Category: Economics

“Get Out of the Way” is a valid choice.

Like most Robert Samuelson columns, I like significant portions and despise the rest. Usually I like his analysis and despise his proposals. The former rests on economics. The latter rests on government. Yesterday’s column is no different. His conclusion, which is the sanity:

All this is telling. The administration and Congress, though pledging to restore economic growth, care more about protecting foreclosure victims and promoting homeownership among the young and poor. Politics trumps economics.

That is spot-on. But his proposal is that the Obama administration and Congress are trying wrong sort of political interference in the economy. He suggests this:

The simplest way is to bribe prospective buyers not to wait. For example: Give them a 10 percent tax credit, up to $15,000, on the purchase of a new home. Anyone who bought a $150,000 home would get a $15,000 tax break. The credit would expire in a year. Waiting would be costly. Buyers would delay only if they thought home prices would drop as much or more.

The $15,000 tax break is problematic on its own. But the 1 year expiration date shows the true problem. This proposal is an attempt to manipulate the market into preferred behavior now, believing that the possible short-term boost will not result in a long-term letdown. But purchasing a home is not a spur-of-the-moment decision. Treating it that way politically and financially is a large reason we’re in our current mess. There are consequences of this behavior. For example, if artificially rising home prices encourages more people to attempt to sell their homes, are we better off?

Somehow, we need to cut bloated inventories (13 months of supply for unsold new homes), curb falling prices and stimulate new construction. …

In the short term, I doubt we can manipulate two of those at the same time. But cutting bloated inventories and stimulating new construction are mutually exclusive as concurrent political strategies. I vote against trying to cheat on either, but considering them demonstrates only a desire to promote home ownership over renting. Home ownership is not the valid choice for everyone, so this still places politics over economics.

Capitalism improves. Social engineering punishes.

In yesterday’s Washington Post, E.J. Dionne wrote a column around this idea:

The central issue in American politics now is whether the country should reverse a three-decade-long trend of rising inequality in incomes and wealth.

Politicians will say lots of things in the coming weeks, but they should be pushed relentlessly to address the bottom-line question: Do they believe that a fairer distribution of capitalism’s bounty is essential to repairing a sick economy? Everything else is a subsidiary issue.

Apparently we can’t ask whether or not our current and prior attempts to achieve a “fairer” distribution of capitalism’s bounty contributed to our sick economy. Not that we have capitalism in the way that Dionne wishes to imply. The failings of a mixed economy do not prove that it’s time to toss the capitalism from the mix. Making that case requires a bit more than tossing around the undefined, subjective word fair and pretending that the argument is won.

As Dionne continues:

“Over the past two or three decades, the top 1 percent of Americans have experienced a dramatic increase from 10 percent to more than 20 percent in the share of national income that’s accruing to them,” said Peter Orszag, Obama’s budget director. Now, he said, was their time “to pitch in a bit more.”

Is there more direct proof that liberals view the rich as the nation’s piggy bank than claiming it’s time for the top 1 percent “to pitch in a bit more”? Does Orszag mean the top 1 percent who paid 39.89% of all federal income taxes in 2006? Dionne is saying that it’s okay to increase the existing unfairness in the tax code because the disparity in income at the extremes is unacceptable to his sense of fairness. He must ignore the question of whether or not the alleged victims of the unfairness of capitalism’s bounty are better off than they were in the past. He concludes:

Do we want to be a moderately more equal country or not? This is the question Obama has put before the nation. Let’s debate it without the distracting rhetorical sideshows designed to obscure the stakes in the coming battle.

I would ask something different: Do we want to be a more productive country or not? Does everybody gain, even if the distribution is “unfair”, or do we harm some to improve others in the short-term? Dionne has the wrong preference.

Laissez-Faire Capitalism can’t fail before we try it.

I’ve never felt inferior because I earned my MBA from a school ranked lower than 13th. This Forbes essay by Nouriel Roubini, a professor of economics at NYU’s Stern Business School, reminds me to continue that confidence. After a rundown of recent economic facts, Professor Roubini states:

This severe economic and financial crisis is now also leading to a severe backlash against financial globalization, free trade and the free-market economic model.

I’ll interrupt here to say that I agree with this statement, although those lashing out are ignorant of what they rebuke. That includes Professor Roubini, who next states:

To paraphrase Churchill, capitalist market economies open to trade and financial flows may be the worst economic regime–apart from the alternatives. However, while this crisis does not imply the end of market-economy capitalism, it has shown the failure of a particular model of capitalism. Namely, the laissez-faire, unregulated (or aggressively deregulated), Wild West model of free market capitalism with lack of prudential regulation, supervision of financial markets and proper provision of public goods by governments.

I have two words for Professor Roubini: Sarbanes-Oxley.

Having Enron and WorldCom go bankrupt, with the accompanying loss of shareholder investment, is the free market. Having executives go to jail is regulation. As a libertarian I am not reflexively against regulations that make the market more transparent. Regulations have unintended, often negative consequences, as Professor Roubini quickly glosses over, yet I don’t consider the idea of the SEC an abomination. But to pretend that we are in some Wild West model of capitalism suggests two conclusions: Either Professor Roubini is incompetent, or he’s engaging in hyperbolic nonsense bordering on propaganda.

I’m betting on the latter:

It is clear that the Anglo-Saxon model of supervision and regulation of the financial system has failed. It relied on several factors: self-regulation that, in effect, meant no regulation; market discipline that does not exist when there is euphoria and irrational exuberance; and internal risk-management models that fail because, as a former chief executive of Citigroup put it, when the music is playing, you’ve got to stand up and dance.

The “Anglo-Saxon” model of supervision and regulation is hardly self-regulation. If the free market has failed, how can we explain the massive unwinding of the complex, poorly designed mortgage securitization market? People who invested unwisely and often ignorantly are being punished through the loss of their wealth. Does Professor Roubini believe the mortgage securitization will reappear anytime soon without new regulations to control it? Pain is a powerful motivator. The market is working exactly as it should be, except Congress and the President are determined to reduce the pain of those who made mistakes, intentional and unintentional. Incentives matter. Regulation skews incentives. We ignore that at our own peril.

Going back to Sarbanes-Oxley (SOX), I deal with it as a financial software consultant. It drives me insane with the ridiculousness it requires. It is a burden with very little obvious benefit. Every decision we make must run through the SOX team. Every mistake must be documented in detail to verify that it was an honest mistake rather than an attempt at deception. Something as trivial as having extra, unintended access to the financial system must be documented in detail beyond the logs clearly showing the user ID never accessed the system. It’s a Chicken Little response that makes politicians feel proud for Doing Something, but the regulation actively diminishes productivity. And it assumes every accountant is a criminal.

Our modern day Wild West exists only in the halls of Congress.

Homes are undervalued by $6,000?

Rather than try an idea that might work and has the added benefit of extending liberty, President Obama unveiled his $75,000,000,000 plan to rescue us from the foreclosure crisis. Presumably Obama’s plan is precise and complicated, but Doug Mataconis has a succinct explanation at The Liberty Papers for why this plan will fail. His entire post is worth reviewing because he gives a concise summary of the various incentive problems involved, but his basic, widely-applicable conclusion is this:

Most of all, this part of the plan seems to be aimed at the idea that the government must reinflate the housing bubble so that housing prices return to the “correct” level.

Here’s a clue, though. The only “correct” price for your house is the price that someone is willing to pay for it. Today.

Exactly. As much as I’d love to be able to sell my house for what I paid for it in 2005, that’s not where the market is at in 2009. That is unfortunate, but the only way the government can help me is to get out of the way and allow the market to stabilize itself. They’re self-correcting that way. It’s a little lot painful, yes, and, although I bought what I could afford rather than what the bank was willing to lend me, I still made my choice despite the warnings. Lesson learned. And I wish it wasn’t so, but pain is how most people will have to learn. Buffeting them from that only prolongs the faulty thinking.

Unfortunately, even in the misguided belief that propping up the market is an effective method for stabilizing it, President Obama’s plan ignores the reality of the market. It appears to be nothing more than Do Something at its worst.

“The plan I’m announcing focuses on rescuing families who have played by the rules and acted responsibly: by refinancing loans for millions of families in traditional mortgages who are underwater or close to it,” Obama said at a speech in Mesa, Ariz. The White House released an early transcript.

Those of us who played by the rules are those of us who bought what we could afford and continue to pay for what is not worth what we owe. We don’t need or want to be “rescued”. Giving me money that you will extract from me later through taxes is hardly a bargain worth applauding.

If the plan rescues people like me:

Finance companies cannot currently refinance a loan if the homeowner owes more than 80 percent of the home’s value. But under the plan, Fannie and Freddie — which were taken over by the government last year — would be able to refinance a mortgage if it does not exceed 105 percent of the current value of the property. For example, if the value of the borrower’s property is $200,000, but the homeowner owes $210,000, he or she could still qualify for the program. The program will not launch until March 4.

The housing market in America is far worse than a 1.05 loan-to-current-value ratio. I’d flip cartwheels up-and-down my street if I had a 1.05 ratio. I think most people with negative equity are in the same situation. (If the administration knows something to the contrary, now might be a good time to provide that information.) This plan hardly seems a response to that, under the not-conceded belief that the government should get further involved. President Obama wants to add further government involvement and debt to rescue people who would lose no more than 5% if they sell today? A homeowner who can’t cover a 5% loss shouldn’t own a home. A homeowner with a ratio larger than 1.05 will apparently see no benefit.

Maybe the theory is that propping up home values by the claimed $6,000 will grease the market into action. That’s unlikely, at best, but it’s not the claim the administration is making. This plan gets us nowhere other than $75 billion further in debt, with a more-entrenched, market-distorting incentive system.

When a politician offers to save the economy, he will seek to destroy it first.

GM and Chrysler are back at the federal trough, this time hoping to extract billions more in “loans” from American taxpayers. This is not a surprise. David Z asks the right questions at no third solution:

What happens when April comes around, and General Motors still doesn’t have a viable future? Do they get more money? At what point does the nonsense end? At what point do the politicians recognize and accept the fact that continually taking money from the taxpayers and giving it to companies like General Motors in massive corporate welfare schemes can’t ever work? …

Giving money to Detroit auto makers is nothing more than a lesson in how to destroy wealth. First, we destroyed $17.4 billion. Next we’ll destroy at least $14 and probably $21.6 billion, as the article states. At some point we (i.e. Congress) need to realize that these companies are dead. Walking dead, but they’re dead. Treat the original “loans” as a sunk cost, hope to recover something in bankruptcy, and move on with a commitment to never make that mistake again with someone else’s money.

That won’t happen, as suggested by the Obama administration yesterday.

“The president of the United States wants to see a strong and vibrant auto industry that’s employing tens of thousands of hardworking Americans and building the cars of tomorrow for Americans right now. That’s what this president wants to see,” Obama spokesman Robert Gibbs told reporters aboard Air Force One.

President Obama apparently believes that wishing makes it so. It doesn’t. The rational economic perspective would remove obstacles to a strong and vibrant free market that deploys – and redeploys – its finite resources in the most productive manner possible. Employment of hardworking Americans (and Chinese and Germans and Brazilians and …) would follow.

But the president isn’t interested in a rational economic perspective because the president, like all the politicians in Congress, is interested only in political games. Watching as winners and losers emerge based on merit is too risky. Picking the winners and losers himself better enhances his power. That’s what this president wants to see. A free market without centrally-planned allocation of resources won’t provide that, so it mustn’t be allowed.

“Stimulus” suggests we should constantly change the rules.

From a Forbes article on the porktastic spending bill’s impact on business:

Currently firms are allowed to record their losses during the previous two tax years. The compromise bill permits only companies with $15 million in gross revenues to account for the losses five years back. That’s particularly bad news for big manufacturers and homebuilders who have been hammered by the downturn.

Many firms had already planned on taking the tax break. “We had a large number of clients who were very far down the road of having their taxes prepared,” says Clint Stretch, a tax expert at Deloitte Tax.

If I’m to believe the porktastic spending bill will stimulate the economy, isn’t this the type of wasteful productivity we want to root out? They’ve produced their tax returns already. Bah. If we change the rules, they’ll have to do them again. Think of how many people tax firms will have to hire. It’s brilliant.

While we’re at it, change the 2008 individual tax filing rules. I’ve already filed mine, so changing the rules would make me do work. And maybe pass a law that only TaxCut can get the new rules, since I used TurboTax. I’ll have to buy a new copy of software. Sure I can deduct that from my taxes, but it would stimulate the economy.

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No matter how many times it’s identified, the Broken Window fallacy will never go away. Why should it, of course? Advocating for inefficiency has its privileges, like a plush gig at the New York Times.

Mobility Improves an Economy

I dislike putting requirements on the ability to exercise a right, but we don’t live with a perfect government. In that context I endorse the idea Thomas Friedman discussed earlier this week:

Leave it to a brainy Indian to come up with the cheapest and surest way to stimulate our economy: immigration.

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

This is not the first time I’ve heard this idea; the first was possibly from Jonathan Rowe. It made sense when I first read it. I haven’t changed my mind.

I disagree with part of Friedman’s conclusion, though. It’s the same short-sighted belief that government can accurately predict all economic factors.

We don’t want to come out of this crisis with just inflation, a mountain of debt and more shovel-ready jobs. We want to — we have to — come out of it with a new Intel, Google, Microsoft and Apple. I would have loved to have seen the stimulus package include a government-funded venture capital bank to help finance all the start-ups that are clearly not starting up today — in the clean-energy space they’re dying like flies — because of a lack of liquidity from traditional lending sources.

Friedman was so close. He is saying that government should (partially) get out of the way of economic growth, but it should get in the way of decisions made to build wealth by those who benefit from better immigration policy. Now we need to require that immigrants buy a house and have skills in politically preferred sectors. A question or three: Would government-backed venture capital have funded Apple when it wanted to build its first home computer in the 1970’s? Would it have funded a company making mainframes? Would a major industry player like IBM have leaned on politicians?

Still, the bulk of this argument is logical, which is why our government will never do it. Our present climate of fear and populism is too strong.

Libertarianism is not keen to watch Rome burn.

I’ve long admired Balloon Juice because of John Cole’s insightful, considered analysis. He supported President Bush but was willing to change his mind when it became clear that Republicans had lost theirs. Then the Republicans became so despicable that he actively switched to endorsing Democrats. That didn’t bother me because I’ve voted that way most of my life. The change in Balloon Juice over the last six months or so, however, is closing in on unbearable. Like this, from yesterday:

At what point did the normally sane people at Hit and Run turn into the libertarian version of the Rush Limbaugh show? If I had to guess, I would have assumed they would think a bill of $400 billion in tax cuts and $400 or so billion in spending would at least be considered half good, but instead the reaction over there the past few weeks has made Malkin look restrained by comparison.

I will not be the first to defend Hit & Run because it tries to be – or is – too hip for me at times. Still, much of what I’ve read there during as the stimulus package loomed is best exemplified in this post by reason editor-in-chief Matt Welch [links in original]:

Why do people oppose the stimulus? Here are a few actual reasons: There is no strong evidence that stimuli work, and plenty of evidence that they don’t (a relevant consideration, no?). Like the deeply flawed PATRIOT Act, the deeply flawed Iraq War resolution, and the deeply flawed bank bailout, it is being rushed through the legislature in an atmosphere of pants-wetting crisis and presidential warnings of impending doom. It is filled with special interest giveaways, big-government featherbedding, and "Buy American" considerations that have about as much to do with stimulating an economy as playing violin has with putting out fires. By taking from fiscally responsible states (like South Carolina) and giving to fiscally irresponsible states (like California), it violates basic notions of fairness and creates still more moral hazard in an already hazardtastic universe. …

Basically.

Rather than explain further, Mr. Cole summarized my sentiments in a comment to his entry:

If you asked anyone who read me in 2004 and liked what they read and then read me today, they would tell you I am howling bugfuck insane now, so take that with a grain of salt.

I wouldn’t go quite that far because Mr. Cole still shows flashes of his earlier skepticism. But even if that was 100% true, his next paragraph gets to current mindset at Balloon Juice that’s difficult to read:

I mean, we all have principles we like to think we adhere to, but reality often seems to get in the way. I would love it if we could lower taxes, cut spending, and frugal our way out of this mess. I just don’t see how that is the answer.

Difficult times do not require that we stop being rational. A belief in limited government held at a time when the government is constantly expanding recklessly does not imply an unwillingness to deal with reality. If a person has a 50 pound cancerous tumor, the libertarian’s response is not to suggest she go about her day as if she doesn’t have cancer. Likewise, the solution to the government being too large is not to set the charges and implode it all at once. Americans have allowed (and encouraged) government to get so tangled up in daily life that a simple stop is not possible without disastrous consequences. Mr. Welch’s statement suggests how massive, unquestioned spending is not the answer.

That’s not to say that libertarians are perfect and have all the correct answers. Even if we have no other flaws, we often fail to suggest the map to limited government. I’m guilty of that, I’m sure, a problem I’m aware of when I blog. We all need to do better at selling the principle and how to get there.

However, the first step is to not make things worse. A $1 trillion deficit (and growing) is a very dangerous ploy. American history provides evidence of what can happen when government does and does not intervene. This is not sufficient to make a decision, but watch the way politicians are exclusively deploying fear to dismiss any need for analysis. It’s “do this or die”. They claim it doesn’t matter what we do, as long as we do something. Buying a pony for every American is something, but only the Pony Owners of America, the United Horse Food Producers, and the American Saddle Makers Association would think that’s a good idea. Unsurprisingly, that type of special interest giveaway is what we’re going to get. It’s not hysterical to call bullshit.

Propoganda Beats Flawed Economics

If the communists were capable of reaching for false economic claims when Orwellian information control tactics are available, I’m sure they’d violate Bastiat’s Broken Window Fallacy to excuse fire destroying a new luxury hotel.

As the sun rose on Tuesday, throngs of Beijing residents flocked to the headquarters of China’s national television network hoping to catch sight of the futuristic steel behemoth that had been consumed by flames the previous night. The blaze, ignited by an errant firework set off on the final night of the lunar new year, destroyed a luxury hotel and theater, left one firefighter dead and injured six others.

Bonus points if you find an example of someone explaining how this will stimulate the Chinese economy because another luxury hotel can be built in its place. The humorous attempt mentioned1 at the end of the New York Times article doesn’t count.

Lest anyone think that’s the key lesson to pull from this, always remember that China is a communist dictatorship:

A directive sent out by propaganda officials left no room for error: “No photos, no video clips, no in-depth reports,” read the memo, which instructed all media outlets to use only Xinhua’s dispatches. “The news should be put on news areas only and the comments posting areas should be closed.”

Information is king, unless murderous thugs make themselves king instead.

1 Dear New York Times: The article is on the web. Include the link.

Politicians pledge to distort the economy.

Economically, we’re screwed because President Obama is offering mortgage help. That’s bad, but the Republican response shows that not even the opposition gets it. (I know, surprise.):

Republicans, who opposed the president’s stimulus package of over $800 billion largely because of its spending priorities, suggested mortgage help as well, proposing government-backed 4 percent fixed-rate mortgages for “any credit-worthy borrower,” Senate Republican Leader Mitch McConnell said.

“The availability of these low-interest loans would increase demand for houses significantly and low-interest mortgages would boost household income,” McConnell said in a separate radio address.

Unless people believe the near-future economy will be better, they’re not going to invest in housing, especially since a decent short-term memory will suggest that housing involves risk. But more importantly, isn’t artificially lowering the cost of an activity unwise?

The key is artificial. Sen. McConnell is offering no explanation for how he arrived at 4%, and I doubt he’s enough of an expert to determine that 4% is appropriate for “any (i.e. every) credit-worthy borrower”.

I don’t grasp how a low-interest mortgage increases household income, either. Does he mean disposable income? If so, does he mean only people with a high(er) interest rate mortgage already? For those who will enter the home buying market, will their mortgage be higher than their rent, even at 4%? This would decrease household disposable income. How will that help the economy?

Every time a politician interferes, that politician forgets that there are people who suffer from the decisions. Groups, as they exist for political posturing, are meaningless.