Joaquim Nabuco, a Brazilian visionary in Washington

During most of the 19th century Brazil and the United States showed little mutual interest. Brazilian foreign policy was initially directed to Europe (mainly England) and then to border problems in South America (particularly with Argentina and Paraguay). Meanwhile, the US was concerned about its expansion to the west and its internal tensions between north and south. With little convergence in these priorities, the two countries basically ignored each other.

However, this picture began to change at the end of the century, especially because Brazilian coffee found in the USA an excellent consumer market. The definitive change occurred in the first decade of the 20th century, when Barão do Rio Branco, Brazil’s foreign minister for 10 years (1902-1912) decided that the country should privilege relations with the US in its foreign policy. The Baron understood that after Africa and Asia, South America (especially the unprotected Amazon) would be the target of European imperialism. Without an army and a navy that could deal with Europeans, Brazil needed US protection.

Fortuitously, this was also the period in which Theodore Roosevelt gave his corollary to the Monroe Doctrine. Roosevelt had already made clear his intention to keep Europeans away from the American continent, particularly in his intervention to build the Panama Canal. An unwritten alliance was formed between the two countries: the convergence of interests caused Brazil and the United States to experience an unprecedented approach in history. To consolidate the new paradigm of foreign policy the Baron elevated the Brazilian diplomatic representation in Washington to the level of embassy. In the diplomatic gesture of the time this was a clear indication of the preference that the country gave to the USA. The Baron chose Joaquim Nabuco to be Brazil’s first ambassador to Washington.

Nabuco is a well-known personage to the scholars of Brazilian history. When he became ambassador to Washington he was already famous for his struggle against slavery in Brazil and for his work as a historian. Like the Baron, Nabuco believed that Brazil would be the target of European imperialism, and that it needed US help to protect itself. Unlike the Baron, however, Nabuco saw an opportunity at the time to do something more: to turn America into a zone of peace, a continent with international relations essentially different from those of Europe.

The Baron saw international relations only as a zero-sum game. He also did diplomacy thinking in terms of a balance of power. Nabuco was not unaware of these aspects, but he believed that through regular international conferences and open trade, America could avoid the wars that were so characteristic of Europe. But for that the US leadership was essential, and should be supported by all. The Baron sought the US punctually: he wanted the protection of a stronger country while Brazil was not able to protect itself. Nabuco wanted a permanent alliance. In his foreign policy the Baron was a kind of conservative: changes do not occur easily. The story simply repeats itself. The 20th century would simply repeat the 19th. Nabuco believed that change is possible. He believed in universal principles linked to classical liberalism.

Nabuco passed away in 1910, only five years after assuming the position of ambassador. Perhaps if he had been more successful in his foreign policy we would have had a very different twentieth century. The United States would not have become involved in Europe, as it did in World War I. America would be a continent of peace, contrasting with the Old World. America would lead by example, not intervention. And many problems we face today, the fruits of American interventionism, would be avoided.

BC’s weekend reads

  1. The raccoon scrotum monster
  2. The unrecognized
  3. The Gandhi statue causing a fuss in Ghana
  4. The battle for Burundi
  5. The end of interventionism
  6. The Socratic classroom for an activist age

Massachusetts to let cabs tax Uber: The seen, the unseen, and the minor nuisance

There’s a simple alternative to regulation: liability. We don’t need to tell companies how to be safe if we make them legally responsible for negligence.

It’s as though Mass’s government decided that back-to-school season calls for creating real-life rent seeking examples for my class. They’re going to start taxing ride-sharing customers $0.20 per ride with five cents of that going to the taxi industry.

“The law says the money will help taxi businesses to adopt ‘new technologies and advanced service, safety and operational capabilities’ and to support workforce development.”

New technologies like an app that gets more use out of otherwise idle cars? Or an app that makes it easy to hail a ride with little wait? Or an app that brings supply into harmony with demand when demand surges? Oh wait! We’ve already got that and it’s the thing that’s being taxed!

There are a few important economic lessons that Massachusetts’ electorate is evidently in need of. Let’s start with taxes.

Taxes don’t stick

“Riders and drivers will not see the fee because the law bars companies from charging them.” They won’t see the fee, but that doesn’t mean they won’t pay it. A business only exists by collecting money from customers and paying some portion of that to suppliers. The government cannot tax a business without taxing that business’s customers and suppliers.

Granted, part of the cost will be reflected in lower profits (although profits aren’t as big as people think) which means Uber’s shareholders will face part of the tax. But what does that mean? It means 1) a little less money in pensions, and 2) potential investment capital is moved from the people who gave us the best version of taxi travel to the people who gave us the worst version of it.

Money is fungible and I don’t know how to run a cab company

Safety, new technology, and workforce development all sound good, but taxi companies (at least those that deserve to stay in business) will already be doing these things. Safety is important because accidents are costly (especially if your fleet size is limited by regulation). New technology is being adopted by every other (competitive) industry without government support. Other companies invest in their employees.*

Supporting workforce development is part of a larger trend of people supporting specific fringe benefits without appreciating the tradeoff between monetary and non-monetary compensation. And all these ideas reflect a faulty logic: just because something is good, doesn’t mean we need to force people to do it.

Voters simply aren’t in the right position to know if some good thing is good enough relative to other options. If you go into the backrooms of any industry you aren’t already familiar with you will surely learn about techniques and tools you had no idea existed before. So why should we expect that cab companies need regulators to tell them what to do? Let them learn from their trade magazines.

But there’s good news. If we mandated that cab companies use this new revenue stream to pay for new tires, they wouldn’t simply waste the money by buying superfluous tires. They’d stop buying tires out of their own revenues and start buying them from Uber’s. Telling someone to pay from their left pocket simply leaves more money in their right pocket for everything else.**

Extra money in cab company coffers could allow them to invest in better service, happier employees, “and help so taxi owners could buy ‘flagship’ vehicles like a 1940s Checker or a Porsche.” But cab companies are already free to reinvest their profits if they think doing so would create value (i.e. greater future profits). The more likely outcome is that they will simply have more money than before.

Competition is not the problem, it’s protectionism

When we see problems in the world we need to look for their root causes if we want to actually make things better. More often we act like a doctor diagnosing cancer is the cause of the cancer. Don’t want cancer? Outlaw doctors!

Cab companies aren’t as successful as they previously expected and the apparent culprit is Uber. But they only exist because an inefficiency in the market created a profit opportunity. Cab companies are doing poorly because they don’t provide as much value per dollar. And that’s largely because of regulation that prevents competition. Much of it was put in place specifically to protect incumbents from competition.

A lot of these regulations sound nice enough, but they still created the market niche that Lyft and Uber filled. And they protected cab companies from competition right up until ride-sharing became feasible.

Regulation is not the answer

Let’s give cabbies the benefit of the doubt for a minute. Let’s assume that they aren’t really in it for the cash-grab and that they just want to help people get around safely and conveniently. Let’s even assume that NYC’s medallion system is about congestion rather than competition.

If that’s the case, then there are better ways to address the root causes of the problems cabbies tell us to worry about. We don’t need to address each of these problems individually if we can find a few key causes at the root of each of them.

never-half-ass-two-things-whole-ass-one-thing

Cabs have medallions but civilians don’t, so congestion will still be a problem in cities until congestion fees are implemented that balance the demand for road access with its limited supply. Safety is important, but mandating extra inspections for only some types of cars is a half-assed way of dealing with it.

There’s a simple alternative to regulation: liability. We don’t need to tell companies how to be safe if we make them legally responsible for negligence. This is an important lesson for how we think about regulation in all industries. The basic logic is also why economists vastly prefer pollution taxes to specific regulations; it’s usually better to name the outcome we want and create a cost for failure to meet it rather than mandate specific behaviors.

Perhaps this means we should modify the laws that require all drivers to be insured so that some drivers have higher minimum liability coverage. That would be far less invasive and do far more to alleviate the concerns Uber’s critics raise than mandating specific behaviors.

Concentrated benefits dispersed costs

Okay, so maybe this is too small an issue to be concerned with. If that’s not by intentional design, then it at least reflects an evolutionary logic. This policy is likely to survive because the people it taxes will face a cost so small it isn’t worth doing anything about. Yes, Uber and Lyft have incentive to lobby against it, but it’s so close to invisible that they’ll probably be able to pass it almost entirely on to drivers and passengers.

This is going to cost millions… with a tiny little m. At first I read it as a 5% tax and quickly realized that Uber rides are so cheap that I won’t even notice it. And 20 cents a ride is even less than 5%.

So why worry? Precedent. The problem with death by a thousand cuts isn’t any one cut.


*Of course we can argue about whether they do enough of that. There may be a tragedy of the commons if there’s asymmetric information between people looking to make human capital investments and businesses looking to gain access to specific human capital. Such a situation might create an opportunity for government to do some good by investing in public goods or subsidizing on-the-job training. But if that’s the case, it calls for very different programs (education reform, etc.) than taxing successful companies to subsidize their competition.

**Why is this good news? Because if cab companies did change their behavior it would imply they’re doing something where cost exceeds benefit. It would destroy value. Remember those stories of WWII rationing? Imagine that situation but with cab companies buying twice as many tires and just storing extras in the garage. It would clearly be a bad thing. Scarcity isn’t so urgent nowadays, but the basic logic remains the same.

Moral Markets and Immoral “Capitalism”

The question, “Is capitalism moral?” was raised by Steven Pearlstein in a 15 March 2013 article in the Washington Post. He is a professor of public and international affairs at George Mason University and a column writer for the Washington Post.

Pearlstein writes that we in the US are engaged in a “historic debate over free-market capitalism.” Maybe so, but “free-market capitalism” is a contradiction in terms. There are two reasons why the economic system is called “capital”ism rather than “laborism” or “landism.” First is that capital dominates labor. The second reason to call the system “capitalism” is to hide the role of land, so that people focus only on the conflict between workers and capitalists. The chiefs of finance and real estate are able to dominate because of their political clout. They obtain privileges from government in subsidies, limits on competition, and periodic bail outs. In contrast, in a free market, there is no domination, with neither subsidies nor imposed costs.

Pearlstein then says that if “markets” were providing prosperity for most folks, there would be no need for governmental intervention. But we don’t have pure markets. We have a mixed economy, with intervention into markets, so one has to first analyze whether it is markets or else interventions that cause high inequality, instability, poverty, and unemployment. Since pure markets are not given an opportunity to work, how can they be responsible for economic woes?

He then asserts that for the past 30 years, the world has been moving towards a greater role for markets. That is so for China and the countries previously dominated by the USSR, and these economies have indeed experienced greater growth and prosperity.

But, contrary to Pearlstein’s assertion, the US has been moving away from a market economy. Frequent governmental crises – the fiscal cliff, budget deadlines, ever changing tax rates – threaten the stability of financial, industrial, and labor markets. The subsidies to real estate and its financial allies have never been greater. The domination of the Federal Reserve over money, banking, and interest rates has reached historic heights. The tax reforms of the 1980s have been reversed by Congress, which has made income taxes ever more complex. Costly regulations continue to pour out of Washington DC by the thousands each year. And now the government will dominate medical provision like never before.

The decline in the role of markets can be measured by an index of economic freedom. According to the Fraser Index of Economic Freedom, U.S. market freedom peaked out in the year 2000 at a rating of 8.5 out of 10, and then declined to 7.69 in 2010 as intervention grew. The US freedom ranking among countries dropped from third place in 2000 to 18th out of 144 in 2010, and most probably has continued sinking since then.

Critics of markets have asserted that stagnant household incomes and financial crises are the fault of a greater role for markets, when in fact, in the US and Europe, massive subsidies to real estate caused the recession, excessive government borrowing has caused the fiscal crises, and a governmental redistribution of wealth from workers to landowners has stagnated net wages.

I agree with Pearlstein that we should welcome the debate on economic morality. But we should use words that have real economic meaning, rather than propaganda terms. Any person who refers to “capitalism” other than with critical quotation marks contributes to the confusion. The critics of markets opportunistically use the term “free market” to refer to the mixed economy, and then use the term “capitalism” also for the concept of a pure free market. Hence they argue that “capitalism,” as the mixed economy, suffers from economic woes, and then jump to the false conclusion that “capitalism,” meaning the pure market, causes the problems.

A real debate should also unmask the role of land that hides under the label “capital”ism. Critics who speak of the “market’s” unequal distributions overlook the massive redistribution of income from workers to landowners, as taxes on wages pay for public goods that pump up rent and land values. Their call for higher taxes on the rich disregards the distinction between earned income from entrepreneurship and unearned income from governmental subsidies.

Pearlstein admits that “many of the arguments have been a bit flabby, with both sides taking refuge in easy moralizing.” That is true. An honest and robust debate should avoid the deceitful switching of meanings for “capitalism”, and indeed avoids using the flabby term altogether. Instead, use the clear and honest words “pure market,” “intervention,” and “mixed economy.” If we say that the mixed economy has economic woes, one cannot then conclude that the pure market has caused them, because the mix also includes intervention. Clear thinking about economic morality cannot begin until we have clear terms that reflect the full-spectrum of economic reality.

Blissful Ignorance and the Conservative Worldview

I have been mulling over the recent foreign policy debate I had with Dr. Delacroix and have come to a couple of conclusions. The first conclusion is that conservatives have absolutely no evidence to support their foreign policy proposition of world hegemony, so they instead rely on that old faithful tactic of demagoguery.

Dr. Delacroix was once a prestigious scholar and an expert in international affairs, so his arguments are ones that we can use to ensure that no straw man is being built for the purpose of winning the fight. Libertarians maintain that the 9/11 terrorist attacks did not come out of anywhere and that the United States is not an innocent actor overseas. This causes many people on both the Left and Right to ruffle their feathers and denounce libertarians as unpatriotic or worse.

Yet just consider the two points that libertarians do make in regards to the 9/11 terrorist attacks (again, I wanted to pick out the strongest example so that no straw man may be built for the crass purpose of “winning” the argument):

  1. The 9/11 terrorist attacks did not come out of nowhere.
  2. The United States is not an innocent actor overseas.

I don’t see how any sane, rational individual good skeptic can avoid these two arguments. Just look at the evidence in support of both. Al-Qaeda has been around since the Cold War and the CIA had actually worked with them in their operations against the Soviets in Afghanistan. When the first Bush administration (daddy) decided to keep troops in Saudi Arabia, bin Laden and Al Qaeda became an instant enemy of the republic. The bin Laden family is a rival of the Saudi family in the Arabian peninsula, and Osama bin Laden did not like the fact that Washington was now in bed with his hated enemies.

Policymakers in Washington knew that they had irked a potentially dangerous faction in the Muslim world, and the Clinton administration attacked Al Qaeda operations in both Sudan and Afghanistan with precision missile strikes during his presidency. Conservatives and liberals often pretend that the United States was an innocent bystander in the world up until the terrorist attacks of 9/11, and public ignorance is something that cannot be discounted, but intellectuals like Dr. Delacroix have resorted to demagoguery and myths instead of confronting the facts on this issue. They should be ashamed of themselves.

Imperialists cannot even acknowledge that the US had troops in Saudi Arabia at the time of the 9/11 attacks. They cannot admit this because it destroys almost every myth that the God of War depends upon to flourish in the minds of the hoi polloi. Just look at Dr. Delacroix’s images within the cave. Continue reading