My paper “The Case Against Fiscal Stimulus,” in the Harvard Journal of Law & Public Policy,  got picked up by RealClearPolitics over the weekend and generated an interesting comment from Bill Balson:

Beyond the simple fact that the Administration did not actually spend the stimulus money when it could have helped (only 39% had been dispersed through August 2010), I think a simple thought experiment makes your case clearly because a quick visit to Main Street belies the abstract view adopted by those with the “helicopter” view. 

Sitting in a local hardware shop circa early 2009, one might commiserate with the choice of the proprietor: a) to close and avoid further losses by firing his employees or b) to remain open bearing more loses in the expectation of an improving economy. 

He has a very simple spreadsheet showing gains and losses under alternative scenarios.  The spreadsheet allows him to input wage rates, admin costs, COGS, tax rates, and sales for each month over the next few years. 

A tax oriented stimulus would lead him to immediately plug in changes in the tax rates, even without cash in hand. Maybe its enough to change his decision.  

A spending stimulus (assuming he is not on the “friends and family” list), causes him to think: “hmmmm, will it work?”  He concludes it only works if in fact his final sales results benefit from the economic chain linking the spending stimulus to his sales.  Looking at his spreadsheet, he has no input variables to change until he sees data confirming the benefit to his hardware store. 

As in monetary policy, expectations is the dominant factor in fiscal policy also.  While prosaic, the hardware store thought example has been played out over the past 18 months in companies large and small from sole proprietors to Fortune 500 firms. 

ANTWERP, Belgium—When the housing market crashed in 2008, David Llewellyn’s construction business went with it. Casting around for a new gig, he decided to commercialize something he’d long done as a hobby: making drugs.

But the 49-year-old Scotsman didn’t go into the illegal drug trade. Instead, he entered the so-called “legal high” business—a burgeoning industry producing new psychoactive powders and pills that are marketed as “not for human consumption.”

Mr. Llewellyn, a self-described former crack addict, started out making mephedrone, a stimulant also known as Meow Meow that was already popular with the European clubbing set. Once governments began banning it earlier this year, Mr. Llewellyn and a chemistry-savvy partner started selling something they dubbed Nopaine—a stimulant they concocted by tweaking the molecular structure of the attention-deficit drug Ritalin.

The article is interesting throughout.  The best part is the extensive, double-blind controlled trials that are undertake to determine whether new drugs are “safe and efficiacious:”

Mr. Llewellyn … boasts that his safety testing method is foolproof: He and several colleagues sit in a room and take a new product “almost to overdose levels” to see what happens. “We’ll all sit with a pen and a pad, some good music on, and one person who’s straight who’s watching everything,” he says.

Take that, FDA!

Great op-ed in the Washington Post:

General Motors’ Chevy Volt is finally here, heralded by a new TV ad. “This is America, man,” the narrator purrs, as the sun rises over a solitary Volt tooling along a country road. “So doesn’t it make sense that we build an electric car that goes far, really far?”

The pitch is lyrical, almost religious. It asks consumers to make an economic and technological leap of faith – just as both GM and the firm’s biggest backer, the Obama administration, have invested, financially, politically and psychologically, in plug-in hybrids and other electric vehicles.

How else to explain the fact that both Washington and Detroit persist in their costly electric-car project despite mounting evidence that the vehicles serve no particular purpose, environmental or economic?

Maybe it was karma, but the Volt’s launch coincided with publication of a 72-page report by J.D. Power and Associates that confirmed, in devastating detail, what many other experts have found: Electric cars still cost too much, even with substantial federal subsidies for both manufacturers and consumers, to attract more than a handful of wealthy buyers – and this will be true for at least another decade.

What little gasoline savings the vehicles achieve could be had through cheaper alternative means. And electrics don’t reliably reduce greenhouse gas emissions, since, as often as not, the electricity to charge their batteries will come from coal-fired plants.

Finally:

LONDON — Several European officials questioned American requirements for airport security on Wednesday, a day after the chairman of British Airways criticized Britain for bowing too quickly to Washington’s demands.

The chairman, Martin Broughton, said at a conference on Tuesday that Britain should not “kowtow to the Americans every time they wanted something done” with aviation security procedures.

Especially irritating, Mr. Broughton said, according to The Financial Times, was the requirement that passengers take off their shoes and remove their laptops from their luggage during security checks. The practice should be abandoned, he said. A representative for British Airways confirmed that he made the remarks.

This won’t change anything, of course.

If Republicans seize control of the House of Representatives next week — as polls suggest they will — under the Constitution one of their most critical tasks will be to craft the initial funding bills for the U.S. government. One account, foreign aid to Israel, might prove problematic because many GOP lawmakers have routinely voted against foreign aid bills.

Now Rep. Eric Cantor (R-Virg.) — the presumptive majority leader if the polls are correct –has floated a novel solution to protect aid for Israel from the current foreign aid backlash: giving the Jewish state its own funding account, thus removing it from funds for the rest of the world.

It’s hard to know what to say about Cantor’s suggestion; it is bizarre on many levels.  So I will just offer a different suggestion: no foreign aid for any country.

The University of Chicago’s John Cochrane provides an excellent critique.  His bottom line:

Markets and exchange rates are not always right. But it is a pipe dream that busybodies at the IMF can find “imbalances,” properly diagnose “overvalued” exchange rates, then “coordinate” structural, fiscal and exchange rate policies to “facilitate an orderly rebalancing of global demand,” especially using “medium-term targets” rather than concrete actions. The German economics minister, Rainer Brüderle, called this “planned economy thinking.” He was being generous. Planners have a clearer idea of what they are doing.

Sacrosanct tax breaks, including deductions on mortgage interest, remain on the table just weeks before the deficit commission issues recommendations on policies to pare back with the aim of balancing the budget by 2015. …

At stake, in addition to the mortgage-interest deductions, are child tax credits and the ability of employees to pay their portion of their health-insurance tab with pretax dollars.  …

Officials have found there aren’t any easy ways to balance the budget, and they are expected to steer clear of more polarizing issues like Medicare, Medicaid, Social Security and a broad rewrite of the tax code.

In other words, the Commision is focussing on tax increases but not expenditure cuts.  Two comments:

1. The mortgage interest deduction and the deductibility of employee health insurance premiums are both bad features of our current system. Eliminating these, while lowering marginal rates and holding total revenue roughly constant, is a no-brainer.

2. But eliminating these features while not adjusting the rest of the tax code, and while not cutting expenditure, is suicidal. The higher taxes will slow growth and raise only modest amounts of revenue.  The improvement in the fiscal outlook will be minor, since it rests mainly on the incredible growth rate of Medicare expenditures.

MAQUR, AFGHANISTAN – October has been a calamitous month for the Taliban guerrillas waging war from sandy mountains and pistachio forests in this corner of northwestern Afghanistan.

The first to die was their leader, Mullah Ismail, hunted down and killled by U.S. Special Operations troops. Next came the heir apparent, Mullah Jamaluddin, even before he could take over as Taliban “shadow” governor. Within a week, several other top commanders were dead, a new governor had been captured and the most powerful among the remaining insurgents had lit out for the Turkmenistan border – all casualties of the secretive, midnight work of American commandos.

And yet what has happened here in Badghis province also shows how large a gap remains between killing commanders and dismantling an insurgency. Nearly half of the province remains under insurgent control, an Afghan intelligence official estimated. A new Taliban governor has already been dispatched to the province, Afghan officials say, even though NATO portrayed Mullah Ismail’s killing as a “huge blow” that would “significantly reduce Taliban influence throughout the region.”

“Fighting in Afghanistan is like hitting coals with a stick, it just spreads to other places,” said Delbar Jan Arman, who as provincial governor is trying to stave off the Taliban advances. “It will continue.”

Read the rest here.

As you have probably heard, National Public Radio has fired long-time commentator Juan Williams:

NPR fired Williams, 56, late Wednesday after he appeared on Fox News’s “O’Reilly Factor” two nights earlier. In a discussion about terrorism with host Bill O’Reilly, Williams said: “But when I get on a plane, I got to tell you, if I see people who are in Muslim garb and I think, you know, they’re identifying themselves first and foremost as Muslims, I get worried. I get nervous.”

Williams also works for Fox News, and Fox was quick to respond to NPR’s action:

For its part, Fox News on Thursday awarded Williams a new multiyear contract worth nearly $2 million that will expand his role on the cable news channel and its Web site. In a statement that indirectly referenced his firing by NPR, Fox News chief Roger Ailes called Williams “an honest man whose freedom of speech is protected by Fox News on a daily basis.”

NPR then responded to Ailes’s intimations about Williams’s First Amendment rights. An NPR executive stated that

Juan has a First Amendment right to say whatever he wants. He does not have a First Amendment right to be paid by NPR for saying whatever he wants.

The NPR position is correct, and it responds to a frequent confusion about the First Amendment.  The right to free sppech means the government cannot impede your speech, but this right does not guarantee anyone the money, job, or platform with which to express that speech.

Now if only NPR would apply that principle in the context of campaign finance!

Addendum: Does NPR’s action violate the First Amendment because NPR receives government funding? Perhaps, but the issue is messy.  NPR is competing with private entities in the marketplace, and these organizations can certainly fire people who exress views the employer does not like (imagine what Fox would do if Bill O’Reilly, thinking the camera had stopped rolling, said that Tea Partiers are a bunch of loonies).

So how does policy balance an employer’s freedom to hire and fire as it pleases against the First Amendment?

By not providing any taxpayer subsidy for NPR.

Out in the districts where Democratic members of Congress are enduring an unrelenting avalanche of attack ads from well-financed conservative groups, some of the party’s strategists are now warning of a permanent change in the landscape.

Looking beyond next month’s elections, the fear among some influential Democrats is that Republicans now enjoy a structural advantage that will continue to prove overwhelming unless Democrats move quickly to build what one operative describes as a “soft-money Death Star” of their own.

Recent history would suggest, though, that what Democrats lack at the moment isn’t necessarily some new kind of campaign infrastructure, but rather a sense of passion and power among their contributors.

Exactly. The Democrats are desperately trying to argue that money is influencing voter preferences. In fact, the money is likely just reflecting voter preferences. Republicans are raising lots of money because, at the moment, they have a message that is more appealing to voters.