Reflections in the Times of Hysteria

VICTOR DAVIS HANSON'S insights on post-modern poverty in this time of recession:

"And for the less fortunate? Here is southern Fresno County, at ground zero of the illegal immigration explosion, where unemployment reaches 14%, agriculture is in the doldrums and construction and manufacturing fare worse, the depression among the poor is still ambiguous, at least in historical terms.

I went into the local Food 4-Less again the other day, a cut-rate, bulk-buy chain food store. The parking lot was full of late model trucks and cars—not the sort I prefer, but those V-8 monsters, loaded up with high-priced rims, wide tires, custom paint, tinted windows, oversized trailer hitches, the whole American shebang so to speak that tops out at around $40,000. The customers may have been out of work, but I counted nine, just nine, of some 100 (this was a research trip for this blog posting), who did not have one of the following four appurtencies visible—cell phone, Bluetooth, blackberry-like device, I-pod. On the way out of the parking lot, the car radio was blaring with three sorts of ads: get out of credit card debt, get out of mortgage debt, get out of back IRS payments—now! Easy! Little cash upfront! This is not Bleak House as we are led to believe.

We are hurting, but not in 1933 fashion, due both to expanded government entitlements; Chinese-made cheap consumer goods; the fumes of past easy credit; black market, untaxed temporary cash and carry jobs (a vastly underestimated source of enormous income); and a culture that absolves one of the shame of reneging on debt (or perhaps even admires the possibility of a phoenix-like resurgence from loser to winner, and has a grudging admiration for the machinations involved in such rebirth).

I’m not sure this is even the 1979-83 recession where finally we got 10%-plus unemployment, 18% interest, and 12% inflation—a topic I once devoted a book to, Fields Without Dreams. Then I remember seeing Cryolite bags go up 10% every six months. I remember raisin prices going down from $1400 a ton to about $450. I remember vineyard prices falling from $15,000 an acre to $3500. I remember taking out Federal Land Bank loans at 13%, and short-term Bank of America crop loans at 15%. And I remember pickers getting 22 cents a grape tray in 1980—and 11 cents in 1983. I bought a used Pontiac Grand Prix (a fixer-upper that had been totaled) for 12% interest. So, I am sorry. This is not quite yet the early eighties recession, and I am not yet convinced that the baby-boomer generation that has come of age cannot ride this out without adopting European-socialism as a cure."

Let's certainly hope there is enough good sense left in this republic to steer clear of European-socialism, because if not, our past prosperity will become a remembrance rather than a prelude to our future prosperity.

But, alas, the recent election of a President-as-savior for so many, combined with the rationally ignorant and the rationally irrational, may well mean there is not enough good sense left in this republic.

National Debt History

JOHN STEELE GORDON:

"Still, it's the trend that is worrisome, to put it mildly. There have always been two reasons for adding to the national debt. One is to fight wars. The second is to counteract recessions. But while the national debt in 1982 was 35% of GDP, after a quarter century of nearly uninterrupted economic growth and the end of the Cold War the debt-to-GDP ratio has more than doubled.

It is hard to escape the idea that this happened only because Democrats and Republicans alike never said no to any significant interest group. Despite a genuine economic emergency, the stimulus bill is more about dispensing goodies to Democratic interest groups than stimulating the economy. Even Sen. Charles Schumer (D., N.Y.) -- no deficit hawk when his party is in the majority -- called it 'porky.'"

Our political economy is again beginning to show symptoms of the sclerosis Mancur Olson studied in THE RISE AND DECLINE OF NATIONS.

Free vs. Big

You might want to CHECK THIS OUT.

Perverse Incentives

PETER BOETTKE:

"Barney Frank was on Face the Nation this morning talking about the problems of perverse incentives created by the current policies. These guys, he said, can make risky decisions and make great profits, but if the turn out to be wrong decisions they don't have to worry about all the loss. Congressman Frank argues that we need to change this. REALLY???

It would have been nice if he knew that basic lesson of economics before he pushed for a lowering of lending standards over a decade ago. But while he might have learned something in the process about incentives decision makers face, he hasn't learned that the current set of rule changes being advocated are simply augmenting the perversity rather than countering it."

Well put!

1st Amendment Economic Liberties

ED MORRISSEY:

"It’s an easy question. Does this administration believe in free speech or government censorship? Their sudden inability to provide a clear answer, when they had no problem giving such assurances eight months ago, does not bode well for the answer.

I’d like to say I told you so to all of those who accused us of paranoia, but the window on that ability to do so on the airwaves looks like it’s about to expire — like all of Obama’s campaign promises."

Check it out. An expiration date on the President's campaign promises, eh? Rational ignorance comes up again.

The policies falling under the idea of the "fairness doctrine" pose threats not just to speech and press liberties. The idea is going to be for government to force the owners of radio stations to make business choices with respect to their programming that they would otherwise not choose to make. So, economic liberties are going to be threatened as well.

Such threats to economic liberty seem to be part of this President's vision for the future of America, because we also have seen since his inauguration that he intends to cap pay for business executives and he is going to have a AUTO INDUSTRY COUNCIL that will restructure this US industry.

Hey, remember the song lyric "the future's so bright I gotta wear shades"? It's beginning to look like we can throw those shades away.

Politics, Ain't It Grand

ROGER KIMBALL WRITES, "now they tell us:"

"They haven’t even extracted the money yet and already they’re telling us poor suckers “not to expect instant miracles from the $787 billion economic stimulus bill he will sign this week, but said it would help eventually.”

. . . . White House spokesman Robert Gibbs today said that “the economy is going to get worse before it gets better.”

And what about the 3.5 million jobs the current President of the United States said his spending orgy would “save or create.” (Save or create? What does that mean? How would you measure the saved jobs?))

Oops, now it’s 2.5 million by the end of 2010."

Didn't the President say he would create 4 million new jobs? It seems the choices of our fearless leaders in Washington depend heavily on assuming voters are rationally ignorant. But, isn't this past week just a bit too much, as in: "Oh, my, the sky is falling. . . .We must do something. . . .Let's spend, spend, spend so we can save/create jobs. . . .But, never mind, now that our legislation has passed, don't hold you breath, because, you see, we really don't think our spending can change the direction of the economy any way."

Remember hope and change? I hope the change to a larger government in Washington doesn't continue, but there are still many months until mid-term Congressional elections.

Unemployed Trojan Horse

ALAN REYNOLDS wonders why most of Congressional stimulus bill is directed toward areas of the economy with little unemployment:

"House Democrats propose to spend $550 billion of their two-year, $825 billion 'stimulus bill' (the rest of it being tax cuts). Most of the spending is unlikely to be timely or temporary. Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health. Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively. Yet 39% of the $550 billion in the bill would go to state and local governments. Another 17.3% would go to health and education -- sectors where relatively secure government jobs are also prevalent.

If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest?"

Do our fearless leaders in Washington really overlook such details? Or, do they know well what they are doing and assume most of us are not watching? Are our fearless leaders confident they are safe in trying to fool us because most of us choose rational ignorance and/or rational irrationality?

Another View of the Trojan Horse

WSJ EDITORIAL:

"'Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before.'

So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic 'stimulus,' but now that Democrats have finally released the details we understand Rahm's point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

We've looked it over, and even we can't quite believe it. There's $1 billion for Amtrak, the federal railroad that hasn't turned a profit in 40 years; $2 billion for child-care subsidies; $50 million for that great engine of job creation, the National Endowment for the Arts; $400 million for global-warming research and another $2.4 billion for carbon-capture demonstration projects. There's even $650 million on top of the billions already doled out to pay for digital TV conversion coupons."

On Economic Stimulus: Don't Worry, Be Happy

Every where I look these days economists are writing about government stimulus to remove us from our recessionary times. ROBERT HIGGS waxes poetic:

"It’s pointless if you make a fuss
About Obama’s stimulus.
The government’s determined, see,
To rescue the economy.
Paul Krugman’s here to point the way
Toward a bright and shining day,
When everyone will be employed
And all consumers overjoyed.
The Fed’s enormous loans will serve
To calm the frightened banker’s nerves,
And Congress will serve pork and beans
To cronies fat, to peasants lean.

* * *

We’ve no need to panic, the world’s in good hands.
Financial details, Old Ben understands.
He’ll huff and he’ll puff, and he’ll spew dollars out,
He won’t stop to rest till he’s quelled every doubt
That dollars created from thin air each session
Are all that we need to steer clear of depression."

STEVE HORWITZ warns that he smells a rat:

"One of the (correct) complaints about the proposed stimulus plan is that it's full of all kinds of programs that would appear to have nothing to do with any accepted economic theory about what sorts of spending could even possibly lead to recovery. The best example of this is the funds for family planning policy that are in the bill. Of course to those who understand public choice, none of this is a surprise. One good argument against a stimulus package is that any package will necessarily have more pork in it than the Dinosaur BBQ.

That all said, I think there's something else at work here. This isn't just your run-of-the-mill pork. What we are seeing happen right now is that Congress sees this crisis as an opportunity to enact a whole variety of programs that they've wanted to pass for years, especially (but not only) the Democrats who no longer fear a veto, and now finally have the chance. Just as the Patriot Act was a bunch of laws waiting for a political 'crisis,' so is much of the stimulus package a bunch of programs waiting for an economic 'crisis.' The current crisis is just a convenient excuse.

[ . . . ]

Bottom line: the more that those of us who are skeptical continue to even refer to this as a "stimulus" plan, the more we play into the other side's hands. This isn't a stimulus package, it's a whole bunch of programs designed to extend the state's role in the economy and in our personal lives, and to do so at enormous cost to us, and to our children and grandchildren. Let's challenge the rhetoric of fear and crisis and name this for what it is: the current majority's attempt to do exactly what the Bush Administration did post-9/11, which is to use fear and crisis to pass programs that will impoverish us and curtail our freedoms, and to do so with the minimum of serious debate possible."

Non-economist DICK MORRIS captures the Horwitz warning with a charming image:

"But Obama’s strategy is to hide inside the Trojan Horse of stimulus an army of radical measures to change America permanently.

The most pernicious of his proposals will be the massive Make Work Pay refundable tax credit. Dressed up as a tax cut, it will be a national welfare program, guaranteeing a majority of American households an annual check to “refund” taxes they never paid. And it will eliminate the need for about 20% of American households to pay income taxes, lifting the proportion that need not do so to a majority of the voting population. Unlike the Bush stimulus checks, this new program will be a permanent entitlement, a part of our budget that can only go up and never down. Politically, it will transform a majority of Americans from taxpayers, anxious to hold down government spending, into tax eaters, eager to reap new benefits."

If you would like to see for yourself just exactly what Congress calls economic stimulus, then you should check out the web site READ THE STIMULUS. Be sure to open the SPREADSHEET you can find there.

But don't worry, be happy. After all, our great, powerful, and wise democracy has spoken.

The Nature of Government

WILLIAM SHUGHART writes about the government stimulus idea. His bottom line points to a key attribute of government:

"Companies usually risk their own money. In Washington, the politicians will be risking ours."

The Nature of Politics -- Fannie & Freddie

KARL ROVE:

"When Republican Richard Shelby of Alabama, then chairman of the Senate Banking Committee, pushed for comprehensive GSE reform in 2005, Democrat Sen. Chris Dodd of Connecticut successfully threatened a filibuster. Later, after Fannie and Freddie collapsed, Mr. Dodd asked, 'Why weren't we doing more?' He then voted for the Bush reforms that he once called 'ill-advised.'

But Mr. Dodd wasn't the only Democrat to heap abuse on the Bush reforms. Rep. Barney Frank of Massachusetts defended Fannie and Freddie as 'fundamentally sound' and labeled the president's proposals as 'inane.' He later voted for the reforms. Sen. Charles Schumer of New York dismissed Mr. Bush's 'safety and soundness concerns' as 'a straw man.' 'If it ain't broke, don't fix it,' was the helpful advice of both Sen. Thomas Carper of Delaware and Rep. Maxine Waters of California. Rep. Kendrick Meeks of Florida berated a Bush official at a hearing, saying, 'I am just pissed off' at the administration for raising the issue."

Politicians are such interesting people, wouldn't you say?

Part of my upcoming semester will be devoted to talking with students about public choice economics. One of the basic ideas that we will explore is that voters choose to be rationally ignorant. The idea is that an individual voter likely believes that he or she cannot determine the outcome of an election, and therefore decides to spend little, if any, time becoming well-informed about issues and about the positions and records of politicians. It seems to me that Mr. Rove's commentary illustrates one of the implications of such rational ignorance. Specifically, politicians are able to get away with saying in the present things that are not at all true about their votes and positions in the past.

I would also say that politicians are themselves well aware that most voters are rationally ignorant.

One might hope that a free press would mitigate the unfortunate implications of rational ignorance, but I think Mr. Rove's commentary points out why I think that this is not really to be expected. Even if the press and the news industry work hard at holding politicians accountable for their past actions vis a vis their present assertions, the rationally ignorant voter is paying very little attention. I suspect the press and the news industry has come to recognize the electorate is largely rationally ignorant, and this means members of the press and the news industry know that they too cannot be easily held accountable for inconsistencies between past stories and present stories. In addition, most voters simply are unlikely to spend the time to discover which news suppliers are keeping tabs on the inconsistencies and the outright lies of the politicians.

A few of my friends have wondered why it seems no one saw the problems that were to result from public policy with respect to Fannie & Freddie. I don't think no one saw the potential problems. Economists often point out to their students, and anyone one else who will listen for that matter, that when government subsidizes risk taking the result is too much risk taking, and eventually the (overly risky) chickens will come home to roost. This is a large part of the story of the present financial situation. What is not possible to predict is specifically when and in what specific ways those chickens will come home to roost. Mr. Rove's commentary points out that there were people, economists and even politicians, who made efforts to mitigate the problems that were to come as a result of bad public policy toward mortgages, but successful politics is often bad economic policy. The politics of Fannie & Freddie ruled the day, and the politicians who failed to act to mitigate or reduce the risk of this financial failure seem to be largely escaping accountability. This seems the nature of politics because voters choose to be rationally ignorant.

Some people understand this about the nature of politics, and they suggest making efforts toward political reforms. But, politics is politics. I don't think much of this can be changed, especially when the unfortunate aspects of politics follow from the choices of voters to be rationally ignorant. If we understand the inherent nature of politics and government, then we should understand that this nature cannot be changed, and instead efforts and attention should be focused on constraining the list of things government is allowed to do. Governments really should not be allowed to subsidize risk taking.

Left Libertarian?

What is a "left libertarian?" I don't know, but Roderick Long says he is one.

Carbon Corrective Tax

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

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

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

Rules & Purposes

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

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

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

Are Bailouts Regulation?

CHRISTOPHER COX:

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

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

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

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

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

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

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

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

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

It Has Been A Very Unusual Year

DEVILSTOWER offers an interesting look at history with this picture.





[ Hat Tip: Greg Mankiw ]

Who is Less Free than 40 Years Ago?

SHANNON LOVE:

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

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

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

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

Economics Of Corners

SANDY IKEDA:

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

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

Africa Power & Prosperity

STRATEGY PAGE:

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

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

The Story of the Schechter Brothers

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

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