craschworks

The Onion – How the Web's Most Beloved Humor Site Stays Profitable

http://www.contentbiz.com/sample.cfm?contentID=2187

CHALLENGE: Although millions of its Web fans are unaware of it,
The Onion started as a printed tabloid.

“A bunch of college kids in Madison Wisconsin were putting out
copies of what they thought was good satirical humor,” explains
current Publisher (Ms.) Chris Cranmer. It was good enough that
entrepreneur Scott Dikkers bought it from them to run as a formal
publishing company. “I'm not sure what the amount of the sale
was, but I'm sure it wasn't much.”

Dikkers' joking goal: To have The Onion delivered to doorsteps
across America just like The New York Times.

Then the Internet showed up and Dickers realized his joke could
become a reality.

But should they abandon local print editions? Should they say
yes to the VCs and partner-wanna-bes pounding at the door? Would
online ads be enough to keep them alive, even if the online ad
economy tanked?

CAMPAIGN: The Onion's staff was a very tight team. All had been
on board for years, some since the very start. It felt like a
family. The paper was also already profitable. It was working
and they liked working on it together.

No one wanted to make a radical change, grab VC funds, hire on
loads more people, just to become potentially richer faster.

Cranmer says, “We had tons of offers. We still have tons of
offers – they just never stop. But we've always been confident
in our own abilities. Even if it's going to take us longer to
make it on our own in five years, instead of a quick fix by going
to a portal like Yahoo, we'd rather do it our way.”

The Onion's site was launched in 1996 initially mainly to please
the writers. (Note: during our interview with her, Cranmer
mentioned her writers' desires more frequently than any publisher
we've ever spoken to.) “Our initial goal with the Web was to get
out to as many people so they could read us. The writers were
very happy just reaching more people,” says Cranmer.

There wasn't a budget for online marketing, and the printed paper
itself was only being distributed in Madison, Milwaukee and
Chicago. But somehow the site found itself being inundated with
visitors from all over the world.

“We had just amazing g*rowth every year. It just got crazier and
crazier.” (Typo ours.)

At first, selling ads profitably was pretty easy. As the economy
tanked, the ad sales team (all of whom have been with the company
now for seven or more years) pulled out all the stops to keep the
site profitable. Cranmer outlined three of their tactics for us:

Tactic #1: Focus Ad Reps' Territories to Maximize Sales

Instead of selling online versus print ads, Cranmer divides
territories by local (which is mainly print) versus national
(which is mainly online.) All national reps worked their way up
from the local level.

Recently she's reworked national territories so that reps are now
given clients based on which agency the client's with. “We used
to assign accounts client by client, but we found this is better
because that a rep would tend to get to know an agency well.
When the agency had a new client, they would call the person
they'd worked with before. It just made sense to go down this
line. It wasn't hard for us to do at all.”

Tactic #2: Deal with Clients, not Networks or Brokers

“Back in the days when the networks were big, we would be working
with a client who was buying direct from us and then two days
later a network insertion order would come along for a deal for a
client we'd already had for years.

“We realized we didn't need to deal with networks. Thankfully we
have a lot of great relations with big agencies and clients, so
we're not worried about having too much inventory hanging out
there.”

Plus dealing with third party brokers had another price –
sometimes they'd represent a CPA buy as CPM. (i.e., the broker
would pay The Onion a flat CPM cost per thousand, but in turn
would bill the client at CPA cost per action.)

“I'll never forget the day when some network had [famed CPA
advertiser] Orbitz ads included as a part of the buy. I'll never
forget those Orbitz pop-ups. I called my reps 'Who did that???'
thinking somebody had sold CPA without me knowing about it.”

Pseudo CPM buys come with a price tag — everyone in the know in
the ad community thinks you've changed your practices. Naturally
this was frustrating for Cranmer who'd spent years turning down
CPA offers flat.

“We lost a lot of buys because I wouldn't take them. It was a
difficult decision. I believe in Internet ads being a branding
tool.”

Tactic #3: Offer Unusual Sizes

“Every proposal that comes in says, 'What can you do for us
that's different from other guys?' Every one.”

After vertical skyscrapers became so popular, The Onion became
one of the first mainstream sites to offer extra-large horizontal
banners. (Check out the top of their home page, link below.)

They also recently started giving every advertiser running a
contest or sweeps extra exposure on The Onion's new 'Contests'
section which is nothing more than a series of box ads. “We kept
getting more and more contests, we said let's just post it all in
one area. It's part of their campaign. They're not paying
extra,” explains Cranmer.

Plus, about a year ago Cranmer switched the site's 40-character
text-link ads from a f*ree bonus to a paid ad unit. “Text links
have always done very, very well for us in terms of clicks,” she
says. “In early years they'd buy the banner and nothing else,
and we'd put up the link as a f*reebie. They performed so well
we eventually made them an actual ad unit for sale.”

She notes there doesn't seem to be a big limit on the number of
text links you can post before people will stop clicking on them.
For example, we counted 20 in a row on today's home page.

“I know from feedback from our readers that they're very content
oriented. They don't like a lot of in-your-face advertising.
They email us, 'Hey if you keep it as low key as possible, I'll
click on it for you. I'll help you out by checking out these
sponsors' products.”

Aside from ads, The Onion also supports itself with three main
ancillary revenue streams:

Ancillary #1: The Store

It started with just a few t-shirts featuring simple slogans such
as “You are dumb.” and “I enjoy drinking beer.” Now the online
store carries a wide variety of stuff, from magnetic headline
kits to bumper stickers.

With lots of input from the writers, Cranmer adds three to four
new products every single month, and removes anything that's not
selling very well. (In fact she notes her big battle is in
stopping writers from vetoing older products with still-strong
sales that they are bored with.) The store is completely built
and powered in-house.

Ancillary #2: Repurposing Archive Content

You can purchase a CD of writers reading best-of articles into a
microphone … and yes plenty of people have.

Although The Onion's first print book featured entirely new
content, the Company has also published three print books based
on archived material. Titles include, 'The Onion's Finest News
Reporting, Volume One' and 'The Onion Ad Nauseam.' These are
distributed nationally at regular bookstores.

Ancillary #3: Personals Ads

The Onion's personal ads are powered by Spring Street Networks,
who also feed ads from Nerve and Salon into a common pool. Each
site gets a cut of the take without having to actually do too
much work.

Aside from the Web site, The Onion is currently published in
three other formats — a regular radio show that's syndicated
through America's largest radio network Westwood One, a
mobile/PDA edition through AvantGo, and print editions now in
four cities including the latest launch in New York.

Why continue producing a local print tabloid? Cranmer gave us
four reasons:

1. Everybody on the staff really likes it. “There's something
really great about holding a paper in your hands.”

2. Local print readers love it too, so much so that The Onion
is deluged with phone calls every week a few hours after
the f*ree print edition is distributed … because often
copies are gone so fast that people miss them.

3. Making the writers happy. When The Onion's Managing Editor
wanted to move back home to New York, Cranmer launched a
Manhattan print edition partly to help his dream come true.

4. Steady ad revenue you can count on. Cranmer says, “With
the Internet being as shaky as it is, sometimes we have a
fantastic month and then nothing happens. You don't know.
Offline is hugely constant. I can go to bed knowing
exactly what's going to happen for each quarter.”

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… make it a profitable venture for all of us,” says Cranmer.
Both online and offline editions of The Onion are profitable
although these days, “online is predominant.”

Radio syndication revenues are negligible, but Cranmer says
she'll definitely keep up the program because “the marketing
aspect of it is fantastic.” It's a big traffic driver.

The Onion actually stopped their Mobile/PDA distribution for a
while when AvantGo announced last year that the formerly free
service would go paid. “It was insane, like $60,000 a year. I
thought are you kidding?” says Cranmer.

At first she didn't think anyone would notice the absence of the
service, once advertised with the slogan, 'The Onion has gotten
smaller and harder to read.' “We took it down for about a week
and we had hundreds and hundreds of emails.” So the site's tech
team cobbled together their own wireless feed, and later AvantGo
caved in. “And that was that.”

Nope, hardly anybody's buying ads on the feed … so far anyway.
But Cranmer figures why not keep readers happy in the meantime.

The site itself gets 1.3 million visitors accounting for 5.3
million pageviews per week (yes, that's week, not month.) In
contrast, The Onion's print editions reach 300,000 readers who
pick up f*ree local copies, and 20,000 who pay a token
subscription fee to have it mailed to them.

Other ancillary sales are small slice of the pie compared to ad
dollars. Cranmer notes that store sales always peak for two-
three days after she puts new products in each month (note:
continually freshen your inventory to keep sales high) and also
during the gift-giving season.

You may have noticed one format The Onion doesn't publish in –
email. Cranmer notes she's cracking under reader and advertiser
pressure to launch an email edition soon. “We want it to be
good. We don't just want to rush in and dump headlines into it
and say, go check these out. We wanted something a little
different. We're still knocking around what that difference will
be.”

Which pretty much sums of The Onion's whole philosophy of getting
ahead in business … by really, really trying.

http://www.theonion.com

Woman carries fetus for 46 years

http://www.canada.com/national/story.asp?id={92A82987-5ABA-4844-A7D9-709608F85162}

The Ottawa Citizen

Sunday, October 27, 2002
ADVERTISEMENT
Click here to find out more!

RABAT, Morocco — A 75-year-old woman who complained of stomach pains was found to have been carrying a calcified fetus — a “stone baby” — for 46 years, doctors said.

The doctors said they removed a 3.5-kilogram fetus they believe had been lodged in the woman's abdomen since an ectopic pregnancy in 1956.

Doctors said the woman, who said she'd last been pregnant in 1956, had refused a caesarean section when she was unable to deliver the fetus, which had developed outside the uterus, and never had it removed.

“Augustine once recounted a conversation between Alexander the Great and a captured pirate. “How dare you molest the seas?” asked Alexander. “How dare you molest the whole world?” the pirate replied. “Because I do it with a little ship only, I am called a thief. You, doing it with a great navy, are called an emperor.”

Chris Leithner is an Australian investment advisor. I thorougly enjoy his letters to shareholders. Here's an excerpt from his latest, which analyzes the risks of the “War on Terror”:

“…War, as Gwynne Dyer notes in an excellent article (“Falling into the Terror Trap”, The Toronto Star, 17 October), can and does devastate whole societies. Terrorism is not war: it is an essentially marginal activity, undertaken by the relatively weak, that succeeds only if it can provoke its much stronger nemesis into drastic overreaction. Dyer notes that from 1942 to 1945, after all the major participants had joined the carnage, the Second World War caused deaths at the rate more than 1 million per month. That is equivalent to a Bali bombing every 10 minutes, day and night, for four years. By that horrible standard and whatever its cause, terrorism is a localised, minor and tolerable (except, of course, by those whom it kills, injures and traumatises) phenomenon.

Over the past 12 months, excluding the mega-strikes at New York and Washington, the average monthly American death toll from terrorism has been fewer than three. If terrorist groups could undertake an 11/9-scale strike on American soil every year, their actions would cause an average of 250 U.S. deaths per month and an annualised probability of 1 in 100,000 that they killed a randomly-selected American; and to undertake a 12/10-scale bombing annually in Australia would generate 8 deaths per month and an annualised probability of 5 in 1 million (or 1 in 200,000) that it killed a given individual. Given such attacks in perpetuity, the average likelihood of death by terrorism in these countries would be comparable to the chances of winning a modest jackpot in a lottery….”

Leithner & Co Pty Ltd
The Leithner Letter
Issue 3526 Noember 2002

SECTIONS

Nobel Triumph and
Personal Tragedy

Historical Context

Is This a Significant
Threat?

Vast Overreaction
Is the Norm

Obsessing About
Individual Cases…
A Curious Kind of War

Why It Will Fail

Australia's Politicians
Fall Into the Terror
Trap

Disengaging from the
“War on Terrorism”

LINKS

Contact Information

Circulars

Archived Newsletters

Australian Market
News

Leithner & Co Website

Stock Exchange

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To Print the Newsletter

You can't do well in investments unless you think independently. And the truth is, you're neither right nor wrong because people agree with you. You're right because your facts and your reasoning are right. In the end that's all that counts.

Take the probability of loss times the amount of possible loss from the probability of gain times the amount of possible gain. That's what we're trying to do. It's imperfect, but that's what it is all about.

Warren E. Buffett
Chairman, Berkshire Hathaway, Inc.

If you don't get this elementary, but mildly unnatural, mathematics of elementary probability into your repertoire, then you go through a long life like a one legged man in an arse-kicking contest. You're giving a huge advantage to everybody else.

Warren gets blinding headaches if he sits in a room full of people around a table, and a lot of people are saying dumb things on and on.

Charles Munger
Vice-Chairman, Berkshire Hathaway, Inc.

Nobel Triumph and Personal Tragedy

On 9 October The Royal Swedish Academy of Sciences awarded the 2002 Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel (commonly but inaccurately known as the Nobel Prize in Economics), to Daniel Kahneman of Princeton University and Vernon Smith of George Mason University. In the words of the Academy's press release, “Daniel Kahneman has integrated insights from psychology into economics, thereby laying the foundation for a new field of research. Kahneman's main findings concern decision-making under uncertainty, where he has demonstrated how human decisions may systematically depart from those predicted by standard economic theory. Together with Amos Tversky (deceased in 1996), he has formulated prospect theory as an alternative that better accounts for observed behaviour. Kahneman has also discovered how human judgment may take heuristic shortcuts that systematically depart from basic principles of probability. His work has inspired a new generation of researchers in economics and finance to enrich economic theory using insights from cognitive psychology into intrinsic human motivation” (see also Letter 9).

Although many did not hear the news until the next day, on 12 October 2002 many families, friends and acquaintances suffered terrible losses. In a bomb attack at Bali, Indonesia, approximately 200 people (the exact number is unknown), perhaps half of them Australian, were murdered. Many more were grievously injured. Australians, who are roughly one-fifteenth as numerous as Americans, thus suffered a loss of life of roughly half the order of magnitude that Americans did on 11 September 2001.

The attack at Bali was clearly a crime. Accordingly, it is imperative that its perpetrators be located, apprehended, tried and, if convicted, punished according to law. Equally clearly, to lose a family member or friend, whether through a criminal act, accident or natural causes, is a dreadful experience whose intensity may abate over time but never disappears. Hence the points that follow neither depreciate nor denigrate the grief of those who lost friends, mothers and fathers, brothers and sisters and children on that awful night (or, indeed, for any other reason on any other occasion).

Yet the shock of the event, and the emotional intensity of the images published and broadcast in its immediate aftermath, must not overwhelm dispassionate thinking about its causes and consequences. In that respect the insights of Kahneman, Tversky and other pioneers of behavioural finance (as the field they created has become known) can be used to evaluate the reactions of the general public and Commonwealth Government to the Bali bombing.

Among these insights: people, perhaps especially politicians occupying powerful positions, tend to be very poor calculators of risk; in particular, they tend drastically to overestimate and therefore to overreact egregiously towards exotic and statistically minuscule risks (and drastically to underestimate and therefore discount mundane but far more significant risks); and strong but often erroneous beliefs about particular risks and risk more generally, once formed, change very slowly if at all and are extraordinarily immutable in the face of valid, reliable and contrary evidence. For readable books that document this point in great detail and in a variety of contexts, see Letter 33. In politics as well as financial markets and other settings, then, seemingly smart people not only do very dumb things: they do them repeatedly and systematically (see also Letter 18).

Using these insights and readily available data, this Newsletter reasons towards three conclusions. First, the risk to Australians posed by subsequent attacks such as those at the World Trade Centre and Bali is infinitesimal. These attacks, to repeat, are crimes; and it is imperative that their perpetrators be apprehended, tried and, if convicted, suitably punished. Given hard data and even dour assumptions, however, the risk that any given Australian will die as a result of further attacks is so remote that it (as opposed to the grieving for and remembrance of the lives lost) is best ignored.

Alas, it is hardly being ignored. Quite the contrary: the Commonwealth Government is mobilising huge resources into a “war on terror.” The second conclusion is that this war, like the “war on poverty” and the “war on drugs” which preceded it, is inherently unwinnable. The third and related conclusion is that the cost of the Commonwealth's drastic overreactions to the Bali bombing will exceed its benefits; indeed, these overreactions are likely to increase rather than decrease the inconsequential risk that such attacks pose to Australians. As in some other areas within their purview, Australian politicians are obsessing about a non-existent problem and their efforts may well worsen rather than improve matters. Only one good thing that can be said about responses to the Bali bombing: because the risk to individuals from further attacks is already so minute, politicians' ineffective and negative impact will not significantly increase the risk of future attacks.

Historical Context

Other events transpiring on a single day at a specific place have killed large numbers of Australians. On 19 February 1942, for example, Japanese air raids at Darwin killed 243 people. Between 23 October and 4 November 1942 at El Alamein, the 9th Australian Division suffered 2,694 casualties, including 620 dead, 1,944 wounded and 130 taken prisoner. In late November 1941 (the precise date has not been established) HMAS Sydney disappeared off the coast of Western Australia. The cause of its disappearance, often thought to be a German U-boat, has been disputed; incontrovertibly and much more precisely, however, 645 of its personnel were officially classified as “missing presumed dead.”

The record of the First World War is even bleaker. (From the arrival and entry into combat of Australian military personnel in Europe, the Middle East, Southeast Asia and the Pacific until the conclusion of the Second World War at Tokyo Bay, Australian soldiers, sailors, airmen, medical and other military personnel died at an average rate of 16 per day. During the Great War the daily average was 37). In 1917, in battles at Bullecourt, Messines and the four-month campaign around Ypres (known as the battle of Passchendaele), there were multiple days on which hundreds of soldiers of the Australian Imperial Force were killed. Likewise at Gallipoli, where roughly 10,000 Australians and New Zealanders – and almost 50,000 Britons and Frenchmen and even more Turks – fell. Like its British and Canadian counterparts, the AIF's single blackest day occurred in July 1916: at Fromelles, on the Somme, 5,533 Australians fell within 24 hours.

On 16 February 1983, seventy-five people died, 2,545 buildings were destroyed and more than 390,000 hectares of country laid waste by massive fires in Victoria and South Australia. With the exception of the Ash Wednesday fires, then, the loss of large numbers of Australian lives on a single day as a result of a single incident tends to occur during wartime; and considered as a single event, the bomb blast at Bali on 12 October killed more Australians than any other event since the Second World War. Perhaps for these reasons, and also because it is widely supposed by politicians, journalists, various “experts” and members of the general public that the perpetrator(s) of the attack at Bali are “terrorists,” particularly Islamic terrorists (on several occasions during the week of 20-24 October the op-ed pages of The Australian used the term “Islamofascist”), the Commonwealth Government regards its response to the attack as an integral part of its war on terrorism. As of 30 October, however, the identity of the bomber and the motive behind the bombing remain unknown. (On that day, Abdurrahman Wahid, a former president of Indonesia, wrote in an op-ed article published in The Australian Financial Review that “there has been widespread speculation that elements of the military and police are involved in acts of terror in Indonesia. It goes without saying that it is high time those in the security and intelligence community behind such acts of terror are arrested and investigated”).

Terrorism, according to the U.S. State Department (Patterns of Global Terrorism, Washington, 2001), is “premeditated, politically motivated violence perpetrated against non-combatant targets by sub-national groups or clandestine agents, usually intended to influence an audience.” In a thought-provoking article (The Definition of Terrorism, The Guardian, 7 May 2001), Brian Whitaker analyses this definition. Noting its inconsistent application to seemingly similar events and the pattern the term's contradictory usage forms, he derives “a simpler – and perhaps more honest – definition: terrorism is violence committed by those we disapprove of.”

Even using an expansive definition of terrorism and including the WTC and Bali attacks, such incidents kill very few Australians per year; and arguably not since 13 February 1978, when a bomb exploded outside The Hilton in Sydney (the site of that year's Commonwealth Heads of Government Meeting), killing three and seriously injuring several others, has such an incident occurred in Australia. According to the U.S. State Department publication Patterns of Global Terrorism (21 May 2002), no terrorist attacks occurred in Australia in 2001. And to search the Chronology of Significant Terrorist Incidents of the Dudley Knox Library of the Naval Postgraduate School is to search virtually in vain for incidents during the past ten years that have killed Australians. It is true that every year a handful of Australian tourists travelling overseas are kidnapped; thankfully, however, most are released.

But not all of them are. On 26 July 1994 the Khmer Rouge attacked a train and kidnapped (among others) an Australian, a Briton and a Frenchman. Each was subsequently murdered. And on 28 December 1998 armed militants kidnapped a group of tourists including twelve Britons, two Americans and two Australians travelling in Yemen. On 29 December Yemeni security forces undertook a rescue attempt during which three Britons and one Australian died. Yemeni officials reported that the kidnappers belonged to the Islamic Jihad and the investigation is ongoing.

Including these incidents and the WTC and Bali attacks, and assuming that 100 Australians perished at Bali, during the past ten years terrorist attacks have killed an average of 11 Australians per year and 55 per year during the past two years.

Back to Top

Is This a Significant Threat?

Pundits and politicians say almost unanimously and unequivocally – indeed, stridently – that it most certainly is. “The spread of terrorism across national borders in Indonesia, the Philippines, Singapore, Malaysia and Thailand poses grave threats to Australia and the region … The Bali bombings and threats of terrorism throughout Southeast Asia warrant a major rethink of the country's defence … There can be no doubt that we have entered a period of extreme and violent anarchy, perhaps comparable with that at the turn of the previous century when anarchists committed widespread acts of terrorism in Europe” (The Australian 24 October).

They also assert that the Commonwealth Government is able to do something about it, and for this reason (as well as the “public interest,” a phrase that Glendon Schubert demonstrated in the 1950s and 1960s is bereft of coherent meaning) they insist that the government do something about it. “Taxpayers will have to face paying at least $1 billion extra a year to meet the greatest challenge to Australia's security since the Cold War, Paul Dibb, the country's leading strategic thinker, has warned.” This means “ensuring troops were properly equipped and readily deployable to remote trouble spots, buying more troop-lifting aircraft and helicopters, employing the latest electronic warfare technology, using reserves to protect domestic targets vulnerable to terrorism, and improving intelligence gathering.” Further, “NSW Premier Bob Carr will today ask Prime Minister John Howard to create a ministry of homeland security … Carr also wants a big boost to resources given to the task … Our situation is not good and is in need of rapid repair … The top priority must be a massive infusion of new resources into the human intelligence side of counter-terrorism, especially ASIO … Carr wants urgency in this debate” (The Australian 24 October).

For its part, the Commonwealth appears to be more than happy to oblige. The Prime Minister “[said] yesterday that Australia will fight the global campaign against terrorism shoulder-to-shoulder with the U.S. … He warned against any loss of blood providing a loss of nerve. Australians shouldn't think 'we've paid this price therefore we'd better back off' … Mr Howard said there was no other response but to stick with 'the worldwide war against terror'. 'It's a world threat,' the Prime Minister told the Nine Network's Sunday program. 'And I think the answer must, in the name of the Australian dead, must necessarily be that we continue to fight on a global scale because this is a global problem'” (The Australian 21 October).

Asked whether the Bali bombing would prompt the Commonwealth to increase its defence budget, Mr Howard said “I think it is inevitable that we will have to spend even more on defence. I feel it in my bones. It is just elementary that when some transforming event like this occurs, you have to go back into your critical infrastructure in a whole lot of areas. That's just inevitable” (The AFR 24 October). The 2002-2003 budget, presented to Parliament in May, unveiled a range of counter-terrorism measures that will cost $1.3 billion over five years. The defence budget is presently $13.1 billion, i.e., 7.7% of the Commonwealth's $170 billion of annual expenditure.

Back to Top

Vast Overreaction is the Norm

It is more than interesting, and perhaps not a co-incidence, that senior Australian military men, particularly those recently retired and thus able to speak relatively freely, are, like their American and British counterparts, far more calm, considered and cautious about these matters than the rhetorical warriors on the op-ed pages and floor of Parliament.

Perhaps this is because they (unlike many of the bellicose) have experienced the horror and suffering of war at first hand. Perhaps it is also because they are perceptive students of military history and therefore know that drastic overreaction plays a part in virtually every aspect of human activity (see, for example, David Dreman, Contrarian Investment Strategies: The Next Generation, Simon & Schuster, 1998, ISBN: 0684813505).

A typical example occurred on 2-4 August 1964, when two North Vietnamese torpedo boats in the Gulf of Tonkin allegedly attacked the USS Maddox. In response, members of Congress gave to President Johnson emergency powers that virtually abrogated the Legislature's constitutional authority to declare war. Some historians have questioned whether the boats were remotely near the Maddox and whether the incident as reported by the Executive actually took place. So too have some key “insiders” (see, for example, Daniel Ellsberg, Secrets: A Memoir of Vietnam and the Pentagon Papers, Viking Press, 2002, ISBN: 0670030309). But no matter: Congress's reaction was a key trigger for the enormous escalation of the Vietnam War and the resultant deaths of 58,000 American military personnel, 670,000 Viet Cong and NVA soldiers, up to one million ARVN and (estimates vary widely) as many as 2.5 million civilians.

Egregious overreaction accompanies much military thinking. Dreman notes that French military strategists attributed their country's defeat in the Franco-Prussian War of 1870 to a lack of the dash and daring that had characterised the armies of Napoleon I. Marshals and generals subsequently emphasised élan above all else – even though weaponry had undergone revolutionary changes since Napoleon's time. For 44 years afterwards, French military manoeuvres concentrated upon those tactics, particularly fixed bayonet attacks in closely packed ranks, which had won Boney victory after victory.

But 1914 was not 1812, and at the commencement of hostilities in August (itself a gross overreaction to the assassination of the Austrian Archduke, Franz Ferdinand, in June) French infantry suffered horrific casualties from the rapid and precise fire of German machine guns and the enormous destructive power of German artillery. The overreaction to the Prussian defeat in 1870 caused, in the first six weeks of the Great War (not to mention the entire period ending 11 November 1918), the deaths of no fewer than 250,000 French soldiers. This number is roughly equal to the total number of American soldiers killed during the Second World War.

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Obsessing About Individual Cases and Ignoring General Base Rates Encourages Drastic Overreaction

According to the most recent available data (from Australian Bureau of Statistics publication 3302.0 and dated 11 December 2001), there were 128,300 deaths registered in Australia in 2000 and 128,100 registered in 1999. Australians thus died at an average rate of 352 people per day in 2000 and 351 per day in 1999. In 2000, cancer was the leading cause of death (35,600 deaths, 28% of all deaths or 98 deaths per day) and heart disease was the second leading cause (26,500 deaths, 21% of all deaths or 73 deaths per day). Stroke was the third most important cause (11%); chronic lower respiratory disease was the fourth-ranked cause (12,830 deaths, 10% of all deaths or 35 death per day); and accidents comprised the fifth leading cause of death (5,132 deaths, 4% of deaths or 14 deaths per day). The hundreds of other causes thus comprised 32% of all deaths (41,056 deaths or 112 deaths per day); individually, however, each of these many other causes comprised fewer than 3% of all deaths (3,849 deaths or 11 deaths per day).

Also according to the ABS (publication 3303 dated 11 December 2001), “external causes” encompassing deaths from accidents, poisonings and violence were responsible for 8,098 deaths or 6.3% of all deaths registered in 2000. Since 1990 there has been a 13% decrease in the standardised death rate for deaths from external causes, mainly due to a 37% decrease in the incidence of transport accidents. In 2000, there were 2,363 deaths attributed to suicide, 5.2% lower than the 1999 figure and 13% lower than the record 2,723 suicides registered in 1997. By Western standards Australia's rate of suicide is very high: it accounts for more than one in five deaths of those aged 25-34 years.

Given that on 25 October at 13:06:05 (Australian Eastern Standard Time), the resident population of Australia was projected to be 19,767,520 (see the ABS Population Clock), given that 11 Australians per year, on average, have died in terrorist incidents during the past ten years and assuming that this toll will continue into the future, it follows that the likelihood that a randomly-selected individual will die under such circumstances during a given year is 0.0000006 (i.e., a chance of 6 in 10 million or 1 in 1.7 million). Further, given that 55 Australians per year, on average, have died in terrorist incidents during the past two years, and assuming that WTC and Bali-like incidents continue and therefore that this greater toll will continue into the future, the annualised risk of death from terrorism will increase to 0.000003 (i.e., 3 in 1 million or 1 in 333,333).

This risk compares to the odds, over the course of an average North American life span, that one will die from pesticide poisoning (1 in 200,000), AIDS contracted via a blood transfusion (1 in 96,000), drinking contaminated tap water (1 in 60,000), heart disease from eating one broiled steak per week (1 in 48,000), a lightning strike (1 in 30,000), cancer from eating one peanut butter sandwich per day (1 in 5,000), disease caused by drinking one beer per day (1 in 1,000), cancer caused by an average number of X-Rays (1 in 700), cancer caused by background radiation in nature (1 in 700), disease caused by indoor radon (1 in 440), an accident in the home (1 in 130), disease caused by heavy consumption of alcohol (1 in 100), a motor vehicle accident (1 in 60) and disease caused by smoking one packet of cigarettes per day (1 in 6) (James Walsh, True Odds: How Risk Affects Your Everyday Life, Silver Lake Publishing, 1996, ISBN: 1563431149; see also Joel Best, Damned Lies and Statistics: Untangling Numbers from the Media, Politicians, and Activists, University of California Press, 2001, ISBN: 0520219783; and Aaron Cohl, Are We Scaring Ourselves to Death? How Pessimism, Paranoia, and a Misguided Media Are Leading Us Toward Disaster, St. Martin's Press, 1997, ISBN: 0312150563).

Clearly, then, relative to the major killers of Australians, the “terrorist threat” is minuscule; and to assert that terrorism poses a grave threat to our safety is simply false. To say otherwise is either hoodwink oneself or to seek, unwittingly or otherwise, to misinform others. If henceforth an incident of the magnitude of the Bali bombing occurred in Australia every fortnight and in perpetuity, the resultant annualised loss of life would approximate that presently caused by suicide. In 1914, HMG and British newspapers shrieked that German soldiers were bayoneting Belgian babies. In 1990 they screamed that Iraqi troops were disconnecting the incubators holding Kuwaiti babies. Both allegations, it was demonstrated subsequently, were false. Today Australian mass media repeat uncritically the mantra that the country's “security” is gravely threatened by “terrorists.” Publicly available information and common sense tells us that this, too, is false.

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A Curious Kind of War

Since 11 September 2001, American politicians have told Americans that their country is at war. Australia, too, according to many of its politicians and journalists, has been at war; and the frequency and stridency of their declarations have increased markedly since 12 October 2002. But this “war on terror” is peculiar. It is seemingly, given the indistinct nature of the enemy, a war with no clear objective, no strategy to achieve this objective and no criterion to determine whether it has achieved its end. But all of its proponents agree that it will last years and cost heaven and earth. What kind of war is that? It sounds more like a Great Society program, and in that respect there are disturbing precedents.

Wars on such “enemies” as poverty and drugs are endless wars because poverty and drug addiction, alas, are ineradicable. When the government declares “war” on poverty or drugs it means that the government decrees the mobilisation of taxpayers' money and “committed” bureaucrats. In practice, it also signifies the government's implicit admission that it cannot improve matters but that it can (and sometimes does) do much to worsen them. Indeed, in the names of “compassion” and “commitment” governments have repeatedly caused disasters where none previously existed (see in particular Charles Murray, Losing Ground: American Social Policy, 1950-1980, Basic Books, tenth anniversary ed., 1995, ISBN: 0465042333; Thomas Sowell, The Vision of the Anointed: Self-Congratulation As a Basis for Social Policy, Basic Books, 1996, ISBN: 046508995X; Thomas Sowell, Is Reality Optional? Hoover Institution Press, 1993, ISBN: 0817992626; and Eric Schansberg, Poor Policy: How Government Harms the Poor, Westview Press, 1996, ASIN: 0813328241).

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Why It Will Fail: Three Laws of a “War on Terrorism”

If the analogy between the “war” on poverty, drugs and terror is even roughly approximate, then we can use the logic and evidence that Charles Murray used to evaluate major social programs in order to conduct a preliminary and very rough-and-ready assessment of the war on terror. Its results are hardly encouraging (also see Llewellyn Rockwell's The Impossible War).

Law #1: The Law of Imperfect Selection

Murray finds that any rule that defines eligibility for a social program will, arbitrarily or irrationally, exclude some people. We have noted that “terrorism” is an elusive concept, inconsistently applied according to the whims of governments, and that in practical terms it refers to violence committed by those whom a particular government (let us call it Government A) disapproves. If Government B turns a blind eye to the violence (regardless of whatever lofty rhetoric it uses to denounce the violence), then B's actions imply that it does not, in effect, regard the violence as terrorism.

This inconsistent treatment by different governments of the same violent people, organisations and incidents saves governments much embarrassment. If the American and British governments were truly at war against terrorism, for example, and if they applied the strategy adopted in the wake of 11 September to all organisations they have labelled as “terrorist,” then they would have unleashed their military forces not just upon Afghanistan but also upon the suburbs of Boston, Chicago and New York City – i.e., those areas a very few of whose residents have, according to the U.S. State Department, over the years lent moral and material support to Noraid and through it the Irish Republican Army.

Law #2: The Law of Unintended Rewards

Murray finds that any social transfer increases the net value of being in the condition that prompted the transfer. Applied to the war against terror, the hypocrisy of Western and other governments that stems from Law #1 is not lost upon the residents of certain areas and members of certain ethnic, religious, national and other groups who regard themselves as the victims of injustice, oppression – and, indeed, given the term's elasticity, terror. Wars on terrorism, inconsistently applied, thus increase the incentives for members of aggrieved areas and groups to sympathise with and actively assist organisations and actions that some government (be it A or B or C) regards as terrorist.

Law #3: The Law of Net Harm

Murray finds that the less likely it is that the unwanted behaviour will change voluntarily, the more likely it is that a social program that is intended to induce amelioration will actually cause harm. Moreover, the more the net harm caused the more governments reward the offending programs with more resources. Allowing for the innate and perhaps insuperable difficulty of the tasks to which they are charged, the CIA, NSA and FBI were unable to alert Americans of the approach of suicide-hijackers; and ASIO, ASIS and other Australian organisations were unable to anticipate bombers at Bali. In response, politicians and various “experts” have clamoured that more money, staff and power be allocated to these agencies. Similarly, the “war on drugs” has failed to reduce the consumption of drugs; in response, and unintentionally echoing “the best and brightest” of the Vietnam War era, politicians and their advisors have greatly escalated the war's reach, intensity and destructive effects.

The perverse logic of this “if at first you don't succeed” approach, as it has been dubbed by a colleague in another Sunshine State, is that major programs that do not achieve their objectives and generate unintended consequences will be rewarded with more resources. Consider the impact upon bureaucrats' incentives when their political masters in effect tell them: “if you succeed (and therefore need less money) we'll either ignore your success or cut your budget; but if you fail spectacularly then (abetted by an uproar in the media and among the general public) we'll quickly conclude that you're 'underfunded' and shovel more resources your way.”

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Australia's Politicians Fall Into the Terror Trap

War, as Gwynne Dyer notes in an excellent article (“Falling into the Terror Trap”, The Toronto Star, 17 October), can and does devastate whole societies. Terrorism is not war: it is an essentially marginal activity, undertaken by the relatively weak, that succeeds only if it can provoke its much stronger nemesis into drastic overreaction. Dyer notes that from 1942 to 1945, after all the major participants had joined the carnage, the Second World War caused deaths at the rate more than 1 million per month. That is equivalent to a Bali bombing every 10 minutes, day and night, for four years. By that horrible standard and whatever its cause, terrorism is a localised, minor and tolerable (except, of course, by those whom it kills, injures and traumatises) phenomenon.

Over the past 12 months, excluding the mega-strikes at New York and Washington, the average monthly American death toll from terrorism has been fewer than three. If terrorist groups could undertake an 11/9-scale strike on American soil every year, their actions would cause an average of 250 U.S. deaths per month and an annualised probability of 1 in 100,000 that they killed a randomly-selected American; and to undertake a 12/10-scale bombing annually in Australia would generate 8 deaths per month and an annualised probability of 5 in 1 million (or 1 in 200,000) that it killed a given individual. Given such attacks in perpetuity, the average likelihood of death by terrorism in these countries would be comparable to the chances of winning a modest jackpot in a lottery.

Clearly, however, and as the research of Daniel Kahneman, Amos Tversky and others alerts us, this statistical reasoning utterly ignores the intensely emotional reaction of governments, journalists, “experts” and members of the general public to events that kill many people in a single place. Because politicians watch television, read the newspapers and participate in talkback radio, they, like most Australians, react instinctively and emotionally to heart-rending accounts in mainstream media – and not dispassionately from deductions from first principles using hard data. Indeed, James Walsh shows that far from having privileged access to valid and reliable information, politicians and governments assess risk just as poorly as the average person.

Accordingly, and precisely because terrorism is viewed in a unique light and its risk is vastly exaggerated, the Commonwealth Government is prepared to spend many times – probably several hundred times – more in response to one death from a terrorist attack than it is in response to one death from (say) heart disease, an accident in the home or a car crash. And most voters, journalists and “experts” strongly support this prioritisation. Human beings obsess about threats that they falsely think they (or governments) can reduce, minimise or eliminate; at the same time, they discount or ignore dangers that they falsely think they can do little to control. The result is the absurd and common reality of a (say) a middle-aged man who eats too much of the wrong things, exercises too little, drinks too much, smokes and drives long distances without rest breaks – and, whilst slouching in front of the TV, frets about anthrax, the Ebola virus and terrorist attacks.

Terrorists seem to understand this principle – established theoretically and empirically by Daniel Kahneman and others – and use it ruthlessly to their advantage. Hence, according to Gwynne Dyer, the first objective of any competent terrorist is to attract the attention of the target government and to make himself a primary focus of public concern and government policy. It is by provoking that far larger and more powerful society to over-react drastically and in ill considered and self-defeating ways that a terrorist seeks to achieve his objective.

As Murray Rothbard noted, governments' standard response, the commencement of war in order to stop “terrorist aggression,” is predicated upon an invalid extension of the analogy of aggression by one individual upon another. Smith attacks Jones; nearby police rush to the defence of Jones; and they use “police action” to stop the aggression and subsequently undertake “peacekeeping action” to prevent its recurrence.

But “police action” makes sense only at the individual (i.e., Smith-Jones) level) and makes no sense whatever at a State-to-State level. Governments that commence war as it is presently practiced virtually necessarily become aggressors against non-combatants; indeed, on numerous occasions during the twentieth century, and whatever their initial intentions, they became mass murderers of civilians. The correct analogy is thus Smith attacks Jones; the police rush to help Jones; and in the course of trying to apprehend Smith they bombard a city block and fire machine guns into a crowd of innocent bystanders. Clearly, however, any “police” agency that behaved in this way would itself be a criminal aggressor – and commit far more aggression than the original Smith who commenced hostilities against Jones.

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Disengaging from the “War on Terrorism”

Hence our three conclusions. First, empathy with those who lost friends and family on 12 October (and, indeed, on any other occasion) and the rightful demand that the perpetrator(s) of those murders be apprehended and punished should not distract attention from the fact that the risk to Australians posed by subsequent attacks is minute. Second, the “war on terrorism” is inherently unwinnable. Finally, Australian politicians' responses to the Bali bombing will increase rather than decrease the inconsequential risk that such attacks pose to Australians. Their response fails the cost-benefit test set by Mr Buffett in the quotation at the top of this Letter.

The challenge is not, as this country's “leading strategic thinker” alleged in The Australian (24 October), “for the Australian Government to devise a set of credible and affordable defence policies that accommodate our domestic and regional defence concerns, as well as [contribute] to the new war on terror.” Similarly, it is demonstrably false to say, as was said in the AFR on 31 October, that “only concerted action by the West that support[s] failing states and addresses developing countries' claims for justice will undercut the appeal of fundamentalism.”

Rather, the challenge to Australia's politicians is to learn the rudiments of risk and probability, to acquaint themselves with the history of drastic and disastrous over-reaction to minuscule risks, and to appreciate why Daniel Kahneman became a Nobel Laureate on 9 October. To fail this challenge is to embark upon a futile and misguided crusade that expends much energy and incurs no gain. It is, to borrow Mr Munger's imagery, to go through a long life like a one legged man in an arse-kicking contest – and thereby to cede a huge advantage to others.

Only one good thing that can be said about Australian politicians' over-reactions to the Bali bombing: because the risk to individuals from further attacks is already so small, the ineffective and negative impact of their responses will not significantly increase the risk of future attacks. At the same time, however, these overreactions and other negations of civilised relations with foreign people and places (see Ludwig von Mises, Liberalism: The Classical Tradition, Foundation for Economic Education, 1926, 1996, ISBN: 1572460229 and George Washington's Farewell Address to the People of the United States) are likely to generate enmity in the countries in which the Commonwealth Government meddles. St Augustine once recounted a conversation between Alexander the Great and a captured pirate. “How dare you molest the seas?” asked Alexander. “How dare you molest the whole world?” the pirate replied. “Because I do it with a little ship only, I am called a thief. You, doing it with a great navy, are called an emperor.”

Chris Leithner

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“…Bureaucratic performance is also a serious concern. Bureaucracies often can achieve their ends with a “can't do” stance in place of the “can do” attitude that is needed for market success. A perennial case in point is the “Washington Monument strategy” of the National Park Service. At budget time the service frequently threatens to curtail visiting hours at its most popular attraction, the Washington Monument, if its budget request isn't met, and it threatens to blame Congress and the budget process when tourists complain….”

Via http://www.econlib.org/library/Enc/PoliticalBehavior.html

Political Behavior
by Richard L. Stroup

The fact of scarcity, which exists everywhere, guarantees that people will compete for resources. Markets are one way to organize and channel this competition. Politics is another. People use both markets and politics to get resources allocated to the ends they favor. Political activity, however, is startlingly different from voluntary exchange in markets. In a democracy groups can accomplish many things in politics that they could not in the private sector. Some of these are vital to the broader community's welfare, such as control of health-threatening air pollution from myriad sources affecting millions of individuals, or the provision of national defense. Other public-sector actions provide narrow benefits that fall far short of their costs.

In democratic politics, rules typically give a majority coalition power over the entire society. These rules replace the rule of willing consent and voluntary exchange that exists in the marketplace. In politics, people's goals are similar to the goals they have as consumers, producers, and resource suppliers in the private sector, but people participate as voters, politicians, bureaucrats, and lobbyists. In the political system, as in the marketplace, people are sometimes (but not always) selfish. In all cases, they are narrow: how much they know and how much they care about other people's goals are necessarily limited.

A Mother Teresa or an advocate of the homeless, working in the political arena, typically lobbies for a shift of funding to help the poor and the sick. The views of such a person, while admirable, are surely narrow. He or she prefers that the government allocate more resources to meet his or her goals even if it means less for the goals of others who are also lobbying. Similarly, a dedicated professional, such as the director of the National Park Service, however unselfish, pushes strongly for shifting government funds away from other uses and toward expanding and improving the national park system. His priority is to get land and dollars allocated to parks, even if goals espoused by others, such as helping the poor and the sick, necessarily suffer. Those favoring other expenditures—on space exploration, retraining workers, the arts, preventing disease, and defense—feel just as strongly. Passionate demands for funding and for legislative favors (inevitably at the expense of other people's goals) come from every direction.

Political rules determine how these competing demands, which far exceed government's (or even the whole society's) ability to provide, are arbitrated. The rules of the political game are critical. Is the government democratic? Is it a representative democracy? Who can vote? Over what domain of issues can the government make decisions? How much of the society's output is taken for political allocation? The rules provide answers to these questions, influencing not only who gets what from society's product, but also how big the product itself is and how much of it is devoted to influencing the game.

Why do individuals and groups often seek their aims in the political sector rather than in markets? There are several reasons:

* Political solutions can compel people, on threat of prison, to support politically chosen community goals. This solves the financial “free rider” problem caused by the fact that even citizens who don't voluntarily pay for national defense or for, say, a sculpture in the town square can benefit from the expenditures of those who do.
* Political action can allow one group to benefit at the expense of others. This does not happen in a free market, where those who pay are the ones who benefit. (Of course, political victories may themselves be costly.)
* Imperfections in the legal protection of one's rights—such as one's right to be safe from harmful air pollutants, or even one's civil rights—can be addressed politically. Some aspects of the political process, however, work against those who pursue their goals via the political route:
o One Congress or legislature cannot bind the next, so a political solution—other than the grant or sale of private rights—lasts only as long as the political muscle of those who push it. Any political program, land allocation, or treaty can be reversed as political pressures change. In other words, a political solution cannot be purchased—only rented. A political act is inherently less secure than a private purchase or trust arrangement.
o Truly innovative activity is often difficult to sell to the majority of the political group, such as the Congress or a specific committee, that must agree to the proposed action. In the free market, on the other hand, innovations typically are funded when only a few entrepreneurs and capitalists believe in them.

For the ordinary citizens who are not politically active, political activity has very different consequences from market activity. Although such citizens benefit from some political action achieved by active groups, they are bound by (and must pay for) all political actions. They are outside the political process except when they vote and when they have concentrated, or special, interests. Dairy farmers, for example, typically know nothing about the costs to them of the space program. However, they are keenly informed about the federal milk program, which restricts milk production and keeps milk prices high.

Small groups whose members inordinately benefit or suffer from proposed legislation are often quite powerful politically. Consider the case of wool and mohair growers in the United States. During World War II military planners found that U.S. wool producers could supply only half the wool wanted by the military. Partly for this reason, and partly to give added income to wool growers, Congress passed the National Wool Act in 1954. Mohair, produced by Angora goats, had no military use but was included as an offshoot of the wool industry. Although wool was removed from the military's list of strategic materials in 1960, the program survives and continues to grow.

Under the Wool Act, growers are given subsidy checks to supplement what they receive in the market for their wool. In 1990 the wool subsidy rate was 127 percent. The farmer who got $1,000 for selling wool in the market also got a $1,270 check from the government. Selling twice as much would have brought a check for $2,540 from the government. The subsidy rate for mohair was a much larger 387 percent. The subsidies are paid for by tariffs on imported wool. The tariffs cause consumers to pay more for imported wool, and also drive up the market price they pay for domestic wool, which is a close substitute. The economy operates less efficiently, since less wool is imported even though the imported wool costs less. The subsidy program, together with the higher price caused by the wool tariff, means that domestic land, labor, and capital resources are applied to the production of wool and mohair instead of more highly valued goods.

Nevertheless, Congress continues to support the program. Thousands of very small checks are sent to small growers in every state. Almost half of the 1990 payments were less than $100. Many of those who receive them are willing to write letters and to vote for those who support the program. Nearly half of the money, though, goes to the 1 percent of the growers who are the largest producers. The largest checks—nearly three hundred of them—averaged $98,000 and accounted for 27 percent of the program's 1990 cost. Recipients of these large checks can be counted on to contribute to organizing costs, and to give campaign donations to members of congressional committees critical to the continuation of the subsidy program. By contrast, because American taxpayers pay only a few dollars per family (Wool Act subsidies were $104 million in 1990), most are unaware of the program and of how their elected representatives voted on it. Even though taxpayers are numerous, and the Wool Act costs them a lot, each taxpayer loses so little that they do not become organized or knowledgeable on the topic. Thus the Wool Act, which harms the interests of the great majority of voters, has survived.

Although such special interest groups are sometimes in line with more general citizen interests, there is little to confine them to general interests. For example, the general public wants national defense, and weapons contractors have an interest in providing the means to obtain defense. But the contractors and the government's military itself will push for far more elaborate means of defense than would a knowledgeable citizen with broader interests.

So although political activity has benefits as well as costs, political behavior causes some predictable problems for citizens in general:

* One-to-a-citizen ballot votes, which are the currency of the formal democratic marketplace, do not allow voters to show the intensity of their preferences, as dollar votes do when citizens focus their budgets—some spending more on housing, others on entertainment, education, or their favorite charity.
* The voter is purchasing a large bundle of policies and cannot pick and choose. In a representative government the voters select a single candidate—the “bundle”—to represent them on many different issues. Voters cannot vote for the position of one candidate on issue A, the position of another on issue B, and so on, as they do routinely when shopping for thousands of items in the marketplace. In a representative democracy fine- tuning one's expression at the ballot box is impossible.
* An individual voter has virtually no chance of casting the decisive vote in an election. Even among the more than four thousand elections held each decade to fill the U.S. House of Representatives, a race decided by less than one hundred votes is newsworthy at the national level, and a recount is normally conducted. Moreover, the cost of an uninformed or mistaken vote that did make a difference would be spread among other citizens. This differs from the cost of a mistaken purchase, the full burden of which the buyer pays. People, thus, have little incentive to spend scarce time and effort learning about election issues, monitoring politicians, or even voting; instead, they tend to be “rationally ignorant” on most issues. Thus, it makes sense for a politician to pay attention primarily to special interests on most issues, and to use the financial support of special interests to campaign on “image” issues at election time.
* Because politicians do not sell their interests to their successors (the way the owners of companies, farms, and houses do), they have an incentive to provide current benefits while delaying costs into the future whenever possible. They have less incentive to invest today for the benefit of the future. Future voters cannot affect elections now but will simply inherit what current voters leave to them—both debts and assets. In contrast, private assets can either be sold or given by bequest. Only charitable instincts among voter-taxpayers (and perhaps the lobbying of special interest groups such as weapons system suppliers, or owners of real estate that may go up in value) will push for a costly project with benefits mainly in the future. Charitable instincts toward the future are present in the private sector, too (especially in private charities), and in the market they are reinforced by the fact that future productivity and profits are reflected in today's asset prices, including the stock price of a corporation.

Political activity is often seen as a way to solve problems not handled well by the private sector—everything from pollution problems and national defense to the redistribution of income to the poor. Clearly, private sector results in each of these areas are unsatisfactory to many, and there are massive, growing political programs aimed at each of these goals. But the problems just described reduce the ability of the political system to reach the sought-after goals.

A growing portion of government expenditures is simply to transfer income from the politically disadvantaged to the politically advantaged. In fact, since the early fifties all of the growth in federal spending, as a percentage of GNP, has been in transfer programs. Federal spending for goods and services as a percentage of GNP has been constant. However, only one of every six dollars transferred is in programs that are targeted to low-income people. The rest, such as the very large funding for Social Security and for farm subsidies, goes to members of groups that are politically better organized than most.

Pollution control programs, from the Clean Air and Clean Water acts to the Superfund program, have received great political support. The cost to the economy of environmental programs is generally agreed to be over $100 billion per year. Yet political manipulation of each program is widely recognized to have led to large imperfections in handling these problems. A classic case has been the political uses of the 1977 amendments to the Clean Air Act. Careful policy analysis by Bruce Ackerman and William Hassler has shown that by requiring the use of expensive scrubbers on coalfired power plants, the amendments effectively protected eastern coal interests while harming both the health and the pocket-books of millions of Americans. Robert Crandall of Brookings has shown that the same amendments were used by eastern and midwestern manufacturing interests to stifle competition from new Sunbelt factories.

Bureaucratic performance is also a serious concern. Bureaucracies often can achieve their ends with a “can't do” stance in place of the “can do” attitude that is needed for market success. A perennial case in point is the “Washington Monument strategy” of the National Park Service. At budget time the service frequently threatens to curtail visiting hours at its most popular attraction, the Washington Monument, if its budget request isn't met, and it threatens to blame Congress and the budget process when tourists complain.

It is hard to imagine a private firm, facing hard budget times, curtailing its most popular product or service. The private firm would lose too much business to the competition. But politically controlled agencies are different: they typically are monopolies. One result is that perverse behavior, such as cutting the most valued services first, is a time-honored way to expand a budget.

Political behavior in a democracy has both prospects and problems that differ from those of private, voluntary activity. Political action can force all citizens to comply with decisions made by their elected representatives. Because these political decisions are intended to be for the benefit of all, the support of all is commanded. But because each citizen's ballot is not decisive, voter monitoring of both the intent and the efficiency of political action is not very effective. Voter turnout is often low, and voters, though quite intelligent, are notoriously uninformed. Americans of voting age cannot, on average, even name their congressional representative. Such results are not as strange as they may sound when the impact of political rules on individual incentives is examined.

About the Author
Richard L. Stroup is an economics professor at Montana State University and senior associate at the Political Economy Research Center, both in Bozeman, Montana. From 1982 to 1984 he was director of the Office of Policy Analysis, U.S. Department of the Interior.

Further Reading

Ackerman, Bruce A., and William T. Hassler. Clean Coal/Dirty Air or How the Clean Air Act Became a Multibillion Bail-Out for the High-Sulfur Coal Producers and What Should Be Done About It. 1981.

Buchanan, James, and Gordon Tullock. The Calculus of Consent. 1962.

Crandall, Robert W. “Economic Rents as a Barrier to Deregulation.” The Cato Journal 6, no. 1 (Spring/Summer 1986): 186-89.

Downs, Anthony. An Economic Theory of Democracy. 1957.

Gwartney, James, and Richard L. Stroup. Economics: Private and Public Choice, 6th ed. Chaps. 4, 30. 1992.

Mark Zupan. “An Economic Explanation for the Existence and Nature of Political Ticket Splitting.” Journal of Law and Economics 34, issue 2, part I (October 1991): 343-69.

Richard L. Stroup
Richard L. Stroup

Further Reading

See also:

Public Choice Theory

Redistribution of Income

Richard Stroup

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…via

I have the power to channel my imagination into ever-soaring levels of suspicion and paranoia.

I assume full responsibility for my actions, except the ones that are someone else's fault.

I no longer need to punish, deceive or compromise myself. Unless, of course, I want to stay employed.

In some cultures what I do would be considered normal.

Having control over myself is nearly as good as having control over others.

My intuition nearly makes up for my lack of good judgment.

I can change any thought that hurts into a reality that hurts even more.

I honor my personality flaws, for without them I would have no personality at all.

Joan of Arc heard voices too.

I am grateful that I am not as judgmental as all those censorious, self-righteous people around me.

I need not suffer in silence while I can still moan, whimper and complain.

As I learn the innermost secrets of the people around me, they reward me in many ways to keep me quiet.

When someone hurts me, forgiveness is cheaper than a lawsuit. But not nearly as gratifying.

The first step is to say nice things about myself. The second, to do nice things for myself. The third, to find someone to buy me nice things.

All of me is beautiful and valuable, even the ugly, stupid, and disgusting parts.

I am at one with my duality.

I will strive to live each day as if it were my 40th birthday.

Only a lack of imagination saves me from immobilizing myself with imaginary fears.

I honor and express all facets of my being, regardless of state and local laws.

Today I will gladly share my experience and advice, for there are no sweeter words than “I told you so.”

False hope is nicer than no hope at all.

A good scapegoat is nearly as welcome as a solution to the problem.

Just for today, I will not sit in my living room all day watching TV. Instead I will move my TV into the bedroom.

Why should I waste my time reliving the past when I can spend it worrying about the future?

The complete lack of evidence is the surest sign that the conspiracy is working.

I am learning that criticism is not nearly as effective as sabotage.

Becoming aware of my character defects leads me to the next step – blaming my parents.

To have a successful relationship I must learn to make it look like I'm giving as much as I'm getting.

To understand all is to fear all.