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.

Afghanistan: Power & Prosperity

MICHAEL YON FROM AFGHANISTAN:

"These compounds offer a strong contrast to large American houses with front lawns ringed by picket fences. The people who live in these compounds might seem very different from us, but they want basically the same things: to earn a living and raise their families. But yet again, the Afghan people are caught in the crucible of history, and their homes are battlefields. War is part of the character of many of these people. They are not all innocent victims. The ones I am meeting are very friendly, but fighting is life to them. Afghanistan is a primitive patch of Earth. By comparison, Iraq is very developed and modern. Still, it’s easy to see why so many westerners like Afghan people. They can make you feel welcome, so long as you aren’t shooting at them."

Earn a living and raise a family.

You really should check out all the photos of the compounds.

Congress: What Were We Thinking?

ROGER KIMBALL REFLECTS on Congress and the financial crisis:

"Did we really elect these people to represent our interests? What were we thinking?"

If you are interested in an answer to Mr. Kimball's question, you might want to reflect a bit on Bryan Caplan's THE MYTH OF THE RATIONAL VOTER.

Crisis Bill & Coverup

A WSJ EDITORIAL this morning has a couple of things that confuse me. First,

"The government needs the power to use public capital to defend and stabilize the financial system. In that sense, we are really bailing out ourselves."

What does "public capital" mean? I suspect this is a phrase that obscures what is real. I don't think government has any savings or investments in real estate or investments in stock ownership that it can reallocate to defending and stabilizing the financial system. I think the government can act in this case based upon taxing the "public" or perhaps by increasing the money supply (and increasing inflation) or perhaps by borrowing against the future productivity of our system of political economy. Maybe if we recognize such actions of government, then we can see "public capital" to mean that the rest of us invest less today in what would otherwise become more capital in the future which would be owned by us privately. Of course, more capital owned by us now and in the future means more growth and prosperity in the future. So, using "public capital" today seems to me less growth and prosperity in the future. But, it seems to me using such a term actually hides this reality from us. Perhaps the present crisis suggests similar tradeoffs, but I don't think we should hide other truths by the use of terms that seem to make little sense.

Second,

"Mr. Ryan and some other stalwarts are proof that political leadership does exist in Washington, albeit not always at the highest ranks. In this sense, too, the votes this week in Congress are about bailing out our political class from its own embarrassing performance. Americans are anxious, even frightened, about the financial system. They are looking for leaders who will act to defend it."

Well, yes, I do think the actions of Congress are a major part of the explanation for the present circumstances. I suppose Americans are looking for leaders who will defend our system. Unfortunately, the public debate seems to obscure the Congressional responsibility for the present situation in general, and it also seems to hide the specific blame on certain members of Congress that should be made clear.

The bailout of the political class seems likely to continue the interventionism that explains the present situation. The lesson that I think should be learned in all this is that members of our political class, and our government governors in general, cannot possibly ever have the information necessary to use government's force and coercion in ways that will accomplish their purposes for the public policies they choose. The general lesson to learn is that we should have a government that rests more upon economic liberty and less upon the choices of our governors in Congress and in the government bureaucracy.

But this is not a lesson that is going to be learned by this bailout of our political class. Of course those in Congress now, even if they know this lesson, do not want us to know this lesson because they want to stay members of our political class. Thus, I think this "bailout" of our financial markets is also a "cover-up" for our political class.

On Frozen Credit Markets

Here's an interesting observation by DON BOUDREAUX:

"I can't count the number of times I've heard in the past few days that credit markets are now frozen in America. Such a 'freeze' allegedly is a main reason justifying Uncle Sam's longed-for bailout of Wall Street.

Well, some tropical sun must be hitting at least a small part of the credit market, for yesterday's mail brought to my son, Thomas, an offer of a credit card from American Express.

Thomas is eleven. And while his credit is pretty good with his mother and me, I'm very impressed that he's managed to establish his credit creds so firmly with a company that, if there's truth in today's told tale, has scant amounts money to lend.

In looking over this offer of credit to my pre-pubescent son, I see that Thomas Macaulay Boudreaux's qualifications for this generous offer seem to be the fact that he has a mailing address and a frequent-flyer number with a major airline.

Geez, I can only imagine what sorts of offers of credit will flood in to Thomas if and when Uncle Sam thoroughly thaws the credit markets with a bailout."

Maybe this illustrates one of the principles I like to keep in mind: You can't trust what you read or hear that comes from the news industry.

REJECTED!

Wow. What an interesting turn of events, eh? The House rejects the (first) big bailout deal. The House leadership tells the public we've got a deal, but apparently the House leadership can't count votes. Maybe this says something about why the approval rating of Congress is even lower than the approval rating of the President, i.e., the Congressional leadership seems just not too competent.

Congress: Crash Course In Econ?

I FIND AN INTERESTING ADMISSION in today's Politico:

"Rep. Jane Harman (D-Calif.), said that her Democratic colleagues have come to see the decision they face in the stark terms Delahunt described.

'This has been a crash course in Econ 201, and everybody's in school,' she said. In the five-and-a-half hours leading up to the meeting, she said, she’d been in five hours of meetings in which the details of the rescue plan were discussed."

Wow. I wonder. If you know that you know very little about economics, then I wonder why you think you should try to regulate the economy?

Financial Crisis: Congressional Coverup?

JEFF JACOBY:

"'THE PRIVATE SECTOR got us into this mess. The government has to get us out of it.'"

That's Barney Frank's story, and he's sticking to it. As the Massachusetts Democrat has explained it in recent days, the current financial crisis is the spawn of the free market run amok, with the political class guilty only of failing to rein the capitalists in. The Wall Street meltdown was caused by "bad decisions that were made by people in the private sector," Frank said; the country is in dire straits today "thanks to a conservative philosophy that says the market knows best." And that philosophy goes "back to Ronald Reagan, when at his inauguration he said, 'Government is not the answer to our problems; government is the problem.' "

In fact, that isn't what Reagan said. His actual words were: "In this present crisis, government is not the solution to our problem; government is the problem." Were he president today, he would be saying much the same thing.

Because while the mortgage crisis convulsing Wall Street has its share of private-sector culprits -- many of whom have been learning lately just how pitiless the private sector’s discipline can be -- they weren't the ones who "got us into this mess." Barney Frank's talking points notwithstanding, mortgage lenders didn't wake up one fine day deciding to junk long-held standards of creditworthiness in order to make ill-advised loans to unqualified borrowers. It would be closer to the truth to say they woke up to find the government twisting their arms and demanding that they do so - or else.

This is where I think we should be finding the explanation for this crisis. When people risk their own money, without the assurance that government will cover their bad bets, people take fewer risks. You should read the whole piece by Jacoby and see if his story makes more sense to you that the stories being told by most of the members of Congress.

The Question We Have To Ask

Of course the reports are that Congress has a "bailout" deal. I'm not sure I'm going to like the deal. I'm also not sure I will even be able to get information about what the specifics of the legislation will look like.

In the meantime, I would like to take a look at something Senator Obama said in the debate last Friday. The exerpt here begins with a question from Mr. Lehrer:

But, I mean, are you -- do you favor this plan, Senator Obama, and you, Senator McCain? Do you -- are you in favor of this plan?

OBAMA: We haven't seen the language yet. And I do think that there's constructive work being done out there. So, for the viewers who are watching, I am optimistic about the capacity of us to come together with a plan.

The question, I think, that we have to ask ourselves is, how did we get into this situation in the first place?

Two years ago, I warned that, because of the subprime lending mess, because of the lax regulation, that we were potentially going to have a problem and tried to stop some of the abuses in mortgages that were taking place at the time.

Last year, I wrote to the secretary of the Treasury to make sure that he understood the magnitude of this problem and to call on him to bring all the stakeholders together to try to deal with it.

So -- so the question, I think, that we've got to ask ourselves is, yes, we've got to solve this problem short term. And we are going to have to intervene; there's no doubt about that.

But we're also going to have to look at, how is it that we shredded so many regulations? We did not set up a 21st-century regulatory framework to deal with these problems. And that in part has to do with an economic philosophy that says that regulation is always bad.

I agree with Senator Obama that before we get to carried away writing legislation we really should ask ourselves how we got into the present situation. However, it seems to me the Senator doesn't really offer a direct answer to his own question. But, maybe it seems that way to me because what he may have offered as his answer seems either lame or incorrect to me.

Perhaps his answer to this important question is this: Well, Jim, the explanation for how we got into this situation is that a couple of years ago I sent out a warning, and then last year I sent out a letter of warning, and my warnings were ignored. That is how we got into this situation.

He may have sent out warnings, but if his answer is really I said trouble was coming but no one listened, then I wonder what he thought his job was in the Senate. As we can see from the past few days, this situation isn't one that seems to have fallen within the power of the President or within existing statutes. If there was a problem, then why didn't the good Senator get to work to craft legislation that would deal with the crisis he was warning about? So, I think if this was his answer, it is kind of lame. Especially since I think it is also the case, from what I've been led to believe from news and commentary, that both Presidents Clinton and Bush made more than one effort each to get Congress to deal with the operations of the Fannie's. It seems each and every one of the efforts by these Presidents was rebuffed by Congress. Nothing changed. Well, maybe something changed, maybe Congress made changes that increased the incentives for the Fannie's to make loans that would ordinarily have been thought to be too risky. Some of the things I read and hear make it plausible to me that Congress did indeed increase the incentives for the bad loans.

In any case, maybe he offers a different answer. He speaks of shredding regulations. I'm not really sure what that is supposed to mean. Probably just political rhetoric that he hopes will merely be taken any way that favors him in the polls. It seems to me it is probably spin trying to confuse or hide the real answer to his good question. The real answer is that Congress made the bad incentives that led to the current situation.

Perhaps you have heard a simple summary of the incentives I refer to here: "privatize the returns, socialize the risks." I think this is a pretty neat and simple way to explain how we got to the present crisis. Congress created these incentives by insuring loans which really means Congress subsidized giving mortgage loans to customers that used to be thought to be too risky. So, I think this simple slogan is a good way to understand the basic economics of how this crisis started.

But, of course, Senator Obama doesn't want us to hear this simple explanation, because consider how the exerpt above ends. It ends by asserting this crisis is due to unregulated capitalism. Such an assertion seems wrong and quite the opposite of the real explanation. But, consider, if you are a member of Congress, you certainly don't want the voters to come to believe the problem was caused by either the action or inaction of Congress. And, if you tend to support policies that regulate markets rather than free markets, then you certainly don't want the voters thinking that it is actually the regulatory structure of our capital markets that explains our present circumstances.

Finally, notice that the policy that has been discussed the most to respond to this crisis involves government buying real estate and then later selling it for a "profit" for the taxpayers. I suppose this may sound good to many voters, but let me use that simple phrase above to explain why I think the essential idea of this "bailout" is a bad idea. The "bailout" take a situation of "privatize returns, socialize risks," into a situation of "socialize returns, socialize risks." Of course, that sounds like socialism doesn't it? Obviously, I think socializing risks led to the crisis, and now socializing returns can't fix the fundamental reason for this crisis. We should be looking for an answer that gets us to "privatize returns, privatize risks." That's capitalism, of course. I'm pretty sure Senator Obama doesn't want to move in that direction.

Maybe the question we have to ask ourselves, or ought to ask ourselves, is why are we apparently going to respond to the current crisis by moving closer to socialism?

Bailout Gallows Humor:

TODD ZYWICKI points to a nice letter to the editor:

"While witnessing, but not participating in, the home real estate frenzy in 2005 and 2006, I kept asking: Who is the idiot buying up all these mortgages issued on inflated home prices to all these people who have neither the capacity nor the intention to repay the loans?

Now I learn it was me.

TED THACKER Ann Arbor, Mich."

Oh, it seems to be getting hard to avoid that sinking feeling, eh?

Chilling Bailout

ARNOLD KLING on bailout:

"I found this story too depressing to finish. It says that we have a bipartisan agreement on a bailout, and I read only as far as the proud quotes from Chris Dodd and Barney Frank.

The unemployment rate is 6.1 percent, about average for the last 30 years. What adversity there is in the real economy is due more to oil prices than to credit market developments. Acting historic emergency legislation now is like doing a heart transplant on a patient with a head cold or calling out the National Guard to stop a food fight in the school cafeteria.

The Case Against the Bailout seems compelling, or at least worth discussing. The case for it is a vague threat issued by the nation's leaders that awful things are in store if this is not done. Awful things are in store, all right. Because of what is about to be done.

For me, this is like watching an announcement that in order to restore order Washington is being taken over by a military coup. I find it that chilling."

Interventionism & The Lessons of History

Ludwig von Mises from his book INTERVENTIONISM:

This analysis is intended merely to explain that the economic policy of interventionism,which is advertised by its advocates as a progressive socio-economic policy, is based on a fallacy. This book demonstrates that it is not true that interventionism can lead to a lasting system of economic organization. The various measures, by which interventionism tries to direct business, cannot achieve the aims its honest advocates are seeking by their application. Interventionist measures lead to conditions which, from the standpoint of those who recommend them, are actually less desirable than those they are designed to alleviate. They create unemployment, depression, monopoly, distress. They may make a few people richer, but they make all others poorer and less satisfied. If governments do not give them up and return to the unhampered market economy, if they stubbornly persist in the attempt to compensate by further interventions for the short-comings of earlier interventions, they will find eventually that they have adopted socialism.

[ . . . . ]

If there is anything history could teach us it would be that no nation has ever created a higher civilization without private ownership of the means of production and that democracy has only been found where private ownership of the means of production has existed.

Should our civilization perish, it will not be because it is doomed, but because people refused to learn from theory or from history. It is not fate that determines the future of human society, but man himself. The decay of Western civilization is not an act of God, something which cannot be averted. If it comes, it will be the result of a policy which still can be abandoned and replaced by a better policy. (pp. 92-93)

Our system of political economy today is very much interventionist. Of course it is also "capitalist" in that there is a large realm of private ownership of the means of production. One of the important things to learn from this book is that the policies of the interventionist don't accomplish the goals of the interventionist. But not to worry for the interventionist because for the interventionist this just means it will always seem like there is more work to do later on. In other words, the interventionist politician has a pretty good scam working in that the earlier interventions of legislation and regulation just turn into situations later that are seen as needing more legislation and more regulation. Aaron Wildavsky noticed this too, and in SPEAKING TRUTH TO POWER he explained his conclusion that government had never fixed any of the problems it sought to fix. Instead, it was his assessment that government merely created more and/or different problems for the future to face.

Ludwig von Mises ends his analysis of interventionism with the words I quote above. So, he seems to hold some optimism that we can, and might, still learn our lessons from history. Unfortunately, it seems to me that politics today suggests that not enough people have learned these lessons. There seem to be very few voices speaking about interventionism and the present financial situation. Certainly few of our politicians are speaking publicly about the present "crisis" by noting it is likely the result of earlier government interventions.

Take a look also at the policies advocated by the presidential candidates and by our two major political parties. The policy debates tend not to be about reducing the interventionism in our system of political economy, but rather they seem to be about which new intervention will be the better intervention. The "change" being debated is not a change away from interventionism and back toward capitalism. Pity. It seems too many refuse to learn from history.

FAN & FRED

A WSJ EDITORIAL take note of politics with respect to Fannie Mae and Fredie Mac:

"The MBS portfolios have long been both the chief source of the systemic risk posed by the two mortgage giants and of the profits that so handsomely enriched shareholders and officers alike for decades. Without the extreme leverage inherent in those portfolios -- which the companies borrowed heavily, at taxpayer-subsidized rates, to accumulate -- their federal takeover might never have become necessary.

For years, Mr. Frank and other friends of Fan and Fred opposed not only bills written to limit the size of their portfolios, but any bill that in their view gave an independent regulator too much discretion to order a reduction. This was true of the reform that his House committee passed last year. Only when the White House caved to Mr. Frank and dropped its earlier insistence that a reform bill rein in the portfolios did Mr. Frank move his bill."

I'm not trying to draw attention to the politician under the WSJ's spotlight here. I suppose if the staunch support didn't come from this politician it would have come from another politician. The point I want to draw attention to is that the failures of FAN and FRED have much to do with the failures of government. Check out the entire editorial and note the idea that "taxpayer-subsidized rates" are important parts of the story of these failures.

Congressional Secrecy & Corruption

Email from Senator DeMint:

The Senate will likely vote tomorrow on Sen. DeMint's amendment to the Defense Authorization bill. The amendment strikes Section 1002 that incorporates all of the secret earmarks written in committee reports, giving them the force of law even though they are not in the bill, not debated, not voted on, and not signed into law.

This "incorporation language" must be stopped.

- It effectively reverses the President's Executive Order that Porkbusters pushed him to issue, which aims to stop secret, non-legislative earmarks dead in their tracks.

- It forces agencies to make funding decisions based on the instructions they get from committee staff who author these reports rather than on merit.

- It prevents Congress from debating and voting on earmarks, which is the only true form of transparency and accountability.

- It sets a dangerous precedent that will be repeated if it is not challenged and stopped.

Please also note that the GOP earmark reform task force created by Sen. McConnell recommended that all earmarks be written into our bills. That's what the Constitution requires. The vote tomorrow on DeMint's amendment will test Republican support for this principle.

If the amendment is adopted, the earmarks in the reports will become what Sen. Durbin famously described as just a "note to your sister" and will not be legally binding. Instead, government agencies will be able to spend these taxpayer funds on true national priorities, not special interest politics.

Glenn Reynolds:

If people want appropriations for their pet projects, it seems to me they should have to ask for them publicly, have them reviewed through the usual channels, and have them voted for. Is that asking too much? Apparently. But efforts at putting secret earmarks through are likely to play badly right now, with the federal government already facing financial strain from bailing out corrupt, politically-connected entities like Fannie Mae.

I also notice that the press seemed a bit quicker to pick up on these earmark stories back when the GOP controlled Congress . . . .

I certainly hope earmarking will play badly these days. I think it should be regarded as unconstitutional for Congress to "act" without actually writing legislation for review by all members of Congress, much less by the public. And, if earmarking can't be seen as unconstitutional, then surely secrecy in spending decisions should suggest that our Congress is corrupt.

Earmarks: Senators vs. Governors

There is an article today in the Wall Street Journal about earmarks, and it seems to me the authors either (a) seek to use their article to influence public opinion negatively toward Governor Palin, or (b) they reveal their ignorance of the very matters they choose to report on. Here is how the article begins:

Last week, Republican presidential candidate Sen. John McCain said his running mate, Alaska Gov. Sarah Palin, hadn't sought earmarks or special-interest spending from Congress, presenting her as a fiscal conservative. But state records show Gov. Palin has asked U.S. taxpayers to fund $453 million in specific Alaska projects over the past two years.

These projects include more than $130 million in federal funds that would benefit Alaska's fishing industry and an additional $9 million to help Alaska oil companies. She also has sought $4.5 million to upgrade an airport on a Bering Sea island that has a year-round population of less than 100.

The article begins by noting that the governor of Alaska asked the national government for funding for projects in Alaska. So, who is surprised by this? I suspect many people in Alaska, as well as people in each of the rest of the 50 states, expect this to be part of the normal job responsibilities of their governor. Perhaps the Alaska state legislature was involved in these projects as well.

The article moves on to bring up the controversy over earmarks, and seems to take it for granted that Governor Palin was asking for earmarks:

During an appearance Friday on ABC's "The View," Sen. McCain said Gov. Palin shared his views, and hasn't sought congressional earmarks. "Not as governor she hasn't," he said.

In fact, in the current fiscal year, she is seeking $197 million for 31 projects, the records show. In the prior year, her first year in office, she sought $256 million for dozens more projects ranging from research on rockfish and harbor-seal genetics to rural sanitation and obesity prevention. By comparison, her predecessor, Gov. Frank Murkowski, sought more than $350 million in his last year in office.

Now, I may be a fool, but it seems to me that phrases like "she is seeking" and "she sought" are inaccurate, and quite possibly intentionally chosen to distort. It seems to me that Governor Palin was not acting for herself, but instead, that she was carrying out her duties as governor of "the great state of Alaska." In other words, it was the state of Alaska that was seeking funds from the national government for "projects ranging from research on rockfish and harbor-seal genetics etc."

The article ends by noting the McCain campaign, including Governor Palin, has been critical of Senator Obama's record with respect to earmarks:

On the campaign trail, Gov. Palin has repeatedly attacked Sen. Obama on earmarks. "Our opponent has requested nearly one billion dollars in earmarks in three years. That's about a million for every working day," she said at a rally in Albuquerque, N.M.

Sen. Barack Obama requested a total of $860 million in earmarks in his Senate years, according to Taxpayers for Common Sense. That doesn't include $78 million for projects that were national in scope and had been requested by many lawmakers. Sen. Obama halted all earmark requests in fiscal 2009.

It is difficult to compare Sen. Obama's earmark record with Gov. Palin's -- their states differ in size, for instance, and the two candidates play different roles in the process. . . .

Indeed, Senator Obama and Governor Palin do have different roles to play with respect to earmarks, while Senators Obama and McCain play quite the same roles with respect to earmarks.

The practice of earmarking is a Congressional practice. Both Senator Obama and Senator McCain are members of Congress, and therefore both Senator Obama and Senator McCain can participate in the corrupt practice of Congressional earmarking. In stark contrast, Governor Palin is not a member of Congress, and therefore Governor Palin cannot choose to engage in the corrupt practice of Congressional earmarking.

Why do I say Congressional earmarking is corruption? In case you haven't been paying close attention to the scandal that is Congressional earmarking consider the following explanation from an article at Harpers online:

Only later, after the approved bill had been shuffled off to the President for signature, could lawmakers and laymen alike peruse its contents in earnest. Scattered throughout the bill were hundreds of hastily inserted pages of “earmarks,” or allocations for local projects that are tucked into federal budgets. As approved at the November 17 appropriations meeting, the Foreign Operations bill had contained a mere nine earmarks. The omnibus measure, which was completed after two feverish days of work, allocated money for 11,772 separate earmarks. There was $100,000 for goat-meat research in Texas, $549,000 for “Future Foods” development in Illinois, $569,000 for “Cool Season Legume Research” in Idaho and Washington, $63,000 for a program to combat noxious weeds in the desert Southwest, $175,000 for obesity research in Texas. In the end, the bill’s earmarks were worth a combined total of nearly $16 billion—a figure almost as large as the annual budget of the Department of Agriculture and roughly twice that of the Environmental Protection Agency. It was the biggest single piece of pork-barrel legislation in American history.

Of who added these grants, no public record exists. Except in rare cases, members of Congress will refuse to discuss their involvement in establishing earmarks, and the appropriations committees have a blanket rule against commenting. Often it is difficult to discern even who is receiving the funds: earmarks are itemized in bills but generally without disclosure of the direct recipient—just a dollar amount, destination, and broad purpose. Indeed, in the matter of the $16 billion burglary, and the similar acts of mass theft plotted for this year, the only certainty seems to be this: that lawmakers and lobbyists collude to conceal, to the utmost extent possible, their actions from the American taxpayer, who serves as the ultimate benefactor to their chronic bouts of generosity.

What do members of Congress want to hide when it comes to the practice of earmarking? Their corruption of course. Please allow me to quote myself so that I might try to drive the point home:

It's kind of hard for me to imagine that our Constitution is consistent with the practice of earmarks. It is certainly true that the Constitution grants Congress the power to tax and spend on programs consistent with the enumerated powers of Congress. But this is a power of Congress and not a power granted to each individual member of Congress. Earmarks allow Congressman X or Senator Y to say that project Z back home, which is the brain child of Mr. K (a friend? neighbor? contributor?), will get money from taxpayers all across the country.

Individual members of Congress have been allowed the opportunity to individually use the government's power to tax in order to pay friends, family, favored political supporters, and maybe even themselves on at least some occasions. That's corruption, and if it wasn't corruption then as a member of Congress you would want your constituents to know the many ways in which you've been bringing back home the Congressional bacon.

As a matter of Senators versus Governors, Governors simply cannot choose to make a Congressional earmark, nor can they choose to hide their earmarks from public review. Actually I can imagine that the so-called "earmark" requests of Governor Palin arrived in Washington on official Governor of Alaska letterhead. In contrast, the part in the earmarking process played by individual members of Congress not only does not appear on their official letterhead, but the earmarks themselves do not appear in written form in legislation and often there is meant to be no official and public way to tie an earmark to the member of Congress who makes it.

So, how do Senators Obama and McCain stack up with respect to earmark corruption? Since I've been following this scandal I know that Senator McCain has fought in the Senate to end the practice. While I've not followed Senator Obama closely on this issue, my impression is that he did not fight against the practice in the past.

With respect to the authors of the Wall Street Journal article, they seem to me to have made little effort to help the reader understand the corruption of earmarks and the role in earmarks played by Senators versus Governors. Does this reflect ignorance or bias?

[Hat Tip: Instapundit]

Wits To Prosper

Deirdre McCloskey in THE BOURGEOIS VIRTUES:

"The real danger comes from assaults on the human capital that made land scarcity irrelevant in the first place. We can pollute Lake Erie. In fact, we did. During the 1960s every environmentalist declared with angry assurance that Erie was biologically dead forever, kaput, finite, over. And yet in the 1990s we can bring it back for fishing and swimming, and did, if we have our wits about us. . . . . The modern world is different from a zero-sum world, which Malthus theorized just as it was disappearing forever. . . .If we have our wits about us. Responding to the real danger threatening our future, I argue, requires attention to human freedom. It is human freedom which has given us the wits to prosper." (34-35)

I have not yet read her entire book, but I think the first chapter is a marvelous defense of capitalism and freedom.

Taxing The Wealthy

We hear pretty often in politics these days about "tax cuts for the wealthy" and about taxing the wealthy because they can afford to pay. The underlying assumption of those who speak of such things seems to be that reducing taxes on the wealthy would surely not be in the interest of those who aren't wealthy. Perhaps there is something to be learned from Ludwig von Mises on such issues:

"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 inncomes, 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]

Friedman Says -- Innovation Policy Please

THOMAS FRIEDMAN:

"What I found missing in both conventions was a sense of priorities. Both Barack Obama and John McCain offered a list of good things they plan to do as president, but, since you can’t do everything, where’s the focus going to be?

That focus needs to be on strengthening our capacity for innovation — our most important competitive advantage. If we can’t remain the most innovative country in the world, we are not going to have $1 billion to toss at either the country Georgia or the state of Georgia.

While we still have enormous innovative energy bubbling up from the American people, it is not being supported and nurtured as needed in today’s supercompetitive world. Right now, we feel like a country in a very slow decline — in infrastructure, basic research and education — just slow enough to lull us into thinking that we have all the time and money to play around in Tbilisi, Georgia, more than Atlanta, Georgia."

Both candidates are now talking about "change" as a center point in their campaigns. It seems to me they don't want to be too explicit about the changes they would like to see happen. Still Senator McCain seems to be saying that he specifically wants to change the way Congress is corrupt with respect to earmarks. I would like to see the corrupt practice of earmarking ended.

Senator Obama's "change" most often seems to me just about changing the political party that claims the occupant of the White House. And, when Senator Obama talks about possible changes in policy, then I start to get a bit concerned because of the issue discussed in my last post. You see, I agree with Friedman that it would be good if the policies of the next President were good for innovation and entrepreneurship in the United States. Unfortunately, in my view, the very liberal policies Senator Obama has voted for in the past tend to be the sorts of policies that reduce innovation and entrepreneurship over time.

Instead of turning to Washington and government policies for change, perhaps we would do well to realize that change happens all the time in our lives and in our system of political economy. Sometimes the change is not so good, but most often the economic changes in a system of political economy like ours have been, over time, good for our standard of living. Over time, the changes that have allowed us all to enjoy greater prosperity are the changes that follow from innovation and entrepreneurship. And, of course, the innovation and entrepreneurship flow from the private sector and capitalism, not from the interventionist public policies of Congress and the Presidency. Senator McCain may understand this. Senator Obama's past suggests he likely does not understand this.

Obama Searching For The Median

VICTOR DAVIS HANSON:

"It is interesting how Obama has been evolving toward McCain’s positions rather than vice versa. Take Iran. At first, to Obama it posed little threat; now it is a danger large indeed—as McCain insisted all along. Obama used to ridicule the surge and claim it had failed; now he assures us that it has worked beyond our wildest dreams. Obama was opposed to oil drilling, and was silent about coal and nuclear power. Now suddenly he has dropped mention of inflating our tires, and is referring to oil, gas, coal, and nuclear production as legitimate means to wean ourselves off foreign oil. In political terms, all this is wise, since voters ultimately want to be reassured about centrist positions rather than worry over consistency. As Anbar quiets and we leave, expect him to suggest his pressure and criticism were responsible for the Iraqi government’s turn-about.

On matters like abortion, capital punishment, gun control and FISA, Obama again moves closer to McCain rather than vice versa. Apparently, he realizes that no northern Democratic liberal has been elected since JFK, nearly a half-century ago—an amazing fact in and of itself—and so has to follow the Bill Clinton centrist route, which can be accomplished by a variety of measures."

It is interesting, and it does seem to be happening. The simple voting model in economics that says the preferences of the median voter will determine the outcome of an election seems to apply in this case.

It has been observed that Senator Obama has the most liberal voting record in the Senate, and then he picked the 3rd most liberal senator in Senator Biden to join him on the ticket. Unless the median voter preferences in the country are very liberal, it would seem that Senator Obama has quite a ways to go to get to the median. Mr. Hanson's observations suggest that even Senator Obama recognizes that his past policy preferences aren't likely to capture the median voter's preferences.

Now I have to wonder if Senator Obama is going to be successful in his search to appeal to the median voter. Will voters decide that his past policy preferences are his true policy preferences? Or will voters decide that what he says now actually reflects his true policy preferences?

The Real Economic Scorecard

ROBERT SAMUELSON takes a look at the economy:

"Just last week, the Census Bureau released its annual study of household incomes, poverty and health insurance -- often called the nation's 'economic report card.' Its hard numbers seemed to confirm how many Americans feel. Sure, we're prosperous, but prosperity is fraying. Except for the rich, living standards are stagnant. Poverty is up; health insurance coverage is down. Naturally, both Barack Obama and John McCain seized upon the report to claim that their policies would restore progress.

Hold it.

Though echoed by policy wonks, pundits and politicians -- last week, Bill Clinton -- the conventional wisdom is wrong or, at least, misleading. Here's a more accurate assessment. For most Americans, living standards are increasing, albeit slowly, over any meaningful period. But rising health spending is eroding take-home pay, and immigrants are boosting both poverty and the lack of health insurance. Unless we control health spending and immigration, the economic report card will continue to disappoint. Unfortunately, neither Obama nor McCain seriously addresses these problems."

Samuelson makes sense to me. He specifically suggests three reasons why the "conventional wisdom" of the politicians paints an inaccurate picture. One of these reasons I think we should pay particular attention to:

Low-skilled immigrants, concentrated among Hispanics, outnumber the high-skilled. They drag down median incomes and raise poverty and the number of uninsured. One way to filter out the effect on income is to examine groups with few immigrants or their American-born children. Consider non-Hispanic white families. From 1997 to 2007, their median incomes rose about $6,000, to $69,937, a gain of about 9 percent. For black families, the increase was also about 9 percent, though only to $40,222. Again, not stagnation.

Immigration's effects on poverty and health insurance coverage are greater. Since 1990, Hispanics numerically account for all the increase in the number of officially poor. Similarly, immigrants represented 55 percent of the increase of the uninsured from 1994 to 2006, says the Employee Benefit Research Institute. Many unskilled workers can't get well-paid jobs with insurance.

Perhaps another way of putting his point is that the country is effectively importing poverty. It strikes me as a bit odd for public policy to be to import poverty while at the same time our politicians get on the stump and say they will create new government programs to end poverty. It seems that much of the recent "measured" increase in poverty could be "cured" by changing immigration policy.

But perhaps there is another, more ironic, point to consider. The conventional "wisdom" is that the economy is struggling through a bad time. Perhaps. But, the idea that the country is importing poverty suggests there is a bigger picture and a larger truth. Those who come to this country, whether legally or illegally, do so because they expect to be able to become better off here than they can be if they stay where they come from. Not only is the country importing poverty, but in doing so the country's economy provides the means by which many people are escaping even worse poverty. The economy of this country is not only able to import poverty but it is able to improve the lives of those our census bureau "measures" to be in poverty. Isn't it ironic that even in times of a struggling economy in this country, the country as a whole is still an "engine" and the means by which so many do better for themselves.

While it seems ironic, perhaps there is a serious danger lurking in our politics these days. If we misunderstand the economic picture, especially the larger truth of our economy, then it becomes more likely that the public policies that will follow this election cycle will impede and diminish the ability of our economy to continue to be the engine by which so many prosper.

Candidates & The Court

Pastor Rick Warren interviewed the presidential candidates on Saturday. He asked each senator which Supreme Court Justice he would not have nominated. Here are Senator Obama's views:

"WARREN: OK. The courts. Let me ask it this way. Which existing Supreme Court justice would you not have nominated?

OBAMA: That's a good one. That's a good one. I would not have nominated Clarence Thomas. [ applause ] I don't think that he -- I don't think that he was as strong enough jurist or legal thinker at the time for that elevation, setting aside the fact that I profoundly disagree with his interpretations of a lot of the Constitution. I would not nominate Justice Scalia, although I don't think there's any doubt about his intellectual brilliance, because he and I just disagree. He taught at the University of Chicago, as did I in the law school.

WARREN: How about John Roberts?

OBAMA: John Roberts, I have to say was a tougher question only because I find him to be a very compelling person, you know, in conversation individually. He's clearly smart, very thoughtful. I will tell you that how I've seen him operate since he went to the bench confirms the suspicions that I had and the reason that I voted against him, and I'll give you one very specific instance and this is not a stump speech.

WARREN: All right.

OBAMA: I think one of the -

WARREN: I think --

OBAMA: Right, exactly. I'm getting the cues. I'm getting the cues. One of the most important jobs of, I believe the Supreme Court is to guard against the encroachment of the executive branch on the other, the power of the other branches.

WARREN: OK.

OBAMA: And I think that he has been a little bit too willing and eager to give an administration, whether it's mine or George Bush's, more power than I think the Constitution originally intended."

So, Senator Obama seems to disagree with the constitutional interpretations of Justices Thomas, Scalia, and Roberts. How about Senator McCain:

[WARREN:] "The first one is on the courts. Which existing Supreme Court Justices would you not have nominated?

MCCAIN: With all due respect, Justice Ginsburg, Justice Breyer, Justice Souter, and Justice Stephens.

WARREN: Why? Tell me why.

MCCAIN: Well, I think that the president of the United States has incredible responsibility in nominating people to the United States Supreme Court. They are lifetime positions, as well as the federal bench. There will be two or maybe three vacancies. This nomination should be based on the criteria of proven record, of strictly adhering to the Constitution of the United States of America and not legislating from the bench. Some of the worst damage has been done by legislating from the bench. (APPLAUSE).

And by the way, Justices Alito and Roberts are two of my most recent favorites, by the way. They really are. They are very fine. (LAUGHTER). And I'm proud of President Bush for nominating them."

Senator McCain seems to disagree with the constitutional interpretations of Justices Ginsberg, Breyer, Souter, and Stephens.

In my view the Constitution defines a limited national government and as written it seems to me to protect individual economic liberty. The opinions of Justices Scalia, Thomas, Roberts and Alito are mostly consistent with this view, while the opinions of Justices Ginsberg, Breyer, Souter, and Stephens are inconsistent with this view. I agree with McCain's answer.

I also must mention one pet peeve of mine which comes up in Senator Obama's answer:

". . . more power than I think the Constitution originally intended."

I don't believe a piece of paper can have intentions.

Prosperity & Its Discontents

JONAH GOLDBERG ON CAPITALISM and prosperity:

"Capitalism is the greatest system ever created for alleviating general human misery, and yet it breeds ingratitude.

People ask, “Why is there poverty in the world?” It’s a silly question. Poverty is the default human condition. It is the factory preset of this mortal coil. As individuals and as a species, we are born naked and penniless, bereft of skills or possessions. Likewise, in his civilizational infancy man was poor, in every sense. He lived in ignorance, filth, hunger, and pain, and he died very young, either by violence or disease.

The interesting question isn’t “Why is there poverty?” It’s “Why is there wealth?” Or: “Why is there prosperity here but not there?”

At the end of the day, the first answer is capitalism, rightly understood. That is to say: free markets, private property, the spirit of entrepreneurialism and the conviction that the fruits of your labors are your own."

I like his point about the "default position." Looking over the course of world economic history, the important question does seem to be: Why do some countries enjoy great prosperity while others don't? It seems to me the answer to this question has to involve the idea that the for what ever reason the prosperous countries have governments sufficiently limited in scope and sufficiently attentive to protecting individual economic liberty. Or, in other words, what Goldberg says in his last paragraph above.

Greenspan's View

ALAN GREENSPAN'S WISDOM:

"The economic edifice – market capitalism – that has fostered this expansion is now being pilloried for the pause and partial retrenchment. The cause of our economic despair, however, is human nature’s propensity to sway from fear to euphoria and back, a condition that no economic paradigm has proved capable of suppressing without severe hardship. Regulation, the alleged effective solution to today’s crisis, has never been able to eliminate history’s crises.

[ . . . ]

We may not easily confront or accept the price dynamics of home and equity prices, but we can fend off cries of political despair which counsel the containment of competitive markets. It is essential that we do so. The remarkably strong performance of the world economy since the near universal adoption of market capitalism is testament to the benefits of increasing economic flexibility.

It has become hard for democratic societies accustomed to prosperity to see it as anything other than the result of their deft political management. In reality, the past decade has seen mounting global forces (the international version of Adam Smith’s invisible hand) quietly displacing government control of economic affairs. Since early this decade, central banks have had to cede control of long-term interest rates to global market forces. Previously heavily controlled economies – such as China, Russia and India – have embraced competitive markets in lieu of bureaucratic edict. The danger is that some governments, bedevilled by emerging inflationary forces, will endeavour to reassert their grip on economic affairs. If that becomes widespread, globalisation could reverse – at awesome cost."

Obama Promises Energy

SENATOR OBAMA SPOKE ABOUT new energy for America today:

"If I am President, I will immediately direct the full resources of the federal government and the full energy of the private sector to a single, overarching goal – in ten years, we will eliminate the need for oil from the entire Middle East and Venezuela. To do this, we will invest $150 billion over the next ten years and leverage billions more in private capital to build a new energy economy that harnesses American energy and creates five million new American jobs."

Oh dear, I don't think I like the sounds of this. Notice first that Senator Obama promises, if President, to direct the full energy of the private sector. Oh my, I wonder what the Senator has been reading to think that he can direct the full energy of the private sector? If the Senator, as President, could direct the full energy of the private sector toward anything, then would there be a private sector?

Quick get out your copy of the Constitution, and see if the President has the constitutional power to direct the full energy of the private sector. Nope, I can't find this power listed there, can you?

So, what do you suppose he means when he says "the full energy of the private sector?" The private sector encompasses an awful lot of stuff, including resources directed to producing homes, schooling, restaurants, baseball bats, golf clubs, tennis shoes, cell phones, and of course this list has to be enormously long. Does he really want to direct the full energy of the private sector to just one goal?

I must say, I see such a campaign promise to reveal the Senator as someone who may well understand virtually nothing of "the basic principles upon which this civilization was built."

And, then of course, even though I think he has taught constitutional law, he may not have consulted his copy of the constitution lately. Because the second thing I note is that he promises to direct the full resources of the federal government to his one favorite goal. Again, I'm not liking the sounds of this. I believe a great deal of the power that will be necessary to accomplish directing the full resources of the federal government has to be power that is, as a matter of our constitution, the power of Congress.

Now, this is starting to sound a bit familiar to me. I can't quite pull from my memory where I've heard this sort of thing done before. Hmmm. Wait a minute, something is coming to me. Yep, I've got it now. President Chavez of Venezuela, didn't he decide to essentially become the government so he could direct the full resources of the government to his purposes? And, didn't President Chavez decide to "nationalize" oil so that he could direct the full energy of what was a private oil sector in the economy?

But of course, there is still more in the one paragraph of promises quoted above. When the Senator says "we will invest" I wonder who the "we" is? I'm afraid he is not talking about investing his own money or the money of his family or even the money of his campaign. I'm afraid he's talking about investing some of the money I will earn over the next 10 years. Oh my, the Senator and his friends in Washington already have plans for "investing" a significant part of the money I will earn over the next 10 years for social security checks and medicare payments for the retired (i.e., those no longer earning an income).

Of course, the President doesn't have the power to tax, and the President doesn't have the power to create a budget for the federal government. So, maybe the President has already talked this over with Congress, and the "we" is both the President and the Congress. Or, maybe the Senator is simply making a grand promise he well knows he cannot keep by his own actions alone.

Or, maybe the Senator and his friends have some pretty grand plans for our government that are quite inconsistent with "the basic principles upon which this civilization was built."

And, I haven't even noted his reference to "leverage" billions in private capital. Enough is enough! At least for now.

What If Iraq Works?

Victor Davis Hanson considers the future of power & prosperity in Iraq:

"Iraq could still degenerate into one of those models. But for now, Iraq -- with an elected government and free press -- is not investing its wealth in subsidizing terrorists outside its borders, spreading abroad fundamentalist madrassas, building centrifuges or allowing a few thousand royal first cousins to squander its oil profits.

Iraq for the last 20 years was the worst place in the Middle East. The irony is that it may now have the most promising future in the entire region."

Energy Conservation

Be a patriot and check your tires daily.

Obama Believes Rational Ignorance

ANN ALTHOUSE considers Senator Obama's inconsistency:

"Does he think we are idiots?"

Just another illustration of a politician assuming voters are rationally ignorant, eh?

On Obama's Sense Of Patriotism

Senator Obama's speech on patriotism includes:

As I got older, that gut instinct - that America is the greatest country on earth - would survive my growing awareness of our nation's imperfections: it's ongoing racial strife; the perversion of our political system laid bare during the Watergate hearings; the wrenching poverty of the Mississippi Delta and the hills of Appalachia. Not only because, in my mind, the joys of American life and culture, its vitality, its variety and its freedom, always outweighed its imperfections, but because I learned that what makes America great has never been its perfection but the belief that it can be made better. I came to understand that our revolution was waged for the sake of that belief - that we could be governed by laws, not men; that we could be equal in the eyes of those laws; that we could be free to say what we want and assemble with whomever we want and worship as we please; that we could have the right to pursue our individual dreams but the obligation to help our fellow citizens pursue theirs.

Unfortunately, the Senator's view seems not to include economic liberty in the things he values. I suspect the men and women of our founding period were much more comfortable believing with John Locke that the endowment of individual liberty included the ownership of the fruit of our labor than they would be believing with Senator Obama today that there is an obligation to others that should be enforced through a government.

The Senator finds patriotism in holding a commitment to ideals:

That is why, for me, patriotism is always more than just loyalty to a place on a map or a certain kind of people. Instead, it is also loyalty to America's ideals - ideals for which anyone can sacrifice, or defend, or give their last full measure of devotion. I believe it is this loyalty that allows a country teeming with different races and ethnicities, religions and customs, to come together as one. It is the application of these ideals that separate us from Zimbabwe, where the opposition party and their supporters have been silently hunted, tortured or killed; or Burma, where tens of thousands continue to struggle for basic food and shelter in the wake of a monstrous storm because a military junta fears opening up the country to outsiders; or Iraq, where despite the heroic efforts of our military, and the courage of many ordinary Iraqis, even limited cooperation between various factions remains far too elusive.

I believe those who attack America's flaws without acknowledging the singular greatness of our ideals, and their proven capacity to inspire a better world, do not truly understand America. [emphasis mine]

Given the Senator's interest in cooperation and understanding, perhaps it is also unfortunate that the Senator ignores one of the most important ideals for the success of our system of political economy. Specifically, his view of the ideals important to this country seem to neglect (perhaps avoid) the obvious idea of a system of free markets.

Perhaps if the Senator becomes president I will have my own opportunity to be a patriot:

We may hope that our leaders and our government stand up for our ideals, and there are many times in our history when that's occurred. But when our laws, our leaders or our government are out of alignment with our ideals, then the dissent of ordinary Americans may prove to be one of the truest expression of patriotism. . . . Recognizing a wrong being committed in this country's name; insisting that we deliver on the promise of our Constitution - these are the acts of patriots, men and women who are defending that which is best in America. . . .

I would like to insist that our elected leaders pay much more attention to our Constitution. Our Constitution is supposed to be a constitution for a limited government, one which has only the powers specifically enumerated in the constitution itself. If those politicians in Congress and in the office of the President defended the Constitution, then government would be much, much smaller and markets would be much, much more free. If the Senator's speech on patriotism included an emphasis on economic liberty, an emphasis perhaps on freeing our markets, then I would think the Senator was indeed a patriot to the ideals on which our country was founded. Because the ideal of economic liberty seems no where to be found in the Senator's speech on patriotism, if he is elected I suspect I will frequently get my chance to be a patriot by pointing out that he and his political colleagues are not delivering on the promise of our Constitution.

Senator Obama also speaks about what we should teach our children:

As we begin our fourth century as a nation, it is easy to take the extraordinary nature of America for granted. But it is our responsibility as Americans and as parents to instill that history in our children, both at home and at school. The loss of quality civic education from so many of our classrooms has left too many young Americans without the most basic knowledge of who our forefathers are, or what they did, or the significance of the founding documents that bear their names. Too many children are ignorant of the sheer effort, the risks and sacrifices made by previous generations, to ensure that this country survived war and depression; through the great struggles for civil, and social, and worker's rights.

It is up to us, then, to teach them. It is up to us to teach them that even though we have faced great challenges and made our share of mistakes, we have always been able to come together and make this nation stronger, and more prosperous, and more united, and more just. It is up to us to teach them that America has been a force for good in the world, and that other nations and other people have looked to us as the last, best hope of Earth. It is up to us to teach them that it is good to give back to one's community; that it is honorable to serve in the military; that it is vital to participate in our democracy and make our voices heard.

And it is up to us to teach our children a lesson that those of us in politics too often forget: that patriotism involves not only defending this country against external threat, but also working constantly to make America a better place for future generations.

Once again it seems to me the Senator's view of this country misses one of the most important reasons for success. Where in his list of things to teach is the value of economic liberty, free markets, and capitalism?

Good Taxes or Bad Taxes?

One of the economic ideas about public policy that comes from the concept of a corrective tax for a negative externality is that in choosing tax bases we should tax the "bad things" (e.g. pollution) while leaving the "good things" (e.g. income, savings, investment) untaxed. GREG LOPEZ has a different view:

My rejection in a nutshell: The knowledge of which things are good or bad, in which circumstances of time and place, and to what dollar amount, are beyond the reach of anyone including policymakers; but even absent the knowledge problem, the incentive problem ensures that the enacted policies would be diverted by compromise from what little we do happen to know of the public interest.

In short, Hayek and Buchanan trump Pigou.

[ Hat Tip: Peter Boettke ]

Oil Prices 101

MARTIN FELDSTEIN explains oil prices:

The relationship between future and current oil prices implies that an expected change in the future price of oil will have an immediate impact on the current price of oil.

Thus, when oil producers concluded that the demand for oil in China and some other countries will grow more rapidly in future years than they had previously expected, they inferred that the future price of oil would be higher than they had previously believed. They responded by reducing supply and raising the spot price enough to bring the expected price rise back to its initial rate.

Hence, with no change in the current demand for oil, the expectation of a greater future demand and a higher future price caused the current price to rise. Similarly, credible reports about the future decline of oil production in Russia and in Mexico implied a higher future global price of oil – and that also required an increase in the current oil price to maintain the initial expected rate of increase in the price of oil.

Once this relation is understood, it is easy to see how news stories, rumors and industry reports can cause substantial fluctuations in current prices – all without anything happening to current demand or supply.

Perhaps one interesting implication of this involves what we should make of all the talk about speculators. Someone who owns oil in the ground may be one of the so-called speculators. Such an oil owner who expects the future price of oil to be higher sees an incentive to keep barrels of oil in the ground today instead of bringing them up for sale today.

But Feldstein notes there can be good news to be found in understanding all of this about oil prices:

Now here is the good news. Any policy that causes the expected future oil price to fall can cause the current price to fall, or to rise less than it would otherwise do. In other words, it is possible to bring down today's price of oil with policies that will have their physical impact on oil demand or supply only in the future.

There is also much talk today that Congress should get busy and end the moratorium on new off shore oil development (among other suggestions about new oil supplies). A frequently heard response is that such a policy change would have no effect because it would necessarily be many years before any oil from such new projects would reach the market. But such a policy change would imply a lower future price for oil and this would mean a lower oil price today.

So, if you would like lower oil and gasoline prices today, then take note that the politicians who are calling for policies that would increase U.S. oil supplies in the future are supporting your interests, and the politicians who want to continue to restrict new U.S. oil production are not.