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Friday, March 12, 2004

De Long on Freedom of Capital Movements 

Brad de Long, of Berkeley, Discusses his change of view from favorable to less positive about freedom of capital movements. The article is at:

http://www.j-bradford-delong.net/movable_type/2004_archives/000378.html

Here are excerpts from his argument, followed by my comments.

"There appeared to be four important reasons to be in favor of removing capital controls: (1) The direct boost to production and productivity to follow from the removal of this barrier to market exchange. (2) The reduction in corruption and improvement in the quality of government that we hoped would follow. (3) The fact that our social welfare function places a higher weight on the utility of the poor than does the social welfare function implicitly maximized by the market, and so we place a large positive value on the improvement in the income distribution that follows from enlarging the supply of the scarce factor--capital--in capital-poor countries. And (4) the external benefits that flow from learning-by-doing using modern machinery and from capital imports as a carrier of technological knowledge."

Quite frankly, the last 2 arguments are not the relevant ones, as they are purely utilitarian and most importantly, because they assume that:
3) a social welfare function exists and should guide policy
4) the direction of capital flows can be evaluated from the outside; that is that an inflow into developing countries is "good" and from these countries into mature economies is "bad".

"It is very nice that Mexican workers and entrepreneurs are gaining experience in export manufactures, and exporting enough to the U.S. to run a trade surplus. But the flip side of the trade surplus is the capital outflow. Should capital-poor Mexico really be financing a further jump in the capital intensity of the U.S. economy? In the Treasury in 1993, I naively projected that after NAFTA there would be a net capital flow of some $10 to $20 billion a year for decades to come as investors around the world built factories in low-wage Mexico that now had guaranteed tariff-free access to the largest consumer market in the world. Instead, the capital flow has gone the other way."

This actually proves the merit of free trade. Rather than a "sucking sound" of businesses going to Mexico, the interdependence of the US and Mexico has increased.. That is clearly positive.

In addition, there is nothing wrong with Mexico investing in the US!

"It is not possible for a card-carrying neoliberal like me to wish for any but the most minor of controls to curb the most speculative of capital flows. Capital markets can get the allocation of investment badly wrong, but governments are likely to get it even worse, and the incentives to corrupt bureaucrats do need to be kept as low as possible."

This is in fact the core argument in favor of free capital movements. De Long states it as valid here, but omitted it at the beginning!


"But the hope for a repetition of the late nineteenth-century experience, in which core investors' money gave peripheral economies the priceless gift of cutting decades off the time needed for successful economic development, has so far proved vain."

Empirically, this is not true considering the vast foreign investment into China and the related economic development! As to Mexico, there are other reasons why Mexico's dirigiste economy does not develop faster.


Monday, March 08, 2004

Time to fight back the police state? 

I was probably not alone in being alarmed and surprised reading about the sweeping law (section 1001 of the federal code) which criminalizes lying to governnent agents. That was the law used against Martha Stewart and many others, as can be seen from the attached article from the New York Times of March 8, 2004.

I do not think that it is enough to "be aware" that "with the government you are always on the record" and one can always take the fifth and refuse to talk, as some lawyers say.

Such a law essentially precludes an individual from arguing his own case when questioned. Given the immense power and arsenal of intimidation at the disposal of the federal government, including blackmailing a person offering plea bargaining, immunity for cooperation and sheer intimidation through electronic surveillance (see in particular the book "the soft cage" by Parenti), it is very hard and expensive for an individual to simply take the fifth and refuse to talk. Just the cost of hiring defense attorneys against the government (who has much deeper pockets) can ruin an individual (not Martha Stewart, but most people are not that affluent).

It is time for citizens interested in liberty to fight back. We hope that Mr. Silverglate will be able to pursue a challenge and we need to support these efforts.


March 7, 2004
STEWART'S FOLLY

There's a Reason Your Mother Told You Not to Lie
By ALEX BERENSON


N the end, the case turned out to be a slam dunk.

After months of debate about whether prosecutors made Martha Stewart a target because of her fame and after an apparently serious setback to the government's case only a few days earlier, jurors on Friday convicted Ms. Stewart of four counts of conspiracy and obstruction of justice. They had begun deliberating only two days earlier.

The quick conviction may not settle the public debate over whether Ms. Stewart was treated fairly. But defense lawyers for white-collar criminal cases say the focus on Ms. Stewart's celebrity misses the point. The real lesson of the case, they say, is that it once again proves the potency of a little-known federal law that has become a crucial weapon for prosecutors.

The law, which lawyers usually call 1001, for the section of the federal code that contains it, prohibits lying to any federal agent, even by a person who is not under oath and even by a person who has committed no other crime. Ms. Stewart's case illustrates the breadth of the law, legal experts say.

Ms. Stewart was convicted of obstruction of justice and making false statements to F.B.I. agents and investigators from the Securities and Exchange Commission who were investigating her for insider trading. (Her former broker, Peter E. Bacanovic, was convicted of four out of five counts of conspiracy and obstruction of justice.)

But Ms. Stewart was never charged with criminal insider trading, suggesting that if she had simply told investigators the truth she would not have faced criminal charges. The only counts the jury considered related to her behavior during the investigation.

"This was a classic case of the cover-up being worse than the crime," said Seth Taube, a white-collar defense lawyer at McCarter & English, a law firm in Newark. "It's an easy case to prove a lie."

That disturbs civil libertarians, who say that 1001 charges typically criminalize behavior that most people would not recognize as illegal.

"This 1001 law is really a remarkable trap," said Harvey Silverglate, a criminal defense lawyer in Boston.

People lie all the time to colleagues, friends and family, Mr. Silverglate said, and unless they are legal experts they probably do not know that lying to any federal investigator is illegal even if they are not under oath.

And F.B.I. agents and other investigators usually do not tape-record their conversations, so people can be convicted of making false statements based only on an investigator's notes, which may not exactly reflect what was said.

"Any casual conversation between a citizen and a person of the executive branch is fraught with the possibility that you can be convicted of lying," Mr. Silverglate said. If the government wants to make sure it is being told the truth, he added, it should put people under oath. "That's why we have perjury laws - because we tell people this time you're under a special formal obligation to tell the truth," he said. "And by the way, you'll notice it doesn't run in both directions, so a federal agent can lie to you, can trick you, in order to get information."

But prosecutors, and even some defense lawyers, say that 1001 charges are an essential tool that allow the government to punish witnesses or defendants who mislead investigators. Even if the prosecutors eventually decide not to bring criminal charges for the actions that initially prompted their investigation, lying should be taken seriously, Mr. Taube said.

"The fact that lying to the government can be a crime when the government doesn't charge the underlying offense doesn't bother me," he said. "You have an absolute right in this republic not to talk to the government, but it makes sense if you open your mouth that you should choose your words wisely."

Mr. Taube said Ms. Stewart's conviction offered an important lesson to anyone being interviewed by the F.B.I. or other federal agencies. "Fundamentally, if they make an appointment with you and sit down, you've got to know you're on the record," he said. "With the government, you're always on the record."

Thursday, March 04, 2004

German justice better than US? 

The Supreme Court in Germany states that the state cannot not abandon principles of justice, however grave the crime.

How long it will take for the Justices in the US to wake up to this simple truth?
Why the judges have become subservient to calculations of public utility instead of applying the principles of the rule of law?

KARLSRUHE, Germany (Reuters) - The only man convicted over the Sept. 11 attacks won the right to a retrial Thursday in a German appeal ruling that prosecutors said would hamper their pursuit of extremists.

Mounir El Motassadeq, a Moroccan, was jailed for 15 years in February 2003 for conspiring to murder nearly 3,000 people in the 2001 attacks on America and for membership of a terrorist organization, a German al Qaeda cell which included three of the suicide hijackers.

Supreme Court judge Klaus Tolksdorf said the state could not abandon principles of justice, however grave the crime.

"The fight against terrorism cannot be a wild, uncontrolled war," he said.

The successful appeal was likely to be seen by the United States and German authorities as a major setback. German Interior Minister Otto Schily had described the original conviction as an important success in the war on terror.

"It is quite clear that higher hurdles have been set for the prosecution of terrorism," state prosecutor Rolf Hannich said.

The U.S. embassy declined to comment.


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