Friday, March 27, 2009

Fed Tinkering and the Current Recession

Back in August 2007, the economist George Selgin wrote a clear-eyed explanation of how "fine-tuning" by the Federal Reserve created easy credit and, unintentionally, led to the housing bubble:

. . . Why did mortgage lenders earlier this decade start showering credit as if it were spewing from a public fountain? The answer is that credit was spewing from a public fountain – and that fountain was the Fed. In December 2000, the Fed began an unprecedented year-long series of rate cuts, reducing the federal funds rate from over 6 percent to just 1-3/4 percent – a level last seen in the 1950s. By mid-2003, two further cuts had reduced the rate to just 1 percent.

The general aim of these cuts was to keep a mild growth slowdown from getting worse. But they had the quite unintended effect of generating euphoria in the mortgage market by flooding it with funds. Lenders dramatically lowered mortgage rates and kissed old-fashioned lending standards goodbye. . . .

. . . It illustrates the late Milton Friedman's claim that the full effects of monetary policy changes happen only after "long and variable lags," when conditions that motivated the changes have passed into history. The resultis that fine-tuning often ends up promoting business cycles instead of dampening them.

The subprime lending crisis also shows that, while central banks certainly have the power to expand a nation's spending power, they can't guarantee that the extra power gets used as intended, namely, to give a roughly uniform boost to the overall demand for goods. On the contrary: The crisis supports the argument, first developed by Austrian-school economists Ludwig von Mises and Friedrich Hayek, that the techniques central banks employ to increase spending power are bound to distort spending patterns by driving lending rates below their sustainable, "natural" levels.

By injecting the new money they create into credit markets, central banks create an artificially high demand for long-term investments, such as real estate, in which interest costs loom large. . . .

In hindsight, it's easy to say that the Fed blundered. But avoiding similar blunders in the future is another matter. The truth is that the Fed, as presently constituted, faces an impossible task: It can't tell whether its targeted rates are "natural" (and therefore sustainable) except in retrospect, when it's too late; and it will always be tempted to engage in fine-tuning, both because the Humphrey-Hawkins Act of 1978 calls for it to do so, and because a myopic and inadequately informed public rewards Fed bureaucrats for "doing something" even when they ought to stand pat.

Only institutional reform can get us out of this predicament. The Fed must be taken out of the fine-tuning business. Instead, it must observe a strict and unambiguous monetary rule, such as one calling for the Fed to announce and stick to an inflation-rate target.

Thanks to Cafe Hayek for resurrecting this excellent piece.
Should I Buy an Amazon Kindle?

Tyler Cowen has another post about the Kindle, with a lot of interesting comments. One commenter says, "I can't decide if the Kindle is a right fit for me."

I agonized and researched for a long while before I finally bought my Kindle. But after I'd had it for a few days, I wished I had bought it sooner, so that I would have had that much more time to enjoy reading on it.

Based on my experience, here's a very simple test to decide whether you should buy a Kindle:

1. Do you read a lot?

2. Are the types of things you like to read available in Kindle format? (Go to Amazon and search for what you like in the Kindle Store.)

3. Are you able to take reasonably good care of electronic devices (you don't leave your cell phone on airplanes, you don't spill drinks on your laptop, etc.)?

4. Can you afford it?

If you answer Yes to all of the above, then go ahead and buy one. You will love it.

Wednesday, March 25, 2009

Let's Try This Yet Again

Blogger has been giving me trouble today. I wrote two posts that (in my opinion) were outstanding. Both of them disappeared into the ether. (Something to do with highlighting text and then hitting an up or down arrow. . . .)

In any event, here are the short versions:

1. Last night, President Obama said the government needs to "save and invest," but his proposed budget is projected to bring us bigger deficits than anything we experienced during the Bush administration. John at Power Line says Obama's statement was a "bald-faced lie" and provides a helpful chart. Cafe Hayek makes the same point.

2. I love the Amazon Kindle. I've had version 1.0 since August 2008. Reading has been my favorite pastime for as long as I can remember, and the Kindle makes it twice as enjoyable, if you can imagine such a thing. Blogger Steven Berlin Johnson offers a list of pros and cons. His cons don't bother me, but this particular pro is entirely true and not the least bit exaggerated: "Buying a book through the [on-line] store is absolutely magical. One-click, wait thirty seconds, and you're reading."

Tuesday, March 24, 2009

90% Bonus Tax as a Bill of Attainder

Ever since the House approved a bill that would tax the infamous AIG bonuses and the like at 90%, numerous people have wondered whether the bill (if it becomes a law, which seems unlikely) would be unconstitutional under the Bill of Attainder Clause in Article I, Section 9 of the federal Constitution. The law professors at Volokh Conspiracy, for example, have offered some thoughtful commentary.

The issue sent me back to my copy of The Heritage Guide to the Constitution, published in 2005 by Regnery. I originally bought The Heritage Guide on an impulse, thinking it might be fun to browse through. But it has since become my go-to source whenever I want some quick learning on a constitutional provision. While I have other, more "professional" sources on constitutional law in my office (including the 6-volume treatise published by West), The Heritage Guide is the best place I've found for an intelligent overview.

On the question of bills of attainder, The Heritage Guide points out, first, that the Constitution prohibits both the federal government (in Art. I, Sec. 9) and the states (in Art. I, Sec. 10) from passing bills of attainder and ex post facto laws. The Guide then explains that, while at common law bills of attainder "condemned specifically designated persons or groups to death" (my emphasis), Chief Justice John Marshall, in the 1810 opinion Fletcher v. Peck, stated that "a Bill of Attainder may affect the life of an individual, or may confiscate his property, or may do both."

In the 20th century, the Guide goes on, the Supreme Court devised a three-part test for determining whether a legislative enactment is a bill of attainder: "such legislation specifies the affected persons (even if not done in terms within the statute), includes punishment, and lacks a judicial trial." Most recent Supreme Court opinions on whether legislation violates the Bill of Attainder Clause have turned on the "punishment" prong of the test. For instance, exclusion from employment has been found to be punishment, but the denial of non-contractual government benefits (such as financial aid) has been found not to be punishment.

This is a broader reading of the clause than I had recalled (if we ever studied this provision in Con Law class, which I doubt). The argument that the 90% tax is a bill of attainder would therefore seem to have some promise.

Monday, March 23, 2009

Making Sense out of Treasury's Plan

The "self-evident" blog has a great explanation of how the Treasury's toxic-asset plan is supposed to work.

Hat tip to Marginal Revolution.

Sunday, March 22, 2009

The Rule of Law

David Boaz, at Cato @ Liberty, had some choice words earlier this week about the House's 90% tax on bonuses paid by firms receiving stimulus money:
The rule of law requires that like people be treated alike and that people know what the law is so that they can plan their lives in accord with the law. In this case, a law is being passed to impose taxes on a particular, politically unpopular group. That is a tyrannical abuse of Congress’s powers. And in addition, it is retroactive legislation, changing the law upon which AIG and its employees had relied. As James Madison wrote in Federalist 62, “It will be of little avail to the people, that the laws are made by men of their own choice, if the laws . . . undergo such incessant changes that no man, who knows what the law is to-day, can guess what it will be to-morrow.”

Selective taxation is tyranny. Ex post facto legislation violates the spirit of the liberal order, even if a particular piece of legislation can be “structured” to pass constitutional muster.
Wisdom from Gary Becker on the Past, Present, and Future

The Wall Street Journal published a few days ago an excellent interview with one of the greats, economist Gary Becker. The article is peppered with valuable and sometimes frightening insights:

Becker on the causes of the recession:
Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."

"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.

The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."
Becker on recovery through market forces:

Mr. Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."

Becker on counterproductive action by the federal government:

[The government] has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."

Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest[s] that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.

He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

Becker on aiding the economic recovery:
"What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on."

* * *

Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."

* * *

Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."

Becker on mark-to-market accounting:
Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."

Becker on bank size:
To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do."

Becker on Keynesianism:
There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."

Becker on entitlement programs and democracy:
"When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Hat tip to Cafe Hayek.

Saturday, March 21, 2009

A Fundamental Flaw in Keynesianism

In this opinion piece, economist Don Boudreaux explains one of the fundamental problems with Keynesianism. According to Keynes, when there's a recession, the government should spend more in order to make up for the reduced spending of private parties. The problem with this is that the reduced spending of private parties is a signal to investors and producers to look for opportunities in areas different from those where they've been investing and producing. Government spending dampens that signal and simply arrests or retards the readjustments that the recession is telling people should be made. As Prof. Boudreaux explains:

For example, suppose consumers’ taste for fish intensifies while their taste for beef weakens. Consumers will then spend more money buying fish and less buying beef. The resulting higher price of fish relative to the price of beef will signal to entrepreneurs, investors and resource owners to produce more fish and to produce less beef. This change in production patterns is precisely what should happen.

Specialized beef producers, though, aren’t so keen on this little piece of economic change. Some workers in the beef industry will lose their jobs. . . . Would it be sound economic policy for government to save those jobs by entering the beef market and buying more beef? Of course not, for to do so would divert scarce resources from other uses more valuable to consumers.

Now suppose that an unusual amount of such economic changes take place at one time. The result will be, and should be, that an unusual amount of economic displacement takes place in the short-run as an unusually large number of workers adjust to the new pattern of consumer demands.

Keynesians, however, misread such events as evidence that total demand is too low and prescribe higher government spending. Politicians, ever eager to justify meddling further into the economy, jump on this Keynesian bandwagon. The result is that the normal corrective adjustments in the market are thwarted and government’s power over the private economy grows dangerously.

Friday, March 20, 2009

Abuse of Power

Yesterday's passage in the House of the punitive tax on bonuses paid by companies that received TARP funds is, I think, one of the most flagrant abuses of civil power at the federal level that I've seen in my lifetime. (Fortunately, it's just an attempted abuse of power so far. I hope the Senate will show more sense.)

It's important to be reminded that politicians and representative bodies can become bullies every bit as dangerous as power-drunk police or FBI agents. As Chief Justice Marshall pointed out 190 years ago:

That the power to tax involves the power to destroy; that the power to destroy may defeat and render useless the power to create . . . are propositions not to be denied.

(from McCulloch v. Maryland, 17 U.S. (4 Wheat) 316, 431 (1819).)

Thursday, March 19, 2009


A fatuous opinion piece in the Washington Post by one Steven Pearlstein has sparked a glorious outburst by economist and champion of freedom Don Boudreaux. Here are Prof. Boudreaux's final paragraphs, which are not a whit too strong:

The idea that private business persons are "arrogant" if they don't genuflect to the hypocritical and utterly immoral scumbags who work on Capitol Hill is outrageous. The idea that, if government forces a private firm to take taxpayer money, that firm should be grateful and should cooperate with the political theater that plays 24/7 in Washington sickens me beyond words.

And as I predicted here, the notion that only those firms that requested and received government help will be the ones who suffer detailed intrusions by government is naive. The obnoxious collectivism that permeates the "thinking" of persons such as Steven Pearlstein will press as far as it can to assert control over as many private choices as it can get its greedy and officious paws on.

The single greatest instance of intellectual foolishness today is the continuing pretense that politicians are serious people worthy of serious consideration. They are scoundrels, each and every one, regardless of party (although some of them, it is true, are more scoundrelly than others). For any scholar to pretend that these people are disinterested servants of the public welfare -- to pretend that the words politicians utter or send out in press releases are meant to promote any goal other than politicians' own glorification and pursuit of power -- is for that scholar to be duped to a degree that should be more embarrassing than would be the discovery that that scholar believes the earth to be flat or that Big Foot was in league with Lee Harvey Oswald to murder JFK.
Jurors and Electronic Media

During my morning commute yesterday, Michael Smerconish brought to my attention an apparently growing problem: jurors' use of Blackberries and other electronic devices to do research on the case they're hearing or to communicate about it. For example, according to an AP story:

"Dozens of people a day are sending tweets or Facebook updates from courthouses all over America," said Anne W. Reed, a Milwaukee trial lawyer and jury consultant who writes a blog that follows juries and social networking sites.

While most posts are innocuous, Reed said, a few cases have raised eyebrows — and questions about whether judges need to clarify jury instructions about online communications.

In Arkansas last week, a building materials company and its owner appealed a $12.6 million verdict against them, alleging that during the trial a juror posted Twitter messages that showed bias. Juror Johnathan Powell, of Fayetteville, told The Associated Press that the complainants were "grasping at straws" to try to undo the award.

A federal judge in Florida last week had to declare a mistrial after an eight-week drug trial after learning that no fewer than nine jurors had done online research about the case, according to the New York Times.

It may seem counterintuitive that jurors are not supposed to do independent research when they are hearing a case. Don't we want jurors to be well informed? If, for example, a juror hears a term he doesn't understand, why shouldn't he look it up on the Internet during a break?

The purpose of the rule against independent research is to help ensure that jurors base their verdict only on the evidence that is provided to them, in the courtroom, by each side. Consider a doctor who is defending himself against a malpractice claim. His lawyer, the other side's lawyer, and the judge will work together before the trial to determine whether, for example, the witness the doctor wants to testify about the appropriate standard of care meets the legal criteria for being presented to the jury as an expert.

If jurors then go on-line to supplement what the witness says, they're taking into account "testimony" that has not been vetted by the parties and the judge. It's almost as bad as when a juror has independent knowledge of one of the parties, or a prejudice against one of the parties, but never tells the judge. The verdict is then based, at least in part, on evidence that was unknown to the parties and the judge, was completely outside their control, and cannot be questioned on appeal. It makes the trial that much more unpredictable, that much more a matter of chance -- something the Anglo-American legal systems have been trying to get away from for centuries.

Wednesday, March 18, 2009

Debunking the "Deregulation" Myth

John Hinderaker at Power Line has a truly excellent post about today's hearing of the House Subcommittee on Capital Markets. Most of the news coverage has focused on the testimony of AIG Chairman and CEO Edward Liddy. But John picked up on something more significant -- testimony by the Acting Director of the Office of Thrift Supervision. As this testimony makes clear, it wasn't an absence of regulatory authority or resources that caused Thrift Supervision not to rein in AIG. It was nothing more or less than a "mistake" on the part of the regulators.

John draws the moral:

Part of the mythology that the Democrats are trying to create out of the financial crisis is that it is due to a lack of regulation (or, better yet, "deregulation"). In fact, the industries involved are heavily regulated, and I'm not aware of any instances where a lack of regulation, as opposed to a failure of regulation, is to blame for a significant aspect of the crisis. In general, what happened was that regulators and businessmen made the same mistake: they failed to foresee the decline in real estate values and, perhaps more important, failed to understand fully the consequences that would flow from such a decline. . . .

It's never been clear why liberals have so much faith that regulators are smarter or better able to foresee the future than businessmen.
We Don't Need to Be "Stimulated" out of the Slump

Economist Don Boudreaux uses the story of the automobile to explain why a government stimulus is not needed to end the recession. Two hundred years ago, no one could have imagined what a huge role cars would play in our lives. If you could travel back in time to 1809 and describe to someone what the America of 2009 is like, your listener might very well wonder how such developments could come about without the guidance of a central decision-maker:

[W]hat I suspect they would find most unbelievable is not the progress of technology that automobiles require. Rather, what would be most difficult to comprehend is the fact that such an amazingly complex development and coordination of economic activities can occur without being consciously arranged. After all, it's not just that people in 2009 can easily afford automobiles, but also that whole industries exist to support automobile driving. . . .

Stupendous coordination of millions of individual plans and talents emerged spontaneously -- and not only in the automobile industry. The entire economy is a testament to such spontaneous coordination.

The single greatest fact about capitalist society is that the great bulk of it appears to be the handiwork of a master designer but, in fact, is unplanned and even unimaginable before it becomes real and familiar.

Remember this lesson whenever you hear alleged "experts" insisting that only conscious effort by government to "stimulate" demand can save the economy from its current downturn.

It's true that no one can know beforehand the precise path by which a free market travels to escape the downturn. No one can foresee that, say, entrepreneurs in Texas and Ohio will be especially creative at finding ways to produce things that consumers will open their wallets wider to buy -- and, hence, that these entrepreneurs will succeed at launching profitable firms that hire more workers. . . .

But economics and history tell us that our inability to foresee and predict -- or even to imagine -- how recovery will come in the absence of conscious government stimulus is no reason to conclude that recovery requires conscious government stimulus.

Populism and Conservatism

As various observers have pointed out, we're hearing a lot of populist rhetoric from Washington these days. Populism, despite the term's democratic sound, is not a good thing:

In the U.S. and Canada, populist movements . . . arose among western (and southern U.S.) farmers in the second half of the nineteenth century. North American populism was less a doctrine or a movement than an expression of discontent directed against those whom the farmers held especially responsible for their problems -- the eastern bankers and railroad interests. Populist parties demanded easier credit, lower shipping rates, agricultural co-operatives, and other forms of public assistance.

(From A Glossary of Political Ideas, Maurice Cranston & Sanford A. Lakoff, eds. (Basic Books, 1969).) The U.S. populist party faded away once the Democratic and Republican parties absorbed many of its goals. As an attitude and a rhetorical stance, however, populism remains a big part of American life.

Among Republican politicians, populism often takes the form of castigating the "Eastern elites." Among Democrats, it often takes the form of what we're seeing today, scolding of "the rich" and "big business." Some public figures -- such as Bill O'Reilly and Michael Savage -- are more populists than they are conservatives or Republicans, since they target all of the above in their attacks and don't try to maintain any kind of ideological consistency.

Unlike conservatism, populism has no intellectual foundation. It's a style of attack that can be used to motivate, distract, or entertain voters.

Tuesday, March 17, 2009

Podcast on the Employee Free Choice Act

Richard Epstein, a brilliant legal scholar and self-proclaimed classical liberal, provides a straight-from-the-hip podcast on Cato at Liberty about the Employee Free Choice Act -- what most people refer to as the "Card Check" bill.

This bill, favored by the ruling party, is likely to become law soon. Epstein's bottom line: (1) It maintains the winner-take-all monopoly view of labor relations, as first enacted in the 1930s under the Wagner Act; (2) it will make it easier for unions to organize within a business; (3) it will chill lawful efforts by employers to advocate that workers not unionize, by greatly increasing the penalties for going over the not-very-clear line; and (4) it will increase federal regulators' involvement in labor relations.

The podcast is only 10 minutes long and is packed with information, so you need to listen carefully. But he lays it all out very nicely.
More about the Limitations of Keynes

Economist Don Boudreaux, in response to comments from readers, explains his views on Keynes's shortcomings as an economist:

I have never disputed that Keynes was a great pioneer in probability theory. I do dispute that he was a great economist.

His ruminations on animal spirits and on the marginal propensity to consume don't come remotely close to being sufficiently micro-theoretic. The important question is how do individual choices interact with each other -- conflict, mesh, adjust, create synergies -- to bring about material prosperity?

Recognizing various psychological properties of individual human decision-making is important, but such recognition remains chiefly in the province of psychology and not economics -- at least not in that all-important species of economics that aims to understand how individual choices create results that are no part of anyone's intentions (such as, say, a production structure that creates pencils).

Economic growth and widespread material prosperity require enormously complex adjustments at very detailed levels. The Austrian notion of capital, of course, is a paramount example of this fact that Keynesians (and monetarists) ignore. Capital, in fact, is not a blob that only grows, shrinks, or remains unchanged in size. It is a hugely vast complex of specifically adjusted relationships, both physical and commercial, that concepts such as aggregative concepts mask.

(This occurs among the comments to the linked post; you'll therefore need to scroll down to find it.)
AIG Bonus "Outrage"

A lot can be, has been, and will be said about AIG's payment of executive bonuses and the expressions of "outrage" from President Obama and other politicians. Tyler Cowen, for example -- one of the most reasonable people anywhere -- sparked criticism with an uncharacteristically sarcastic post on the topic.

One thing that I think this episode shows is that AIG (not surprisingly) is better than the government at market participation. The bailouts were, in part, arm's-length negotiations between AIG's people and the government's people, over how much AIG would have to give up in exchange for how much government money. This is what businesspeople do for a living; it's not what most government people do for a living. (As just one example, what employer would ever begin a salary negotiation by telling the employee, "My company can't afford to lose you"? And yet that's what the government did in saying that AIG was too big to fail.)

And so, surprise surprise, AIG came out of the negotiations with what appears to be a very nice deal.

Now the government, realizing it got snookered, is trying to divert attention from its own clumsy performance by voicing moral outrage at AIG. "I agree that you can have a dog in your apartment. . . . How dare you have a Saint Bernard in your apartment!"

Update: Minutes after posting this, I saw (courtesy of Russell Roberts at Cafe Hayek) that one of the bonus lamenters (Sen. Dodd) is the person who inserted into the stimulus bill an exception for contractually obligated bonuses agreed on before Feb. 11. In other words, "How dare AIG do what we agreed it could do!"

Monday, March 16, 2009

Rule Number 1: If You Subsidize Something, You Will Get More of It

Three years after enacting its universal health "insurance"* law, Massachusetts is trying to figure out how to rein in healthcare costs.

To review, the law requires state residents to have health "insurance" and subsidizes premium payments to make compliance possible:

Massachusetts achieved its high coverage rates by mandating in its landmark law that almost every resident have health insurance, and that all but the smallest businesses make some contribution toward their employees’ costs. Those who do not enroll but are deemed able to afford insurance can be fined up to $1,068 in the 2009 tax year.

To make the mandated insurance affordable, the state subsidizes premiums for those earning up to three times the federal poverty level, or $66,150 for a family of four.

By subsidizing premiums, the state made the cost of healthcare lower. Therefore, people have consumed more of it:

The state expects to spend $595 million more on its health insurance programs this year than in 2006, a 42 percent increase. But** about 432,000 people have gained coverage, leaving only 2.6 percent of the population without insurance, according to a recent state survey.

So tell us again, How is universal coverage supposed to save money without limiting what services people can and can't have?

Hat tip to Tyler Cowen at Marginal Revolution.

* As many people have pointed out over the years, "insurance" is a misnomer for what really are third-party-payer health plans.

** An entire book could be written about the editorializing built into transition words like "but." "Costs have gone up, but more people are covered." That's nice, we think to ourselves, the higher costs (a bad thing) are balanced by more coverage (a good thing). To be accurate, however, shouldn't that "but" be a "because" or at least an "and"?
Emperor Keynes Has No Clothes

Economist Russell Roberts explains nicely why Keynesianism (at least as currently advocated) is "silly pseudo-science":

What did Keynes really mean? It's hard to say. His masterwork is a bit opaque and has been interpreted by many generations of acolytes.

In the current environment, we are told that consumers aren't spending so aggregate demand has fallen. (This is typically discussed as if the reason for this drop is irrelevant). Therefore government must step in as the spender of last resort. This was the defense of the so-called stimulus package of $787 billion. Those who defended it did not defend it on the merits of what was in it, but rather simply on its magnitude. And many of those defenders (including Paul Krugman and Robert Reich) said it was not big enough.

Their basic argument is Keynesian in nature—that aggregate demand, C [consumer spending] + I [investment spending] + G [government spending], must be boosted up to its former level and that this can be achieved through an increase in G. And according to the Administration (and the study it produced written by Jared Bernstein and Christina Romer), every dollar of government spending would produce 1.57 (or was it 1.54?) dollars of income.

The presumption is that it does not matter what G [government spending] is spent on. The most important thing is to get spending into people's hands so that they will in turn spend it and the multiplier will kick in.

The presumption is that the multiplier is a constant. It does not matter how G is financed. It does not matter what G is spent on. It does not matter why C [consumer spending] is down. G just needs to go up. This is silly pseudo-science.

The presumption is that if G goes up, C will stay unchanged. This ignores any possibility that people will be aware that their taxes are going to go up very dramatically in the future and they will do nothing in response.

The presumption is that the borrowing or printing of money to finance the increase in G will have no effect on aggregate demand.

The presumption is that the people who get the money from the government will spend it rather than save it.

These last points are empirical questions. Actual estimates of the multiplier are all over the map. We don't have a lot of evidence on either side that is reliable. Anecdotal evidence is generally restricted to World War II on the encouraging side and Japan's recent experience on the discouraging side.

I have argued that economists generally came down on one side or the other of the stimulus package based not on their economic understanding but on their political and philosophical biases. I still believe that. I think we're in macroeconomically uncharted territory. [Emphasis added.]

Sunday, March 15, 2009

An Excellent Reference Work from ISI

American Conservatism: An Encyclopedia (published in 2006) surveys the intellectual foundations of conservatism in the United States. It focuses on developments after World War II, with entries on key individuals, organizations, and publications, along with essays on the various strands of U.S. conservatism and issues central to conservative thought. The editors, taking a "big tent" view, have included discussions of classical liberalism and libertarianism. The text is well written, insightful, and accessible; the format is reader-friendly; the price is right considering the effort that went into this. Thanks to ISI for making it happen.
Our Institutions Could Be Different -- and Worse

In his History of England, Macaulay recounts a murder that took place in London in the 1690s. Two men, a lord and a high-born commoner, conceived a grudge against Mountford, a celebrated actor. They went in search of him one night, to take their revenge:

They swaggered sword in hand during two hours about the streets near Mountford's dwelling. The watch requested them to put up their weapons. But when the young lord announced that he was a peer, and bade the constables touch him if they durst, they let him pass. So strong was privilege then; and so weak was law. [from Chapt. XIX]

The pair ultimately killed Mountford, but the young lord was acquitted of the murder by the House of Lords.

Incidents like this help us remember how valuable our legal and cultural institutions of equality are. "We hold these truths to be self-evident: That all men are created equal . . . ."

Saturday, March 14, 2009

This Is Not the Time for Keynes

Economist Don Boudreaux explains, in a concise letter to the New York Times, why Keynesian stimulus spending will hurt rather than help in our current situation:

Paul Krugman insists that the current stimulus plan will fail because it is too small ("Behind the Curve," March 9). We non-Keynesian economists also believe that it will fail, but for very different reasons: the chief problem is less one of deficient aggregate demand than it is one of poor coordination of the plans of producers with the (non-bubblicious) demands of consumers.

Economic prosperity requires that workers whose jobs were created by the bubble be redeployed into jobs that are viable. Stimulus spending does nothing to promote this greater coordination of economic activities -- and, by promising higher taxes or higher inflation in the future, likely interferes with the economy's capacity to coordinate. [Emphasis added.]

In other words, the real-estate bubble caused resources to be over-invested in that and related sectors (including certain kinds of financial services). Now that the bubble has burst, those excess resources need to find their way to different sectors, sectors where they will be productive. The government's giving individuals money to cause more consumption will do nothing to help that necessary reallocation of resources.
My Mixed Emotions about President Obama

As the 2008 national elections approached, my (faint) hope was that we would get a Democratic president, with the Republicans controlling the Senate if not the House as well. By election day, however, it was obvious that the Democrats would win both the White House and the Capitol. I therefore voted for Barr (the Libertarian presidential candidate) and for Republicans in the other races.

With Democrats in the driver's seat, I feared the worst in terms of social engineering and bigger government. But I hoped that President Obama and his advisers would be wise enough to steer a somewhat moderate course.

That does not so far seem to be in the offing.

I want Obama to be a good president, even while I hope that he does not succeed in having national health insurance or carbon-emission limits adopted. The historic nature of his presidency -- our first African-American (or partly African-American) chief executive -- is still thrilling to me. I want him to do at least well enough that no one can afterwards honestly say African-Americans don't have what it takes to be president. Also, as an alumnus of Harvard Law School, I want him to reflect well on the school. (While many presidents have been Harvard graduates, Obama is only the second president to be a graduate specifically of the law school. The other was Rutherford B. Hayes.)

A Republican majority in either house or both houses following the 2010 elections could be a big help to him. It could call upon his reasonableness (which I believe is there) and encourage prudence.
"What Oft Was Thought, but Ne'er So Well Expressed"

John at Power Line has finely articulated what a lot of skeptics are thinking -- that the current administration wants us to stay afraid enough to spend lots of money, but not too afraid:

So things aren't as bad as we think, just bad enough to warrant more than a trillion dollars in new taxes, trillions more in deficit spending, radical overhaul of the health care system, a tax on energy that will make American industry less competitive and impoverish every American, and much more. But it all makes sense because the future is rosy and if only we borrow trillions, then economic growth will kick in, starting next year, miraculous "savings" will be achieved, and our deficits will be only a little larger than those we racked up during the Bush administration.

It's a sort of high-wire act, because if things really aren't as bad as we think, then we should scrub these risky if not revolutionary changes, refrain from borrowing trillions, and wait for the economy to turn around over the next six to nine months. Recessions, after all, always come to an end, usually pretty quickly. Even the financial crisis may not be as bad as we thought, with executives from both Citigroup and Bank of America voicing optimism today [i.e., March 12].

So -- things aren't too bad, but just bad enough to require radical measures which, no matter what happens, should be given credit for the fact that things aren't worse. I don't know; maybe someone will buy it.

(The title quote is from Pope's Essay on Criticism.)
Our Constitutional Right to Procedural Due Process

We Americans tend to take for granted the precious rights guaranteed by our institutions. This passage from Macaulay's History of England from the Accession of James the Second throws into high relief the safeguards afforded us by the rule of law we inherited from England (and subsequently improved):

During the eight years which preceded the Revolution [of 1688], the Whigs had complained bitterly, and not more bitterly than justly, of the hard measure dealt out to persons accused of political offences. Was it not monstrous, they asked, that a culprit should be denied a sight of his indictment? Often an unhappy prisoner had not known of what he was accused till he had held up his hand at the bar. The crime imputed to him might be plotting to shoot the King; it might be plotting to poison the King. The more innocent the defendant was, the less likely he was to guess the nature of the charge on which he was to be tried; and how could he have evidence ready to rebut a charge the nature of which he could not guess? The Crown had power to compel the attendance of witnesses. The prisoner had no such power. If witnesses voluntarily came forward to speak in his favour, they could not be sworn. Their testimony therefore made less impression on a jury than the testimony of the witnesses for the prosecution, whose veracity was guaranteed by the most solemn sanctions of law and of religion. The juries, carefully selected by Sheriffs whom the Crown had named, were men animated by the fiercest party spirit, men who had as little tenderness for an Exclusionist or a Dissenter as for a mad dog. The government was served by a band of able, experienced and unprincipled lawyers, who could, by merely glancing over a brief, distinguish every weak and every strong point of a case, whose presence of mind never failed them, whose flow of speech was inexhaustible, and who had passed their lives in dressing up the worse reason so as to make it appear the better. Was it not horrible to see three or four of these shrewd, learned and callous orators arrayed against one poor wretch who had never in his life uttered a word in public, who was ignorant of the legal definition of treason and of the first principles of the law of evidence, and whose intellect, unequal at best to a fencing match with professional gladiators, was confused by the near prospect of a cruel and ignominious death? Such however was the rule; and even for a man so much stupefied by sickness that he could not hold up his hand or make his voice heard, even for a poor old woman who understood nothing of what was passing except that she was going to be roasted alive for doing an act of charity, no advocate was suffered to utter a word. That a state trial so conducted was little better than a judicial murder had been, during the proscription of the Whig party, a fundamental article of the Whig creed.

from Chapter XVIII

Friday, March 13, 2009

Is Global-Warming Alarmism a Religion?

It seems there's no topic that will get someone's back up as quickly as global warming. Adults who want the government to limit carbon emissions are apparently unable to discuss their views the way they might discuss their other positions on science topics, such as whether gorillas are capable of using language or whether exposure to high-power lines causes cancer. They reject out of hand any data that conflicts with their belief and dismiss "deniers" as dupes or corporate stooges.

Earlier today, for example, the following was posted by an alarm-sounder on the politics discussion board at IMDb:

The vast majority of studies and models have been independently verified. The only ‘scientific’ dissent is from institutes connected strongly to polluting industries and researchers strongly dependent on their money.

That's the junk science.

In other words, any scientist who does not accept the premises of global-warming alarmism is ipso facto "damned." The creed requires belief in the coming global catastrophe. That is the Truth, in the same way that a given religious doctrine is the Truth for its believers.
Boost Your Economic Literacy, with the Teaching Company

Since I spend over an hour in the car each weekday, I've become a huge fan of the courses offered by the Teaching Company. Some of their best offerings are in the field of economics. Listening to the following will give you an excellent grounding in basic economics:

Economics, 3d edition -- This is essentially an introductory economics course. The first half is focused on microeconomics, the second half on macroeconomics. It's one of their most popular courses, and rightly so.

Modern Economic Issues -- Each lecture deals with a different issue, including free trade, income inequality, budget deficits, and so on. Excellent, balanced discussions. However, because these were prepared about two years ago, the current recession is a 300-lb. elephant in the lecture room.

Thinking about Capitalism -- A wonderful journey in intellectual history. The professor explores what leading Western philosophers, economists, and reformers have written about capitalism, from the ancient world up to the present.

A word about Teaching Company prices: Their "everyday" prices are extremely, shockingly high. But all of their courses go on sale at one time or another during the course of a year. ("Thinking about Capitalism" is on sale now.) The sale prices are high but not out of line for what you get.
Why "Blackstone in America"?

Sir William Blackstone was an 18th-century English legal scholar who wrote a four-volume treatise on English law -- known among lawyers simply as "Blackstone" -- that was authoritative for many generations. His writings were, for example, highly influential on the Founders.

Among other things, Blackstone asserted concisely and straightforwardly the value of individual liberty under a constitutional government. For example:

THE absolute rights of man, considered as a free agent, endowed with discernment to know good from evil, and with power of choosing those measures which appear to him to be most desirable, are usually summed up in one general appellation, and denominated the natural liberty of mankind. This natural liberty consists properly in a power of acting as one thinks fit, without any restraint or control, unless by the law of nature: being a right inherent in us by birth, and one of the gifts of God to man at his creation, when he endued him with the faculty of freewill. But every man, when he enters into society, gives up a part of his natural liberty, as the price of so valuable a purchase; and, in consideration of receiving the advantages of mutual commerce, obliges himself to conform to those laws, which the community has thought proper to establish. And this species of legal obedience and conformity is infinitely more desirable, than that wild and savage liberty which is sacrificed to obtain it. For no man, that considers a moment, would wish to retain the absolute and uncontrolled power of doing whatever he pleases; the consequence of which is, that every other man would also have the same power; and then there would be no security to individuals in any of the enjoyments of life. Political therefore, or civil, liberty, which is that of a member of society, is no other than natural liberty so far restrained by human laws (and no farther) as is necessary and expedient for the general advantage of the publick. Hence we may collect that the law, which restrains a man from doing mischief to his fellow citizens, though it diminishes the natural, increases the civil liberty of mankind: but every wanton and causeless restraint of the will of the subject, whether practiced by a monarch, a nobility, or a popular assembly, is a degree of tyranny. Nay, that even laws themselves, whether made with or without our consent, if they regulate and constrain our conduct in matters of mere indifference, without any good end in view, are laws destructive of liberty: whereas if any public advantage can arise from observing such precepts, the control of our private inclinations, in one or two particular points, will conduce to preserve our general freedom in others of more importance; by supporting that state, of society, which alone can secure our independence. . . . So that laws, when prudently framed, are by no means subversive but rather introductive of liberty; for (as Mr Locke has well observed) where there is no law, there is no freedom. But then, on the other hand, that constitution or frame of government, that system of laws, is alone calculated to maintain civil liberty, which leaves the subject entire master of his own conduct, except in those points wherein the public good requires some direction or restraint.

THE idea and practice of this political or civil liberty flourish in their highest vigour in these kingdoms, where it falls little short of perfection, and can only be lost or destroyed by the folly or demerits of its owner: the legislature, and of course the laws of England, being peculiarly adapted to the preservation of this inestimable blessing even in the meanest subject. Very different from the modern constitutions of other states, on the continent of Europe, and from the genius of the imperial law; which in general are calculated to vest an arbitrary and despotic power of controlling the actions of the subject in the prince, or in a few grandees. And this spirit of liberty is so deeply implanted in our constitution, and rooted even in our very soil, that a slave or a negro, the moment he lands in England, falls under the protection of the laws, and with regard to all natural rights becomes
eo instanti a freeman.

From Vol. I, pp. 121-23.

We will see a noticeable, steadily improving trend in the U.S. economy by August 15, 2009.

I first made this prediction on an IMDb discussion board in the middle of February. At the time, I based it on an article in the Wall Street Journal indicating that credit was starting to defrost. In my view, the main cause of the general contraction is that businesses not directly affected by the bursting of the real-estate bubble are nevertheless clinging to their cash, afraid to make any unnecessary outlays. As credit begins to flow again, the economy outside the financial sector will start to return to normal.
Good News?

The current administration may be showing signs of centrism (from today's Wall Street Journal, probably gated):

In his most aggressive outreach yet to the business community, President Barack Obama told some of the nation's leading CEOs that he is ready to talk about lowering corporate income-tax rates and could compromise on his plan to combat global warming.

Speaking for more than an hour Thursday to the Business Roundtable, a chief executives organization, Mr. Obama made it clear he wants the business community's cooperation to secure his agenda of expanding the federal role in education, overhauling health care and transforming the energy sector. . . .

Of course, this is sort of like having a 10%-off "sale" after prices have been marked up by 20%. But there seems to be a wee cause for hope in there somewhere.
Bad News

According to an opinion piece in yesterday's Wall Street Journal (might be gated), one goal of the present administration is reducing income inequality, and the preferred means of getting there is taking from the rich:

Let me introduce [President Obama's third book], a book that will touch everyone's life: "A New Era of Responsibility: Renewing America's Promise. The President's Budget and Fiscal Preview" (Government Printing Office, 141 pages, $26; free on the Web). This is the U.S. budget for laymen, and it's a must read.

Turn immediately to page 11. There sits a chart called Figure 9. This is the Rosetta Stone to the presidential mind of Barack Obama. Memorize Figure 9, and you will never be confused. Not happy, perhaps, but not confused.

. . . The one on page 11 is attributed to "Piketty and Saez." . . .

Thomas Piketty and Emmanuel Saez, French economists, are rock stars of the intellectual left. Their specialty is "earnings inequality" and "wealth concentration." . . .

As described in Mr. Obama's budget, these two economists have shown that by the end of 2004, the top 1% of taxpayers "took home" more than 22% of total national income. This trend, Fig. 9 notes, began during the Reagan presidency, skyrocketed through the Clinton years, dipped after George Bush beat Al Gore, then marched upward. Widening its own definition of money-grubbers, the budget says the top 10% of households "held" 70% of total wealth. . . .

Turn to page five of Mr. Obama's federal budget, and one may read these commentaries on the top 1% datum:

"While middle-class families have been playing by the rules, living up to their responsibilities as neighbors and citizens, those at the commanding heights of our economy have not."

"Prudent investments in education, clean energy, health care and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected."

"There's nothing wrong with making money, but there is something wrong when we allow the playing field to be tilted so far in the favor of so few. . . . It's a legacy of irresponsibility, and it is our duty to change it."

Mr. Obama made clear in the campaign his intention to raise taxes on this income class by letting the Bush tax cuts expire. What is becoming clearer as his presidency unfolds is that something deeper is underway here than merely using higher taxes to fund his policy goals in health, education and energy.

The "top 1%" isn't just going to pay for these policies. Many of them would assent to that. The rancorous language used to describe these taxpayers makes it clear that as a matter of public policy they will be made to "pay for" the fact of their wealth -- no matter how many of them worked honestly and honorably to produce it. No Democratic president in 60 years has been this explicit. . . .
I Can't Wait to Read This Book

The book is A Failure of Capitalism, by Richard Posner. It's due out in May, although Tyler Cowen already has a copy.

Judge Posner is one of the smartest guys around and one of the founders of the law-and-economics "movement." In addition, his years as a judge on the Seventh Circuit Court of Appeals have given him an understanding of real-world economics and society that few other academics can claim.