Saturday Night Live lampoons Barack Obama and his reckless and gargantuan, federal government spending and debt mongering in their recent skit of a joint press conference with Obama and Chinese President Hu Jintao, “China Wants Its Money Back”:
How seriously Congress has ever taken its responsibility to serve as a “check and balance” against the powers of the executive and judicial branches of the U.S. government is debatable, but it has certainly run pell-mell from those clearly delineated responsibilities in the past several decades: abdicating its sole power to declare war, enabling the rise of an imperial presidency throughout the 20th and into the 21st centuries, and culminating in its almost unanimous passage of the unread USA-PATRIOT Act that granted the executive the near-total unitary power the Constitution’s framers hoped to guard against.
The current health-care “reform” legislation thus represents but the latest of Congress’s abusing its power to enact legislation while retaining none of the responsibility or accountability for overseeing the subsequent use of the power it delegates thereby. The House version of the legislation grants a politically appointed committee (the majority appointed by the president) total discretion to design and implement all aspects of our future health care: who will be covered, for what care, at what cost; who will pay; what regulations will prevail. The Senate version proposes to pay for the legislation through achieving huge imaginary savings from Medicare, and delegates to another politically appointed committee the power to recommend “annual Medicare payment rates as well as other reforms” [emphasis added]—and whose decisions would be approved and disapproved at the sole discretion of the president. In sum, total control over the very lives and deaths of every American is being deputed to unaccountable committees vested with extraordinary powers.
Having now violated every principle of the doctrine of nondelegation, Congress can either be fired en masse or its actions repudiated by the Supreme Court. I’m taking no bets on either.
My friends at NAS.org have posted on the “Climate Conspiracy” that broke when hackers revealed global warming scientists had apparently manipulated data, organized attacks on skeptics, and much more. Surprise, surprise.
The timing couldn’t be worse for those who would cripple economies with the plaintive cry: “Do as we say or we all die!” Worldwide there is growing skepticism about the benefits of micromanaging every aspect of daily life while measuring “carbon footprints.” The Wall Street Journal even contributed to this Nanny Project with a long piece measuring the carbon footprint of various common products. I was relieved to see that beer had the lowest carbon footprint.
How far have we gone when we decide whether or not it is “good for the planet” to drink beer? Now we must ask: Did German scientists manipulate the beer data to preserve their national beverage? (I’m kidding). It’s a good cause (beer drinking) but who studies this stuff? And when is enough enough?
For more on the “climate conspiracy,” read the following:
“Hacked E-Mail Is New Fodder for Climate Dispute,” by Andrew Revkin (New York Times, November 20, 2009)
“Climategate: the final nail in the coffin of ‘Anthropogenic Global Warming’?”, by James Delingpole (London Telegraph, November 20, 2009)
“CRU Files Betray Climate Alarmists’ Funding Hypocrisy,” by Marc Sheppard (American Thinker, November 22, 2009)
Climate Audit, by Steve McIntyre — this server is slow but it does work.
“The Global Warming Debate, Peer Review and University Science,” by Mitchell Langbert (NAS Blog, November 23, 2009)
Fear not: Our own EPA, under “science president” Obama, has allegedly suppressed an EPA report skeptical of global warming.
This last story on our own home-grown ClimateGate, ends with these quotes:
The revelations could prove embarrassing to Jackson, the EPA administrator, who said in January: “I will ensure EPA’s efforts to address the environmental crises of today are rooted in three fundamental values: science-based policies and programs, adherence to the rule of law, and overwhelming transparency.” Similarly, Mr. Obama claimed that “the days of science taking a back seat to ideology are over… To undermine scientific integrity is to undermine our democracy. It is contrary to our way of life.”
“All this talk from the president and (EPA administrator) Lisa Jackson about integrity, transparency, and increased EPA protection for whistleblowers — you’ve got a bouquet of ironies here,” said Kazman, the CEI attorney.
The Christian Science Monitor has a neat little piece on America’s burgeoning shadow economy:
Perhaps the biggest surprise about America’s shadow economy is its size. Long associated with colorful street hawkers in the developing world, the shadow economy makes up a larger portion of the economies of countries like Greece (25 percent) or Mozambique (more than 40 percent) than it does in the US. But because America’s economy is so much bigger, its shadow economy amounts to nearly 8 percent of its gross domestic product (GDP)—in the ballpark of $1 trillion, estimates Friedrich Schneider, an economics professor at Johannes Kepler University in Linz, Austria. That’s bigger than the GDP of Turkey or Australia.
Many nations wouldn’t survive if not for their gray and black markets. Some of Europe is more heavily regulated than America, but with large segments of the economy operating outside the radar of the regulatory and tax police. Of course, many of the Soviet Union’s subjects only survived thanks to illegal economic activity.
This expanding black market in America demonstrates something important: The capacity of the market to exist without the state. Indeed, we libertarians who believe that a free society could thrive without a monopoly on violence (i.e., a state), should look upon the growing black market as overall a positive thing, and a model, for the most part, of civilized behavior.
In a free market society, there would be no black market as such, at least not in anything that would be legitimate (there might still be small amounts of exchange in the realm of properly illegal activity, such as the hiring of hitmen). In a free society, contracts could be upheld for a large range of activity where there is no government protection, such as the street drug trade.
But consider: Most of the illegal drug trade works and thrives. People get what they want out of it. Most illegal drug transactions are upheld and carried out honestly, with most economic actors walking away from the transactions satisfied. This all happens not just in the absence of government protection of contracts, but in the face of outright government hostility, prohibitions, policing, and threats of jail time.
If a market can operate without the government protecting it, and indeed while the state is attempting at great cost to obstruct it, then we can safely argue that it would probably operate fine, and even better, without the state being involved at all. Not only would taking the state out of the picture allow for the now-illegal market to flourish without the cost of avoiding state sanction; getting rid of the state would allow for the advent of more market mechanisms, such as arbitration, openly publicized customer reviews leading to sophisticated public calculation of a business’s reputation, and contract enforcement.
That one trillion dollars is moving around in the economy in direct confrontation with state intervention shows that the market is self-organizing. We do not need the state to oversee all this business— in fact, despite the state’s obstructive presence, the underground market thrives. Are there problems? Of course. There is fraud, which would be harder to get away with if this market were all out in the open, and not forced into the shadows by the state. There is misrepresentation and dishonesty. But these are the exceptions.
And can we really believe there is less of this in the legal, regulated economy? It seems to me, the more involved the state is in overseeing the economic sector—banking, military spending, education, health care—the more we see corruption, waste and fraud. This is because the state itself represents the legitimization of violent and predatory behavior, and the more it expands its role in overseeing and attempting to direct the economy, the more illegitimate and dishonest behavior gets the state’s official seal of approval and protection through the force of law. The state allows corrupt business practices to operate under the facade of legitimacy. The black market, on the other hand, must exist with efficiency and mostly with honesty, so as to overcome the cost of avoiding government obstacles and detection. Indeed, I would guess we are less likely to see speculative bubbles and systemic fraud in the illegal market than in huge swaths of the more highly regulated and politicized sector. But the remaining problems with the black market, such as with the turf wars and adulterated products in the drug market, would mostly disappear if the state just withered away, as almost all these problems could be traced to the effect of police intervention and the need of illicit entrepreneurs and customers to circumvent the state’s watchful eye. But most of the black market is much more peaceful than the drug market, since it is just taxes and regulations, rather than iron clad punitive drug laws, that are being avoided. Competition, reputation and arbitration would allow for a more honest market than we see today either below ground or above the board.
Since the summer of 2008, the U.S. Treasury and the Fed have initiated a welter of new spending, lending, and subsidizing programs ostensibly aimed at stemming the recession that began early in that year and deepened quickly in its last quarter and in the first quarter of 2009. Among the most notable of these programs have been attempts to prop up the real estate market and the residential construction industry, where the Fed’s easy-money policies in the first half of the present decade induced lenders to make millions of mortgage loans to home buyers who would not have qualified for such loans if traditional underwriting standards had been applied.
During the housing bubble, however, with congressional backers goading Fannie Mae, Freddie Mac, and other lenders, caution was thrown to the wind, and loans were extended to home buyers who had little more than a pulse as a qualification. People who believed that real estate prices would never fall did not worry much about the great volume of dicy credit being extended to house buyers – for the moment everybody seemed to be getting rich effortlessly with little or no risk. However, people who believed that real estate prices would never fall were fools, and when the Fed began to back away from its easy-money policy and interest rates began to rise, real estate prices began to fall, mortgage delinquencies and foreclosures began to rise, and before long the entire house of cards began to collapse: house prices dropped drastically, as did the pyramid of financial derivatives built atop the mountain of mortgage loans, and in quick succession some of the world’s largest banks and other financial-services companies went belly up. Some, including Fannie, Freddie, and AIG, were taken over by the government or the Fed; hundreds of others were bailed out, at least for the time being.
A sensible person, surveying all of this wreakage and pondering how such a debacle might be avoided in the future, certainly would have concluded that the government should cease and desist from artificially spurring the real estate market by subverting traditional underwriting standards for mortgage loans. Those standards include, for example, a substantial down payment, usually 20 percent, and well-documented sources of income sufficient to permit the buyer to service the loan, usually a steady job or substantial assets.
During the crisis since mid-2008, however, the government has not done what a sensible person would have concluded it should do. Indeed, it has done the opposite. Rather than terminating the government policies that had encouraged the foolish behavior of real estate buyers, sellers, and lenders – foolishness that lay at the heart of the artificial boom that went bust during the past two years – the government has undertaken to continue and even to compound the selfsame policies that in large part caused our present economic troubles. For example, Fannie and Freddie, now effectively government owned and operated firms, continue to extend loans as if promising borrowers were superabundant.
Moreover, the Federal Housing Administration, a government agency created in 1934 to insure conventional mortgage loans, has greatly expanded the volume of its business, and according to a recent report in the New York Times, the FHA “is underwriting loans at quadruple the rate of three years ago even as its reserves to cover defaults are dwindling.” The Mortgage Bankers Association affirmed on November 19 that “more than one in six F.H.A. borrowers was behind on payments.” The FHA has backed 37 percent of all residential mortage loans made in 2009. Reporter Patrice Hill observes that “these loans are exposing taxpayers to the same kinds of soaring default rates and losses that brought down Fannie Mae and Freddie Mac as well as destroyed many banks and the private market for mortgage loans.”
The government is not resting content, however, with taking over the mortgage-loan business and making a multitude of rotten loans. Hill reports:
The FHA’s predominance was enhanced further this year when Congress lifted the ceiling to more than $729,000 for major urban areas and passed an $8,000 tax credit for first-time homebuyers that can be accelerated for borrowers to use as a down payment on FHA loans and avoid any cash commitment to their home purchases.
While these changes were intended to be temporary and expire by the end of the year, given the fragility of the housing and mortgage markets, Congress is considered likely to extend them this fall.
The significant expansion and liberalization of FHA’s loan programs is enabling Americans to go back to many of the same bad credit practices that analysts say were at the root of the housing crisis, likely feeding further waves of default and foreclosure. But this time it is the taxpayer — not the banks — who could end up holding the bag.
Whitney Tilson, manager of investment firm T2 Partners LLC and author of “More Mortgage Meltdown: 6 Ways to Profit in These Bad Times,” called “cataclysmic” the surging default rates of more than 30 percent on loans insured since 2006 by the FHA. That is not far below the 40 percent rate of default and foreclosure on the notorious subprime loans that ignited the credit crisis.
“The FHA’s portfolio is exploding and the taxpayer is now on the hook for 100 percent of the losses,” he said.
“I find it hard to distinguish between the actions of FHA and the self-denominated subprime lenders,” said Edward Pinto, a former chief credit officer at Fannie Mae who recently testified before a House panel on FHA’s growing default problems. “The results are the same — unsustainable loans that prolong and perpetuate our nightmare of foreclosures.”
Mr. Pinto estimates that 20 percent of the FHA’s entire portfolio of $725 billion mortgages will end up in foreclosure — a rate recently borne out by estimates FHA provided to Congress. He predicts that the agency will require a taxpayer bailout within two to three years.
One reason defaults are soaring is that the agency is attracting nearly all of the business of homebuyers who haven’t saved enough to make down payments, he said. Loans with little or no down payments have high rates of default because the borrowers have little financial stake in losing their homes to foreclosure.
The agency requires a minimal 3.5 percent down payment — far below the 20 percent now required by private lenders. That’s very little “skin in the game,” especially in today’s market where the buyer’s equity can be quickly wiped out, Mr. Pinto said. Home prices have fallen an average of 30 percent nationwide.
Many borrowers have been able to avoid even that minimal level of personal investment in their homes. The government is enabling these buyers to put up no cash at all by allowing them to get advanced payments of the $8,000 homebuyers tax credit through arrangements with nonprofit housing groups and state housing agencies. The tax credit can be used the same way to pay closing costs.
Beyond the loosened standards on down payments, the FHA remains willing to make loans to people with low credit ratings, even those with histories of default, foreclosure or bankruptcy. Those with histories of default are far more likely to default again.
Naturally, anything this horrendous in housing-finance policy has a high probability of being backed by Representative Barney Frank and his congressional partners in crime, who continue to conspire with the”affordable housing” coalition as if the present debacle had not plainly revealed the destructive consequences of such policies. At present, 14.4 percent of residential mortgages are delinquent or in foreclosure – an all-time high – and the percentage continues to rise, notwithstanding the government’s commitment of some $50 billion in TARP funds for its Housing Affordability Stability Plan, which seeks to modify and refinance home loans. In this area, as in the labor market, things will probably get much worse before they begin to get better.
To listen to our glorious leaders discuss such matters is to realize that they have no real understanding of what they are dealing with. They see the collapse of an artificially stimulated house-construction industry, and they conclude: the government must subsidize more house construction. They see the collapse of real estate prices, and they conclude: the government must stimulate demand for real estate in order to raise its price. Thus, they demonstrate that they have no comprehension of the structural logic of economic activity. By this expression I mean that, contrary to the way of thinking advocated and formalized in modern macroeconomics, in which an addition to GDP is an addition to GDP, and all such additions are equally apt and good, the sound economist understands that the nation’s economic activity consists of millions of distinct inputs and outputs, and these elements must assume a particular configuration, or structure, if the whole process is to achieve generally beneficial results for its participants.
No one knows (and no one can know) precisely what this structure should be at any particular time, but if people are left alone to exchange their private property rights as they think best, they will make bids and offers that establish market prices for inputs and outputs, and these prices (and the profits and losses associated with them) will set in motion the reallocations of inputs and the alterations of outputs that allow demanders and suppliers to coordinate the changes in their actions that must be made if they are to pursue their objectives successfully. If policy makers ignore or work against this vastly complex, dynamic process of constantly changing prices, input uses, and output production, the result will be a mass of malinvestments and distortions in input use and output production — a veritable economic monstrosity.
When this twisted creation proves incapable of living and breathing and breaks down in agonizing spasms of business losses, bankruptcies, and unemployed labor, the preeminent need is for a restructuring of the economic process: industries and locations mistakenly stimulated by bad policies must shrink; and industries and locations previously starved for inputs must receive them, as investors and workers abandon the enterprises now revealed as losers and seek opportunities elsewhere for more profitable employment of their resources. Cutting short this process of liquidation and redirection by implementing more of the same distortive policies that created the mess in the first place only insures that the restructuring will take longer and be more painful.
To be more specific about the case at hand, the government’s bad monetary policy and bad housing-finance policies earlier in this decade created house prices that were too high and securities based on the returns to mortgage loans (and their derivatives) that were overvalued. To repair this situation, house prices, security valuations, and corporate share prices driven skyward in the government-stimulated frenzy need to come down, in many cases down so far that bankruptcies, unemployment, and substantially reduced wages will occur in the process. Simply piling on more and more of the same distortive policies that generated the crisis in the first place can, at best, only delay the day of reckoning while magnifying the adjustments that ultimately will have to occur. For Fannie, Freddie, and the FHA to pile more bad real estate loans atop the mountain of such bad loans extended between 2002 and 2006 is the height of folly, a virtual apotheosis of a policy of living for today at the expense of our future prosperity.
To repeat unsolicited advice I have given since the beginning of this crisis, I maintain that the best thing the government can do now is to get out of the way: abandon the bad monetary and housing-finance policies conducted in recent years and let the economic process sort itself out through market processes. The claim that without the government’s vast interventions the economy will sink into oblivion is nothing but another fallacy that no sound economist will countenance. This economy and others, when markets were allowed to function without government interference, worked splendidly for a long time before John Maynard Keynes ever achieved his ill-deserved status as the über-architect of macroeconomic salvation. It can work well again if the politicians will stand down – and the people will recognize the wisdom of this laissez-faire course and cease their clamor for salvation via Washington at someone else’s expense.
I’ve wondered why state governors and legislators haven’t been more vocal opponents of the healthcare reforms being drawn up in Washington. All these proposals would put huge financial burdens on the states.
I haven’t seen much in the news until this article appeared, reporting that two Florida state senators are proposing that the state examine dropping out of the Medicaid program (which is jointly funded by the federal and state governments) and starting a state-only program to replace it.
The story appeared in the Lakeland Ledger and as far as I know hasn’t been picked up by other papers. Perhaps it will be in the next few days.
I’d like to see the story get lots of publicity, and I’d like to see state legislators in other states jumping on this bandwagon. (OK, it’s not a bandwagon yet, but it could become one.) I’m amazed that with Congress trying to place such a huge financial burden on state governments in their proposed healthcare reforms there hasn’t been more vocal resistance by state governments.
Congress is telling the states, “We’re going to design a healthcare reform, but we’re going to make you pay a substantial amount of the cost.” Are state legislatures really so passive that they are content to let people in Washington dictate how a big chunk of their revenues will be spent?
As cities across the country face growing deficits, instead of their current strategy of raising taxes and cutting services, they might like to take a look at a few case study examples of how those before them solved their challenges.
As an example, ten years ago we hosted the then-mayors of Indianapolis, Stephen Goldsmith, and Oakland, Jerry Brown, at the Independent Institute’s conference center to discuss some creative ideas. Stephen Goldsmith had been elected mayor of Indianapolis—with a population of 900,000, 25% of it African-American—only to discover the city had a billion dollar deficit. He shared the steps he took that successfully turned that situation around. Excerpts follow:
Mayors get elected, they have lots of problems of poverty and urban decay. They’re intent on doing good deeds. In order to do the good deeds, they need money. So they tax the people who have it in order to redistribute it to those who don’t.
Now, this process was particularly aggressive east of the Mississippi, where essentially mayors taxed their way further into poverty. And my office is on the 25th floor of our City County building and on a very bright, clear day I can see dollar bills float across the city line and land in the suburbs, where the tax rate is less, the regulatory burdens are less, the crime rate is less and the schools are often better.
So we had this dynamic, a lot of people were moving out of the city, the tax rates were too high, the infrastructure was decaying, and it was clear that we really couldn’t continue to do business the way we had done it. I then began to look at ways to change the way government functions.
Mayor Goldsmith started his term by going around and doing a different city job each week. In the process, he learned that
the theory that public employees are inherently inferior to private employees is really not fair. Public systems are inherently inferior to private systems because they lack competition—they’re monopolies and bureaucracies and the people are trapped in those systems. So I wanted to see what I could do, structurally, to unlock these systems, to unlock the power of competition, to help the people who really wanted to do a good job perform better and buy the best I could from the private marketplace at the same time.
So we began this effort that we call marketization or competition. And we’ve done 80 of these. Without taking you through them all, let me just say the concept basically is: competition produces value and makes for more efficient delivery of public services. And we then created this model to let our public employees bid against the private sector.
So I reached an agreement on our labor contract and said, “I won’t privatize but I am going to submit a number of these transactions to the marketplace. You have a 90-day window in which to bid. We’ll provide you consultants. We’ll provide you help, but we want you to bid.”
In one example—fleet management—the union and their consultants figured out how to get rid of two-thirds of their own managers. They contracted out custodial service. They froze their wages. And as workers retired, they decided they didn’t need to fill the now-vacant positions. Bottom-line: they were able to submit a bid that won out over the private competition, and:
So we’ve now been through 80-plus of these, saved $400 million. And this effort is really not the end, obviously. The end is a higher quality of life for city residents. This was a way of freeing up capital to invest in either reducing taxes, more police officers, infrastructure, as the situation may be.
Mayor Goldsmith also learned:
Regulatory reform is important, as well. We fought the licensing issues and the permitting issues and the cab cartel issues…I had the Republican Council against me, the Democratic Council for me, and the NAACP on my side, because basically they were saying, “Our citizens are under served and we have a lot of folks who want to go in this business. And why is it the government is prohibiting small and minority-owned businesses from having an opportunity for enterprise in this community?
This was kind of a classic free market fight, one that we had actually lots of opposition and great fun in fighting and eventually won, and predictably, as the work of The Independent Institute would suggest, urban service went up; 60 new operators came into the marketplace, many of them moms and pops, and the configuration of services changed once the cartel was removed.
For the complete presentation, see here.
And for more creative ideas, see The Voluntary City: Choice, Community, and Civil Society
How many jobs has the “stimulus” package created? Sensible economists of course know this question cannot possibly be answered. Government spending directs resources toward politically favored projects at the expense of others, but the net effect on resource allocation, including the net effect on “jobs” — a heterogeneous category that depends on hours worked, job characteristics, and other small details — cannot be measured with precision. There are also important intertemporal effects — e.g., expectations of inflation, tax increases, new government programs, etc., may cause firms to delay hiring workers they otherwise would have hired.
Not to worry, says John Irons of the Economic Policy Institute. Indeed, the Obama Administration’s silly attempt to count “jobs saved” may actually underestimate the beneficial effects of stimulus, because “that construction worker [hired by stimulus funds] then goes out and spends money at a local diner, at a local McDonald’s or the local movie theater. That could very well mean an additional job.” Well, yes, but there’s the construction worker who wasn’t hired because investors, spooked by regime uncertainty, wouldn’t fund the construction project; the construction worker who won’t be hired tomorrow when taxes are hiked to pay for today’s stimulus; the construction workers who will sit idle at home when hyperinflation destroys the construction industry; and many other members of Bastiat’s “unseen” who would have spent money at diners and McDonald’s and movie theaters. But we never see those lost jobs, so — poof! — they don’t exist, and shouldn’t be counted against the free lunches wished into existence by Stimuluspalooza.
Update: My colleague Mike Sykuta beat me to it.
In Newsweek, November 16, 2009, p. 20, Fareed Zakaria says, “There are two general health-care crises in America — one involving coverage and the other cost. The Obama plan appears likely to tackle the first but not the second. This is bad economics but also bad politics: the crisis of cost affects 85 percent of Americans, while the crisis of coverage affects about 15 percent. Obama’s message to the country appears to be ‘We have a dysfunctional health-care system with out-of-control costs, and let’s add 45 million people to it.'”
In Newsweek, November 23, 2009, p. 21, Robert J. Samuelson criticizes President Obama for saying the proposed health care reform will control costs and reduce government spending as government-financed health care is extended to millions of additional people. He says, “The disconnect between what Obama says and what he’s doing is so glaring that most people could not abide it. The president and his allies have no trouble. But reconciling blatantly contradictory objectives requires them to engage in willful self-deception, public dishonesty, or both.”
One might expect criticisms like this from Glenn Beck or Sarah Palin, but these criticisms appeared in Newsweek, which advertises its pro-government bias. Speaking of Sarah Palin, the cover of the November 23 edition in which Samuelson’s column appears features a photo of her (looking very good in her jogging atire) with the caption, “HOW DO YOU SOLVE A PROBLEM LIKE SARAH? SHE’S BAD NEWS FOR THE GOP — AND FOR EVERYBODY ELSE TOO.” And just a few weeks ago the cover featured a photo of Al Gore, with the caption, “THE THINKING MAN’S THINKING MAN.”
When Newsweek, a magazine that promotes it’s pro-government, and pro-Democrat, bias, is running columns critical of Obamacare, that suggests that its shortcomings are recognized across the political spectrum. These aren’t just minor criticisms either. Zakaria says the Obama plan would add to “a disfunctional health-care system with out-of-control costs,” and Samuelson accuses President Obama of “willful self-deception, public dishonesty, or both.”
The question then is: if it is so easy to see the faults, why does Obama, and his party, keep pushing something so obviously flawed. The only answer I can think of is politics. They said they were going to pass health care reform, they ran on that platform, and now they are determined to do it despite the widespread recognition that if they succeed the outcome will make the nation worse off.
Bob Barr, David Keene and Grover Norquist have called for civilian trials of terror suspects, and urged that the “scaremongering about these issues has to stop.”
There are problems with civilian trials, of course. Many detainees were freed by Bush’s extralegal system who would have likely been convicted and be sitting in prison right now. And should New York courts really try some of these cases – that don’t involve “terrorism” at all, but simply fighting back against military forces in the Afghanistan war?
