crisis
July 19, 2011: Debt Ceiling Dilemma
July 25, 2011: Why Deliberately Defaulting on the National Debt or Any Other Sums Owed Would be Unconstitutional

On the History News Network (HNN):
Original Intent and the Debt Ceiling

And if any of you are wondering what I think of the ICE takeover of the NYSE, see my post of this day on the Bloomberg Echoes blog:
NYSE's Long History of Mergers and Rivalries

Governance, Finance, and Entrepreneurship: Global Lessons for Indian Country Policy Makers

2012-11-04T20:37:00.000Z

This is the substance of a talk I am giving on Tuesday, Nov. 6 (yep, election day) at the Society for Government Economists' annual conference at George Washington U. in Washington, DC.

Many thanks to my colleagues Eddie Welch and Bill Swart for their comments on earlier drafts.

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD

For seven years I taught a course in the MBA program at New York University’s Stern School of Business called “Global Perspectives on Enterprise Systems.” During that span, two other professors who taught that same course, business historian George Smith and financial historian Richard Sylla, joined me to create and elaborate an heuristic device we called the “Diamond of Sustainable Growth” to help students to better understand the economic development process. As we read widely in comparative economic history and worked with students to apply the model to specific countries across the globe and across history, we concluded that our teaching tool was actually a four stage descriptive model that fit the history of every wealthy nation on earth, with the exception of a few countries temporarily grown fat by exploiting natural resources like oil.

The diamond reference in our heuristic refers to a baseball diamond, not a precious gem or Jared. We can dispense with the baseball analogy here and move right to the heart of the matter. What we discovered is that nations that have experienced sustained increases in real per capita economic output have all followed the same four stages, in order. First they developed non-predatory governments and de facto limited constitutions. Non-predatory governments protect life, liberty, and property; de facto limited constitutions contain checks and balances that effectively reduce predatory behavior by the government. With expectations of future protection of property and human rights in place, modern financial systems arose, then open access entrepreneurial systems, and finally modern management techniques. Holland, Great Britain, the United States, Canada, France, the Scandinavian nations, and the Asian, Latin, and Celtic tigers all went through those same stages in the same order, which is a logical sequence as well as an historical one. Before modern management becomes necessary, an economy needs large companies which are the result of competition between entrepreneurs for sales and financing. Before people have an incentive to create a well articulated financial system, they need to have fairly strong assurances that their property, not to mention their lives and liberties, will be secure from threats foreign and domestic.

Impoverished nations in Latin America, Africa, Eastern Europe, Central Asia, the Middle East, Southeast Asia, and Micronesia suffer under governments that are predatory, that in other words do not adequately protect most citizens’ lives, liberties, or properties. In many such cases, the governments themselves are the local alpha predator and their predatory practices range from genocide, famine, and unchecked pestilence to systemic corruption and crony capitalism to institutions that, purposely or not, create and perpetuate an underclass, a topic to which I will shortly return.

Nations that backtracked, including Argentina, Japan, and Germany, experienced revolutions that established governments that offered fair protections of their citizens’ lives, liberties, and properties. They later suffered economically, however, when their constitutions proved to have de facto checks and balances insufficient to prevent a return to predatory government. After the horrors of World War II, Japan and Germany developed constitutions with de facto checks and balances and unsurprisingly thrived economically thereafter. That Japan’s economy has remained stagnant, albeit at a high income level, since the early 1990s is testament to the strength of national economies once they have achieved all four stages of development described by the diamond model.[1]

The reason that you probably haven’t heard of the diamond model is that it has not been tested statistically. As larger and improved datasets addressing governance quality, financial systems, entrepreneurship, and management become available, however, testing has become more appealing and I’d be happy to team up with anyone who wants to do so. For me, however, the most compelling evidence of the model’s power comes out of natural experiments, not statistics. Several nations have been arbitrarily cut into two and randomly assigned different types of government while retaining similar cultures, histories, genetics, natural resource endowments, and so forth. Those with non-predatory governments and sufficient de facto checks and balances developed modern financial, entrepreneurial, and management systems and they grew economically and have stayed wealthy even in the face of global financial shocks. Think West Germany, South Korea, Hong Kong, and Taiwan. Those with predatory governments have remained or became impoverished. Think East Germany, North Korea, and mainland China before Deng’s reforms.[2]

Pertinent to our focus here today, the diamond model also helps to explain differences in economic outcomes within nations. South Africa has a bifurcated economy because its government was long non-predatory toward whites and highly predatory toward blacks. India’s economy is also uneven due to the long persistence of the Hindu caste system. The U.S. South lagged the North economically until the remnants of slavery, Jim Crow, and the KKK were defeated in the 1960s. Appalachia remains somewhat backwards but improved dramatically after company coal towns in cahoots with tidewater politicians were reformed after the Second World War.

And American Indian Reservations in the continental United States were poverty stricken places until federal, state, and tribal governments made credible commitments to protect the lives, liberties, and properties of Native Americans. Well, I hope to be able to claim that within the next two or three decades. As it stands now, many natives rightly equate their situation with blacks in South Africa under apartheid. Much of the impetus for change is being provided by native peoples themselves, some from well meaning outsiders like the people in the audience here, and some from federal budget constraints. Providing basic public goods like protection of life, liberty, and property is cheap in the scheme of things and certainly less expensive than trying to micromanage Reservation economies with bureaucratic controls, the modus operandi for over a century. After adequately protecting Natives’ lives, liberties, and properties, policymakers should stand aside and watch the woodlands, prairies, and even the Badlands blossom, metaphorically if not literally. As native American entrepreneur Charlie Colombe put it, “if we had good … governments, we would be overflowing with business opportunities and jobs.”[3]

What Indian Country can do without are grand top down schemes, the sort of government or NGO planning rightly derided by Bill Easterly, Dambisa Moyo, Hernando de Soto, and others, that have so often failed in Indian Country as well as in Africa, Latin America, and elsewhere. As Adam Smith put it in 1755, “Little else is requisite to carry a state to the highest degree of opulence from the lowest barbarism, but peace, easy taxes and a tolerable administration of justice; all the rest being brought by the natural course of things. All governments which thwart this natural course, which force things into another channel or which endeavour to arrest the progress of society at a particular point, are unnatural, and to support themselves are obliged to be oppressive and tyrannical.”[4]

We can debate what Smith meant by “easy taxes” but basically he argued that nations with predatory governments will have lousy economies while those with non-predatory ones will thrive, regardless of their resource endowments. He elaborated on that point in his discussion of China in the Wealth of Nations. “China seems to have been long stationary,” he noted, “and had probably long ago acquired that full complement of riches which is consistent with the nature of its laws and institutions. But this complement,” he added, “may be much inferior to what, with other laws and institutions, the nature of its soil, climate, and situation might admit of.” Rather than natural resource endowments determining income levels, in other words, Smith saw that “laws and institutions” were the limiting factors.[5]

In the eighteenth and nineteenth centuries, the notion was widespread that the quality of political governance mattered far more to income levels than natural resource endowments did. In an 1831 book, Albert Gallatin, the longest serving treasury secretary in U.S. history, argued that “the increased wealth and prosperity of Europe and America are the cause, and not the effect, of the increased amount in value of gold and silver, which they now possess. The causes of that great increase of wealth, are not to be found in the fertility of the mines of America, but in the general progress of knowledge, skill, and every species of industry, in the consequent improvement of governments, laws, and habits, in all that constitutes civilization.” Two years previously, an anonymous author argued that “the powerful influence of good laws and their good administration on the wealth and prosperity of nations, is in theory universally acknowledged. A wise and beneficent policy in the law of debtor and creditor, or in any laws affecting the interests of large numbers,” he continued, “may do more to advance the welfare of a nation than the greatest natural advantages.” “Who would carry on business,” he asked, “in a place in which wealth rendered the life of its possessor insecure?”[6]

Who indeed? What has been missing on Indian Reservations from the beginning has been good governance, assurances that life, liberty, and property would be protected by the government, not taken by it. The cost of poor governance has been enormous. According to one Treasury Department study, Indian Reservations should have received $44 billion more in investment than they actually have. Other studies have come to comparable conclusions.[7]

Much of the blame for the investment deficit falls squarely on the federal government. “We must act with vindictive earnestness against the Sioux,” General William Tecumseh Sherman told President Grant, “even to their extermination, men, women, and children. Nothing less will reach the root of the case.” But one does not have reference the Trail of Tears, Bad Axe, Bloody Island, Sand Creek, Bear River, Skull Valley, Fort Robinson, Wounded Knee, hundreds of lesser known massacres, or even the Cobell case against the Department of the Interior to show that the federal government behaved in a predatory manner toward Native Americans. Even more insidious was the reservation and government trading systems that developed over the nineteenth century because they bred dependence, a point well understood by astute contemporaries. Indian commissioner E. A. Hayt argued from his experience in the mid-1870s that “civilization” had “loosened” and in some cases even “broken, the bonds that regulate and hold together Indian society” but the federal government had failed to fill the resulting power vacuum. As a result, “women are brutally beaten and outraged; men are murdered in cold blood … and schools are dispersed by bands of vagabonds; but there is no redress.”[8]

An Indian agent complained in 1880 that while the government stood idly by traders exploited Native Americans on both ends of trades, charging too much for manufactured goods and crediting too little for Indian wares, a common expropriation technique of predatory leaders and their cronies throughout the globe to this day. Other agents and newspaper reporters evinced similar sentiments, rendering the common complaint that Native Americans were “disinclined to work” unsurprising. By the 1910s, Native Americans in South Dakota had been thoroughly pacified, “partly through kindness and partly through fear” in the words of one Dakotan farmwife. Yet predatory pacification policies persisted for decades thereafter. Land allotment and inheritance policies, for example, rendered Indians’ lands less valuable than they would otherwise have been by dividing ownership among hundreds or even thousands of descendants. In addition, the over 11 million acres of Indian lands still owned in trust by the U.S. government are not available to collateralize loans. The reason for the trust arrangement, like the rationale for most aspects of Indian policy, was deeply racist and paternalistic: don’t let Indians run into debt or they will surely lose their lands. But the policy had the effect of cutting Native peoples off from a major source of startup capital, keeping them dependent on the government and non-Native businesses for employment except in the rare instances when other collateral was available. Tim Giago obtained initial funding for his newspaper, for example, by putting up a classic automobile as collateral. By the 1950s, so-called “termination,” a process by which the federal government no longer recognized tribes, had replaced physical annihilation but the effect on incentives was nearly as negative. The Klamath tribes, for example, lost 1.8 million acres when they were “terminated” in 1954 and their lands were not returned when federal recognition was restored in 1986.[9]

Most interaction between native tribes and government occurs at the federal level but state and county governments have also generally governed Reservations poorly in several important realms of responsibility, including criminal justice, transportation and other infrastructure, income redistribution, taxation, and business regulation. Government policies at all levels create a vicious cycle of low expectations, high unemployment, and low wages that cannot be broken solely by economic forces. According to certain neoclassical economic models, the high levels of unemployment endemic on most Reservations should attract capitalists eager to tap a cheap, easily replaceable workforce. It has not, however, worked out that way on most Reservations. In the postwar period, for example, several businesses tried to establish factories on South Dakota’s Indian Reservations, most of which then as now were among the poorest of the poor. Some lasted for several years but all eventually failed or moved away, including a meat packing plant, a bison ranching and slaughtering operation, and factories for making arrows, dolls, electrical circuits, fish hooks, moccasins, and shirts. The state’s Employment Security Department, for example, expected big things of the Wright & McGill Fishing Tackle Company, which set up operations on the Pine Ridge reservation in 1960. Wright & McGill is still around but shuttered its Pine Ridge facilities in 1968. It turns out that businesses do not seek low wages per se, they seek high levels of productivity, of output per dollar paid in compensation. Unsurprisingly, uneducated, unmotivated Natives did not on average produce enough to justify even their low wages, so manufacturers moved on.[10]

More recent attempts to improve life for Native Americans has in a way reinforced their dependency by raising incomes without necessarily sparking development. The gambling, gasoline tax, and tobacco tax regulatory advantages of native tribes helped to relieve some poverty but in some ways replicate natural endowment curses. Oil and other endowments raise per capita incomes but stymie development by allowing and even encouraging governments to remain predatory by fueling corruption. Tribes, like other nations, are best off when they begin to tap endowments after developing well-checked and balanced non-predatory governments. Of course the BIA and corporations have ensured that Natives would rarely face such a problem by stripping the Black Hills from the Lakota, fleecing the Navajo nation of the majority of its reserves, and similar acts of predation.[11]

Wealth without development alleviates poverty but only temporarily. Casinos have brought wealth to a few tribes near major urban centers but what happens when gamblers start visiting the rapidly growing number of alternatives? Or if gambling enters a secular decline, as has happened several times in the past? (Thankfully, several well-governed tribes have used gambling profits to diversify into other, less volatile businesses.) And what happens when hybrids and electric vehicles mean fewer trips to the gas pumps? Or if Congress revokes one or more other tribal regulatory advantages? Rather than regulatory advantages or natural resource endowments like water, fossil fuels, minerals, or timber, the improvement in economic conditions on many Reservations since the mid-1990s is best attributed to the Self-Governance Act of 1994 because after its passage all Natives faced a federal government somewhat less capable of predation.[12]

The self-determination movement, however, brought problems of its own. Tribal governments are less predatory than federal, state, and county governments but many tribes do not have the capacity to protect the lives, liberties, or properties of individual Native Americans sufficiently to induce those individuals to invest in their own education, health, or other aspects of their human capital. “Prolonged federal paternalism,” explained The Harvard Project on American Indian Economic Development in its recent book, “has resulted in underdeveloped institutions and in tribal leadership that is ill-prepared to lead fully sovereign communities.” Internal disputes and jealousies do not help matters. “So many times,” explains Rosebud Reservation entrepreneur Wayne Boyd, “our tribal governments enact laws that counteract economic development.”[13]

Moreover, many tribal governments have yet to enact the basic laws or court precedents needed to assure financiers and entrepreneurs that their successful efforts will be fairly rewarded. Most tribal constitutions do not explicitly bar impairment of contractual obligations and have not included ex post facto stipulations in their constitutions. Many tribes have yet to create separation of powers between their courts and their legislative tribal councils, and suffer for it with higher unemployment rates. Most have yet to enact the UCC and many lack zoning ordinances or land use plans. Those that have find effective implementation challenging. Many tribes also lack checks and balances rooted in traditional governance practices, largely because many adopted, or were forced to adopt, the weak cookie-cutter constitution proffered in the 1934 Indian Reorganization Act. Constitutions imposed from on high, or from outside of domestic political traditions, did not work in Latin America or most other places. Checks against undue power come in many varieties, not all of them de jure or conjured up by the U.S. Framers. When it comes to checking predation, substance trumps form every time. Natives need to find what checks work in their society and implement them.[14]

One would expect to find little in the way of finance, large scale innovative entrepreneurship, or modern management on the worst governed Reservations and one would be right. The first native controlled credit union on the Pine Ridge Reservation, Lakota FCU, was approved just a few months ago and is slated to begin operations in Kyle this month. Pine Ridge is hardly an outlier in this regard as a Treasury department report released in 2001 found that only 14 percent of Indian Reservations had even a single financial institution to serve their communities. Over a third of Native Americans had to travel at least 30 miles, mostly on dirt roads, to reach an ATM or bank. In 2008, the 561 federally recognized tribes owned only 21 FDIC insured banks. Little wonder then that when Natives need to borrow, most must resort to loan sharks or other uber-expensive types of lenders.[15]

Native-owned businesses have increased in number in the best governed areas but overall entrepreneurship is lacking. In fact, native Americans own private businesses at the lowest rate per capita of any group in the United States. When the Lakota Fund, a micro-finance lender, was established in 1985, there were fewer than 40 registered businesses on a 2 million acre reservation, and most were owned by non-Natives. The situation has since improved but in 2006 only about 5 percent of the working age population in the Rosebud and Cheyenne River reservations were engaged in formal entrepreneurial activities and more than half of all businesses operating on or near those reservations were owned by non-Natives.[16]

Numerous replicative unregistered nano-enterprises owned by natives operate in the underground economy, as is typical in Third World nations with chronic double digit unemployment and little public confidence in government authorities, but few innovative or scalable enterprises exist, though interest in entrepreneurship among Natives has been trending upward since the mid-1990s. Receiving small liquidity loans from micro-finance lenders helped many beaders, quilters, nano-retailers, and others to escape the deepest depths of poverty but in and of themselves are insufficient to transform local economies, in part because it takes Natives significantly more time and money to register businesses than it takes non-natives to.[17]

Where tribes have done well developmentally, tribal governance has been non-predatory and political power has been sufficiently checked. The Mescalero Apache Tribe, for example, improved its economy by first changing its constitution to promote, in the words of Wendell Chino, “more stability.” Chief Phillip Martin of the Mississippi Choctaw also credits constitutional reform for his tribe’s relative economic success, which includes enough automobile subassembly, plastics manufacturing, printing, and electronics manufacturing jobs for every tribe member who is willing and able to work. Similarly, economic conditions on the Flathead Reservation in Montana improved after constitutional reforms reduced tensions between rival tribes. Tribal corporations have done best where not subjected to political oversight.[18]

There are those who think, typically silently or between the lines but sometimes openly, that native peoples simply do not have the desire, smarts, and/or chutzpah to join advanced economies. We have developed a whole complex of myths to convince ourselves of this, stories about Native American ecological stewardship, hunting and gathering subsistence strategies, and economies based on gift exchange, a lack of private property rights, and even disdain for wealth accumulation. Slowly, however, old notions of communal or even socialist Indians are unraveling under an avalanche of archeological data on pre-contact native lifeways. It is now clear that most native groups were agriculturalists who farmed everything from corn to fish. Most tribes had clearly defined private property rights in land, horses, and other possessions, some vested in individuals and some vested in groups analogous to Western corporations.[19]

The existence of extensive trading networks is also becoming increasingly well documented. Pre-Columbian native groups even engaged in specialized manufacturing for large-scale, long-distance exchange. In Mitchell, South Dakota, researchers like my colleague Adrien Hannus are uncovering evidence of an extensive factory for processing bison hides and meat en masse hundreds of years before Columbus was born. Those goods were then exchanged for pottery from Cahokia – but it isn’t yet clear, and may never become clear, if those were arms length market transactions, inter-firm transfers, or something in between.[20]

Of course ultimately what matters for economic development today are Native Americans’ attitudes towards the market today. Ask just about anyone in South Dakota and they will tell you that most Reservation Indians are poor because most are lazy, lying, drunken bastards. Or words to that effect. Unfortunately, casual observers have the causality backwards. People do what they have incentives to do. Many casual observers used to think of Mexicans as sombrero-wearing, siesta-taking, Jose Cuervo-swilling miscreants but after NAFTA and other reforms improved incentives south of the border those same observers now express fears that Mexicans are going to “take our jobs.” Ditto the Irish, nay all Catholics if you want to go down Max Weber’s well worn path of prejudice. And when is the last term you heard a good Pollock joke? Well, gosh darn it, Poland got rid of Communism and joined the EU and now it only takes one Pole to screw in a light bulb.[21]

What I am trying to say here is that it is too easy to dismiss the potential of entire peoples by positing a sort of culture of poverty trap. The latest and greatest research indicates that grinding poverty was not a cultural trait of Native peoples. Their technology lagged that of their western European conquerors for roughly the reasons outlined by Jared Diamond in Guns, Germs, and Steel but their population densities were at world standards, per capita incomes were much closer to those of Western Europeans than they are today, and their overall levels of individual health, abstracted from studies of their bones, may very well have exceeded those of Europe. Post contact, numerous individual Natives as well as entire tribes tried to attain riches and some succeeded. Some owned slaves, others huge ranches or lumber operations, others lucrative energy or mineral leases. More recently, a few have established fabulously successful casinos.[22]

Many Natives do profess disdain for wealth accumulation but to a large extent economic conditions determine cultural attitudes toward the wealthy. In a poor, stagnant economy, it makes sense to be critical of large wealth because the rich probably got that way by exploiting others. Thus we have the African “PHD” or pull him down behavior and the infamous jokes about crabs in boiling water preventing each other from escaping death and Russian peasants who would rather see their neighbor’s cattle destroyed than their own herds increased. In most parts of America, by contrast, social jealousy is expressed differently, as “keeping up with the Joneses” rather than torching the neighbor’s new Mercedes. In pockets of rural poverty, like the Reservations, or in urban ghettoes, by contrast, the only practical way of maintaining community standards is to prevent others from getting ahead.[23]

What I am suggesting here is that rather than lamenting, or trying to change, cultural characteristics, policymakers should concentrate on economic development. The culture will reform itself as expectations about future household wealth adjust to improved conditions. It generally takes only a decade or two to see pronounced improvements in prevailing cultural sentiments. In short, there is no reason to “kill the Indian, save the man” or to destroy native cultures as they are not inherently antithetical to development. Most natives want property, and they want it protected. As American Indian Rides at Door put it: “I want some law or protection whereby I can always hold that [incidentally oil rich] property intact so that no white man can take it away from me.”[24]

The question for policymakers convinced by the growth diamond model is how to credibly commit to a policy of protecting the lives, liberties, and properties of Native Americans, especially those living on Reservations. The ultimate goal is to learn what threats to their lives, liberties, and properties Natives perceive and then to remove those threats in palpable and permanent ways. The federal government doesn’t have a very good record of keeping its promises to native peoples and the record of tribal governments is so far spotty at best. At the very least, governments at all levels need to reduce uncertainty by creating clear, equitable policies about land ownership and jurisdictional authority that it can stick to over the vagaries of election cycles and swings in political sentiment.[25]

Canada may be a place to begin looking for clues. Our northern neighbors have clearly bested us, repeatedly, in the realm of financial regulation and in the last few decades anyway in the treatment of native peoples. Canadian policymakers are not perfect, as they are the first to admit, but there is much we can learn from them. Other valuable resources include the recommendations in Robert J. Miller’s recent book, Reservation “Capitalism” and in the Harvard Project’s book. Finally, after federal, state, county, and tribal governments have become non-predatory, and are amply checked from returning to their formerly predatory ways, policymakers, especially at the federal and state levels, have to learn to step aside and allow economic development to proceed in its own way. Adam Smith was not right about everything, but he did correctly predict that economic development occurs where ever and whenever people have confidence that they will be able to be able to keep the just fruits of their labors. What Natives need most, therefore, is a climate “conducive [to] economic development,” not “affirmative entrepreneurship policies.” As Lynn Rapp, an investment advisor and Oglala Lakota, put it: “In every economy from the beginning of time, the more governments are involved, the less successful … business becomes.”[26]

Thank you.

Notes

[1] For more information about the model and more in-depth discussion of specific cases, see Robert E. Wright, One Nation Under Debt: Hamilton, Jefferson, and the History of What We Owe (New York: McGraw-Hill, 2008), 2-15; George D. Smith, Richard Sylla, and Robert E. Wright. “The Diamond of Sustainable Growth,” Sternbusiness (Spring/Summer 2007): 26-29.

[2] M. A. Thomas, “What Do the Worldwide Governance Indicators Measure?” European Journal of Development Research 22 (2012): 31-54; Martin Cihak, Asli Demirguc-Kunt, Erik Feyen, and Ross Levine, “Benchmarking Financial Systems Around the World,” (World Bank, August 2012).

[3] Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 36, 39-40; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 73.

[4] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 39-40, 46; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 4, 20, 113; William Easterly, The White Man’s Burden: Why the West’s Efforts to Aid the Rest Have Done So Much Ill and So Little Good (New York: Penguin Press, 2006); Dambisa Moyo, Dead Aid: Why Aid Is Not Working and How There Is a Better Way for Africa (New York: Farrar, Straus and Giroux, 2009); Hernando de Soto, The Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else (New York: Basic Books, 2000); The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 113; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 277; Duane Champagne, “Tribal Capitalism and Native Capitalists: Multiple Pathways of Native Economy,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 324; www.econlib.org/library/Smith/smWN0.html; Tim Giago, “The Failed Policies of the Democrats on Indian Reservations Will Continue Under Matt Varilek,” Huff Post (28 Oct. 2012). www.huffingtonpost.com/tim-giago/the-failed-policies-of-th_b_1997978.html

[5] Book 1, Chapter 9: http://oll.libertyfund.org/?option=com_staticxt&staticfile=show.php%3Ftitle=220&chapter=217401&layout=html&Itemid=27

[6] Albert Gallatin, Considerations on the Currency and Banking System of the United States (Philadelphia: Carey & Lea, 1831), 17; “Manufacturing Corporations,” American Jurist (July 1829), 92.

[7] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 93; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 130; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 111.

[8] Bahman Dehgan, ed. America in Quotations (Jefferson, North Carolina: McFarland & Co., 2003), 20; Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 34; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 369; Will G. Robinson, “Digest of the Report of the Commissioner of Indian Affairs, 1877,” South Dakota Historical Collections and Report 32 (1964): 260; Martha Shirk and Anna Wadia, Kitchen Table Entrepreneurs: How Eleven Women Escaped Poverty and Became Their Own Bosses (New York: Westview Press, 2002), 112; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 7-8; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 113; Linda Barrington, “Native Americans and U.S. Economic History,” in Linda Barrington, ed., The Other Side of the Frontier: Economic Explorations into Native American History (Boulder, Col.: Westview Press, 1999), 33.

[9] Will G. Robinson, “Board of Indian Commissioners Report, 1880,” South Dakota Historical Collections and Report 32 (1964): 498; Will G. Robinson, “Digest of the Report of the Commissioner of Indian Affairs, 1877,” South Dakota Historical Collections and Report 32 (1964): 268, 271, 385; Jennifer Malkin and Johnnie Aseron, Native Entrepreneurship in South Dakota: A Deeper Look (CFED, 2006), 23; George Kolbenschlag, A Whirlwind Passes: Newspaper Correspondents and the Sioux Indian Disturbances of 1890-1891 (Vermillion: University of South Dakota Press, 1990), 20-23; Estella Bowen Culp, Letters from Tully: A Woman’s Life on the Dakota Frontier (Boulder, Col.: Johnson Books, 2007), 207; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 55, 96-99, 102; Alexandra Harmon, Rich Indians: Native People and the Problem of Wealth in American History (Chapel Hill: University of North Carolina Press, 2010), 195-96, 205; Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 44, 94, 121; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 96-97; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 92, 95; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 39-40; William Bauer, “Working for Identity: Race, Ethnicity, and the Market Economy in Northern California, 1875-1936,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 245; Kathy M’Closkey, “The Devil’s in the Details: Tracing the Fingerprints of Free Trade and Its Effects on Navajo Weavers,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 113.

[10] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 94, 123; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 69-81; Kathleen Ann Pickering, Lakota Culture, World Economy (Lincoln: University of Nebraska Press, 2000), 17-18. Martha Shirk and Anna Wadia, Kitchen Table Entrepreneurs: How Eleven Women Escaped Poverty and Became Their Own Bosses (New York: Westview Press, 2002), 111 mentions the moccasin factory, which apparently had a putting out system component; 25^th Annual Report of the Employment Security Department of South Dakota (1961), 17; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 169-72, 250; Sebastian Braun, Buffalo Inc.: American Indians and Economic Development (Norman: Oklahoma University Press, 2008).

[11] Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 210-11; Kathleen P. Chamberlain, Under Sacred Ground: A History of Navajo Oil, 1922-1982 (Albuquerque: University of New Mexico Press, 2000), x-xii, 38-40, 92-115. On cigarette sales by Indian tribes, see Philip DeCicca, Donald Kenkel, and Feng Liu, “Reservation Prices: An Economic Analysis of Cigarette Purchases on Indian Reservations,” (Working Paper, September 2012) and Jessica R. Cattelino, “Casino Roots: The Cultural Production of Twentieth-Century Seminole Economic Development,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 81-85.

[12] The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 7-10, 114-16, 121-25, 135-36, 145, 156, 161, 369-72; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 69; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 81-85; Duane Champagne, “Tribal Capitalism and Native Capitalists: Multiple Pathways of Native Economy,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 318-20.

[13] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 119, 126-27; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 9, 23, 203-212; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 12, 258; Richard Polsky, Boneheads: My Search for T. Rex (San Francisco: Council Oak Books, 2011) 96-98; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 79.

[14] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 102, 106-8, 120-21, 142-43; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 19-20, 24, 126-9; Jennifer Malkin and Johnnie Aseron, Native Entrepreneurship in South Dakota: A Deeper Look (CFED, 2006), 51-52; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 36, 41; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 190-93.

[15] Stephanie Woodard, “Pine Ridge Gets New Credit Union on Reservation With ‘No Other Access to Federally Insured Financial Services’,” Indian Country (31 August 2012); Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 2, 148-49; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 130-31; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 40-42.

[16] Jennifer Malkin and Johnnie Aseron, Native Entrepreneurship in South Dakota: A Deeper Look (CFED, 2006), 5, 42; Duane Champagne, “Tribal Capitalism and Native Capitalists: Multiple Pathways of Native Economy,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 320-21.

[17] The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 117-121; Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 3, 113, 129; Cary C. Collins and Charles V. Mutschler, eds., A Doctor Among the Oglala Sioux Tribe: The Letters of Robert H. Ruby, 1953-1954 (Lincoln: University of Nebraska Press, 2010); Martha Shirk and Anna Wadia, Kitchen Table Entrepreneurs: How Eleven Women Escaped Poverty and Became Their Own Bosses (New York: Westview Press, 2002); Dale Peterson, Storyville USA (Athens: University of Georgia Press, 1999); Kathleen Ann Pickering, Lakota Culture, World Economy (Lincoln: University of Nebraska Press, 2000); Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 169-70, 220; Jennifer Malkin and Johnnie Aseron, Native Entrepreneurship in South Dakota: A Deeper Look (CFED, 2006), 5, 11-12, 29, 39-41, 49-50; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999); Kenneth Provost, “American Indian Entrepreneurs: A Case Study,” (Ph.D. diss., South Dakota State University, 1991); Duane Champagne, “Tribal Capitalism and Native Capitalists: Multiple Pathways of Native Economy,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 317-18; Michael J. Francisconi, Kinship, Capitalism, Change: The Informal Economy of the Navajo, 1868-1995 (New York: Routledge, 1998), 81-98, 103-5.

[18] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 49-70; The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 26, 44-47, 112. For other examples of tribal economic success see Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 78-79, 85-86, 252-53. The characteristics of successful individual Indian entrepreneurs is very similar to the population at large: appropriate education, experience, and social skills. See Kenneth Provost, “American Indian Entrepreneurs: A Case Study,” (Ph.D. diss., South Dakota State University, 1991); Duane Champagne, “Tribal Capitalism and Native Capitalists: Multiple Pathways of Native Economy,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 322-23.

[19] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 11-16; Alexandra Harmon, Rich Indians: Native People and the Problem of Wealth in American History (Chapel Hill: University of North Carolina Press, 2010), 9, 209; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 77; David Arnold, “Work and Culture in Southeastern Alaska: Tlingits and the Salmon Fisheries,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 156-83; Linda Barrington, “The Mississippians and Economic Development Before European Colonization,” in Linda Barrington, ed., The Other Side of the Frontier: Economic Explorations into Native American History (Boulder, Col.: Westview Press, 1999), 86-102.

[20] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 10, 21-24, 115-16.

[21] Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 5, 207.

[22] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 4-5, 8-24, 29; Alexandra Harmon, Rich Indians: Native People and the Problem of Wealth in American History (Chapel Hill: University of North Carolina Press, 2010), 5, 17-54; Jared Diamond, Guns, Germs, and Steel: The Fates of Human Societies (New York: W. W. Norton, 1997); Angus Maddison, The World Economy: A Millennial Perspective (OECD, 2001), 231-32, 264; P. Willey, Prehistoric Warfare on the Great Plains: Skeletal Analysis of the Crow Creek Massacre Victims (New York: Garland, 1990), 153-75; Duane Champagne, “Tribal Capitalism and Native Capitalists: Multiple Pathways of Native Economy,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 314-16; Paul C. Rosier, “Searching for Salvation and Sovereignty: Blackfeet Oil Leasing and the Reconstruction of the Tribe,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 32-44; Nicholas G. Rosenthal, “The Dawn of a New Day?: Notes on Indian Gaming in Southern California,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 90-111; Linda Barrington, “The Mississippians and Economic Development Before European Colonization,” in Linda Barrington, ed., The Other Side of the Frontier: Economic Explorations into Native American History (Boulder, Col.: Westview Press, 1999), 86-102; Daniel H. Usner, Jr., American Indians in the Lower Mississippi Valley: Social and Economic Histories (Lincoln: University of Nebraska Press, 1998), 95; Brian Hosmer, American Indians in the Marketplace: Persistence and Innovation Among the Menominees and Metlakatlans, 1870-1920 (Lawrence: University Press of Kansas, 1999).

[23] Robert J. Miller, Reservation “Capitalism”: Economic Development in Indian Country (New York: Praeger, 2012), 117-18; Jennifer Malkin and Johnnie Aseron, Native Entrepreneurship in South Dakota: A Deeper Look (CFED, 2006), 26; Ian Frazier, On the Rez (New York: Farrar, Straus, and Giroux, 2000), 12, 218, 238, 241-42, 246, 249-50; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 38-39, 49, 65-66, 83, 85-86.

[24] Colleen O’Neill, “Rethinking Modernity and the Discourse of Development in American Indian History, an Introduction,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 3, 14-15; Jessica R. Cattelino, “Casino Roots: The Cultural Production of Twentieth-Century Seminole Economic Development,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 66-90; As quoted in Paul C. Rosier, “Searching for Salvation and Sovereignty: Blackfeet Oil Leasing and the Reconstruction of the Tribe,” in Brian Hosmer and Colleen O’Neill, eds. Native Pathways: American Indian Culture and Economic Development in the Twentieth Century (Boulder: University Press of Colorado, 2004), 28; Brian Hosmer, American Indians in the Marketplace: Persistence and Innovation Among the Menominees and Metlakatlans, 1870-1920 (Lawrence: University Press of Kansas, 1999), xii, 16-17.

[25] The Harvard Project on American Indian Economic Development, The State of the Native Nations: Conditions Under U.S. Policies of Self-Determination (New York: Oxford University Press, 2008), 58, 134-35; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 83.

[26] Jennifer Malkin and Johnnie Aseron, Native Entrepreneurship in South Dakota: A Deeper Look (CFED, 2006), 46; Lisa Little Chief Bryan, American Indian Entrepreneurs: Rosebud and Pine Ridge Reservations Case Studies (Pablo, Montana: Salish Kootenai College Press, 1999), 68.

On Guest Posts, Infographics, Brown Nosing Emails, and Mutually Beneficial Projects

2012-10-19T14:47:00.000Z

For some reason, I receive each month a couple of requests from bloggers to make guest posts on my blog. I'm happy to consider such posts, and have done one or two in the past, but they must follow the three As: ACCURATE, ASTUTE, and ANALYTICAL. In other words, no pop history and no lists like "X Reasons You Should Do Y" or whatever. There are plenty of other blogs that do that sort of thing.

I also get emails from people who want me to post or link to their "infographics." They tend to be quite sharp looking pics but some fail all three A criteria specified above and I have yet to see one that was sufficiently analytical. Again, there are plenty of blogs out there that post infographics.

And please do NOT send me emails claiming that you have read my blog with interest, etc. and then display the utmost ignorance about its actual content.

But rest assured I'll happily trade with anyone who offers a mutually beneficial proposal.

When Will America Have Its "Charlie Moment"

2012-09-25T14:20:00.000Z

Last night on Revolution, a new show on NBC that depicts the remnants of the USA 15 years after electricity suddenly stopped working, Charlie (the hot blondie blue chick) chastised two compatriots because they were so intent on stealing a sniper rifle that they had not even thought about what the sniper was guarding ... thirty enslaved people. The show is fictional, of course, but hardly irrelevant: people today, in the good ole USA, are working against their will, usually at mere subsistence levels. When will some Charlie out there awaken the nation to the slaves amongst us? Well, President Obama may be trying to do so, TODAY, 25 Sept. 2012, in his speech from the Clinton Global Initiative at Noon EDT. We shall see.

Yvette Clarke not entirely wrong

2012-09-10T17:25:00.003Z

Yes, I saw Stephen Colbert's interview of Yvette Clarke (D-NY) in which Ms. Clarke professed to believe that slavery existed in New York City in 1898. That is eighteen ninety eight, 30+ years after the Civil War, the Emancipation Proclamation, and the 13th amendment of the U.S. Constitution ended formal slavery. Clearly, Clarke was confused about the chronology, even claiming that the Dutch were the culprits.

Yet, Clarke was not entirely wrong because various forms of unfree labor continued in NYC and elsewhere in 1898. In fact, they persist to this day, even in America. So Clarke would have been right to tell the New Yorkers of 1898 to set the enslaved free. The ironic thing is that she should be saying that today, too: set free everyone, white or black, male or female, American or otherwise, who have no or limited choices due to the power of their pimp, handler, or warden. I've laid how out in Fubarnomics and will continue to do so as editor of a new book series, about which more anon, tentatively titled Slaveries Since Emancipation.

Booms, Busts, and Bubbles

2012-09-10T17:02:00.004Z

I gave this presentation before the CFA Society of Buffalo on 9/7/12.

100s of Indicators But These 10 You MUST Watch

2012-08-23T18:06:00.001Z

These are the PowerPoint slides I used during recent presentations to the AAII (American Association of Individual Investors) in Boulder and Denver, Colorado in support of my book with Simon Constable called The Wall Street Journal Guide to the 50 Economic Indicators That Really Matter.

Healthcare and Insurance Reform: Innovation Zones, Vertically Integrated Mutuals, and Hybrid Policies

2012-08-16T17:59:00.001Z

McKinsey & Co. was supposed to publish this in some forthcoming piece about mutuals and co-ops but just called to say that it isn't going to publish anything so controversial during a presidential race. So I append below my original draft. There is some chance that the edited version will eventually appear, presumably after the election, and quite a lot of their editing went into it, so I won't post the that version, just my original IP. I realize I haven't blogged in awhile but I'll have some investment-related stuff very soon.

The U.S. healthcare system is ill. Prices for medical services (and hence insurance premiums) have increased faster than inflation for decades and now comprise almost one fifth of aggregate economic output. No end to the trend appears in sight. Some American hospitals and doctors offer the best medical treatment in the world, bar none, but most Americans can afford access only to lower tier services that palpably lag global best practices. Tens of millions have no insurance whatsoever and suffer for it financially, psychologically, and biologically when they are sick or injured.

In 2010, the U.S. federal government responded to those signs of illness by passing the Patient Protection and Affordable Care Act (PPACA). The mammoth law, much of which phases in incrementally with complete implementation coming in 2020, tries to address perceived problems by direct fiat. Millions of Americans are uninsured, so the law proclaims that they will be fined up to 2.5 percent of income (by 2016) if they do not acquire insurance (the so-called individual mandate). Pre-existing conditions raise insurance premiums or preclude coverage altogether so insurers will be forbidden to use them in underwriting decisions by 2014. Copayments reduce the number of scheduled appointments so they are to be banned for preventive care and checkups in 2018. And so forth.

The U.S. Supreme Court (SCOTUS) may declare the individual mandate unconstitutional and could possibly strike down the entire law. Regardless of the court’s decision, which will likely come down to a single vote, America must face the reality that PPACA treats the healthcare system’s symptoms without doing much to cure its underlying disease, asymmetric information. Healthcare and its insurance is rife with adverse selection, moral hazard, and agency costs and until those problems are reduced the system will continue to perform in a suboptimal, if not dysfunctional, manner.

In the context of healthcare, adverse selection is the greater propensity of people who are sick, or who are likely to become sick, to seek insurance. Insurers reduce it by increasing the premiums of people known to be sick or who have a history of illness and by declining to cover pre-existing ailments. They also mostly insure employed individuals, who unsurprisingly are on average healthier than people out of the labor force (other relevant factors like age and gender held constant).

Moral hazard manifests itself in healthcare by the greater propensity of insured people to seek medical treatment for any given medical complaint. Insurers traditionally reduce it with copayments and deductibles. A copayment of $5 or $10 keeps insureds with the lowest incomes and most trivial ailments from utilizing scarce medical resources. Deductibles, healthcare expenses that insureds must pay out of pocket before insurance becomes effective, have a similar effect, at least until they are met.

Agency problems occur when healthcare providers (HCPs) exploit the presence of insurance coverage to over-diagnose and over-treat patients. Doctors feel justified in breaking their Hippocratic Oath (the most widely used modern version of which enjoins doctors to avoid the “twin traps of overtreatment and therapeutic nihilism”) by pointing to the high costs of malpractice lawsuits: better to order yet another test lest the HCP be sued later on. To protect themselves from those agency costs, insurers limit what they will pay for specific procedures and refuse to pay for treatments that they believe are unwarranted. Unfortunately, most healthcare insurers today have incentives to behave in a short-sighted and niggardly fashion toward insureds, most of whom cannot change insurers, and whose deaths would benefit insurers’ shareholders.

PPACA does not develop better ways of mitigating the costs associated with any of those three types of asymmetric information and in some instances, like abolishing the use of pre-existing conditions, even exacerbates them. (Some critics argue that its main purpose is to drive insurers out of business, thereby opening the door to a government-based healthcare system.) That PPACA does not address key economic issues is unsurprising given that it was clearly a political solution to what many took to be a largely, if not purely, political problem. A more economic, less hubristic approach would be to allow market participants to experiment to find ways of mitigating the problems of asymmetric information that plague the healthcare system. That might entail nationwide deregulation of healthcare and health insurance markets or, more conservatively, the establishment of one or more healthcare innovation zones (HCIZs) where such experimentation could lawfully take place. (Judging by reactions to PPACA in some parts of the nation, there would be no shortage of volunteer states or regions.)

When free to look after their own interests, sellers and buyers of simple goods and services are so efficient at determining equilibrium price, quality, and quantity that only the most despotic governments intervene in the process, almost invariably with disastrous results. With more complex services, however, especially those involving a high degree of asymmetric information, governments become more heavily involved. The efficacy of government involvement varies depending on its exact nature but is often sufficiently uncertain to prevent a consensus from forming, at least among more empirically-driven (less ideologically-driven) policymakers and wonks. Moreover, the measuring rod against which the current healthcare system should be measured remains unclear. International comparisons with Canada, Netherlands, Switzerland, Cuba, and so forth are tricky, as are historical comparisons to earlier policy regimes.

Given the obvious power of markets to solve difficult questions of production and distribution with the protection of, but without any guidance from, government, nations like the United States that purport to be dedicated to free market principles ought to compare the outcomes of regulated and unregulated markets. In other words, it should make its regulatory regimes compete with more market-based alternatives. (America’s failure to do this is one cause of otherwise outlandish claims that this policy or that politician are “socialist.”) Unregulated markets may not be perfect, but the nation would save tremendous resources, not to mention much angst, if they prove themselves superior to a regulated status quo. Based on my reading of the history of healthcare, insurance, and business in America, I believe that a relatively efficient private healthcare system would emerge if allowed to and can even speculate about what it might look like.

First, HCPs and insurers would join forces in the same company, as many did before the Great Depression, because vertical integration reduces agency costs by uniting the interests of insurers and doctors and by reducing incentives to overcharge or over-treat. Throughout history, U.S. businesses have often merged in order to reduce dependency on market conditions and align the interests of suppliers and distributors. There is no obvious economic reason why HCPs and health insurers should not do likewise.

Second, the most successful HCP-insurers (HCPIs) would be organized as mutuals, or in other words as for-profit corporations owned by their policyholders. Mutual accident, fire, life, and health insurers date to the nineteenth century, when elites anxious to help solve perplexing social problems lent their brains, energies, and expertise to mutual formation and operation. They acted not to enrich themselves directly – most were already well-off if not wealthy – but to improve the world in which they and their families lived by meeting the financial needs of the masses at the lowest possible cost.

Because non-bank corporations, including mutuals, were chartered by states, not the federal government, considerable variation reigned at first. The healthcare and insurance space was further enriched by the presence of numerous non-profit organizations ranging from free clinics to fraternal lodges. Even after an initial set of best practices emerged, ample room for innovators to test new organizational and policy forms against reality remained until the Great Depression. That great shock destroyed established institutions and practices and induced the federal government to favor joint-stock insurers and employer-based group policies, the flawed system left largely intact by PPACA.

Mutuals often dominated important segments of the insurance industry because their organizational form contains intrinsic incentives to provide safe, low-cost, long-term contracts. Mutual life insurers, for example, offer participating whole life policies that repay premiums to policyholders (in the form of so-called dividends) when mortality, expense, and/or investment returns prove better than expected. Lacking shareholders eager for short-term stock market gains, mutuals share profits with policyholders and invest safely for the long-term. Most mutual managers earn far less than their joint-stock peers and see themselves as stewards or risk managers rather than as risk-taking innovators.

For that very reason, mutuals are often criticized, sometimes accurately, for being unresponsive to changing market conditions. The most successful mutual insurers, like Guardian and MassMutual, stay energetic due to pressure from their sales agents, whose future commission streams depend upon appropriate policy innovations. The Guardian’s general agents (GAs), for example, play much the same role as large stockholders do in joint stock companies. Because their stakes in the mutual insurer cannot be sold nearly as easily as stocks, however, GAs have more incentive than stockholders do to encourage projects that maximize long-term value and minimize inappropriate short-term risks.

The most successful HCPIs would offer participating, non-cancelable (by the HCPI) policies providing both life and health insurance (hybrid). The actuarial problems involved in setting premiums for hybrid policies are non-trivial but not insurmountable (especially if participating policies are issued) and any additional cost is outweighed by the benefits hybrids would provide. The life insurance component effectively bonds the HCPI to provide a level of healthcare rationally consistent with the life insurance benefit. (No HCPI, for example, would deny a $50,000 surgery with a 95 percent chance of extending the life of a 40 year old patient for at least two decades if she was entitled to $1 million in life insurance because the investment returns on the $1 million and the continuation of premium payments would more than compensate.) In borderline cases, the HCPI could lower the death benefit in exchange for added medical care. Such policies would induce people to seek fewer heroic end-of-life treatments, which are currently a large portion of healthcare expenditures, because the costs would fall palpably and directly on their children and other life insurance beneficiaries.

Mutual HCPIs issuing hybrid policies would have strong incentives to minimize costs without endangering patient health. They would increase the number of qualified doctors and other providers, rationally allocate patients to the proper provider (e.g., nurse practitioner or physician’s assistant for simpler diagnoses), and provide policyholders with high levels of quality preventative care, rendering the government’s food pyramid, anti-smoking initiatives, and other preventative health programs unnecessary once again. Those incentives would be strengthened even further if patients received premium discounts during periods of illness.

If left to their own devices, HCPIs would minimize adverse selection by issuing individual policies in utero, before any health screenings. Most parents would voluntarily purchase such policies for their unborn children because they would be cheaper than any issued thereafter, especially for children who turned out to have health problems. Abortion, contraception, gender reassignment, and other sensitive medical issues would all be left private, matters for policyholders and HCPIs to work out amongst themselves and not targets for politicians or pundits.

Again, the conjectures proffered here are based on precedents from U.S. business history, especially the history of mutual life and health insurers. Healthcare and its insurance is humbling due to its complexity so HCPIs issuing hybrid policies in utero may or may not work. Under current policy, however, Americans will never know because nobody can lawfully test them, or any other healthcare-insurance innovations for that matter, in real markets. Without HCIZs, policymakers and their ostensible bosses, the American people, are effectively flying blind when it comes to healthcare reform. PPACA may not crash and burn; future court decisions, reforms, loopholes, or just plain luck may save it. Nobody should be surprised, however, if it fails to lower healthcare costs or improve outcomes. When costs reach 25 or 33 percent of GDP, will the federal government finally allow healthcare entrepreneurs to (re)introduce and test innovative policy and organizational forms or will it continue to pretend that it can solve major economic problems with politically-driven policies? Or will it nationalize and thus further politicize healthcare? Or will Americans continue to sink ever larger portions of their household budgets into an inefficient system grown too large and powerful to be reformed?

Throw the Toll Gates Open!

2012-07-14T19:08:00.003Z

I spent all of June traveling the toll roads of Pennsylvania, New York, and New Jersey. The amount of construction was considerable ... and rather disconcerting as many of the projects seem to have hardly advanced since my last major time spent in the area, in 2008-9. Yet, like millions of others, I had to stop and hand somebody money or throw quarters into a bucket (or have my newly re-acquired EZ Pass debited). Why should commuters pay full toll when the roads are slow due to seemingly never ending construction projects?

The founders, who formed numerous toll roads to tie their young nation together politically and economically, had a solution to bad roads and construction delays: throwing the toll gates open. Why not institute the practice adopted by New York in 1804,* which stipulated that turnpike commissioners could force turnpike companies to stop charging tolls if they determined that their roads' condition impeded the regular flow of traffic? Today, instead of having the brunt of the cost fall on stockholders (of which there aren't really any as most of today's toll roads are so called public corporations owned by governments), deduct any shortfalls in toll revenue from the pool in which turnpike executives draw their salaries and benefits. Under the new incentives, construction projects will be completed much more quickly and with much less waste of commuters' time and patience, guaranteed.

*For details, see Daniel Klein and John Majewski, “Economy, Community, and Law: The Turnpike Movement in New York, 1797-1845,” Law and Society Review 26, 3 (1992): 492-93.

LIBOR scandal Fubarnomics and the pressing need for real reform

2012-07-13T19:54:00.002Z

Several years ago I published a book called Fubarnomics that argued that most of the FUBAR ("fouled" up beyond all recognition) aspects of our economy -- including construction, healthcare, higher ed, and the financial crisis -- were rooted in hybrid failures, in both market and government failures in other words.

The recent scandal over LIBOR is no different. The market failure here is palpable: asymmetric information allowed the bankers to lie about how much it cost their banks to borrow. The government failure is more subtle but is perhaps best exposed by the question: wtf? More specifically, how was it that these crucial transactions were not monitored? that even after it became clear there were problems with self-reporting nothing substantive was done? The answer, of course, is regulatory capture. The Fed, the Treasury, and the FDIC are Wall Street's hand maidens, not its policemen.

The LIBOR scandal is just another indication that the financial system is badly broken. I think we need to return to basics: non-profit, plain vanilla depository institutions (credit unions) for the bulk of us; mutual insurers; mutual asset managers paid by performance (mutual funds); partnership-only investment banks/LCFIs/hedge funds; deposits guaranteed up to $25,000 and life insurance to $250,000, and everyone else on the hook for losses. If any company, financial or otherwise, becomes Too Big To Fail (TBTF) it needs to be broken up before it crashes the economy and causes taxpayers billions. Anyone in a fiduciary position caught stealing or lying needs to expect serious jail time and a lifetime of poverty.

But ahhhh there is that regulatory capture again. Sensible reforms are impossible until Americans make them happen. Traditionally, they are supposed to do so at the polls but what to do when both political parties have also been co-opted and only offer a choice between Frick and Frack? Revolution? Not yet. First Americans need to flex their economic muscles and stop doing business with big banks, political parties, and anyone else standing in the way of serious reform.

We're Screwed! (Economically Speaking)

2012-05-15T15:26:00.001Z

My word, personal finance experts are real bears! Check out the "What 25 Personal Finance Experts Desperately Want New Grads to Know" entry on Online Colleges. Here are some highlights:

be ready to pay off your debts for a long time
use public transportation and get a roommate
don't try to keep up with the Joneses
don't buy "luxury" items like all the crap you bought in college
save for retirement now (because Soc. Sec. won't be there for you later)
move back in with your parents!

No wonder the Occupy movement continues unabated. If these bears' advice turns out to be valid we're in for a heap of trouble.

Check Out "Fortune 500" of 1812

2012-04-11T00:47:00.002Z

Check out my blog (with Dick Sylla) on America's "Fortune 500" list ... for 1812 which just appeared on Bloomberg: Echoes.

And my blog about William Duer and Bagehot's Rule, also on Bloomberg.

And, finally, my Washington Examiner piece on Reprivatizing Healthcare.

Guns and Drugs from Washington to The Wire

2012-03-28T18:03:00.003Z

By Robert E. Wright for Augustana College’s chapter of Phi Alpha Theta, 28 March 2012.

Strangely enough, I became an historian of the Early Republic in order to better understand current public policy debates. Politicians and pundits have long been pretty good at putting words into the mouth’s of the Founding Fathers. I don’t think that all our policy decisions need to be based on the thought of the Founders but when they are, they should be based on plausible historical interpretations.

After having studied the thoughts and deeds of numerous Founders for almost two decades now, I’ve concluded that sometimes the words that policy wonks put into the Founders’ mouths ring true. But too often they are a load of specious bull puckey. One particularly laughable claim is that the Founders believed that roads should be forever free. Some Founders favored local government roads but realized that even those had to be paid for, with labor and materials if not cash. Other Founders -- including George Clinton and Philip Schuyler of New York, Fisher Ames and Henry Knox of Massachusetts, and Stephen Girard and George Logan of Pennsylvania -- chartered for-profit turnpike companies that built long distance roads and then charged tolls to travel them.

Speaking of early corporations, the majority opinion in Citizens United is pure bunk that should undermine any remaining confidence in SCOTUS as it is currently constituted. To a man, the Founders would have shuddered at the thought of business corporations influencing American political processes and explicitly said so on numerous occasions. See my forthcoming book Corporation Nation for details. The Founders considered corporations a quote unquote person only analogically. For them, corporations were economic entities endowed with several privileges not accorded to traditional business partnerships. For example, corporations enjoyed perpetual succession, or in other words the right to change owners without having to dissolve the enterprise, and the right to sue and be sued in name of the corporation, rather than in the names of their often numerous owners. But to grant corporations civil rights like freedom of speech would have been viewed as preposterous because corporations were created by the government, initially literally by statute. Natural people, by contrast, were the creators of government under John Locke’s widely held theory of governance.

And of course there can be no doubt that the Founders would oppose Bank of America, Citibank, Goldman Sachs, JP Morgan Chase, Wells Fargo, and the other megabanks that fomented the financial crisis of 2008. Not only don’t I exclude Alexander Hamilton from that claim, I assert that he would lead the charge against them, not because they are banks, which would be sufficient justification for Thomas Jefferson and many of his followers, but because they threaten the government’s ability to repay its debts as promised. Hamilton would also stress how horrifically inefficient they are, while Jefferson would point to their uncanny ability to influence public policies in their favor.

The Founders’ views on the political dangers posed by banks and other corporations remained widespread throughout the 19^th century and into the twentieth. In 1906, New York governor Frank W. Higgins told the New York Times: quote Political contributions by business corporations are illegal and ultra vires. ... The practice is morally as well as legally wrong. ... I recommend that the making of political payments by corporations be made a penal offense. Unquote. Ultra vires, by the way, was a legal doctrine that allowed the dissolution of companies that overstepped the very clear boundaries placed on their activities in their corporate charters.

I’ve also done a little work on the Second Amendment and here the progress over the last decade or so has been palpable. Historian and peace scholar Michael Bahleel [Bellesiles] inadvertently helped gun right’s scholars like myself by publishing a book called Arming America that claimed that the Founding Fathers owned few guns and most of the weapons they did own were broken and unwanted. Let me repeat that: Bahleel claimed that the Founding Fathers owned few guns and most of their weapons were broken and unwanted. It turns out that Bahleel engaged in some very shady practices to quote unquote prove his thesis. So shady, in fact, that it cost him his job at Emory University. The flurry of research that went into debunking his outrageous claims, however, greatly strengthened our understanding of the Second Amendment and that played a big role in recent advances in gun rights, tentative though they are.

Discussions of gun rights often turn into debates about drug policies because illicit drugs and gun violence are intimately linked. Some discussants claim that the Founders would support the suppression of marijuana, heroin, and cocaine while others have portrayed the Founders as literal potheads. The latter view is apparently due to the fact that some of the Founders grew hemp for industrial purposes and most drank copious quantities of alcohol on a daily basis. So they must have toked up, right? Somebody with the screen name of capital letter D actually wrote on one blog and I quote: Our country was basically started by Marijuana. I have to repeat that. According to D, which I hope was his or her grade in history class, Our country was basically started by Marijuana.

The former view, that the Founders would support the so-called War on Drugs, appears to rest on the conviction that the Founders were good Christians – and don’t even get me started on that claim -- and as good Christians would never do drugs, because drugs are bad, mmmm… kay. Again I quote: I think Jefferson or George Washington would have rather strongly discouraged you from growing marijuana and their techniques with dealing with it would have been rather more violent than our current government. Unquote That comes right out of the mouth of a former history professor you may have heard of … Newt Gingrich. I did not attend the New Hampshire town meeting in January where he said it because I had to teach interim … but I have seen a video of the event that does not appear to have been doctored or edited in any way. Unlike the videos on Finding Bigfoot, it was not grainy or jumpy and the sound was good, at least when Newt was speaking. Finding Bigfoot airs on Animal Planet, a rival of The History Channel, which produced a show in which an historian, the curator of the Hemp Museum, swears that the Founders were hooked on the chronic.

That unassailable tertiary source to the contrary notwithstanding, it is a little silly to argue that the Founders had strong views on marijuana, much less crack or meth. Perhaps the easiest way to establish that point is to read a newspaper article that I discovered in the 20 May 1803 Charleston Courier while working at the American Antiquarian Society about 15 years ago. I call it “Bowls, Bongs, and Blunts But Not Quite Brownies” but the original title was “Intoxicating Quality of Hemp.” Listen carefully:

HEMP is cultivated in the plains of upper Egypt, but it is not spun into thread as in Europe, although it might probably answer for that purpose. It is, nevertheless, a plant very much in use. For want of intoxicating liquors, the Arabs and Egyptians compose from it different preparations, which throw them into a sort of pleasing inebreity, a state of reverie

that inspires gaiety and occasions agreeable dreams. This kind of annihilation of the faculty of thinking, this kind of slumber of the

soul, bears no resemblance to the intoxication produced by wine or strong liquors, and the French language affords no terms by which it can

be expressed. The Arabs give the name of keif to this voluptuous vacuity of mind, this sort of fascinating stupor.

The preparation most in use from this hemp is made by pounding the fruits with their membranous capsules; the paste resulting there from is baked, with honey, pepper, and nutmeg, and this sweetmeat is then swallowed in pieces of the size of a nut. The poor, who sooth their misery by the stupefaction produced by hemp, content themselves with bruising the capsules of the seeds in water, and eating the paste. The Egyptians also eat the capsules without any preparation, and they likewise mix them with tobacco for smoking. At other times they reduce only the capsules and pistils to a fine powder, and throw away the seeds. This powder they mix with an equal quantity of tobacco, and smoke the mixture in a sort of pipe, a very simple, but coarse imitation of the Persian pipe. It is nothing more than the shell of a cocoanut hollowed and filled with water, through which a pungent and intoxicating smoke is inhaled. This manner of smoking is one of the most ordinary pastimes of the women in the southern part of Egypt.

As well these preparations, as well as the parts of the plant that serve to make them, are known under the Arabic name of haschish which properly signifies herb, or plant of plants. The haschisch, the consumption of which is very considerable, is to be met with in all the markets. When it is meant to designate the plant itself, unconnected with its virtues and its use, it is called [illegible].

Although the hemp of Egypt has much resemblance to ours, it, nevertheless, differs from it in some characters which appear to constitute a particular species. On an attentive comparison of this hemp with that of Europe, it may be remarked, that its stalk is not near so

high; that it acquires in thickness what it wants in height; that the port or habit of the plant is rather that of a shrub, the stem of which is frequently more than two inches in circumference, with numerous and alternate branches adorning it down to the very root. Its leaves are also not so narrow, and less dentated or toothed. The whole plant exhales a stronger smell, and its fruitification is smaller, and at the same time more numerous than in the European species.

What this source tells me is that early Americans were not conversant with the quote unquote intoxicating quality of hemp or the editor would have not used up valuable space in his newspaper to describe it in such detail. Contrast the article with the treatment of America’s current drug culture on three popular and critically acclaimed television programs, AMC’s Breaking Bad, HBO’s The Wire, and Showtime’s Weeds.

In Weeds, which is initially set in suburban southern California but later ranges throughout the West before landing in Manhattan, seemingly everyone knows about marijuana. All the major characters smoke or eat it and know how to score it. Or they deal it, sometimes by the dime bag and sometimes by the kilo. A few even know how to grow the stuff, inside, outside, in vans, bathtubs, the backrooms of front businesses, in ditches, and even in national parks. The main character, erstwhile suburban housewife and mother Nancy Botwin, initially has qualms about selling it to kids but eventually will sell a potent form of hash that she makes in her employer’s commercial clothes dryer to anyone with the cash. She does draw the line, however, at harder drugs like black tar heroin and will not brook involuntary prostitution. But the message of the show is that weed is cool even if it turns you into jailbait and your son into a cold blooded murderer.

Walter White, a former high school chemistry teacher, has no qualms about manufacturing and selling methamphetamine, so long as it meets his high standards and he gets a cut of the proceeds. In Breaking Bad, meth is not quite as ubiquitous as pot in Weeds but the unmistakable conclusion, for viewers today and presumably 200 years hence, is that early Third Millennium America had a pretty pronounced illicit drug culture. Nobody has to be told what drugs are, how to use them, or even what they cost in the street. While both Weeds and Breaking Bad become a little far fetched at times, nobody seriously questions the main premise that middle class Americans can become drug kingpins if they get cancer or their spouses die suddenly, apparently without life insurance. Weeds and Breaking are dark comedies to be sure but clearly millions of Americans find that premise amusing … and maybe even alluring, as several bored housewives admit to Nancy in Weeds. Interestingly, about a dozen college professors have been caught distributing illegal drugs in the last few years, though alas none here at Augustana. … To my knowledge.

Although it contains numerous humorous scenes, The Wire is a much more serious show that reveals just how deeply heroin and cocaine have permeated our society, from addicts like Bubbles, Johnny Weeks, and Sherrod to Baltimore’s political power structure, especially in the form of corrupt politician Clay likes to say Shiiiiiiiiiiiiit Davis. The series, which ran for 5 seasons in the mid-20 aughts, was so realistic that several real life drug gangs actually began to use some of the distribution and communication techniques it detailed. Two centuries hence, historians will use The Wire to outline America’s urban drug culture much the way they currently use the 1931 flick The Public Enemy or the 1922 and 1924 novels Babbitt and The Great Gatsby to unmask some of the intricacies of Prohibition.

The city of Baltimore felt compelled to officially blast The Wire, the realism of which threatened to cut into its tourism trade. The Port of Baltimore doesn’t attract as many ships as it used to and the water still smells a little funky, but it is pretty to look at and it’s treated enough so it doesn’t kill the sea critters in Baltimore’s amazing National Aquarium or the dinner patrons in nearby Lil Italy … at least not immediately. The Wire’s depiction of the drug infested areas of the city, some within Glock range of the Inner Harbor tourist zone, were just too accurate, a conclusion that I draw from personal experience having again visited the outskirts of some of the drug neighborhoods while attending a conference and conducting some research in Balmer last fall.

I think it safe to say that the Founders would not like modern Baltimore but that would not necessarily equate into a policy stance on drugs as other issues were rather more salient two centuries ago. In fact, I’m pretty sure that Jefferson, Madison, and Monroe, if not Washington himself, would point to modern Baltimore as evidence for the necessity of slavery, a fallacious conclusion to be sure but an irresistible one for anyone with a material interest in the peculiar institution. Calhoun, who came a little later of course, certainly would have used conditions in today’s Baltimore to advance a pro-slavery, anti-tariff, and anti-urbanization agenda because, heck, he used the condition of the Baltimore of his time to support those views.

On the other hand, every Founding Father would see that the promises laid out in the preamble of the Constitution were not being met in a city devoid of justice, domestic tranquility, or the blessings of liberty. And The Wire’s message about political corruption would have surely further aroused the Founders’ against the Citizens United decision because it shows so clearly how money corrupts absolutely. But a pro- or anti- drug message? I just don’t see it because drug use was not very high on the Founder’s agenda. Americans would of course eventually remonstrate against the abuse, some even the use, of tobacco, alcohol, and later opium. But the Founders were pretty quiet on the issue. That might have been because they were civil libertarians content to allow people to make their own life choices, as Ron Paul might argue, but it could also be that they simply had no widespread experience with addiction to substances other than tobacco, alcohol, sugar, and caffeine. If members of the Founding generation weren’t consuming pot, coke, or heroin, how could the Founders have held a view about their legality, at least one that we are bound to respect? I say that when it comes to drug policy, we allow the Founders to remain fast asleep, dutifully pointing their muskets and cannon at large corporations, especially inefficient, political system corrupting megabanks.

Thank you!

GROUND RENTS: ANCIENT I/O MORTGAGES THAT STAVED OFF FORECLOSURES DURING THE DEPRESSION

2012-03-22T23:34:00.002Z

In Philadelphia, Baltimore, and their respective suburbs, some homeowners still pay "ground rents." The term, which dates from the eighteenth century, is a misnomer as the payments represent interest on renewable 99-year or perpetual mortgages. Although the creation of new ground rents fell out of favor before World War II, ground rents and other types of long-term, interest-only mortgages have much to recommend them and are widely credited with making Philadelphia the "city of homes" and Baltimore the "city of home owners."

In the eighteenth and nineteenth centuries, lenders found in ground rents a secure, readily salable (liquid) long-term asset that generally yielded between five and six percent. Defaults were rare because loan to value ratios (LTV) were conservative, typically in the neighborhood of 50 percent, and the interest due any given quarter or year was negligible compared to the value of the real estate, providing borrowers with strong incentives to make payments. Moreover, in case of default, lenders could lawfully enter the home and seize and sell any personal property found at the address. Rarely was it necessary to repossess the real estate to keep an account current.

Homeowners liked ground rents because the contracts kept their housing payments relatively low and eliminated the refinancing risks that periodically crushed those whose mortgages fell due when interest rates were high, mortgage renewals were unavailable, or housing prices were plummeting, as during the Great Depression. Ground rents were extinguished when a homeowner bought his contract from the investor holding it. When market interest rates were relatively high, the contracts could be purchased cheaply. When they were relatively low, the contracts were dear. The key was that homeowners could decide if and when to purchase the contract, allowing them to ride out financial storms rather than be sunk by them. "It is worthwhile noting," wrote legal scholar Frank Kaufman in 1940, "that relatively few ground rent defaults occurred during the recent depression. In fact," he continued, "Baltimore has seen less of the foreclosure evil than have other large cities in which only ordinary mortgages are used."

That raises the question of whether widespread use of ground rents could have mitigated the crisis of 2007-8. They might have, even if the average ground rent LTV had increased to 100 percent and the contracts were securitized as mortgages were. Ground rents would have decreased borrower opportunism (moral hazard) by making it easier for lenders to force homeowners who continued to reside in their houses to keep their accounts current and, in the case of walkaways, to foreclose on the property. In addition, as interest rates fell following the crisis, the value of ground rents would have increased, offsetting to some degree losses realized on the sale of foreclosed properties. The vicious cycle witnessed since 2007 -- decreased home prices and liquidity leading to defaults that decrease home prices and housing market liquidity yet further, triggering yet more defaults -- may have been stopped sooner or even prevented in the first place. We will never know for sure, of course, but regulators should consider allowing some modern experimentation with these hoary instruments of home finance.

TSA Twice Mocked

2012-03-16T18:28:00.000Z

The creators of South Park laid waste to the Transportation Security Administration (TSA) in their new episode (S16 E1) on Wednesday (3/14/12), equating it with a fictional Toilet Safety Administration charged with keeping people safe when sitting on their porcelain thrones. Hilarious!

Potentially more damaging to the TSA, however, is a recent, EZ-to-read infographic from Online CriminalJusticeDegree.com that details the TSA's (exorbitant) costs while exploring its (extremely meager) benefits. When o' when will we rid ourselves of this Civil Rights' destroying monstrosity, which might be more aptly called the Transportation Sodomizing Authority?

Hey Jon Stewart! This is what happens when ...

2012-03-09T00:28:00.000Z

Hey Jon Stewart! "Politics getting in the way of women's healthcare" is what happens when a good (anything that people want) is not allowed to be freely traded: it becomes politicized. Nuts like RL come out of the woodwork and put a political spin on everything, especially politically controversial topics like contraception and extramarital sex. The closer we get to full implementation of the Obama healthcare reform, the louder and more frequent the bull ... oney about who has to provide what for whom will become. I know it is great material for political satire but it threatens to further polarize public discourse. A better solution is to back out of the Obama reforms and go right to the heart of the problem, the skewed incentives of HCPs (treat and treat and treat instead of make well) and insurers (deny coverage instead of being bonded to make rational decisions). If only you had read the copy of Fubarnomics I sent you shortly after it came out in 2010 you could be more of an agent for positive, lasting change in this increasingly troubled nation.

How Low Will We Go?: Long Term Perspectives on a Flailing Economy

2012-02-24T16:53:00.000Z

How Low Will We Go?: Long Term Perspectives on a Flailing Economy

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD

11:30 am, Friday, 24 February 2012, CJ Callaway’s Event Center (69^th and Minnesota)

Nine days ago, at the Augustana Academy for Seniors, I delivered a speech called “Little Business on the Prairie: Exploring How Entrepreneurs Keep South Dakota’s Economy Vibrant.” That speech, which like this one is posted on my personal blog called finance history and policy dot blogspot dot com, that’s finance history and policy dot blogspot dot com, was about South Dakota’s economy and was much more upbeat than today’s pessimistic talk, which is about the national economic outlook. I fear that the national economy will remain in a funk – a period of no to slow growth – for a decade or more, perhaps, like Lenore, for evermore. That’s from Edgar Allan Poe’s poem “The Raven,” by the way. To invoke Poe once more, this time his place of death, I fear the entire U.S. economy will soon resemble that of Baltimore in the HBO Series The Wire – very po’ indeed. Seriously, barring a major natural catastrophe or war, the odds of America degenerating into third world-like poverty is slim but without major political reforms I think our economy is likely to slip into the same superpower retirement community inhabited by Persia, Rome, the Mongols, the Mayans, Holland, England, Japan, and so many other has beens.

The United States is the third most populous nation in the world behind China and India and has almost a 100 million more people than number four Indonesia, so it is going to remain an important player on the world stage for a long time to come. But if it continues down its current path it will not long remain the most important one, economically, politically, or militarily.

South Dakota may benefit from these changes, at least in relative terms, due to its entrepreneurial culture and pro-business economic climate. As you may know, famed economist Arthur Laffer and the American Legislative Exchange Council recently ranked South Dakota second, behind Utah, in overall economic outlook. South Dakota ranked first, of all U.S. states and Canadian provinces, in the Fraser Institute’s economic freedom index and the state has for seven years in a row ranked number one in the Small Business and Entrepreneurship Council’s small business survival index, well ahead of runners up Nevada and Texas. But no state can soar too far above the others without attracting enough people and capital to bring it back into orbit around the national economy. In other words, if the overall U.S. economy stagnates, so too will that of each of the states, at least eventually. The American Dream will die first but what consolation will that be when South Dakota’s Reverie follows it gently into that good night? That’s not Poe, by the way, and enough with the po-etry for today.

One particularly troubling sign that the state and national economies are stagnating is the recent rise in what was traditionally called sharp business practices. It’s not as apparent here in Sioux Falls as elsewhere but even our burgeoning little metropolis has its share of shysters. Several kiosks in the mall, the big one, have been selling shoddy quote unquote No Way products because there is no way the vendors will refund your money and no way the products should have been sold in the first place. And at least one major local car dealer is getting a reputation for overcharging for repairs. Well, overcharging even more than it used to. What is troubling is that those and other businesses engaging in sharp practices must not envision a more prosperous future on the horizon. They are trying to get as much as they can today even though they must know that if they persist in scamming their customers they will not be around tomorrow. As a business strategy that only makes sense if they are on the verge of bankruptcy or believe that the economy is.

Please keep in mind that I am not predicting that national economic stagnation must occur. There is nothing inevitable about it that I can see. Rather, America’s, and hence ultimately South Dakota’s, economic future hinges on its policies, which are ultimately a function of its politics. If numerous people argue persuasively that the economy will remain in a funk they may change public sentiments and politicians’ agendas enough to drive implementation of reforms that will break the funk and hence the nation’s relative economic slide. If that comes to pass, historians, decades hence, will chide and deride the pessimists not realizing that their vocal lamentations indirectly saved the nation’s economy, just as the wails of George Washington and Alexander Hamilton in the 1780s initiated the reforms that launched America on its modern growth trajectory a decade later.

I’d like nothing better than to regale you with a three hour lecture explaining how Hamilton et al turned an unstable, bankrupt, economic backwater into a major nation in a single lifetime. But if you are really that interested you could pick up my One Nation Under Debt, which is really reasonably priced on Amazon right now. Suffice it to say here that the U.S. implemented constitutions at the national and state levels that protected people’s lives, liberties, and properties without dipping very deeply into their pockets or intruding much into their day-to-day lives. Confidence in government led directly to the financial and corporation revolutions that made possible the agricultural, transportation, and industrial revolutions that transformed the continent into the most productive in history to date.

Reforms are necessary again today because current policies are clearly not working. The economy is showing few signs of growth in the short term, faces a major conundrum in the intermediate term, and the most important long term driver of growth, confidence in government, has disintegrated in recent years. If the economy does soar anytime soon, be on the lookout for yet another speculative bubble at the heart of it and signs of the financial cataclysm that must inevitably follow. Please allow me to explain the reasoning behind those claims in some detail.

Nobody can predict short run movements in the economy consistently and with precision but consensus economic forecasts are often quite accurate and go well beyond stock prices, which you may have noticed have been up recently. Just like they were in 1929 and 1999. The VIX, a stock market volatility index, is just a quarter of the level it was during the crisis of 2008, in fact at almost exactly the same level it was before the financial manure hit the fan that year. So it is difficult for me to rest easy simply because the VIX is low, or because the stock market is up.

Certainly watch the VIX and the equities markets -- the Dow, the S&P, and the Russell 2000 -- but don’t be a lemming. There are numerous other, more important economic indicators out there. In our 2011 book, The Wall Street Journal Guide to the 50 Economic Indicators That Really Matter, Simon Constable and I show that even lay investors can peer a few months into the future with some confidence by carefully studying the clues that the economy is constantly creating about its current condition and direction. Most of those clues or indicators are still showing signs of weakness and even the economy’s few bright spots could be, perversely enough, signs of its shaky condition. To call a turn in the economy, many forecasters like to see the so-called three Ps: pronounced, persistent, and pervasive movements in the data. Pronounced means large, persistent means a trend, not a random bounce, and pervasive means not limited to just a few indicators. Right now, the economy has zero Ps.

Let’s overview the short-term outlook in more detail:

1. GDP growth in 2011 was positive but still anemic. That means each person on average produced a little bit more than they did in 2010 but not by much. Some forecasts for 2012 are more optimistic but others are pessimistic and hardly anyone expects breakout growth. The headline for the Philadelphia Fed’s most recent survey of professional forecasters is quote Forecasters Predict Lower Growth and Higher Unemployment in 2012 and 2013. unquote

2. Unemployment has decreased of late, job growth is up, and new jobless claims are down. Unemployment, however, is still above 8 percent nationally and is likely to remain higher than optimal throughout the rest of the year. That means continued weak demand for consumer durables, more mortgage defaults, and continued stress on government budgets.

3. The Federal Open Market Committee’s promise to keep the Federal funds rate, its overnight interbank interest rate target, at almost zero for the foreseeable future suggests that the Federal Reserve and many investors remain pessimistic about the economy’s growth prospects this year. It also means that fears of future inflation and asset bubbles loom large.

4. The Federal Reserve’s January Beige book, its summary of current economic conditions, pointed to modest improvements in manufacturing and retail but also noted continued problems in financial services and real estate.

5. Consumer confidence grew steadily last Fall but has recently weakened again. Consumer spending was sluggish in December despite early claims to the contrary. Investor confidence also declined recently, mostly due to uncertainty about Europe. Small business confidence indicators are up, but only slightly. Business inventories are slowly building but remain lean.

6. Consumer credit recently jumped $20 billion, way above the consensus forecast. Some of the news here is good – about $5 and a half billion went to new car sales, which are showing a little life, probably because people like me are finding it too expensive to keep our old clunkers running. But the rest of the news is bad – people are running up their credit card balances again. That means that many of the little glimmers of hope we have seen recently may be the result of people running deeper into debt prior to bankruptcy. Our bankruptcy laws give people big incentives to do that now, you know.

7. Nonfarm productivity is at its lowest levels since 2008.

8. At just over 4 percent, Mortgage Rates are still a major bargoooon but Mortgage Applications are down over 3 percent. Existing Home Sales are up but only because Home Prices continue to erode. Nationwide, in January alone the median price fell 4.6 percent and the average price fell 4 percent. There are a few signs, like the recent improvement in the National Association of Home Builders’ housing market index, that a bottom nears. Inventories of Homes for Sale are down to 6.1 months, its lowest level since the crisis. Until housing prices actually regain some lost ground, however, more foreclosures and economically damaging lawsuits are in the offing.

9. Manufacturing is pretty strong, but largely because of last year’s earthquake in Japan and the weakness of the dollar, which has boosted exports for the third year in a row. If the dollar continues its recent uptick, manufacturing will probably hit the skids again.

10. The Non-Manufacturing index surged in January but it did the same thing a year ago before declining yet again.

11. Construction is finally showing signs of life but it is coming off extremely low levels of activity.

12. Gasoline demand is at its lowest levels since the financial crisis and of late demand for natural gas has been lower than expected, even adjusting for the mild winter.

13. The Philadelphia Fed’s Aruoba-Diebold-Scotti Business Conditions Index is slightly above zero but flatter than a prairie meadow.

14. The coverage of retail sales has been kind of humorous. When the weather is bad, analysts claim that sales are down because people stayed home. When the weather is good, the same analysts say that sales are down because people don’t need to buy winter clothes, emergency supplies, and so forth. How about sales are down because people don’t have much money and their credit cards are all maxed out? In any event, December’s numbers have been revised downward and January’s numbers were weaker than expected.

15. Last but not least, zombies still stalk the land. No, I’m not referring to the human flesh craving monsters that roam AMC every Sunday night at 8 Central, I’m talking about banks that are economically dead, that are technically bankrupt -- due in part to an ever growing inventory of foreclosed homes of dubious value -- but that remain on regulatory life support. Such banks, we learned during the S&L Crisis, will often take big risks to try to get their balance sheets back into the black. A few will succeed but most will not, further straining the financial system and the government’s elaborate but strained bailout net.

Zombie banks also cloud the horizon in the intermediate term because their existence increases what economists call asymmetric information. Banks don’t know which of their brethren they can trust and borrowers don’t know if they were turned down for a loan because they are a bad credit risk or because their bank is brain dead. Zombie banks can be overly litigious too. Instead of rationally settling debts caused by the continued gloom in the housing sector, they sue, and sue, and sue so some executive can book a quote unquote profit when a judgment is obtained. That’s a great boon for banks’ lawyers but destroys the credit of Americans with good incomes who pay their bills but who can’t get above water on their mortgages or who had to relocate because of a new job, a growing family, or the deterioration of their neighborhood due to all of the crackhead-infested, boarded-up houses that have not so mysteriously appeared in it over the past few years.

As the housing crisis grinds into yet another year, such frivolous lawsuits are growing in number and overall economic drag but policymakers are reluctant to address the problem in a significant way. A few weeks ago, for example, the government settled with five big banks accused of abusive foreclosure practices for a mere $25 billion. Homeowners helped by the legislation will receive around $2,000 each sometime in the next three years. A writer Forbes, not exactly a leftwing business periodical, called that sum a quote unquote spit in the bucket. The editors at equally radical Bloomberg agreed that quote the settlement amount is a pittance. Unquote A hundred, hundred fifty years ago any bank that systematically presented fake evidence to courts would have been liquidated, their directors sued into poverty, and their executives jailed.

Intermediate term growth prospects are also clouded by the possibility of inflation. If the economy ever heats up, the Fed will have to raise interest rates aggressively to stop the general price level from rising rapidly or another asset bubble from forming and that may stop the economy in its tracks. If the Fed doesn’t boost rates fast enough, the economy could suffer from a bout of stagflation, or high inflation, high unemployment, and low growth, similar to the 1970s. A decade ago, when confidence in the Fed’s ability to fine tune the economy was at its apex, the seriousness of the Fed’s conundrum would have been downplayed. Today, few would estimate the probability that the Fed can engineer a robust, low inflation expansion at much above one in three. That’s a big reason why gold is way up. The price of gold is off its highs but the precious yellow stuff is still up over 25 percent on the year and over 150 percent over five years ago. Investors buy gold when they fear inflation, perceive high levels of policy uncertainty, and/or foresee a period of civil unrest.

Civil unrest is not an impossibility because long term growth prospects are extremely weak. Anybody remember the 1960s? I don’t because I wasn’t born until the tail end but I heard the family stories about grandma Wright sitting on the front porch with a loaded side by side while rioters looted and burned stores just a few blocks away. And of course I’ve studied the history. A few more years of economic despair for our young adults and another round of bank bailouts, especially one widely perceived to have been caused by European fiscal profligacy, and it could be 1967-68 all over again. Hell hath no fury like someone with high expectations scorned. And while large scale rioting might help the manufacturers of riot gear, tear gas, billy clubs, and so forth, it is not good for the economy. The 1960s riots contributed mightily to the quote unquote malaise of the 1970s, which was just Jimmy Carter’s hokey term for the economy’s astonishingly low rate of productivity growth in that dreadful decade.

Economic growth is not about, and never has been about, jobs per se. Good jobs are a result of economic growth, not a cause of it. Economic growth is about efficiency, about producing the same quantity and quality of goods from less input: fewer hours worked, less energy wasted, fewer raw materials consumed. That means that prosperity is ultimately built on driving people into new lines of work and capital into new industries. The first factory operatives and miners were farmers made obsolete by improved agricultural techniques and tools, the agricultural revolution unleashed by the national and state constitutions and Hamilton’s financial reforms that I mentioned earlier. Likewise, today’s modern service economy is built upon the brains of the sons and daughters of factory workers, people no longer needed to build stuff due to sundry innovations in production techniques from Ford’s assembly line to robotics to just-in-time inventory systems.

So, again, what matters for long term growth is efficiency, doing more with less. Businesses and industries become more efficient only when people have incentives to work harder and smarter. The incentives are the main thing, not the particular technologies that they spawned. Americans invented, improved, or commercialized cotton gins, steamships, telegraphs, light bulbs, automobiles, mainframe computers, personal computers, the Internet, and literally millions of lesser inventions and innovations because they believed that they would be fairly rewarded for doing so. Americans were no smarter than other peoples – we’re just a genetic hodge podge and cultural stew of them anyway – but since the ratification of the Constitution we’ve been among the best compensated for enhancing efficiency.

Incentives to work harder and smarter, the long range drivers of the American economic miracle, are, however, deteriorating along with the Constitution. We seem determined to teach our children that the way ahead is to cultivate cozy relationships with government officials, create shoddy but clever products, foist them off on unsuspecting dupes, reap millions, and then take refuge in government bailouts and incompetence.

Many Americans now believe that they live in a very sophisticated kleptocracy. More obvious, more brutal kleptocracies, like Saddam’s Iraq, Fidel’s Cuba, Kim’s North Korea, Mao’s China, or Muammar’s Libya, to name just a few, remained extremely poor because nobody had any incentive to work harder or smarter for fear that they would lose their property or even their lives. Despite the passage late last year of the National Defense Authorization Act, legislation that allows the military to detain U.S. citizens on American soil indefinitely and without trial, most Americans are not yet worried about government-issued jack boots kicking in their doors late at night so they continue to go to work and school. But increasing numbers of them do perceive that income inequality is rising and civil liberties are weakening. They sense that the rich and politically powerful are more equal than the rest, so real wages are likely to flat line even as taxes increase. Life is still pretty good – as a conservative think tank recently pointed out, most Americans own things like TVs and refrigerators. But many people sense that conditions are not likely to improve no matter what actions they, as individuals, undertake, a fear effectively exploited in a recent TV commercial where a grandfather wonders aloud if his grandson will ever be able to own a big house like his. One of our hoariest and most useful myths, that of Horatio Alger and the self-made person, has passed into history and with it the innovations that would have reinvigorated our moribund economy.

A weak economy does not bode well for Obama’s re-election this Fall, which will sadden the Democrats in the room – both of you – and encourage the Republicans. But more and more Americans seem to be coming to the view that the nation’s economic trajectory does not rest on which party controls the White House, Congress, or even the entire government. Both major parties and the federal bureaucracy appear to be in Washington to help themselves, not to promote a vision of the greater good, however defined. That is why Congress’s approval rating is now 10 percent, lower than pornography, lower than polygamy, and even, I suspect, lower than polygamist pornography. The sense that politicians and government bureaucrats are in it for themselves is also why not one, not two, but three apostate political factions, the Tea Party, Ron Paul, and Occupy Wall Street, flourish.

Members of each of those factions know that the status quo is rife with serious problems but for ideological reasons focus their wrath too narrowly. Tea Party folks are riveted on government budgets. Taxes, deficits, and government expenditures are certainly important issues – some of you may know that I called for the creation of the Tea Party, albeit with a less stupid name, in a Los Angeles Times op ed way back in March 2008 – but as the movement evolved, entirely without my involvement I should add, it became partisan and ideological. Budget reform has proven intractable because members of both parties, as well as government employees of course, have incentives to borrow and spend. Instead of becoming the independent party opposed to both existing parties that I called for, the Tea Party allowed itself to be co-opted by the Republicans.

Members of the Occupy movement -- which by the way I can’t be blamed for in any way, shape, or form -- fixate on the influence of the rich, the now infamous one percent, on government policies. The uber-wealthy do seem to have undue influence, and gained still more in recent years thanks to the proliferation of SuperPACs and SCOTUS’s seriously flawed Citizens United decision. Seriously, I mean seriously flawed. As in laughable were it not so tragic. Unfortunately, the Occupiers are also too partisan, blaming rich Republicans for the power they wield instead of blaming a system that gives the wealthy members of both parties, and even of other countries, too much of a say in American electoral politics.

Ron Paul is nominally a Republican but he is not going to win the Republican primary. His numbers in the polls and primaries held to date, however, have been remarkable, about twice what he polled four years ago. More than 1 in 10 American voters throughout the country believe the federal government has taken its wars, monetary policies, and civil liberties restrictions too far. But like the Tea Party, Paul and his disciples place too much blame on the government per se and not enough on manipulation of the government by powerful special interest groups. Paul insists on auditing the Federal Reserve directly, for example, rather than auditing its owners and clients, the commercial banks that it has, unsurprisingly, been bailing out the last three plus years.

The differences between these three groups are deep and heartfelt. Occupiers love to bash Paul and vice versa. Ditto Tea Partiers and Occupiers. And of course most Tea Partiers blanche at Paul’s stand on defense, the so-called wars on drugs and terror, and a number of social issues. There is a chance, however, that the three groups could coalesce under a single, neo-progressive banner. A century ago, Progressives, a motley crew of Republicans, Democrats, and Populists ranging from Theodore Roosevelt to William Jennings Bryan, sought to purify all levels of government by fighting corruption and inefficiency with a variety of reforms, the most important and lasting of which were electoral. It was the Progressives who revitalized American democracy by pushing the secret ballot, initiative, referendum, recall, direct primaries, direct election of U.S. Senators, and women’s suffrage. Progressives, believe it or not, were major players in South Dakota’s political scene a century ago and could become so again.

The neo-progressive movement that I have in mind would not espouse specific economic policies – it would immediately splinter if it did -- but would instead work to reinvigorate American democracy beginning, perhaps, with campaign finance reform. Citizens United must be overturned, Super PACs obliterated, and the power of political party machines over candidate selection reduced if not eliminated. Initiative, referendum, and recall need to be extended to the federal government in intelligent -- which is to say more Dakotan than Californian -- ways. And if that doesn’t work to restore the public’s confidence in their national government, more radical reforms – like random selection of legislators -- must be contemplated, debated, and tested.

But what if such reforms lead to the implementation of the wrong economic policies, ones that injure long-term growth prospects? Frankly, I do not think that is possible. First, it may very well be the case that economic policies are not “right” or “wrong” per se but rather that any policy widely perceived as legitimate will turn out to be growth-inducing because it will establish known rules that will be widely followed. Rationing and price controls, for example, largely worked during World War II but flopped in 1971 because the public saw the wartime measures as necessary but easily saw through Tricky Dick Nixon’s New Economic Plan. If this view is correct, the problem with Obamacare, Social Security, the recent bailouts, and the like is not their intrinsic characteristics but the fact that many Americans see them as illegitimately enacted and continued, as de facto unconstitutional whether the Supreme Court rules it so or not.

Second, it seems unlikely that a well-functioning democracy – something the neo-progressives could help the nation to re-create -- replete with diverse economic interests would allow one group to exploit another to any significant degree, much as Madison argued in Federalist Number 10. If that is the case, a quote unquote wrong policy would quickly be corrected. If a policy benefitted no one, repeal would be easy. If it benefitted a minority interest, the expropriated majority would soon overturn it. Policies that injured the overall economy but benefitted a majority would be rare but difficult to dislodge if not checked by the Senate or a presidential veto before their implementation. Overall, though, there is little to fear from quote unquote wrong policies. What we need to worry about is what we now have in spades, illegitimate and unconstitutional policies that benefit small special interest groups at the expense of taxpayers and hence overall economic health.

A neo-progressive small d democratic movement might also be able to coalesce around corporate governance reform. Stockholders have long since lost control of the corporations they nominally own to executives, which to a first order approximation is why executives get paid so much. In my book Corporation Nation: Rise and Demise of the American Economic Juggernaut, forthcoming from the University of Pennsylvania Press late this year or early next, I describe several reform proposals that would return control to stockholders and hence make corporations less likely to take on excessive but executive bonus enhancing risks. Occupiers could see those reforms as “regulations,” and hence good, while followers of Paul and the Tea Party could see them as property rights protections, and hence something they should support. A side benefit of corporate governance reform is that returning control to stockholders would also likely limit corporate politicking, just as it did in the nineteenth century. Corporations will still lobby for special perks for themselves but won’t find it cost effective to back candidates for ideological reasons.

Finally, a neo-progressive movement might reduce America’s economic malaise by directly reforming its emerging kleptocracy. The disparate parts of the movement could be brought together simply by recognizing that both governments and corporations can and do steal from the American people. Governments steal from taxpayers whenever they allow inefficiencies like Amtrak or the Post Office to persist and whenever they allow markets to become or stay uncompetitive, views already held by some Tea Party and Paul followers. Corporations steal from consumers whenever they engage in uncompetitive practices or obtain special favors such as bailouts, views already held by Occupiers and some of Paul’s followers. Unlike members of the current factions, neo-progressives would recognize that they cannot hope to reform the government or big businesses but rather that both must be brought to heel through the concerted efforts of everyone who recognizes the damage that kleptocracy can, has, and will continue to inflict on the economy by diminishing Americans’ incentives to work hard and smart.

So there you have it. Leading economic indicators show few signs that the U.S. economy will pick up soon, intermediate-term growth prospects are clouded by the specters of asset bubbles, zombie banks, and runaway inflation, and long-term growth prospects remain dim due to levels of political and business corruption unseen since the Progressive era a century ago. If Paulites, Tea Partiers, and Occupiers can concentrate on common ground, however, they could implement reforms that would restore Americans’ faith in their government and give them reasons to work hard and smart once again. Without the restoration of such incentives, the U.S. economy will continue to stagnate, eventually dragging down even the vibrant economy of the Northern Plains. The nation will probably remain comfortably affluent but will slip relative to Brazil, China, India, and other large up and comers and inequalities of income and influence will grow, how far nobody knows. Beyond that, I dare not speculate.

Finance: History and Policy

Reverse Eminent Domain, Again

The Throne of Games (and Other Academic Arcana)

"The World's Best Hope": The U.S. Founders as Development Economists

China's Economy: A Long-Term, Incentive-Based View

Global Climate Change Policy: Some of the Economic Issues Involved

Wall Street on the Prairie: How Financial Innovation and Regulation Cajoled Citibank into South Dakota

Sequester the Sequestration?

G Dub/AH on public credit

Reminders of my views on debt ceilings and deliberate defaults

Governance, Finance, and Entrepreneurship: Global Lessons for Indian Country Policy Makers

By Robert E. Wright, Nef Family Chair of Political Economy, Augustana College SD

Notes

On Guest Posts, Infographics, Brown Nosing Emails, and Mutually Beneficial Projects

When Will America Have Its "Charlie Moment"

Yvette Clarke not entirely wrong

Booms, Busts, and Bubbles

100s of Indicators But These 10 You MUST Watch

Healthcare and Insurance Reform: Innovation Zones, Vertically Integrated Mutuals, and Hybrid Policies

Throw the Toll Gates Open!

LIBOR scandal Fubarnomics and the pressing need for real reform

We're Screwed! (Economically Speaking)

Check Out "Fortune 500" of 1812

Guns and Drugs from Washington to The Wire

GROUND RENTS: ANCIENT I/O MORTGAGES THAT STAVED OFF FORECLOSURES DURING THE DEPRESSION

TSA Twice Mocked

Hey Jon Stewart! This is what happens when ...

How Low Will We Go?: Long Term Perspectives on a Flailing Economy

11:30 am, Friday, 24 February 2012, CJ Callaway’s Event Center (69th and Minnesota)

11:30 am, Friday, 24 February 2012, CJ Callaway’s Event Center (69^th and Minnesota)