The Bear Stearns Debacle

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on March 25, 2008. Audio is here.

Wall Street is all about profit. All about the bottom line. And profit does play a major role in making our world go round. Without profit, there's no point in taking risks. Without risk-taking, there's no investment. Without investment, there's no growth. Profits are the cornerstone of our economy and our way of life.

But as Milton Friedman liked to point out, our economic system isn't just based on profit. It's a profit and loss system. It's the combination that sustains and enhances our standard of living.

Yes, the potential for profit encourages people to take risks. But without the potential for loss, you have reckless risk-taking. You have risk-taking without prudence. Without the potential for loss, irresponsibility goes unpunished.

The Federal Reserve and the Treasury Department have orchestrated the rescue of Bear Stearns. The defenders of that maneuver argue that if Bear Stearns had failed it would have created a lot of collateral damage, so much collateral damage, that you and I, normal folk who don't know anything about high-falutin' financial instruments like "collateralized debt obligations" would have been engulfed as well. If Bear Stearns had gone bankrupt, Lehman Brothers might have been next. Some say that if Bear Stearns had failed, the entire banking system was at risk.

Maybe.

It seems awfully hard to know for sure.

But what I do know for sure is that by subsidizing the marriage of Bear Stearns and JP Morgan, the government has removed some of the loss from the profit and loss system. Oh, they tried to make Bear Stearns suffer by demanding a price of $2 a share. But now the deal has been renegotiated—ta-da!—to $10 a share, a mere five-fold readjustment. What's going on here?

What's going on here is that we're in uncharted territory, a world where the Fed and the Treasury are making up the rules as they go along, where accountability is being ignored and a world where the government bails out Bear Stearns and its creditors rather than letting those who have been reckless learn a lesson for the next time.

Yes, letting Bear Stearns go under would have been dangerous. But helping JP Morgan devour Bear Stearns is dangerous, too. Where does the government stop in protecting people from irresponsibility? Home owners and lenders are next. The political pressure is inexorable for some sort of bail out. And then comes more regulation of investment banks.

In a world where people who make bad decisions are spared the full consequences, only one thing is certain. We've encouraged more people to make more bad decisions in the future. The real price to be paid isn't the dollar costs of any bail out, but the encouragement of recklessness and irresponsibility. That will make all of us poorer down the road.

Selling Anchovy Ice Cream

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on February 20, 2008. Audio is here.

A friend of mine told me the other day he’s planning to vote for John McCain. Why? Because McCain promises to keep the Bush tax cuts and my friend thinks that a good idea.

Why would my friend think that John McCain will keep the cuts—after all, he voted against them as a Senator.

My friend said, well, McCain said he’d keep the cuts.

I know. It seems pretty absurd doesn’t it? Ridiculous, really. Who actually believes what politicians say? But my friend who likes McCain is no fool. He’s probably read more history books than a lot of history professors. I’d never call him naïve. But he wants to like one of the candidates and McCain is his best shot. So he’s managed to convince himself that McCain is going to keep the tax cuts.

I have to conclude that my friend is living in something of a fantasy world. But he’s not alone. Any one who’s passionate about a candidate is doing the same thing. Hillary is promising universal health care. And why should we believe she’ll keep that promise? Because she says so. Where’s the evidence she’ll succeed the second time around?

Outside of politics, we’re usually a little more down to earth when it comes to rhetoric and promises. Suppose you see an ad for anchovy ice cream. The ad promises "It’s delicious!” Convinced? Probably not. You take that word “delicious” with a grain of salt. Actually more than a grain. More like a pound. You realize that the seller of the ice cream is self-interested and just trying to make a sale.

I treat the rhetoric of politicians like ads for anchovy ice cream. Call me a cynic, but I assume they’re trying to make a sale.

So when Obama says on his web site that he’s tired of “divisive ideological politics,” I wonder: what other kind of politics is there? Promising politics without “divisive ideology” is like selling a sure fire way to be a millionaire , working from home using the Internet. Most of us know it’s too good to be true. But Obama is selling like hotcakes even though his promise is just as unrealistic.

We have such a yearning for a candidate with principles and ideals. We like to think our candidate is the good one, it’s the other guy’s favorite who’s the evil opportunist. But they always break our hearts, don’t they? Too many of us, I fear, are living in a fantasy world.

Once in office, they all want to be popular. They like power more than principle. They respond to the political winds, rather than the rhetoric that got them elected. And when they break their promises because it’s politically expedient, they always have a justification.

The good news? That evil candidate from the other party that you hate, isn’t nearly as dangerous as you think. Once in office, he or she will listen to the public rather than to principles. It happens every time.

The Science of Stimulus

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on January 16, 2008 in response to much talk about the the need to create a stimulus package to avert a recession. Audio is here.

Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch. A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that "rouses or incites to activity." Sounds like the perfect prescription for an ailing economy.

But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times?

Sunny Side Up

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on December 26, 2007. You can listen to it here.

I know the economic news doesn’t seem very cheerful these days. But a lot of it is blown out of proportion, stories and subplots designed to scare us, told by politicians and people with their own agenda. Let’s not let them push us around whether they’re on the right or the left, Republican or Democrat.

They always tell us the sky is falling. That’s the minimum standard for getting our attention in a busy news cycle. But remember that the sky usually doesn’t fall. We just move on to the next scare.

So my New Year’s wish for America is that we be skeptical of falling sky stories and that as a result we all sleep better.

Defending Baseball's UnNatural

By Russ Roberts

This commentary aired on NPR's All Things Considered on September 13, 2007. You can listen to it here.

At the age of 20, Rick Ankiel was a starting pitcher on a playoff-bound St. Louis Cardinals team. Then it fell apart. I was there. I saw him throw five wild pitches and walk four against the Braves in a single inning. He never got over that. He tried the minors to find the lost magic in his arm. Then surgery. Nothing helped. The dream died.

But Ankiel wouldn’t let it die. It took him almost seven years, but he made it back to the major leagues as an outfielder. That was heartening enough. But he did more than make the team. He played with flair. With grace. With excellence. Suddenly, he was leading the Cardinals toward first place.

Then came the news that Ankiel had ordered human growth hormone, or HGH, in 2004. Suddenly, the golden boy was tarnished. Sports writers called it a tragedy. My nine year old son’s face fell when I told him. Why are you sad, I asked. All those things he did, he said. It wasn’t him.

The Lady in the Harbor

By Russ Roberts

This commentary aired on National Public Radio's All Things Considered on June 7, 2007. You can listen to it here.

According to the White House, the new immigration bill will "Help Keep The U.S. Competitive In The Global Economy By Establishing A New Merit-Based System For Immigration That Is Similar To Those Used By Other Countries."

And how is it going to do that?

There's going to be a point system to determine who gets one of the precious 380,000 visas that are up for grabs. Highly educated people get points. People with skills that are in high demand, whatever that means, get points. Young but not too young? Points. Speak English well? More points for you. Speak it badly, fewer points. Don't speak it at all? No points.

People with the highest point totals get the visas.

Some people complain that the Bush Administration is too free market. But the idea that Washington bureaucrats can figure out which skills are in high demand is an idea straight out of the old Soviet Union. It would be great if we could get some old communists from the politburo to administer it, but we won't be able to. They won't score high enough on the point system to get a visa.

The whole thing's pretty inspiring isn't it?

We once believed in a lady in the harbor with a lamp beside the golden door.

Funding Space Travel

By Russ Roberts

As much as commentator Russell Roberts loves the idea of space exploration, he doesn't want to have to pay for it.

Audio (listen/download)

The Lessons of Monopoly

By Russ Roberts

When our children got old enough, we'd play Monopoly, a game that was an important part of my childhood. The vivid orange of Tennessee Avenue. The royal blues of Boardwalk and Park Place. The little man with the mustache being hauled off to jail. And all that pastel colored money.

But if I play Monopoly now, it's only to teach my kids how badly its lessons prepare you for the real world.

In Monopoly, whoever has the most toys wins and winning means taking everything belonging to everyone else.

In Monopoly, landlords are parasites that eventually drive everyone into bankruptcy. And bankruptcy is like death. Game over.

Monopoly is the ultimate zero-sum game. You profit only by taking from others. The assets of its world are fixed in number. Yes, you can build houses or hotels, but somehow, the greater the supply of places to live, the HIGHER the price, an absurd contradiction to real-world economic life.

In Monopoly, hotels never get a makeover and railroads, unlike Amtrak, are always profitable.

In Monopoly, getting rich and succeeding in business only comes from exploiting unlucky suckers who randomly enter your life. There's no role for hard work or creativity— figuring out what customers might want to buy that isn't being offered by a competitor. There’s no competition.

I know. That’s why it’s called monopoly. But only Marxists look at the world of capitalism the way the game of Monopoly does—as an unrelentingly gloomy system of exploitation where the rich eventually wear everyone else down.

Ironically, most of the new board games with more realistic economic lessons come, like Karl Marx, from Germany.

In games like The Settlers of Catan players compete, but they also cooperate and trade in various ways. One player’s economic success can end up benefitting fellow players. Yes, there’s a random element to success but life has that too. And in these new German-style board games as they’re sometimes called, strategy and skill matter more than the roll of the dice.

So leave Monopoly on the shelf and try the Settlers of Catan. My wife usually wins when we play, but at least my kids learn about the value of trade and cooperation in creating wealth and success.

In Defense of High Prices and Profits

By Russ Roberts

From National Public Radio's Morning Edition
Click here for audio edition.

Those Senate hearings on the cause of high gasoline prices should be really brief. Three words. Supply and demand.

When hurricanes destroy refining capacity, pipelines and drilling platforms there’s less gasoline to go around and prices rise.

Everybody knows what’s bad about high prices. Less money for us. More money for the oil industry.

But high prices are good, too. When prices are high, some people will drive less, car pool, buy more energy efficient cars allowing the people who really want gasoline to have it.

There’s another benefit of high prices. They encourage greedy oil companies to pull oil out of the ground that isn’t worth pulling out of the ground when prices are low.

Getting oil out of the ground and into your car in the form of gasoline is an extremely expensive and unpredictable process. ExxonMobil spent almost $15 billion last year on equipment to find new oil and make refineries more productive.

As consumers, we want oil companies to take risks and spend money searching for new supplies. Profits are the reward for risk-taking and investment. Take away profits when they're high and oil companies will take fewer risks and invest less. That means less energy in the future.

But isn’t the recent run up of prices just corporate greed run amok? I don’t know. At my local station, prices are down 85 cents per gallon from the peak of a few weeks ago. Did the owner just get nice overnight? Did he forget how to gouge? Did he figure he’d made plenty of money and it was time to give me a break? I actually think he’d still charge $3.50 a gallon if he
could. But now that there’s more gasoline on the market, he can’t charge what he did before and still get my business. Too many competitors are charging less.

And next summer, if there’s no hurricane, what will happen if oil companies try and raise prices back to $3.50 per gallon? It won’t work. There’ll be too much gasoline to go around and prices will fall.

If the Senate does have hearings on oil industry profits. My fantasy is that an Exxon executive will have the courage to say:

“Yes, we made a lot of money last quarter. We earned it and we’d like to keep it. And in those times when we make a lot less, or even lose money, we won’t expect to be bailed out.”

I doubt I’ll hear that. But leaving profits alone and the incentives they provide, works better than having the government decide how much the oil industry deserves.

No Such Thing as a Safe Drug

By Russ Roberts

From National Public Radio's Morning Edition

The truth is, there’s no such thing as a safe drug. Every drug has side effects. It’s only a matter of degree. And there’s usually a tradeoff between safety and effectiveness. Powerful drugs are more likely to have side effects. Everyone who undergoes chemotherapy understands that life is about tradeoffs—about the likely costs and likely benefits.

Cautiousness is always in order when you introduce a powerful drug into your body. You don’t want to die from a dangerous drug. But you also don’t want to suffer or die because the right drug is not available.

In this world of imperfect safety, why do we give the FDA the authority to make these choices for us? The FDA is the ultimate one size fits all solution. If arthritis makes my life a living hell, why can’t I decide to take on a greater risk of a heart attack? The choice between pain and risk should belong to me and my doctor.

Remaking Iraq

By Russ Roberts

Audio (click to listen/download)

Why Are We Losing Manufacturing Jobs?

By Russ Roberts

Audio

Politicians like to blame the loss of manufacturing jobs on the nefarious schemes of foreigners to steal American jobs and lower our standard of living. The real answer lies closer to home. And surprisingly, the shrinking of the manufacturing sector is actually a sign of America's economic health.

Consider how long this has been going on. In 1950, about a third of the work force was in manufacturing. For five decades, that percentage has fallen steadily. Today, manufacturing jobs are only 12% of the workforce. A trend that lasts fifty years isn't a trend. It's a tidal wave. And reversing that trend will mean understanding its source.

Globalization is part of the cause. But the driving force behind the changes of the last half-century is the incredible productivity and innovation of the manufacturing sector. Take a look at the automobile industry. Fewer people work in that sector but they're able to make a lot more cars. That's happening all over America, in any industry where you can use machines and know-how to make people more productive.

That transformation has meant hardship for some manufacturing workers and their employers. But overall it's been good for America—it's played a key role in the enormous growth in our standard of living. Our cars and refrigerators and washing machines and televisions last longer, work better and require less maintenance than they used to. And the average American worker can earn the money to buy those goods in a fraction of the time it took back in 1950. That frees up the resources to create the companies and the products we couldn't have dreamed of in 1950—new medicines, computers, cell phones and all the things we enjoy now but didn't have back then. And that's how we've been able to more than double the overall number of jobs in America in the last 50 years.

Contrary to conventional wisdom, our standard of living does not depend on manufacturing employment.

Manufacturers and their unions will tell us otherwise. But the only way we can revitalize manufacturing employment is put up some kind of barrier to innovation and competition. That will only serve to make the rest of us poorer.

Cut Taxes, Help the Rich (And the rest of us too)

By Russ Roberts

Text from National Public Radio, Morning Edition
Audio

A lot of people seem to think that the Bush stimulus plan is just a way for the President to pay off some of his fat cat friends.

Could be. But for those who always assume the worst about this President, I have two words: Jimmy Carter.

Jimmy Carter also supported the centerpiece of the Bush plan, the elimination of the tax on dividend income.

Wow. Who knew that Carter had a secret agenda for helping his fat cat friends? Or maybe there's another reason for cutting taxes on dividend income. Actually, for over fifty years, prominent economists have opposed taxing dividend income and the so-called double taxation of corporate earnings.

The President's plan increases how much investors get to keep, after-tax, from investing in successful companies. That makes it easier for corporations to raise money for risky investments. That gives corporations more machinery and capital to work with, boosting productivity and wages.

That's the idea, anyway. The President's plan also makes it more attractive for corporations to pay out the profits from successful investments to shareholders in the form of dividends. Those corporations already paying dividends will have an incentive to increase them.

Increasing the use of dividends should reduce the kind of accounting shenanigans we've seen lately. It's one thing to have high profits on paper based on an arcane Caribbean partnership. But you can't pay a dividend out of a paper profit. You need to earn real cash. So dividends encourage credible accounting.

That's one reason why the Carter administration dropped the idea of eliminating the tax on dividends. Big business wanted a murkier playing field, earnings kept inside the company for CEOs to play with rather than paying them out to shareholders. CEOs didn't want the pressure of having to make dividend payments. Sure they could choose not to offer dividends. But the companies knew that if dividends were tax-free to investors, there would be pressure from investors to offer dividends as a way of proving a company's reliability.

Getting rid of the taxation of dividends will make some rich people richer. But it will also make the rest of us richer too. Not just those of us who happen to invest in dividend paying stocks. The real gain will an increase in investment that will raise our wages and our standard of living. Will it fix the sluggishness of today's economy? Probably not. For that, we're going to have to resolve the situation with Iraq.

Farm Aid

By Russ Roberts

Text from National Public Radio, Morning Edition
Audio

I suspect the irony was lost on the President. On the same week he signed the farm bill, he was in the midwest advocating tougher workfare requirements for welfare moms.

Six years ago, Congress passed the Freedom to Farm Act promising to phase out farm subsidies. It would introduce farmers to the power of markets. Farmers would learn to stand on their own two feet. And taxpayers would benefit from reduced spending.

We heard similar arguments when Congress passed welfare reform. Welfare moms would learn about the virtues of the marketplace. They would learn to stand on their own two feet. And taxpayers would benefit from reduced spending.

Welfare reform was deemed a great success. Welfare rolls have shrunk by more than half. And the percentage of children living in poverty is down.

But the President's acquiescence on the new farm bill says that we have given up on reforming welfare for farmers.

I guess the farmers didn't like all that tough love. Sure it's hard to step away from the government trough. But if welfare moms can do it, why can't farmers?

There's no good economic reason for having farmers on the dole and welfare moms off it. But the politics must be pretty persuasive.

The farm lobby speaks loudly in a number of states. When farmers feel pinched or even poked, lots of their suppliers and their employees feel it and complain.

These folks have a lot of power. They are highly organized. And their representatives in Congress are powerful, too.

But there's another group that helps smooth the political way for paying big subsidies to farmers. You and me. Many Americans romanticize farming. We don't think of farmers being on the dole. Welfare moms get called lazy or cheats. But that's never stopped us from paying farmers not to farm.

When we think of farmers, we think of sturdy folk in overalls working the land. Never mind that a lot of farmers who receive government payments are millionaires with clean fingernails.

It's depressing but not surprising that politicians from farming states are in favor of spending my money and yours to enrich their constituents.

But the President campaigned on free markets and free trade. When he endorses a massive porkfest like this, it has consequences. It will be harder for him to stump for free markets at home and abroad. He's in favor of free trade, except for steel. He's in favor of self-reliance for welfare moms, but not for farmers. By signing the farm bill, he has betrayed his principles.

Cipro and Price Controls on Pharmaceuticals

By Russ Roberts

From National Public Radio
Audio

The critics say it's immoral for Bayer to profit from fear and disease. After all, other pharmaceutical manufacturers have said they'll give away their antibiotics in the fight against anthrax. Tommy Thompson of the Department of Health and Human Services even threatened to ignore Bayer's patent and allow other companies to produce a generic form of Cipro.

Is it immoral for Bayer to profit from the misfortunes of others? I don't know, but I do know why pharmaceutical companies get started. I know why investors invest in pharmaceutical companies. I know why pharmaceutical companies take risks on unknown compounds. I know why they spend billions on research, much of which will come to nothing. All these things take place because pharmaceutical companies exist to profit from the misfortunes of others. Really, that's what they do.

And in our system you make profit by reducing misfortune or preventing it. It works extraordinarily well. Money and profit aren't the only motivations.

There's great satisfaction in knowing that your insight and labor and struggle and failures prevent people from dying, but without the money, there'll be less effort.

That's one of the reasons Poland and China and Cuba don't lead the world in pharmaceutical innovation. America and Germany do. And the profit motive has driven the pharmaceutical revolution of the last 100 years.

“But don't drug companies make enough money already?” you ask. I don't know. I don't know the definition of enough, but I do know what happens when we lower the profits from discovering new drugs. We reduce the incentives to find the yet to be discovered drugs of the next 100 years that can eradicate cancer, heart disease, AIDS and Alzheimer's.

It may seem compassionate for the government to take away Bayer's profits -- but politicians always like policies where the benefits come today and the costs come tomorrow. But still, isn't it wrong for people sick with anthrax to have to pay for something that could save their lives?

It would be nice if new drug discoveries were like manna that fell from heaven, but they aren't. New drugs come from hours of toil and millions of dollars. And when we force or intimidate drug companies to give away their products, we're not really making the drugs free. We're making investors pay for them. And we're also making our children and grandchildren pay.

They won't get the drugs that would have been discovered had we left incentives in place. I'd rather have Congress tax all of us to pay for the needed drugs or have charities cover the cost of drugs for people who can't afford them.

Only politicians can claim that there is such a thing as free drugs. The rest of us should know better.

Social Security—Where do they put our money?

By Russ Roberts

Text from National Public Radio, Morning Edition

What do you think of when you hear the phrase "raid Social Security?" I see an elderly person, maybe a nice white-haired Grandma about to take a spoonful of soup on a cold winter night. Suddenly, someone grabs the sweet old thing's wrist in mid-slurp. "Sorry, Ma'am, but we need these resources somewhere else in the economy." The bowl is whisked away and elderly Americans everywhere go to bed hungry.

Too dramatic? Then what could it mean to "raid Social Security?" Surely it means less money for the current elderly or at the very least for baby boomers approaching retirement age. Maybe twelve billion less.

The President pledged during the campaign to leave that money in the Social Security Trust Fund. The Democrats say he's breaking that promise. Even the President's budget director, Mitch Daniels, says we could use as much as 12 billion from the Social Security Trust Fund for general government expenditures this year, if the economy doesn't hold up.

When I hear the phrase, "Social Security Trust Fund" I think of an account in a bank, accruing interest over time. Maybe you envision Al Gore's old Lock Box. Alas, that is not how the Social Security Trust Fund works.

Today, because the baby boom generation is hard at work, the government collects more money from Social Security taxes than it pays in Social Security benefits. The promise not to touch this surplus is a lie.

OK, maybe not a lie, but an enormous deception. They claim it's being set aside for Social Security in the Social Security Trust Fund. But the Social Security Trust Fund is not really a trust fund at all. There's no money in it.

As soon as the money enters the Trust Fund it goes out the door at the Treasury Department. The Treasury Department spends it, the same way it spends money collected from the income tax. It then leaves behind an IOU which says that, in the future, the agency will use taxes or bonds to pay back Social Security. The IOU even includes some interest.

That's a lovely promise. But there's no money or real assets backing up that promise. The promise will be enforced in the future with future taxes, just as it would be if the Social Security Trust Fund didn't exist.

Whether the government spends the social security surplus on defense spending, education, or paying down the federal debt, there is no extra money being set aside today for the Social Security recipients of tomorrow.

Both the President and the Democrats should stop engaging in dishonesty. Stop treating us like children. Tell the truth about Social Security. Otherwise we'll have to call it the Social Security DISTrust Fund.

Is Holiday Spending Good for America?

By Russ Roberts

When I travel, I often find myself on an airplane chatting with a stranger and mentioning that I'm an economist. "That must be awfully handy around tax time," my seatmate will often reply. Or "I bet you're good at balancing your checkbook."

Truth is, I hate balancing my checkbook and I pay someone to do my taxes.

Economics isn't really about money. It's about the choices we make with our money and our time and our skills.

I often think about this during the holiday season when someone says that all this consumer shopping is good for the economy. It is good for business. At least the businesses that are racking up the sales. And business is part of the economy.

And that's the part most often measured by the government and the business section of the newspaper. What doesn't get quantified is the value of talking to our children or taking a walk in the snow. If we decide to enjoy more of those unmeasurable pleasures and less retail shopping, the measured economy may suffer. But we'll be the richer for it, though not in dollars-if those unmeasured, but very real pleasures, are what we prefer.

In that spirit, I'm encouraging all my friends to downsize the commercial part of the holidays this year. Let's spend less time shopping and wrapping presents and fighting the parking lot at the mall. Let's spend more time talking to our kids or marveling at the red cardinal against the white snow at the bird feeder or helping our elderly neighbors shovel snow.

My wife and I have called our brothers and sisters and told them no Hanukkah presents this year, please. We're not cruel-the grandparents are grandfathered in under this new policy. They can still buy the kids something. But we won't. We buy the kids plenty of stuff all year round.

So we'll have a Hanukkah with fewer presents and more latkes. Less time tearing open the wrapping paper and more time talking about what Hanukkah is really about-religious freedom and the possibility of miracles.

I know. You like this idea but you've already done a lot of your holiday shopping. That's OK. Put the presents in the garage and surprise your kid on a Tuesday night in March with a new bicycle. Or give it away to a kid who's never had a bicycle.

Our kids seem fine with the new Hanukkah. They seem to like the idea. And despite what you might hear on the news about consumer confidence and retail sales, it's even good for the economy, if we could measure the unmeasurable.

Microsoft Woods

By Russ Roberts

Text from Morning Edition

The record-shattering performance of Tiger Woods at the U.S. Open has galvanized the Justice Department to examine his dominance of the game of golf.

According to lawyers involved in the case, Tiger Woods incredible success on the tour and his enormous earnings have reduced the amount of innovation and competition in the game. The anti-trust division claims his success has driven potential competitors into tennis and other sports.

Would a ban on soft money hurt special interest politics?

By Russ Roberts

Text from National Public Radio, Morning Edition

The rush toward campaign finance reform continues to pick up momentum. People want to purge money from politics. That's a little like asking to take the grinder out of the sausage factory. The whole thing is about money.

The Federal government will spend around 1.7 trillion dollars this year. How the money gets spent is in the hands of roughly 536 people-our elected Senators, Representatives and President.

The reformers want the people, not special interests, to influence how that money gets spent. That's the appeal of banning "soft money," the money spent by the political parties and donated by the special interests.

One snag with this plan is that it may conflict with the First Amendment. But even ignoring the Constitution, will a ban on soft money increase the power of the people?

It will enhance the power of incumbents. Incumbents don't need money to generate name recognition and publicity. They already have it. If soft money isn't available to be spent on behalf of new candidates, incumbents' seats become even safer. Without the threat of a well-financed challenger, incumbents won't have to be as responsive to the electorate.

But the real problem is those pesky special interests. If soft money is banned, do you think they'll stop trying to influence policy? With almost 2 trillion dollars to be spent and countless regulations to be written, do you think those lobbyists and industry groups and unions are going to shrug, fold their tents and disappear?

If the special interests can't donate soft money, they'll still find ways to influence government. Under Gore's proposal, lobbying groups will still be able to make so-called independent expenditures on issues they care about.

They'll also find ways to influence policy that are harder to detect. They'll befriend legislative aides and staffers with gifts and favors. They'll try to position friends and allies as delegates and party officials. When $1.7 trillion dollars is up for grabs, special interests will work awfully hard to have a say in how it's spent.

In a world without soft money, the influence of the special interests won't be eliminated, just further removed from scrutiny and accountability. Instead of trying to sweep special interests under the rug, let's keep their impact out in the open. Let money flow freely and openly. Eliminate the limits on hard money, the direct contributions to candidates, and post all contributions on the Internet.

Letting money flow freely creates more challengers to incumbents. That means more choice for the voters and more competition within the political parties. Letting it flow openly gives the voters a chance to judge whether a politician is in the pocket of special interests. More choice and more information enhances the power of the ballot box. That's the best way to give power to the people.