Wednesday, January 28, 2009

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

"'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."

Tuesday, January 27, 2009

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."

Thursday, January 08, 2009

The Nature of Politics -- Fannie & Freddie

"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.

Monday, January 05, 2009