News item:

Goldman Sachs surprised even optimistic analysts with a $3.44 billion profit for the three months to June, almost 90% more than the previous quarter. Profits were also up at JP Morgan Chase, which announced second-quarter profits of $2.7 billion on July 26th, which were 36% higher than a year ago. (“The World this Week”, The Economist, July 18–24, 2009, p. 8.)

Why should anyone be surprised that two of the nation’s largest financial institutions have prospered in the wake of taxpayer bailouts, facilitated in the case of Goldman Sachs by a revolving door between Wall Street and the U.S. Treasury? Three recent secretaries of that executive branch department—Robert Rubin, Hank Paulson and Timothy Geitner—have intimate and longstanding ties with the same newly adopted ward of the state.

Neither should it be surprising that Goldman Sachs’s record second-quarter profits flowed from unprecedented risk-taking: the firm’s “value-at-risk number—an imperfect but popular measure of risk appetite—hit a new high” during the same three-month period (“Keeping Up with the Goldmans,” The Economist, July 18–24, 2009, p. 71)—nor that more than 72 percent of the $15.8 billion in profits the company has earned so far this year has been paid out in salaries and bonuses to officers and staff (“Going Overboard”, The Economist, July 18–24, 2009, p. 72).

Now fully confident that it is “too big to fail”, Goldman Sachs is free to pursue high-risk profit opportunities with impunity knowing that it can retain the payoffs from such strategies if they succeed and shift losses to the taxpayers if they do not. Bailouts subsidize moral hazard; they are inimical to the operation of a market-based economy that allocates scarce resources to their highest valued uses by punishing rather than rewarding poor business decision-making.

Meanwhile, two of Goldman Sachs’s rivals, UBS and Citigroup, find themselves to be in dire financial straits as the result of losses of business to … Goldman Sachs. Another hard-pressed lender, CIT, likewise is on life support nowadays, with its ultimate survival apparently depending on the sufferance of bondholders.

As Nobel laureate George Stigler once said, the intended effects of government policies should be deduced from their actual effects. Barack Obama, like George Bush before him, has been captured by the interests of a few favored Wall Street firms. The change we can believe in is being counted at the offices of Goldman Sachs and JP Morgan Chase.

In the last of his three Lionel Robbins lectures at the London School of Economics on June 30 of this year, Nobel laureate Paul Krugman remarked that the macroeconomic theory of the past thirty years has been “spectacularly useless at best, and positively harmful at worst” (“The Other Worldly Philosophers”, The Economist, July 18–24, 2009, p. 65).

Professor Krugman was referring to the economics profession’s failure to predict the onset of the current global financial crisis and its inability to supply sound policy recommendations for responding to it.

But his justifiable criticism of macroeconomic theory ignores, as most of the profession has, the elephant in the room.

Orthodox macroeconomists, with the exception of Robert Lucas and a handful of other theorists, have adopted a Keynesian (or so-called neo-Keynesian) perspective on the world that commits two disastrous errors. One of the errors is that government can be assumed to be exogenous to the macro-economy and therefore is able to intervene surgically to “fine-tune” it. The other error is that important macroeconomic aggregates, such the level of prices, of national income, and the rate of employment (or unemployment), are taken as objects of affirmative choice for governmental decision-makers

Those two errors commit what Friedrich Hayek calls the “fatal conceit” of socialism. Government policy is, in fact, endogenous—the Keynesian perspective would be worthless if fiscal and monetary policies did not respond appropriately to the private economy’s observed macroeconomic performance. What is more important, macroeconomic aggregates—GDP and the rates of inflation or unemployment—are determined not by government policy but by spontaneous market interactions between hundreds of millions of independently acting individuals. Except in the very short run, government cannot “choose” any of those variables (see, e.g., the essay by George Mason University economist Richard Wagner in The Elgar Companion to Public Choice, 2001).

The uselessness or harmfulness of “modern” macroeconomic theory and it policy prescriptions thus follow not from their mathematical elegance (or lack thereof), but from studious failure to recognize the policy-shaping influence of ordinary politics. Disinterested philosopher-kings do not reside on Harvey Road or anywhere else. Macroeconomists can re-attain positions of policy-relevance only by recognizing that their theories and evidence will be filtered through (and deformed by) politically self-interested policymakers of all political stripes.

Way back in 2002, as part of the process of closing Oakland’s historic Army Base, 303 acres of Army-owned land were transferred to local government entities—168 acres to the Port Authority and 135 acres to the City of Oakland itself.

Located just south of the Bay Bridge, the two properties have remained in limbo ever since as officials dithered over what to do with them.

The list of proposals considered at one time or another includes a land-based Indian casino and a brand new stadium for the Oakland As. Concluding that their project would be incompatible with the decidedly downscale business operations of the neighboring port and a nearby sewage-treatment plant, Hollywood’s Wayans brothers backed out of a deal to build a movie studio and upscale shopping center on the city-owned parcel.

Seven years on, after failing to take advantage of the run-up in real estate prices, a fresh set of land-use schemes are on the table. Mayor Ron Dellums has given his blessing to a plan put forward by a private developer that would revitalize Oakland’s port by combining both parcels as sites for additional warehousing, packaging and distribution facilities. That proposal faces competition from yet another private developer who wants to begin work on a retail, hotel and office-space complex on the city’s 135-acre property.

The Port Authority, meanwhile, is in the process of choosing a developer to draw up plans for expanding the port’s cargo-handling infrastructure on its 168-acre parcel by, among other things, extending railway lines to facilitate intermodal (ship-rail) transit capacity. Because that developer will be granted exclusive negotiation rights, one can expect a sweetheart deal.

Facing an $80 million budget deficit, Oakland’s taxpayers ought to be dismayed at the prospect that city and Port Authority officials will decide how 303 acres of prime waterfront property ultimately will be disposed of. Politicians and bureaucrats have little incentive to allocate real estate or any other resource to its highest valued use. That best use can, however, readily can be determined by selling the property to the highest bidder. Such a sale not only would ensure value-maximization, but undoubtedly would generate revenue sufficient to close holes in the city’s budget for years to come.

In the following video, “Human Rights Group Campaigns to End Use of Child Politicians in Africa,” the Onion News Network brilliantly satirizes the hypocrisy and shallowness of politics, compulsory education, government-mandated childhood community service, child abuse, and the view that children should be groomed to seek political office.

Human Rights Group Campaigns To End Use Of Child Politicians In Africa

Female Host: For years now we have all heard the tragic stories of the child soldiers in Africa. But now children there are being exploited in a much more, heart-breaking way.

Male Host: That’s right. According to several human rights organizations, young boys as young as seven years old are being kidnapped and forced into life as child politicians. And joining us here in the studio is one of those former child politicians. He has written this book, What I Saw: Memories of a Child Politician, Sheku Mohammed. And from UNICEF, Wesley Harbin. Thank you guys for being with us this morning.

Female Host: Wesley, help us understand this senseless cruelty.

Harbin: Well, it’s hard to imagine, Tracy, but in Africa, boys like Sheku are torn from their families. They’re taken to training camps and forced to run for government office against their will. They’re bound and gagged, they’re given talking points.

Male Host: Politics is sad enough when it just adults involved, but when you force children into that kind of activity, that’s beyond disgusting.

Harbin: It is. These kids are marched off to villages where they go from house to house, trying to get votes. Shaking hands, complimenting the food at local restaurants.

Female Host: That’s terrible.

Harbin: They’re forced to memorize the names of thousands of local sports teams.

Male Host: My God.

Female Host: Sheku, is this what happened to you?

Mohammed: Yes, they broke into my house. They threatened to rape my sisters unless I’d run for the open seat in Parliament in the district. I was only eleven.

Male Host: Unbelievable.

Female Host: Mother, it breaks my heart to see children like this.

Mohammed: It was just horrible. All day and night, waving, giving thumbs up.

Male Host: Of my goodness.

Mohammed: I was never allowed to rest.

Harbin: A former Prime Minister from Uganda, he’s twelve now, he told me that his adviser would cut his arms with knives and pack cocaine into the wounds so that he would stay up for days on end, talking to farmers about protecting their jobs.

Male Host: No child should ever have to pander for votes like that.

Mohammed: On the campaign trail, when I saw a baby, I just grabbed it and kissed it. I didn’t care whose it was.

Male Host: Ohhh.

Female Host: So sad, you didn’t have a choice.

Mohammed: I was lucky because I escaped. But, most of my childhood friends are still politicians.

Harbin: And the victimization is not limited to boys. Young girls are often forced to become politicians’ wives against their will. Made to wear elaborate hairdos, they have to stand next to their child-politician husbands smiling, but they’re warned that if they speak, they’ll be killed.

Female Host: Oh, it’s so sad.

Male Host: The book again is What I Saw: Memories of a Child Politician. Go out and buy it. It will make you glad to be an American.

HT: Julie Sheppard

The Obama administration is planning to cite “national security” concerns to quash a lawsuit alleging illegal government spying under Bush. This is no surprise. A full year ago, Obama the candidate made it completely clear he intended to break his promise to oppose warrantless spying when he voted for cloture on the 2008 FISA Amendments Act. As I warned three years ago, there was no reason for anyone to expect that the Democrats, once in power, would be better guardians of our civil liberties than were the Republicans.

Overall, Obama is about as bad as Bush in this area. He has been slightly better on torture, although not better enough, and he has been precisely as bad on transparency and secrecy and perhaps even worse on habeas corpus.

So here’s the change we’ve gotten: A worse economic policy (as hard as that is to swallow after eight years of spendthrift Republican rule), a foreign policy about as bad but maybe slightly better, and policies on civil liberties that put Obama in about the same league as Bush. Ah, change. We’d better keep an eye on this administration, as we know it will be keeping an eye on us.

A passel of bigwig economists has signed a petition urging Congress and the executive branch “to reaffirm their support for and defend the independence of the Federal Reserve System as a foundation of U.S. economic stability.” In support of this defense of the Fed against those now challenging the secrecy of its undertakings and, in some cases, its very existence, these economists offer three arguments.

First, “central bank independence has been shown to be essential for controlling inflation.” A little difficulty for this claim, however, resides in the undeniable fact that for more than a century before the Fed’s establishment, the purchasing power of the dollar fluctuated around an approximately horizontal trend line—that is, despite inflations and deflations usually associated with the wartime issuance of fiat money and the postwar return to specie-backed currency, the dollar more or less retained its exchange value against goods and services over the long run, whereas since the Fed’s establishment the dollar has lost more than 95 percent of its purchasing power. If this post-1913 experience is what these economists consider “controlling inflation,” I would not want to see what happens to a currency’s purchasing power when inflation is not controlled! It seems that the petitioning economists have placed the performance bar absurdly low in their judgment of the Fed’s containment of inflation. Evidently, barring a Weimar-Germany-style hyperinflation, they suppose that everything is hunky-dory on the monetary front.

Second, say our esteemed economists, “lender of last resort decisions should not be politicized.” This statement only goes to prove that, as everybody knew already, economists make terrible comedians: the statement is obviously a joke, but it’s just not funny. “Not be politicized,” they say? What is one to call the Fed’s decisions during the past year to dole out trillions in loans, credit lines, guarantees, asset exchanges, and so forth to the big boys on Wall Street? Are we supposed to believe that all those big investment banks that were permitted to transform themselves instantaneously into depository institutions, thereby gaining access to various forms of Treasury and Fed support, were selected and accommodated on purely disinterested grounds? Or may we be permitted to imagine that institutions such as Goldman Sachs and Morgan Stanley just might—might, I said—enjoy a tad more political coziness with the government in general and the Fed in particular than, say, you and I and another three hundred million Americans do?

Finally, the leading economists declare: “The democratic legitimacy of the Federal Reserve System is well established by its legal mandate and by the existing appointments process. Frequent communication with the public and testimony before Congress ensure Fed accountability.” But legitimacy, it would seem, properly lies in the eyes of the legitimizer, not in the tables, charts, and econometric exercises of top-tier academic economists. The Fed’s appointment process, as I see it, suggests more the co-conspiratorial character of the ruling elites than anything we might grace with the adjective “democratic.” And if frequent congressional testimony by Fed officials, notorious for its mumbo-jumbo lack of clarity and definiteness, suffices to “ensure Fed accountability,” then we are left to wonder what led Senator Byron Dorgan to complain on the floor of the Senate on February 3: “We’ve seen money go out the back door of this government unlike any time in the history of our country. Nobody knows what went out of the Federal Reserve Board, to whom and for what purpose. . . . When? Why?” Indeed, the lack of Fed transparency and accountability has been so outrageous during the past year that it has prompted nearly three hundred members of the House of Representatives to support Congressman Ron Paul’s bill to audit the Fed.

All in all, the economists’ petition reflects the astonishing political naïvité and historical myopia that now characterize the top echelon of the mainstream economics profession. (I prefer this interpretation to the more conspiratorial one that they are fronting for the Fed in order to reap some form of personal gain. Academic economists are more often obtuse than evil.) Everybody now understands that economic central planning is doomed to fail; the problems of cost calculation and producer incentives intrinsic to such planning are common fodder even for economists in upscale institutions. Yet, somehow, these same economists seem incapable of understanding that the Fed, which is a central planning body working at the very heart of the economy—its monetary order—cannot produce money and set interest rates better than free-market institutions can do so. It is high time that they extended their education to understand that central planning does not work—indeed, cannot work—any better in the monetary order than it works in the economy as a whole.

It is also high time that the Fed be not only audited and required to reveal its inner machinations to the people who suffer under its misguided actions, but abolished root and branch before it inflicts further centrally planned disaster on the world’s people.

Independent Institute Research Fellow Stephen P. Halbrook testified today before the Senate Judiciary Committee against the confirmation of Sonia Sotomayor for Associate Justice of the U.S. Supreme Court. In his testimony, Dr. Halbrook noted that:

Legitimate concerns exist about the selection of Judge Sonia Sotomayor for Justice on the U.S. Supreme Court with regard to the interests of the tens of millions of Americans who exercise Second Amendment rights. As an appellate judge, she participated in rendering decisions which expressed little regard for the constitutional right of the people to keep and bear arms.

His testimony reviews in depth various cases in which she has been involved and concludes that “Judge Sotomayor adhered to two per curiam decisions which gave short shrift to Second Amendment rights.”

The Independent Institute’s recent book by Dr. Halbrook, The Founders’ Second Amendment: Origins of the Right to Bear Arms, formed the basis for his Amici Curiae Brief on behalf of 55 members of the Senate, the Senate President, and 250 members of the House of Representatives, in the successful, landmark, 2008 case of District of Columbia v. Heller before the U.S. Supreme Court.

Mary, not everyone is so pleased. Paul Walker pointed me to this item from New Zealand’s National Business Review, which worries that the free-content model of the blogosphere

has spawned a huge band of amateur, untrained, unqualified bloggers who have swarmed over the internet pouring out columns of unsubstantiated “facts” and hysterical opinion.

Most of these “citizen journalists” don’t have access to decision makers and are infamous for their biased and inaccurate reporting on almost any subject under the sun (while invariably criticising professional news coverage whose original material they depend on to base their diatribes).

Paul’s response:

I don’t know about other areas, but when it comes to economics I know I trust a number of bloggers a lot more than I trust the NBR. . . .

Does the NBR really think its better at dealing with development economics than Bill Easterly, or better at dealing with Austrian economists than Peter Boettke or Steve Horwitz, or better at commenting on almost any economic issue than Gary Becker or Richard Posner, or more knowledgeable about Adam Smith than Gavin Kennedy, or know more about organizational economics and the economics of institutions than Nicolai J. Foss and Peter G. Klein? Then there is David Friedman or Russ Roberts and Don Boudreaux or Tim Harford or Greg Mankiw or Arnold Kling and Bryan Caplan or Alex Tabarrok and Tyler Cowen, or Al Roth. If only the NBR had such people with their level of professionalism, training and qualifications.

[Cross-posted at Organizations and Markets]

The business of political capitalism, that is. Like Enron, Goldman operates primarily in the nebulous world of public-private interaction. It is the US’s most politically powerful financial firm, skilled at navigating the byzantine regulations governing the virtually nationalized US financial sector. Goldman’s eye-popping $3.4 billion second-quarter earnings shouldn’t surprise anyone; as Craig Pirrong notes, these earnings reflect good old-fashioned moral hazard, with Goldman exploiting its too-big-to-fail status by taking on huge amounts of risk:

Goldman knows it is too big to fail. How does it know this? Well, the government bailed out AIG not so much for AIG’s sake, but for the sake of big AIG counterparties — most notably Goldman. Moreover, given the conventional wisdom that the government’s primary error in the financial crisis was its failure to bail out Lehman — a piker compared to Goldman — it doesn’t take a rocket scientist to figure out that it won’t repeat that mistake in the future, and let Goldman go down. So Goldman knows it can get bigger, and take more risk. It is the classic heads Goldman wins, tails the sucker taxpayer eats the loss gambit. If nobody steps in to rein in the firm, it will continue to add risk, thereby enhancing the value of the Treasury put hiding in the equity entry on its balance sheet.

Somebody should be stepping in — but nobody is. Why not? Partly, no doubt, it is Goldman’s political heft. It is likely too that important policy makers don’t want to crack down on a major source of risk capital to the markets in the fear that this would impede a recovery. Even though in reality, that risk capital is your money and mine, with the exception that we have no chance of capturing the upside, and are left with a good chunk of the downside. This is a piece with the hair-of-the-dog strategy being pursued by Treasury and the Fed.

Who’s that man in blue? None other than the Independent Institute’s Research Director, Alex Tabarrok, gracing today’s Wall Street Journal’s “Personal Journal” cover as a “New Star of the Blogosphere.”

In the “rancorous” blogosphere, Marginal Revolution, Tabarrok’s blog co-written with Independent Institute Research Fellow Tyler Cowan, is singled out as offering a refreshing alternative that “point[s] toward interesting research and ideas.”

Citing the explosion in popularity of blogs written by economists by “Americans trying to understand the nail-biting financial trauma of the past several months,” the Journal points out

Marginal Revolution is one of the best-read economics blogs, attracting more than 23 million visitors since its launch in 2003.

For the Wall Street Journal article, “The New Stars of the Blogosphere,” see here.

To read and bookmark Marginal Revolution: “Small steps toward a much better world,” as part of your daily enlightenment, see here.