Carbon Corrective Tax

Soon to be President Obama seems interested in "energy independence," and he is touting the idea that there are many, many new green jobs to be created in pursuit of energy independence. One of the new President's reasons to support energy independence seems to be his concern that carbon fuels are culprits in global warming. Hey, sounds like Mr. Obama wants to correct a negative externality. Of course, the economic approach to correcting a negative externality does not involve government regulations about fuel economy, and it doesn't involve subsidizing "green energy." The economic approach would be to use a corrective tax. ARTHUR B. LAFFER offers an application of the economic approach with the following:

"The Obama team's chatter about creating jobs in alternative renewable energies is hollow to say the least. Here's why: Any serious attempt to reduce carbon emissions must ultimately rely on a very large tax on the use of fossil fuels. And a very large tax on fossil fuels as an add-on to the taxes we already pay would drive the economy deeper into the ground -- with or without alternative renewable energy jobs.

The only real solution is Al Gore's proposal to offset a carbon tax dollar-for-dollar with either an income or payroll tax reduction. If a carbon tax increase were offset dollar-for-dollar with an income tax rate cut, I for one would strongly support the policy. The economy would benefit because the progressive income tax does far more damage than a carbon tax would, and we'd use less oil. It's a win-win situation. Yet this perspective appears to be totally outside the Obama team's ken."

Rules & Purposes

Hayek in Law, Legislation and Liberty, Volume 1: Rules and Order:

Man is as much a rule-following animal as a purpose-seeking one.

It seems to me most of economics emphasizes the purpose-seeking and pretty much misses the rule-following. Does this mean economics misses about half of what it should pay attention to?

Are Bailouts Regulation?

CHRISTOPHER COX:

"When the Securities and Exchange Commission was created in 1934, its purpose was to serve as an independent regulator of the unbridled profit-seeking activity of self-interested individuals and firms in the securities markets. It was not intended to supplant the market or directly participate in it. Instead, it marked a deliberate effort to clearly define and separate the role of the national government, on the one hand, and the capital markets, on the other."

Henceforth, fraud and unfair dealing in the stock and bond markets would be subjected to external discipline by the federal government. Minimum standards would be enforced, such as requiring that investors be told the essential details about securities in which they were investing. Registration of securities and licensing of broker-dealers would be required. It was, in short, arms-length regulation of an unabashedly private market.

Over the years, the agency has acquired three explicit goals: protecting investors; maintaining fair and orderly markets; and promoting capital formation. These three complementary missions are logically consistent with the original premise of the securities laws, which was that government is an auxiliary to the market, not a substitute for it or a participant in it. Virtually every aspect of the 1933 and 1934 Acts, and the regulations implementing them, follows from the notion that markets should be efficient, competitive, transparent and free of fraud.

I think this puts in perspective an issue that ought to be raised: Is it constitutional for our national government to make efforts to "bail out" industries and businesses? And, is it constitutional for our national government to become a participant in financial markets by becoming a shareholder and therefore an owner in financial businesses? It seems to me the answer should be no.

The Constitution grants Congress the enumerated power to regulate interstate commerce. It seems to me this means Congress has the power to write a set of rules by which financial businesses will operate. Mr. Cox describes these sorts of rules in the quotation above.

But "regulation" does not mean offering loans to businesses to keep them from bankruptcy. And, I can't find in Artcile 1 Section 8 of the Constitution that Congress has the enumerated power to essentially be in the business of loaning money, whether for mortgages or for saving businesses and industries.

It seems to me "regulation" does not include use of a government official as a car czar, as I understand the auto industry "bail-out" bill does, who will approve or disapprove specific aspects of efforts by auto industry businesses to restructure in an effort to be more competitive in the future.

And, surely, the power to regulate interstate commerce does not include the power to own the very businesses Congress has the power to regulate.

Unfortunately, as Hayek wrote, "the basic principles on which this civilization was built have been falling into increasing disregard and oblivion."

It Has Been A Very Unusual Year

DEVILSTOWER offers an interesting look at history with this picture.





[ Hat Tip: Greg Mankiw ]

Who is Less Free than 40 Years Ago?

SHANNON LOVE:

"Anyone who actually creates new wealth has seen their freedom to create attacked in the last 40 years. Farmers, builders, manufactures and small business people all have seen their choices progressively reduced. Individuals have far fewer choices when it comes to such activities as raising crops, building houses, building factories, designing products, setting work rules or even running a corner store.

Most of us do not see this contraction of freedom because we are not actual economic creatives. Most of us work for creatives, we ourselves do not create the businesses that pay us or the products and services they sell. We merely implement the innovations of others. We do not personally bump our noses against the government restrictions that the people who employ us and sell to us do.

Restricting the freedom of economic creatives ultimately restricts the freedoms of everyone. Without the material necessities and luxuries provided by the creatives, the rest of us cannot implement our own choices."

Who is less free than 40 years ago? Sounds like we all are.

Economics Of Corners

SANDY IKEDA:

"Jacobs stresses the importance of corners for overall economic development in a city, or more precisely, she argues that, ceteris paribus, short blocks are preferable to long blocks (which translates to more corners). Having shorter blocks and more corners multiplies the ways of getting from point A to point B, which enables pedestrians (and drivers) to experience more diversity of use at street level, and offers vendors more good locations to supply that diversity, than otherwise. Because roughly twice as many people will pass by a corner property per hour than locations at mid-block, the former naturally tend to be pricier than the latter.

A rule of thumb for the success of an urban center is that about 1000 persons need to pass through every hour (see Joel Garreaus’s Edge City). Short blocks and multiple corners make this more likely, as people who find streetscapes interesting tend to attract still more people, and more business."

Africa Power & Prosperity

STRATEGY PAGE:

"Money alone won't solve the problem of tribal violence, Honest government will. But you can't easily buy that. The locals have to put aside centuries of custom to make government work. That won't happen fast, and when it does, it will take a long time to eliminate the tribal loyalties. Meanwhile, Africa is a grim example of survival of the fittest. Resourceful and ruthless men, abetted by cheap guns and natural resources to plunder, thrive, while proponents of civil society and honest government cower in the shadows."

Read the whole piece. It is a nice summary of history relevant to power and prosperity.

The Story of the Schechter Brothers

For students in my Constitution & the Economy course, you might be interested in learning more of the story behind the Schechter opinion. STEVE HORWITZ tells about this story, and he suggests an interesting economic story is involved as well:

". . . there’s a terrific dissertation waiting to be written that explores the Laws of Kashrut as a set of informal institutions that serve as a non-governmental health code. It would be a project complementary to Lisa Bernstein’s work on the informal norms of the diamond industry. That story is only made better by the role the NRA played in overriding the, arguably superior, private sector arrangements within the Jewish community. The NRA’s attempt at cartelizing and planning all of these industries destroyed the indigenous institutions that functioned better."

Wind & Collective Action

There is an article in the NY Times that tells of an interesting application of Mancur Olson's Logic of Collective Action. Ranchers in Wyoming are forming wind energy associations. Here is an explanation of the incentives for these new associations:

Mr. Stumbough felt the ranchers were at a disadvantage when dealing individually with wind developers. The developers, in most cases, know more than landowners about the value of the wind and the transmission lines that will carry it.

[ . . . ]

"Mr. Stumbough said: “I thought we could use collective bargaining strategies to maybe have a little more leverage in negotiating with wind developers. If we could all get together and work together cooperatively and do some cost sharing and maybe share some of the profits, I think it’s going to be a benefit to everybody.”"

Cost and profit sharing represents collective goods for the associations.

Note also the information problem suggested in the first paragraph. This reminds me of Hayek's The Use of Knowledge in Society. The individual landowners face a personal knowledge problem of wanting to discover the value of leasing their property for wind energy production. The associations are voluntary means of dealing with this problem. The relative values of resources in different uses are also emerging in prices for leases as well as prices for the electicity produced by wind turbines.

This situation also looks like it involves the information asymmetry often described as a source of market failure. But, the association's seem to me to be a market answer, in this case, to this supposed market failure. Thus, it is an illustration of why I am skeptical about information asymmetry as a legitimate source of market failure.

There are a couple of things in the story that concern me from the perspective of economic understanding or economic literacy. One is the caption under one of the photos:

Strong winds in southeastern Wyoming have forced landowners together to improve bargaining position.

Nothing, and especially not strong winds, have FORCED Wyoming landowners to form these associations. These are voluntary associations; not forced associations (i.e., they are not organizations such as unions are).

The second is the implied suggestion there is something wrong with secret deals:

That has made it easier for wind developers to make individual deals and insist that the terms be kept secret. The developers’ cause has not been hurt by a 10-year drought’s impact on agricultural families’ finances.

I would think there would be something wrong in secret deals if they involved force, but surely a landowner and an energy company can ethically make a voluntary agreement that includes secrets as long as no harm is done to the person or property of others.

You can learn about some of the specifics involved in forming the Slater Wind Energy Association here.

If you've read Olson's Logic, perhaps you would comment on the way in which the number of members is related to the formation of these associatons.

The Ant Colony

TIBOR MACHAN:

So you notice that your income has shrunk, you may even have lost your
job. So you decide to trade in your gas guzzler for a small vehicle and
even reduce your monthly car payments, if you have such. And in other
realms of your life, too, you may be making adjustments to cope with the
general economic downturn. You cook at home instead of eating at your
favorite restaurant; you do not purchase that pair of shoes you would have
otherwise, etc., etc.

In short, you are acting prudently, tightening your belt, as the saying
goes, in the face of the widespread economic contraction. Never even mind
why the contraction occurred--some of it could actually have come around
simply from people changing their preferences and behavior. (Instead, of
course, it happened because the government has been abandoning its proper
role as the protector of our rights and like a rouge referee, has been
inserting itself into the game for decades on end!)

But now that the results of such bad government have hit so many of us,
you are taking steps to deal with them. Ah, but no such luck. Instead of
making it possible for you to deal with your reduced resources, instead of
letting you make the budgetary adjustments you can make within the context
of your own life circumstances, the politicians are insisting that if you
refuse to spend the big bucks on those Detroit gas guzzlers, for example,
they will tax you and hand over what they have extorted from you to the
car makers, never mind your prudent choices. In time the savings you
thought you could garner from your good sense and discipline will have to
be shelled out in extra taxes so as to bail out those who aren’t getting
your business any more. Instead of insisting that those who make the big
cars and whatever else that’s no longer in demand in the market place make
their own adjustments, tighten their own belts, etc., the politicians
insist that they continue to be paid as if nothing had happened, no one
changed his or her purchasing behavior, as if the economy continued to be
in fine shape.

This is just one of thousands of results of the mixed economy, the
welfare state, in which your individuality is abolished and you are
treated as a member of some ant colony or bee hive. You will be
conscripted to be part of it all, never mind how sensibly you may figure
out to deal with the fiasco. No, you will not be allowed to use your good
sense, virtue, and occasional luck to address the economic mess the
politicians, bureaucrats and their rent-seeking clients produced. These
folks were the ones who prevented the realization of the free market and
instead created a top-down, planned or managed arena of wealth
redistribution.

Elections the Venezuelan Way

MARY ANASTASIA O'GRADY:

"In recent weeks he [Mr. Chavez] has begun threatening to use the military against his own population in states where his municipal and gubernatorial candidates are defeated. On a trip to the state of Carabobo last week, for example, he told voters, 'If you let the oligarchy return to government then maybe I'll end up sending the tanks of the armored brigade out to defend the revolutionary government.' Just as troubling are the president's declarations that in states where his candidates are not elected, he will withhold federal funding."

Economics

F.A. Hayek:

"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design." [The Fatal Conceit, p. 76]

I guess few economists understand this. After all, the models economists rely on assuming complete knowledge. Even the "tools" they use, such a benefit cost analysis, presume that an economist, or perhaps two or three working together, can come to know enough to calculate the benefits and costs of public expenditures and public policy changes. Instead of attempting to "demonstrate" how little they know, they attempt to demonstrate how the complete knowledge models of a static world can help people and governments make better decisions in a real world of adaptation and evolution. Few economists seem to think the world they study is a world of adaptation and evolution.

The Loss Of Individual Liberty

PETER ROBINSON:

"All that the nation's founders understood two centuries ago about the imperative of limited government, all that we learned from the long struggle between collectivism and free markets during our own time--all this could soon simply evanesce.

We are being asked to unlearn what we know, to surrender the virtues that can only be acquired in conditions of freedom, and to become a lesser people than we are. The land of the free and the home of the brave could soon be transformed into the land of the dependent and the home of the infantilized.

I may not have seen it at the time, but Milton Friedman was right. The challenge for this generation is to keep our liberty. And the challenge is now upon us."

Earlier in Mr. Robinson's piece he tells us of a conversation over dinner with Milton Friedman which includes this:

I had just re-read God and Man at Yale, the 1951 book in which William F. Buckley Jr., denounced the leftist attitudes he had encountered among the Yale faculty and administration as an undergraduate. Buckley singled out the department of economics as the most collectivist department on the campus. "Today," I said, "nobody would call the economics department at a major university 'collectivist.'"

Academia as a whole may have continued its long, sorry wobble to the left, I continued, but the economics profession had proved an exception, moving the other way. Departments of economics across the country now grasped the importance of free markets. "Mises, Hayek, Stigler and you," I told Friedman. "You've transformed the intellectual climate. You've won."

I suspect it is not true that economics departments across the country have not wobbled to the left. Efficiency economics abounds, and the conceptual framework of economics is static rather than dynamic, and as such, I believe efficiency economics is very far from the economic lessons taught by Hayek and Mises. I suspect that most of economics today falls prey to Hayek's The Fatal Conceit "that man is able to shape the world around him according to his wishes." Isn't this fatal conceit, after all, the conceptual nature of any discussion that involves the role of government as correcting market failure?

I do agree with Mr. Robinson that it would be a good thing for many of us to decide now is the time to work to save the idea of individual liberty.

[HT: Instapundit]

Hyperion Power Generation

What is this a picture of? Is it a picture of our nuclear energy future?

Apparently, HYPERION POWER GENERATION is already taking orders for shipment. Here is some of Hyperion's promo from it's web page:

Small enough to be transported on a ship, truck or train, Hyperion power modules are about the size of a "hot tub" — approximately 1.5 meters wide. Out of sight and safe from nefarious threats, Hyperion power modules are buried far underground and guarded by a security detail. Like a power battery, Hyperion modules have no moving parts to wear down, and are delivered factory sealed. They are never opened on site. Even if one were compromised, the material inside would not be appropriate for proliferation purposes. Further, due to the unique, yet proven science upon which this new technology is based, it is impossible for the module to go supercritical, “melt down” or create any type of emergency situation. If opened, the very small amount of fuel that is enclosed would immediately cool. The waste produced after five years of operation is approximately the size of a softball and is a good candidate for fuel recycling.

Perfect for moderately-sized projects, Hyperion produces only 25 MWe — enough to provide electricity for about 20,000 average American sized homes or its industrial equivalent. Ganged or teamed together, the modules can produce even more consistent energy for larger projects.

Pretty neat hot tub, eh?

[ Hat Tip: Instapundit ]

Complex Order

F.A. Hayek:

"Despite. . .differences, all evolution, cultural as well as biological, is a process of continuous adaptation to unforeseeable events, to contingent circumstances which could not have been forecast. This is another reason why evolutionary theory can never put us in the position of rationally predicting and controlling future evolution. All it can do is to show how complex structures carry within themselves a means of correction that leads to further evolutionary developments which are, however, in accordance with their very nature, themselves unavoidably unpredictable."

[Fatal Conceit, p. 25]

Social Justice Virus

DAVID HARSANYI:

"Now, I'm not suggesting Obama intends to transform this nation into 1950s-era Soviet tyranny or that he will possess the power to do so. I'm suggesting Obama is praising and mainstreaming an economic philosophy that has failed to produce a scintilla of fairness or prosperity anywhere on Earth. Ever."

Yes, I agree. Since so many voters seem to be climbing on board Obama's bandwagon, I'm beginning to think social justice should be described as a virus.

Beware Aggregation

From CAFE HAYEK an illustration by Pietro Poggi-Corradini:

"Research on inequality usually keeps track of percentiles. So let's look at the following simple example. A society at the beginning consists of 10 individuals, 9 of which make 1 dollar and 1 who makes 10 dollars. Social scientists decide to keep track of the top 20%. So the top 20% makes an average of 5.5 dollars while the bottom 80% makes an average of 1 dollar. Now suppose that after 1 year there are now 8 people making 1 dollar and 2 people making 10 dollars. The top 20% now makes an average of 10 dollars. Dividing 4.5 by 5.5 this represents an 82% increase for the top quintile. The bottom 80% on the other hand sees a 0% increase in income. One would like to conclude that 'inequality has risen'. But if you were given a choice to live in a society like the earlier one with 9 people making the same income of 1 dollar and one very rich person making 10 dollars, or live in the latter society where less people make 1 dollar and more people make 10 dollar, what would you choose? A simple calculus of probability tells me that the latter society might be more appealing to most people."

I offer this just as another illustration of my warning to beware the stories told based upon aggregation.

Can We Keep It?

BENJAMIN FRANKLIN:

"“Well, Doctor, what have we got—a Republic or a Monarchy?”

“A Republic, if you can keep it.”"

Policy and Paradise?

SHANNON LOVE:

One really has to ask the obvious question: If Obama’s economic policies work so well, why isn’t Detroit a paradise?

In 1950, America produced 51% of the GNP for the entire world. Of that production, roughly 70% took place in the eight states surrounding the Great Lakes: Minnesota, Wisconsin, Illinois, Indiana, Michigan, Ohio, Pennsylvania, and New York.

The productive capability of this small area of earth staggers the imagination. Virtually everything that rebuilt the industrial bases of Europe and Japan came from those eight states. Cars, planes, electronics, machine tools, consumer goods, generators, concrete - any conceivable item manufactured by industrial humanity poured out this tiny region and enriched the world. The region shone with widespread prosperity. People migrated from the South and West to work in these Herculean engines of industry.

The wealth, power and economic dominance of the region at the time cannot be overstated. Nothing like it has existed in human history.

Yet, a mere 30 years later, by 1980, we called that area the “rustbelt” and it became synonymous with joblessness, collapsing cities, high crime, failing schools and general hopelessness.

What the hell happened?

Obama happened.

Of course, not Obama personally but rather the same ideas that Obama espouses. What those ideas did to the Great Lakes states, they can do to the entire country.

Mystery

GLENN REYNOLDS:

"As Gas Prices Go Down, Driving Goes Up. When things get more expensive, people do them less -- but when things get less expensive, people do them more! What could explain this phenomenon? It's a mystery!"

Indeed!

Oh Crap

[via Greg Mankiw]

Redistributing the Wealth

There is new audio of Barack Obama discussing redistribution on a Chicago PBS radio program in 2001. BILL DYER gives it thoughtful attention. Here is what Dyer learns:

"Even back in 2001, Barack Obama was already focused on building a 'coalition of power' in the executive and legislative branches that could indeed bring about a national redistribution of wealth which even the most activist courts couldn't achieve on their own."

Plus:

"The reason for conservatives and moderates to be concerned about Barack Obama is not simply that he's a hard-left liberal — it's that he's an ambitious and talented hard-left liberal. He's seen where the Warren Court fell short. Barack Obama is now literally only days away from, in his words from this radio program, possibly "put[ting] together the actual coalitions of power through which you bring about redistributive change." Of that, we ought to all be duly terrified."

Mr. Dyer does an excellent job exploring the audio. You really should read the whole thing.

One point from the audio that I think is very important is that the Senator takes note that, as written and ratified, our constitution does not allow government to redistribute wealth. The implication of this, for me, is that in order to give the federal government the power to redistribute wealth it should first be necessary to amend the Constitution to grant this enumerated power to Congress. Amending the Constitution requires a super majority to agree, and I do not think a super majority in this country would approve of such an amendment. I would find this a comforting safeguard.

In contrast, it seems that Senator Obama believes "redistributive change" can be accomplished legislatively. As a practical matter, given the nature of our national tax system whereby pretty close to the lowest 40% - 50% of households by income do not pay federal income taxes and receive checks from the federal government instead, the Senator may be correct. I suspect, if elected, President Obama will try to find out if it is possible to accomplish "redistributive change."

After seeing the Joe the Plumber video in which Senator Obama said he thought that spreading the wealth around was a good thing, I tried to explain why it would diminish our prosperity. I would like to add a bit too my earlier explanation.

Mancur Olson explains that the necessary conditions for prosperity are (1) strict enforcement of private property rights, which includes the strict enforcement of voluntary contracts, and (2) a minimum of predation. A government that redistributes wealth will violate both of these necessary conditions. Such a government will fail to strictly enforce private property rights because it takes income and wealth from Peter to give to Paul. And, by taking from Peter to give to Paul the government itself becomes a predator, and most likely the largest predator in the economy.

In my course Power and Prosperity, I suggest to my students that the key point of the course is to understand the difference between good government and bad government. Of course, I mean to help my students understand that good government supports and sustains the necessary conditions for prosperity as described by Mancur Olson. Bad government then, is government that is the predator. It seems that the policies of Senator Obama would seek to give us bad government.

Who Pays Federal Government Taxes?

Over the course of this presidential election season there has been quite a bit of discussion of income taxation. As you can see from my blog post just before this one, Senators McCain and Obama have policy positions with respect to income taxation that are considerably different.

One of the tax themes that I don't like to hear is that the federal government should more heavily tax the wealthy. This theme goes along with the assertion that recent efforts to decrease federal income taxes have been to the benefit of the wealthy. What are the facts in this regard?

The two charts I provide here summarize data reported by the Congressional Budget Office. Each chart shows tax shares by income quintiles for all households.

The first chart, above, shows the share of just the federal income tax by income quintiles for all households, 1979-2005. The red line shows the share of the federal income tax paid by the top 20% of households by income. In 1979 the top 20% paid 64.9% of all federal income taxes and since that time this share has been increased so that in 2005 the top 20% paid 86.3% of all federal income taxes. It would appear that the often heard political mantra of "tax cuts for the wealthy" is just a bit inconsistent with the experience of the past 25 years regarding the federal income tax.

Of course, the federal government has other sources of tax revenue that are not reflected in the chart above. Notably, the payroll or social security tax is excluded from the chart above. The chart just below shows the tax shares for all federal tax liabilities, including the payroll tax.




This chart too shows that the top 20% of households by income have paid an increasingly larger share of all federal tax liabilities. At the same time, every other income quintile group has paid a smaller share of all federal tax liabilities over time.

It seems to me that a different political narrative and set of issues should be discussed. The distribution of the burden of financing federal government seems very unequal, and perhaps inequitable (dare I say unjust) to me. Is it fair or equitable for the burden of financing our federal government to fall so heavily on the top income households that this income quintile pays 2/3 of all federal tax liabilities? Is it fair that the top income households pay over 86% of the federal income tax liabilities? Is it fair that the bottom income households not only show no income tax liabilities as a group, but this bottom group actually receives payments from the federal government? After all, isn't the idea of government that it provides goods and services that all citizens share? If so, then shouldn't all citizens share in paying for the goods and services received from the federal government?

The distribution of the burden of financing federal government also may weaken our republican form of government. Look again at the chart at the top of this post. The bottom 40% of households by income pay a negative share of the income tax, i.e., people in these income quintiles receive payments. Doesn't this set up a bad set of incentives with respect to public policy, especially with respect to government taxation?

When I teach public choice to my undergraduate students we rely heavily on the median voter model. The charts above suggest we may be pretty close with the federal income tax to a situation in which the median voter is actually a person who has no federal income tax liability and who may actually receive payments from the federal government. If such a situation was the case then it would seem that the lower income households could see incentives to vote for politicians who would seek to help them take from the political minority.

Maybe we are closer to this situation than I think. After all, there are politicians campaigning, and it seems even leading in the political polls, who showcase their tax policy as making the wealthy pay more, as though the wealthy weren't already paying the largest share. After all, there are even politicians who say they favor redistributing the wealth. Is it now the situation in this country that the median voter prefers such politicians because it is expected he or she will be rewarded for supporting such politicians with more of the income and the wealth of others?

Or, is this stretching the history of the past 1/4 century a bit too far?

At least we economists should be able to offer another bit of insight into the present situation. For efficiency, we know that the benefit principle should be met. That is, for an efficient allocation of resources, each individual should pay an amount equal to their personal benefit at the margin for the goods and services provided by government. It seems likely that the charts presented above suggest we are quite a distance from the benefit principle in federal government taxation, and thus we are quite a distance into a government revenue and expenditure system which results in an inefficient allocation of resources.

One final observation. The politicians who have chosen the policy position of more taxes for the wealthy, are often (maybe mostly?) members of Congress. The data charted above are produced periodically by the CONGRESSIONAL BUDGET OFFICE. I think this means we can safely assume that the politicians saying "more taxes for the wealthy" aren't saying this because they haven't had the data at their fingertips.

Greg Mankiw's Work Incentives

GREG MANKIW CONSIDERS presidential tax plans:

"If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.

Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.

The bottom line: If you are one of those people out there trying to induce me to do some work for you, there is a good chance I will turn you down. And the likelihood will go up after President Obama puts his tax plan in place. I expect to spend more time playing with my kids. They will be poorer when they grow up, but perhaps they will have a few more happy memories."

You really should read the whole thing.

I think his calculations offer a pretty dramatic illustration of the differences in the presidential tax plans.

Don't miss the implications of this illustration for growth and prosperity. The difference in the money left to his kids with and without the income tax also illustrates the impact of income taxation over time on growth and prosperity.

Obama's Delusions?

ALAN REYNOLDS takes a look at Senator Obama's campaign promises:

"A trillion here, a trillion there, and pretty soon you're talking about real money. Altogether, Mr. Obama is promising at least $4.3 trillion of increased spending and reduced tax revenue from 2009 to 2018 -- roughly an extra $430 billion a year by 2012-2013.

How is he going to pay for it?"

Raising the tax rates on the salaries, dividends and capital gains of those making more than $200,000-$250,000, and phasing out their exemptions and deductions, can raise only a small fraction of the amount. Even if we have a strong economy, Mr. Obama's proposed tax hikes on the dwindling ranks of high earners would be unlikely to raise much more than $30 billion-$35 billion a year by 2012.

Besides, Mr. Obama does not claim he can finance his ambitious plans for tax credits, health insurance, etc. by taxing the rich. On the contrary, he has an even less likely revenue source in mind.

In his acceptance speech at the Democratic convention on Aug. 28, Mr. Obama said, "I've laid out how I'll pay for every dime -- by closing corporate loopholes and tax havens." That comment refers to $924.1 billion over 10 years from what the TPC wisely labels "unverifiable revenue raisers." To put that huge figure in perspective, the Congressional Budget Office optimistically expects a total of $3.7 trillion from corporate taxes over that period. In other words, Mr. Obama is counting on increasing corporate tax collections by more than 25% simply by closing "loopholes" and complaining about foreign "tax havens."

Nobody, including the Tax Policy Center, believes that is remotely feasible. And Mr. Obama's dream of squeezing more revenue out of corporate profits, dividends and capital gains looks increasingly unbelievable now that profits are falling, banks have cut or eliminated dividends, and only a few short-sellers have any capital gains left to tax.

You really should read the entire piece.

So what do you think? Is the Senator delusional? Or is the Senator just playing us voters for big chumps? Is he relying on voter ignorance or irrationality? I guess I hope he's playing the voters for chumps.

Memo To Young Voters

ROBERT SAMUELSON is tryng to look out for you:

"You're being played for chumps. Barack Obama and John McCain want your votes, but they're ignoring your interests. You face a heavily mortgaged future. You'll pay Social Security and Medicare for aging baby boomers. The needed federal tax increase might total 50 percent over the next 25 years. Pension and health costs for state and local workers have doubtlessly been underestimated. There's the expense of decaying infrastructure -- roads, bridges, water pipes. All this will squeeze other crucial government services: education, defense, police.

You're not hearing much of this in the campaign. One reason, frankly, is that you don't seem to care. Obama's your favorite candidate (by 64 percent to 33 percent among 18- to 29-year-olds, according to the latest Post-ABC News poll). But he's outsourced his position on these issues to AARP, the 40 million-member group for Americans 50 and over."

He doesn't see candidate McCain as being less much better.

What should you do?

What should you -- the young -- do? First, get angry -- at the media and think tanks for discussing this problem in misleading euphemisms (for instance, the problem is not an "entitlements crisis"; it's excessive benefits for the old); at the candidates for exploiting your innocence; and at yourself for your gullibility.

Next, start picketing AARP. It's the citadel of seniors' political power and the country's most powerful "special interest." It wields a virtual veto over roughly two-fifths of the federal budget. Your activist groups ought to be there every day with placards reading "Give Us Generational Justice" or "Get Off Our Backs." Ask direct questions of federal candidates about what benefits they'd cut, which they'd keep and why.

You need to appeal to the shame and guilt of older Americans by reminding them that their present self-absorption is not a victimless exercise. Only if older Americans act on their rhetorical pledges of worrying about their children will the political climate change. If you -- the young -- don't stand up for yourselves, believe me, your elders and your politicians won't.

Argentina's Property Grab

WSJ REVIEW & OUTLOOK:

"Argentine President Cristina Kirchner announced this week that her government intends to nationalize the country's private pension system. If Congress approves this property grab, $30 billion in individually held retirement accounts -- think 401(k)s -- managed by private pension funds will become government property.

[ . . . ]

Mrs. Kirchner won't have trouble making the case for expropriation to Congress, which is controlled by her fellow Peronists. When the Argentine government ran out of money in 2001, it blamed the market and increased its own role in the economy. Since then it has imposed price controls, defaulted on its debt, seized dollar bank accounts, devalued the currency, nationalized businesses and tried to set confiscatory tax rates with the aim of making society more "fair." Mrs. Kirchner and her predecessor (and husband) Nestór Kirchner have also preserved the Peronist tradition of big spending.

All of this has been deemed acceptable because of the "crisis." But it has come at a cost: Among emerging market investors Argentina is now considered one of the worst places on the planet to put your money. . . . Argentina, if little else, serves as a cautionary tale on how to ruin an economy."

When the role of government is as the great predator prosperity flees to safer domains.

Uncle Milty On The Draft

From Greg Mankiw's blog, this is MILTON FRIEDMAN ON THE DRAFT:

"In his testimony before the commission, Mr. Westmoreland said he did not want to command an army of mercenaries. Mr. Friedman interrupted, 'General, would you rather command an army of slaves?' Mr. Westmoreland replied, 'I don't like to hear our patriotic draftees referred to as slaves.' Mr. Friedman then retorted, 'I don't like to hear our patriotic volunteers referred to as mercenaries. If they are mercenaries, then I, sir, am a mercenary professor, and you, sir, are a mercenary general; we are served by mercenary physicians, we use a mercenary lawyer, and we get our meat from a mercenary butcher.'"

McCain On The Draft

In addition to saying he would not like to reinstate the draft, there is a nice bit of humor thrown in as well.

Obama & The Draft?

KATHRYN JEAN LOPEZ:

"Recall that Obama has said: “But it’s also important that a president speaks to military service as an obligation not just of some, but of many. You know, I traveled, obviously, a lot over the last 19 months. And if you go to small towns, throughout the Midwest or the Southwest or the South, every town has tons of young people who are serving in Iraq and Afghanistan. That’s not always the case in other parts of the country, in more urban centers. And I think it’s important for the president to say, this is an important obligation. If we are going into war, then all of us go, not just some.”"

Other Congressional democrats have specifically said they want to return to a draft and apparently conscripted military service. Are there reasons to think that our recent reliance on voluntary military service has not served the country well? If the country returns to conscripted military service will a larger number of men and women in uniform mean a greater incentive for Washington to use those forces worldwide than would be the case with a smaller voluntary military?

Is Capitalism Dead?

There is an interesting WASHINGTON POST EDITORIAL today:

"IS THIS the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

It's true that the Bush administration has stood for light regulation of capital markets. But it did not invent this approach. By the middle of the last decade, experts across the spectrum believed that U.S. financial institutions faced outmoded restraints on their ability to innovate. Thus, the Clinton administration, supported by then-Federal Reserve Chairman Alan Greenspan, refused to tighten regulations on financial derivatives, memorably dubbed 'financial weapons of mass destruction' by Warren Buffett. The 1999 repeal of the Glass-Steagall Act, a Depression-era law separating commercial banking and investment banking, passed with overwhelming bipartisan support in Congress and was signed into law by President Bill Clinton"

Yes, indeed, this crisis is a crisis of interventionism.

Check out the bottom line to this editorial:

The new capitalist model that emerges from this crisis must operate according to more consistent principles. The Fed should set interest rates with the long-run value of the dollar in mind. Government must be more selective about manipulating markets; over the long term, business works best when it is subject to market discipline alone.

Obama's Carbon Ultimatum

WSJ COMMENTARY:

"Liberals pretend that only President Bush is preventing the U.S. from adopting some global warming 'solution.' But occasionally their mask slips. As Barack Obama's energy adviser has now made clear, the would-be President intends to blackmail -- or rather, greenmail -- Congress into falling in line with his climate agenda.

Jason Grumet is currently executive director of an outfit called the National Commission on Energy Policy and one of Mr. Obama's key policy aides. In an interview last week with Bloomberg, Mr. Grumet said that come January the Environmental Protection Agency "would initiate those rulemakings" that classify carbon as a dangerous pollutant under current clean air laws. That move would impose new regulation and taxes across the entire economy, something that is usually the purview of Congress. Mr. Grumet warned that "in the absence of Congressional action" 18 months after Mr. Obama's inauguration, the EPA would move ahead with its own unilateral carbon crackdown anyway.

Well, well. For years, Democrats -- including Senator Obama -- have been howling about the "politicization" of the EPA, which has nominally been part of the Bush Administration. The complaint has been that the White House blocked EPA bureaucrats from making the so-called "endangerment finding" on carbon. Now it turns out that a President Obama would himself wield such a finding as a political bludgeon. He plans to issue an ultimatum to Congress: Either impose new taxes and limits on carbon that he finds amenable, or the EPA carbon police will be let loose to ravage the countryside."

Uh oh, I'm not liking the sounds of this. Say it ain't so O.

If we have to have carbon policies I would hope the idea would be a carbon tax. Unfortunately, the politicians would prefer the control they think they get with regulations for every thing.

Prosperity prospects look to be getting dim, eh? Say it aint's so O.

Normally a democracy reaches consensus through political debate and persuasion, but apparently for Mr. Obama that option is merely a nuisance. It's another example of "change" you'll be given no choice but to believe in.

Change, change, change. The private and free economy is always changing. But, change with force, now that's what we want.

When Good Decisions Make You Rich

The WSJ has an interesting piece on the VIEWS OF ANNA SCHWARTZ regarding the government's policy response to the financial crisis:

"To understand why, one first has to understand the nature of the current 'credit market disturbance,' as Ms. Schwartz delicately calls it. We now hear almost every day that banks will not lend to each other, or will do so only at punitive interest rates. Credit spreads -- the difference between what it costs the government to borrow and what private-sector borrowers must pay -- are at historic highs.

This is not due to a lack of money available to lend, Ms. Schwartz says, but to a lack of faith in the ability of borrowers to repay their debts. 'The Fed,' she argues, 'has gone about as if the problem is a shortage of liquidity. That is not the basic problem. The basic problem for the markets is that [uncertainty] that the balance sheets of financial firms are credible.'

So even though the Fed has flooded the credit markets with cash, spreads haven't budged because banks don't know who is still solvent and who is not. This uncertainty, says Ms. Schwartz, is 'the basic problem in the credit market. Lending freezes up when lenders are uncertain that would-be borrowers have the resources to repay them. So to assume that the whole problem is inadequate liquidity bypasses the real issue.'"

The government's policy is off the mark because it seems to misunderstand the nature of the problem. In other words, it is like the government is treating symptoms and not causes.

If the government wanted to treat the causes, what would the policy look like?

. . . In fact, by keeping otherwise insolvent banks afloat, the Federal Reserve and the Treasury have actually prolonged the crisis. "They should not be recapitalizing firms that should be shut down."

Rather, "firms that made wrong decisions should fail," she says bluntly. "You shouldn't rescue them. And once that's established as a principle, I think the market recognizes that it makes sense. Everything works much better when wrong decisions are punished and good decisions make you rich." The trouble is, "that's not the way the world has been going in recent years."

If the bottom line for this financial crisis is that lenders cannot get the information they need so they can figure out who is sound and who is likely to fail, then it seems to me the policy should be to let the troubled businesses fail because this is likely to be the most effective, maybe the only, way to figure out who is safe to lend to, i.e., the businesses left standing were not the troubled businesses.

There is a very sound principle, or perhaps moral to the story, found in the quote just above:

EVERYTHING WORKS MUCH BETTER WHEN WRONG DECISIONS ARE PUNISHED AND GOOD DECISIONS MAKE YOU RICH.

Of course, this is the way of capitalism and free markets. It most certainly is not the way of governments and public policy. For quite some time now government policy has intervened in mortgage markets, and the policies amounted to subsidizing risk taking in mortgage lending.

If we want to live by this principle, then shouldn't we also want to see those who were involved in making the bad policy decisions that "socialized" the risk "punished" as well? Congress bears responsibility for the bad policy decisions, and it seems there are specific leaders in Congress who were leading the charge to so many bad mortgages. How can these members of Congress bear the responsibility for their bad policies unless they are removed from Congress? Of course, it looks like this will not happen, and it also looks like we are likely to elect a new Congress and a new President in November, and relatively few of the newly elected will understand the wisdom of this principle.

Obama-McCain: Capitalism's Friend or Foe

I watched the debate last night. At one point I think I sank into a mild despair. At that point both candidates were promising more government, and neither seemed to understand the importance of a limited (and significantly constrained) government.

So, this morning I decided to give some thought to whether either candidate would be a friend of capitalism. There might be several things to consider in attempting an answer to this question, but I only have time to consider a few.

The National Journal vote rankings pick Senator Obama as the most liberal Senator in 2007 (running mate Biden is #3 most liberal). Senator McCain was not ranked because he had too few votes cast.

The Cato Institute calls Senator McCain a FREE TRADER, while it finds that Senator Obama's voting record makes him pretty much an INTERVENTIONIST. Last night Senator McCain called himself a free trader, and he was critical of Senator Obama for failing to support free trade efforts in the Senate. Senator Obama seemed to admit McCain's view of his position because he suggested there were more important concerns than free trade.

Citizens Against Government Waste ties Senator McCain for 2008 with $0 in pork and it ties Senator Obama with $89,784,790 in pork.

Then of course, Senator Obama recently told plumber Joe that he wanted to spread the wealth around, and last night Senator McCain made it clear he did not subscribe to the same policy ideas. I'm thinking that Senator Obama's attitude about spreading wealth around is so opposite the values that support capitalism that this alone should be sufficient to say that Senator Obama is not a friend of capitalism.

Over all it seems to me that Senator Obama is not a friend of capitalism, and I think his policies and views might even be called anti-capitalism. I think Senator Obama is a foe of capitalism.

Senator McCain seems a bit more difficult for me to characterize. His voter record is clearly one of a free trader, and that suggests he is a friend of capitalism. Many of his other policy views suggest he is a friend of capitalism as well. But, he also seems to have been a bit too comfortable with big government, not only with some past policy positions but also with respect to a significant number of his policies offered in his presidential campaign, not the least of which seem to be his reactions to the financial crisis. Over all, Senator McCain may not be a close friend of capitalism, but he does seem to be a friend of capitalism.

Joe The Plumber . . . Capitalist?

So, what do you think? Does Joe love liberty and capitalism? I wonder if Joe would like to be in Congress?

Who You Gonna Call?

TRUE OR UNTRUE?

"The agent in charge of the Secret Service field office in Scranton said allegations that someone yelled “kill him” when presidential hopeful Barack Obama’s name was mentioned during Tuesday’s Sarah Palin rally are unfounded.

The Scranton Times-Tribune first reported the alleged incident on its Web site Tuesday and then again in its print edition Wednesday. The first story, written by reporter David Singleton, appeared with allegations that while congressional candidate Chris Hackett was addressing the crowd and mentioned Oabama’s name a man in the audience shouted “kill him."

News organizations including ABC, The Associated Press, The Washington Monthly and MSNBC’s Countdown with Keith Olbermann reported the claim, with most attributing the allegations to the Times-Tribune story.

Agent Bill Slavoski said he was in the audience, along with an undisclosed number of additional secret service agents and other law enforcement officers and not one heard the comment.

“I was baffled,” he said after reading the report in Wednesday’s Times-Tribune.

He said the agency conducted an investigation Wednesday, after seeing the story, and could not find one person to corroborate the allegation other than Singleton.

Slavoski said more than 20 non-security agents were interviewed Wednesday, from news media to ordinary citizens in attendance at the rally for the Republican vice presidential candidate held at the Riverfront Sports Complex. He said Singleton was the only one to say he heard someone yell “kill him.”"

With politics, especially in the middle of a presidential election season, how in the world can you figure out what is true and what is not? In politics, rhetoric is reality. I wonder, can politicians simply make things up, and with enough reporting do the made up stories become "true" in the minds of voters?

Rational Ignorance & Limited Government?

ROGER KIMBALL:

"They say an informed electorate is a bulwark of democracy. How are we doing on that score? Well, a colleague of the talk show host Howard Stern traveled up to Harlem to canvas some folks about their choice for President. It is not surprising that most said they supported Obama. Statistics I’ve seen predict that Obama will get somewhere north of 95 percent of the black vote. But why? Judging from the responses of the men and women in Harlem, it doesn’t have a lot do with his policies. Stern’s colleague took several of McCain’s policies–staying the course in Iraq, being pro-life, setting limits to stem-cell research, even choosing Sarah Palin as his VP–and attributed them to Obama. No problem! As one respondent put, it’s very important to stay in Iraq and finish the job: he was really with Obama on that. He was with him, too, on being pro-life!

Question: “And if he [Obama] wins, would you have any problem with Sarah Palin being Vice-President?”

Answer: “No I wouldn’t. Not at all.”"

I guess this supports the idea of rational ignorance, eh? Doesn't it also argue in favor of the proposition that the best government is a LIMITED GOVERNMENT?

Obama Spreads Wealth

Now, that's something I don't like to hear: "I think that when you spread the wealth around it's good for everybody."

Perhaps there is something Senator Obama, and his supporters, could learn from Ludwig von Mises on the Senator's apparent fondness for taxing the wealthy:

"Popular opinion is inclined to believe that the taxing away of huge incomes does not concern the less wealthy classes. This is a fallacy. The recipients of higher incomes usually consume a smaller proportion of their incomes and save and invest a larger part than the less wealthy. And it is only through saving that capital is created. Only that part of income that is not consumed can be accumulated as capital. By making the higher incomes pay a larger share of the public expenditures than lower incomes, one impedes the operation of capital and eliminates the tendency, which prevails in a society with increasing capital, to increase the marginal productivity of labor and therefore to raise wages." [Ludwig von Mises, Interventionism, p. 51]

I disagree with Senator Obama that "spreading the wealth around" is good for everybody. One reason for this is the important insight offered by Ludwig von Mises in the quote above.

There is at least one other reason which should be pretty obvious. The plumber/citizen asking the question clearly thinks he will not be better off if the Senator's tax plan to spread the plumber's wealth around becomes law. After all, the plumber clearly recognizes that he will be worse off with less of his wealth when government gives some of his wealth to someone else.

Actually, I think most of the Senator's tax plan is not really about wealth, and I suspect the plumber in this video was not thinking about the Senator taxing wealth either. I suspect the plumber was talking about the Senator's promise to increase income taxes. And, I suspect from the Senator's answer that it might be important to draw a basic distinction between income and wealth.

As I discussed with my public finance course recently income is earned. Income is a flow of money per time period that is received because the income earner is productive with respect to goods and services that others value. Wealth, on the other hand, is a stock. Where does wealth, or this stock of wealth come from? Wealth is chosen. In order to have wealth a person has to choose to save from income rather than consume it all.

In order to "spread the wealth around," Senator Obama has to take wealth from me or you or the plumber and then give it to someone else. In doing that wealth, which is a stock remember, is taken by government, and then government gives income to the recipient. What does the recipient do with that income? My guess is that the recipient probably spends it. After all, the policy idea the Senator is promoting is to spread the wealth around to those who don't have it. It would not make much sense to the Senator, I don't think, to take wealth from one person just to "spread it around" to another person who has wealth. The recipient is picked out of the crowd, in other words, because in the past the recipient has not tended to choose to try to make wealth out of his or her own income. The Senator's idea of spreading the wealth around would actually not spread the wealth around. Instead it would turn wealth into income, and wealth would be lost as a result.

But, I don't have to assume the recipient spends all the income that is received from the government's transfer payment. Suppose we assume government has taken $100,000 of wealth from some of the wealthy that it will spread around to 100 people who do not have wealth. Each of these 100 people will then receive an extra $1,000 in income for the year in which they receive their spreading-around-the-wealth-check. Assuming each of these 100 people save 20% of the income from the government's spreading the wealth program, the recipients all combined will then choose to save a total of $20,000 of new wealth. In other words, even assuming a pretty generous savings rate for each recipient, a program based on ideas like Senator Obama's for spreading the wealth around would turn $100,000 of accumulated wealth (and capital) into only $20,000 of wealth. Here again, the Senator's idea would turn wealth into income and wealth would be lost as a result.

I suppose some might think such a result is not a bad thing, perhaps some would think such a result is even a good thing. But less wealth means less accumulated capital over time, and less accumulated capital over time means less prosperity for all who live in our system of political economy.

This leads me to think about my son who loves to play Mario video games. I just can't seem to get the idea. I must be too old to relate. My fingers just never get it. But, what I see in a lot of these video games is the Mario character running around all over the place, here and there with those fast legs and feet just churning. The point of all this churning seems to be for Mario to pick up little treasures here and there all over the place. It seems to me that Senator Obama must think that wealth is a lot like this, otherwise I can't understand why one would support a spread-the-wealth-around policy. It makes sense to me if we find wealth. It makes no sense to me at all if we each choose the wealth we have.

So, maybe there could be a new Mario video game: Mario and Friends Spread the Wealth. The game would of course have Mario churning his legs and feet all around here and there collecting little morsels of wealth. He would find them in houses and in buildings, in parks and on roadways, in banks and in factories. Mario would run around and make his collections which he would then take to the central collection house where the wealth morsels would be left. Then off he would run with his churning legs and feet to find and collect even more wealth morsels to bring in to the central collection house. Of course, there would be another part to the game. Mario's friends would run to the central collection house and grab handfuls and armfuls of dollars which they would then run with all around the city and the country side looking for people and households and maybe even businesses who are without any little morsels of wealth. Of course, Mario's friends would leave handfuls and armfuls of dollars with the morsel-less people they find and then they would return to the central collection house to begin anew their task. But there would still be something else that must be a part of this new Mario game. After some time playing the game, it would have to be the case that Mario found it more and more difficult to find new morsels of wealth to collect. There would have to be more and more running around by Mario, while at the same time his friends were running into morsel-less characters every where the looked. His friends would hardly have to even leave the central collection house before running into many morsel-less characters. And, to really add drama to the entire game, after some time running this spread the wealth game it should be the case that the buildings, the homes, the office towers and complexes, etc. would start to fade away from the video screen. Of course, the game player would be told that the object of the game was to have every game character that Mario and his friends ran into have some morsels of wealth. The Mario and Friends Spread the Wealth game would then be won when every character in the game had at least one morsel of wealth. Of course, for me to really like this new Mario game, one more feature must be a part of the game. If the game player pays attention and learns from the game, then the game player should be able to realize that if he or she decides to stop collecting the wealth morsels then the result will be more and more wealth morsels show up all over the game, and eventually the game must be able to be won by letting the game characters choose for themselves to make their wealth.

Well, I can hope I guess that such a game would be available, because I very much want my son to growth up knowing that his wealth will be the result of his choices, and not the result of politicians running around and collecting wealth from others.

Peggy Noonan's Perspective

PEGGY NOONAN offers perspective:

"Neither party has clean hands. Or rather, both parties have dirty hands. Here is the truth, spoken by the increasingly impressive Sen. Tom Coburn: 'The root of the problem is political greed in Congress. Members . . . from both parties wanted short-term political credit for promoting homeownership even though they were putting our entire economy at risk by encouraging people to buy homes they couldn't afford. Then, instead of conducting thorough oversight and correcting obvious problems with unstable entities like Fannie Mae and Freddie Mac, members of Congress chose to . . . distract themselves with unprecedented amounts of pork-barrel spending.' That is the truth.

And yet at the debate, when one citizen-questioner invited both candidates to think aloud about the responsibility of our representatives in Washington, they both gently suggested she was cynical.

She was not cynical. She was informed.

Why would anyone trust either candidate to help dig us out of this if they can't speak frankly about what got us into it?"

I too think Senator Coburn is being honest and has got it right.

I also think Peggy Noonan gets it right. Neither campaign is up to this moment in our history because neither campaign can see what Senator Coburn sees. And, even if one or both of them did, I suspect neither be willing to say it is now crucial to begin to reign in government. Neither candidate seems to have a political philosophy based upon liberty and limited government.

Cheaper In The Future

VERNON SMITH HAS advice for today's renters:

"Housing is one-third of all U.S. wealth, totaling $19.4 trillion in the second quarter of 2008, according to the Federal Reserve. Almost all of the mortgage debt on those assets will be paid. Only a subset of homes funded recently with low down payments at unsustainable prices are at risk. All of you who rent -- a respectable American tradition -- can look forward to buying more cheaply in the future. Take your time."

Banking History of the United States

JOHN STEELE GORDON:

"In the 1990s interstate banking was finally allowed, creating nationwide banks of unprecedented size. But Congress's attempt to force banks to make home loans to people who had limited creditworthiness, while encouraging Fannie Mae and Freddie Mac to take these dubious loans off their hands so that the banks could make still more of them, created another crisis in the banking system that is now playing out."

If you want to be among the economically and historically illiterate, then don't read the rest of Gordon's story.

Oh, and be sure to notice the moral of his story in the paragraph above, i.e., Congress has responsibility for this current crisis.

Congressional Corruption & Financial Crisis

THE WSJ LOOKS at Senator Dodd:

"The Connecticut Senator has been out front denouncing the 'companies that form the foundation of our financial markets,' for 'their insatiable appetite for risk.' He has also decried 'reckless, careless and sometimes unscrupulous actors in the mortgage lending industry' and he has proclaimed that 'American taxpayers deserve to know how we arrived at this moment.' To that end, we propose he take the stand -- under oath.

Former Countrywide Financial loan officer Robert Feinberg says Mr. Dodd knowingly saved thousands of dollars on his refinancing of two properties in 2003 as part of a special program the California mortgage company had for the influential. He also says he has internal company documents that prove Mr. Dodd knew he was getting preferential treatment as a friend of Angelo Mozilo, Countrywide's then-CEO.

That a 'Friends of Angelo' program existed is not in dispute. It was crucial to the boom that Countrywide enjoyed before its fortunes turned. While most of the company was aggressively lending to risky borrowers and off-loading those mortgages in bulk to Fannie Mae and Freddie Mac, Mr. Feinberg's department was charged with making sure those who could influence Fannie and Freddie's appetite for risk were sufficiently buttered up. As a Banking Committee bigshot, Mr. Dodd was perfectly placed to be buttered."

Members of Congress have been personally and secretly allocating taxpayer dollars to specific projects back home. That's the corrupt practice of earmarking. Perhaps the corrupt nature of Congress is deeper and wider that just earmarking.

In response to the charge that he knew he was getting favors, Mr. Dodd at first issued a strong denial: "This suggestion is outrageous and contrary to my entire career in public service. When my wife and I refinanced our loans in 2003, we did not seek or expect any favorable treatment. Just like millions of other Americans, we shopped around and received competitive rates." Less than a week later he acknowledged he was part of Countrywide's VIP program but claimed he thought it was "more of a courtesy."

Mr. Feinberg, who oversaw "Friends of Angelo" from 2000 to 2004, begs to differ. He told us that as the loan officer in charge he was supposed to make sure that the "VIP" clients knew at every step of the process that they were getting a special deal because they were "Friends of Angelo.

[ . . . ]

One indicator of his influence is the $165,400 in campaign contributions -- more than to any other politician -- that Fan and Fred have given him since 1989, according to the Center for Responsive Politics. These contributions are legal. But favors like those Mr. Dodd is alleged to have received may not be. Mr. Feinberg says he went public with his story because when he heard Senator Dodd on TV talking about predatory lending, he felt it was "hypocritical" and he says, "I just thought, 'This is wrong.'"

Mr. Dodd hasn't yet released his copies of the mortgage documents, though he promised to do so more than two months ago. His office told us this week they'd get back to us on that. Meanwhile, presumably the Justice Department can have Mr. Feinberg's Countrywide documents, if it's interested."

The seeds of this financial crisis are to be found in Congressional legislation created over many years and they are to be found at least as far back as the early 1990s. Without Congress participating in rent seeking, or if Congress was constrained and limited in the degree to which it could supply the demands for rent seeking, perhaps the statutes and the other actions of members of Congress that nurtured the perverse incentives to excess risk taking would not happened.

I've wondered why it seems so difficult for our political leaders in Washington to understand that their bad policies toward mortgages and affordable housing are the foundation of this financial crisis. Perhaps one reason is that many do understand, but they like their jobs having power over the incomes and the lives of others and they have decided they have to cover up the Congressional role in all of this or else they will likely loose their jobs. Perhaps another reason is that the members of Congress are among the economically illiterate. Here is what REP. HARMON RECENTLY said in this regard:

'This has been a crash course in Econ 201, and everybody's in school,' she said.

Senator Dodd's story suggests that Congressional corruption is another possible reason. How many other Friends of Angelo are in Congress? And, how many other Friends or Mort or Friends of Andy clubs are there out there with respect to other areas in which Congress has legislated?

The Financial Crisis & Moral Hazard

GARY BECKER DISCUSSES short term and long term financial policies. With respect to the short term policies Becker emphasizes doing the best at coping, and when he turns to the long-term he emphasizes reducing the likelihood of future crises. A key aspect of his discussion is moral hazard:

"The moral-hazard consequences for banks receiving a bailout now is worrisome since they may expect to get rescued again by the government if their future investments turn sour. Yet while I find helping these banks highly distasteful, moral-hazard concerns should be temporarily relaxed when the whole short-term credit system is close to collapse. Still, the bank bill with its huge bailout does suggest that the $29 billion bailout of the bondholders of Bear Stearns in March was a mistake. It seemed to have a moral-hazard effect by encouraging Lehman Brothers and other investment banks to delay in raising more capital because they too might have expected the government to come to their rescue if times got much worse. Although the government was apparently concerned that foreign central banks were major holders of the bonds, it was unwise to give them and other bondholders such full protection."

The idea of moral hazard is that a person may choose to take more risk when he is insured. It seems to me that moral hazard is a big part of the explanation for the present situation. Government policies have encouraged moral hazard with respect to mortgage loans. It may well be the case that in the short term government actions that increase incentives with respect to moral hazard are useful in coping with the present situation. On the other hand, Becker's analysis just above also suggests that this may not be the case because it may also increase the short term negative impacts.

Even if in the short term increasing incentives toward moral hazard are helpful, why should we think that sufficient numbers of people in Congress will learn good lessons from this crisis? It seems members of Congress were advised in the past by their own colleagues, and by others with knowledge of our capital markets, about the results of the moral hazard incentives that had been created by Congress. But, Congress did not act. It seems that a dominant story line in political discussion today is not about moral hazard, but about the evils of "capitalist greed." If increasing moral hazard in the short term policy responses to this crisis is perceived as useful in coping with the present situation, then how will the politicians telling the greed story come to understand the needed changes in policies in the long term? Further, it seems this economic crisis is increasing the likelihood that the politicians with a political philosophy that tells the "capitalist greed" story will be in the majority in Washington come January. While main street may be unhappy about bailing out those who made mistakes in giving out too many bad loans, it seems unlikely that main street will also largely come to understand the role of moral hazard in all of this. After all if enough of main street, explicitly or implicity, understood this, then it seems to me the candidacy of Senator Obama would not be benefiting from this crisis as appears to be the case.

Again, I recall BRYAN CAPLAN'S "RATIONAL IRRATIONALITY," and I'm not very optimistic that the voters and the politicians will emerge for this crisis and from this election cycle with the understanding and the motivation to reduce the moral hazard created by public policy in the future.

Economy Advice For The Senators

THE WSJ HAS ADVICE on the economic policies of the presidential candidates:

". . . Because they were immediate, marginal and permanent, the 2003 tax cuts did help ignite a recovery. The world economy could use a similar U.S. tax-cut boost now to reduce the depth of recession and speed on recovery.

This is where our two Presidential candidates could help, if they have a mind to. The response by both Barack Obama and John McCain to the financial panic has done neither man credit. Both have been tactical and political in the most self-interested sense. Mr. Obama may get away with it given his lead in the polls, but Mr. McCain could use this moment to show some leadership.

Senator McCain could use tonight's debate to map out an economic argument for the final month of the campaign. He would explain to voters how we got here, and that he has a plan to calm the panic, rebuild the banking system and revive the economy. He could start by saying his economic plan was designed before this crisis, but given the panic he has scrapped it and is proposing a major and immediate across-the-board tax cut.

It ill serves voters if the two men running for the Presidency of the United States offer little more than campaign boilerplate amid a crisis of this magnitude. The whole world is focused on these sobering events. The time is now for the country's next President to match the moment."

Are you holding your breath?

Congress Just Can't So No

WSJ REVIEW & OUTLOOK:

"The House voted mostly along party lines late last month to pass something called the Credit Cardholders' Bill of Rights. Given the current financial turmoil, the last thing Congress should do is undercut access to credit and increase its price. This bill would do both."

I guess with Congress the right hand never knows what the left hand is doing. Or, maybe members of Congress have poor memories, and even less foresight and wisdom. Or maybe Congress is like the proverbial liar. After a while, the liar can't remember which lie he told when and where. Maybe members of Congress have intervened so often in our economic lives, and in so many different ways, that they just can't keep their interventions straight in their minds any more.

Oh, please, can't we all just vote for politicians who want to give us liberty rather than more interventions? I'm pretty sure I know the answer, eh?

Congress: Haunting The Economy

TOM BLUMER:

"The just-enacted legislation will likely haunt the economy, and the nation, for years.

That we have a nearly incorrigible and immature Washington political culture has never been more clear."

Some California Government Failure

WSJ's POLITICAL DIARY:

"A canary in this coalmine is the Northern California city of Vallejo, now in bankruptcy court and trying to rip up labor contracts with police and firefighters. Like the auto and steel industries and Social Security and Medicare, local governments around the country have committed to paying (in present value) $1.7 trillion in retiree benefits beyond the ability of their tax bases to fund them. In California alone, the share of city budgets going to these costs has more than doubled in just the last eight years to 26%. A lawyer for municipal unions laments the shape of things to come: 'Other cities are now saying they could just do a Vallejo.

Yup -- setting the stage for a generation's worth of political warfare. There are two choices: Either we can boot-strap our way out or inflate our way out.

You won't be hearing about any of this from the presidential campaigns, of course. Boot-strap means stripped-down tax and regulatory policies that allow the economy to grow faster -- what Barack Obama and Joe Biden continually anathematize as "deregulation." It also means some brutal revoking of promises to workers and retirees -- as Vallejo is trying to do. (Can't happen? Ask airline and steel and auto workers.) What's the alternative to the boot-strap approach? To pile on taxes even at the cost of economic stagnation, with the Fed increasingly under pressure to run the printing press to create an illusion of rising incomes.'"

Capitalism & Development

WILLIAM EASTERLY:

"Development economics still bears the scars of the Depression. A prominent World Bank Growth Commission concluded in May that 'fast, sustained growth does not happen spontaneously. It requires a long-term commitment by a country's political leaders,' and 'each country has specific characteristics and historical experiences that must be reflected' in the leaders' 'growth strategy.' Some at the U.N. still recommend the discredited Big Push strategy of state-planned investment.

How much poverty has endured because individual entrepreneurs were shunned in favor of the likes of the $5 billion state-owned Ajaokuta Steel Mill in Nigeria, which never produced a bar of steel? Or because African governments spend their time preparing World Bank-required national Poverty Reduction Strategy Reports instead of freeing space for innovators?

We will never know. But we do know that the free market has a long-run track record of creating prosperity -- even with the occasional crash. The Depression's deceptive intellectual legacy is that development flows from all-knowing states rather than creative individuals. Here's hoping that the backlash to today's crash will not spawn another round of bad economics for the poor."

Government Failure Fighter

Here's the story of a member of Congress, CONGRESSMAN RYAN, who fought against the government failure at the bottom of this financial crisis:

"Mr. Ryan is among the former. As early as 2000 he was warning in House hearings that Fan and Fred were rushing into subprime loans and mortgage-backed securities, growing and concentrating their risk, and putting taxpayers on the hook. He's so vociferously called for more supervision that he was once stalked by a Fannie Mae lobbyist.

In 2002 he co-sponsored legislation that would have put these beasts under SEC accounting standards. Fan and Fred, and their congressional enablers, killed it in committee. In 2005 he signed on to a bill that would have subjected the giants to modest reform. The Fan-Fred alliance speared it in the Senate.

In 2007, Mr. Ryan opposed a proposal by Texas Republican Randy Neugebauer to gut systemic risk protections for the duo. It passed 383 to 36, with 162 Republicans voting for the companies. Many were the same members who this week thought it too politically risky to stabilize a market rocked by the very Fan-Fred privileges they granted."

Note the "as early as 2000," as well as the fact that this member of Congress tried to get legislation as early as 2002. I think Mr. Ryan's story trumps Senator Obama's story (paraphrasing): "I wrote letters each of the past two years."

History Lesson - Financial Crisis

RUSSELL ROBERTS tells the story of this financial crisis. Here is the moral of the story:

"Fannie and Freddie played a significant role in the explosion of subprime mortgages and subprime mortgage-backed securities. Without Fannie and Freddie's implicit guarantee of government support (which turned out to be all too real), would the mortgage-backed securities market and the subprime part of it have expanded the way they did?

Perhaps. But before we conclude that markets failed, we need a careful analysis of public policy's role in creating this mess. Greedy investors obviously played a part, but investors have always been greedy, and some inevitably overreach and destroy themselves. Why did they take so many down with them this time?

Part of the answer is a political class greedy to push home-ownership rates to historic highs -- from 64% in 1994 to 69% in 2004. This was mostly the result of loans to low-income, higher-risk borrowers. Both Bill Clinton and George W. Bush, abetted by Congress, trumpeted that rise as it occurred. The consequence? On top of putting the entire financial system at risk, the hidden cost has been hundreds of billions of dollars funneled into the housing market instead of more productive assets.

Beware of trying to do good with other people's money. Unfortunately, that strategy remains at the heart of the political process, and of proposed solutions to this crisis."

Today's financial crisis is not a story of market failure. It is a story of government failure. Some time ago Congress began intervening in real estate markets and changing incentives that affected both the supply and the demand for mortgages. The changes resulted in incentives to make a larger number of risky loans than would otherwise have been the case. In addition, Congress began requiring Fannie and Freddie to make larger and larger numbers of mortgage loans affordable, which of course also meant a larger and larger number of loans than would otherwise have been made. Congress encouraged and it even demanded many of the risky loans that are the bottom line of the present financial crisis.

Don't be fooled by the political yak-yak today that this crisis has it's beginning some time during the Bush presidency. The earliest date Professor Roberts writes about in his history is the year 1992, and many of the events he writes about happened before the election year of 2000. This crisis began to brew at least 16 years ago. And, it seems to me that the government's interventions with mortgage loan incentives began even earlier than this.

This crisis does not illustrate a failure of deregulation, and it does not illustrate the failure of capitalism. This crisis illustrates the failure of unconstrained government.

Indeed, beware of public policies that seek to do good with other people's money.