Wednesday, September 30, 2009

Religious Freedom and National Parks

The establishment clauses of the U.S. Constitution's First Amendment read as follows:

Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof.

Do these clauses prohibit a private group from displaying a religious symbol in a national park? That is the issue before the Supreme Court. The case involves

a small plywood box, set back from a gentle curve in a lonesome desert road. It looks like nothing so much as a miniature billboard without a message.

But inside the box is a 6 1/2 -foot white cross, built to honor the war dead of World War I. And because its perch on a prominent outcropping of rock is on federal land, it has been judged to be an unconstitutional display of government favoritism of one religion over another.

This might seem to be a messy issue, since the precise definition of "establishment of religion" or "free exercise thereof" is not obvious.

But here is a simple resolution: get rid of national parks. Government has no compelling interest in this activity, so it should return all the land to private ownership. This allows markets forces to determine whether these lands are best used for private parks, grazing, timber, condominiums, or golf courses.

And then the constitutional issue is moot.

Tuesday, September 29, 2009

TARP is Expanding; Housing Subsidies Too

Since the economy is beginning to recover, U.S. policy should be winding down TARP, right? And we should be ending mortgage subsidies to less credit-worthy borrowers, since that policy played a crucial role in causing the crisis in the first place, right? Well, guess again:

The Obama administration is close to rolling out two initiatives aimed at addressing lingering problems from the financial crisis: A long-delayed effort to cleanse financial firms of their toxic assets, and a $35 billion plan to prop up state programs that help lower-income borrowers get affordable mortgages.

This makes no sense.

The argument made last fall for having Treasury buy toxic assets from banks was that, if banks had been forced to sell then, they would have received "firesale" prices due to the crisis. This would allegedly have pushed more banks to fail, with negative repercussions for the credit system.

That argument is irrelevant now. Panic is over. If banks own assets that investors will buy only at heavily discounted prices, that is because these assets are not worth much. Let the banks take the losses; TARP purchases are just further bailout for the banks.

Propping up state "affordable" mortgage programs will help generate the next crisis by encouraging homeownership among people who cannot afford it. All affordable mortgage programs should be phased out, not expanded.

Monday, September 28, 2009

A Federal Ban on Texting While Driving?

In response to claims that texting-while-driving (TWD) causes traffic accidents, Congress is considering

a federal bill that would force states to ban texting while driving if they want to keep receiving federal highway money.
This approach to forcing a particular policy on the states mimics the 1984 Federal Uniform Driving Age Act, which threatened to withhold federal highway funds unless states adopted a 21-year-old minimum legal drinking age. The justification for that law was reducing traffic fatalities among 18-20 year olds.

A federal ban on TWD is not compelling:

1. Federal imposition of the 21-year old minimum drinking age did not save lives.

2. A ban on texting might increase other distractions: adjusting the radio, putting on makeup, eating a sandwich, reading a map, and so on. Relatedly, the evidence that TWD causes accidents is far from convincing. Traffic fatalities per vehicle mile travelled have declined substantially over the past 15 years, despite the explosion in text messaging.

3. TWD has benefits, not just costs. Truckers, for example, claim that

Crisscrossing the country, hundreds of thousands of long-haul truckers use computers in their cabs to get directions and stay in close contact with dispatchers, saving precious minutes that might otherwise be spent at the side of the road.
4. If the benefits of banning TWD become clear, most states will ban on their own.

Thus laws that penalize TWD might make sense. But this is an issue for states, not the federal government.

Sunday, September 27, 2009

Dumping Electronic Waste: The Summers Memo Lives

As the result of mandated recyling policies, plus laws that forbid the export of electronic waste, there is now a black market that exports this waste from Europe to developing countries:

Exporting waste illegally to poor countries has become a vast and growing international business, as companies try to minimize the costs of new environmental laws, like those here, that tax waste or require that it be recycled or otherwise disposed of in an environmentally responsible way.

This situation brings back memories of a famous memo involving Larry Summers, former Treasury Secretary and Harvard President, who is now one of President Obama's chief economic advisers:

The Summers memo was a 1991 memo on trade liberalization that was written by Lant Pritchett and signed by Lawrence Summers while the latter was Chief Economist of the World Bank. It included a section that both Summers and Pritchett say was sarcastic that suggested dumping toxic waste in third-world countries.

After the material was leaked, Pritchett stated that he had written the memo and Summers had only signed it. According to Pritchett, the memo as leaked was doctored to remove context and intended irony, and was "a deliberate fraud and forgery to discredit Larry and the World Bank."

Now, the suggestion that rich countries unload their toxic waste on poor countries, against the wishes of those countries, is patently offensive. That is not what Summers / Pritchett were suggesting, even in jest, but that is how the memo got characterized in popular discussions.

Consider, however, a milder form of their suggestion: allow waste disposal firms in rich countries to pay poor countries to accept their waste. The poor countires can choose whether to engage in such transactions and can regulate exactly what precautions are required for the waste to be disposed of in their countries.

This approach is infinitely reasonable: it benefits both rich and poor countries. The mandates for recycling, and the ban on exports, are wrong-headed; they inevitably generate the kind of black markets described in the article, with all the attendant negatives.

Saturday, September 26, 2009

Iran: Engagement, Sanctions, or Nothing?

The recent

disclosure of a second uranium enrichment site in Iran has led the Obama administration to shift the emphasis in its dealings with the Islamic republic -- away from engagement and toward building an international consensus for sterner action against Tehran.

Is this the right response? Let's take as given that, other things equal, it is in the world's interest that Iran not possess nuclear weapons. This might not be right - maybe Iranian nuclear weapons would help check other unfriendly forces in the Middle East - but leave that for another day. Then the following propositions all seem plausible:

1. Continued engagement just allows Iran to continue developing its nuclear capabilites.

2. Sanctions might slow Iran's nuclear development a bit, but since both Russia and China are not really on board with sanctions, this effect will be minimal.

3. Military action to destory the Iranian nuclear capabilities will address the issue in the short term, but Iran will just start over. Plus, such military action might escalate into something far more costly.

Faced with these choices, my vote is to do nothing.

Friday, September 25, 2009

Climate Change and Health Care: Free Lunches?

In the debate over health care reform, advocates of expanded government health insurance suggest we can pay for this by making Medicare and Medicaid more efficient.

In Paul Krugman's most recent column, he makes a similar claim about reducing greenhouse gas emissions:

The evidence suggests that we’re wasting a lot of energy right now. That is, we’re burning large amounts of coal, oil and gas in ways that don’t actually enhance our standard of living — a phenomenon known in the research literature as the “energy-efficiency gap.” The existence of this gap suggests that policies promoting energy conservation could, up to a point, actually make consumers richer.

Both claims of a "free lunch" are heroic, at best.

In the case of health insurance, Medicare and Medicaid are inefficient, but to make them more efficient we have to reduce government subsidy for health insurance, not expand it.

In the case of energy efficiency, more energy efficient practices exist (e.g., flourescent light bulbs), but they are expensive: if they actually made consumers richer, most would be using them already.

Now the fact that expanded government health insurance and increased energy efficiency would cost more, not less, does not prove they are bad ideas (that's a separate discussion). But it means society must evaluate a tradeoff, not just assert we can have something for nothing.

Wednesday, September 23, 2009

Bankruptcy or Bailout?

I will be testifying today before the House Financial Services Committe on a proposal to give the FDIC the same authority over bank holding companies (e.g., Citigroup) that it already has over banks. The key aspect of the proposal is that it allows the FDIC to "assist" failing institutions with taxpayer funds (e.g., by making loans, buying assets, taking equity positions). Thus, this propoal institutionalizes TARP.

In my judgement this is a terrible idea: it means moral hazard on a grand scale. You can read my full testimony here.

Paul Volcker, Arthur Levitt, Jr., Mark Zandi, and John Cochrane will also testify.

Will the Fed Create a New Bubble?

Steve Pearlstein of the Washington Post puts the question nicely:
For the past two years, the central challenge of U.S. economic policy has been to find a way to stabilize the financial system and the economy without reinflating the bubble or going back to the days of consuming more than we produce. In the end, that may prove harder than it seems.


The difficulty, of course, is politics rather than economics. The Fed unquestionably has the tools to prevent an outburst of inflation, assuming it has the courage to use these tools. But curbing inflation might be hard politicially, since it could require the Fed to raise interest rates when economic recovery is still anemic.

The current situation illustrates why the economy would plausibly be better off without a central bank: beneficial actions today will often soiw the seeds of harmful actions tomorrow.

Tuesday, September 22, 2009

Robbing Peter to Pay Paul

The FDIC's insurance fund, which it uses to pay off despositors in failed banks, is getting low. One way it can bolster its reserves is to draw on a $100 billion line of credit from the Treasury. Instead, however,

Senior regulators say they are seriously considering a plan to have the nation’s healthy banks lend billions of dollars to rescue the insurance fund that protects bank depositors. That would enable the fund, which is rapidly running out of money because of a wave of bank failures, to continue to rescue the sickest banks.

A brilliant scheme to avoid another taxpayer bailout? Not really.

The banks are willing to lend because the FDIC will pay them a good interest rate. Repayment is virtually guaranteed because the FDIC can always draw on its line of credit. Thus the banks are getting a better deal than they would in the marketplace (that's why they are doing this), so the scheme is a backdoor way of further bailing out the banks.

Why go through this charade? Apparently, using the Treasury credit line

is said to be unpalatable to Sheila C. Bair, the agency chairwoman whose relations with the Treasury secretary, Timothy F. Geithner, have been strained.

“Sheila Bair would take bamboo shoots under her nails before going to Tim Geithner and the Treasury for help,” said Camden R. Fine, president of the Independent Community Bankers. “She’d do just about anything before going there.”

Instead, the FDIC will con the taxpayers. The FDIC has no choice under existing policy, of course, but to pay off depositors of failing banks. They should just be honest about how who is paying for it.

Monday, September 21, 2009

If It Quacks Like a Duck

President Obama argued on TV talk shows this weekend that his proposed mandate for everyone to buy health insurance - or face a large financial penalty - is not a tax increase:

In a testy exchange on ABC's "This Week," broadcast Sunday, Obama rejected the assertion that forcing people to obtain coverage would violate his campaign pledge against raising taxes on middle-class Americans.

"For us to say you have to take responsibility to get health insurance is absolutely not a tax increase," Obama said in response to persistent questioning, later adding: "Nobody considers that a tax increase."

Well, I consider it a tax increase, so I guess that makes me nobody.

The real question is whether this tax increase is a good idea. My answer is no. If others disagree, then fine, let's have that debate. But denying plain truths suggests that advocates of Obamacare are trying to pass something that Americans would not endorse if it were structured and explained clearly.

Saturday, September 19, 2009

Pro Sports and Drug Testing

Should professional sports league be allowed to impose drug-testing on their players, as they have done in recent years? Absolutely. The fans seem to want contests not affected by the use of certain drugs, and professional teams have every right to produce a product - drug-free sports - that accommodates this preference.

Yet new federal court ruling

has jeopardized the National Football League’s ability to enforce its drug-testing program and raised significant doubts about the programs of other professional sports in the United States.
This is goofy, and exactly backwards. If this ruling stands, federal resources will be wasted trying to prohibit the drugs in question, while federal law prevents private parties from taking actions that might help reduce their use.

A Victory for Free Speech

Can independent, non-profit political groups spend their own money on political ads? One might imagine that in a country with free speech, the answer would have to be yes. Amazingly, however, U.S. law restricts such spending. Now, however,

The federal appeals court for the District of Columbia ruled Friday that the government cannot restrict independent political spending by nonprofit groups or political committees, accelerating the judicial rollback of regulations aimed at curtailing the power of money in politics.

The ruling, in Emily’s List v. Federal Election Commission, broadens the field of activity open to groups known as 527s (after that section of the tax code) and other independent outfits like on the left or Swift Boat Veterans for Truth on the right.

The court's decision is not yet a total victory for free speech, since the decision still prevents 527 groups from coordinating their activities with a candidate or party. This restriction is especially stupid because it is utterly unenforceable, so it merely penalizes those 527s that honor the letter of the law.

Still, the court's decision is a major step in the right direction.

Friday, September 18, 2009

Fed to Regulate Banker Pay? Madness

Under new regulation currently being designed,

Policies that set the pay for tens of thousands of bank employees nationwide would require approval from the Federal Reserve as part of a far-reaching proposal to rein in risk-taking at financial institutions.

The Fed's plan would, for the first time, inject government regulators deep into compensation decisions traditionally reserved for the banks' corporate boards and executives.

Under the proposal, the Fed could reject any compensation policies it believes encourage bank employees -- from chief executives, to traders, to loan officers -- to take too much risk. Bureaucrats wouldn't set the pay of individuals, but would review and, if necessary, amend each bank's salary and bonus policies to make sure they don't create harmful incentives.

This is madness. Setting aside the horrific precedent, the plan will fail massively for three reasons:

1. Determining which compensation plans encourage risk is hard; regulators will sometimes get it backwards.

2. Financial firms will create complicated compensation packages that innovate around the regulations.

3. If the regulations are truly onerous, financial firms will just re-locate outside the U.S.

The only way to prevent excessive risk-taking is to let financial firms fail when their investments blow up. No bailouts, no subsidies, ever.

Wednesday, September 16, 2009

Have the Democrats Outsmarted the Republicans on Health Care?

In their attempt to defeat Obamacare, Republicans have focussed their criticism on the public option, painting it as the most objectionable feature of existing proposals. Senator Max Baucus, Democrat of Montana, has now proposed a plan without the public option. This leaves the Republicans in an awkward position, especially since Baucus's plan is projected to cost less than earlier proposals. If Republicans oppose the Baucus plan, they surely risk the ire of voters who will be told during the mid-term elections, "The Republicans blocked a plan that would have covered the uninsured and reduced the deficit."

The problem is, the public option was never the crucial issue; instead, it was the mandate to purchase insurance. Once government mandates insurance coverage, it gets to define what constitutes insurance, which means it can ban pre-existing condition clauses and the like. The mandate also"justfies" large subsidies for insurance, to avoid non-compliance with the mandate. So, an individual mandate, which the Baucus plan includes, implies a rapid takeover of the entire health care system by the federal government.

Something like the Baucus plan will pass. It will either cost far more than existing projections, if government administrators fail to impose the restrictions on reimbursements that generate the projected cost savings, or it will involve massive rationing of care.

The Democrats played it perfectly. The Republicans got sucker-punched.

Too Much Housing

The U.S. obsession with homeownership makes for terrible policy. All the subsidies, credits, loan guarantees, interest deductions and the like mean that too much of our capital stock is invested in residential housing and too little in factories and equipment. The attempt to increase homeownership also led to the extension of mortgage credit to borrowers who could not afford homes, thereby promoting the housing bubble and financial panic.

The most maddening aspect of all this is that we have done nothing to moderate or correct these policies; instead, the U.S. has initiated new policies that aim to prevent foreclosures, "stabilize" the housing market, and further expand homeownership. These measures were sold as temporary stopgaps designed to end the recession, but they will be end up being permanent:

When Congress passed an $8,000 tax credit for first-time home buyers last winter, it was intended as a dose of shock therapy during a crisis. Now the question is becoming whether the housing market can function without it.

As many as 40 percent of all home buyers this year will qualify for the credit. It is on track to cost the government $15 billion, more than twice the amount that was projected when Congress passed the stimulus bill in February.

This program made no sense even in the short run; housing prices were excessive and homeownerhip was too high before the crisis. Policies designed to promote housing thus prevent a necessary adjustment, and they will cause over-investment in housing going forward.

Tuesday, September 15, 2009

Health Insurance and Illegal Immigrants: Two Solutions

Should health care reform cover illegal immigrants? For libertarians, that's any easy question:

1. Governments should not provide health insurance for anyone, so it does not have to decide whether to cover illegal immigrants.

2. Governments should not restrict immigration. Then all immigrants would be legal, so even if government provides health insurance, the immigration issue is moot.

You might not agree with either of points 1 or 2, but you have to admit that policymaking is nice and simple in Libertarian Land!

Monday, September 14, 2009

Expanded Government: Temporary or Permanent?

One crucial concern about all the steps taken by the federal government to ameliorate the financial crisis is that many of these steps will be permanent rather than temporary. At the moment, the government's role in the economy is unprecedented, other than in war time:

One year after the collapse of Lehman Brothers set off a series of federal interventions, the government is the nation’s biggest lender, insurer, automaker and guarantor against risk for investors large and small.

Between financial rescue missions and the economic stimulus program, government spending accounts for a bigger share of the nation’s economy — 26 percent — than at any time since World War II. The government is financing 9 out of 10 new mortgages in the United States. If you buy a car from General Motors, you are buying from a company that is 60 percent owned by the government.

If you take out a car loan or run up your credit card, the chances are good that the government is financing both your debt and that of your bank.

And if you buy life insurance from the American International Group, you will be buying from a company that is almost 80 percent federally owned.

Despite this enormous expansion, the administration's claim is that it wants to exit these expanded roles as quickly as possible:

Mr. Obama plans to argue, his aides say, that these government intrusions will be temporary.
The federal government's role may well shrink from its current size; indeed, that process is already taking place to a significant degree. Yet advocates of small government should still be worried, for several reasons:

1. The decisions to scale back the new interventions will not be determined just by the administration and its economic advisers; Congress will play a huge role. Many members of Congress would love to see a signficantly larger role for government, so Congress will find ways to continue much of what it has already started.

2. Even if current interventions get scaled back or eliminated, they have set a precedent for similar interventions in the next crisis. Worse, some of the interventions - those that have bailed out private risk-taking - virtually guarantee that the next crisis is coming.

3. Although the administration may reduce or end many recent interventions, it is enthusiastic in its support for several new interventions, such as a hugely expanded roles in health care and energy.

More generally, the rhetoric from the administration and many Democrats in Congress suggests that in their hearts, they are hostile to markets and believe government is the solution, not the problem. As long as Democrats control Congress, therefore, the trend will be for more government, not less.

Sunday, September 13, 2009

The Legacy of TARP: Crony Capitalism

When Treasury Secretary Hank Paul proposed the bailout of Wall Street banks last September, I objected in part because the TARP meant that government connections, not economic merit, would come to determine how capital gets allocated in the econony. That prediction now looks dead on:

As financial firms navigate a life more closely connected to government aid and oversight than ever before, they increasingly turn to Washington, closing a chasm that was previously far greater than the 228 miles separating the nation's political and financial capitals.

In the year since the investment bank Lehman Brothers collapsed, paralyzing global markets and triggering one of the biggest government forays into the economy in U.S. history, Wall Street has looked south to forge new business strategies, hew to new federal policies and find new talent.

"In the old days, Washington was refereeing from the sideline," said Mohamed A. el-Erian, chief executive officer of Pimco. "In the new world we're going toward, not only is Washington refereeing from the field, but it is also in some respects a player as well. . . . And that changes the dynamics significantly."

Read the rest of the article; it is truly frightening. We have taken a huge leap toward crony capitalism, to our peril.

Saturday, September 12, 2009

The 9/12/09 Taxpayer March

Today is the national taxpayer march on Washington, a national extension of the "tea-party" protests that occurred this past summer. Here is the group's mission statement:

We’ve had enough of the out of control spending, the bailouts, the growth of big government and the soaring deficits. And we reject the future tax increases to pay for all of this spending and debt down the road. We are gathering on 9-12-2009 to deliver our message in person that we’ve had enough!

The nice thing about this statement is that it identifies the crucial problem: excessive spending. Many anti-government protests focus only on high taxes, without stating what spending should be reduced as well.

Cutting expenditure is politically difficult, of course. Virtually all expenditure benefits some interest group; otherwise, it would have been cut already. Medicare is a perfect example; everyone either receives it now or hopes to receive it in the future, so support is widespread. Yet Medicare is a large and growing fraction of the budget, so lowering spending without touching Medicare is missing the forest for the trees.

The Tea Party groups could thus gain enormous points for honesty and consistency, yet lose a large fraction of their support, by opposing not only new spending like Obamacare but also existing spending like Medicare. We will see.

Thursday, September 10, 2009

Fairness and Pre-Existing Conditions

Under Obamacare, insurance companies would be barred from denying coverage based on pre-existing conditions. Most people think this is basic fairness, since they assume pre-existing conditions result from bad luck.

In some cases, this view is correct. People born with genetic diseases like Huntington's corrhea or hemophilia did nothing to cause their conditions.

Yet many pre-existing conditions result from decions made by those affected. High blood pressure and high cholesterol are often due to bad diet and lack of exercise. Most lung cancer is caused by smoking. Cirrhosis of the liver reflects excessive drinking.

So it is far from obvious that fairness means people who have insurance should pay higher premiums to fund health insurance for those without. Instead, fairness would seem to dictate that those who contributed to their own health problems should bear the consequences of their decisions.

Wednesday, September 9, 2009

Obama's Speech on Health Care

The infuriating aspect of Obama's speech last night was the claim that health care reform is either free, because we can find hundreds of billions of dollars of bad medicine, fraud, and abuse in Medicare and Medicaid, or something we can just impose on health insurance companies, at no cost to consumers.

If the administration can make Medicare and Medicaid less expensive and more effiective - the same quantity and quality of care for less money - that is great, and everyone should sign on. But we know that is a pipe dream; if such a free lunch were available, someone would have eaten it already. It is trivial to make Medicare and Medicaid less expensive, of course: offer them to fewer people, or raise co-pays and deductibles, or reduce the amount of care they cover. But these adjustments involve real tradeoffs between winners and losers; they are not win-wins for everyone.

Paying for more government health care by imposing fees on health insurance companies is also not a free lunch: it means higher insurance premiums for those already covered, while federal subsidies make coverage cheaper for those newly covered. Thus again the plan involves winners and losers, not the same or more for everyone.

The health care proposals from Obama and Congress are not about making the health care system better, despite all claims to the contrary. They are about giving more health care to some people, and having other people pay for it. That is, they are about redistributing income, plain and simple.

If advocates for these proposals want to argue for this kind of redistribution, that is their privelege. But no one should mistake the fact that this is what is really going on.

Tuesday, September 8, 2009

If You Can't Shake Hands with It, It Doesn't Pay Taxes

Here is a sentence that will annoy every economist, independent of political affiliation:

Those involved in negotiations over health care were also weighing a proposal ... that would impose new fees on some sectors of the health care industry, but none on individuals. (emphasis added)
All taxes are taxes on individuals. A tax on businesses means either that the owners earn lower profits, or the employees earn lower wages, or the customers pay higher prices.

In this particular case, the main impact is likely to be higher prices. Thus higher fees on the health care industry mean more expensive health care. Some might argue this is a cost worth paying, but it is impossible to avoid the fact that it is a cost, and that it is borne by individuals.

More Troops for Afghanistan?

A headline in today's NYTimes poses the issue perfectly:

Crux of Afghan Debate: Will More Troops Curb Terror?
My answer is, probably not. Perhaps a major buildup would suppress the Taliban for a time, but more likely it will push them into Pakistan or cause al Qaeda to shift its operations to someplace like Somalia. The occupation, moreover, generates resentment against the United States, potentially raising the likelihood of future terrorist attacks.

What we know with certainty is that the U.S. presence in the Middle East is enormously costly.

Why should we incur a large, certain cost to achieve, at best, a highly speculate reduction in the likelihood of terrorist attacks?

Monday, September 7, 2009

The Next Housing Bailout, Continued

U.S. housing policy is still insane:

In the go-go years of the U.S. housing boom, virtually anybody could get a few hundred thousand dollars to buy a home. ... Now ... only one lender of consequence remains: the federal government, which undertook one of its earliest and most dramatic rescues of the financial crisis by seizing control a year ago of the two largest mortgage finance companies in the world, Fannie Mae and Freddie Mac.

While this made it possible for many borrowers to keep getting loans and helped protect the housing market from further damage, the government's newly dominant role -- nearly 90 percent of all new home loans are funded or guaranteed by taxpayers -- has far-reaching consequences for prospective home buyers and taxpayers. ...

Taxpayers are on the hook for most of the loans that are still being made if they go bad. And they are also on the line for any losses in the massive portfolios of old loans at Fannie Mae and Freddie Mac, which own or back more than $5 trillion in mortgages.

There is growing evidence that many loans being guaranteed by the government have a significant risk of defaulting. Delinquencies are spiking. And the Federal Housing Administration, another source of government support for home loans, is quickly eating through its financial cushion as losses mount.

We are recovering from the financial crisis by sowing the seeds of the next one. The deficit situation is even worse than it appears. The U.S. must stop trying to promote homeownership and let the market determine who owns a home and who does not.

Sunday, September 6, 2009

Stimulus Forever?

How long should the stimulus continue? Here is the answer given yesterday by U.S. Treasury Secretary Timothy Geitner at the G20 meeting in London:

The basic to make sure that we do enough, long enough, so that you really have a recovery in place before we shift to restraint.

Implicit in this view is the assumption that that stimulus is a necessary ingredient for recovery. Yet before 1914, when there was no Federal Reserve and no Keynesian economics, the economy experienced recessions yet recovered about as quickly as since the advent of government stimulus efforts.

Thus Geithner's view is convenient for advocates of stimulus. If stimulus continues long enough, it will appear that stimulus worked. Then politicians can take credit for saving the economy, even if stimulus was unimportant or even counterproductive.

Friday, September 4, 2009

Obama's Education Speech

As you have probably heard,

Educators across America found themselves at the center of a political storm this week as conservatives exploded in anger over President Obama's plans to give a speech to the country's schoolchildren.

A stunned White House insisted the address, planned for Tuesday, and accompanying suggested lesson plans are meant simply to encourage students to study hard and stay in school.

But some parents said they aren't buying it. They said they're convinced the president is going to use the opportunity to press a partisan political agenda on impressionable young minds.
What government policy is at the root of this controversy? Compulsory education, meaning laws that require children ages 5-16 (roughly) to attend school.

President Obama has every right to address any group he wants. But, he does not have the right to compel anyone to listen. The difference between this speech, and a standard evening television address, is that the audience is captive.

Aside: The location of the speech is Wakefield High School, my alma mater (class of '75). I will be attending my 35th reunion next summer.

Housing Bailouts: Lessons not Learned

The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac - the government sponsored enterprises with implict backing from taxpayers - to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal downpayments. We know how that turned out.

Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:

The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can't make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.

In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.

And what is the result of this surge in FHA insurance?

The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.

This is madness. Repeat after me: TANSTAAFL (There ain't no such thing as a free lunch).

Thursday, September 3, 2009

Antitrust Policy and Uncertainty

One negative of antitrust policy is increased uncertainty and delay for relevant market participants. The pending purchase of Sun Microsystems by Oracle provides a good example:

The European Commission Thursday opened an in-depth antitrust investigation into Oracle Corp.'s planned $7.4 billion purchase of Sun Microsystems Inc.

The commission said it has "serious concerns" that the deal between Oracle, the world's second-largest software maker, and Sun Microsystems might lead to reduced competition in the market for computer databases.

This comes on the heels of a different outcome here. On August 25th

Oracle Corp. said antirust regulators at the U.S. Department of Justice have cleared its $7.4 billion deal to buy Sun Microsystems Inc., removing a major hurdle for the transaction.

The Justice Department's decision occurred five months after the deal was announced.

Meanwhile, competitors like HP and IBM have been trying to profit from the ill-defined status of the deal. The EU's investigation

could put the world's No. 3 software maker, Oracle, months behind its original plan for closing the deal, giving rivals -- including Hewlett-Packard Co and International Business Machines Corp -- more time to poach hardware customers from Sun, the No. 4 maker of computer servers.

HP and IBM have been offering discounts and other incentives to woo Sun customers since Oracle agreed to buy Sun in April, playing up concerns that software maker Oracle might have trouble running a hardware maker.

Reasonable people can make a case for some degree of antitrust enforcement. This case should recognize, however, that some beneficial mergers and acquisitions do not occur because of the costs imposed by antitrust investigations.

Wednesday, September 2, 2009

Progress in the War Against the Taliban: Not!

Also in today's news:

The Taliban has become a much more potent adversary in Afghanistan by improving its own tactics and finding gaps in the U.S. military playbook, according to senior American military officials who acknowledged that the enemy's resurgence this year has taken them by surprise.

U.S. rules of engagement restricting the use of air power and aggressive action against civilians have also opened new space for the insurgents, officials said. Western development projects, such as new roads, schools and police stations, have provided fresh targets for Taliban roadside bombs and suicide attacks. The inability of rising numbers of American troops to protect Afghan citizens has increased resentment of the Western presence and the corrupt Afghan government that cooperates with it, the officials said.

Who still thinks we should continue this war?

Progress in the War on Opium: Not!

One goal of the U.S. presence in Afghanistan has been to suppress opium production, since Afghanistan is the world's leading supplier. So, how has that been going? Not so well:
Cultivation in Afghanistan of opium, the nation's most lucrative cash crop and a major funding source for the Taliban, has fallen sharply this year in large part because an excess supply of the drug has pushed down prices to a 10-year low, according to a U.N. report scheduled to be released Wednesday.

Opium cultivation takes place in plain view, yet the U.S. has been spectacularly unsuccesseful in supressing it. It is any wonder we cannot defeat the Taliban, which has innumerable places to hide? Both goals are futile.

Tuesday, September 1, 2009

Does Preventitive Care Reduce Health Costs?

A new study finds that

Preventive services for the chronically ill may reduce health-care costs, but they are unlikely to generate the kind of fantastic savings that President Obama and other Democrats have said could help pay for an overhaul of the nation's health system, according to a study being published Tuesday.

Using data from long-standing clinical trials, researchers projected the cost of caring for people with Type 2 diabetes as they progress from diagnosis to various complications and death. Enrolling federally-insured patients in a simple but aggressive program to control the disease would cost the government $1,024 per person per year -- money that largely would be recovered after 25 years through lower spending on dialysis, kidney transplants, amputations and other forms of treatment, the study found.

However, except for the youngest diabetics, the additional services would add to overall health spending, not decrease it, the study shows.

This should not be suprising; if preventive measures could achieve substantial savings in health costs, insurance companies would already be pushing them.