Five years ago, as the housing bubble was ramping up, affordable housing was a big issue.  Today, as housing prices have fallen after the bubble burst, I may be one of the few people who thinks housing prices are still too high. [Also see the recent book, Housing America: Building Out of a Crisis.]

You have likely seen the news that there was a big decline in home sales in July.  Economists should think that if the quantity supplied (of anything, including housing) exceeds the quantity demanded, that is an indication that prices are above the market-clearing level, and should fall.

One factor keeping housing prices up is federal government policy.  It is not surprising, for example, to see a big decline in housing sales in July, after the federal government’s tax credit program for new home buyers expired.  The government’s mortgage refinancing initiatives, the Fed’s purchase of toxic mortgage loans, the propping up of Fannie and Freddie, all have supported house prices.

We shouldn’t be supporting house prices; we should be letting them fall to their market-clearing level.  To do otherwise will just prolong the period of adjustment and delay recovery.

If we are really concerned with providing Americans with affordable housing, the lower housing prices fall, the better.

Certainly, falling house prices have hurt lots of people.  Some financial institutions made some bad decisions investing in the housing market, but fate of those financial institutions is a peripheral issue.  Speculators and house flippers found that their business models that worked during the bubble hurt them during the bust.  Should public policy prop them up?

Ordinary homeowners have been hurt less, or maybe not at all.  If they bought a house as a residence, they agreed to make a monthly mortgage payment in exchange for living in their residence, and that hasn’t changed.  If the housing bubble hadn’t burst, they would be living in the same home, paying the same monthly payment.  It did, but their residence, and their monthly payment is what it would have been without the collapse, even if they now find themselves “underwater.”

What about people who have to sell their homes?  Of course this is a problem for people who bought more home than they could afford, but as noted already, that problem is largely the result of government policy.  Let’s not keep making the same mistakes by supporting housing prices.

Keep in mind that every time a house is sold, it is also bought.  The seller who sells at a low price sells to a buyer who buys at a low price.  The disadvantage to the seller is offset by an equal advantage to the buyer, so on net that is a wash.  And, if we really were concerned about affordable housing, the balance, from a public policy standpoint, might tilt to favor buyers who can now buy at lower prices.

People who have to sell because, for example, they are changing jobs and moving to a new community, will be minimally impacted.  They have to sell their existing house for less, possibly for less than they paid, but they have the opportunity to buy another house for less too.

People benefit when the things they want to buy are less expensive.  That applies to houses as much as to computers.  And we still have too many policies that keep housing prices up, like zoning and other land use regulations, and building codes.

Meanwhile, we have a host of short-term policies to try to prop housing prices up.  They are counterproductive.  We should let housing prices seek their market-clearing level, which indeed will leave speculators, some financial institutions, and some homeowners financially worse off, but at that point the housing market can start to recover, and be a boost to economic activity rather than a drag.

I normally do not circulate “viral email” but these rebellious ditties remind me of what circulated in the run up to the 1938 election—an election that walloped the New Deal upside the head (although existing programs remained in place). Source: Origin unknown.

Following this Dr. Seuss post is some anti-New Deal humor. Critics of the New Deal normally referenced Alice in Wonderland Economics when talking about the New Deal. Today it is Dr. Seuss Economics.

Enjoy!

2010:

I do not like this Uncle Sam, I do not like his health care scam.

I do not like these dirty crooks, or how they lie and cook the books.

I do not like when Congress steals,

I do not like their secret deals.

I do not like this speaker, Nan ,

I do not like this ‘YES WE CAN’.

I do not like this spending spree,

I’m smart, I know that nothing’s free,

I do not like your smug replies, when I complain about your lies.

I do not like this kind of hope.

I do not like it. nope, nope, nope!

1930s:

“‘Twas the night before Christmas

When all through the land,

The ballots were ready, the polls fully manned

The stockings were hung by the chimney with care

Because good St. Franklin soon would be there.

The people were snuggled all warm in their beds

With visions of alphabet plums in their heads;

And voters were dreaming of how, the next day,

They’d march to the polls for old PWA

When the jingle of sleigh bells was heard from afar

And swift through the night roared a big White House car

From out of the packages, piled high to see

Shone the bright, smiling face of the good Saint F.D.

Each bulging package a dollar sign wore

And down every chimney he poured them, galore….

And they heard him exclaim, as he flew out of sight;

‘Merry Christmas to all–and be sure you vote right!”

***

“Roosevelt is my shepherd; I am in want

He maketh me to lie down on park benches;

He leadeth me beside the still factories.

He disturbeth my soul:

He leadeth me in the paths of destruction for his Party’s sake.

Yea, though I walk through the valley of recession,

I anticipate no recovery

For he is with me;

His promises and pipe dreams they no longer fool me.

He preparest a reduction in my salary in the presence of my creditors:

He anointeth my small income with taxes;

Surely unemployment and poverty shall follow me all the days of the New Deal

And I will dwell in a mortgaged house forever.”

Source:  George Wolfskill and John A. Hudson, All But the People: Franklin D. Roosevelt and His Critics, 1933-1939 (1969)

Regime uncertainty has gained increasing recognition as the current economic troubles have persisted with little or no improvement since the economy reached a cyclical trough early in 2009. As described in my 1997 paper, regime uncertainty pertains to

the likelihood that investors’ private property rights in their capital and the income it yields will be attenuated further by government action. Such attenuations can arise from many sources, ranging from simple tax-rate increases, to the imposition of new kinds of taxes, to outright confiscation of private property. Many intermediate threats can arise from various sorts of regulation, for instance, of securities markets, labor markets, and product markets. In any event, the security of private property rights rests not so much on the letter of the law as on the character of the government that enforces, or threatens, presumptive rights.

In the latter half of the 1930s, many investors feared that the government would destroy the private enterprise system and replace it with fascism, socialism, or some other extreme transformation of the existing economic order.

In testing my hypothesis, I marshaled three distinct types of evidence: historical documentation of government actions and public reactions; findings of public opinion surveys, especially surveys of businessmen; and evidence from financial markets. The latter seems to some observers, especially to economists, to be the most telling because it is relatively “hard” and quantitative.  In any event, it is the sort of evidence economists are accustomed to analyzing.

My most striking financial evidence for the New Deal episode pertains to the yield curve for corporate bonds, that is, to the spreads between the effective yields on high-grade corporate bonds with various terms to maturity. I found that this yield curve became suddenly much steeper sometime between the first quarter of 1934 and the first quarter of 1935 (a period when the New Deal lurched from its first, or business tolerant, phase to its second, or business hostile, phase) and remained very steep until sometime between the first quarter of 1941 and the first quarter of 1942 (a period when the New Deal handed over the reins to the military and the big businessmen who, along with the president himself, ran the war-command economy for the duration). I interpreted these extreme spreads as risk premiums on longer-term investments caused by regime uncertainty.

Given the extraordinary scale and scope of the actions the government has taken since mid-2008 and the many expressions of uncertainty (and hence of unwillingness to undertake long-term investments) voiced by businessmen and others as a result of this flurry—bailouts, unprecedented monetary policies, surges in government spending, and tremendous regulatory undertakings in health care and financial markets, among other things— one wonders whether the corporate bond yield curve shows the same kind of movement it displayed in the face of the regime uncertainty that prevailed from 1935 to 1941.

To pursue this matter, I have examined a number of series on corporate bond yields, by term to maturity, that I constructed from data available at Bondsonline.com.  (Normally, when economists analyze “the yield curve,” they use data on U.S. Treasury securities. I caution against using such data for the purpose under discussion here. To analyze risks to private property rights as manifested by the risk premiums in bond yields, one must use private bonds, not government bonds.)

I find that back in 2008, before the onset of the financial panic in September, the corporate bond yield curve was rather flat – that is, the yields increased only slightly with term to maturity. At the lower end of the yield curve, yield spreads were tending to narrow slightly until late September. When the panic hit, yields became extremely volatile, especially for the bonds with 2 years to maturity (the shortest term in the data), and remained volatile for almost a year. After mid-2009, the volatility diminished greatly.

Examining these data, I find that once this dust had settled, the yield curve for corporate bonds had become substantially steeper. For example, the spread between corporate bonds with 5 years to maturity and corporate bonds with 2 years to maturity increased from roughly 1 percentage point or less  before the financial crisis to roughly 2 percentage points since mid-2009. Similar changes occurred in the spread between the bonds with 10 years to maturity or 20 years to maturity and the bonds with 2 years to maturity: the former increased from roughly 1 percentage point to 2-3 percentage points; the latter increased from roughly 2 percentage points to roughly 4 percentage points or more.

Similarly, at the upper end of the yield curve, the spreads widened: between the bonds with 10 years to maturity and those with 5 years to maturity, from roughly a fraction of 1 percentage point to roughly more than 1 percentage point; between bonds with 20 years to maturity and those with 5 years to maturity from roughly 1 percentage point or less to 2-3 percentage points. Finally, the spread between the bonds with 20 years to maturity and those with 10 years to maturity increased from less than 1 percentage point before the crisis to 1-2 percentage points since mid-2009.

Thus, corporate bond yields have exhibited three distinct periods: pre-crisis stability with a shallow yield curve; extreme volatility of the yield curve, including some inversions in the latter part of 2008; and post-crisis stability with a much steeper yield curve since mid-2009.

Thus, just as the steep yield curve for the New Deal years corresponds precisely with the so-called Second New Deal, when Roosevelt and his leading subordinates and advisers went on the warpath against investors as a class, the recent transition corresponds to the volatility associated with the period of frenetic government action and financial market fluctuations between September 2008 and the middle of 2009, leaving in its wake a much steeper yield curve.

I view these financial data as consistent with the hypothesis of recently heightened regime uncertainty. Of course, they do not “prove” that it is true, just as the striking data I found for the 1930s do not “prove” the hypothesis as applied to that episode. But in economic history, one looks above all for the correspondence of various forms of evidence with the interpretation one places on the observations. In the current episode, as during that of the latter 1930s, we find that (1) a great deal of direct testimony by businessmen and investors, (2) an account of the government’s ideological character and the historical narrative of what the government has done and, and (3) the bond-market evidence (as well as the movements of the stock market, although they are more difficult to interpret) all conform with a hypothesis that places significant weight on regime uncertainty.

In any event, these preliminary explorations certainly show that the hypothesis should not be dismissed out of hand because it is not “scientific” or because it is not part of the mainstream macroeconomist’s customary style of mathematical modeling. If mainstream analysts continue to disregard the role of regime uncertainty in the major depressions of the modern era, especially in accounting for their extraordinary duration, then they will only demonstrate the poverty of their own mode of analysis.

The following graphs show the data on yield spreads that I have discussed above.

As usual, this week’s Lighthouse deals with a wide range of topics, including British Prime Minister David Cameron’s efforts to slash public spending (Alvaro Vargas Llosa), same-sex marriage in California (William J. Watkins, Jr.), the virtues of private policing (Bruce L. Benson), and the importance of entrepreneurship (David J. Theroux). Here are links to the individual items:

1. Vargas Llosa Lauds Britain’s Budget Cuts
2. Watkins Criticizes Nationalizing Marriage
3. Private Police to Reduce Costs and Make Cities Safer
4. Free-Market Entrepreneurship Is Essential

You can sign up to receive The Lighthouse (and other email alerts from the Independent Institute) here.

This latest outrage just reminds us of the folly of government airline security. Supposedly there to protect us against terrorists, the TSA works with police and law enforcement agencies when it detects behavior it deems suspicious—which in many cases can lead to crackdowns on victimless crimes or invasions into the private lives of travelers. Kathy Parker for Maryland was scrutinized, and her checks questioned by police, all because they were allegedly almost sequential. Accusing her of fraud and embezzling and then calling her husband to warn him of a “divorce situation,” these government officials had no compunctions about overstepping the boundaries of Parker’s family and financial life. She felt “humiliated.” Well of course she did, and bigger and smaller incidents of humiliation occur many thousands of times a day in America’s airports, thanks to the Bush administration and Congressional Democrats who pushed for nationalizing airport security in the aftermath of 9/11.

Meanwhile, the new X-ray scanners appear to subject passengers to 20 times the radiation previously estimated, which could cause problems for up to 1/20 of the population — children and those with gene mutations, especially. Government, as always, is hazardous to your health. Yet another reason to let airline security, as with everything that’s important, be handled by the private sector.

Here Is the Final Part Continued from Part 2: Part 1

Scientism

For Lewis, science should be a quest for knowledge, and his concern was that in the modern era science is too often used instead as a quest by some for power over others. Lewis did not dispute that science is an immensely important tool to understand the natural world, but his larger point is that science cannot tell us anything that is ultimately important regarding what choices we should make. In other words, Lewis shows that “what is” does not indicate “what ought” to be. Scientists on their own are not able to address moral ethics, and all social and political questions are exclusively questions of morality. Lewis furthermore viewed as nonscience, or scientism, all those disciplines that attempt to replicate the scientific method to analyze man: “[T]he new oligarchy must more and more base its claim to plan us on its claim to knowledge. . . . If we are to be mothered, mother must know best. . . . Technocracy is the form to which a planned society must tend. Now I dread specialists in power because they are specialists speaking outside their special subjects. Let scientists tell us about science. But government involves questions about the good for man, and justice, and what things are worth having at what price; and on these a scientific training gives a man’s opinion no added value” (“Is Progress Possible?” pp. 314-15).

Lewis “dread[ed] government in the name of science” even more. For him, the connection was clear: “That is how tyrannies come in.”

In every age the men who want us under their thumb, if they have any sense, will put forward the particular pretension which the hopes and fears of that age render most potent. . . . We must give full weight to the claim that nothing but science, and science globally applied, and therefore unprecedented Government controls, can produce full bellies and medical care for the whole human race: nothing, in short, but a world Welfare State. It is a full admission of these truths which impresses upon me the extreme peril of humanity at present. We have on the one hand a desperate need: hunger, sickness, and dread of war. We have, on the other, the conception of something that might meet it: omnipotent global technocracy. Are not these the ideal opportunity for enslavement? . . . The question about progress has become the question whether we can discover any way of submitting to the world-wide paternalism of a technocracy without losing all personal privacy and independence. . . . All that can really happen is that some men will take charge of the destiny of the others. They will be simply men; none perfect, some greedy, cruel and dishonest. The more completely we are planned the more powerful they will be. Have we discovered some new reason why, this time, power should not corrupt as it had done before? (“Is Progress Possible?” pp. 315-16)

. . . .

For the full article, please click here.

… and it’s not going to happen.  I attended a conference in Seoul last week, and all outward signs are that the Koreans there view themselves, with those in the North, as a part of one Korean  nation, one people, temporarily living under divided government.  The people refer to their country as Korea (not South Korea, or by the country’s official name, Republic of Korea), and they refer to themselves as Koreans.  When asked, they will tell you that they view those in the North as fellow Koreans, and that their thinking of their country this way represents their long-standing hope of eventual reunification.

But talking to people at the conference (mainly academics and government employees) about the prospects for unification, while holding the “one Korea” ideology in the abstract, they thought unification was a bad idea.  It would place too much of a burden on the South.

They have seen the results of the German reunification.  Immediately after unification the East German currency was substantially overvalued compared to the West German Mark, resulting in a substantial transfer from West to East.  Then a unification tax was placed on the former West Germany to help fund the reconstruction of the former East.  That tax is still in place more than two decades after reunification.  The former East Germany still lags behind the former West, and remains an economic burden on those in the former West.

The economic distance between North and South Korea is even greater than the distance that existed between East and West Germany, and the result of unification would be a substantial economic burden placed on the South.  People in the South see this, and they don’t want it.

South Koreans are justly proud of the substantial economic progress their country has made in the past half century, and they are not inclined to use their new-found prosperity to bring the North’s backward economy into the twenty-first century.  These would not be short-term costs, but, like in Germany, would be burdens that would last for decades.

This problem is insurmountable, especially because there is no particularly compelling reason for reunification, other than the “one Korea” ideology that is as much a desire for less belligerent relations between the two Koreas as it is a desire for a single Korean government.  Korea has been divided now for more than 60 years, so most Koreans have never lived in a unified Korea.  To them it is just an abstract idea they have heard about throughout their lives.

The ideal solution, from the South Korean perspective, would be for North Korea to move toward the adoption of more market-friendly economic institutions, as China and Vietnam have, and as North Korea integrated itself into the world economy it would become more interested in increasing its economic well-being than using military provocations to rally domestic political support.  In this scenario, South Korea would be a trading partner, not a source of economic transfers.

So, despite the “one Korea” ideology, when pressed about the actual procedure by which it could be realized, the answer is, it’s complicated.  Nobody wants to come out and say it can’t be done, but it can’t be done.

Of course, not really. But Obama’s August deadline for the end of the war has passed and now all the U.S. troops are no longer “combat” forces but rather “transition forces.” Similarly, next July there is supposed to be a drawdown in Afghanistan—but who can believe it will be any more than some cosmetic change? Moreover, in Iraq the U.S. has another deadline next year “etched in stone,” but what does that mean? The State Department is pushing for its own military footprint in Iraq, and Obama has said very little about the permanent bases and contractors. The U.S. presence in both nations will continue until the natives force out the occupying troops, the U.S. runs out of money, or the American people demand a full withdrawal and make clear to politicians they will tolerate no less. Can we expect anything like this to happen?

More than six years ago, the U.S. government was talking about handing Iraq off to the Iraqis so American forces could leave. I called out the administration then in an Institute op-ed “The Iraqization Scam.” This was a couple years before pundits and policy wonks began calling the U.S. policy “Iraqization.” But now it looks like even I was optimistic, as cynical as I was about actual U.S. intentions to leave the country and region. It appears the U.S. will continue to occupy both Iraq and Afghanistan for the indefinite future, seeing as how the Mr. Nobel Peace Prize is in charge of the wars and, although more Americans want the U.S. to leave, it seems fewer are adamant about it as a political priority.

Remember when John McCain said we might stay in Iraq for 100 years? That was over two years ago. The Democrats had a field day. But now their president is securely on the McCainian path in Iraq. And now, with some defenders of the war citing Korea as an example of a supposedly successful war from which the U.S. never really withdrew, I have to worry. Will a heavy-handed and deadly U.S. occupation of the Middle East become a permanent fixture of the U.S. political landscape? Again, perhaps only running out of money will end the madness. The empire and welfare state, if they have a silver lining, at least contain the seeds of their own destruction, however tragically gradual.

Continued from Part 1: Part 3

Moral Relativism and Utilitarianism

Of central importance in Lewis’s discussion of natural law is his critique of the moral relativism of utilitarianism (“the end justifies the means”) as a theory of ethics and guide to behavior. Lewis claimed that the precepts of moral ethics cannot just be innovated or improvised as we go along. Picking and choosing among the code of the Tao [natural law as in “the way” or “the path”] is inherently foolish and harmful. He noted, for example, that attempts to define moral ethics as the product of a physicalism of survival and instinct create a profound dilemma. On the one hand, the utilitarian (or “Innovator,” as Lewis called him) tries to make judgments of the value of human choices by claiming that one decision is good or not. But on what basis is this valuation made if the only standard that exists is instinct? Lewis shows that all such valuations necessarily must use an objective standard of the Tao to do so, even if only partially.

The Innovator . . . rates high the claims of posterity. He cannot get any valid claim for posterity out of instinct or (in the modern sense) reason. He is really deriving our duty to posterity from the Tao; our duty to do good to all men is an axiom of Practical Reason, and our duty to do good to our descendants is a clear deduction from it. But then, in every form of the Tao which has come down to us, side by side with the duty to children and descendants lies the duty to parents and ancestors. By what right do we reject one and accept the other? . . . [T]he Innovator may place economic value first. To get people fed and clothed is the great end, and in pursuit of it, scruples about justice and good faith may be set aside. The Tao of course agrees with him about the importance of getting the people fed and clothed. Unless the Innovator were himself using the Tao he could never have learned of such a duty of justice and good faith which he is ready to debunk. What is his warrant? He may be a jingoist, a racialist, an extreme nationalist, who maintains that the advancement of his own people is the object to which all else ought to yield. But no kind of factual observation and no appeal to instinct will give him a ground for this opinion. Once more, he is in fact deriving it from the Tao: a duty to our own kin, because they are our own kin, is a part of traditional morality. But side by side with it in the Tao, and limiting it, lie the inflexible demands of justice, and the rule that, in the long run, all men are our brothers (The Abolition of Man, p. 43, italicized in original).

. . . .

For the full article, please click here.

On March 26, 2010, the South Korean patrol boat Cheonan sank, resulting in the death of 46 South Korean sailors.  The South Korean government said the Cheonan was sunk by a North Korean torpedo.  As this story reports,  South Korea will release a final report of about 250 pages, detailing the findings of 74 investigators from South Korea, the United States, Sweden, and Australia.  The study presents the evidence that shows the Cheonan was, in fact, sunk by a North Korean torpedo.

One interesting part of the story says, “Opinion polls show that 20% to 30% of South Koreans doubt the investigation committee’s findings.”  Talking with my US friends, none of them has expressed any doubt in the claim (made by the US government as well as the South Korean government) that the North Koreans sank the Cheonan.  Yet, talking with South Koreans, they tell me that many of them believe the Cheonan ran aground, which is what caused it to sink.  The opinion poll results reported in the WSJ story back up my casual observation on this.

Why would the South Korean government lie?  Talk of military threats often boosts support for incumbent politicians, and that’s the reason for the doubts I’ve heard from talking with South Koreans.  They view their political leaders with a healthy degree of skepticism, and as a result, 20-30% doubt the government’s claims about the Cheonan.

The US government has made the same claims, has supported the South Korean government on this, and has stepped up its military exercises with the South Koreans as a result of the sinking of the Cheonan.  In contrast to the skepticism of South Koreans, I’ve seen no evidence of any doubt in the US that North Korea sank the Cheonan.

It’s an interesting observation on people’s trust in their government.