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Giving Away the Keys to the Kingdom?
The New York Times editorial board must be baffled by this news story about a few dozen present and former corporate executives appealing to Congress to expand public funding of political campaigns.
The appeal comes one day after the Supreme Court re-extended (some) First Amendment rights to corporations in a move the editorial board branded a “blow to democracy” that will lead to corporations “overwhelm[ing] elections and intimidat[ing] elected officials.” But now some corporate executives want to be dispossessed of the keys to the kingdom immediately after SCOTUS returned them — say what?
The executives’ appeal makes sense if you’ve read this article by law professor Robert Sitkoff (then of Northwestern, now the John L. Gray Professor of Law at Harvard ). Sitkoff argues that the 1907 Tillman Act, which placed the first federal limits on corporate involvement in campaigns, was not adopted because elected officials wanted protection from corporations, but because corporations demanded protection from donation-seeking politicians like William McKinley and his bagman Mark Hanna. Now, in the wake of the Citizens United decision, corporations are asking for renewed protection — this time on the taxpayers’ dime.
As others have argued, corporations are subject to federal laws, regulations and taxation, just like citizens, and therefore should have First Amendment rights just like citizens. If corporations are afraid their regained rights will expose them to politicians’ demands for corporation-financed political ads, then corporate officers should follow their duty to shareholders and learn how to say no.
As for the New York Times Company’s concern about corporations having undue influence on democracy, there are a couple of things it can do to reduce that influence. For one, the New York Times Company can stop endorsing candidates for office — a practice that undermines newspapers’ claims of fair and objective reporting. For another, the New York Times Company can stop using its reporters to electioneer.
Filed under: Cato Publications; Government and Politics; Tax and Budget Policy
Why Do You Want to Tax ‘Cadillac’ Health Care Plans?
The battle is intensifying between Democratic leaders and their labor supporters over a proposal to tax higher premium employer-provided health care plans. The proposal, which is contained in the Senate Democrats’ health care bill and supported by President Obama, would add a 40% excise tax to any amount above $8,500 paid for an individual worker’s coverage, or above $23,000 for a worker’s family. Labor leaders claim that a quarter of unionized workers would be subject to the tax, and government analysts estimate that 22 percent of all workers would be subject to it in 10 years.
A reasonable policy argument can be made for taxing employer-provided health coverage (more on this anon). That argument is not the one that the media (uncritically) reports is the chief motivation for President Obama and Senate Democrats. According to the press, the president and Senate Democrats want the tax so as to disincentivize employers from buying more comprehensive and elaborate coverage for their workers, which would mean that insurers would pay less for workers’ care and thus “lower the cost curve.” That thinking does not make for good public policy.
To be sure, the public worries about the rising cost of health care. But that doesn’t mean that we should embrace any policy that lowers that cost; otherwise, we would simply outlaw surgery and cancer treatments. Instead, what people want is to pay no more than they have to for the health care they want. Put more carefully, people want greater efficiency in health care (that is, more bang for their buck), not a cap or threshold tax on the care they receive.
Higher-premium health coverage does not violate this demand for efficiency. A so-called “Cadillac” plan can be broadly comprehensive and elaborate, and still be efficient, while a “Yugo” plan can be horribly inefficient. Just as important, the purchaser of that coverage (the employer, acting in place of the worker) has plenty of motivation and opportunity to consider different levels of coverage at different prices from different providers that compete on efficiency (and other dimensions). If the employer selects an expensive plan as part of its workers’ compensation, what’s the policy issue?
Sharp readers will point out that there is a policy issue in that employer-provided health care is an untaxed benefit, whereas most other forms of compensation — especially wages — are taxed. This brings us to the “anon” from above: The different tax treatments distort worker compensation, resulting in workers receiving more health care benefits and less wages than they would if all forms of compensation were treated equally. But notice that this distortion occurs when any amount of employer-provided health care is untaxed, not just the amount over $8,500 per worker or $23,000 per family.
The distortion problem is seldom mentioned in press coverage of the “Cadillac” tax proposal, and when it is discussed, it’s portrayed as a minor justification for the tax, behind the chief justification of “bending the cost curve.” And it is the latter, bogus justification that President Obama, Senate Democrats, and the press seem to be focused on.
A Double Dip for Housing?
Washington is fretting this week over news that mortgage applications fell dramatically in November. Coupled with earlier indications of renewed softening in the housing market, there is growing fear that housing is headed for a “double-dip downturn” that could further damage the economy. As a result, Federal Reserve policymakers are considering additional stimulus, while the National Association of Realtors is suggesting an(other) extension of the “temporary” homebuyer tax credit.
Remarkably, neither policymakers nor the media are asking the obvious question: Given all of the emergency interventions in housing that government has undertaken, and the fact that the housing market continues to erode, do such interventions do much good?
Since the bursting of the bubble in 2006, the great unknown has been whether housing prices will revert to their historical trend (and possibly to below trend for a short period), or stabilize at some permanently higher level because a portion of the bubble (aided perhaps by public policy) would prove enduring. There is good reason to expect reversion to trend, but the economy can surprise us.
Let’s use an example to understand this better. The graph below depicts the course of house prices for my hometown of Hagerstown, MD, an area within commuting range of suburban DC that was hit particularly hard by the bubble and its deflation. The black line is a house price index computed by the Federal Housing Finance Agency for 1989–2009. The red line is an extended linear trendline drawn using index data from the period 1989–2002. (You can do the same analysis for your area using these FHFA data.) The question, then, is whether house prices will fall all the way back to the trendline or will stabilize at a level above the trendline.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
A Want Ad for God
The press is still abuzz over Tim Geithner’s behind-closed-doors tirade against critics of the Obama administration plan to tighten financial regulation. As Mark Calabria writes below, Geithner offered a simple message to Fed chair Ben Bernanke, FDIC chair Sheila Bair, and others: “[Y]ou’ve been heard, so you were ‘included,’ now shut up.”
But while Bernanke, Bair, et al. quibble over details of the Obama plan, Geithner should be more concerned about the glaring flaw at its center: the idea that government can conjure up a “systemic risk monitor” that will identify and avoid future market bubbles.
Many of the great bubbles in financial history grew out of some belief that “everyone” (including financiers, politicians, and regulators) was confident was true, yet it turned out to be wrong (either because it was always wrong, or conditions changed in some unforseen way). Some examples:
- The supply of Dutch admiral tulip bulbs was constrained though they were in heavy demand, so the 17th-century tulip mania was good investing.
- The supply of land in the South Seas and the Mississippi Valley was fixed, so the 18th-century land-buying mania was good investing.
- The emergence of a nationwide U.S. marketplace in the early 20th century was a watershed event, so the post-WWI stock frenzy was good investing.
- The emergence of the Internet marketplace, combined with path dependency and network effects, was another watershed event, so buying “dotcom” stock was good investing.
- And of course, until the last few years,”everyone knew” that investing in real estate and mortgages was “safe as houses.”
That last bullet wasn’t just the belief of “greedy investment banks,” but also of government officials and regulators. My colleagues Peter Van Doren and Jagadeesh Gokhale have a forthcoming paper that notes, in part, that despite the populist rhetoric now being bandied around, banking is heavily regulated under international rules. However, those rules assume that investment in mortgages and mortgage-backed securities is low-risk (and indeed the rules push money toward those investments).
The paper also quotes numerous top-tier economists who claimed the soaring house prices of the past decade were supported by “the fundamentals,” or that a bubble wouldn’t threaten the broader economy. (Their paper doesn’t mention — but could — that Fannie Mae and Freddie Mac, along with their bureaucratic and congressional overseers, believed those firms’ investments in riskier mortgages were “safe as houses.”)
Everyone “knew” housing was a sound investment. It just turned out that everyone was wrong.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
The Best Way to Get a Kidney (or Heart, Lung, Liver…)
An op-ed in today’s NYT describes the abysmal organ tranplant situation in the United States, where the demand for healthy organs vastly outstrips the supply. A snippet :
There are 85,000 people biding their time [awaiting kidney transplant]… More than 4,500 of them died last year waiting. On average, that’s 13 people dying each day awaiting a kidney. (Maybe you should hope for liver disease: there are only about 16,000 people on the liver waiting list, and one-third of them get their liver in any one year.)
The column’s author is Daniel Asa Rose, whose new book Larry’s Kidney describes his cousin’s travel to China to receive a transplant (skirting Chinese law).
Rose argues the United States can resolve the transplant organ shortage by adopting three policies:
[B]etter finance stem-cell research so we can start simply growing kidneys; build better mechanical organs; and change the presumed consent option so that people would have to opt out of donating organs rather than opt in.
The first two proposals, unfortunately, are more wishful thinking than serious policy, at least in the near term. Decades of attempts at robotic organs have yielded very disappointing results, and the many advances that we’re promised from stem cell research seem to be many years in the offing. If the United States is to save the lives of most of the people now on organ transplant lists, or who will join the lists in the next decade, it will be because of a dramatic increase in organ transplantation.
One way to accomplish this increase is to adopt Rose’s third policy — hospitals would harvest organs from the recently deceased unless the deceased has explicitly refused to make his organs available for donation. As the op-ed notes, several countries around the world already have this policy.
But this policy should trouble people who care about civil liberties. Should a person have to explicitly state on a legal document that he wants his body to be kept intact after his death? And even if the person has done so, what if the hospital (perhaps conveniently) cannot find the deceased’s documents?
Fortunately, there is an intermediate policy that would be much more respectful to the deceased and to civil liberties, would be easy to implement, would dramatically increase the supply of organs, and would have little cost relative to the other costs of transplantation: Incentivize people to volunteer to be organ donors — perhaps by granting a tax credit to their estate or covering their funeral expenses if, upon their passing, a healthy organ is harvested for transplantation.
Unfortunately, this policy is prohibited by the 1984 National Organ Transplant Act, a law that has cost more U.S. lives than were lost in the Korean and Vietnam wars combined. And this policy is opposed by many bioethicists despite clear empirical evidence that the policy would significantly reduce pain and suffering — which says more about the sorry condition of contemporary applied ethics than about the idea of rewarding organ donors.
Cato has done considerable work advocating this idea. For some examples besides the articles linked in the above paragraph, see this video and these papers.
Filed under: Health, Welfare & Entitlements; Law and Civil Liberties
Oh C’mon, NYT!
C@L readers know that I’m a fan of the NY Times’s news and business reporting. If you want depth and detail (especially today, when papers increasingly read like Tweets), the NYT’s news coverage is about as good as it gets.
The opinion page, sadly, is another matter.
Case in point, last Friday’s lead editorial chastising Japan and Europe for not adopting large fiscal stimulus plans. The lede:
The world economy has plunged into what is likely to be the most brutal recession since the 1930s, yet policy makers in Europe and Japan seem to believe there are more important things for them to do than to try to dig the world, including themselves, out.
That’s actually OK — the editorial board is free to believe (and espouse) that massive fiscal stimulus is the best policy for dealing with the current recession. But to use an old saying, they’re entitled to their own opinion, but not their own facts. Ignoring that admonition, the ed led off its final graf with this howler:
In a recent speech, Christina Romer, another of President Obama’s economic advisers, pointed out some lessons [sic] from the Great Depression: fiscal stimulus works.
If you follow the economic history literature, this is a stunner; some of Romer’s most important academic work demonstrates the opposite, namely that fiscal stimulus did little to get the United States out of the Depression [$] and subsequent U.S. recessions [$]. Has she rejected her own findings?
I tracked down the speech transcript and found out that, nope, she hasn’t; in fact, she was explicit that “fiscal policy was not the key engine of recovery in the Depression.”
Solve the Financial Crisis (and Make Some Serious Money)
Peter Van Doren and I have been puzzling over this very interesting NYT op-ed on home foreclosures by Yale economist John Geanakoplos and Boston University law professor Susan Koniak. If G&K’s story is right, then shouldn’t there be an opportunity for some clever financiers to help struggling homeowners keep their houses, help banks and other investors repair their balance sheets — and the financiers could help themselves to piles of cash in the process?
G&K argue that all three parties to a home mortgage — the homeowner, the lender, and the loan servicer who works as a go-between — currently face grim financial prospects:
- Many homeowners are “underwater” — that is, they owe more on their mortgages than their homes are now worth. According to First American Core Logic, some 20% of mortgages were underwater as of December 2008. The percentage varies greatly from state to state, with 55% of mortgages underwater in Nevada, but only 7% in New York. The homeowners who are underwater include not just those who purchased with little down payment, but also many people who put down the traditional 20 percent when they bought in 2005 or 2006, at the peak of the real estate bubble. According to Case-Shiller index data, house prices nationwide have fallen 27% (as of December) from their May 2006 peak. Some local markets have experienced more dramatic declines, highlighted by Phoenix’s 46% slide. Rental prices are now far below many homeowners’ monthly mortgage payments, and lots of underwater homeowners will have to make payments for years before they have some equity stake in their homes. Many of those homeowners would rather default and risk foreclosure. G&K’s op-ed includes this figure showing that defaults increase dramatically as homeowners sink further and further underwater. Given their current options, default is rational.
- The mortgage lender faces heavy losses if the home enters foreclosure. According to G&K, ”the subprime bond market now trades as if it expects only 25 percent back on a loan when there is a foreclosure.”
- The servicer also is at risk. According to G&K, the servicer is obligated to continue paying the lender its monthly payment even if the borrower is in default. That obligation only lifts at foreclosure.
Because of the servicer’s obligation, the servicer has strong incentive to push for quick foreclosure. However, the homeowner and the mortgage lender would likely benefit from a loan modification — even a significant write-down of principal — because that would keep the homeowner in his house and it would deliver a better return to the lender than the 75% loss from foreclosure. G&K thus argue that government, instead of continuing to bail out the banking industry and struggling homeowners (and putting taxpayers on the hook for hundreds of billions of dollars), should simply require that the lenders write down the mortgage principal.
But is government action needed? Couldn’t some private actors accomplish the same thing — and make some serious scratch in the process?
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Did the New Deal ‘Help’?
While Barack Obama’s economics team hammers out its $800 billion fiscal stimulus plan, the commentariat is battling over the effectiveness of what some consider the prototype stimulus package, the New Deal.* The suppressed (and problematic) conclusion to all this punditry seems to be: Because government spending under the New Deal helped/didn’t help to end the Great Depression, the Obama stimulus plan will/won’t help to end the current recession.
One of the opening salvos was this exchange between George Will (anti-New Deal) and Paul Krugman (pro). More recently, New York Times editorial board member Adam Cohen (pro) wrote this column, responding to an op-ed by former Business Week bureau chief Andrew Wilson (anti) in the Wall Street Journal.
So who’s right? Did New Deal government spending “help,” as Cohen puts it?
To answer that, we first have to define Cohen’s term — what would it mean to say that government spending under the New Deal “helped”? Two possibilities come to mind:
- New Deal spending boosted consumption, thereby increasing production, reducing unemployment, and ending the Depression.
- New Deal spending aided people who would have otherwise been destitute during the Depression.
The first sense considers the New Deal as a stimulus program to revive the economy; the second considers it as a welfare program to aid the poor. The two notions are far from equivalent. My reading of the literature suggests that the New Deal did little as an economic stimulus, but it did provide welfare benefits.
Read the rest of this post »
Filed under: Finance, Banking & Monetary Policy; Government and Politics; Tax and Budget Policy
Meet the New Boss…
Speaking at George Mason University (oh, the irony) today, President-elect Barack Obama urged “Congress to act without delay” to pass his still-undisclosed economic stimulus package, with a pricetag that’s drifting toward $800 billion.
“We should have an open and honest discussion about this recovery plan,” Obama allowed, but America faces a grim future “if we don’t take dramatic action as soon as possible. … It is time to set a new course for this economy, and that change must begin now.”
Where have I heard this “We must act now!” refrain before? Perhaps when the USA Patriot Act was on the floor? Or legislation authorizing the president to invade Iraq? Or congressional deliberation of the FISA amendments and their wiretaps? Or last year’s economic stimulus bill? Or the $700 billion TARP legislation?
The president-elect is about to submit legislation to pile nearly $1 trillion (if we’re lucky — who thinks the final cost will be that low?) in new liabilities on future generations in order to fund an economic strategy that has a poor track record. This is exactly the time for a careful, clear public discussion of the Obama proposal, so Americans will understand what we’re signing on to, its cost, and its uncertain prospects. The last thing we need is to continue the “Don’t just stand there — spend something” philosophy of the last eight years.
I Hope for Change.
Cass Sunstein and the Cato Institute
The Washington Post is reporting that Harvard law professor Cass Sunstein will be named director of the Office of Information and Regulatory Affairs, the White House’s regulatory review office. The appointment is baffling, not because the Obama administration has chosen Sunstein (he is a first-rate thinker), but because Sunstein has (apparently) accepted it. OIRA chief is one of the most thankless jobs in Washington, and the office has historically shown itself to be a victim of the political winds no matter how sharp-minded and sincere the chief is.
Sunstein would not fit the label “libertarian,” but he is, in his own way, a supporter of liberty. And he has been a good friend to the Cato Institute, speaking here and writing for Regulation (1, 2).
I wish Cass well in this difficult new job.
Deal or No Deal?
Arnold Kling makes an important observation that “Democrats want to [pass the Paulson-Bernanke bailout proposal] without deliberation, because putting the financial sector under government control is what they want.”
Despite the sturm und drang of the Left blogosphere (not to mention protesters) over the proposal, it is not their Blue Team heroes who are standing against the proposed bailout. Instead, a bloc of limited-government Republicans is providing the only significant congressional impediment to the proposal. Meanwhile, Capitol Hill Democrats are ready to embrace Paulson-Bernanke and the Left punditocracy is miffed that John McCain helped to disrupt the endgame.
Why would a cadre of Republicans side against a plan drawn up by a Republican Treasury secretary and Fed chair, while Democrats favor it? One reason, as Arnold diagnoses, is that the bailout would give Congress justification to intervene (further) in financial markets. That should worry us because earlier congressional mischief deserves much blame for the current financial mess — and portends future mischief and crises.
The meltdown of recently developed products in the financial markets — like the sale of tranches of collateralized debt obligations and derivatives connected with those products, primarily credit-default swaps — are at the heart of the financial crisis. It is important to remember who fueled the market for those products: congressional puppets Freddie Mac and Fannie Mae.
For decades, the federal government (and other levels of government) have pursued the (questionable) goal of ever-higher homeownership rates. However, politicians (correctly, I suspect) believed that the public would oppose a broad, explicit taxpayer subsidy program for homebuyers. So federal lawmakers encouraged the development of elaborate financial products to provide loans for higher-risk mortgage borrowers — the financial products that have now gone toxic following the collapse of the real estate bubble.
Filed under: Finance, Banking & Monetary Policy; Government and Politics
Update on Berwyn Heights Botched Raid
Things are getting worse for Prince George’s County, Md. police officials after last week’s botched no-knock raid (previously chronicled on C@L here).
Not only did the police not have a warrant to conduct a no-knock raid, but it now appears they were well-aware that a drug ring was delivering large shipments of marijuana to innocent addressees’ homes in the D.C. suburbs. The packages would then be intercepted by other members of the ring, all without the addressees’ knowledge or involvement. Nonetheless, the cops executed their guns-ablazin’ raid on the home of Berwyn Heights mayor Cheye Calvo and his wife Trinity Tomsic, where the cops shot the couple’s black Labs and detained Calvo and his mother-in-law in handcuffs for hours.
The cops have now arrested the delivery truck driver and an accomplice who apparently orchestrated the Berwyn Heights shipment, and P.G. Police Chief Melvin C. High has conceded, ”Most likely, [Calvo and Tomsic] were innocent victims.”
Astoundingly, High refuses to admit that police did anything wrong in the raid. He says in today’s Washington Post:
In some quarters, this has been viewed as a flawed police operation and an attack on the mayor, which it is not. This was about an address, this was about a name on a package . . . and, in fact, our people did not know that this was the home of the mayor and his family until after the fact.
I correct Chief High: When police officers execute a no-knock raid though they have no warrant or cause to do so, when they blast and shoot their way into a home without first learning who lives there, then they’ve carried out a flawed police operation. That’s the case regardless of whether Calvo and Tomsic are guilty of trafficking drugs.
In Prince George’s County, flawed law enforcement isn’t unusual. At least, in this case, the victims of the botched raid may have the social stature to fight back.
UPDATE (8/8): It took a week, but P.G. County police chief Melvin High has finally conceded that Calvo and Tomsic were not involved in drug trafficking.
Unfortunately, Chief High did not issue an apology for the police action or admit that the raid was botched. That raises an interesting question: Is he trying to protect his department, or does he really think the Berwyn Heights incident exemplifies how law enforcement is supposed to act?
Another Police Raid; More Dead Dogs
Just north of D.C., in the small suburb of Berwyn Heights, a county SWAT team raided a house last week after a shipping service delivered a large quantity of illegal drugs to the front door.
Good police work in the war on drugs? Probably not.
The house is home to Berwyn Heights mayor Cheye Calvo and his wife Trinity Tomsic, and their two black Labs (pictured left). Though the package containing more than 30 lbs. of marijuana was addressed to Tomsic, the couple may have had nothing to do with the drugs. In recent months there have been incidents in which large quantities of drugs were shipped to homes in the D.C. area, where they were then supposed to be intercepted by drug dealers — all without the package addressees’ knowledge or involvement. Calvo and Tomsic may have been caught up in just such a scheme.
This would make Calvo and Tomsic the unfortunate victims of an understandable error by the police SWAT team, except…
The police action was yet another guns-ablazin’, no-knock raid, in which the officers (in what seems like SOP) shot the couple’s dogs, even as one of the pups tried to run away. The cops then handcuffed Calvo and his mother-in-law and interrogated them for hours, while the dogs’ bodies laid in pools of blood nearby. The cops later found the package of drugs — unopened, as if it were an unexpected package. No arrests were made.
“My government blew through my doors and killed my dogs,” Calvo told the Washington Post. “They thought we were drug dealers, and we were treated as such. I don’t think they really ever considered that we weren’t.”
Choosing What to Worry About
Paul Krugman’s column in today’s NYT laments the lack of a national policy to combat global warming. He writes:
It’s true that scientists don’t know exactly how much world temperatures will rise if we persist with business as usual. But that uncertainty is actually what makes action so urgent. While there’s a chance that we’ll act against global warming only to find that the danger was overstated, there’s also a chance that we’ll fail to act only to find that the results of inaction were catastrophic. Which risk would you rather run?
He then cites the work of Harvard economist Martin Weitzman, who surveyed the results of a number of recent climate models and found that (in Krugman’s words) “they suggest about a 5 percent chance that world temperatures will eventually rise by more than 10 degrees Celsius (that is, world temperatures will rise by 18 degrees Fahrenheit). As Mr. Weitzman points out, that’s enough to ‘effectively destroy planet Earth as we know it.’”
Krugman concludes, “It’s sheer irresponsibility not to do whatever we can to eliminate that threat” and he calls for opprobrium against those who might impede global warming legislation: “The only way we’re going to get action, I’d suggest, is if those who stand in the way of action come to be perceived as not just wrong but immoral.”
There is merit to the argument that society should consider a policy response to the threat of global warming. A small chance of an enormous calamity equals a risk that may deserve mitigation. That’s why people buy insurance, after all.
However, Krugman doesn’t accept that argument — at least, not when applied to other worrisome risks that trouble people whose politics are different than his. Less than two months ago, he wrote this about another future crisis:
[O]n Friday Mr. Obama declared that he would “extend the promise” of Social Security by imposing a payroll-tax surcharge on people making more than $250,000 a year. The Tax Policy Center estimates that this would raise an additional $629 billion over the next decade. But if the revenue from this tax hike really would be reserved for the Social Security trust fund, it wouldn’t be available for current initiatives. Again, one wonders about priorities. Whatever would-be privatizers may say, Social Security isn’t in crisis: the Congressional Budget Office says that the trust fund is good until 2046, and a number of analysts think that even this estimate is overly pessimistic. So is adding to the trust fund the best use a progressive can find for scarce additional revenue?
Filed under: Energy and Environment; Government and Politics; Health, Welfare & Entitlements; Tax and Budget Policy
Pickens’ Hot Air
The NYT editorial board is all aquiver over T. Boone Pickens’ plan to increase wind-generated electricity in the United States. A Times editorial gushes:
[Pickens would] develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40 percent and the country would save $300 billion a year.
Just one problem: Increased wind power may not free up that much natural gas.
Nat gas–fired generation has some important characteristics: Turbine generator nat gas plants are relatively cheap and quick to build, but they can be expensive to operate because the fuel is pricey. The plants can be put into service (“dispatched”) and taken out quickly with little start-up cost. Moreover, nat gas turbine plants can be very small (some are the size of a tractor-trailer) and emit little pollution relative to coal-fired plants, so they can be sited close to (and in) areas of heavy electricity demand.
Given its profile, nat gas generation is often used for “peak” production — that is, used for periods when demand is great and must be satisfied immediately (e.g., hot summer days when air conditioners are running full-blast, “work hours” when factories and offices are consuming a lot of juice) as well as to address localized power problems (e.g., areas that are at risk of brown-outs). This contrasts with coal-, nuclear-, and hydro-powered plants that are expensive to build but relatively cheap to run, that are difficult to idle and to site, and that are used, accordingly, to provide “baseline” power to large areas. (I should note, in charity to Pickens, that nat gas “co-gen” plants are also used as part of the baseline supply.)
Wind-powered generation is an intermittent source of electricity that may not be available during periods of peak demand. Its product, as envisioned by Pickens, would have to be transported over great distances on the nation’s overly-congested power grid — from the “wind-swept plains” to population and manufacturing centers — in order for it to satisfy much of the nation’s energy demand. Thus, it’s unclear how wind-powered electricity can effectively displace much of the 20 percent of U.S. electricity that is currently produced by natural gas. (In contrast, all renewables, combined, produce about 2.4 percent of U.S. electricity.)
If anything, wind-powered generation seems better suited to replace some coal-fired generation (especially in Texas where Pickens is building a $10 billion wind farm and where coal is often the marginal source of power). But since coal isn’t a transportation fuel, this displacement wouldn’t reduce the nation’s dependence on oil — unless there’s a breakthrough in battery technology that would make electric cars more practical. Moreover, if the nation does increase its dependence on wind power, then we would likely have to increase our dependence on nat gas peakers to cover those days when wind isn’t available (which often are those hot days when air conditioners are cranked up).
This is not to say that wind-powered generation should be ignored. The United States will likely overcome its current energy woes through a mixture of technology advances and conservation efforts, and wind may be part of that mix. But Pickens’ claim that wind power could be used to displace 40 percent of U.S. transportation fuel seems like little more than hot air.
Do We Need Fannie and Freddie?
All eyes were on Wall Street Monday morning as Freddie Mac, one of the two giant government-sponsored enterprises that dominate U.S. mortgage finance, floated $3 billion in bonds to continue its role as a buyer and reseller of mortgage obligations. The bond sale came after a week in which Freddie’s stock, and the stock of its sister Fannie Mae, plummeted as analysts and economists worried that the housing bubble collapse would push the two GSEs into insolvency. To fortify Fannie and Freddie, the Bush Treasury Department, with blessings from the Democratic Congress, worked feverishly over the weekend to cobble together a bailout plan should the GSEs’ conditions worsen to the point that they can no longer function. The successful bond sale indicates the Bush plan has reassured the market — albeit barely.
It is an article of faith across the political spectrum that Freddie and Fannie cannot be allowed to fail — especially not at this time when the broader housing market is undergoing painful correction. Why do they have such exalted status?
Before Fannie Mae — the first of the twins — was created amidst the “Recession within the Depression” in 1938, home mortgage lending was highly risky for banks. State regulation kept banks small and geographically limited in order to make them better targets for taxation and political manipulation. As a result, banks could not geographically diversify their loan risk, leaving them highly vulnerable to localized economic downturns. Because they lent money (as mortgages and business loans to farms and other firms) to local borrowers for long periods of time but they had to honor local depositors’ withdrawal requests, banks were often one bad harvest and one bank run away from insolvency. For that reason, they shied away from financing long-term home loans.
Fannie Mae (formally, the Federal National Mortgage Association) provided badly needed lubricant to the mortgage industry. It purchased loan obligations from banks, putting money back in the banks’ vaults and making that money available for more home loans. Fannie financed its operations by borrowing on Wall Street and, later, by pioneering the creation and sale of mortgage-back securities (MBSs) — selling large “bundles” of loans to investors and then servicing the loans on the investors’ behalf. In this way, Fannie diversified loan risk, allowing a nationwide (and worldwide) pool of investors to finance (at first indirectly, then directly) a nationwide pool of mortgages. This wasn’t the ideal solution that banking reform would have been, but Fannie was a good second-best solution.
Because of its tax-free status and government backing (as well as banking regulations that constrained would-be competitors), Fannie quickly came to dominate the mortgage industry. This system hummed along, unchanged, until 1968 when Fannie’s costs conflicted with Lyndon Johnson’s efforts to rein in the federal budget amidst the war in Vietnam and the war on poverty. It was decided that Fannie would be spun off as a private corporation whose investors would bear its costs. However, Fannie retained its tax-free status and received a $2.25 billion line of credit at the U.S. Treasury. It also was allowed to operate with much lower reserve requirements than banks. But the most valuable of Fannie’s parting gifts was its implicit too-big-to-fail status: because of its history and role in mortgage lending, investors believe the federal government will ride to Fannie’s aid if it ever became financially unable to function. For this reason, investors buy Fannie’s stocks, bonds, and MBSs.
Filed under: Cato Publications; Regulatory Studies; Tax and Budget Policy
Much Ado about Offshore Drilling
The lead story in today’s papers and the buzz on the political talk shows is about President Bush’s request to Congress that they suspend the federal ban on oil drilling off the U.S. Atlantic and Pacific coasts.
Already, drilling proponents and environmentalist opponents are gearing up for battle, and the presidential candidates are sounding off on the idea. None of their comments, so far, offer anything useful for public policy.
For people who want good policy, here are some points to consider:
- Part of the reason for the high current price of oil (and gasoline) is that supply is “inelastic” – that is, it’s hard for producers to increase production even when prices are high and there is significant economic incentive to do so. A significant increase in production capacity would reduce oil and gas prices significantly — assuming the current condition of high inelasticity continues until the new oil is brought to market.
- It will take a long time for that new oil to reach the market. It often takes as much as a decade or more for a new oil field to be brought online.
- No one knows how much oil lies offshore and whether that oil is economically worthwhile to extract, as there hasn’t been any extensive studies of those areas in decades.
- Concerns about the environmental impact of drilling are legitimate, as are concerns that the United States may be forgoing the use of a valuable resource by not drilling in these areas.
Good public policy would examine the risks and costs underlying both of these concerns, and then make a decision (or perhaps a compromise) about drilling. However, this issue will not be decided in such a rational way. The debate will be dominated by two ideological camps — the “drill at any cost” crowd and the “don’t drill at any cost” crowd” — and their ideological priors and political power will preempt any good policy discussion.
Unfortunately, that’s how we roll here in Washington, D.C.
The Gas Tax Holiday Explained
The commentariat (including Cato folks and friends) have spent the past couple of weeks sounding off on John McCain and Hillary Clinton’s proposals to suspend the federal motor fuels tax this summer. The commentary has been almost uniformly critical of the idea, and some of the harshest critics have been economists.
Unfortunately, a lot of this commentary seems to be value judgments disguised as economics. Also, much of the economic analysis makes assumptions about the market that may not be correct or that may be offset by other market conditions — but the commentators do not mention (and may even forget) those problems. Put simply, though the idea of a gas tax holiday may be flawed, many of the opinion and analysis pieces on the McCain and Clinton proposals appear to be flawed as well.
Peter Van Doren and I have put together this short paper on the microeconomics of the gas tax. Don’t let the figures and the talk of “elasticities” throw you — the ideas are easy to understand.
The upshot is this: Contrary to many economists’ claims, it’s quite possible that a tax holiday could give consumers some price relief on motor fuels. (This is an economic insight.) However, it’s an open question whether that savings is worth its cost. (Answering that question requires a value judgment.)
Filed under: Energy and Environment; Government and Politics; Tax and Budget Policy
‘The Amazing Hillary’
Hurry, hurry, hurry! Step right up, ladies and gentlemen, and see the Diva of Deception, the Impresario of Illusion — THE AMAZING HILLARY!! Watch her make the federal gas tax SEEM TO DISAPPEAR!! But in fact, you’ll still be paying the same price for gas! Even the media can’t figure out this trick!! She’s remarkable! She’s astounding! So hurry right in and see the First Lady of Legerdemain, the Mistress of Magic!
That’s what Hillary Clinton’s campaign managers should be barking about her joining John McCain in proposing to suspend the federal gasoline tax for the 2008 summer driving season. Says Candidate Clinton, the move would “immediately lower gas prices.”
What makes her proposal a true work of wizardry is that, she claims, it would not reduce government tax revenues. Whereas McCain says he would reduce government spending to make up for the lost tax money (an example of magical thinking?), Clinton would implement “a windfall profits tax on the big oil companies” to close the revenue gap.
Did you catch The Amazing Hillary’s trick? Did you see why consumers would still pay the same price for gasoline? No? OK, let’s watch the sleight of hand in slow motion:
Filed under: Energy and Environment; Government and Politics; Tax and Budget Policy
The Housing Crisis: Maybe We Should Do Nothing?
Two weeks ago, the Senate passed legislation ostensibly intended to address home foreclosures. That legislation is now being criticized as little more than a handout to corporate interests. The criticism is legit; the bill is largely a package of tax breaks for developers (and other struggling industries, including those that have nothing to do with housing), along with tax credits for the purchasers of foreclosed homes (a provision that has its own criticisms) and grant money to local governments that want to play Flip This House.
Across Capitol Hill, the House is considering different foreclosure legislation that would give tax credits to first-time homebuyers and developers of lower-cost housing (proposals that are subject to some of the same criticisms now being lobbed at the Senate bill). House and Senate committees are also considering additional legislation that would permit the Federal Housing Authority to underwrite as much as $300 billion in mortgages for borrowers who are at risk of falling behind on their payments.
Lawmakers’ interest in combating the mortgage problem is understandable: default and foreclosure are painful for homeowners, clusters of vacant houses are hard on communities, and the struggling homebuilding industry is a significant contributor to the nation’s overall economic malaise. (Another factor that makes it understandable: this is an election year.)
However, before Congress puts taxpayers (most of whom are also paying mortgages or renting their homes) on the hook for billions of dollars in grants, tens of billions in tax breaks, and guarantees for hundreds of billions of dollars in mortgages, three points should be acknowledged:
- The bailout proposals are as much a benefit to lenders as borrowers.
- The homebuyers who are to be rescued are not the victims of “raw deals” (unless they were deceived or defrauded).
- The bailout could make the nation’s overall economic condition worse.
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