Sir Antony Fisher, Gentleman Turtle Farmer

Many old memories have bubbled to the surface since the Atlas Economic Research Institute invited me to speak at their conference in Canada next week -- on a panel about supply side environmentalism -- primarily because Atlas founder, Sir Antony Fisher, was a good friend and influential mentor to me in my youth. Many of the core ideas that I write about on this blog are a direct outgrowth of Sir Antony's free market environmentalist influence. So addressing his organization, his intellectual descendants, feels a bit like coming full circle.

Sir Antony was a frequent overnight guest in my family's Manhattan apartment in the 1970's and early 1980's, a wanderer on a great mission -- a mission he shared with my father, Randy Richardson, then President of the Smith Richardson Foundation, and others -- a mission to spread the idea of liberty. There can be no doubt that Sir Antony is one of liberty's great unsung heroes, directly instigating the creation over 150 libertarian or free market think tanks world wide in his lifetime -- including many of the most influential, such as the Institute For Economic Affairs in London, The Manhattan Institute, The Fraser Institute in Canada, and the Pacific Research Institute in San Francisco. That network of think tanks, supported and fostered by Atlas, has now swelled to well over 300.

My dad half-jokingly call him "the Johnny Appleseed of ideas." He was a fascinating Englishman, and we were only too happy to help him in his mission, and provide him with shelter and meals whenever he blew into town.

Sir Antony and my dad clicked on so many levels. Both were WWII veterans, my dad a grunt in Patton's Third Army, Fisher more glamorously, a decorated RAF pilot who flew alongside and lost his brother in the Battle of Britain. The war taught them a deep, lifelong hatred of totalitarianism in all its flavors. So both became champions of liberal democracy and free markets. Both were entrepreneurs and aquaculture pioneers, with a passion for doomed sea farming ventures: Fisher ran a green sea turtle farm in the Cayman Islands, while my dad in those days launched innovative ventures with mussels, clams and shrimp. (Dad sometimes referred fondly to Sir Antony as "that gentleman turtle farmer.")

They advised each other on these ventures, and stoked a kind of wild eyed mania in each other for the dream of saving the planet by farming the sea. Whenever Sir Antony would show up, we would trade long yarns, war stories and fish tales until late into the night. I of course got quite caught up in all this, eventually taking time off after my freshman year in 1980 to do underwater construction on the first US mussel farm, BlueGold Sea Farms, located in Narragansett Bay, RI. The next time I saw Sir Antony, he was keen to hear all about my experiences working 50 feet down in pitch black freezing water, lowering, guiding and then unshackling two ton mooring blocks, sunk six feet in mud, while scores of giant spider crabs circled and closed in. Ah, the romance of the sea!

(I remember thinking enviously that Sir Antony at least had the good sense to do his sea farming on a tropical island with warm, clear water and resort facilities.)

But for me, the most seductive aspect of the various aquaculture ventures we discussed with Sir Antony was not their potential profitability, but their innovative idealism. To us, sea farming was a way to feed a world in danger of overpopulation and starvation, a way to provide massive amounts of cheap high quality protein well beyond the overstretched capabilities of dirt farmers. Sir Antony was not just trying to turn a buck with his green sea turtle farm, he was saving an endangered species. A portion of all turtle hatchlings at the farm were raised until able to fend for themselves, then released into the wild. Sir Antony was actually increasing wild turtle populations, actually saving the green sea turtle. Ironically, the farm was done in by radical environmentalist who banned the sale of all green sea turtle products, regardless of origin, and refused to listen to reason. Sir Antony's turtle farm would have been successful, but for this.

Of direct relevance to the Atlas conference in Canada, to our panel on supply side environmentalism, is then the legacy of Sir Antony's free market environmentalism, and his personal impact on the ideas I will be presenting. A key point is that the founder of the Atlas network, Sir Antony Fisher, was NOT dismissive of environmental concerns, but passionate about them. He was only critical of ill-conceived big government solutions to these problems. Rather, he cared deeply about beautiful endangered species such as the green sea turtle, and personally committed his time and fortune to saving them, through free market means. (Note that Sir Antony was well ahead of the curve with this strategy. Nowadays is is commonplace for groups like the Rainforest Alliance to promote the idea of saving an endangered resource like the rainforest by turning it into a sustainable commercial opportunity.)

As Atlas network think tanks ponder the way forward in the wake of the financial crisis and the electoral gains of liberals, we could do no better than to consider Sir Antony's passion for green sea turtles. Don't waste time dismissing liberal environmental concerns. Instead, get passionate about solving real environmental problems. Promote free market solutions that work better than tax, spend and regulate, that leave the economy in better shape than if we did nothing (regardless of whether the problem is real or not). In other words, steal the issue by providing better, cheaper, prosperity-inducing solutions.

Like supply side green energy tax cuts.

More on that later.

Libertarian Columnists, Right and Wrong

Some libertarians get it, some don't.

Nationally syndicated pundit Deroy Murdock has taken up the green energy tax cut cause with spirit and passion in his latest column for Scripps Howard News Service and National Review Online. Mr. Murdock quotes me and this blog extensively. He points out that the cap and trade bill in Congress will likely act as an energy tax, depressing the economy further, while a green energy tax cut would both stimulate the economy and more effectively shift America away from dirty fuels and inefficient vehicles.

On the other hand, Cato Institute scholar Alan Reynolds, for whom I have enormous respect as one off the founding fathers of supply-side economics, has most disappointingly joined the chorus of those calling for a gas tax in a op-ed in the Wall Street Journal. Reynolds is one of the key guys who made the Reagan tax cuts happen, so it is frustrating to see him now championing tax hikes. Worse, he is part of an increasingly weird phenomenon of folks who call themselves libertarian/supply-side/or free market economists who now voice some support for energy taxes. This group includes Harvard economists Jeffrey Miron and Greg Mankiw, as well as Cato Senior Fellow Jerry Taylor, whom I debated at some length in January.

Of course, neither carbon nor gas tax hikes have any real basis in libertarian or supply-side theory. What precisely is behind this misguided pro-tax advocacy will be a subject for a future post.

To his credit, Reynolds rationale for a gas tax is better than most. Reynolds is rightly concerned that new CAFE fuel efficiency standards (which already shut down the previously successful Caterpillar Diesel Truck Engine division just last year) will kill GM. Further, he rightly points out that because we apply a 24¢/gallon tax to diesel, our most efficient fuel, but not to gasoline and ethanol, we create an economic distortion that decreases American fuel efficiency. Reynolds argues that a 24¢/gallon tax on both gas and ethanol would level the playing field, increasing American fuel efficiency and the spurring the development of more fuel efficient cars without the potentially catastrophic damage CAFE will do to GM and Chrysler.

The problem with Reynolds' proposal is that, in the current climate, if Republicans who listen to people like Reynolds become friendly to a gas tax, we will get BOTH the new, harsh CAFE standards AND a new gas tax. The Democrats have blinders on to any economic damage that might result from their most beloved green policies: CAFE, energy taxes and subsidies. They are not going to listen to Mr. Reynolds criticism and will insist on the policies they want, and use any support they get from the pro-energy-tax libertarians to ram that policy through too.

Further, just as the Democrats turn a blind eye to the damage from CAFE, Reynolds also turns a blind eye to the damage that will be caused by the taxes he proposes. All energy taxes create a dead-weight loss that act as a drag on the entire economy, raising prices, depressing nearly all economic activity. Reynolds ignores that inconvenient truth, as do his pro-tax libertarian colleagues.

The saddest part of it is that Reynolds should know better. If supply-side tax cut prescriptions work for the entire economy, they will also work for Americas' green industries, while stimulating the entire economy in the process. Mr. Reynolds should have provided a real alternative not only to CAFE, but to the entire tax/subsidize/regulate Democrat energy agenda. CAFE standards should not be used to force companies to make uneconomic decisions, but as the basis of a schedule of tax relief encouraging companies to invest in the most fuel efficient vehicles. Not only should such vehicles be tax free to the extent they meet or exceed CAFE standards, but companies that meet them (and their stocks and bonds) should be income and capital gains tax free in proportion to the percentage of highly fuel efficient vehicles that such companies sell. Far from depressing the economy as would any energy tax, such CAFE-based green tax cuts would stimulate both the economy and massive new investment in a green retooling of the auto industries -- without a bailout -- as I discuss here.

Spurring new green investment is essentially a supply-side problem, amenable to supply-side solutions. Reynolds and his pro-energy-tax economist colleagues should learn that energy tax hikes do not spur green investment. These folks need to take a hard look at the experience of Scandinavian countries that have employed aggressive carbon taxes since the 1990s with (surprise!) no net reduction of carbon emissions. This failure is explained by the fact that energy taxes starve industries of the very revenue and new capital that are most needed in order to invest in green technologies. If new green investment is what is needed, supply-side green tax cuts are the best way to go.

Obama Talks Sense! Reason Rallies with Markets!

I swear, it is like Obama is reading my blog.

A week ago, I opined that Obama's lack of bipartisanship destroyed the market's confidence, and that he needs to cut corporate taxes in line with European/OECD rates and rethink his energy plan in order for the markets to rally and the economy recover. Today, addressing CEOs at the Business Roundtable, Obama put corporate tax cuts and energy plan redesign on the table. And the markets rallied.

Even better, Obama apparently linked cutting corporate taxes to closing loopholes and ending subsidies. Amen. One can only hope this does not turn out to be another example of his famous fake right, go left hoops tactic.

But really, the last couple of days has seen an epidemic outbreak of reason, tracking the current stock market rally. On Tuesday, Barney Frank announced the re-instatement of the uptick rule, which slows down a short-selling avalanche and so will give a lift to markets. On Wednesday, both Fed Chairman Bernanke and Warren Buffet urged "improvements" in mark to market accounting rules, which many argue triggered the current financial crisis and collapse of major investment banks by forcing valuable assets to be listed at zero market value when markets are not functioning.

Then the Europeans chimed in: "In Berlin Thursday, with German Chancellor Angela Merkel at his side, French President Nicolas Sarkozy explicitly rejected Mr. Obama's push for more global fiscal stimulus, declaring, 'the problem is not about spending more, but putting in place a system of regulation so that the economic and financial catastrophe that the world is seeing does not reproduce itself.'"

Since the mere mention of European technocrats can induce fits of boot licking and forelock tugging among American liberals, one can only hope Obama will listen closely to this advice. Hopefully, Sarkozy will also find time at the G-20 summit to explain to Obama the policy of green tax cuts that he and British Prime Minister Gordon Brown helped steer through the European Parliament this winter – the addition of which could seriously improve Obama's energy plan.

One can only hope that good sense is contagious, and these ideas all take root, as they should have months ago, sparing us all much unnecessary pain and loss. My expectation is that the degree to which these various great ideas are adopted or rejected, the markets and the economy will rise or fall.

How to Dodge "The Obama Depression"

Google "Obama Depression" and you will find that an increasing number of bloggers and pundits are throwing the term around. Since a depression occurs only when real GDP declines more than 10%, more circumspect publications like the Wall Street Journal are now calling it "The Obama Economy" and warning that the possibility of depression has been increased by the President and his party's policies and statements.†

While there is plenty of blame to go around, there are perhaps reasons to lay some responsibility for the post-inauguration stock market free fall at Obama's doorstep, and if GDP falls 10% or more, it will be called the Obama Depression, and the name will likely stick. Why?

1) Lack of bipartisanship on the stimulus bill, budget and financial recovery plans destroyed confidence. This goes beyond the obvious fact that these were all the highly partisan creations of Team Obama, so he will get the credit, or blame, for the results. More importantly, by insisting on a partisan economic plan, Obama guarantied that only about half the country would like the plan, and the other half would have no confidence in it. Obama failed to restore consumer or investor confidence, and in fact destroyed it, by rushing through plans half the country would certainly hate. Plunging stock markets and lowest-ever consumer confidence index are a direct reflection of that dynamic.

The perception among many moderates (like myself) that Obama has broken his pledge to govern in a bipartisan manner has also increased uncertainty about how extreme his policies might become (i.e., nationalization). This uncertainty has obviously helped fuel the market decline as well.

2) Obama promotes economic policies that have failed in the past, while he rejects policies that have succeeded. Obama's stimulus is entirely demand-side spending in hopes of sparking more demand and spending, and no supply-side tax cuts to stimulate work and investment. In fact, his plan even includes supply-side depressants in the form of tax hikes and a more steeply graduated tax code. History gives fairly clear guidance that this is the wrong approach. Supply-side tax cuts were put into effect under Kennedy/Johnson, Reagan and Bush, and each time resulted in economic expansion and the end of a recession or slump. However, the last time large scale demand-side stimulus was attempted in conjunction with tax hikes it resulted stagnation and inflation under Carter. When FDR raised taxes in 1937, he re-tanked the economy and undid whatever good he had done up until that point. Anyone who is aware of this history – as are many sophisticated investors – would be understandably concerned about Obama's dangerous combination of demand-side stimulus and tax hikes.††

Thus, many investors lack confidence in Obama's plans because there is fairly strong evidence that they won't fix the economy and might even set back any recovery.

While Obama often contrasts his plan to "those who think we should do nothing," in reality most Republicans and libertarians actually advocate supply-side corporate tax cuts. The US rates are 15 percentage points higher than the OECD average but produce about a third less revenue. That is good evidence that not only are the rates out of line internationally, placing the US at a competitive disadvantage, but that the rates are too high on the curve, so reducing them could likely result in more tax revenue, and a greater stimulus effect than spending. There really is no good excuse not to do this, given the OECD data. Ironically, Obama can now be criticized for not doing enough, for rejecting the most promising solutions because of ideological prejudice.

So how can the President best prevent "The Obama Depression" and revive the markets and the economy? First, by actually living up to his pledge to govern in a bipartisan mannner, particularly with respect to the stimulus and budget. We need a recovery plan that can give confidence to ALL Americans, not just half of them. There needs to be elements in the plan that everyone can cheer. Specifically, by revising the stimulus plan to cut corporate tax cuts to average OECD levels (24%) and including other supply-side incentives to work and invest, he can give hope and confidence to all Americans, not just his followers. Markets would rally. Such tax cuts would increase the earnings derived value of corporate stock by over 23%, so help markets to rise and recover, which would in turn boost spending and renewed investment. All that would boost the economy, and so reduce the rate of foreclosures, taking pressure off the banking crisis.

Getting buyers back in the markets is key, both to help stocks recover, and in order to clean up the CDO mess. Here are a few suggestions to encourage such investments: For the next twelve months, let's make any stock purchased be capital gains and dividend tax free for as long as it is held. That would be a very strong encouragement for buyers to come back into the markets... and we are not giving up any current revenue to do so. In fact, we could raise a great deal of current revenue if instead, for twelve months, buyers paid a .25% sales tax on stock at purchase rather than a 15% or 20% capital gains tax when it is sold: that is quite a good deal for investors, and would raise quite a bit here and now, while pulling buyers back to the market.

Eliminating gains taxes on existing distressed CDOs would increase their value and marketability to private investors, and reduce the amount taxpayers would have to pay for any bailout. Along these lines, I suggest interest income taxes be eliminated in cases where banks voluntarily reduce the interest or principal due on a loan in foreclosure by at least the value of the taxes due. This would encourage voluntary loan adjustments, reduce foreclosures, and also help to increase the marketability of CDOs.

Other parts of Obama's plan could also be accomplished with more stimulus effect, less economic drag and reduced cost. For instance, aggressive supply-and-demand-side tax cuts for clean, efficient renewable energy technologies could replace most of the Obama energy plan with better results for less. Expensive subsidies often end up rewarding failure, while carbon taxes depress the economy and simply don't work.†† CAFE regulations recently put the successful Caterpillar diesel truck engine division out of business, and could do the same to other companies. By contrast, steep tax cuts or tax freedom for green energy businesses that meet the desired standards would stimulate the entire economy by lowering the cost of clean energy while increasing and diversifying the supply. This would create a stronger, more entrepreneurial green energy sector, while avoiding the pitfalls of political patronage, heavy-handed over-regulation, subsidized failure and corporate dependency. And it could help save and transform the auto industry without a bailout.

Obama can turn around the economy and take out an insurance policy against "The Obama Depression" by embracing smart, supply-side, bipartisan solutions that markets can cheer. Indeed, given the unprecedented severity of the crisis, and the extent to which people are suffering as never before, it is unconscionable for Obama to leave undone anything that could help, particularly the proven solutions that have worked in the past.

†I spoke to soon: even the WSJ has published the "Obama depression" moniker here.
††Obama has a similar problem with his energy program. While Obama promotes a carbon cap-and-trade plan, many green advocates believe cap-and-trade is ineffective and unenforceable, and prefer a carbon tax. Unfortunately, the empirical evidence from Scandinavian countries is that carbon taxes do not work. Norway has had carbon taxes since the 1990's and their per capita emissions are up over 40%. Denmark's experience shows that what really works is investment in renewable energy and efficiency. So the question then becomes how to best support such investment: direct subsidy or supply-and-demand-side tax cuts for green energy? Unless you want to subsidize failure an create a culture of patronage and corporate dependency, the only real answer is tax cuts. This approach would be cheaper, more effective, and better at stimulating both green energy and the economy.