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"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" - Adam Smith

The Media's Top 10 Economic Myths of 2008 (No.4)

Written by Julia A. Seymour & Paul Detrick | Sunday 28 December 2008

4. Attack of the Killer Tomatoes

Media myth: A salmonella scare frightened everyone and upset one CNN anchor so much that he called for the impeachment of President Bush – but it turned out peppers were the culprit.

Originally published by the Business & Media Institute

CNN's Lou Dobbs, host of "Lou Dobbs Tonight," called for the impeachment of President George W. Bush on June 19, 2008 – but this wasn't about the Iraq war or some sort of atrocity. It was over tomatoes.

Dobbs placed the blame for the salmonella outbreak that had sickened 383 people by April 2008.

"You know, I have heard a lot of reasons over the years as to why George W. Bush should be impeached," Dobbs said. "For them to leave the Food and Drug Administration (FDA) in this state, its leadership in this sorry condition and to have no capacity apparently or will to protect the American consumer – that is alone to me sufficient reason to impeach a president who has made this agency possible and has ripped its guts out in its ability to protect the American consumer."

The media spread fear of tomatoes to the public. In the first four days of the scare – June 8 through June 12 – the three broadcast networks aired 20 stories hyping the salmonella outbreak and pointing the finger at tomatoes.

Ultimately, the misplaced blame cost the tomato industry at least $100 million according to an Associated Press story. The Food and Drug Administration later cleared tomatoes and found the true culprit of the Saint Paul salmonella outbreak: jalapeno or serrano peppers.

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The Media's Top 10 Economic Myths of 2008 (No.5)

Written by Julia A. Seymour & Paul Detrick | Saturday 27 December 2008

5. The economy has a fever and the only prescription is more bailouts.

Media myth: From the economic stimulus early in 2008 to the call for a Big Three auto bailout in December the media couldn't find a bailout it disliked.

Originally published by the Business & Media Institute

Bear Stearns, AIG, Fannie Mae and Freddie Mac. 2008 was the year of the government bailout and the news media supported such interventions time and time again.

One particularly vocal advocate for bailouts was CNBC's Jim Cramer who warned that without a financial bailout the U.S. could face a second Great Depression. He said the same thing months later about an auto industry rescue. Before AIG was given a loan package from the Federal Reserve, Cramer warned that the company absolutely "cannot fail."

When public opinion was turned against the $700-billion bailout CNN correspondent Carol Costello admitted that the network's experts were confused. Costello said, "I talked to our own polling experts and they are perplexed by the numbers" which showed a majority against the bailout.

The $25 billion housing bailout of Fannie Mae and Freddie Mac was also embraced by the media. "CBS Evening News" called the bill a "lifeline" for the government-sponsored enterprises, but correspondent Jim Axelrod didn't explain that the "unlimited capital from the government" would come from taxpayers.

But Jerry Bowyer, the chief economist for the Benchmark Financial Network, criticized the Fannie/Freddie bailout: "It's bad in the short run, unless you are either a highly paid Fannie executive or currently a staffer for any Democratic member of a Congressional Banking Oversight Committee, in other words, a future highly paid Fannie execute [sic]," Bowyer wrote. "In the long run, this will be a huge transfer of wealth to a corrupt bureaucratic and inefficient bureaucracy from the rest of us tax payers."

Bowyer and other free-market economists have criticized the many bailouts, but their perspective was rarely included in bailout stories.

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The Media's Top 10 Economic Myths of 2008 (No.6)

Written by Julia A. Seymour & Paul Detrick | Friday 26 December 2008

6. Alternative energy: All gain, no pain

Media myth: According to journalists, the only way out of high gas prices and global warming are expensive, impractical "green" fuels.

Originally published by the Business & Media Institute

Rather than give an even-handed report on the oil supply situation, many journalists continued to push the "green" theme in 2008, calling alternative energies "a surefire way to cut fuel costs" and saying that a fuel other than gasoline would be "a welcome relief," despite the trillions of dollars and number of years that may take.

In June, CBS "Evening News" stacked a story against drilling on the very night a poll came out showing public support for increased drilling. Correspondent Bill Whitaker cited "bipartisan" opposition to offshore drilling "in California, which suffered a devastating oil spill from a rig off Santa Barbara in 1969." But he didn't balance his own story evenly with proponents and opponents; instead he promoted the "green" views of environmentalists and Gov. Arnold Schwarzenegger.

NBC "Nightly News" consulted CNBC's Erin Burnett on June 22. Burnett acknowledged the oil supply problem, saying "a lot of people want oil, and we don't seem to have enough." But she never mentioned increasing domestic supply by allowing offshore or ANWR oil exploration.

Instead, Burnett said, "We have to take our lumps, pay these prices and invest aggressively in alternative fuels that we can have right here in the United States of America. We get 15 percent of our power from right now from nuclear energy. We could dramatically increase that. We have other sources as well that are plentiful here at home like wind, like coal. We need to invest in those."

Burnett wasn't the first journalist to cheerlead for alternative energy development. "For anyone with a fresh idea, expensive oil is as good as a subsidy – with no political strings attached," Wired.com contributing editor Spencer Reiss wrote in December 2005. "And smile when you see a big black $3 or $4 out in front at the gas pump. Those innovators need all the encouragement they can get. Shale oil, uranium, sunlight – there's enough energy out there for a dozen planets."

Alternative forms of energy are less efficient and usually less attractive to an open market than oil and coal. [Click 'read more' to continue]

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The Media's Top 10 Economic Myths of 2008 (No.7)

Written by Julia A. Seymour & Paul Detrick | Thursday 25 December 2008

7. Barack Obama sends stocks soaring, but not sinking.

Media myth: Journalists gave the new president-elect credit for an Election Day stock market rally, but when markets collapsed Obama got a pass.

Originally published by the Business & Media Institute

As stocks rose on Election Day 2008, the media were more than happy to credit investors' excitement over Democratic nominee Sen. Barack Obama's chance of winning. But when stocks tanked in the days following Obama's election, concern over Obama's economic policies was the last possible culprit.

The Dow fell four trading days out of five following the election, and by the close Nov. 11 was still down more than 600 points from its Nov. 3 close. Stocks were also trading lower on Nov. 12 "after Treasury Secretary Henry Paulson announced changes to the government's bailout plan," according to BusinessWeek.com. The Dow had shed over 3 percent by 11:35 a.m. according to the article.

Yet, one global news agency [which one?] trumpeted the biggest Election Day rally "in history" as an "Obama effect," while many others declared that investors were simply "relieved" to see the end of the campaign.

But then the markets went into what CNBC's Melissa Lee termed a "tailspin." Nov. 5 and 6 losses became the worst two-day decline since the 1987 crash, but the three networks placed no amount of blame on Obama.

Out of 23 stories on ABC, NBC and CBS only one asked about the "notion" that the election outcome could influence the stock market negatively.

Chris Cuomo was the only network reporter to ask about a potential Obama connection to the drop. On Nov. 7 "Good Morning America" he asked ABC News correspondent Bianna Golodryga "What do you make of the notion that the drop in the stock market is a function of the election?" [Click 'read more' to continue]

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The Media's Top 10 Economic Myths of 2008 (No.8)

Written by Julia A. Seymour & Paul Detrick | Wednesday 24 December 2008

8. Fannie's failure

Media myth: When it came to the demise of Fannie Mae and Freddie Mac, the network news never saw the trouble coming.

Originally published by the Business & Media Institute

Print journalists had been warning of trouble at government-sponsored enterprises Fannie Mae and Freddie Mac since 2002. But in 2008 ABC, CBS and NBC were clueless when it came to the extreme risk the duo presented to taxpayers.

The NBC "Today" show hinted at problems with the two government-sponsored companies on July 14 when Andrea Mitchell reported Sen. John McCain's (R-Ariz.) reaction to a bailout:

"John McCain also says the survival of the mortgage giants is essential, despite some of their past practices," said Mitchell. Viewers were left to wonder what those "past practices" could have been. Here are a few hints: billions of dollars in accounting scandals, stock prices that have plummeted, connections to prominent politicians and a high-risk portfolio.

CNBC's Erin Burnett shed almost no light on the situation in a "Today" segment the same morning.

When co-host Matt Lauer asked, "How did they get themselves in this situation?" Burnett explained that Fannie and Freddie guarantee mortgages for other lenders so that if the loan goes unpaid, they take the loss instead of the original lender. But she neglected to mention the enterprises' government mandate to increase home ownership and the implied taxpayer guarantee that enabled the two public companies to dominate the market.

The media also underreported accounting scandals at Fannie Mae. In 2004, earnings restatements at Fannie Mae were $11 billion. That was 19 times bigger than Enron's, yet Enron is the scandal everyone remembers. [Click 'read more' to continue]

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The Media's Top 10 Economic Myths of 2008 (No.9)

Written by Julia A. Seymour & Paul Detrick | Monday 22 December 2008

9. Gas at $4-a-gallon, blame the oil companies.

Media myth: Oil companies and CEOs were a favorite media target in 2008, but the monopolistic oil cartel that does manipulate oil prices was rarely scrutinized.

Originally published by the Business & Media Institute

When gas hit 4 bucks a gallon, who got the blame? Not the oil cartels, that's for sure.

When oil prices climbed to more than $100 a barrel, journalists were looking for someone to blame for Americans' "pain at the pump." They called "Big Oil" companies "thieves" and accused them of reaping "excessive profits" driven by "greed." But the networks ignored one of the leading causes of high gas prices – the hostile leaders of the world oil cartel – the Organization of Petroleum Exporting Countries (OPEC).

On NBC's May 15 "Today," host Matt Lauer interviewed ExxonMobil CEO Rex Tillerson. Lauer quizzed Tillerson on oil companies' profit margins and higher gas prices, but Lauer didn't ask Tillerson about other factors that affect the price of gas, like the Lieberman-Warner climate-change bill.

"Most analysts say prices at the pump will get even worse during the summer driving season," Lauer said, "but the oil companies are posting huge profits." He noted that ExxonMobil, made a $10.9-billion profit in the first quarter of 2008, and asked Tillerson a question from "Today" viewer "Elaine in Pennsylvania":

"How can you justify the record profits you're making when people can't afford to put gas in their cars to go to work?"

In response, Tillerson pointed out that Exxon's profits are not large because of high profit margins, but because of high volume. "[W]hen you take our profit of $40 billion [in 2007], that's 10 cents on every dollar of revenue that we generate," he said. "That puts us about in the middle of most Fortune 500 companies, so we're not at the top in terms of profit per revenue; we're not at the bottom." [Click 'read more' to continue]

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The medieval inheritance tax

Written by Tim Worstall | Thursday 07 February 2008

It's one of the tropes of our times, that the inheritance tax is such a spiffingly new and inventive idea that it must be progressive. In one way of course it is new, starting in 1986 (with the origin as Estate Duty in 1894), in another, it's really rather old.

Feudal England worked on the basis that everything, most especially the land, belonged to the King. Whilst you might have an estate, even the hereditary right to one, you only ever held a lifetime interest in it. At your death, your inheritors would pay a fee to the next lord up in the fedual chain. This progressed all the way to the top, where those who held lands directly from the Monarch paid him at their own moment of inheritance. There were other such details, such as heriot, the right of a lord to seize the best animal or clothes of a serf from his estate.

Fortunately we got rid of such things as the medieval system faded away: land holdings became freeholds, owned absolutely, property rights actually meant that things were inheritable rather than held only for life.

Until, of course, the system of inheritance tax came along again. What is ours is not ours to do with as we wish again, to dispose of as we please. Our inheritors must pay again a fee, to the State this time instead of the feudal lord, for the enjoyment of our property, what we have built and paid for. 

Thus, far from being progressive, the inheritance tax is in fact medieval, positively feudal: we're now simply regarded as serfs of the State, ripe for the plucking upon our passing. 

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The mediocrity of chasing the middle ground

Written by James Lawson | Thursday 07 March 2013

The economy is stagnant, government spending continues to rise, and we’ve lost our AAA rating. With the recent rejection of boundary reforms, and the UKIP-led humiliation at Eastleigh, it’s no surprise that some Conservative backbenchers are grumbling.

Cameron is adamant that he will not “lurch to the right” in response. His focus remains on the centre. After all, the median voter theorem tells us that majority rule voting will select the outcome most preferred by the median voter. But is success as simple as chasing the middle ground?

Firstly, the median voter theorem only works along one-dimension, 'Left' v 'Right'. This is hopelessly simplistic as the public’s views vary across issues. When we vote, we are limited to choosing a party package and we each have different priorities within those packages.

Secondly, it relies on there only being two parties, and assumes that those at the extremes will vote on side. Yet there are at least three significant parties.By some estimates UKIP cost the Conservatives a number of key marginal seats at the last election too. The winner of the 2010 election was actually ‘none of the above’ – more people avoided the ballot box altogether than voted Conservative.

Thirdly, the theorem assumes that preferences are ‘single-peaked’. Instead it’s possible to have different views on the same issue depending on the scenario. For example, one might in theory oppose paying for state schools. Yet, after being taxed for education, one might then prefer to pay a bit more voluntarily to get better state schools and thus avoid the additional cost of going private.

Finally, chasing the median voter has limited grounding in the public good. Public Choice theory teaches us that politicians and voters are liable to government failure. Some will act selfishly, voting to promote their wellbeing at the expense of the masses. Excessive focus on the centre also guarantees that principles are left behind in the wake of the latest opinion polls. U-turns can turn off past loyalists. Many who did support the Conservatives now lack enthusiasm, and the Government is generally criticised for its chameleonic approach.

Yes, the Conservatives had lost three elections in a row, and were ‘toxic’. Yes, there are votes to be won in the centre, and policies should be presented in terms that resonate with the public. However, votes may also be won by pursuing radical policies, by building enthusiasm amongst core voters, by reengaging non-voters and even by turning 'right'. One shouldn't just focus on the middle ground, there are many votes to be won elsewhere.

Having never won a General Election, Cameron might consider his predecessors. Margaret Thatcher was radical, faced an entrenched socialist status quo and was more ‘right-wing’. She delivered three electoral majorities, enthused her core vote, won over many ‘working class Tories’ and left a legacy that shaped the political world.

James was a founder of the Liberty League, who are hosting the upcoming Freedom Forum.

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The mercantilists strike back

Written by Anton Howes | Friday 18 January 2013

Professor Dani Rodrik at Harvard University has offered up a challenge for free market liberals. He is openly, and unashamedly mercantilist: the very ideology that Adam Smith originally set out to defeat back in 1776. While rejecting the historical obsession with amassing precious metals, Rodrik proposes a mercantilist alliance of government with corporations towards common objectives like economic growth.

Swatting aside accusations of cronyism, he offers two reasons to be mercantilist. Firstly, he claims that it works: the recent Asian experience of modern economic growth suggests so, along with the fact that classical liberalism only became dominant in Britain around the 1840s, after it had already started to industrialise. But both of these claims are dubious at best. Regarding the Asian economies, most of them are experiencing catch-up growth, skipping stages of invention. For example, they needed only to import smartphone technology, rather than going through the painstaking process of inventing every single model of mobile phone from the clunky ancient ones to the iPhone. The adoption of capitalism they experienced was not the alliance of the state with business, but the openness to adopting ideas. Indeed, countries like Japan who have recently caught up now experience stagnation. The mercantilist structure does not seem to be quite so conducive to sustained, original innovation, and hence modern economic growth.

As for the British experience of the Industrial Revolution, the original technical innovators, Rodrik's claim does not imply that mercantilism is the better system. Just because the British state did not adopt a liberal attitude to innovation until the 1840s does not necessarily mean that pro-innovation liberalism was not already in action before the Establishment adopted it. If anything, the liberal view is the anti-Establishment view. It wasn't in state-subsidised or state-monopolised industries or businesses that the unprecedented innovation took place. If anything, the much-admired cotton industry of the time had to operate despite protectionist laws like the Calico Acts. Similarly, the invention and increasingly sophisticated application of steam power had almost nothing to do with the government whatsoever. We also have a useful comparison, as post-Revolutionary France was desperately intent on copying the British industrial experience. Yet despite massive subsidies, early attempts consistently failed.

Secondly, Rodrik says that under mercantilism, it is producers rather than consumers who are king. He claims that mercantilists subsidise liberals' vaunted consumption. The obvious question is "Why?" What is the purpose of production if not to satisfy someone's wants or needs? Even people who value work for work's sake are "demanding" the production of something that meets those values. What is the point of having an economy, of interacting and exchanging with others, if not to acquire value for yourself? This does not necessarily mean that you are some selfish miser, obsessed with money, but includes the whole panoply of values you can hold, from equality, to community, to family and to love. If Rodrik's mercantilist challenge is to have weight, he needs to explain what the point of production is, if not to satisfy demand.

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The merits of Anglo Saxon capitalism

Written by Tim Worstall | Saturday 28 January 2012

As we all know one of the differences between the Anglo-Saxon variant of capitalism and others such as Rhineland such is the way in which economic activity is financed. They tend to use banks to finance both the debt and equity portions of a business, we tend to use markets to do so. For us large companies tend to issue shares, bonds, commerial paper, and even small companies don't get their equity from banks, only their debt financing.

As an aside it has hugely amused me the way in which recent events have had everyone spitting at the banks, insisting that they be cut down to size. And then the very same people (yes Mr. Hutton, we're lookin' at you) insist in the next breath that we must have Rhineland capitalism, the one in which the banks loom even larger in the financing of industry.

But that is an aside. What we really want to know is which is the best method of financing industry?

The nature of the firm and its financing are closely interlinked. To produce significant net present value, an entrepreneur has to transform her enterprise into one that is differentiated from the ordinary. To achieve the control that will allow her to execute this strategy, she needs to have substantial ownership, and thus financing. But it is hard to raise finance against differentiated assets. So an entrepreneur has to commit to undertake a second transformation, standardization, that will make the human capital in the firm, including her own, replaceable, so that outside financiers obtain rights over going-concern surplus. I argue that the availability of a vibrant stock market helps the entrepreneur commit to these two transformations in a way that a debt market would not. This helps explain why the nature of firms and the extent of innovation differ so much in different financing environments.

It would seem that the draw of being able to float a company increases the incentives to make it truly independent of the original guiding force, the entrepreneur. And as is mentioned, we very much want companies to both outgrow and outlive their founders. So it would appear that it is the Angoo Saxon variant that wins this little part of the battle then.

So rah rah for The City then, eh?

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