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This Month at Cato Unbound: What Happened?
Writing the history of a financial crisis can’t be easy, and it’s even harder when that crisis is still unfolding. That’s why this month we’ve invited a team of economic experts for a very special issue of Cato Unbound. Each brings a different perspective on our financial troubles, and, partly because the matter is so far from settled, we’ve decided to give them all equal billing: Lawrence H. White, William K. Black, Casey Mulligan, and J. Bradford DeLong will each write a full-length essay in a first of its kind roundtable format. The question at hand: What happened?
Prof. White’s essay is available here, and I found the following particularly interesting:
One can’t explain an unusual cluster of errors by citing greed, which is always around, just as one can’t explain a cluster of airplane crashes by citing gravity. Anyway, the greedy aim at profits, not losses.
I’m just old enough to remember how everyone called the 1980s a decade of greed. Then there were the 1990s, also a decade of greed. The 2000s? Greed yet again. (I wish I could invest in this “greed” thing. It never seems to go out of style.)
I also liked the following, which makes one of its most substantive points in the final parenthesis:
As calculated by the Federal Reserve Bank of St. Louis, the Fed from early 2001 until late 2006 pushed the actual federal funds rate well below the estimated rate that would have been consistent with targeting a 2 percent inflation rate for the PCE [Personal Consumption Expenditure] deflator. The gap was especially large—200 basis point or more—from mid-2003 to mid-2005. [4]
The excess credit thus created went heavily into real estate. From mid-2003 to mid-2007, while the dollar volume of final sales of goods and services was growing at a compounded rate of 5.9 percent per annum, real-estate loans at commercial banks were (as already noted) growing at 12.26 percent. [5] Credit-fueled demand both pushed up the sale prices of existing houses and encouraged the construction of new housing on undeveloped land. Because real estate is an especially long-lived asset, its market value is especially boosted by low interest rates. The housing sector thus exhibited a disproportionate share of the price inflation predicted by the Taylor Rule. (House prices are not, however, included in standard measures of price inflation.)
I understand that it isn’t easy to incorporate housing prices into measures of inflation, and that there is no generally accepted method of doing it. It seems more important than ever, though, to include these prices in some way, if only to let the public know the sort of trouble housing inflation has very likely been causing.
Obama’s Touch Cured Me of Scrofula
Arjun Appadurai (of “Magic Ballot” fame) has replied to my recent post. I think it’s at least worth clearing up a few misconceptions:
I assume Mr. Kuznicki is sympathetic to the mission of the Cato Institute, whose name can be traced back to Cato the Younger, implacable foe of Julius Caesar. Alas, he sounds a lot more like Cato the Elder, also known as Cato the Censor, famed for his rigid moralizing, his ascetical approach to public spending, and his brutal approach to war against the enemies of Rome.
I don’t care for moralizing, and still less for war, but I’m guilty as charged when it comes to asceticism in public spending.
I believe that the government should live within its means, and that whenever possible, workers and investors should keep what they earn. Call me a penny-pincher, but I think that terming a $700 billion bank bailout “magic,” as Mr. Appadurai did, is the single weakest justification I’ve ever heard for any government project, ever. And I’ve heard some doozies before.
Calling acts of government “magic” gives our political leaders way more credit than they deserve. Our leaders may be intelligent, or charismatic, or honest, or judicious. But even the best of them are not magic. To tell the truth, I hadn’t thought this a controversial idea.
Pay No Attention to the Man behind the Curtain
I’m sorry, but this just makes me ill. In a post he actually titled “The Magic Ballot,” Arjun Appadurai writes:
The word is MAGIC. On the night of November 4, it felt as if something magical had happened, and perhaps there were others, like me, who used that word. But it is not the biggest word in current public use and I wish it were more fully available to us now.
We’ve chosen someone to work for us. We’ve hired him. For a job. We did it through the (yes, rather nifty) process of democracy. And… That. Is. All. Barack Obama is an employee. He’s not a magician. We can fire him later if we like, and he’s not going to retaliate by turning us all into toads or shooting lighting bolts out of his eyes.
I know that many believe that priests can perform miracles, at least of certain kinds, but Obama isn’t a priest. Tuesday night did not and could not make him one. It’s superstitious, impious, or both, to think that something as common as a democratic election could endow anyone with magical powers.
I regret that we are forced to catch the special aura of this election without a deep and serious space for the idea of magic, magic as it used to be. It would help us fill this rhetorical void. It would let us name the un-nameable and it would let us enjoy our means even without certainty about our ends. It would let us enjoy this week without dragging it immediately into boring predictions about what Nancy Pelosi will do, about how many huge headaches Obama will face, about how heavy the coming storm will be, and how fragile our collective sources. We have hardly crowned Obama and we have promptly begun to mourn for him, as if he is has already been vanquished by his foes.
Crowned??? Sir, this is a Lockean republic, not a New-Age theocracy.
But wait, it gets worse:
I’m from the Government, and I’m Here to Help You, Whether You Want It or Not
This story says a lot about who most wants bank bailout money, and why:
Community banking executives around the country responded with anger yesterday to the Bush administration’s strategy of investing $250 billion in financial firms, saying they don’t need the money, resent the intrusion and feel it’s unfair to rescue companies from their own mistakes.
But regulators said some banks will be pressed to take the taxpayer dollars anyway. Others banks judged too sick to save will be allowed to fail.
The government also said yesterday that it will guarantee up to $1.4 trillion of private investment in banks. The combination of public and private investment is intended to refill coffers emptied by losses on real estate lending. With the additional money, the government expects, banks would be able to start making additional loans, boosting the economy. . . .
Peter Fitzgerald, chairman of Chain Bridge Bank in McLean, said he was “much chagrined that we will be punished for behaving prudently by now having to face reckless competitors who all of a sudden are subsidized by the federal government.”
At Evergreen Federal Bank in Grants Pass, Ore., chief executive Brady Adams said he has more than 2,000 loans outstanding and only three borrowers behind on payments. “We don’t need a bailout, and if other banks had run their banks like we ran our bank, they wouldn’t have needed a bailout, either,” Adams said.
“Pressed” how, exactly? One wonders. But common sense suggests two strong indicators that money is being misallocated. The first is when it goes to an institution with a track record of failure. The second is when it’s being urged on a recipient who does not even want it. It seems that we’re faced with one or the other now.
Down with the B.A., and Long Live Education
That could be the rallying cry of Charles Murray in this month’s Cato Unbound. Suppose, he argues, we were to give the job of designing our higher education system to an expert, and that expert gives us the following proposal:
First, we will set up a single goal to represent educational success, which will take four years to achieve no matter what is being taught. We will attach an economic reward to it that often has nothing to do with what has been learned. We will urge large numbers of people who do not possess adequate ability to try to achieve the goal, wait until they have spent a lot of time and money, and then deny it to them. We will stigmatize everyone who doesn’t meet the goal. We will call the goal a “BA.”
Mad, says Murray. A terrible system.
Education should not be made to suffer under a system like this, and neither should those who want to achieve something with their lives. You can read his proposals for education reform in this month’s Cato Unbound. Education economist Pedro Carneiro will have a reply tomorrow, economist Bryan Caplan of George Mason University will reply on Friday, and education policy expert Kevin Carey will have a follow-up on Monday.
All That and a 30-cent Mojito
This AP story, which ran in the Miami Herald, is an example of some shockingly bad reporting:
A communist experiment is letting average government workers in this eastern city enjoy a few things only foreigners and monied Cubans can usually afford: a good burger, a kicking jazz bar and stiff cocktails.
Across the rest of the island, average monthly government salaries of 408 pesos, about $19.50, don’t cover grocery bills, let alone a night out. But in Bayamo the central government has made a special effort to support peso businesses, giving the lowly currency actual buying power.
Along the stylish pedestrian mall known as Paseo or ”The Boulevard,” six blocks of restaurants, barber shops, ice cream parlors and department stores give Cubans a taste of tourist life at local prices.
Jazz bands jam for free until 2 a.m. at the Piano Bar, where mojitos go for just 5.50 pesos, or 30 U.S. cents. A 1950s-style diner serves up tasty meatball sandwiches for about half a peso — the equivalent of three cents — and four scoops of the richest ice cream in Cuba for about the same price.
”Almost everyone who comes in is surprised at first. The music is good. The cocktails are strong,” said Ernesto Aldana of the Piano Bar, where the Cuba Libre — copious rum pours with ice and splashes of cola and lime — costs 4.80 pesos, the equivalent of less than 25 cents.
The intended first impression, I suspect: Wow, 30-cent mojitos? What an enlightened country!
My actual first impression: You know a country is having problems when a functioning ice cream parlor makes the international news. And, like everything in life, the experiment comes at a price:
Laissez-Faire and Corporatism
I’ve just read Steven Horwitz’s excellent “Open Letter to My Friends on the Left,” on the subject of the credit crisis. I highly recommend it, whether you’re on the left or not:
In the last week or two, I have heard frequently from you that the current financial mess has been caused by the failures of free markets and deregulation. I have heard from you that the lust after profits, any profits, that is central to free markets is at the core of our problems. And I have heard from you that only significant government intervention into financial markets can cure these problems, perhaps once and for all. I ask of you for the next few minutes to, in the words of Oliver Cromwell, consider that you may be mistaken. Consider that both the diagnosis and the cure might be equally mistaken.
Consider instead that the problems of this mess were caused by the very kinds of government regulation that you now propose. Consider instead that effects of the profit motive that you decry depend upon the incentives that institutions, regulations, and policies create, which in this case led profit-seekers to do great damage. Consider instead that the regulations that may have been the cause were supported by, as they have often been throughout US history, the very firms being regulated, mostly because they worked to said firms’ benefit, even as they screwed the rest of us. Consider all of this as you ask for more of the same in the name of fixing the problem. And finally, consider why you would ever imagine that those with wealth and power wouldn’t rig a new regulatory process in their favor.
The seemingly arcane difference between laissez-faire and corporatism is one of the most important in today’s public policy debates. Laissez-faire means the equality of all before the law, with the state neither helping nor hindering any market actor. Corporatism means offering special favors to those who’ve already succeeded. (Just for starters: “Too big to fail” is corporatism.)
If only this distinction were more clearly understood by lawmakers, journalists, and the general public. Too often all of these groups just use the vague word “capitalism,” which seems mostly intended to split the difference — or to obscure it. But laissez-faire and corporatism are directly opposed to one another, and if more people on the left understood this, they might be far more sympathetic to free markets. Even, perhaps, while keeping a healthy mistrust of corporations.
New at Cato Unbound: Responsible Drug Use
What would we do without drug prohibition? Well, we’d probably have to think for ourselves, make informed choices about drug use, and behave responsibly. A scary thought.
But in a sense, we already have to do these things, because prohibition has completely failed at keeping illegal drugs out of American life. Making wise decisions is already important, and prohibition hasn’t changed much about the need to be informed and responsible. Prohibition has, however, encouraged a great deal of misinformation about drugs, harmed our civil liberties, promoted violence, wrecked the usual market safeguards that apply to consumer goods, and made the most dangerous drugs more prevalent.
After admitting that “just ban them all” is not a viable answer, the next step in getting past drug prohibition is the search for sensible ways to interact with psychoactive drugs. The real choice isn’t between prohibition and a final drug binge that wipes out America once and for all. It’s between prohibition and individual responsibility — a responsibility that might mean saying “no,” but could sometimes mean saying “yes.”
This isn’t an easy message to sell, but two people have been trying for more than a decade, and their efforts have been extraordinary. They are the pseudonymous authors Earth and Fire Erowid, who together maintain the Erowid.org drug information archive, the largest and most often visited drug information site on the Internet.
They are also the lead authors at Cato Unbound this month, and they’ve produced a remarkable essay criticizing drug prohibition, encouraging free inquiry, and insisting that sound drug policy begins with individual choice and individual responsibility.
Cato Unbound: Jim Manzi on the Costs and Benefits of Climate Policy Alternatives
In the lead essay for August’s Cato Unbound, Jim Manzi weighs various climate proposals and finds them wanting. He begins by putting the economic costs of global warming in perspective:
This is the central problem for advocates of rapid, aggressive emissions reductions. Despite the rhetoric, the best available estimate of the damage we face from unconstrained global warming is not “global destruction,” but is instead costs on the order of 3 percent of global GDP in a much wealthier world well over a hundred years from now.
It should not, therefore, be surprising that formal efforts to weigh the near-term costs of emissions abatement against the long-term benefits from avoided global warming show few net benefits, even in theory. According to the modeling group led by William Nordhaus, a Yale professor widely considered to be the world’s leading expert on this kind of assessment, an optimally designed and implemented global carbon tax would provide an expected net benefit of around $3 trillion, or about 0.2 percent of the present value of global GDP over the next several centuries. While not everything that matters can be measured by money, this certainly provides a different perspective than the “Earth in the balance” rhetoric would suggest.
This month’s issue should be a lively one, with responses on the way from Joseph Romm, Indur Goklany, and Michael Shellenberger and Ted Nordhaus. We hope you’ll find much to think about as the debate unfolds.
After Heller
Well, what now?
Following a victory that some thought impossible, the advocates of the right to bear arms are asking themselves where to go next. None are more qualified to answer that question than Robert A. Levy, co-counsel in District of Columbia v. Heller, the landmark case that has permanently changed the shape of gun rights jurisprudence. In his lead essay at Cato Unbound, Levy discusses several important questions that the Supreme Court did not decide: Does the Second Amendment apply to the states as well, under the doctrine of incorporation? Which regulations are and are not permissible? What’s next in the political realm?
He also has a particularly cogent discussion of judicial activism, a concept conservatives and liberals alike tend to misunderstand:
When the legislative or executive branch exceeds its legitimate enumerated powers, the courts have the authority, indeed the duty, to declare that exercise of power unconstitutional. Deference in the face of excesses by the political branches, coupled with an allegiance to precedent, means that conservatives are rarely willing to overrule prior cases, leaving entrenched the very foundations of the regulatory and redistributive states they rail against. In practice, judicial restraint has mutated into judicial passivism, with a predictable result: more government power and fewer constitutionally protected individual rights.
Neither “judicial activism” nor “judicial restraint” is an end in itself. Liberty is.
On Following the Money
Thomas Frank writes in the Wall Street Journal,
Consider the poor Washington libertarian. Everywhere else in America his type is an exotic species, a coffee-shop heretic who quotes from “Atlas Shrugged” and steers every conversation toward Ron Paul or gold. Take him or leave him, he doesn’t care. He is his own master.
Not so the Beltway variety. Here, in the very home of the taxing, regulating leviathan, the libertarian is such a commonplace and unremarkable bird that no one gives him a second glance. Here he is a factotum of the establishment, a tiny voice in a vast choir assembled by business and its tax-exempt front groups to sing the virtues of the entrepreneur.
And therein lies his dilemma. Almost by definition, our young libertarian’s job is to celebrate the profit motive from the offices of a not-for-profit organization. He is subsidized, in other words, to hymn the unsubsidized way of life. Rugged individualism may be his creed, but a rugged individual he ain’t.
This is more than just an abstract problem, as I discovered last week at a panel discussion hosted by America’s Future Foundation, one of the lesser libertarian nonprofits in the city. The questions that night were whether nonprofit work constitutes a “real job” and if moving to the private sector was “selling out” — ideas well known to any liberal do-gooder.
No, let’s not consider the beltway libertarian. Or at least, let’s not consider him all alone. Instead, let’s look at a couple of money trails. Here’s the first one:
1. Consumers buy products because they want or need them.
2. An entrepreneur, who has supplied these products, collects the money, which the consumer has given of his own free will.
3. The entrepreneur gives some of this money to his investors, some to his employees, and some he keeps for himself as a just reward.
4. The entrepreneur, his investors, or his employees give a portion of that money to a libertarian think tank like the Cato Institute. (Nearly all of Cato’s money comes from individual donors, not corporations or foundations.)
5. I work for the Cato Institute, and it pays me a salary.
There’s something remarkable about this money trail: every step is voluntary. Every step is the product of a private, individual decision. None of them are coerced.
Can the Resource Curse Be Lifted?
Cato Unbound‘s May edition discusses the resource curse. Numerous studies confirm that countries rich in natural resources tend to be poor in property rights, individual liberty, and the rule of law. Is this just a deep, and deeply depressing, feature of the world we live in? Or can wealthier countries (which make up the market for most of these resources) and international institutions somehow intervene to alleviate or even lift the resource curse?
Philosopher Leif Wenar opens up the discussion by charging that you — yes you — are almost certainly the recipient of stolen goods, resources that clearly shouldn’t have belonged to the dictators who first sold them. Wenar then offers a simple but provocative solution to the resource curse, one that will hold kleptocracies responsible for their thefts.
The discussion will feature Cato senior fellow Andrei Illarionov, the former chief economic advisor to Vladimir Putin; journalist and historian John Ghazvinian, author of Untapped: The Scramble for Africa’s Oil; and Washington University political philosopher Christopher Wellman, an expert in matters of international justice. Could Wenar’s proposal succeed? What are the obstacles along the way? What else, if anything, can developed countries do to end the resource curse? Be sure to check out Cato Unbound throughout the week, as discussion develops over one of the most pressing humanitarian issues of our time.
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