The Extended Case Against the Healthcare Bill

The Heritage Foundation notes: "there is no bill but the Senate bill" and that "a review of just how terrible it really is, is in order".

Their case against:

New Middle-Class Taxes: Throughout his campaign, President Barack Obama promised he would not raise taxes on American households making less than $250,000. The Senate bill shatters that promise. For starters, just look at the reason Trumka went to the White House yesterday: the excise tax on high-cost health insurance plans. This tax would overwhelmingly hit middle-class taxpayers. Taxes on prescription drugs, wheel chairs and other medical devices would also be passed on to all consumers, hitting the lower- and middle- classes the hardest.

Increased Health Care Costs: The Senate bill manifestly does nothing to bend the health care cost curve downward. According to the latest CBO report, the Senate bill would actually increase health care spending by $210 billion over the next 10 years. This follows a previous report from the President’s own Center for Medicare and Medicaid Services (CMS) showing the Senate bill would result in $234 billion in additional health care spending over 10 years.

Increased Health Insurance Premiums: The President initially promised that Americans would see a $2,500 annual reduction in their family health care costs. But under the Senate bill, premiums would go up for millions of Americans. In fact, according to the CBO, estimated premiums in the individual market would be 10–13 percent higher by 2016 than they would be under current law.

Increased Deficits: Despite claiming to be comprehensive health care reform, the Senate bill does not address the fact that Medicare’s current price-fixing doctor reimbursement scheme is set to reduce doctor payments by 21% this year. That simply is not going to happen. Congress will pass that fix separately. If that cost were included, Obamacare is already $200 billion in the red. Now throw in the fact that the Senate bill is paid for with another $463 billion in Medicare cuts to health care providers. CMS says if these cuts occur, one-fifth of all health care providers will face bankruptcy. That simply is not going to happen. Just like the doctor reimbursement cuts have never happened, the Obamacare Medicare cuts will never happen. So in reality, Obamacare will add almost $700 billion to our national deficit in the next ten years alone.

Increases Unemployment and Puts Millions of Americans on Welfare: According to The Heritage Foundation’s Center for Data Analysis (CDA), a dynamic analysis of the tax hikes and deficits created by the Senate bill shows that an average 690,000 jobs per year would be lost if it became law. In addition, over half of all Americans who would gain health insurance through the bill (18 million out of 33 million) would do so by being placed on Medicaid, which is a welfare program.

Higher taxes, higher health care costs, higher health insurance premiums, higher deficits, more unemployment and more Americans on welfare. That is America’s future should the Senate Obamacare bill become law.

Quick Hits:

• According to the Treasury Department, the National Debt has increased over $2 trillion over the 421 days since President Obama took office.


• If the House does pass the Senate bill, dozens of conservative lawmakers and candidates have signed a pledge to back an effort to repeal the measure.


• Yesterday Mark Levin posted the complaint his Landmark Legal Foundation will file in federal court if the House uses the Slaughter Rule to pass the Senate bill.


• Over half of the Americans who gain health insurance through the Senate bill will not be able to get their drugs from Washington state Walgreens, since they announced yesterday that as of April 16th they will not accept any new Medicaid patients.


• According to Gallup, Americans firmly prioritize the economy over the environment and fewer than half of Democrats now believe environmental protection is the more important goal.

The Human Cost of Protectionism

Steve Landsburg on the very high humans-costs of legislating against child labor and in favor of protectionism.

(H/T: Don Boudreaux @ Cafe Hayek)

Fear the Boom and Bust

"Fear the Boom and Bust", a Hayek vs. Keynes Rap Anthem:

(Note: You should really watch it full screen, in 720p)

When I first read Russ Roberts was doing a rap video, I was highly skeptical. But this thing turned out to be brilliant.

It has the wisdom of Robert's Cafe Hayek blog, the down-to-earth accessibility of Robert's EconTalk podcast, and the high quality production value you'd expect from "award winning director and media executive" John Papola.


If it's excellence also leave you looking for more, be sure to visit/watch:

• The EconStories.tv website
  


• The Cafe Hayek post about the video
  


• John Papola's web page for the video
  


• NPR/All Things Considers's coverage, Economists' Rap Battle Gains Cred From Ke$ha's Nod
  


• PBS/NewsHour's coverage, Revisiting the Economics of John Maynard Keynes
  


• B-Cast's interview with John Papola
  

Raising Keynes

With Obama and the media raising FDR and his New Deal as the archetype to be imitated to get us out of our current economic problems, those on the right have been turning to the work of people like author and Council on Foreign Relations Senior Fellow Amity Shlaes for counter arguments.

This apparently has been driving Paul Krugman crazy. Krugman, of course, is a Nobel prize winning Princeton professor. But, he's also an appropriately liberal New York Times Op-Ed columnist, who's earned as much notoriety for his constant vitriol at any and every thing the Bush Administration has done as for anything bordering on economics.

Many of those on the left have been ignorantly dismissing anything Shlaes has to say because she comes from the right. I'm tempted to do about the same with Krugman (or anyone who publishes a book that puts a Vice President of our country in a Hitler mustache) but I've come to the conclusion they are both worth taking the time to read.

Having two intelligent, well informed, individuals arguing over what we should do to fix our economic woes is a welcome development for the health of the country.

At the center of their debate is Keynesianism - the economic theory put forward by John Maynard Keynes, that, to quote Wikipeida, "the state can stimulate economic growth and improve stability in the private sector."

In any event, here are the links to the Shlaes v. Krugman debate so far, along with some additional links to outside commentary. It's my hope those crafting the Obama economic plans (and perhaps, in an attempt to be informed, the electorate, as well) are paying attention:

Shlaes v. Krugman

• 11/10, Paul Krugman - Franklin Delano Obama?
  


• 11/19, Amity Shlaes - Obama Will Take Us Backward By Channeling Keynes
  


• 11/19, Paul Krugman - Amity Shlaes strikes again
  


• 11/29, Amity Shlaes - The Krugman Recipe for Depression: Massive government spending is no solution to unemployment.
  


• 11/29, Paul Krugman - Changes in money-wages and Amity Shlaes
  

On the side lines

• 11/6, Eric Rauchway - Stop lying about Roosevelt’s record
  


• 11/29, Robert Stacy McCain - Amity Shlaes vs. Paul Krugman (which features, perhaps, the best write up of what makes capitalism work that I've read in recent history)
  


• 11/29, Don Boudreaux - Relative Price Adjustments and Aggregate Demand

Out of the fray, but on topic

• 3/20, Kim Phillips-Fein - Hard Times (a very critical review of Shlaes's book, The Forgotten Man).


• 11/21, Price Fishback - What Do the New Deal and World War II Tell Us About the Prospects for a Stimulus Package? (H/T, Cafe Hayek)
  


• 11/21, Tyler Cowen - The New Deal Didn’t Always Work, Either (H/T, Cafe Hayek)

Closing Thoughts on the Presidential Election

Tomorrow, Americans will head to the polls and cast their votes for one of two viable candidates: John McCain or Barack Obama.

John McCain is not my ideal candidate, but represents an agenda I think all moderate and conservative voters should be much more interested in.

Barack Obama - by measure of his associations, his voting record, or his proposed policies - would be the most liberal president we've ever had. Some of you may read that and think I'm exaggerating or using hyperbole. I am not. Barack Obama is an excellent politician who has done a tremendous job during the campaign convincing Americans he is moderate and reasonable. But he is not.


On social policy, the issue most important to me is abortion, because literally at stake is life and death. I believe any rational person should be able to discern the scientific case that life begins at conception.

Even if you aren't pro-life, most moderate voters want abortion to at least have some restrictions, like parental notification. But Obama has pledged that "the first thing I would do as President is sign the Freedom of Choice Act." The FOCA would remove all restrictions on abortion, from parental notification to re-legalizing so called "partial birth abortion" which is much more accurately described as infanticide.

Obama's ultra-liberal dedication to abortion even includes his vote against a bill in the Illinois Senate that would have required doctors to provide medical care for babies that survived botched abortions.


On foreign policy, we are now winning in Iraq thanks to the The Surge, a strategy McCain advocated at great risk to his political career. Had we followed Obama's plan we would have begun a withdrawal of troops prior to even attempting The Surge and Iraq would be in shambles, with Al-Qaeda strengthened. Senator Obama has next to no foreign policy, military, or executive experience. Making him president while engaged in wars in Iraq and Afghanistan seems downright dangerous.


On economic policy - the area that seems to be ruling the day, we have Obama proposing a redistributionist tax policy that would literally cut checks to "working families" while ramping up hundreds of billions of dollars of new spending to be paid for exclusively by the top 5% of income earners (or, if you go with this cut off of "$250,000" - the top 1.5% of income earners.) The top 5% of income earners, today, already pay 60% of the personal income tax burden (while making only 20% of the country's income - a disparity of 3:1). Does that seem fair to you?

By contrast, John McCain wants to lower taxes across the board and reduce government spending - starting with reforming earmarks.

Analysis by economists indicates that Obama's policies will actually slow the economy, while McCain's will help it grow. This is probably best demonstrated by the following chart which I'm stealing from here:



From the study from which that chart is generated:

When fully phased in, and all economic adjustments are made, the McCain tax plan would increase the private sector portion of GDP relative to the baseline by about 2.7 percent, and the Obama tax plan would reduce private sector GDP by about 3.5 percent, a significant 6.2 percent difference in output and income between the two plans. (See Chart 1.) The difference in private sector capital accumulation would be 15.8 percent or $4.1 trillion in favor of McCain. Hourly wages before-tax would be up 2.2 percent under McCain, down 2.6 percent under Obama, a 4.8 percent difference. Hours worked would be 0.5 percent higher under McCain, and 1 percent lower under Obama.

I do not want to see this recession continue for four years, do you?

Not the Fault of Deregulation

There is a growing effort from those on the left to blame our current economic problems on "deregulation."

According to leading Democrats:

House Banking Committee Chairman Barney Frank: "This is the fruit of decades of 'leave the market alone, don’t regulate it. It will take care of itself' ... Clearly we’ve got to get some regulation here."

House Speaker Nancy Pelosi: "The Bush Administration’s eight long years of failed deregulation policies"

House Democratic Leader Steny Hoyer: "A stark failure of the economy and this administration’s laissez faire, take the referee off the field, let anyone do whatever they want to do and everything will be fine"


As the Heritage Foundation puts it though, "The problem with the Democrats' 'deregulation did it' meme is that it didn’t happen – deregulation that is."


Although nowhere near being a socialist "command economy", the United States economy is quite heavily regulated, and a lot of new regulations have been put into place under the Bush administration, like Sarbanes Oxley.

Which is not to say that Bush has deregulated some things, but even far-left Democratic senators like Chuck Schumer have been pro-deregulation in recent times.


Furthermore, government interference with the economy shares a large share of the blame for the mess we are in.

I've stumbled across a number of solid articles that correct the record on this dubious "deregulation caused this" claim, which I think are worth sharing:


First, an editorial titled Is Capitalism Dead? explains the (well intentioned) role the government played in ultimately bringing down the housing market. It begins:

Is this the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

A Union-Tribute editorial expands on this, beginning with "The mismanagement of Fannie Mae and Freddie Mac is no orphan. It has many fathers, and deregulation of financial markets isn't one of them." and concluding "Appallingly, some Democrats still claim that deregulation fomented by Republicans and greedy investors caused the meltdown. Never mind that the policy of spreading homeownership around to folks who couldn't afford it will cost millions their homes and taxpayers an extra $700 billion."

Finally, I think Don Bourdeaux makes the case extremely well in a letter he sent to the Washington Times:

Your equating George W. Bush with FDR is spot-on ("Franklin Delano Bush," October 20). Both presidents recklessly increased government's role in the economy - a move that proved (in FDR's case) and will prove (in Bush's case) to do nothing but saturate the economy with such uncertainty as to frighten away entrepreneurs and investors.

But popular history will almost surely remember Bush, not as a second FDR, but as a second Herbert Hoover. The myth will be made that Bush was a staunch free-marketeer who was succeeded in the Oval Office by a charismatic saint whose hyperactive interventions saved the economy (even though precious little evidence of economic salvation will appear in the data). History will forget Bush's interventions just as it has forgotten Hoover's - as it has forgotten that Hoover signed the largest tariff hike in U.S. history; as it has forgotten that Hoover tried to create jobs by deporting hundreds of thousands of Mexicans; as it has forgotten that Hoover signed the Emergency Relief and Construction Act, the Federal Home Loan Bank Act, and created the Reconstruction Finance Corporation; as it has forgotten that, with the Revenue Act of 1932, Hoover raised the top marginal tax rate on personal incomes from 25 percent to 63 percent (in addition to raising the corporate-tax rate).

History will repeat itself, blaming capitalism for a problem caused and intensified by government interventions.

Update: Amity Shlaes responds to a critic, and expands on the forgotten history mentioned by Don Boudreaux.

Obamanomics for dummies

Marxism, brought to you by the year 2001

Conservatives should be able to show that Barack Obama's economic policies are so far to the left that moderate Americans should want to reject them without ignorantly and wrongly invoking "Marxism."

Through the magic of Google's 2001 search engine index and the Internet Archive's Wayback Machine, let's travel back to 2001. This is a time well before any ignorant people on the right were trying to tie Obama to Marxism.

In 2001 you could find a page titled "Workers Power Global | Marxism for Beginners". This is the website of an actual Marxist group.

This particular page from their website details the Workers Power's rejection of the "reformist strategy" of the UK's Socialist Labour Party.

Their rejection of SLP's agenda boils down to basically two points. First, the SLP wasn't calling for a total end to private property and the SLP wanted to work through existing government structures via "reform" rather than radical (militant) revolution.

Aside from the stray Che flag, I see nothing linking Obama to a call for government owning the means of production or violent overthrow of the government.

So, I submit to you that Obama is not a Marxist.

However, what Obama is calling for does fit in exactly with what the SLP was calling for in 2001.

As Workers Power put it in 2001:

The reformist strategy rests on three fundamental beliefs:

• the idea that what is wrong with capitalism is how it distributes the wealth it creates;


• that political reforms can ensure a redistribution of wealth and transform capitalism into a society in which injustice, inequality and the social conflict they generate will cease;


• given parliamentary democracy, all these changes can be brought about legally and without violence.

That is Obama to a tee. Let's look at actual Obama quotes:

To Bill O'Reilly, Obama admits he wants to shift wealth from those "sitting pretty" to"people who are having a tough time affording college," to "people who ... don't have health care," to "people who are trying to figure out how they are going to pay the bills," and to the "waitress who is making minimum wage plus tips".

To "Joe the Plumber", Obama admits he wants to "spread the wealth around" to "all these folks who are bus drivers, teachers, autoworkers who make less" and "the waitress, that I just met over there who's things are slow."

To Charlie Gibson, Obama admits "I would look at raising the capital gains tax for purposes of fairness. We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year -- $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That's not fair. ... What I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don't have it."


Quite clearly, Senator Obama thinks, like the SLP, that "what is wrong with capitalism is how it distributes the wealth it creates."

But, unlike a Marxist, he's happy to, as the SLP wanted to, bring about "all these changes" "legally and without violence."

In fact, that's what this weekend's 2001 audio clip of Obama is precisely talking about. Do you bring about "redistributive change" (his words - not mine!) through the courts or though "political and community organizing and activities on the ground that are able to put together the actual coalition of powers"?


Senator Obama is not a Marxist. But, he does find today's capitalist system to be "not fair" and wants to, through legal means, bring about "redistributive change". This is the agenda of the Socalist Labour Party, the party that in 2001 couldn't gain more than 3% of the vote in the much more "pro-big-government" United Kingdom.

Wake up, America. Hiking up taxes on 5% to give away money to the remaining 95% is unjust and un-American. Obama's economic policies aim to redistribute. I thought we were a country that rewarded success.

Roundup 10/27

Items from the weekend that I find to be of quotable worth.

1. The real record of "free market" economic policies:

The main finding is that—after adjusting the Census Bureau data for three key factors—inflation-adjusted median household income for most household types increased by roughly 44 percent to 62 percent from 1976 to 2006.

- Where Has All the Income Gone?, Terry J. Fitzgerald - Senior Economist at the The Federal Reserve Bank of Minneapolis (H/T Cafe Hayek)


2. On media bias and the duping of America:

Yes, the media are liberal. Even so, it is obvious that this election is different. The media are open and brazen in their attempts to influence the outcome of this election. I've never seen anything like it. Virtually all evidence of Obama's past influences and radicalism — from Jeremiah Wright to William Ayers — have been raised by non-traditional news sources. The media's role has been to ignore it as long as possible, then mention it if they must, and finally dismiss it and those who raise it in the first place. It's as if the media use the Obama campaign's talking points — its preposterous assertions that Obama didn't hear Wright from the pulpit railing about black liberation, whites, Jews, etc., that Obama had no idea Ayers was a domestic terrorist despite their close political, social, and working relationship, etc. — to protect Obama from legitimate and routine scrutiny.

...

But beyond the elites and the media, my greatest concern is whether this election will show a majority of the voters susceptible to the appeal of a charismatic demagogue. This may seem a harsh term to some, and no doubt will to Obama supporters, but it is a perfectly appropriate characterization. Obama's entire campaign is built on class warfare and human envy. The "change" he peddles is not new. We've seen it before. It is change that diminishes individual liberty for the soft authoritarianism of socialism. It is a populist appeal that disguises government mandated wealth redistribution as tax cuts for the middle class, falsely blames capitalism for the social policies and government corruption (Fannie Mae and Freddie Mac) that led to the current turmoil in our financial markets, fuels contempt for commerce and trade by stigmatizing those who run successful small and large businesses, and exploits human imperfection as a justification for a massive expansion of centralized government.

- The Obama Temptation, Mark Levin at The Corner


3. A real, number-crunching, look at the candidate's tax plans:

... [thus] one dollar I earn today will yield my kids:

(1-t1){[1+r(1-t2)(1-t3)]^T}(1-t4).

For my illustrative calculations, let me take r to be 10 percent and my remaining life expectancy T to be 35 years.

If there were no taxes, so t1=t2=t3=t4=0, then $1 earned today would yield my kids $28. That is simply the miracle of compounding.

Under the McCain plan, t1=.35, t2=.25, t3=.15, and t4=.15. In this case, a dollar earned today yields my kids $4.81. That is, even under the low-tax McCain plan, my incentive to work is cut by 83 percent compared to the situation without taxes.

Under the Obama plan, t1=.43, t2=.35, t3=.2, and t4=.45. In this case, a dollar earned today yields my kids $1.85. That is, Obama's proposed tax hikes reduce my incentive to work by 62 percent compared to the McCain plan and by 93 percent compared to the no-tax scenario. In a sense, putting the various pieces of the tax system together, I would be facing a marginal tax rate of 93 percent.

- My Personal Work Incentives, Greg Mankiw, Professor of Economics at Harvard University


4. Will Obama govern as a moderate? Unlikely:

So why would any conservative think that Obama—friend of Ayers, Khalidi, Meeks, Pfleger, and Wright, veteran of mysterious campaigns in which rivals in 1996 and 2004 simply dropped out or were forced out, erstwhile advocate of repealing NAFTA, controlling guns, stopping new drilling and nuclear plants, zealot for bringing all troops home by March 2008, advocate of a trillion dollars in new spending, and raising the tax burden on the 5% who now pay 60% of the aggregate income taxes, supporter of more oppression studies and racial reparations—would not likewise try to govern as he has lived the last 20 years?

Why would anyone think that an Obama would not wish to enact the visions of those who first backed him—the Moveon.org crowd, ACORN, The Huffington Post, Sen. Reid, Rep. Pelosi, a Chris Dodd or Barney Frank—rather than the late pilers-on like Colin Powell or Scott McClellan? We should remember that, unlike the cases of Carter and Clinton, Obama would have both houses of Congress, and a (Republican) precedent of the federal government intervening into the free market, in the manner of 1932.

- Questions Still Not Answered, Victor Davis Hanson at Pajamas Media


5. Topics the mainstream media refuse to touch:

The MSM has decided that nothing and no one is going to stop Barack Obama from being elected. Not even a great story sure to sell a lot of papers. In fact, there are numerous stories about Barack Obama the MSM is ignoring right now: Obama and Vera Baker ... Obama and Ayers ... Obama and Rashid Khalidi ... Obama and Odingo ... Donor Fraud ... Obama’s Destitute Brother George

- Spiked! (Stories the press is sitting on until after the election), John @ Verum Serum


6. Total loss of discourse is becoming much too common of an occurrence on the left:

I can remember when Sullivan was a respected journalist, not a gutter smear merchant and borderline pornographer. His descent exemplifies the Left's decline in recent years to a baboon-like level of discourse. The vileness of much of what passes for political "argument" on the Left has to be seen to be believed. The worst impulses of human nature have been not just unleashed, but rewarded. If you haven't looked at web sites like Democratic Underground, Daily Kos, the Huffington Post and Andrew Sullivan's Daily Dish, you have no idea what the phrase "gutter politics" really means.

Nowhere has the vileness of the Left been more sickening than in its treatment of Governor Palin. It is interesting to contemplate what a semi-pornographic video about Barack Obama, playing on the same sort of prejudices and stereotypes that are so disgustingly on display in Sullivan's video, would look like. Frankly, I can't imagine such a video being made, let alone featured on the web site of the once-proud Atlantic magazine. But on the Left, anything goes--the more slimy and disgusting, the better.

Barbarians at the Gates--of the White House - John Hinderaker @ Powerline


7. Even more on media bias and the legitimate implications of Obama's many radical political relationships:

The larger point is that the very existence of so many of these radical political partnerships (and that is what they are, significant political partnerships, not mere "marginal relationships," as Smith would have it) reveals a systematic pattern–a pattern that shows Obama to be a man of the left–so far left that he long had one foot out of (but also one foot in) the conventional Democratic mainstream. It’s true that the McCain campaign has not effectively made this point. Yet my Corner colleague Andy McCarthy has eloquently complained about that. The most important point is what Obama’s many radical political partnerships reveal about his overall perspective, and how his radicalism ties in to, and helps explain, even his more conventional-seeming Democratic liberalism. I have written extensively about all of this.

Racial or liberal? It’s not an either/or. What’s certain is that Obama is not the post-ideological, post-partisan pragmatist he presents himself as. The press has shamefully colluded in that false presentation.

- Bias Unmasked, Stanley Kurtz @ National Review Online

8. Now even liberal journalists are recognizing how far in the tank their colleagues are. I give you A:

If you were going to events during the primaries, what you saw was that the executive editors and the top people at the networks were all rushing to Obama events, bringing their children, celebrating it, saying they were, there's this part of history. I think they plugged into the Obama narrative in a way that they said, “you know what, out with the past.” And they've been very critical of President Bush and Senator McCain, as an extension of Bush, playing into the Obama campaign theme. I don't think there's any question about this. The American people are smart, they can see this. That's why Obama's on every magazine cover -- I've spend too much time in airports, you walk through there, it's like you're walking through an Obama campaign event. So, there's no question in my mind the media has been more supportive of Senator Obama.

- (Liberal NPR journalist) Juan Williams, H/T NewsBusters)


9. And B:

If there's any doubt there was a double standard [in the media's coverage] in this race, it is completely laid to rest by this because there is no way that this can be ignored.

- (Liberal columnist) Kirsten Powers, H/T NewsBusters


10. Obama's hardball tactics against those that dare to challenge him continue unabated:

This cancellation is non-negotiable, and further opportunities for your station to interview with this campaign are unlikely at best, for the duration of the remaining days until the election.

- The Obama Campaign, in retaliation to perhaps the only media interview they've had that asked real questions of Joe Biden (to which, Biden lied himself out of answering). H/T Monica Crowley

Boudreaux on Greed

This is why I wish all politicians, and McCain especially, would stop blaming our economic problems on "Greed":

"Greed" certainly can be unleashed to do harm, but it can also be harnessed to do good. Any compelling explanation of any observed economic reality must take "greed" as a given while identifying the specific incentives provided by prevailing social institutions. If these institutions make serving the needs of others the best path to personal gain, then "greed" is harnessed for human betterment. But if these institutions make predating on others - either through force or fraud, or either intentionally or unintentionally - the best path to personal gain, then "greed" will indeed lead people to act destructively. In either case, though, it is the institutions and their accompanying incentives, rather than "greed," that explain economic reality.

What Caused This Crisis?

If I can find the time I'll try to write up some in-depth comments on what I've been able to digest about the causes for the current economic situation that's prompted "the bailout".

At this point, I largely blame about equally both government and private firms for both engaging in taking on too many subprime mortgages to get low income individuals into houses. The government both adopted policies that encouraged/forced this behavior, but private firms were engaging it in for their own benefit regardless of that. The subprime mortgage arrangements worked as long as house prices continued to grow, but house prices had grown too high and needed a correction which made the whole subprime setup fail. And hard.


For now I'll defer any future discussion of the topic to the following:

Arnold Kling discusses the housing market developments in an excellent and timely episode of EconTalk: Kling on Freddie and Fannie and the Recent History of the U.S. Housing Market. I highly urge people interested in understanding this state of affairs to listen to it.

Some background on Kling:

Arnold Kling is an independent scholar who writes about a wide variety of economic issues. He was an economist on the staff of the Board of Governors of the Federal Reserve System from 1980-1986, and served as a senior economist at Freddie Mac from 1986-1994.

The Bailout

I'll concede we are in economic trouble. But, I'm against "the bailout" that failed in the House Monday, and which apparently will be tried again in the Senate Wednesday, purely on ideological grounds that most people probably don't agree with: I believe that: a.) the bill causes the government to intrude into financial markets; b.) government intrusion into financial markets necessarily infringes upon personal liberty; and c.) as a rule, the government should not take actions which infringe upon personal liberty.

I have a number of exceptions to (c), including exchanging minimal/reasonable amounts of personal liberty for security and order (military, police), addressing externalities, and some other areas, but the scope of this bailout pretty much automatically eliminates it from this list of exclusions.

And every time I hear a journalist, pundit, or politician explain that "the government has to do something", I go a little crazy inside. Not only does the government not need to do something, to fully respect our liberty, they ideally should do nothing.

But, I've come to realize over the last week that the above position makes me notably "out of the mainstream" so I'll try to put aside that ideology and share some thoughts on the bailout that have appeal to a broader ideological spectrum.


First - just how much is $750 billion dollars?

Well, it would be about $2,500 per American. Or put another way, a stack of 232 dollar bills fits inside one inch. A stack of $750,000,000,000 would be about 50,900 miles tall. From the center of the earth, it would stack more than 1/5th of the way to the center of the moon. That's. a. lot. of. money.

Now, as a number of conservative (but certainly not uber-libertarian) folks who are favoring the bill are pointing out, the longer term cost of this bill is not that $750 billion number. I think most of the people calling their congressmen to urge them to vote against this bill misunderstand this, so it's fairly important. Unlike most government spending, the government gets an asset in return for what it "spends" on this program.

If you go and buy $100 of stock, you don't count yourself $100 "poorer." You've just transfered $100 of value from cash to stock. The stock could appreciate (or decline) in value, but down the line you will likely be able to sell the stock to get money again. It's a very similar thing going on with the mortgage backed securities Paulson wants to buy up.

Where those making the above distinction seem to veer off the path though is in the assertion they usually further make that the government would be making a "good deal" in buying these securities. These arguers seem to be utterly certain that these securities are currently under-valued by the market. If they believe this, I'd encourage them to go put their money where their mouth is, instead of the government's (and by "government's,", I mean "taxpayer's," and by "taxpayer's," I mean "mine"). The market can and does, at times, under-value things. But there is NO guarantee it is undervaluing these now.

I would draw a distinction that, with stocks for companies, you can make a reasonable assumption that over the long run, these will, on the whole, improve in value because businesses can create value through things like increased productivity. A mortgage backed security can't do anything like that. It is my position that the default position one should take for these later types of assets needs to be that the market is pricing them accurately.

Furthermore, the market actually does not seem to be able to price these mortgage backed securities at all - because they aren't being bought and sold, so there is no data about prices. The whole rationale behind the plan seems to be partly just to come up with a price to get them moving.

I have no faith that the government will come up with a price that will allow the government to see these increase in value over time. If the government offers such a price, what's the incentive of a firm to sell them? Even at "market price" there is no incentive to sell to the government, because the bill would attach additional regulations to companies that participate. That means the government will have to buy these at higher than market value to make up for the cost of regulation to the seller.


Another objection I have to the bill is that at least earlier versions included provisions that if the government does make money off these securities, some sizable chunk (say 20%) of those profits are going to go to (far left) politically charged groups like ACORN [1].


So, this all basically works like this: The government takes $2,500 of your money. They invest it in mortgage backed securities. Companies they sell said securities to the government have to live with new special regulations. By the nature of how they'd have to price them so firms would sell the securities to the government, the government probably won't make a profit on these securities. But, if they do, you, the tax payer, from whom the government took $2,500 for this investment, won't see a full fifth of those profits, as they get redirected to special interests. Excellent, huh?

That's why this bail out need to continue to be killed. The market will take heavy losses. That's part of the free market system. It's how the market corrects for things that were priced too highly. The market will be able to figure out a real price for these mortgage backed securities though, and eventually things will head back to normal. Give the market time, don't pass hasty big-government legislation.

Let's Play Wall Street Reckoning

Where she ends up going with her rant is to pretty traditional Democratic/liberal aims that I'd oppose for similar reasons to the bail out, but I am glad to see someone on the other side of the aisle is paying attention and wants to kill the bailout.

Government Intervention Atheist

Mark Shields, last week on The NewsHour with Jim Lehrer

And, you know, Jeffrey Frankel of Harvard put it, I thought, perfectly well. He said, "Just as there are no foxholes -- there are no atheists in a foxhole, there are no libertarians in a financial crisis."

I mean, all of the good folks who've told us "hands off, laissez-faire, no government," I don't know where they are. They've suddenly become Marcel Marceau . They've gone mute on us. You know, everybody wants Sam in there, and you can feel the irresistible wave for regulation.

Oh, hi there. I'm a libertarian ... despite this financial crisis.

And I'm a rather concerned libertarian because Shields is right. Most fiscal conservatives have shut up and the climate is ripe for new regulatory legislation. In particular, the so called "fiscal conservatives" - the ones the left paints as being fiscally conservative, like Bush and McCain, when their record proves otherwise - seem to be especially pro-new-government-intervention.

But government intervention is not the cure all for economic woes.

In the early 80s, under the Reagan administration, taxes were lowered and regulation frozen. Although not immediate, the recession that began under Carter came to a close under Reagan.

In the early 20s, another (serious but lesser known because of the 30's depression) recession came and went without Big Government intervention.

And the economic conditions of those two recessions were dramatically worse that today.

At 6.1%, unemployment is lower today than during any year in the entire twelve year range of 1975 to 1987 with the one exception of 1979 where it was only two tenths of a percent lower than today. And 1979, 1980, and 1981 all saw double-digit inflation.

Between 1919 and 1921, unemployment climbed to 11% and the Dow Jones Industrial Average fell losing nearly half it's value.


Now, new regulations would not necessarily be a bad thing. I would welcome laws requiring more transparency assuming that said laws don't add major imediments to business (like say, Sarbanes-Oxley has done). And, if Fannie Mae and Freddie Mac are regrettably here to stay, something needs to be done to change them away from a model of private profits and socialized losses.

But, it's clear that history teaches markets can correct themselves without dramatic government involvement. And it's unlikely that giving in to the temptation to try to have government rescue us from this will be in our interest in the long run.

I join the plea: Kill the Bailout.

Speculation v. Supply & Demand

It's starting to feel like every 15 minutes I hear a politician, pundit, or friend proclaim the conventional "wisdom" that today's oil prices are due to "speculation, not supply and demand".

Utter foolishness.

And these politicians, pundits, and friends all come from varying sides of the political aisle. ... It's not just foolishness, it's bi-partisan foolishness. Economically ignorant bi-partisan foolishness.

So why is it foolishness? Basic economics. That's why.

You have to start with the assumption that "the oil companies" want to maximize their profits. But that's a given for the "evil oil companies", right?

Well, to do that, you want to price your product at the optimal price point (aka "the equilibrium price"). That's the price at which the amount of a good they are willing to sell (to supply) is equal to the amount of a good consumers are willing to purchase (that they demand).

If the seller sells at a lower price, they miss out on revenue from customers that were willing to pay a higher price. If the seller sells at a higher price, they lose sales from customers unwilling to pay such a high price.

So, if the oil companies ignore supply and demand for their pricing, they miss out on profits. But we've already established they're evil, err, I mean, smart and interested in maximizing profits.

OK, so it is "supply and demand" that's being used to determine the price of oil/gas/etc (just about every good in a free market). What about "speculation"?

"Speculation" (which I've come to the conclusion that a good chunk of the Congress (and maybe even some number of my friends) aren't even sure what is) you can loosely think of as just a fancy name for betting on what the future price of something will be. You can do this in various ways. For instance, you could buy a barrel of oil now and hold on to it for a while and then sell it (you would hope at an increased price) later. What the pundits are probably talking about though is trading futures contracts.

Again, dramatically bringing that concept back to earth - suppose I think that next year oil is going to be $200 / barrel. Well I don't want to pay that much. You have the ability to be able to provide me oil in one year and think oil will only be $150 / barrel then. So, we sign a contract that you will provide me with one barrel of oil in one year's time for $175. Based on what we believe about what the future price will be, we both feel we are coming out ahead.

So, can this speculation affect the price of oil today? Of course it can.

Suppose I'm selling oil and I can see that I can get $100 for a barrel today, but the futures market indicates in a year I can get $175 for that same barrel of oil. I could choose to take that barrel off the market today and hold onto it. (Removing that barrel from the "spot market" (today) so I can sell it in the future.) That reduces the available supply, affecting supply and demand, impacting today's price.

I suspect that maybe when people say "it's speculation, not supply and demand" they actually mean "it's speculation manipulating supply and demand" or "it's speculation, but not any other factors of supply and demand."

Of course, if that's what they mean, they're still wrong.

Why? Because we don't see suppliers hoarding (storing for the future) any significant amount of their oil. Effectively all of it is getting sold today to be consumed today. Thus, no affect on supply, thus no effect on price.

Now, I'll grant that the above all simplifies things considerably. A full treatment should get into if/how speculation in the futures market could affect the demand in the spot market and other such things. But the basic principles dictate that unless you see oil producers dramatically drop how much oil they are producing (so they can leave it in the ground to be sold later) or start storing significant amounts of oil (again, so it can be sold later), the price of oil is not being dramatically increased by so called "speculation."

Advise those that tell you otherwise to enroll in an Econ 101 class.

Stimulus Round Up

Plenty has already been said on the Stimulus Bill. Rather than adding to that volume, simply some links to those that I think get it right:

Lawrence Kudlow, January 5, Goldilocks Needs Tax-Reform, Not Populism:

Yes, corporate profits are slowing and jobs are softening. Despite 52 months of ongoing jobs gains and 1.3 million new payrolls in the past year, December jobs registered only 18,000 and the unemployment rate ticked back up to (a still historically low) 5 percent. Despite years of gains from a booming business sector, corporate profits are in fact falling at about a 6 percent clip.

But the last thing we need now is root-canal economic populism from the campaign trail and the mainstream media telling us that Americans are unhappy. Unhappy? According to a Gallup Poll released last week, "Most Americans say they are generally happy, with a slim majority saying they are 'very happy.'" They're also prosperous. According to Investor's Business Daily, household wealth in the U.S. soared 51 percent to $58.6 trillion in last year's third quarter from $38.8 trillion in 2002.

...

The key thing to remember is that businesses drive the economy. Businesses create jobs and incomes for consumers to spend. Today's John Edwards/Mike Huckabee anti-business populism sounds more like William Jennings Bryan than Adam Smith. It's absolutely crazy. They attack Wall Street and investors, which is another way of attacking capital. Without capital investment, there will be no new business, no new jobs, and no middle class.

Amity Shlaes, January 16, Stop Bush, Democrats Before They Save Our Economy:

President George W. Bush, briefed by experts, may take up the stimulus concept as early as this week. In coming months, the candidates will lean hard on the experts as they battle over questions such as whether the next middle-class tax credit should be refundable (Democrats), or not (Republicans).

This is perverse. The real question about tinkering should not be "how?" but "why?" The persistence of the stimulus habit, and the endorsements by experts, makes it worthwhile to review such previous interventions and their consequences.

Back in the early 1990s, great economies confronted trouble. The savings-and-loan crisis, a recession and disappointing productivity numbers all darkened the U.S. future. In Japan, banks were foundering, and the real estate bubble had popped. The Nikkei stock index was plunging.

...

Fortunately, Republicans and conservative Democrats tamped Clinton's domestic project down into nothing. For the rest of the decade, the Clinton team mostly stayed out of the tinkering business, with spectacular results.

Japan, by contrast, heeded the U.S. and the experts and dutifully "stimulated" the economy for years.

Late in the decade, Prime Minister Keizo Obuchi dumped billions of dollars into the economy on public works projects and tax cuts in the name of recovery. Because his Liberal Democratic Party had so many followers in rural areas, within the keiretsu business conglomerates, and among bureaucrats, the outlays were especially wasteful. A number of stimulus packages and Bridges to Nowhere later, the Japanese economy slept on.

Louis R. Woodhill, January 17, Stimulus and Superstition
- What the economy doesn’t need now is more government mistakes.:

With recession concerns mounting, politicians and pundits have started proposing programs to “stimulate” the economy. All of these plans involve some combination of additional short-term government spending and one-time transfer payments to people who would be expected to spend the additional money. But there is one small problem with these proposals: They are based on economic superstition.

Recessions are periods of falling gross domestic product. They are presumed to be caused by falling demand, and it is assumed that the stimulus measures being proposed will increase demand. In fact, they will do no such thing. Similar programs were tried in the U.S. in the 1930s, Japan in the 1990s, and again in the U.S. in 2001. They all failed. The belief that government spending and deficits stimulate demand is a superstition.

...

Recessions don’t just happen. They are caused by government mistakes. When recession looms, the answer isn’t superstition-based stimulus programs, but to correct the mistake. Economies need three things from government: incentives, money, and certainty. Right now, the main problem seems to be certainty. The solution is to make the 2003 tax cuts permanent and to stabilize the value of the dollar. If we do that, we can stop talking about stimulus programs.

Senator Bob Corker, January 30, Economic Stimulus Bill is "Nothing But a Political Stimulus":

"What I see in this package is nothing but a political stimulus,” said Corker. “It's a stimulus to make the American people think that we, as a body, are doing something to actually cause the economy to be stronger.

“Not to be misunderstood – I'm a strong believer in low taxes and creating a structure in this country that people can count on to move ahead and to make investments, but with that has to be the reality that spending has to be under control."

“…We in this body will never deal in my generation with paying for the $150 billion. But the next generation might, I doubt it. It would actually be $329 billion in 20 years at present rate. And the generation after that, $722 billion."

Two Lies That Need To Die

I'm listening to this week's Bill Moyer's Journal (the show that the PBS Ombudsman calls "the gift that keeps on giving").

This week's episode is titled "John Grisham," and Grisham is one of the few fiction authors I enjoy, so I thought I might actually be able to stomach this week's episode. Well -- I'm 9 minutes into the episode, and no Grisham yet. But Moyers has been going (and on, and on) about how Bush lied us into war and how the economy is tanking because our jobs are going offshore.

And that leads me to: two lies that need to die:

1. Bush lied; people died.
   
   I'd like to be able to roll my eyes when I see this on a bumper sticker. I can't though because it seems that the entire far left honestly, and passionately, believes this (as does, apparently, Bill Moyers).
   
   Moyer's latest rant on this was inspired by the fact that someone has apparently compiled a list of every "lie" Bush and his administration told leading up to the war. I'm sure this will only add to the "Bush lied, people died" hysteria.
   
   Let's get a couple things straight. One, it's not unreasonable to objectively look at how we got into Iraq. But I would invite people still suck ruminating on this to move out of 2003 into 2008.
   
   Two, there is an implication in the statement that Bush intended to see people die. I think most people, if they consider that notion objectively, will conclude Bush didn't actually set out with the goal of killing thousands of Iraqis and US military service members. The problem is that I don't think most people actually think this through rationally.
   
   And three, Bush didn't lie. To have lied, he must have made statements he knew to be false with the intention of misleading. Bush's statements were based on national intelligence. That intelligence, tragically, wound up being faulty. But Bush did not go out and say things he believed to be un-true with the intention to deceive. Now, granted, Bush did cherry pick what he shared with the American people, but unless you want to call criminal prosecutors "liars" as well, you can't twist that into lying.



2. Job outsourcing is destroying the economy.
   
   It's unfortunate when someone gets laid off. I'll grant that. An individual who gets laid off has to find a new job, perhaps learn a new set of skills, has to figure out how to stay afloat financially while searching for the new job, etc., etc. But, lay-offs are not a.) unfair, nor are the b.) bad for the economy.
   
   Lay offs done rationally, and I assume almost all are done rationally, with a solid business case behind them, are done because the cost of keeping the person employed is either greater than the value they produce for the company or the value they can produce for the company can be done by someone else for a much lower cost. What would be unfair would be to tell companies "you can't have this job done by someone for $5,000/year; you must keep paying this person $50,000/year to do it!".
   
   Furthermore, the economics behind layoffs and outsourcing jobs overseas is precisely what keeps the economy moving forward. It's the law of comparative advantage at work. It's why the overwhelming majority of Americans don't have to worry about starving to death. It's why the overwhelming majority of Americans can afford to have free time watch television in the evenings. It's why I can afford to spend time ranting on a blog.
   
   I'll conclude by quoting a recent Steve Landsburg New York Times editorial (which happens to slam both Romney and McCain, but rightly so):
   

   
   In the days before Tuesday’s Republican presidential primary in Michigan, Mitt Romney and John McCain battled over what the government owes to workers who lose their jobs because of the foreign competition unleashed by free trade. Their rhetoric differed — Mr. Romney said he would “fight for every single job,” while Mr. McCain said some jobs “are not coming back” — but their proposed policies were remarkably similar: educate and retrain the workers for new jobs.
   
   All economists know that when American jobs are outsourced, Americans as a group are net winners. What we lose through lower wages is more than offset by what we gain through lower prices. In other words, the winners can more than afford to compensate the losers. Does that mean they ought to? Does it create a moral mandate for the taxpayer-subsidized retraining programs proposed by Mr. McCain and Mr. Romney?
   
   Um, no. Even if you’ve just lost your job, there’s something fundamentally churlish about blaming the very phenomenon that’s elevated you above the subsistence level since the day you were born. If the world owes you compensation for enduring the downside of trade, what do you owe the world for enjoying the upside?
   
   I doubt there’s a human being on earth who hasn’t benefited from the opportunity to trade freely with his neighbors. Imagine what your life would be like if you had to grow your own food, make your own clothes and rely on your grandmother’s home remedies for health care. Access to a trained physician might reduce the demand for grandma’s home remedies, but — especially at her age — she’s still got plenty of reason to be thankful for having a doctor.
   
   Some people suggest, however, that it makes sense to isolate the moral effects of a single new trading opportunity or free trade agreement. Surely we have fellow citizens who are hurt by those agreements, at least in the limited sense that they’d be better off in a world where trade flourishes, except in this one instance. What do we owe those fellow citizens?
   
   One way to think about that is to ask what your moral instincts tell you in analogous situations. Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door? Public policy should not be designed to advance moral instincts that we all reject every day of our lives.
   
   In what morally relevant way, then, might displaced workers differ from displaced pharmacists or displaced landlords? You might argue that pharmacists and landlords have always faced cutthroat competition and therefore knew what they were getting into, while decades of tariffs and quotas have led manufacturing workers to expect a modicum of protection. That expectation led them to develop certain skills, and now it’s unfair to pull the rug out from under them.
   
   Once again, that argument does not mesh with our everyday instincts. For many decades, schoolyard bullying has been a profitable occupation. All across America, bullies have built up skills so they can take advantage of that opportunity. If we toughen the rules to make bullying unprofitable, must we compensate the bullies?
   
   Bullying and protectionism have a lot in common. They both use force (either directly or through the power of the law) to enrich someone else at your involuntary expense. If you’re forced to pay $20 an hour to an American for goods you could have bought from a Mexican for $5 an hour, you’re being extorted. When a free trade agreement allows you to buy from the Mexican after all, rejoice in your liberation — even if Mr. McCain, Mr. Romney and the rest of the presidential candidates don’t want you to.
   

Bush didn't lie.
Outsourcing jobs overseas helps us.
Let's move on.

Another Link Roundup

• Although they coined the phrase, and have never stopped demagoguing about "the politics of personal destruction", somehow I don't think the Clintons will be up in arms about this. I can think of many causes I'd rather see people raising $8.5 million for.
  
  
• If you are a Republican who isn't support Romney because of his flip-flopping, you probably shouldn't support McCain either.
  
  
• Another reason not to vote for McCain, the NYT Editorial Board endorsement.
  
  
• Ed Morrissey explains Why Pork Matters.
  
  
• Wal-Mart: So evil, 7,500 people apply for jobs at a single store.

Cafe Hayek...

...keeps turning out excellent stuff:

Creating jobs for blacksmiths:

There's no doubt that it's harder to make a good living if you're a high school dropout today or even a high school graduate, compared to 60 years ago.

But why would we want to reverse that trend?

...

In America, showing up to work to work on an assembly line is no longer the road to the middle class. That's because most people have found ways to be more productive and make more money using their brains. Most people go to college. True, if you don't go to college, or worse, if you drop out of high school, it's hard to make a good living. But we don't want to fix that by creating jobs for people (or artificially high salaries) for people who have little education. We want to fix the education system and encourage more people to stay in school so they can have a good living.

Winners and losers from trade:

... to point to an American steel worker put out of work by imports of Brazilian steel and say that he is "harmed by trade" is to misunderstand the nature of trade and its winners and losers. He says it's like saying that a man whose wife leaves him for another man is harmed by love. After all, the man married because of love. The man is the product of his parents who were touched by love. So it is with the steel worker. His steel job exists because of trade. His whole life is supported by trade of various kinds. So in what sense is he "harmed by trade?"

It's a profound point. It forces you to see just how trade and specialization and the division of labor create the incredible lives we lead, lives of wealth and health unimagined by previous generations.

...

... it's wrong to say that trade creates winners and losers. We are all winners. But it's also true that the benefits from winning are not evenly distributed and that the political demand for exemptions from certain kinds of economic change isn't going away.

Ironically, the richer we become, the more specialization we have. The more specialized you are, the greater the risks (and rewards) from economic change.

The lesson, I think, is that education should give you a range of places to apply your specialized skills.

The Economics of Marriage

To quote the introduction, "This week Slate is publishing two excerpts from Tim Harford's new book, The Logic of Life, which is premised on the notion that if we want to understand our world—or how to change it—we must first understand the rational choices that shape it."

The two excerpts are great reads. They read a lot like Freaknomics, a book that shares the excerpt's life-through-the-lens-of-economics basis (and which I also recommend). And for people that share a "family-values-based" concern about the direction marriage is headed, I think these two excerpts are a must-read. Unfortunately, I can see "pro-family-values" leaders lazily (ignorantly) dismissing these pieces like various conservative leaders dismissed the abortion-lowered-90s-crime-rates argument given by Freakonomics).

Anyway: Excerpt one. Excerpt two.