Monday's interesting reads

"Credit-Card Wars" Saturday WSJ editorial:

"At the behest of a coalition of U.S. retailers, House Democrat John Conyers of Michigan and Republican Chris Cannon of Utah have introduced the Credit Card Fair Fee Act that would regulate fees that the credit-card industry charges to retail stores...

Typically, a retailer gets about 98 cents on the dollar for a credit-card transaction; the bank that issued the card gets most of the remaining 2% in what's called an "interchange" fee...Much of the complaint about fees comes from small retailers, who say that because they operate on thin margins, they pay more in fees than they earn in profits...

It's not at all clear why Messrs. Conyers and Cannon need to belly-slam into the middle of whether the benefits of accepting credit cards are worth this 2% fee. Retailers have options to avoid the fees. They can offer customers a discount on cash purchases. Larger retailers can even issue their own cards offering discounts as an alternative to Visa. Some big chains exploit their own market power by negotiating lower fees...

As consumers we'd like to see interchange fees come down too, but through market innovation and competition, not Congressional fiat."

Like they say in the article, it "sounds like a price control. When the retailers have options, I see no reason the government should get involved. In time, someone will come up with a way to do something else.

"Hillary's Bad History" WSJ op-ed:

"The Beltway class also now wants to indulge in the same Keynesian "stimulus" that failed in Japan. Mrs. Clinton's "Rebuild America Plan" would invest $10 billion over 10 years in an "Emergency Repair Fund" -- a plan she claims would create 48,000 jobs for every billion dollars spent, or close to half a million jobs. She would build ports, railroads, airports, public transit, tunnels and roads. Senate Democrats are proposing more than $35 billion in new spending -- on top of their $168 billion in tax rebates. These may also lead to false recoveries, but they won't ignite a new round of risk-taking and investment."

I think the last line is the takeaway. The article is talking about how Hillary Clinton is comparing what we're going through now to what Japan went through in the late 80's and early 90's. I think it's easy to see that won't be the case. What I want to point out is why massive public-works spending isn't a good thing, especially when unemployment is low. The economy grows when the private sector invests and employs people. If the government is "investing", it's simply borrowing money from future taxpayers. Not only that, but the people they employ are taken out of the population of available employees. One thing I learned from a class at BYU was that as unemployment goes down, so does productivity. If the government starts to compete with employers in a low unemployment environment, as it is right now, they will hire some of the more productive workers, forcing the private sector to employ and use less efficient workers, meaning that there will be less profits, leading to less investment, leading to less growth. Is less growth a bad thing? You bet it is. Long-term economic growth is the only way to pull people out of poverty, and when government is competing with the private economy, the real source of economic growth, for resources, lasting growth will be longer coming.

"Nationalism, Crony Capitalism May Thwart Mexico in Boosting Oil Production" by David Luhnow at WSJ:

"But those efforts [to strike a deal to allow private oil companies to work with state monopoly Petróleos Mexicanos in finding and exploiting new oil deposits] look unlikely to succeed thanks to two immovable forces on the Mexican landscape: nationalism and crony capitalism."

Apparently, Mexicans don't trust business, and I can see why. But they have no one to blame but their government.

"Much of Mexico's economy is dominated by family-run companies that have long ruled over their respective industries, squashing competition and charging consumers high prices. They rely on friends in the government to ensure favorable regulation or sweetheart contracts, don't give much back in philanthropy, and have a reputation for evading taxes...

Corporations' behavior has reinforced their negative image among ordinary Mexicans. The country's two leading broadcasters frequently use their news broadcasts to advance their owner's interests, often attacking personal or political rivals. Both networks have bullied the Calderón government to block the creation of a third television network. Just before national elections in 2006, the TV companies pressured lawmakers from all three main parties to pass regulations favorable to them."

A podcast I heard once (I think it's here) said the only true monopolies are state-sponsored monopolies. So when the people are opposed to business, it's usually the fault of government.

"Fed's 'Supercop' Role May Give It Headaches" by Greg Ip with the WSJ:

"Mr. Paulson's plan to make the Fed a supercop in charge of keeping the financial system stable is also problematic for the Fed and its chairman, Ben Bernanke. The Fed is being asked to do a job that may be beyond anyone's ability: Identify and avoid a crisis in advance.

"Supervising the very complex derivative products of the banks and of the rest of the financial system would be an enormous technical challenge," said Harvard University economist Martin Feldstein, a prominent Republican adviser who has criticized the Fed's supervision of banks leading up to the current crisis. "The institutions themselves -- paying very high salaries and having their own survival at risk -- got it wrong. Would the Fed get it right?""

I couldn't say it better (but I'll say it again). Why would one person or a group small group of people with very little incentive be better able to get it right than a much larger group of people with tremendous incentives? Why is the judgment of the one (or small group) better or the cognition errors less pronounced than that of the group?

"With Washington in Gridlock, Voters May Determine Oversight" by Gerald Seib in the WSJ's Capital Journal:

"Probably the only factor that could overcome these barriers is fear: a fear in both parties that the mess in the credit markets is so dire that they risk being blamed by the public for inaction.

"Members of Congress from both parties want to show that they are reforming the nation's financial system, which is why there is some chance for congressional action," says Stuart Rothenberg, a non-partisan political analyst. "But Congress isn't built to act quickly, especially on a matter of this complexity, and that makes a far-reaching legislative response something of a long shot in the middle of a presidential race.""

As I said before, I'm afraid of a belief on the part of politicians that they need to "do something." The more is done, the more is likely to be fouled up.

"Speaking in the same hall where Sen. Clinton appeared two weeks earlier, Sen. Casey said Sen. Obama best understands Pennsylvania's economic issues. "He started out working in the shadows of the steel mills of Illinois," Mr. Casey said. "He will fight for us here in Pennsylvania."...

"The Clinton strategy seems to be to use the same economic message that seemed to work in Ohio," says William Green, a political analyst based in Pittsburgh."

This is why I've come to believe a "national primary" would be in our best interest. Instead of giving one message to the people of Pennsylvania and another to those in Ohio and still another to those in Texas, they give one message to the people of the country. They are then forced to get their message out in a clear way that lets everyone know where they stand. It doesn't need to be in early January, like Iowa, but it should be early enough to give the candidates enough time to prepare for November and late enough to give them time to get their message across.

"Tensions rise as world faces short rations" from Reuters:

"Drought, a declining dollar, a shift of investment money into commodities and use of farm land to grow fuel have all contributed to food woes. But population growth and the growing wealth of China and other emerging countries are likely to be more enduring factors."

There is an article in this week's Barrons that talks about how much speculators are impacting the price of food commodities. I'd like to know how much government intervention, in the US and elsewhere, and these speculators have helped drive up prices. We've been talking about the fast growth of China, India, and other devloping nations for years, but it's only been in the last year or so that we've really seen the run up in food costs. I don't think that world demand has all of a sudden increased to the degree that it's had this kind of impact.

Friday's interesting reads

"Sonny Perdue’s argument against Sunday sales of beer, wine, and such" from the AJC Political Insider:

The governor argues against Sunday sales because "legalizing Sunday packaged alcohol sales exacts a significant price that is paid by crash victims and their loved ones, health care providers, insurers, law enforcement and the judicial systems...Those additional crashes led to a 42 percent increase in alcohol-related fatalities on Sundays. If we apply these same percentages to Georgia’s highways, using 2006 data from the Governor’s Office of Highway Safety, we can expect approximate increases of 371 alcohol-related crashes and six alcohol-related fatalities per year."

He goes on to say that a study (the one he's quoting) found that the same increase wasn't seen on other days of the week. I personally have a hard time believing that. It implies people drive fundamentally different on Sunday. They may drive more, either because they drive less during the week while they're at work or they drive more on Sunday because a lot of people are starting or finishing vacations on that day.

This also reminds me of the "bootleggers and Baptists" argument, which says that when the Baptists decide they want to have a dry county the bootleggers will side with them because that means more business for them. This seems similar to me. The only people who I think would be negatively impacted are restaurants and bars, because they can't sell to their normal customers. The grocery and package stores, though, will likely see an increase of sales as people who know they can't buy tomorrow will buy today. But if not selling alcohol decreases traffic accidents, why doesn't Purdue mandate that all liquor must be purchased on, say, Saturday between 8 am and 5 pm? Because his political supporters in that would be washed out by his political opponents.

"Regulatory Rethink" WSJ op-ed by Charles Schumer. He makes a few suggestions; I'll discuss a couple:

"Look closely at unifying and simplifying our regulatory structure, perhaps moving toward a single regulator."

I don't think this is that bad of an idea, per se. I don't like the idea of a super agency, but if it can keep existing regulation (not add more) and cut excess costs out of the "regulatory system", that would be a plus.

"Figure out how to regulate currently unregulated parts of the financial markets and opaque and complex financial instruments."

Who does he think is qualified to do this? It'll have to be either academics or Wall Street veterans, neither of which I think would be wiling to do it. If the investors are just learning about these instruments, how effective will a regulator be?

"There must be greater transparency...Ratings agencies, paid by the creators of products they were rating, essentially rubber-stamped collateralized debt obligations and collateralized mortgage obligations without providing accurate analysis to potential investors. The SEC ignored the inherent conflicts of interest and the risks that entailed."

Practically the exact same arrangement exists for auditors. Companies pay the auditors. Actually, better said, shareholders pay the auditors through the companies, but management chooses the auditors. There is definitely risk inherent in this relationship. The SEC has made steps to fix it, but whenever you have a company selecting and paying their own watchdog, you can bet you'll have conflicts of interests.

"Obama suggests pastor is contrite" from Reuters:

""Had the reverend not retired and had he not acknowledged that what he had said had deeply offended people and were inappropriate and mischaracterized what I believe is the greatness of this country, for all its flaws, then I wouldn't have felt comfortable staying there at the church," Obama said."

This is just typical political backtrack. All politicians do it, so I'm not trying to single out Obama; he's just the one doing it right now. Even thought he's been going to that church for 20 years and considers the pastor a counselor, it isn't until now, when its a political necessity, that he feels he wouldn't feel comfortable going to church there.

"McCain not worried about trade politics" by Ian Swanson at The Hill (HT: Club for Growth):

"Sen. John McCain (R-Ariz.) will not backtrack from his support for free trade to win votes in a general election against either of his likely Democratic opponents, a senior adviser to his campaign said Thursday...

[An advisor] said McCain is not worried about losing votes to his Democratic opponent in battleground states such as Michigan or Ohio, where free trade agreements are blamed for the loss of manufacturing jobs."

I hope he sticks to this. I've had enough of the Nafta and Colombia free-trade agreement debates. I want a president who will stick by free trade in all forms. McCain, of course, probably won't do this to the extent I'd like him to, but I think he'll move in the right direction.

"Protection Racket" WSJ editorial by Pete DuPont:

"As liberal leaders, they are of course for higher income taxes, greater federal spending, and rapid withdrawal of American forces from Iraq. But passionate protectionism illustrates the pro-government, anti-market philosophy that is the core of their beliefs, and it reflects the seriously wrong direction in which they will take America if one of them becomes our next president...

And [despite the good] one of America's political parties and some of its supporters in the press believe that free trade is a bad idea. Sen. Max Baucus and Rep. Charlie Rangel, chairman of the Senate Finance Committee and the House Ways and Means Committee respectively, don't want Congress to approve the pending trade pact with Colombia. And CNN's Lou Dobbs amazingly just "cannot find anyone for whom free trade is good.""

Free trade, by definition, is good for both parties. If the person is truly free, they will only swap their money for things they value at least as much as the money they're giving up. If I walk out of the grocery store or drive away from the gas station complaining about the cost of milk or gas, it was still worth the $4.00 or $3.20/gallon I paid. If it wasn't, I wouldn't pay it (or at least as often as I do). I don't HAVE to drink milk; I don't HAVE to drive my car everywhere. I get very nervous about the direction our country is moving because even if McCain were to win the election, people are becoming more and more skeptical of free trade, fueled, at least in part, by our politicians.

"Food Sense" WSJ op-ed:

"Try this for a novel solution to rising food prices: freer trade. In an effort to access cheaper sources of food and lower prices for consumers, a growing number of governments are lowering tariffs...

[The difficulties of other options to keep prices down] leaves liberalization the only viable option. Many of the trade-freeing measures are being enacted on an emergency basis by ministerial fiat and are billed as temporary, in no small part to make them palatable to farm lobbies.

But economic liberalization can take on a momentum of its own. Consumers and food producers who enjoy lower prices on everyday foodstuffs won't be eager to see prices rise again."

Thursday's interesting reads

"Farm Lobby Beats Back Assault on Subsidies" from the WSJ by Lauren Etter and Greg Hitt:

"The agribusiness industry plowed more than $80 million into lobbying last year, according to the nonprofit Center for Responsive Politics, which tracks spending on lobbying. Much of that was focused on the farm bill...

Farmers and their allies in Congress say a victory is all to the good because the bill, which is typically renewed every five years, is designed to provide farmers with a safety net through cycles of boom and bust. The heady times of the 1970s, when crop prices soared as the Soviet Union gobbled up American grain, devolved into the farm crisis of the 1980s, leaving farmers buried in debt."

Two thoughts: 1) it just goes to show that special interests influence every corner of Washington, regardless of party affiliation. How are farmers any less "greedy" than any other corporate lobby? 2) Why is it that farmers specifically get a safety net through cycles of boom and bust? Why not accountants and nurses and mommies and daddies? Why do they get subsidies while the rest of us don't?

"House of Politics" WSJ editorial:

So much good stuff to talk about.

"The media coverage of Mr. McCain's speech has portrayed his approach as laissez-faire, and the Clinton and Barack Obama campaigns quickly assailed it on those grounds. But that's true only in the sense that Mr. McCain didn't endorse any vast, new government rescue of bankers or borrowers. If this is laissez-faire, we've come a long way from Adam Smith."

Continually growing legislation and regulation does nothing to promote laissez-faire. Something's going to come down from this and it isn't going to be pretty.

"[T]he Arizona Senator framed his policy response around personal accountability for bad choices."

Any kind of policy response should be directed at getting government out of the way of people's choice and accountability. Any different creates perverse incentives.

"The Senator is less helpful in asking for some grand meeting of mortgage lenders to "help their customers and their nation out." If he means a willingness to help some borrowers work through their cash shortfalls, then nearly all lenders are already doing that. But Mr. McCain also offered the dubious analogy to General Motors's 0% financing offer after 9/11. As we recall, GM was offering that to new-car buyers, not to people who already owned their autos. If Mr. McCain is asking lenders to rewrite their mortgage contracts across the board, he's getting very close to Hillary Clinton-land...

[Clinton's plan to freeze interest rates] would amount to the broadest price controls in the U.S. economy since the Nixon Administration. Mr. Obama has said this abrogation of contracts would do nothing to help the market clear and would only drive up borrowing costs."

"What Tata Tells Us" WSJ op-ed by Matthew Slaughter:

"American policy makers should strive to make the U.S. a premier location for the dynamic, high-productivity activities of globally engaged companies -- both insourcing companies and U.S. multinationals alike. To truly be such a location would require dramatic progress on many fronts: renewing the president's trade promotion authority; resuscitating the World Trade Organization's Doha Development Round; passing comprehensive immigration reform. But to start such a journey with a single step, let us all pause to appreciate yesterday's good news from Tata."

I remember back in the 80's seeing commercials encouraging people to buy American cars. What are American cars: cars made by GM or cars made in the US? I know people working at the Mercedes Benz plant in Alabama or the Hyundai plant in Georgia don't mind if you buy "foreign" cars. We can continue to encourage foreign companies to build and invest here by keeping our tax laws competitive and creating an atmosphere that lets business operate.

"Regulatory Overkill" WSJ op-ed by Allan H. Meltzer:

"Their diagnosis is wrong. Mistaken regulation contributed greatly to the current problems in financial markets. Take the 1970s Basel agreement between developed country governments, which followed bank failures in Germany and the U.S. The idea was to have equivalent risk standards in all the principal lending countries. The agreement required banks to increase their capital if they increased mortgage loans and other risky assets.

The banks responded, however, by developing instruments that avoided higher reserves by moving risky loans off their balance sheets. Risk moved to all corners of the global marketplace. We find out who holds the risky assets when they announce they are about to fail.

The response to the Basel regulation is not unique. The first principle of regulation is: Lawyers and politicians write rules; and markets develop ways to circumvent these rules without violating them."

A similar argument can be made with respect to taxes. We raise rates, then give companies loopholes, then watch them spend billions to consultants and lawyers to help them exploit the loopholes. Why not lower the rate and cut the loopholes? The IRS (ie taxpayers) save money chasing people down and making sure they paid enough and businesses have more money to invest in their operations or pay employees or themselves. The argument for decreased regulation really isn't much better.

"Obama calls for $30 billion stimulus plan" from Reuters:

"Democratic presidential candidate Barack Obama proposed greater government regulation of the U.S. financial system and a new $30 billion economic stimulus plan on Thursday in response to the housing crisis."

See above regarding regulation. I think we should call him "O Big Spendin' Obama". All of his policies are very expensive. He plans on cutting taxes on the middle class, effectively creating another group of the population that doesn't add to the pot, while raising taxes on the rich, increasing their proportion of the funding.

"A Foolish Immigration Purge" NYTimes editorial:

"Leave it to the Bush administration to throw thousands of law-abiding American workers and companies off a cliff in perilous economic times.

That would be the effect of its decision to press ahead with a bad idea: to force businesses to fire employees whose names don’t match the Social Security database. The purge is part of a campaign — along with scattershot workplace raids and the partial border fence — to make a show of tackling the broken immigration system...

The burden on law-abiding companies would be great: thousands of dollars to comply with the rules, and thousands more to fire and replace workers. An honest employer who does things by the book would face an excruciating choice — to keep good workers despite dubious “no-match” letters and face harsh fines, or to fire them and face discrimination lawsuits.

All this churning, meanwhile, will be a boon for the unscrupulous businesses that hire off the books and have no use for W-2s. It’s a law-and-order strategy that undermines law and order."

As to be expected, a NYTimes editorial critical of Bush, but I agree, even if the only reason Bush is taking this route is because of political pressure from the conservative base. We have one law, limited immigration, that is short-sighted policy. The, because the incentives exist, a desire to feed your family and the profit motive, for workers and employers to skirt that law, they do. Next, after years of looking the other direction, the government is spending lots of money to try to enforce the law, which again is short-sighted, but is especially so during a period of economic uncertainty. This in turn creates further incentives to work around the law because the original incentives to skirt it are still there.

Wednesday's interesting reads

"Union May Sue if Too Many Floridians Demand School Choice" from Cato@Liberty:

"So the Florida Education Association is saying that if too many poor parents want to escape the public schools and get their kids into independent schools, it will shut them and this whole program down.

That is evil."

I can't imagine how the teachers feel they have been wronged by parents being able to decide for themselves which school they'd like to send their kids to. Another example of groups with a little power trying to use that power to coerce people to do things the group feels are in the best interest of the people.

"Housing prices should be allowed to fall: Paulson" Reuters:

"A correction was inevitable and the sooner we work through it, with a minimum of disorder, the sooner we will see home values stabilize, more buyers return to the housing market, and housing will again contribute to economic growth," he said on prepared remarks for delivery to the U.S. Chamber of Commerce.

The U.S. Treasury chief also said no one should conclude that broker-dealers and other big financial firms will get permanent access to new lending facilities made available by the Federal reserve to ease market stresses."

Reason spoken. Finally.

"Does Bear Stearns Bailout Set a Bad Precedent?" by Russell Roberts (HT: Club for Growth):

"[P]rofit does play a major role in making our world go round. Without profit, there's no point in taking risks. Without risk-taking, there's no investment. Without investment, there's no growth. Profits are the cornerstone of our economy and our way of life.

But as Milton Friedman liked to point out, our economic system isn't just based on profit. It's a profit and loss system. It's the combination that sustains and enhances our standard of living.

Yes, the potential for profit encourages people to take risks. But without the potential for loss, you have reckless risk-taking. You have risk-taking without prudence. Without the potential for loss, irresponsibility goes unpunished."

People are afraid of profit-making as if it's something sinful. Greed and self-interestedness are the forces behind profits, so there is no virtue in making a profit. But as he says, without the potential for profits, there would be no investment, innovation, and growth. On the other hard, though, without the potential for loss, you have excessive risk-taking and moral hazard.

"Seriously, How Do You Flip from Romney to Obama?" Stephen Bainbridge (HT: Glenn Reynolds, via Club for Growth):

I have no idea.

"Artificial Standards" Radley balko at Fox News (HT: Club for Growth):

Just kind of an update to this post talking about the mortgage guild. My favorite:

"IJ has been successful defeating laws in several states that would require African-American hair-braiders to obtain a beautician's license, which generally means thousands of dollars on cosmotology school, and accumulating hundreds of hours of training they don't need."

"Why Give Shoppers This...If They Already Have This?" Chicago Tribune editorial (HT: Club for Growth); you've got to click on the story to see the picture:

"[T]his controversy has always been more about what's on the shelves than how many shelves there are. Wal-Mart is the nation's largest retailer—and the nation's largest grocer. Organized labor is determined to protect its unionized ranks at area Jewel and Dominick's grocery stores. That means it's determined to keep Wal-Mart and its big grocery departments out of Chicago."

Just like the licenses, this is just protectionism on a local scale. Russ Roberts weighed in on this story here.

Tuesday's interesting reads

"We Eagerly Await Your Orders, Ma'am" from Cato@Liberty:

Quoting Hillary Clinton: "We need a president who is ready on Day 1 to be commander in chief of our economy."

Only a few countries have successfully had a commander in chief of the economy. Germany in 193...wait, not that one. USSR starting in the 192...sorry, wrong one again. Cuba under Castr...Well, maybe I'm wrong. I'm not sure there has ever been a commander in chief that worked. FDR tried a little, but after eight years, it took a war to pull us out of the Depression.

"The "Too Simple to Write a Book About It" Diet" by Bryan Caplan at EconLog:

He basically lost a little over 20 pounds over nine months by doing two things: 1) stop eating when he wasn't hungry and 2) ease up on the soft drinks. As my wife knows, I have a hard time leaving food on my plate. I feel like I'm wasting food, and by extension money, when I do. In some cases, I can save money by not finishing the plate (because I can save it for leftovers, again, something she knows I have a particular fondness for). However, for the most part, there is no money saved by continuing to eat.

"The Return on Malthus" Free Exchange at Economist.com:

He's talking about the article in the WSJ yesterday (I commented on this article here). He seems to be a little more pessimistic than I am. I have a lot of confidence in our ability to develop technologically as well as our ability to adapt. The prescient passage from his post:

"Whether or not these difficulties lead to disaster depends on two key questions. To what extent will policymakers allow consumers to feel higher prices, thereby incentivising demand reduction? And, how quickly can we come up with new technological workarounds? Much will depend on the answers."

Essentially what needs to happen is for government to get out of the way and let innovation occur.

"Whither the Derivative?" also from Free Exchange at Economist.com (I actually missed this yesterday):

"The perception has become that this makes them opaque and difficult, if not impossible, to regulate. Whenever anything comes along that is unfamiliar, but not yet fully understood, there exists a temptation to label it as uncategorically dangerous. But limiting innovation because of uncertainty constrains growth. The market for derivatives has allowed investors to take positions they never could before. But that is not necessarily a bad thing.

Allowing investors to take the risky position they desire makes more than just Wall Street traders better off...

The growth of the market out-paced the infrastructure to properly understand the implications and how to best regulate it. Things have recently gone badly, but that is not justification for excessive regulation. This will only make the problem worse. The market exists for these products. Regulation may only give people an incentive to come up with even more opaque products, which will lead to even greater uncertainty."

I really think we need to make sure we don't let the pendulum swing too far as people call for increased regulation of financial derivatives.

"Of Markets and Mortgages" WSJ op-ed by Ethan Penner:

"I also learned that there is mortgage money available for borrowers willing to put up cash, and that there is still in place a very efficient lending and closing system to service these borrowers. The U.S. home-finance system is still the best in the world. The problem is price discovery.

And for price discovery to happen, the government needs to get out of the way, encourage transparency, and let the market resolve this crisis. Lenders, financiers and their regulators need to let the market determine the value of these assets. Let us not forget that the only value of an asset is what someone will pay for it, not some theoretical value derived from a complex computer model."

I'm a big fan of letting market participants figure out for themselves what things are worth. The more government intervenes, preventing investors from discovering market-clearing prices, the longer the pain will last. I do disagree with one thing he said later in the article:

"[N]o test is required for investment managers who make investment decisions on behalf of investors [unlike the Series 7 for those who sell securities]. This doesn't make too much sense, especially with regards to those who are charged with making investment decisions on behalf of municipalities and pension funds. Perhaps the SEC should mandate that these individuals be tested, and perhaps retested regularly, and licensed to represent the investor -- particularly the more vulnerable among us."

I don't think this would accomplish anything. A test would do (or would have done, if required beforehand) nothing to keep things like this from happening. So many investment are behavior-driven, reflecting the investors given aversion to risk. A test isn't going to change that. Besides, one of the biggest causes of the current crisis was that so few investors, if any, really understood all of the risks of these securities. They knew how they worked and the agreements the governed their structure, which is probably all an exam would cover. If no one understands the risks, who would administer the test?

"Trade and National Defense" by Don Boudreaux at Cafe Hayek in response to a letter in the WSJ crying foul in the Boeing/EADS fuel tanker story:

"Adm. Rohrer gripes that "EADS has received tens of billions of dollars in illegal subsidies from the French and other European governments." Translation: European taxpayers now foot part of the bill for Uncle Sam's weaponry, giving Americans more resources to spend (if they wish) on national defense and European governments fewer such resources."

I don't think many people understand how a country giving subsidies helps consumers of other nations. In this case, we're the consumers who don't have to pay for the subsidies, just enjoy the benefits.

I posted this comment:

"The same argument is/was made to support farm subsidies: our national security depends on our ability to feed ourselves. I don't buy it. Like so many things, the US will never be defense, food, energy, etc independent. Nor should we ever make that the goal."

"Argentine Farmers Lash Out at Government Restrictions" from Yahoo:

Apparently the government down there has introduced export taxes on farmers. They, understandingly, don't like it. Here's why the taxes were put there in the first place:

"Government officials counter that farmers have earned record profits as international commodity prices have soared over the past two years and can afford to pay the higher taxes. The new system raises taxes when prices rise and reduces them when prices fall."

Sounds really similar to the proposed windfall profits taxes for oil companies. What the government down there presumably doesn't realize is that if you tax something, the less of that thing you get. In this case, the more you tax exports, the less you export. On the other hand, may that's the idea. If they export less food, that keeps more food in domestic markets, driving down prices. The consequence of that will be that some farmers will be driven out of the farming business and will have to turn to another means of subsistence.

Monday's interesting reads

"New Limits to Growth Revive Malthusian Fears" in WSJ by Justin Lahart, Patrick Barta, and Andrew Batson:

As a background, Malthusian refers to ideas proposed by Thomas Malthus that the earth's population could only grow for so long using the earth's resources and will eventually be forced to revert back substantially.

"As the world grows more populous -- the United Nations projects eight billion people by 2025, up from 6.6 billion today -- it also is growing more prosperous. The average person is consuming more food, water, metal and power. Growing numbers of China's 1.3 billion people and India's 1.1 billion are stepping up to the middle class, adopting the high-protein diets, gasoline-fueled transport and electric gadgets that developed nations enjoy.

"The result is that demand for resources has soared. If supplies don't keep pace, prices are likely to climb further, economic growth in rich and poor nations alike could suffer, and some fear violent conflicts could ensue...

"The world cannot sustain that level of growth, he contends, without new technologies...

Today's dire predictions could prove just as misguided as yesteryear's.

"Clearly we'll have more and more problems, as more and more [people] are going to be richer and richer, using more and more stuff," says Bjorn Lomborg, a Danish statistician who argues that the global-warming problem is overblown. "But smartness will outweigh the extra resource use."

Maybe I'm just an optimist, but I think that we will in fact be smart enough to find away to use our resources more efficiently. We'll come up with the technologies we need to live. Like I mentioned/quoted here, $100 is the answer, not the problem.

"Home Resales Rose 2.9% Last Month As Median Price Dropped 8.2%" story from the WSJ by Jeff Bater:

"Existing-home sales climbed for the first time in seven months during February as buyers took advantage of sharply falling prices...

"Falling prices improve affordability and encourages people to purchase. At the same time, falling prices can keep would-be buyers from signing off on property as they wait for still-lower price tags.

"NAR economist Lawrence Yun was encouraged by the 2.9% sales gain. "We're not expecting a notable gain in existing-home sales until the second half of this year, but the improvement is another sign that the market is stabilizing," Mr. Yun said."

I don't think we should be surprised by this. The news tells us a couple of things. 1) The government should get out of the way and let the home prices fall where they will. They should avoid passing legislation that will artificially inflate demand in an attempt to keep prices from reaching their own natural level (like the one from my own Johnny Isakson I mentioned here). 2) When people feel the prices are at a low-enough level, they will buy. For now, they seem to be putting it off. Eventually, though, they will buy homes and the prices of those homes will likely resume a historically normal appreciation closer to inflation or population growth.

"Political Pendulum Swings Toward Stricter Regulation" story from the WSJ by Elizabeth Williamson. The key quote is from Glenn Hubbard, dean of Columbia's business school and former economic counselor to Bush 2: "The hope is we won't overreact." Don't count on it.

"'Huge Food Shortage In North Korea'" (HT: Club for Growth): Andrew Roth wasn't surprised and neither am I.

"Only citizens who show absolute loyalty to leader Kim Jong Il and his regime are allowed to live in Pyongyang and are considered better off than their fellow countrymen.

But the food situation, which has mostly been felt in rural areas where rations have been suspended since November, has now spread to the city, according to the South Korean aid agency.

"Even ranking officials have run out of their (rationed) food supply, while a ban on (private) trade is strictly maintained," said an unidentified city official quoted by Good Friends.

"It is nothing but a death sentence.""

"Averting a Crisis" NRO editorial:

"We understand that politicians feel the need to “do something.” But what they most need to do is get out of the way of a market adjustment. Housing prices need to fall far enough for people to start buying again. People who cannot afford to own homes should go back to renting."

I couldn't resist. Sound familiar?

"Bogotá Eyes the Irish Model" WSJ commentary by Mary Anastasia O'Grady:

"Before Mr. Plata became trade minister last year, he headed a government export agency. "We starting going to Ireland several years ago, he says, "because we were looking at countries around the world that had been successful in attracting foreign direct investment. What we found was that Ireland had lowered its corporate tax rate from 40% to 12.5%," and as a result "was attracting investment, had lowered tax evasion and had increased tax collection. We went back to Colombia and said, 'why don't we just bring [our corporate rate] from 38% to 12.5%.'"

"That wasn't a popular view with Colombia's treasury department. "It got me kicked out of their offices," Mr. Plata recalls.

"No surprise there. Bean counters in every treasury in Latin America have tax-cut phobia in their DNA. It explains why they often get jobs at the International Monetary Fund in Washington after the collapse of the governments they've served back home. At the fund they can put into practice their deeply held convictions that the only responsible fiscal policy is one built on a static analysis to discover the "right" tax rate. Embracing the notion that production creates its own demand, and that government revenues expand under a low-tax regime, is considered high-risk behavior."

"A Wal-Mart 'Expedition'" New York Sun Editorial (HT: Club for Growth):

"The same City Council that is preventing Wal-Mart from opening a store in New York City is using taxpayer money to pay a non-profit group in the Bronx to drive senior citizens an hour outside New York to shop at Wal-Mart. The city isn't saying that's what it is paying for, but money is fungible, and the group is 60% government funded. So the politicians get to claim credit with the unions for keeping Wal-Mart out of the city while also claiming credit with the seniors for providing them access to every day low prices. Ordinary New Yorkers, who work and pay taxes, are the ones who pay the price. Their city is deprived of the sales tax revenue that Wal-Mart would bring. If they don't have two hours to spend traveling or a non-profit to subsidize their shopping trips, they can't shop at Wal-Mart. Why not just let Wal-Mart open in New York City and eliminate the need for the van rides?"

"We Don't Need a Mortgage Guild" WSJ op-ed by Charles Wheelan and Morris Kleiner:

"Treasury Secretary Henry Paulson Jr. has announced plans to establish stringent national licensing standards for mortgage brokers. This is not a good idea.

The relationship between licensure in various professions and the quality of service is ambiguous at best...

Licensure has three basic problems. First, any kind of regulation makes it harder to enter a profession; that's the point of it. But restricting entry raises the cost of service, which means that some people will either skip the service or try to do it themselves...

Second, licensing requirements don't always have much to do with being good at the profession. Teachers are an unfortunate example. The current licensing requirements in most states have little connection to success in the classroom...Quality matters; licensure doesn't guarantee quality...

Finally, licensure may make consumers worse off by deterring talented people from entering a profession...

The politics of [licensure] make perfect sense, even if the economics don't. Most professions don't have licensure thrust upon them; they seek it."

Milton Friedman's Capitalism and Freedom is what first got me thinking about licensure. I come from a profession that requires licensure, public accounting, and I still think it's a bad idea. I think certified public accountants should be more like chartered financial analysts -- merely an information point that shows your knowledge, not a requirement for practice.

A company is required to have its books audited: who does it ask to perform the audit? The law requires a CPA. Most public companies, however, don't hire just any CPA, they hire one of the Big 4 firms of E&Y, Deloitte, PwC, or KPMG. They don't hire the small firms that also hires CPAs, but the big firms because those who use those audited reports trust the Big 4 firms more than they do the smaller firms to do the job right. If they all of a sudden weren't required to hire CPAs to perform their audits, instead being able to hire anyone they chose, I'd guess they'd still choose to hire the Big 4 firms. Why? They could save audit expenses by using a less prestigious firm. They do because the premium they pay for the services these firms provide brings with it greater trust of the audited results by the capital markets, resulting in a lower cost of capital and higher valuations. In other words, they are willing to pay more for the reputation of the firm.

I don't think companies should be required to pay to have their books audited by a CPA. If they chose not to have them audited by a CPA, the banks who lend them money could simply charge a higher interest rate to compensate for the perceived, real or not, higher risk. If the company borrowing the money wants a lower rate, they pay for a CPA. A CPA would therefore cost more than a non-CPA. So if someone wants a bargain audit, they should be able to buy it.

The weekend's interesting reads

"'Pay day' loans exacerbate housing crisis" from Reuters:

I've actually seen this topic discussed a few times over the last few months. The first was an op-ed in the WSJ in favor of pay day loans (I can't find it right now; if I do, I'll add it later). The second was this unfavorable op-ed in the WSJ by Bill Clinton and Arnold Schwarzenegger, which in turn prompted these letters. In searching for the first op-ed, I found this article in the WSJ that was unfavorable.

The thing that caught my eye with the Reuters article was that it said it would make the housing crisis worse than it already is. It actually never made the case for "exacerbat[ing] the housing crisis;" it only made the point that payday loans are a bad thing. All it did to support the title was simply to quote someone from an "umbrella group of housing counseling agencies" as saying, "We expect pay day loans will make the housing crisis worse," followed by no explanation of why. I think payday loans are in fact prolonging the housing crisis by allowing homeowners to continue to borrow to make ends meet, putting off foreclosure and keeping them in houses they can't afford. I wonder if that's what article's writer had in mind.

I can understand everyone trying to make life easier on those who have to use payday lending, but banning payday lending isn't the answer. People go to payday lenders because they need the money and these types of lenders are the only other legal source to do it. Banks won't lend them money if they don't an ID or permanent address in addition to the fact the banks can't charge them an interest rate that reflects the risk of the loan (due to usury loans). I think it's fair to assume they've borrowed as much as they can from family and friends. If they don't have payday loans as an option, the next choice is to borrow from illegal sources, such as loan sharks than have equally illegal methods of collecting payment, or to turn to illegal activities to get the money.

This reminds me of an article on The Library of Economics and Liberty by Russ Roberts called "Pigs Don't Fly: The Economic Way of Thinking about Politics". He had a section called "Bootleggers and Baptists", in which he argues that bootleggers actually support bans on Sunday sales of alcohol because if people have fewer options to purchase alcohol legally (on Sunday at the grocery store), they'll turn to buying alcohol from illegal options (from the bootleggers). Payday lenders probably support usury laws because it pushes more clients in their direction as banks are not able to (directly, at least) charge the higher interest rates payday borrowers would require. Likewise, illegal loan sharks probably support crackdowns on the payday lenders because, again, it pushes more clients in their direction.

"Clarence Thomas: Mr. Constitution", WSJ Commentary: The Weekend Interview. Just a few quotes I liked:

"My job is simply to interpret it." In that process, the first place to look is the document itself. "And when I can't find something in that document or in the tradition or history around that document, then I am getting on dangerous ground. Because that's when you drift so much more towards your own policy preferences...

"Simply following your own preferences is both flawed and illegitimate, he says. "But if that is difficult, does that difficulty legitimate just simply watching your own preference?" By doing that "I haven't cleared up the problem, I've simply trumped it with my personal preferences...

"This insistence by the Justice on judging based upon the law, and not on who the parties are, presents a stark contrast with today's liberal orthodoxy. The liberal approach -- which confuses law-driven judging with compassion-driven politics, enthused with a heavy distrust of the American political system's fairness -- was recently articulated by Democratic presidential candidate Barack Obama, who emphasized the need for judges with "heart" and "empathy" for the less fortunate, judges willing to favor the disempowered...

"And why doesn't he ask questions at oral argument, a question oft-posed by critics insinuating that he is intellectually lazy or worse? Mr. Thomas chuckles wryly and observes that oral advocacy was much more important in the Court's early days. Today, cases are thoroughly briefed by the time they reach the Supreme Court, and there is just too little time to have a meaningful conversation with the lawyers. "This is my 17th term and I haven't found it necessary to ask a bunch of questions. I would be doing it to satisfy other people, not to do my job. Most of the answers are in the briefs. This isn't Perry Mason.""

"We Need a New Bargain With Big Oil" WSJ op-ed by Joseph P. Kennedy:

I love how everyone likes to go after those with deep pockets. If they're making money, they must be doing something unethical to do it. Taxing "big oil's" profits would simply be taxing the profits of every person who owns these companies in their investment accounts or 401(k)'s. The best line in the article was this:

"More than a century ago, President Theodore Roosevelt, a Republican reformer and environmentalist, raised the wrath of his own class in taking down Standard Oil and the petroleum oligarchs for the good of the nation. The new social compact did not destroy the industry, it simply managed it for the good of our country." My emphasis.

This prompted Don Boudreaux to write a letter in response, quoted here. I also heard a podcast with Don Boudreaux here as well as an interview with Milton Friedman here that talks about how most of our anti-trust policy over the years has been misguided. Instead of targeting companies with monopolies that raise prices, it's targeted companies that lower prices to a level that precludes competition. Mr. Kennedy's Standard Oil example is just one of those anti-trust targets.

"Certifying Parents" WSJ editorial:

"A California court ruled this month that parents cannot "home school" their children without government certification. No teaching credential, no teaching. Parents "do not have a constitutional right to home school their children," wrote California appellate Justice Walter Croskey...

That so many families turn to home schooling is a market solution to a market failure -- namely the dismal performance of the local education monopoly. According to the Home School Legal Defense Association, the majority of states have low to moderate levels of regulation for home schools, an environment that has allowed the option to flourish, especially in the South and Western U.S. Between 1999 and 2003, the rate of home-schooling increased by 29%.

For some parents, the motive for home schooling is religious; others want to protect their kids from gangs and drugs. But the most-cited reason is to ensure a good education. Home-schooled students are routinely high performers on standardized academic tests, beating their public school peers on average by as much as 30 percentile points, regardless of subject. They perform well on tests like the SAT -- and colleges actively recruit them both for their high scores and the diversity they bring to campus."

I think this is ridiculous. I mentioned this to my mom who said that she agreed with it because of someone else she knew that was in eight grade and being home-schooled despite not being able to read. I think there are plenty of anecdotes we could come up with to support either side. At the end of the day, I think people should be free to educate their children however they choose, for whatever reason they see necessary.

Friday's interesting reads

"Thoroughly Modern Do-Gooders" op-ed in the NYTimes by David Brooks:

"Earlier generations of benefactors thought that social service should be like sainthood or socialism. But this one thinks it should be like venture capital...

[T]hey are not that interested in working for big, sluggish bureaucracies. They are not hostile to the alphabet-soup agencies that grew out of the New Deal and the Great Society; they just aren’t inspired by them...

The older do-gooders had a certain policy model: government identifies a problem. Really smart people design a program. A cabinet department in a big building administers it.

But the new do-gooders have absorbed the disappointments of the past decades. They have a much more decentralized worldview. They don’t believe government on its own can be innovative. A thousand different private groups have to try new things. Then we measure to see that works."

He goes on to talk about how a group of these social entrepreneurs want the government to set up a "network of semipublic investemnt funds" admininistered in local communities. These funds, seemingly, would distribute money to the programs that produce results. The author admits the allowing government agencies into the decision-making process can be hazerdous due to their tedency to interfere, though they would ideally give the freedom to the entreprenuers themselves to meet required standards.

If the implementation of funds like this would reduce the overall government payroll, I'm for it as a first step. In other words, if this cuts down on government spending in redundant programs and we're spending the same amount of money, only in more efficient ways, I think it's ok.

However, I really doubt this will be the case. What will happen is that current programs and spending will remain in place. They will then put in place additional beauracracies to oversee these programs. Then, because there will be an increased supply of funding, there will also be an increased demand for that funding, recognized in a balloon of new social entrepreneurs. Because the beauracracies will have to choose between worthy projects, they will have to decide, due to the limited amount of funds, which programs are in the community's best interest. Because they can't decide, they'll ask for more money. And government spending continues to grow.

"Corporate Killing" by Quin Hillyer at The American Spectator. I liked all his points, but I didn't quite see how it would be revenue neutral, so I sent him this email:

"Mr. Hillyer,

I really enjoyed your editorial in The American Spectator. I must admit I’ve never read your publication before; I was linked to your piece from the Club for Growth.

I agree with all of the benefits of cutting the corporate tax, but I don’t understand one. I can’t see how cutting the tax would even be revenue neutral, let alone increase revenue. From your article:

“Third, the stronger economy will generate additional tax revenue -- not just indirectly, through overall economic growth, but in very specific ways. How? Because if there are no corporate income taxes and thus net profits are one-third higher, then the capital gains tax collections and dividend tax collections from every shareholder or trader will grow as well, even if the economy as a whole remains static. Think about that again: Even if there is no overall economic growth, the tax revenues from capital gains and dividends will grow -- and if there is growth in the overall economy, then tax revenues from all other sources will increase, too.”

I don’t believe the end result would be net profits higher by a third. I think that would be the case over the short term, but wouldn’t corporate profit margins likely fall to prior after-tax levels over the long term due to increased competition? Industry players will see they can lower prices to capture market share. Absent collusion, the prices will continue to fall until the prices yield margins that are close to what they were before. The result would be that the extra money that would have been paid for taxes and would presumably be available as extra cash flow to the firm (either to reinvest of distribute as dividends) wouldn’t be there. I do believe, however, there will be some long term revenue feedback as prices fall, leaving more money in people’s pockets to spend on other things or to save and invest.

Is there something I’m missing?

Don’t get me wrong, I’m all in favor of tax cuts. I once saw in interview with Milton Friedman where he said he never saw a tax cut he didn’t like because tax cuts constrain government spending. Unfortunately, I don’t see government constraining spending in any meaningful way at any time in the near future.

Thanks again for the enlightening article."

He actually responded with this email:

"Dear Mr. Hutchinson,

Thank you for your very thoughtful letter. You raise some good points. I agree that over time the benefits to/profits for/tax revenue from proceeds of EXISTING corporations would decline back to something approaching stasis, due to competition. But I also believe that MORE companies would be making MORE money because of the generative effects of the tax cut.But here's the thing: The most interesting part of this is that the person who convinced me that this particular tax cut would, for ALL the reasons I cited, pay for itself, is a left-leaning federal-budget columnist for a major publication who formerly worked as a Democratic aide for the Budget COmmittee in the House. He laid it all out for me. And he is definitely NOT a suppluy-sider. Considering the source, I felt like I was on pretty solid ground.

Either way, I truly appreciate your letter -- constructive, informed, thought-provoking. Thanks again for writing.

Best wishes,

Quin Hillyer"

He seems to be saying that this would be one of those tax cuts that pays for itself due to revenue feedback coming from the additional companies created to compete with existing companies etc. I see his point. I don't think it will be revenue neutral, but also I don't think that's a big deal. Tax cuts enhance our tax competition, increasing employment as more companies do business here and fewer jobs are outsourced (because the cost of providing the work is lower).

"Farm Bill Feeds Greed" Los Angeles Times Editorial (HT: Club for Growth):

"For what it's worth, Bush is dead right [about threatening a veto]. Congress is relying on accounting shenanigans to make the farm bill's numbers pencil out, and the bill continues to give outrageous handouts to millionaire farmers at a time when farm income is skyrocketing."

As you know, I'm against farm subsidies in any form to any person. If they can't run a profitable farm, for any reason, I don't think they should be farmers. However, I don't think it matters whether or not the farmers are wealthy or they are "corporate farms". The subsidies distort the market. That's all that matters.

Thursday's interesting reads

"Oy, Hillary" by Benjamin H. Friedman at Cato@Liberty: I don't know all of the arguments, but I really agreed with this statement. I don't think politicians should be beholden to the whims and fancies of the electorate. This leads to sectionalism and creates bad policies that help one group to the detriment of the country. It's one of the things that makes earmarks hard for me to bear. Our elected representatives should place the good of the country as a whole in front of any state bias. And if they can't determine what's in the country's best interest, they should refrain from doing anything.

"Ours being a representative government, the president shouldn’t even unconditionally support the wishes of the American people, but that would at least be the right country." My emphasis.

This was actually posted on Cafe Hayek on Wednesday:

"Is health care a right? I have no idea. What I do know is that treating it like a right can be hazardous to our health."

This was my comment:

"If health care is a right, lets make sure we aren't leaving out anything more important. I would consider food more important than healthcare. We can live a lot longer without health care than we can without food. We do have a right to eat? It's true we have relatively fewer people who go to bed hungry in the US than exists in other countries. Does that mean its less important? Lets make sure all of our people have eaten, realized their right to food, before we worry about health care.

I propose we nationalize the food industry, institute a single payer system. Instead of going to the grocery store with credit card in hand (we have to pay with a credit card due to the lack of funds in our bank accounts to write checks), we simply tell the cashier how many members of our family and they provide our allotment of rice, potatoes, beans, and milk. If we're lucky, we're in the front of the line and get a small chicken leg.

I've thought about this idea of whether its a right or not and where it came from. My guess is that thinking we have a "right" to health care falls under the previously expressed (back in '76) right to life. If we have a right to life, we, by extension, have a right to anything that helps us prolong life, enjoy life, etc. I disagree, but I wonder if that might be the thinking of those who believe it. I also think that calling it a right in the first place is simply an attempt to appeal to the inner Thomas Jefferson in us, a hope our emotions overcome our reason. But we shouldn't be surprised with this, because its the approach modern liberals have used for decades."

Wednesday's interesting reads

Should've posted this yesterday.

"Housing Bust Fuels Blame Game" -- WSJ. I'll write more about this at another time.

Practically the whole Opinion Section of the WSJ:

"Discovering Obama": I still believe that Obama is only going to "unify" a majority that will elect him to office. After that, it'll be liberal business as usual.

"And the cause of all this human misery? Why, "a corporate culture rife with inside dealing, questionable accounting practices, and short-term greed; a Washington dominated by lobbyists and special interests; economic policies that favor the few over the many." Mr. Obama's villains, in other words, are the standard-issue populist straw men of Wall Street and the GOP, and his candidacy is a vessel for liberal policy orthodoxy -- raise taxes, "invest" more in social programs, restrict trade, retreat from Iraq.

Needless to say, this is not an agenda rooted in bipartisanship or even one that has captured a national Presidential majority in more than 40 years. It would be unfortunate if Mr. Obama's candidacy were toppled by racial neuroses, and his speech yesterday may have prevented that. But it also revealed the extent to which his ideas are neither new nor transcendent."

"Inflation Dissent": I think the Fed should be focused on inflation. Anything more than that creates problems down the road.

"Yesterday's policy statement, while allowing that "uncertainty about the inflation outlook has increased," reiterates Chairman Bernanke's view that slower growth and lower "resource utilization" will bring inflation back into the Fed's comfort zone.

Good luck with that. To the extent that the Fed has recently taken extraordinary actions, such as opening up the discount window, to reliquify troubled financial markets, it is doing what is necessary to avoid a financial meltdown. But keeping its eye on price stability is the Fed's main obligation. The silver lining in the Fed's continued accommodation to easier money yesterday is that at least two Fed Governors behaved as if they still believe that."

"More Visas, More Jobs" largely quoting Bill Gates: I've thought for awhile we need to issue considerably more visas to foreign workers on both ends of the skill-scale. Foreigners will only keep us competitive as they have thoughout the last two centuries.

" "Congress's failure to pass high-skill immigration reform has exacerbated an already grave situation," said the Microsoft chairman. "The current base cap of 65,000 H-1B visas is arbitrarily set and bears no relation to the U.S. economy's demand for skilled workers...Today, knowledge and expertise are the essential raw materials that companies and countries need in order to be competitive. We live in an economy that depends on the ability of innovative companies to attract and retain the very best talent, regardless of nationality or citizenship."

The preponderance of evidence continues to show that businesses are having difficulty filling skilled positions in the U.S. By blocking their access to foreign talent, Congress isn't protecting U.S. jobs but is providing incentives to outsource. If lawmakers can't bring themselves to eliminate the H-1B visa cap, they might at least raise it to a level that doesn't handicap U.S. companies."

"Last Exit": Again, I'll go more into the housing problem later.

"[W]e're not talking about unusual numbers of people who suddenly lost their jobs and no longer can make house payments they previously were able to afford -- the circumstance traditionally behind most foreclosures.

Employment was strong when the crisis started and continues (so far) to be quite decent. Yet the mortgage default rate has risen to about twice the average rate of recent decades, and the difference consists largely of people who contracted mortgages their incomes wouldn't support based on a bet that rising home values would bail them out...

The shortest road back from this perdition, as improbable as it may sound, would be to foreclose on and demolish some of the least-wanted houses, with taxpayer money if necessary."

"The Bear Precedent" by Nicole Gelinas: I'm just not comfortable with the idea of the Fed being the one to save the day. Sorry, but I'll quote a lot from this one.

"But even in a world of bad choices, there's always a worst choice. And the Fed, by being so quick to jettison the bankruptcy process, cut off a valuable source of new information to financial markets and blurred the critical distinction between sophisticated and unsophisticated investors...

For the markets, a bankruptcy would have generated something more valuable than a short-term, soon-to-wear-off boost in confidence. That something is knowledge...

A spectacular bankruptcy would shine a bright line on this mess. To start, Bear's trading counterparties and other creditors would have to show themselves and explain their positions to a public examiner. And then bankruptcy lawyers would have to pore through each and every one of Bear's assets and liabilities, making the full autopsy public...

What the Fed has done instead for these sophisticated investors is to offer them a rough approximation of FDIC insurance, even though they are not depositors and knew going in to the deals they had no such insurance...

No doubt these newly protected traders and other creditors are happy, at least for now. But they should realize that, along with government protection, could come all kinds of unwelcome new regulations so that the Fed can protect itself."

"A New Deal for the New Economy" by Rahm Emanual: This is why I'm not a Democrat. A few of the offending lines.

"[T]he fact that our party is still debating [Nafta] 15 years later is proof it hasn't lived up to its hopes." That or we just think it's a good way to pick up some votes in Ohio.

"[W]e must reform the way we educate the next generation of workers to ensure that our nation stays competitive [by] requir[ing] all students to receive one year of training and education after high school -- be it at a community college, technical school, or a four year university." That's right -- if you don't do what we want you to do voluntarily, we'll make you do it. That's the liberal way.

"Covering every child is a moral responsibility." Doesn't SCHIP and Medicaid already do this for the children who need it most? And aren't there a lot of kids the states simply haven't signed up yet? Why does the government need to cover my kids?

"[W]e must support the development of new, energy-efficient technologies that will make energy less expensive for consumers and businesses, help protect the environment, create millions of green-collar jobs, and make our nation energy independent." How is the government supposed to know which technologies to support? They can't. And I believe that any efforts to make us energy independant is not only a pipe dream but also not what we really want.

"Herbert Hoover's Ghost Haunts Markets, Democrats" by Amity Shlaes (not from the WSJ): I really want to read her book called "The Forgetten Man" about the economic impact of the New Deal. I can't find any good, sums it up quotes. Just read the whole thing.

Tuesday's interesting reads

An article in today's WSJ Opinion section:

"Patriot Tanker Games" about the recent decision by the Navy to buy fuel tankers from EADS and Northrup Grumman instead of Boeing. Boeing is pretty upset and quite a few are making a big deal about buying defense from foreign companies, even though Northrup Grumman is an American company and EADS will be building the tankers stateside. Anyway, from the article:

"What's really going on is a familiar scrum for federal cash, with politicians from Washington and Kansas using nationalism as cover for their pork-barreling. Todd Tiahrt, a Kansas Republican, has even talked about a ban on companies whose home governments don't spend 2% of GDP on their militaries, which would include most of Europe. [What's the significance of defense spending as a percentage of GDP?] The numbers about which tanker bid would have created more jobs are impossible to confirm and meaningless. The Pentagon's job is to defend the country, which means letting contracts that best serve American soldiers and taxpayers, not certain companies."


I just thought this was funny. In this post on the WSJ's Washington Wire, the author says Hillary Clinton is "widening her focus". This is the comment I left:

"I think it’s funny that Hillary is being described as “widening her focus.” If she is widening her focus, doesn’t that mean, almost by definition, she is becoming less focused? I can see someone shifting their focus, but to widen it implies a dilution. I think I get the point of the post, but I also think Hillary is grasping at straws and simply postponing the inevitable."

I think this is a great idea. I hope it's allowed.

A new (for me) White Stripes song

I found "Your Southern Can is Mine" on Imeem last week. it's a cover of a song by Blind Willie Mctell. It sounds misogynistic, but I read somewhere that back in the 30's and 40's when he was making his music, black artists had to disguise their dislike of whites and this was a way they did it. I don't know if that's true or not, but it suits me fine. Regardless, it's a fun song.

Enjoy.

A few interesting reads

Since I obviously don't post as often as I'd like, I thought it might be easier to simply post several articles with my thoughts:

"Beyond the Noise on Free Trade " -- Greg Mankiw in the the NYTimes [HT: Club for Growth]:

"The general public, however, is less likely to take its cue from Adam Smith than from Lou Dobbs."

I think this is so unfortunate. I really do. I think it was Bryan Caplan who said somewhere that if you don't know enough about a particular arena of expertise, you really should be agnostic with respect to policies that concern it. In other words, if we don't know at least a little about economics, we should bow out of the debate and let those more knowledgeable create policies. I'll admit it's a pessimistic point of view about democracy, but I agree. More democracy (defined simply as majority rule) isn't necessarily a good thing. For example what if the poorest 70% of voters decided to vote for a one-time 100% wealth tax on the richest 30%? They could pass a constitutional amendment and everything if they wanted. What would stop them? Well, their sense of decency and fairness for starters, but it's possible in a democracy, even if it would have detrimental effects on the economy. Back to the free trade argument about free trade.

Lou-Dobbs populists are creating a huge backlash against free trade, contrary to the opinions of the experts, which, Mr. Mankiw points out, are overwhelmingly supportive of free trade. Either the people who have collectively devoted centuries to the study of economics or the people who have devoted as much time as it takes to turn on CNN at night are wrong.

However, Arnold Kling makes the point that this (economists support of free trade) shouldn't be the reason we support free trade, and I agree with him in the long run. (I really do like his parable, by the way; I've used something similar myself before.) He argues we should put the arguments in terms everyone understands, but I just don't have a lot of faith in our ability to educate the general populace at large in the short run. I think this is especially true with politicians and commentators yelling in our ears and our general unwillingness to change our minds.

Mr. Mankiw also goes on to make a very good point in explaining why not all economists are Republicans: it's because economists, as all of us should be in my opinion, "are not single-issue voters. Like everyone else, they are divided over contentious issues like health policy, the Bush tax cuts and the war in Iraq." Another reason, he adds, is that "many economists don’t really believe the populist rhetoric coming from the Clinton and Obama campaigns." They believe, and I sure hope this is true, that when in office they will likely adopt more reasonable policies.

"It's My Way or No Highway" -- Brandon Arnold at Cato@Liberty:

"But the full story on earmarks isn’t simply their direct impact on the budget. Earmarks are also used by Congressional leadership to raise the public profile of incumbents in tough reelection fights, entice members to vote for controversial bills, and enforce party discipline."

Last week there was a vote on an amendment proposed by S.C. Senator Jim DeMint that would impose a one-year moratorium on the use of earmarks within the Senate. I was 100% behind the amendment and was disappointed it didn't pass. I wish the earmark process was more transparent and these special projects weren't funded by bypassing debate, but to me the biggest issue, like Mr. Arnold, isn't the dollar impact of the earmarks, which is in relative terms quite small. The thing I don't like is that they've become a type of political currency, freely traded on the Senate floor like smokes at the state pen. Their abuse has simply been the attempts of elected pols doing all they can to stay in power. (See the long careers of John Murtha and Robert Byrd.) A podcast about political survival I heard recently talked about how leaders, elected or otherwise, often try to stay in power by handing out goodies to the "selectorate". A $3 million earmark certainly won't break the budgetary bank but it can sure help get the requesting congressman (or woman) get re-elected by "bringing some of their tax dollars home." And if the support of a few key colleagues can ensure the passing of a critical bill (that, presumably, wouldn't pass on its own merits), why not try to persuade them with the funding of a pet local project or two?

"How Minimum Wage Hurts Teens" -- IBD Editorial:

"As a basic point of economics, it's a given that anytime you raise the cost of anything, you will use less of it. As such, the minimum wage hike that took effect in Massachusetts this year has been a job-killer for thousands of untrained youths, many of them minorities...

It's the same everywhere, nationwide or by state: Hiking the minimum wage sounds generous and decent, but in fact hurts small businesses and workers alike, squeezing profits, destroying jobs and forcing businesses to pare back their paid benefits...

Faced with a mandatory hike in their wage costs, small businesses have a choice: either fire workers, raise prices or do both. Just letting people go often is easiest."

Econ 101 (or 110 if you went to BYU).

Grateful for the First Ammendment

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

From the WSJ:

"In August Beijing declared that reincarnated [Tibetan] lamas, or religious leaders, could be appointed only by Beijing's State Administration for Religious Affairs, not by other monks, as Tibet's brand of Buddhism dictates."

As my own church has only recently lost a beloved leader, I'm so grateful to be in the United States where the church can dictate church affairs and doesn't have to follow leaders a state bureaucracy chooses.

$100 oil is the answer...

Not the problem.

I heard this at a dinner I attended back in October or November. The speaker was talking about how afraid we are of $100/barrell oil. When oil gets expensive relative to other options, we start to use those other options. It's basically saying that when we let the price system help us allocate our resources, we're much better off.

I wish I felt ethanol was going to be the answer. Not only is it considerably more expensive, but it's not even certain if it's actually net-net better for the environment. (This is talked about briefly here and some other places I can't find right now.) But all of the subsidies are creating a lot of artificial incentives for investment that might not even become a viable fuel source.

There's an article in Monday's WSJ about the country's efforts to decrease our use of oil. A few quotes and my thoughts:

"Forecasting future energy prices and demand is "like sitting around in 1994 and forecasting (demand for) Web browsers,"... In other words, no one knows whether...Silicon Valley's "clean tech" movement will succeed in [its] effort to do for the way we fuel cars what Netscape or Google did for the way we shop and collect information."

It's really hard to predict the future. This is why the government should not be playing with taxpayers' money. One of the main ideas I got from a book I read called The Road to Serfdom by F.A. Hayek, in arguing against socialism, no one person or group can possibly see down the road and accurately plan for the future needs and wants of each person in a society. The same applies to scientific development. Right now, the government has put a lot of eggs in the ethanol basket, hoping it's right. But how can it know for sure? The answer is it can't.

"Within the next year or two, Americans are going to be pushed as never before to live without burning so much oil, particularly in their cars...[P]eople aren't likely to embrace expensive, new and unfamiliar automotive technology without a big economic push."

On a comment to a WSJ article I read recently, someone mentioned that our "addiction to oil" is a bit of a misnomer. Most of us don't really have an alternative to driving. In Atlanta, for example, unless you live in a few specific neighborhoods, it's virtually impossible to get by without a car. I take public transportation to work, but only after I drive 20 minutes to get there. If public transportation was a better option, like it is in Chicago, more people would live closer to town and go without a car. But, as it was, oil and gas was cheap so we based our decision to live further from the city on that. As the price of gas goes up, we'll be forced to re-evaluate those decisions and we may choose to move. Again, $100 oil is the answer because we're now considering the tradeoffs between paying a lot of money for gas as we commute from our big homes on multi-acre properties and paying less for gas by living closer to town in smaller houses or condos.

I think the allusion is a push from the government, either in the form of a cap and trade system or a carbon tax or of tax breaks. I don't know all of the details of the cap and trade system, but I feel that the carbon tax system would be best IF we can figure out exactly how to set the tax. If we can't figure out the right way to tax it, we shouldn't try. The biggest economic push will come from more expensive oil.

"Putting the U.S. economy on a course to produce less carbon -- via a government system of carbon "caps" -- "is going to require a kind of social commitment the likes of which we haven't seen since World War II," said Jason Grumet, an advisor to Sen. Barack Obama."

Anything that requires a wartime-like "social commitment" to be successfull will fail. I have no question about that. When it does fail, those of us who aren't fully committed to helping out voluntarily, will be forced to help. It is, after all, for the good of society and we should all be committed to helping, whether you like it or not isn't the governments concern as long as they can be elected with a majority. Wasn't this one of the aims of communism? See Ayn Rand's The Fountainhead for a little commentary about the good of social commitment. Hayek discusses it as well.

Looking for something to do

When I was at BYU, I attended a stake (group of congregations, or wards, if you don't know) that was part of a pilot program the church was doing. Each ward, in additional to its traditional leadership structure, was divided into ten committees. Examples included things like, temple, missionary, sabbath day worship, music, public affairs (service), publicity (basically just outsourced P.R. for all of the other committees), activities, etc. What invariably happened each semester was that the co-chairs of these committees would decide with their various committee members (by the way, the process of how people were put in committees was a hairy process; it was called a "draft" but often more closely resembled the floor of a stock exchange) that they wanted to host either a fireside or a ward activity sometime during the coming semester. That means that the music committee wants a music fireside, the public affairs committee wants a service fireside, temple wants a temple fireside, missionary missionary, you get the picture. Everyone thought they needed to "do something" independent of the other committees.

It was similar on my mission. Every morning, we needed to be out of our apartments by 9:30 in order to be obedient. We were also expected to keep our records up to date, which is hard to during the other hours of the day. It would have been much more effective to designate, say, one hour each Tuesday morning to update the area book, instead of knocking on empty doors. But we needed to be out working, not sitting inside taking care of "administrative" matters that could help other missionaries after we left. We needed to be out doing something.

I was thinking about that recently as I was reading Jacob 1:19 (in the Book of Mormon) where he talks about "magnifying" his calling. Contrary to some, I don't think magnifying a church (or otherwise) responsibility necessarily means to expand it. Instead, I think it means to take the most important tasks and do them correctly; it requires us to focus. When we view anything through a magnifying glass, we see the thing itself bigger, more clearly, and we see less of the other stuff around it. The less we see of the other stuff that doesn't matter as much, the more we see of the important stuff that does matter, letting us place greater emphasis on it.

During this political season, I've been thinking quite a bit about what I belive the proper role of government should be. Consequently I believe it should be small and generally should stay out of people's lives. Disappointingly, the Republican party, one that claims to be a believer in small government, hasn't done that as much as I wish it had. All politicians, it seems, have a "solution" to a "problem" that frequently requires them to "do something" to fix it. Almost without fail, their doing something requires government getting more involved, not less, because doing something is what appeals to the political base. The recent tax rebate/economic stimulus is a case in point. In order for any politician (or candidate for political office) to appear assertive in dealing with the economy, they need to be acting to help us steer clear of the coming recession.

Going back to the magnifying glass analogy, congress and the president need to focus more on the task of governing and less on a lot of the other jobs they have assumed for themselves over the years. I saw an interesting quote about the actual and assumed roles of government from Jonah Goldberg (HT: Arnold Kling):

"The fundamental insight of libertarianism is that the government is the government. It cannot be your mommy, your daddy, your big brother, your nanny, your friend, your buddy, your god, your salvation, your church or your conscience. It is the government. A big bureaucracy charged with certain responsibilities, some of which it is qualified to carry out, many of which it is not."

Falling Home Prices

This has actually been on my mind of late. Living in Georgia, one of my US Senators is Johnny Isakson. Recently he proposed some legislation that has the effect of keeping housing prices from falling too far. Here is a link. I think this is a bad, bad idea. It's akin to the government back in 2000 going out and buying billions of dollars of deflated technology stocks in an attempt to preserve everyone's retirement accounts. He's trying to artificially spur demand before the prices fall to reasonable levels. What does he think will happen, if this bill is passed, when the window of these tax credits passes? Demand will fall off again and we'll be in a situation similar to what we're in now.

Sooner Home Prices Fall, the Better -- from RealClearMarkets

"Gloom. Doom. Calamity. Home prices are tumbling. We're bombarded by somber reports. But wait. This is actually good news, because lower home prices are the only real solution to the housing collapse. The sooner prices fall, the better. The longer the adjustment takes, the longer the housing slump (weak sales, low construction, high numbers of unsold homes) will last...

To be sure, all this weakens the economy. No one relishes evicting hundreds of thousands of families from their homes. Eroding real estate values make many consumers less willing to borrow and spend. Some economists fear a vicious downward spiral of home prices. More foreclosures depress prices, increasing foreclosures as people abandon houses where the mortgage exceeds the value."

I talked about this earlier with respect to the need to let house prices come down. Yes; this is a very hard thing to propose. As the author mentions, no one relishes the thought of evicting all of those people. For many who are evicted, they will be in a better position because now they have the freedom to move into a place they can rent and likely pay less than they currently pay.

Now as far as a spiral down, I don't see that happening for a couple of reasons. 1) People got to live somewhere. I mean, these people getting evicted will move somewhere and help the market there by increasing demand. That leads to number 2) House prices won't fall below a certain floor imposed by the rents that could be charged to a renter.

An example. Suppose that your monthly payments are $2000/month and you can't afford them, so your evicted and the price of your (old) house falls. Further, suppose that in the current rental market, there is no way anyone could rent that house out for anything more than $1700/month. Assume that you and lots of other foreclosed on former homeowners all move to apartment complexes.

If all these people move to apartments, the rents at those apartments will rise (say from $1500 to $1700/month) as the would-be renters bid it up. Now I'd guess that all things equal, people would rather live in a house than an apartment, so some investor will notice that they can capture some of that demand by buying a home and renting it out.

What is the least they would pay for that house? Zero, of course. But they likely aren't the only astute investor, so they have to compete with the others who also see this opportunity and probably end up buying the house for a price that lets them charge the renters, say, $1750 or $1800/month. They will also be competing with some of the people who are renting for $1700/month because, again, those renters would rather live in a house and some would rather own a home than rent one.

The biggest losers in all of this will be 1) those who gambles with their homes and lost some equity and 2) the home builders. The home builders really made some hay during all of this, probably more than they would have made otherwise, and will likely see some major drawback as their excess inventories get purchased over the next few months and years.