President To Speak To Your Kids On September 8

PRESIDENT OBAMA is going to speak to all the nation's school kids on September 8. What do you think about that?

I think the President is a politician, and this President seems to think he is pretty special and awe inspiring. So, of course, if the President asks the nation's youth to study hard, then I'm sure they will. But, because the President is a politician I'm afraid this is truly intended to be another one of his political events. I may be wrong. I think this is a very bad idea because it seems like something from one of the other counties in the world which has little use for individual liberty. Then again, a President who thinks redistributing wealth is good seems not to have high regard for individual liberty to begin with. Maybe the recent election is some measure of how far this country now falls short of holding liberty in high regard?

If you click through on the link above you can find another link to "resources" to help teachers figure out what they should teach their students about the President's address to them. Here is one of the suggestions for talking with students before his speech:

"Why is it important that we listen to the President and other elected officials, like the mayor, senators, members of congress, or the governor? Why is what they say important?"

Let me take a stab at answering. It is important to listen to those in government because they are the men and women who use force in our daily lives. Government uses force in our lives properly when it functions basically as the "protective state," which means it uses force to enforce private property rights and voluntary contracts, and it means government uses power and force to protect us from attack by people living in other countries of the world. It is important to listen to those in government because it seems these days that most of the people in government do not understand this. Instead, most of the people in government today support public policies that use force in ways that are predatory on activities of all of those outside of government who every day try to do the best for themselves and their family by being productive. Therefore, it is important to listen to those in government because if we don't pay close enough attention (and remember the old adage "watch what they do, not what they say"), then those in government will become ever more successful predators and the prosperity we enjoy today will be foolishly lost to ourselves and the very kids the President will speak to next week.

How many kids do you think will offer this answer? I think not very many because it seems to me our schools are no longer very good at teaching a curriculum for a prosperous republic.

Cash for Clunkers Follow Up

BRUCE YANDLE has a nice essay on the economic analysis of cash for clunkers:

"Frederic Bastiat’s brilliant parable of the broken window reminds us that a street hoodlum throwing a brick through a window generates a series of job-generating transactions that might raise GDP by a trivial amount, if it could be measured. Indeed, the idea seems so compelling that people today often speak of the silver lining found in the clouds that create hurricanes. Think of the roofers that become employed. But Bastiat’s key lesson is that a window has been destroyed—and it had value. Before touting the total benefits of clunkers, we must take account of the destroyed vehicles and engines that represented part of the wealth of the nation. As Tony Liller, vice president for Goodwill, put it: “They’re crushing these cars, and they’re perfectly good. These are cars the poor need to buy.”

Finally, over the eons, human communities have contrived all kinds of devices to transmit critical survival skills and compatible behavioral norms. One of these has to do with conservation of wealth. “Waste not, want not,” we are told. “A penny saved, is a penny earned,” we are reminded. Using politics to pay people who destroy valuable vehicles, or to hold crops off the market, or to produce ethanol that may use more energy in production than it adds when burned, teaches a lesson of anti-matter and wealth destruction. When all these considerations are made, Cash for Clunkers sounds like a sorry idea that should not be the model for future policy.

Let’s stop Cash for Refrigerators before the idea spreads further."

Read the whole piece and gain a significant measure of economic literacy.

The President's Art Endowment For Health & The Environment

JIM LINDGREN directs our attention to commentary by Patrick Courrielche with this quotation:

"Artists shouldn’t be used as tools of the state to help create a climate amenable to their positions, which is what appears to be happening in this instance. If the art community wants to tackle those issues on its own then fine. But tackling them shouldn’t come as an encouragement from the NEA to those they potentially fund at this coincidental time.

And if you think that my fear regarding the arts becoming a tool of the state is still unfounded, I leave you with a few statements made by the NEA to the art community participants on the conference call. “This is just the beginning. This is the first telephone call of a brand new conversation. We are just now learning how to really bring this community together to speak with the government. What that looks like legally?…bare with us as we learn the language so that we can speak to each other safely… “

Is the hair on your arms standing up yet?"

Jim warned of this last summer, and relevant portions of that warning are also a part of his posting about the NEA. I encourage you to read the whole thing.

Some of the things I took notice of: the idea of helping to lay a new foundation for growth, the idea of promoting a more civically engaged America, and the idea that we all celebrate the arts for positive change (perhaps one day there can even be a national holiday to celebrate the arts for positive change). Did you know there was a White House Office of Public Engagement? If you are curious about the mission of such an office, follow the link and see for yourself. While you are there be sure to download you very own copy of "Citizens Briefing Book." Right up front in that document you will find that "out of the tens of thousands of submissions, these ideas found the most support; here they are, unvarnished and unedited." "Unvarnished and unedited" is credible, right?

Oh, my, I think my posting yesterday on social engineering and planning is worth considering along with Lindgren's posting of today.

The President & His Plans

Ludwig von Mises on social engineering and planning:

It is customary nowadays to speak of "social engineering." Like planning, this term is a synonym for dictatorship and totalitarian tyranny. The idea is to treat human beings in the same way in which the engineer treats the stuff out of which he builds his bridges, roads, and machines. The social engineer's will is to be substituted for the will of the various people he plans to use for the construction of his utopia. Mankind is to be divided into two classes: the almighty dictator, on the one hand, and the underlings who are to be reduced to the status of mere pawns in his plans and cogs in his machinery, on the other. If this were feasible, then of course the social engineer would not have to bother about understanding other people's actions. He would be free to deal with them as technology deals with lumber and iron. (p. 113)

These days it seems we hear politicians talking about this plan and that, and President Obama seems to take pride in all his plans. What do you think, does Mises characterize our planning President accurately?

Cash for Clunkers Death

Here is a YOUTUBE VIDEO documenting a "cash for clunkers" death. The video is an excellent illustration of the inherent inefficiency of this public policy. The "cash for clunkers" program provides incentives for people to buy automobiles they would not otherwise have bought, while at the same time it leads to the destruction of a productive tool for transporting people and things from here to there.

The video is well worth watching, but I should warn that the audio portion is R-rated for use of the f-word (although I'm sure many watchers will find the language quite appropriate). If you look around on the YouTube web page you will see links to many other videos documenting government's destruction of productive resources.

One of my thoughts after watching this video was to wonder if there are other illustrations of public policies that directly destroy productive resources. Can you think of any?

Then, I was led to wonder if this video is perhaps a useful metaphor for any government action that involves policies outside the role of the "protective state." When government policy does something other than strictly enforce private property and voluntary contracts, government tends to become predatory, and predatory activities in an economy mean that actual prosperity falls short of potential prosperity. But, we can't easily see this because we can only ever experience actual prosperity not potential prosperity. It is difficult for us to visualize what it means when an economist points to a policy and says it diminishes our prosperity. Well, isn't this video pretty much what that means? That is, it means something that could have been real and tangible like the Mazda in this video will be lost to us.

Vanishing Externality

DAVID HENDERSON tells a tale of a vanishing externality.

Vanishing Middle Class?

Some politicians and pundits have been wringing their hands over a vanishing middle class. No worries. STEVE HORWITZ mines some data to suggest that those who have vanished are prospering:

"Let me repeat that: over 30% of US households in 2006 earned above $75K compared to under 20% in 1980. Over the same period, the percentage of US households earning under $35K fell from 42.8% to 36.7%. Fewer households are poor, fewer are middle class, and a hunk more are above $75K."

Parable of the Sovereign & the Leech

GOING JOHN GALT:

"When a private individual incurs debts in another’s name without his consent, that is called identity theft. Why is it considered to be a binding agreement when perpetrated by government?"

This is kind of fun. Read the whole thing. It's short.

You're Getting Sleepy

VICTOR DAVIS HANSON:

"Suddenly hope and change no longer worked like the swinging watch and “you’re getting sleepy” lingo. Voters are feeling they’ve been “had” and were mesmerized into being used for an extremist agenda."

Hey, this seems like another fun way to talk about rational irrationality.

How Are You Thinking?

DAVE PRYCHITKO:

"Job market applicants are often asked to write up something about their teaching philosophy. If I were to ever do so, I'd sum up mine in one sentence: I have no teaching philosophy, or at least none that I'm aware of. (I also have no clear method, no bag of tricks, nothing special to offer.) I do, however, have a single purpose -- to encourage my students to think like an economist."

Charter Schools

THE MIGHT BE GOOD NEWS:

"The U.S. Education Department is engaged in a high-pressure campaign to get states to lift limits on charter schools through a $4 billion education fund, Race to the Top, that encourages more charters as one of the criteria for states to qualify for a piece of the pie. A total of 40 states and the District of Columbia permit charter schools."

Even better news would be that the U.S. Education Department wanted to see public education move to a voucher system.

Pay Czar

WSJ:

"'I don't think the American people begrudge that people make big salaries, as long as they're not jeopardizing the goodwill of the public in doing so,' White House spokesman Robert Gibbs said Wednesday."

What does this mean? Submitting wage proposals to a czar is very troubling, eh?

What Is The Mechanism? Or Is It Just A Miracle?

MARIO RIZZO on PAUL KRUGMAN:

"Let me go back to Krugman’s article. I italicized an interesting phrase. Big government can work when it is run by people who understand its virtues. He should have said big government can work when it is run by people who themselves determine how well it works."

Of course, Professor Krugman says:

"So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government."

It seems to me that Professor Krugman is pretty good at politics in his commentary, and probably not so good at economics.

I think Professor Rizzo is better on the economics, and thus, his commentary exposes the politics and the politicians.

Specifically, how does "stimulus spending" of 1/2 of 1 percent of GDP save the economy from a second Great Depression? I don't see an answer in Krugman's commentary, except perhaps in the faithful reliance in Keynesian models with an "automatic stabilizer" built in. Of course, Rizzo's skepticism in a "super multiplier" is more sensible than faithful reliance.

Krugman's analysis and commentary seem to start with the extra government spending of 1/2 of 1 percent of GDP, and this seems to me to be like starting his analysis with the assumption that the money government spends grows on trees. Where did government get this extra $70 billion dollars it has spent on "stimulus?" I suppose one answer is that this money did grow on trees, or that government simply printed $70 billion extra dollar bills. Is the reason the economy was saved from a great depression that there a now lovers of government governing the economy that had the foresight to plant some new money trees? Or, should I say, has the economy been saved from a second great depression by inflation?

Another possible answer to this question about where government got the extra money is that government increased tax revenue collected. In this recession tax revenue has decreased, and thus to increase tax revenue collected government would have to raise taxes. And, how would raising taxes for this $70 billion save the economy? Tax revenues are transfers from people and businesses to government. In this regard, government is a middle-man that collects (takes) money from you and me, and then it spends that money by giving it to other people just like you and me. I suppose we can focus on just the way government spends this money and say things like "this spending has created many millions of new jobs," and this has saved the economy from a second great depression. But, I'm pretty sure that if government hadn't taken the money from you and I to begin with, you and I would have also spent or saved that money. Spending our money, instead of having it taken to Washington as tax collections, would also have been associated with "new jobs." Do you believe that government spending an extra $70 billion of revenues collected makes more jobs than the number of jobs that will be lost, or will not have been created by you and I spending our money? I don't, at least not in general. The process of transfer is costly and government is wasteful in this process, not to mention that economists have long known that taxation creates an efficiency burden on economic activity as well.

Well, so far I'm not sure that the government's "stimulus" can be accounted for by either inflation or an increase in present taxes. Of course, either or both may be in our future, and if so, then either or both will then be like "brakes" on new prosperity.

There is another way for government to get the additional $70 billion for "stimulus" spending. It can borrow the money. This also looks like a transfer from people that lend this money to the government, but in this case it really is a transfer of future income to present consumption. A key question is then how will this increased money for present consumption be paid for? Obviously the answer is it will be paid for out of future tax collections, from either ourselves and/or from our children and grandchildren. In this regard, the implications are the same as I described just above, i.e., "brakes" on new prosperity for ourselves and/or our children and grandchildren.

I don't see a mechanism by which government spending an extra 1/2 of 1 percent of GDP can possibly have saved us from a second great depression. And, it seems to me that if you do believe extra spending by government saves, then you must also believe that saving today is of greater value than the cost in diminished prosperity in the future, and that it is not unjust to take prosperity from our children and grandchildren to save ourselves today.

L'Obamatized

What is the definition of L'Obamatized? ANDREW WILSON:

That is the highly scientific condition of having half of your brain removed and the other half turned into jelly with no off/on switch to control veneration of the 44th president."

Kind of a cute term for RATIONAL IRRATIONALITY, eh?

Tires & Freedom

WSJ REVIEW & OUTLOOK:

"As Mr. Obama faces his moment of truth on tires, he ought to look at a report issued last week by Rutgers economist Thomas J. Prusa examining how the ITC’s proposed tariffs would ripple through the U.S. economy. Mr. Prusa calculates that each job “saved” by the ITC’s tariffs would come at the cost of at least 12 jobs lost, and possibly more than 25. Most tire-related employment in America consists of the people who distribute and install tires, not people who produce them. By depressing tire sales, a tariff would jeopardize those jobs."

Tariffs on tires, tax the wealthy, now TAX THE REST, cap & trade, socialized medical insurance, government czars for salaries, and government panels to design our cars and decide how to treat our illnesses, etc., etc., etc. Economic liberty slips away. The INDEX OF ECONOMIC FREEDOM is already down a bit. How far will it slide down before the next presidential election?

Liberty = Prosperity. So, the gap between potential prosperity and actual prosperity will grow ever larger now. How much lost liberty will be tolerated by those who vote for our fearless political leaders?

Professor

GREG MANKIW:

"I learned long ago the three best reasons for being a professor: June, July, and August."

Hmmm, I wonder what he's talking about?

Economic Problems

MARIO RIZZO has a very interesting and thought provoking post about problems in macroeconomics:

"Second, what is the root of the difficulty in which macroeconomics finds itself?

I think it is the inability to reconcile a reasonable treatment of radical uncertainty with the strictures of out-of-control formalism. We have come a long way from Alfred Marshall’s idea that one does the mathematics and then burns it. In a 1906 letter to A.L. Bowley (of the Edgeworth-Bowley box fame) Marshall says:

“But I know I had a growing feeling in the later years of my work at the subject that a good mathematical theorem dealing with economic hypotheses was very unlikely to be good economics: and I went more and more on the rules – (1) Use mathematics as a shorthand language, rather than an engine of inquiry. (2) Keep to them till you have done. (3) Translate into English. (4) Then illustrate by examples that are important in real life. (5) Burn the mathematics. (6) If you can’t succeed in (4), burn (3). This last I did often.”

Clearly, the adherents of DSGE did not follow points (4) through (6). "

DSGE is shorthand for the dominant macro model today. I had never heard of this idea of Marshall before, but it seems to me one worthy of much reflection. It also seems to me that most micro economists today also miss the significance of radical uncertainty for the questions and issues they study.

Constitutional Matters

I've been looking through middle school textbooks on Civics and Economics. I just ran across the following in one of the textbooks:

Why It Matters: The Constitution outlines the ideals of American government and describes how they should be achieved. It tells you what your rights and privileges are. The Constitution affects you, your family, and your friends as much today as it affected those who wrote it more than 200 years ago.

I suspect there are many who would agree with this, but I think it is a view of the Constitution that has a great deal wrong with it.

The key problem with this view is that we are told that the Constitution tells us what our rights and privileges are. On the contrary, the view of government and the citizen that provides the conceptual foundations for the Constitution are those of Locke, which were marvelously expressed by Jefferson in the Declaration of Independence:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.--That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed.

In other words, instead of finding a list of our rights and privileges in the Constitution, we are each born with (endowed with) unalienable rights. These rights are prior to both the Constitution and to government, while the view expressed in the textbook suggests that the Constitution and government come before our individual rights.

Furthermore, while we do find an explicit accounting of some of our individual rights in the amendments to the Constitution known as the Bill of Rights, the Bill of Rights itself includes explicit statements consistent with the idea that our rights come prior to government:

9th Amendment: The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

10 Amendment: The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

In other words, our rights are prior to government and we do not find a list of those rights in our Constitution.

A second concern I have with this statement about why the Constitution matters involves the idea that "the Constitution affects you." I'm sure it is accurate to say that the Constitution in some way affects each of us in our daily lives. But I think this is not a very important idea to note about the Constitution, and I think one of the most important ideas to note about the Constitution is completely neglected, perhaps entirely obscured, by the idea that the Constitution affects you. Our Constitution defines a government of only specific enumerated powers. It is a Constitution, along with the Bill of Rights, which explicitly constrains our national government by limiting its power over our daily lives. Our Constitution is directly about government and its constraints and limits, and only very indirectly about you and me. The Constitution indirectly affects you and me in that the government which follows from the Constitution uses its power to create and enforce statutes which have direct effects on our daily lives. The Constitution is about defining and constraining the nature of government we have to live with.

Why is it important to fuss over a statement like this in a middle school textbook? The conceptual view I express here about the Constitution is a view which has been vital to the prosperity you and I enjoy in our lives today. Most of economic history, in all places and all times, has been a history of poverty for most people, and at least some scholars have suggested that the conceptual view of government and the individual I believe is the foundation of our Constitution is the key change in conceptual views of the world that has made the prosperity we enjoy today possible. If this is the case, then the view of the Constitution I'm concerned with here has played a significant role in allowing government to break free of the bounds and constraints written into our Constitution with the result that our system of political economy today, while certainly prosperous, falls significantly short of its potential for people to enjoy prosperous lives. It is also my view that the greater the extent to which people see our Constitution from the perspective I'm concerned with here, the greater will be the extent to which the prosperity of our children and our grandchildren will fall below potential prosperity.

A curriculum for a prosperous republic would present a view of the Constitution which is consistent with Locke, Jefferson, and Madison (who drafted the 9th Amendment), and not the view I'm fussing over here today.

We Are All Fascists Now

Roger Koppl:

"We have forgotten the foundations of liberty and we may not have long to save them from oblivion. The search to recover our lost heritage of liberty will begin when we question the leadership principle, when we begin to wonder what might keep our “leaders” from oppressing us. The search to recover our lost liberty will begin, in other words, when we remember to ask the question the ancient Roman satirical poet Juvenal asked: Sed quis custodiet ipsos custodes? “And who will guard the guardians themselves?” The search to recover our lost liberties will have been put on the right path when we remember the marvelously compact lesson in good government provided by James Madison’s defense of the Constitutional system of checks and balances.

But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself. A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions.

Madison’s “auxiliary precautions” have been swept away by militarism, collective economics, and the leadership principle. It is time to recall the lessons of Juvenal and Madison. It is time to turn away from state power and the leadership principle. We are all fascists now. Let us remember, however, that we were once Americans and can be so again if we so choose."

Well put.

Live Free or Die

DON BOUDREAUX:

"I can find no words to describe just how frightening and infuriating this letter is. A private citizen objects peacefully to a proposed government action, and, as a result, is not only forced to appear before Congress to explain but also to be threatened with further burdens if he doesn't cooperate with the arrogant power-mongers on Capitol Hill."

You can read the letter here. Six members of the House of Representatives (Barney Frank, Maxine Waters, Luis Gutierrez, Paul Kanjorski, Carolyn Maloney, and Melvin Watt) write:

"For the hedge fund industry . . . to take steps so actively in opposition to what is currently in the national economic interest is deeply troubling and will clearly have serious implications for the rules by which we operate in the future if this posture of obstruction of our efforts is maintained. We very much hope you will be able to tell us very soon that you have reversed your position of trying to obstruct . . ."

As I read this I was reminded of a recent speech by MARK STEYN in which he said:

MY REMARKS are titled tonight after the words of General Stark, New Hampshire's great hero of the Revolutionary War: "Live free or die!" When I first moved to New Hampshire, where this appears on our license plates, I assumed General Stark had said it before some battle or other—a bit of red meat to rally the boys for the charge; a touch of the old Henry V-at-Agincourt routine. But I soon discovered that the general had made his famous statement decades after the war, in a letter regretting that he would be unable to attend a dinner. And in a curious way I found that even more impressive. In extreme circumstances, many people can rouse themselves to rediscover the primal impulses: The brave men on Flight 93 did. They took off on what they thought was a routine business trip, and, when they realized it wasn't, they went into General Stark mode and cried "Let's roll!" But it's harder to maintain the "Live free or die!" spirit when you're facing not an immediate crisis but just a slow, remorseless, incremental, unceasing ratchet effect. "Live free or die!" sounds like a battle cry: We'll win this thing or die trying, die an honorable death. But in fact it's something far less dramatic: It's a bald statement of the reality of our lives in the prosperous West. You can live as free men, but, if you choose not to, your society will die.

It seems to me this letter by members elected to Congress is an affront to liberty and to our Constitution, and especially to the First Amendment, which is thought to be part of our so-called "Bill of Rights." Perhaps there are so few citizens today who can be as infuriated and frightened as Professor Boudreaux (and I) by this letter that we should indeed suspect that our society is choosing more and more often not to live free. Our ability to prosper in the future seems more and more threatened these days. It seems to me that more of us should want to obstruct such efforts by those in Congress who seek to use government's power to silence those with opposing views. "LIVE FREE OR DIE."

Happy Birthday F.A. Hayek

TOM SOWELL:

“The 20th Century looked for many decades as if it were going to be the century of collectivism .. Anyone who would have predicted the reversal of this trend .. would have been considered mad just a dozen years ago. Innumerable factors led to [the reversal of the rise of collectivism], not the least of which was the bitter experience of seeing ‘rational planning’ degenerate into economic chaos and Utopian dreams turn into police-state nightmares. Still, it takes a vision to beat a vision .. An alternative vision had to become viable before the reversal of the collectivist tide could begin with Margaret Thatcher in Britain and Ronald Reagan in the United States. That vision came from many sources, but if one point in time could mark the beginning of the intellectual turning of the tide which made later political changes possible, it was the publication of The Road to Serfdom by Friedrich A. Hayek ..”.

Inflation

I found this at Greg Mankiw's Blog.

What Is Going On In This Country?

LARRY KUDLOW:

"What is going on in this country? The government is about to take over GM in a plan that completely screws private bondholders and favors the unions. Get this: The GM bondholders own $27 billion and they’re getting 10 percent of the common stock in an expected exchange. And the UAW owns $10 billion of the bonds and they’re getting 40 percent of the stock. Huh? Did I miss something here? And Uncle Sam will have a controlling share of the stock with something close to 50 percent ownership. And no bankruptcy judge. So this is a political restructuring run by the White House, not a rule-of-law bankruptcy-court reorganization."

Flu

If you are wondering about the flu, then you might find this WSJ COMMENTARY useful reading.

President Obama's Fiscal Policy

Look what I found over at GREG MANKIW'S BLOG.


The picture shows federal government revenues and outlays as a percentage of GDP. This does look like significant change to me. But, I am not in favor of the national government's outlays being in the neighborhood of 25% of GDP or more. Nor can I applaud the significant borrowing by the national government which is depicted in this picture, especially since it seems that so much of this debt will be incurred for current consumption.

Happy Tax Day!

MARY THEROUX:

"In sum, please refund the taxes collected fraudulently for services never provided. If you need additional evidence, please do not hesitate to ask: there’s plenty more where this came from."

Her letter is kind of fun. Read the whole thing.

Beer Taxing

WSJ COMMENTARY:

"Today is the dreaded April 15, but at least in Oregon it's even going to cost you more to drown in your tax sorrows. In their sober unwisdom, the state's pols plan to raise taxes by 1,900% on . . . beer. The tax would catapult to $52.21 from $2.60 a barrel. The money is intended to reduce Oregon's $3 billion budget deficit and, ostensibly, to pay for drug treatment."

And, according to this commentary, taxes are already the most expensive "ingredient" in beer.

Is there a bright side in this? Perhaps in the future economists will have an example of price elasticity of demand that Econ 101 students can relate to. Is beer demand price elastic?

Crisis

Economists STEVEN GJERSTAD AND VERNON SMITH take a look at the reasons for this economic crisis. They are interested in why the collapse of one bubble would lead to a crisis for the financial system while another would not.

Gjerstad and Smith provide a very interesting chart that shows 3 bubbles in housing prices over the past 40 years.



The first housing price bubble over this time period ended in 1979 and the second ended in 1989. Gjerstad and Smith explain that for various reasons pricing bubbles happen and can be expected to collapse at some point. The collapse of a pricing bubble does not have to portend grave implications for the rest of economic activity. The chart suggests the earlier 2 housing price bubbles were rather modest in size and in impact when they collapsed, at least when compared with the most recent housing price bubble.

The housing price bubble that recently collapsed began in 1997. Gjerstad and Smith believe there were 2 basic reasons for this recent price bubble. There was an increase in household income (beginning around 1992)which would have increased the demand for owning homes. There was also a significant change in income tax law that allowed a capital gain of $1/2 million in a home. This would also have increased the demand for owning homes. The first of these reasons would be a "natural" economic explanation, i.e., increased income and increased demand resulting from an increased standard of living due to a prospering economy. The second of these reasons was the result of a specific government action.

Gjerstad and Smith suggest that this most recent housing price bubble might well have ended with the recession of 2001, and if that had been the case it looks to me like this recent bubble would have looked very much like the other two price bubbles we see in the chart. Why did this housing price bubble continue?

Gjerstad and Smith point to one of the reasons in their chart. The Federal Reserve "decided to pursue and unusually expansionary monetary policy." The increased liquidity was then utilized by the rapidly expanding housing sector of the economy, and the bubble continued to inflate. During the earlier two bubbles the Federal Reserve acted in a way that worked against and that mitigated the increase in the bubbles. In contrast, for the latest bubble the Federal Reserve's actions enhanced the bubble.

Gjerstad and Smith also explain that explicit government policy actions also contributed to the expanded housing price bubble. Both the Clinton and the Bush administrations acted to aggressively increase home ownership and this government policy was translated into decreased mortgage credit standards.

There was another interesting government action that Gjerstad and Smith point out. In 1983 government changed the way it calculated inflation. The result was that in 2004 for example the reported inflation rate was about 1/2 the actual inflation rate. The Federal Reserve was choosing an expansionary monetary policy with an inaccurate view both of inflation and the real interest rate. The real interest rate was near zero, and of course "household borrowing took off."

So, the latest housing price bubble peaked in early 2006. We probably remember that the deflating housing price bubble didn't really enter our public consciousness until around Labor Day and the Presidential election in 2008. It took nearly 3 years for the crisis to become a crisis.

Gjerstad and Smith note that the downturn in the equities market from about December 1999 until about September 2002 saw a loss of about $10 trillion of asset value. In contrast the lost asset value for housing was only about $3 trillion of asset value. They wonder why the smaller loss in asset value led to our current financial crisis, when a larger loss in asset value did not.

The answer they suggest is that the people who lost the asset value in the equity market downturn were largely individuals and were not financial businesses/institutions themselves. In contrast, the current financial crisis involves a large number of households who were unable to continue to pay off their mortgage loans. This is alot like saying the losers in the equity market downturn were individuals, but there are important differences.

When households default on their mortgage loans the real asset, the home, becomes owned by a financial business/institution. The lenders were of course making their business decisions in loaning money for the original mortgage based on the knowledge that if the borrower failed in making payments the real asset would become part of the lender's assets. Unfortunately, as the housing price bubble began to deflate, the housing prices across the country began falling very rapidly. In many cases, the loans which were in default apparently involved properties who had decreased in value by 50% or more, and most of these properties had been purchased on 90% to 100% margins.

Gjerstad and Smith suggest that the earlier and larger asset value losses in the equity markets had relatively little impact on our financial system because the lost asset values did not get into the financial institutions and system itself. In contrast, the very inflated recent housing price bubble relatively quickly was moved into losses for the financial institutions themselves.

Perhaps if the housing price bubble had not been overwhelmingly large in historical terms, the losses for the lenders would not have led to the current crisis. So, I think it is important to keep in mind the reasons noted above that government actions and policies have much to do with explaining the existence and the size of the third housing price bubble in 40 years.

Pres. Obama's Plans

This very interesting picture is courtesy of INSTAPUNDIT.

The Real City

SANDY IKEDA:

"A city is not a man-made thing. Rather, it emerges from the actions of its inhabitants, who interact in unpredictable yet orderly ways. Under the right conditions – the right “rules of the game” – what arises is vital, creative, radically unpredictable, and profitable: the living city.

The modern demand to rationalize the city and to make it “more efficient” is misplaced. A living city cannot be efficient. Efficiency, in the economic sense, presupposes an overarching plan against which measured outcomes can be evaluated. A living city, however, follows no such plan. It is itself the unplanned, collective result of the countless individual plans executed continuously in it, day after day.

[ . . . ]

Earnest attempts to preserve large parts of the city or to consciously direct its evolution, like trying to preserve or control any complex living thing, will drain the life from it."

Ikeda is one of my economist heroes.

Predator Government

HOLMAN JENKINS:

"But the biggest lesson here is the old one that the price of freedom is eternal vigilance -- beginning with insistence on the rule of law. Americans clearly cannot trust their elected officials to defend their rights and interests, or care whether justice is served, when the slightest political risk might attach to doing so.

Which brings us back to Mr. Cuomo, whose office has been implicitly threatening to publish names of AIG employees who don't relinquish pay they were contractually entitled to.

Mr. Cuomo is a thug, but at least he reminds us: It can happen here."

It seems that only 2-3 months in to a new government in Washington that government is becoming more and more predatory. In order to spend more today and grow government in size, Washington is borrowing heavily against the future productivity and incomes of our kids and grandkids. Government is laying claim to the incomes of people who aren't even able to vote yet. (Talk about taxation without representation, eh?) Government is buying into businesses and industries in the name of ending a "crisis" and then it follows with efforts to control salaries and even business plans. Government one day passes a law that guarantees to enforce contractually agreed to bonuses to productive employees, and then the next it seeks to confiscate those very bonus payments. Stories abound out of Washington that people in government are looking high and low for any new source for increased taxation. There are many other government actions at the national, state, and local levels of government that could be included here.

In POWER AND PROSPERITY Mancur Olson explains that there are some basic necessary conditions for prosperity. These necessary conditions boil down to the strict enforcement of private property rights, which includes the strict enforcement of voluntary contracts, and a lack of predation. When government itself becomes the biggest predator, and when government begins to violate rather than enforce private property and voluntary contracts, these necessary conditions for prosperity are significantly diminished. After just 3 months into 2009 the actions of government suggest that our country's future prosperity is likely to be significantly diminished.

President Deficit & Debt

WSJ COMMENTARY:

"President Obama's 2010 budget looks more astounding by the day, especially when someone other than the White House budget office is analyzing it. The latest case of epic sticker shock came Friday when the Congressional Budget Office published its assessment, which found that the proposals would increase the federal deficit by $2.3 trillion more over 10 years than the White House had claimed.

[ . . . ]

And by the way, all of this is without including the costs of Mr. Obama's plan to offer "free" health care for the middle class. The White House budget includes only a "down payment" on health care, with every serious person figuring it will cost at least $1.2 trillion, and probably more. Incredibly, Democrats on Capitol Hill are, with White House encouragement, talking about jamming health care through Congress with a special procedure that requires only 50 Senate votes."

I'm reminded of the rock song lyric: "The future's so bright I gotta wear shades." If the President and the Congress are allowed to continue expanding national government, our kids and grandkids can probably save a little money for their taxes by dumping the shades.

Perhaps we should beware the "special procedure." Not only is the national government looking to grow and get bigger, but it seems that this President and this Congress may be getting more predatory as well.

The President's Power

KARL ROVE:

"President Barack Obama and his West Wing lieutenants are playing on the world's largest stage, yet act as if no one is watching them when they contradict their campaign promises. That behavior is unwittingly giving the Republicans an opening.

For example, Team Obama thinks the president, having spent a good portion of the campaign decrying the $2.9 trillion in deficits during the Bush years, can now double the national debt held by the public in 10 years. Having condemned earmarks during the campaign, the Obama administration now believes it can wave through 8,500 of them in the omnibus-spending bill, part of the biggest spending increase since World War II.

With the Dow at 7,486 and unemployment at 8.1%, Mr. Obama says the economy is fundamentally sound. Does he suppose the nation won't recall him attacking John McCain last September for saying the same thing -- when the Dow was at 11,000 and unemployment at 6.2%?"

I have to wonder, does the President think "we the people" are rationally ignorant or rationally irrational?

Here is Mr. Rove's parting observation:

Every president eventually depletes his political capital. Some have done so advancing great, difficult causes. Others squander it because of missteps, and what the public views as breaches of faith. Having been president for all of eight weeks, Mr. Obama retains much residual goodwill and could still change course on the budget to reach across the aisle. But his current strategy has made him weaker than he was and weaker than he needs to be. It's turning into a costly two months for America's 44th president.

Just a week ago, I discussed with my students in my public choice course whether the Congressional leadership or this President had the greater power. Even with all the good will and support President Obama garnered in his election, perhaps he is too young and too inexperienced to effectively use the potential power of the Presidency? Does it seem he is still campaigning rather than governing?

Endless Screwups

GLENN REYNOLDS:

"Our political class lacks the self-discipline needed to handle a crisis. They’re too busy reacting to headlines, polls, and fears of headlines and polls. The result is . . . well, endless screwups like this."

Maybe we should say this is the basic source of government failure, eh?

Tax My Products, Please

WSJ commentary:

"Mr. Mulally offered his own solution to the mismatch, artfully explaining that we needed to 'involve the consumer in our energy policy.' In case anyone missed his point, Michael Jackson, CEO of AutoNation, the largest auto dealer in the country, was more explicit: 'Mr. Mulally said it very elegantly last night and I will say it more straightforward. We need more expensive gasoline.'

While last year's energy spike briefly encouraged small-car sales, Mr. Jackson complained that those sales have plummeted with gas prices. "I have fuel-efficient vehicles parked at my dealerships as far as the eye can see. I can't give them away." He figures a tax that guarantees a gas-price floor of $4 a gallon is a "good start." Mr. Mulally, for his part, talked about how good Ford's sales of small cars were in Europe, and that "one of the reasons is that gasoline and diesel is somewhere between seven and nine dollars a gallon."

So: The U.S. government mandates fuel-economy standards that force Detroit to make cars Americans don't want to drive. When Detroit loses money on those cars, Washington throws taxpayer dollars at its mistake, and the car makers demand a tax increase that would prod Americans to buy the unpopular cars that Washington mandates. As for what the American consumer or taxpayer wants -- or can afford in today's economy -- who cares? Welcome to government-run energy policy."

For those of you who have read Mancur Olson's The Rise and Decline of Nations, isn't this just a "textbook" illustration of sclerosis?

Folly & Washington Finger Pointing

A very interesting story is told today in a WALL STREET JOURNAL commentary:

"Taxpayers have already put up $173 billion, or more than a thousand times the amount of those bonuses, to fund the government's AIG 'rescue.' This federal takeover, never approved by AIG shareholders, uses the firm as a conduit to bail out other institutions. After months of government stonewalling, on Sunday night AIG officially acknowledged where most of the taxpayer funds have been going.

Since September 16, AIG has sent $120 billion in cash, collateral and other payouts to banks, municipal governments and other derivative counterparties around the world. This includes at least $20 billion to European banks. The list also includes American charity cases like Goldman Sachs, which received at least $13 billion. This comes after months of claims by Goldman that all of its AIG bets were adequately hedged and that it needed no "bailout." Why take $13 billion then? This needless cover-up is one reason Americans are getting angrier as they wonder if Washington is lying to them about these bailouts."

Have you ever been suspicious when the those in the Washington political class are out in front of the cameras pointing fingers? I've come to suspect that when this happens the finger pointing is about trying to play offense to cover up the mistakes of government. The WSJ suggests this is the reason for the fingers pointing and wagging over greedy others right now:

The politicians also prefer to talk about AIG's latest bonus payments because they deflect attention from Washington's failure to supervise AIG. The Beltway crowd has been selling the story that AIG failed because it operated in a shadowy unregulated world and cleverly exploited gaps among Washington overseers. Said President Obama yesterday, "This is a corporation that finds itself in financial distress due to recklessness and greed." That's true, but Washington doesn't want you to know that various arms of government approved, enabled and encouraged AIG's disastrous bet on the U.S. housing market.

Scott Polakoff, acting director of the Office of Thrift Supervision, told the Senate Banking Committee this month that, contrary to media myth, AIG's infamous Financial Products unit did not slip through the regulatory cracks. Mr. Polakoff said that the whole of AIG, including this unit, was regulated by his agency and by a "college" of global bureaucrats.

Here is the bottom line to the commentary:

The Washington crowd wants to focus on bonuses because it aims public anger on private actors, not the political class. But our politicians and regulators should direct some of their anger back on themselves -- for kicking off AIG's demise by ousting Mr. Greenberg, for failing to supervise its bets, and then for blowing a mountain of taxpayer cash on their AIG nationalization.

Of course the people of government will not blame themselves. They will instead try to help us overlook their accountability. As Ronald Reagan famously said, government is not the solution, government is the problem. It seems folly to turn to government thinking government can fix a mess it's earlier actions helped create.

Mankiw's Lessons From The President's Budget

GREG MANKIW takes a look at President Obama's first budget proposal. He finds several lessons revealed in this proposal: (1) he is an economic optimist, especially concerning his PLAN (assumes 4% growth rate in the economy over the next 4 years), (2) he likes to spend, (3) he is serious about climate change, and (4) he is a deficit dove (i.e., the deficits are rising with his plans).

I guess I'm not surprised by any of the lessons Mankiw sees in the President's first budget. His campaign speeches suggested he would be a big spender, and of course if so, then most likely he would really be a deficit dove. And, what President wouldn't choose a rosy scenario for economic growth when assuming the President's PLAN for government and the economy was implemented?

But, it seems to me the assumption of 4% growth over the next 4 years is quite inconsistent with assuming the President will successfully impose carbon cap-and-trade policies. If government policy forces significant additional reductions in carbon emissions, the relative prices of energy will be much increased, which will reduce both consumption and production.

Here is the bottom line in Mankiw's commentary:

"So if you are a deficit hawk who lamented the Bush budget deficits, the new president’s budget should not make you feel much better. President Obama offers different fiscal priorities than President Bush did: less military spending, more domestic spending and higher marginal tax rates to “spread the wealth around.” But the borrowing and debt imposed on future generations will not be very different, at least if the numbers in the Obama administration’s own budget document can be trusted."

The Cookie Cartel

From the WASHINGTON TIMES:

Wild Freeborn — adorable and age 8 — has caused considerable hubbub with entrepreneurial spirit and a little homemade video.

"Help me help others. Buy cookies. They're yummy," little Wild says in her one-minute sales pitch for Thin Mints, Samoas and other traditional mainstays of Girl Scout cookie cuisine.

The modest message included an online order form, was videotaped by her father, Bryan Freeborn, in the family living room in Brevard, N.C., and posted at YouTube.com

[ . . . ]

The Girl Scouts were not pleased with Wild's intention to sell 12,000 boxes of cookies and help send her troop to summer camp. The organization ordered the video removed from the social-networking site on the grounds that it violated a policy that bars online sales of Girl Scout cookies. Officials were also concerned that Wild's methods could put less techno-enabled young ladies at a disadvantage.

Federal Government Changes Size

GREG MANKIW looks at federal outlays as a percent of GDP, which seems to be something President Obama wants to change in the direction of larger and larger:

"HOW WILL IT ALL END? Over the last century, the largest increase in the size of the government occurred during the Great Depression and World War II. Even after these crises were over, they left a legacy of higher spending and taxes. To this day, we have yet to come to grips with how to pay for all that the government created during that era — a problem that will become acute as more baby boomers retire and start collecting the benefits promised.

Rahm Emanuel, the incoming White House chief of staff, has said, “You don’t ever want to let a crisis go to waste: it’s an opportunity to do important things that you would otherwise avoid.”

What he has in mind is not entirely clear. One possibility is that he wants to use a temporary crisis as a pretense for engineering a permanent increase in the size and scope of the government. Believers in limited government have reason to be wary."

The Corruption Continues

WSJ:

"Speaking of earmarks, they've quickly made a comeback even by the old definition. The $410 billion omnibus spending bill for fiscal 2009 now making its way through Congress contains at least 8,570 of them at a cost of $7.7 billion. Mr. Obama is not signaling any concern, much less a veto."

Please read this short editorial. We should all be paying attention. The corruption in Washington continues. It seems to me the corruption that is represented by earmarks is not being changed to un-corruption, but instead the direction of change we seem to be able to count out is a deepening of the corruption.

The number of earmarks in this omnibus spending bill alone represents, on average, about 20 personally determined, secret, spending projects for each member of Congress. In dollar terms, this means about $18 million is being spent secretly by each member of Congress.

President's Road Map?

CONGRESSMAN PAUL RYAN:

"The budget the president released last week, however, does provide some certainty about where we are headed: higher taxes on small businesses, work and capital investment.

Add to this the costly burdens of a cap-and-trade carbon emissions scheme and an effective nationalization of health care, and it is clear that the government is going to grow while the economy will shrink. In a nutshell, the president's budget seemingly seeks to replace the American political idea of equalizing opportunity with the European notion of equalizing results."

It seems to me this is the President's vision of the future, and it's not a vision I like? What do you say?

Seen & Unseen

I didn't watch the President's speech last night. I had to walk my dog. And, I haven't yet had time to read his speech, so I can't comment directly. But STEVE HORWITZ watched it, well he apparently watched as long as he could take it:

"It is quite clear after listening to Obama's talk tonight that he, and those who applauded him wildly, have no clue as to this fundamental point in political economy. Not once in all of his talk of what government would do did he ever even come close to acknowledging that what government spends on the one hand must be taken from the private spending stream on the other. In fact, at one point he touted his 'transparency' plan by saying that it would enable 'taxpayers to see how government money is being spent helping other taxpayers.' Maybe so, but he glosses over the fact that the money being spent came from those same taxpayers and would have been spent on other things, without the waste of the transfer, were it not for government's intervention. Robbing Peter to 'help' Paul only damages both in the process, and certainly stimulates no economic activity."

This Crisis & Sowell Clarity

TOM SOWELL:

"From television specials to newspaper editorials, the media are pushing the idea that current economic problems were caused by the market and that only the government can rescue us.

What was lacking in the housing market, they say, was government regulation of the market's 'greed.' That makes great moral melodrama, but it turns the facts upside down.

It was precisely government intervention which turned a thriving industry into a basket case.

An economist specializing in financial markets gave a glimpse of the history of housing markets when he said: 'Lending money to American homebuyers had been one of the least risky and most profitable businesses a bank could engage in for nearly a century.'

That was what the market was like before the government intervened. Like many government interventions, it began small and later grew."

If you want insight, then you really should read the whole thing.

On the other hand, if you choose either rational ignorance or irrationality, then you want to stay far, far away from Tom Sowell.

Presidential Confidence?

I've recently heard quite a number of talking heads discussing what has happened with the stock market indexes since the election of President Obama. I found this chart in A WSJ COMMENTARY today. Perhaps this suggests a lack of confidence in the new President. Then again, it could also reflect a lack of confidence in a Congress which already seems adamantly partisan and Democrat.

In any case, it seems the more Washington says it will fix the economy and this recession, the more it looks like the recession will continue. It seems to me that an increasingly interventionist Washington is making matters worse, not better.

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."