Nick Kristof devotes his NYT column today to wishing that American society were organized like the U.S. military. The armed forces “live by an astonishingly liberal ethos,” he gushes, and closes the column by suggesting that ”as the United States armed forces try to pull Iraqi and Afghan societies into the 21st century, maybe they could do the same for America’s.”

(I swear I’m not making this up.)

Kristof looks at the military and sees the ideal United States:

The military helped lead the way in racial desegregation, and even today it does more to provide equal opportunity to working-class families — especially to blacks — than just about any social program. It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities.

The United States armed forces knit together whites, blacks, Asians and Hispanics from diverse backgrounds, invests in their education and training, provides them with excellent health care and child care. And it does all this with minimal income gaps: A senior general earns about 10 times what a private makes, while, by my calculation, C.E.O.’s at major companies earn about 300 times as much as those cleaning their offices. That’s right: the military ethos can sound pretty lefty.

…The military is innately hierarchical, yet it nurtures a camaraderie in part because the military looks after its employees. This is a rare enclave of single-payer universal health care, and it continues with a veterans’ health care system that has much lower costs than the American system as a whole.

How times change. Four decades ago, folks like Kristof were marching on the Pentagon and burning their draft cards. Today they want to enlist.

More seriously: Racial equality, social mobility, and freedom from concerns about health care and child care are laudable goals. (Among the virtues of free markets is that they move society toward such goals.) Also, the U.S. armed services have helped improve many people’s lives, giving them careers, skills, education, and other benefits.

But, granting all that and assuming Kristof’s view of the armed forces isn’t romanticized (I know, but assume), he overlooks two important points:

First, the U.S. military is an all-volunteer force, which means that service members freely choose to take on both the obligations and benefits of military life. Yet lots of people choose not to live that life, for many reasons — including that they’re displeased with the benefits. Kristof gushes about how the military treats its members (again, assume); but what’s the difference between the military offering benefits that its service members like, and the private sector offering different benefits that its workers like? (Remember the lament that public employees receive lower wages than similar private-sector workers.)

It should also be noted that, until the U.S. military became an all-volunteer force, it compensated and treated its service members more like cannon-fodder. But once the services had to compete for labor in a free market, they expanded the benefits that Kristof now hails. Private-sector employers have to compete in that same marketplace.

Second, the U.S. military is the U.S. military. That is, it is financed through taxation, directed by politicians, and operated as a rigid hierarchy. Costs and the individual preferences of its service members are not of high concern. The social changes Kristof favors can be implemented by force in such a world. But that coercion is out of place in a world where costs matter and people have freedom.

Such a world most certainly does not have “an astonishing liberal ethos.”

Remember When ‘Liberals’ Were Liberal? is a post from Cato @ Liberty - Cato Institute Blog

With gasoline in the United States moving toward (and in some places, above) $4 a gallon and motorists understandably unhappy, there is a growing desire to blame someone for the high prices.

Previous gas price spikes in 2006 and 2008 brought blame on ”Big Oil” (meaning firms like Exxon-Mobil, BP, Royal Dutch/Shell, et al., which really are just mid-sized oil — but whatever), the Bush administration and Republicans, environmentalists, and the federal government. But 2011 offers a new leader in the blame game: speculators. From Capitol Hill lawmakers, to business columnists, to activist websites, to letters to the editor and hyper-forwarded emails, people are calling out trading in the oil and gasoline futures markets, aka ”speculation,” and demanding that government do something about it.

The problem is, I haven’t seen any of these folks offer a coherent explanation for how speculation drives up the price at the pump. And I doubt any is forthcoming.

The speculation-blamers’ story is simple enough: Investors sign futures contracts in oil and gasoline — traditionally, agreeing to a price today for oil or gas that will be delivered weeks or months in the future (and that probably has yet to be pumped out of the ground or refined). But, speculation-blamers say, the investors are running amok, paying outrageous prices for the futures. Those prices then affect oil and gasoline sales today, driving up prices at the pump.

Worse, they say, many of the futures are just paper transactions: the traders don’t have oil or gas to sell, nor do they intend to take delivery of it. Instead, when the future closes (that is, reaches its end-date), then one of the two counterparties will simply pay the other the difference between the agreement’s price and the actual market price on the closing day. For instance, if Smith Investments and Jones Investments signed a six-month future for one barrel of oil at $100, with Smith taking the “short” position (believing that oil’s price will be less than $100 six months from now) and Jones taking the “long” position (believing the price will be above $100), and six months from now oil is selling for $80, then Jones will pay Smith $20. Vice-versa if oil’s price is $120. (In fact, most futures today are settled in cash, even if one of the counterparties is somehow involved in oil production or use.)

On first blush, the speculation-blamers’ story makes sense: Surely, the price for future delivery of oil or gasoline will affect the price for present-day delivery. And all the paper-transaction stuff just seems devious and dangerous — shrewd Wall Street investors are hosing Main Street again!

But think more carefully about the story, and it begins to unravel.

Futures prices for some commodity like oil or gasoline can affect current prices — but if and only if those futures cause producers, consumers, or stockpilers (i.e., people who buy and hold commodities for future sale, aka speculators) to change their behavior in some way that would affect supply and demand today. For instance, if the federal government were to announce that it’s going to buy a lot of gold in six months at a price much higher than what it sells at now, stockpilers would likely respond by buying and storing gold today in anticipation of selling it to Uncle Sam later, at a profit. This would push up prices today.

However, commodities that are costly to store are less likely to experience this because speculators will have to factor in the storage cost, which could make the strategy risky and unprofitable. For instance, roses are inexpensive most of the year, but are very expensive around Valentine’s Day. The reason for this (in part) is that roses harvested in August can’t be stored cheaply and sold on Valentine’s Day. A “rose future” signed in August but closing in February won’t have much effect on August rose prices.

Interestingly, oil and gasoline are more like roses than gold. Oil and gas don’t spoil (at least, not to the extent roses do), but they’re expensive to store — petroleum is heavy, dirty, emits fumes, and is combustible. For that reason, not a lot of oil or gasoline is stockpiled for the long term (beyond the Strategic Petroleum Reserve). With that said, there has been some building of oil stockpiles in recent weeks, but it’s not dramatically higher than the stockpiling usually seen prior to the summer driving season — and gasoline stocks have been declining.

What about the devious-seeming paper transactions? One prominent speculation-blamer, The Street contributor Dan Dicker, derisively compares this investing to gambling. OK, but what does that have to do with the price of gasoline at the pump? If you and I were to bet on the Capitals-Rangers series, our bet wouldn’t affect the outcome of the series. Likewise, I don’t see how a bet on the future price of oil between two investors would affect the price of oil today (or in the future for that matter) because their paper transaction would not affect the supply or demand for oil today.

So what is driving the gasoline price spike? It seems far more likely that it is the result of a combination of the following:

1. Uprisings in the Middle East could spread to mega-exporters Saudi Arabia and Iran, which has resulted in an implicit risk premium on oil and oil products.
2. Japanese recovery efforts from the March 11 earthquake and tsunami are drawing heavily on petroleum.
3. China and India are using more energy as their economies recover from the global recession.

All of this exacerbates the underlying problem: World demand for oil is very strong at most any price, but supply can’t be ramped up quickly in response to demand (because it takes about a decade to bring a new oil field online). In economic parlance, this means that both supply and demand are “price-inelastic,” which in turn means that even little problems can have a big effect on price (fortunately, in either direction). To understand this better, see this short paper.

Now, I admit, I’m no Wall Street wizard, and perhaps the Dan Dickers of the world know something that I don’t. But, so far, I haven’t seen them present a sound explanation for their claim that speculation is to blame for high gas prices. When I read their comments, I think of the old retort, “What’s that got to do with the price of tea in China?” So the next time one of these folks starts in, we need to get him to clearly explain how “speculation” affects the price at the pump.

Gas Prices, Speculation, and the Price of Tea in China is a post from Cato @ Liberty - Cato Institute Blog

I generally admire the work of Roger Pielke Jr., a political scientist in the University of Colorado-Boulder’s Center for Science and Technology Policy Research. His new book on climate change is refreshingly honest and non-ideological, if a bit overly technophilic. His broader work offers the important insight that science alone cannot direct public policy, but rather it can only lay out possible results of different policy choices.

Given the quality of his work, I was disappointed by Pielke’s op-ed in today’s NYT defending Congress’s legislated obsolescence of the incandescent light bulb. He argues that government standard-setting is an important contribution to human welfare, and the light bulb standard is just part of that standard-setting (though he does suggest some minor policy tweaks to allow limited future availability of incandescents). 

To justify his argument, Pielke points out the great benefit of government-established standard measures, as well as quality standards:

Indeed, [in the United States of the late 19th century] the lack of standards for everything from weights and measures to electricity — even the gallon, for example, had eight definitions — threatened to overwhelm industry and consumers with a confusing array of incompatible choices.

This wasn’t the case everywhere. Germany’s standards agency, established in 1887, was busy setting rules for everything from the content of dyes to the process for making porcelain; other European countries soon followed suit. Higher-quality products, in turn, helped the growth in Germany’s trade exceed that of the United States in the 1890s.

America finally got its act together in 1894, when Congress standardized the meaning of what are today common scientific measures, including the ohm, the volt, the watt and the henry, in line with international metrics. And, in 1901, the United States became the last major economic power to establish an agency to set technological standards.

 Alas, this argument doesn’t support Pielke’s light bulb standard.

The weights-and-measures and product standards that he cites are examples of government response to market failures—instances where private action is unable to reach efficient results. Concerning weights and measures, a type of market failure known as the collective action problem can make it difficult to establish standard measures privately. Getting everyone to agree can be like herding cats, and there is ample incentive to secretly defect from that standard — e.g., a gas station would love to sell you a 120-ounce “gallon” that you assume is a standard 128 ounces. (OTOH, there are plenty of examples of private action overcoming this problem, such as the standardization of railroad track gauges in the late 19th century.) Likewise, quality standards can be understood as a response to a kind of market failure known as the information asymmetry problem— e.g., a producer of low-quality goods may knowingly try to pass them off as high-quality goods. (Again, there are plenty of examples of private action overcoming this problem.)

As libertarians, we recognize that there are market failures, and that government can sometimes mitigate them. (That’s why we’re not anarchists.) Also as libertarians, we recognize that government intervention can result in outcomes even less efficient than the original market failure. (That’s why we’re not run-of-the-mill Democrats or Republicans.)

But where is the market failure with incandescent bulbs? After nearly 125 years of use, people know the drawbacks and advantages of incandescents—that they use more electricity than other types of bulbs and have a shorter lifespan, but they cost very little and work much better in certain applications—from dimmer switches to Easy-Bake Ovens—than other bulbs. Besides, CFL bulbs were widely available before Congress’s 2007 legislation, and LED lights were already in the R&D pipeline.

Perhaps Pielke would argue that there is a market failure with incandescents: the negative externality of air pollution, including greenhouse gas emissions. But incandescent lighting is only one of many, many electricity-using devices, and electricity generation is just one of many, many sources of air pollution. So why the focus on just this one externality source instead of advocating a policy that broadly addresses emissions? And why devote his op-ed to discussing technology standards, and make no mention of air pollution?

Pielke’s Problem is a post from Cato @ Liberty - Cato Institute Blog

The left-wing blogosphere and left-leaning newspapers have spent the past few days joyously incensed over the story of a Tennessee city fire department that allowed a home to burn because the homeowner hadn’t paid his annual fire fee.

AlterNet’s Jonathan Holland titled-and-teased his post on the fire:

Ayn Rand Conservatism at Work — Firefighters Let Family’s House Burn Down Because Owner Didn’t Pay $75 Fee

Talk of limited government is appealing until you see what it actually means in practice: a society in which it’s every man for himself.

ThinkProgress’s Zaid Jilani thundered that the fire demonstrates that there are two competing visions of American society:

One, the conservative vision, believes in the on-your-own society, and informs a policy agenda that primarily serves the well off and privileged sectors of the country. The other vision, the progressive one, believes in an American Dream that works for all people, regardless of their racial, religious, or economic background. The conservative vision was on full display last week in Obion County, Tennessee.

(An aside: ThinkProgress loves to throw in partisan barbs, so Jilani claims that “every seat” of the Obion County Commission is “filled by a Republican,” a claim that Holland echoes. Nope. But then, ThinkProgress recently harangued Michael Cannon for an opinion that isn’t his, so ya’ know…)

Finally, today the New York Times editorial page chimes in:

In any case, the founding fathers left no message that government can make an object lesson of a neglectful citizen by letting his house burn down. The [homeowners] deserve an apology, even if it won’t come from the candidates peddling dreams of constricted government.

It’s unfortunate that these writers didn’t pause from their fervor to consider the facts. In a nutshell: The firefighters involved were from a city government fire department following a city government policy concerning people who didn’t pay a city government fee for a 20-year-old city government program that was adopted in response to a county government decision.

John Galt in Nomex this ain’t.

Beyond the facts, these writers are confused about basic political theory.

All three writers argue that fire service is a public good that shouldn’t be left to private action. “Public good” is a technical term referring to a type of market failure in which (to over-simplify) it would be easy for some people to benefit from a good without paying their fair share for it. As a result, public goods are at risk of being under-provided because of all the free-riding. The classic (though flawed) example of a public good is a lighthouse: a ship can benefit from the safety of its beacon without contributing to the lighthouse’s construction and upkeep.

But it’s unclear how the Obion County fire would be an example of a public goods failure — obviously a homeowner who fails to contribute to fire service can be excluded from receiving the service. A better example in support of the public goods argument might be that fire service is publicly provided so as to protect the neighbors of a house that’s on fire — though again, if you read the details of the Obion County fire, you find that it provides an example that such neighbors can be protected.

Indeed, the Obion County fire seems a clear example of government failure, not market failure. Because city government provides the service (albeit through a voluntary fee system for people like the affected owner who live outside the city lines), people likely consider it a subsidized public service. As a result, there is strong disincentive for any private firm to enter the market and offer competing service. It’s not difficult to imagine what a private fire service would do in an event like the Obion fire: it likely would extinguish the blaze and then send the homeowner a bill. There are plenty of examples of this sort of practice in private marketplaces. And it’s what the government fire company in Obion should have done. Instead, the firefighters stood by and watched the house burn.

One can’t blame the NYT editorial page, ThinkProgress, and AlterNet for trying to spin an example of government failure into a tale of the horrors of limited government. Just a few weeks out from a national election in which progressive candidates appear poised for a major waxing, the last thing the progressive side needs is a heartrending example of government failure. And yet, the Obion County fire is an example of why that waxing is sorely needed — and justified.

Hot Heads and Government Failure is a post from Cato @ Liberty - Cato Institute Blog

I turn 41 this summer (thank you for the condolences). Along with the well wishes of family and friends, I received an unexpected gift from NY Times writer Paul Krugman: this column in which he bashes people who are critical of Social Security in its current form or who worry about its ability to deliver expected benefits.

At first glance, the column hardly seems like a gift: it’s long on pointless insults, short on thoughtful discussion, and misleading. But it offers such a poor defense of the Social Security status quo that I suspect readers will be more skeptical of the program after seeing the column, not less. Hence, Krugman’s gift.

He writes:

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted, which the program’s actuaries don’t expect to happen until 2037 — and there’s a significant chance, according to their estimates, that that day will never come.

OK, 2037 — no worries. Except that, as I said, I turn 41 this summer, which means I’ll turn 67 and qualify for full Social Security benefits in mid-2036. The very next year, the Social Security trust fund will be exhausted, according to the “intermediate” scenario contained in the most recent Social Security Trustees Report, available here (see Section IV-B and Appendix E). The program will still pay out some benefits — but less than 3/4s of what it now promises. So what happens then? That’s not a good question if you’re my age or younger.

But suppose you’re not my age or younger. Suppose you’re 10 years older than me, and will have collected 10 years of benefits by 2037. Don’t feel smug — you’ll be asking “So what happens next?” when you’re 77. That’s not a good question at your age, either. 

In fairness to Krugman, the Trustees Report considers different Social Security cost scenarios, the most optimistic of which projects that the trust fund will not be fully exhausted over the 75-year period the report considers. Krugman says there’s “a significant chance” this will be the case, but my (admittedly quick) skim of the report suggests it’s more just “a chance.”

One quick aside about the 2037 exhaustion date: when Krugman wrote this column in 2005, the Trustees’ intermediate scenario projected that the trust fund would last until 2042. In five years’ time, that date has grown 10 years closer. Not good.

Krugman writes that, if the trust fund does run out, Social Security can maintain its benefits using money transferred into the program by Congress from elsewhere in the federal budget. In fact, Congress will have to direct money from elsewhere to Social Security much earlier than 2037. Under the Trustees’ intermediate scenario, beginning in 2018 the amount of money Social Security pays out in old-age benefits each year will be greater than what the public pension program takes in in payroll taxes. (The Disability Insurance component of Social Security is in even worse shape, according to the Trustees, such that the program overall will go in the red in 2015.) To cover the difference, Congress will have to begin paying off the treasury bonds that currently comprise Social Security’s trust fund in order to provide the promised benefits. (In fact, Congress will have to do that this year because, as a product of the recession, Social Security obligations are greater than revenues. Hopefully, the economy will rebound and give the program a few years’ respite before transfers become an annual necessity, though the pessimistic scenario predicts no such respite.)

Krugman is unconcerned by these transfers, dismissing those who worry about them as engaging in “three-card monte.” His column doesn’t acknowledge that these transfers would need to occur at a time when Congress will be scrambling to cover other growing costs: similar deficits in Medicare, obligations to the ever-growing federal debt, and Medicaid’s increasing burden on federal and state governments. I worry that future taxpayers will not be amenable to having so much of their tax money directed to retirees (who refused to reform Social Security when they could have done so at relatively lower cost) rather than to government services for current taxpayers.

Krugman ends the column criticizing the proposal to reduce Social Security’s cost by raising the age at which retirees become eligible for full benefits. As part of an adjustment that began in 2002, retirees must now wait until age 66 to receive full benefits; beginning in 2021, the age requirement will slowly be raised until it reaches 67 in 2027. (Retirees will still be able to take reduced benefits at 62.) Some have suggested raising the full-benefit age to 70. Krugman says that would be unfair:

America is becoming an increasingly unequal society — and the growing disparities extend to matters of life and death. Life expectancy at age 65 has risen a lot at the top of the income distribution, but much less for lower-income workers. And remember, the retirement age is already scheduled to rise under current law. So let’s beat back this unnecessary, unfair and — let’s not mince words — cruel attack on working Americans.

There is something to what Krugman says. From 1980 to 2000, life expectancy at birth for the poorest decile (i.e., 10%) of the U.S. population increased from 73.0 years to 74.7 years, while life expectancy for the wealthiest decile increased from 75.8 years to 79.2 years. (The disparity in life expectancy between the top and bottom decile groups does decline to 1.6 years at age 65, which is up from 0.3 years in 1980. H/T to Dr. Daniel Coyne at the Washington University in St. Louis School of Medicine.)

But inequality in Social Security benefits would exist whether the eligibility age is 65, 66, or 70. Because Americans are required to participate in Social Security, and because all Americans become eligible for full retirement benefits for the rest of their lives at a single threshold age, then the longer-lived wealthy will receive more in benefits than the shorter-lived poor no matter what that threshold is. This is the product of having a one-size-for-all public pension plan (with lousy benefits). The way to address this inequality problem is through Social Security choice.

As I wrote at the beginning, Krugman’s column should leave thoughtful and informed readers more concerned about Social Security, not less. He couldn’t have given me a better present.

A Birthday Gift from Paul Krugman is a post from Cato @ Liberty - Cato Institute Blog

A record-setting heat wave has settled on the Beltway this week, resulting in my thermometer topping the 85°F mark by the time I came into work today.

Did I mention my thermometer is inside my apartment?

“Oh yuck,” you’re probably thinking. “You should get a place with air conditioning.”

But you see, my unit has air conditioning. The problem is that, under Virginia law, it can’t be turned on until May 1.

My apartment is in an older building (1958) with a centralized HVAC system. As a result, the whole building must either be in heating mode or cooling mode. One of the quirks of this system is that it takes a couple of days for it to be converted from one mode to the other.

That physical reality doesn’t jibe well with Virginia law, which requires (in the words of an Arlington County government brochure) that:

Every dwelling unit is … to have heating facilities that are properly maintained and keep all habitable rooms at a temperature of at least 65° during the day and 60° at night during ordinary winter conditions from October 15 – May 1.

The result is that, unless the building superintendent knows for certain that cold-weather conditions have ended for the year, a building with a system like mine (which isn’t uncommon) can only be in compliance with Virginia law if it keeps the air conditioning off until May 1. Hence my 85°F apartment.

No doubt, Virginia regulators will explain that such rules are necessary to protect the comfort and safety of apartment residents. But I wonder what they would say about the comfort and safety of the small children who live in my building and who spent the last few nights trying to sleep in 85°F heat?

Hot Time in the Old Town Tonight is a post from Cato @ Liberty - Cato Institute Blog

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.

Giving Away the Keys to the Kingdom? is a post from Cato @ Liberty - Cato Institute Blog

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.

Why Do You Want to Tax ‘Cadillac’ Health Care Plans? is a post from Cato @ Liberty - Cato Institute Blog

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. 

The sharp downward slope at the end of the price line and  the latest housing news suggest that Hagerstown is destined to revert to trend (perhaps after a period below trend). I’ve drawn similar figures for several other locations and they show similar patterns. It looks like the nation’s housing markets, for the most part, are reverting to trend.

When this crisis first began in 2007, Bush administration officials vowed to “stabilize house prices at the highest possible level.” However, despite their efforts and those of the Obama administration, Congress, and the Fed,  reversion to trend appears inevitable. At best, those efforts may have slowed the reversion — in which case, I suppose the Bush goal has been met.

It can be argued that a gentler reversion to trend may be more tolerable than a sharp return. On the other hand, there are fears that a lengthy softening of the housing market will lead to more defaults, less worker mobility, continued weak consumption, and a long period of high unemployment and stagnant wages for those who are working. Perhaps a sharp return would be the quickest way to shed the ill effects of the bubble.

This leaves us with a final question that policymakers, the media, and the public should be grappling with: If all of these emergency housing interventions only result in a slower reversion to trend, then is that benefit worth the cost?

A Double Dip for Housing? is a post from Cato @ Liberty - Cato Institute Blog

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.

Hence the problem with a “systemic risk monitor:” Such a monitor would have to know when everyone is wrong — including financial experts and government analysts. And the monitor would need the power to force everyone to act contrary to their beliefs and instead obey the monitor’s judgment — and not fall prey to public and political demand that the monitor be replaced because “everyone knows” his judgment is flawed.

It seems the Obama administration is creating a position for God. But I doubt that God will leave his current job.

Someone might object: We wouldn’t have needed God to realize that there was a housing bubble over the past decade. But the problem with bubbles is that they only become apparent — and policies against them only become politically defensible — once they collapse.

And even then they might not be recognized. Consider another asset that experienced a dramatic price spike and collapse in the last decade: oil. Ah, someone might argue, there wasn’t really an oil bubble; we’re just experiencing a temporary decrease in demand. Oil is a scarce commodity with strong price inelasticities, and its price will soar over the long term. But the same was said of admiral tulip bulbs, and South Seas and Mississippi Valley land, and housing in high-demand areas.

What would happen if a systemic risk monitor were to come to Washington and immediately mandate that we abandon ”energy sustainability” policies because they’re premised on a bubble? Would he be right? Who would believe him? And would politicians and the public stand behind this judgment?

A Want Ad for God is a post from Cato @ Liberty - Cato Institute Blog

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.

The Best Way to Get a Kidney (or Heart, Lung, Liver…) is a post from Cato @ Liberty - Cato Institute Blog

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.”

Romer did go on to say that she strongly supports the Obama stimulus plan, believing it will be effective and worthwhile. But this belief is rooted in one school of economic thought (or ideology, to borrow from NYT columnist Paul Krugman), not history. Whatever the merits of Romer’s belief, the NYT‘s line about the Depression proving that “fiscal stimulus works” is just plain horseradish.

In recent years, the NYT editorial board has repeatedly chastised non-progressives, claiming they put ideology over objective fact. Will the ed board scold itself?

Oh C’mon, NYT! is a post from Cato @ Liberty - Cato Institute Blog

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?

A financial wizard with sufficient backing could approach a troubled lender and offer, say, 50% of the original loan amount in order to take some of the toxic mortgages off the lender’s hands. Now, the lender won’t be happy with selling at a 50% loss, but that certainly beats a 75% loss, so the lender would grudgingly agree. The financial wizard would then approach the homeowner and offer to write down the mortgage principal to, say, 60% on condition that the homeowner purchase mortgage insurance. The homeowner should jump at the offer because it would put him back above water, purchasing a home that’s worth more than its debt. Finally, the financial wizard would get the servicer to release its control over the loan, because the servicer would want to be freed from the risk of having to cover the payments to the lender. The financial wizard would then pocket a cool 10% of the original mortgage’s value.

That is not chump change. G&K estimate some 8 million homes could be foreclosed upon in the coming years. Assume the original mortgage on each of those houses is $199,025 (95% of the median sale price of new U.S. homes in January 2004, about halfway up the bubble); that 10% would represent almost $160 billion.

Of course, if the bank proves recalcitrant and demands more than 50%, or the homeowner demands a write-down of more than 40% or he’ll walk away, that would cut into the profits. And the financial wizard would have to cover his costs and possible risk premiums. Still, at least in theory, there would seem to be a significant pile of money on the table.

So why isn’t this happening? Are there no money-loving financial wizards out there?

To some extent, they are. Last week, the NYT reported that some former Countrywide executives have formed a firm called PennyMac that, with financial backing from hedge funds and other investors, purchases toxic mortgages from insolvent banks at low prices, modifies the loans to increase homeowners’ likelihood of making payments, and profits from the rekindled mortgage revenue stream. In the particular case reported in the NYT, PennyMac paid 38 cents on the dollar. But PennyMac seems like very small potatoes compared to the $160 billion that may be on the table. And the banks were forced to sell the loans because they had been taken over by the FDIC.

So why aren’t there more firms doing what PennyMac is doing, or following the strategy that Peter and I have laid out above? And why aren’t banks lining up to offload their toxic mortgages (or to do the write-downs themselves and pocket the 10%)? Peter and I can think of three possible reasons:

1. As G&K note in their op-ed, banks and other investors who’re currently saddled with toxic assets may be waiting for some form of government rescue that would enable them to recoup far more than the 50% or so that would be offered by our financial wizards.
2. Banks are keeping bad mortgages on their books at values much higher than the 25 to 40 cents on the dollar observed in the rare sales of troubled assets, and so the banks are unwilling to sell the assets for 50 cents on the dollar. (Remember that PennyMac is purchasing assets from banks that have been taken over by the FDIC — in other words, these are forced sales.) The banks (and their managers) may strongly prefer to keep the assets on their books rather than sell them at a 50% loss.
3. The transaction costs involved in this scheme (e.g., analyzing the toxic assets to determine which ones to buy, negotiating with the delinquent and at-risk homeowners) are prohibitively large.

Government can address (1) by committing not to bail out the investors. Unfortunately, it’s unclear how reliable that commitment would be, especially given government actions so far in this financial crisis.

Fixing (2) is difficult. Accounting rules could be changed to force the banks to lower their book values for bad mortgages, but it would be difficult to get that accounting change passed quickly. Besides, some accounting experts argue that, in stressful times, accounting rules should have more wiggle room rather than less.

As for (3), the PennyMac guys claim that the work is difficult. But c’mon, there could be a $160 billion payday for the guys who can figure it out.

So, come on you money-loving financial wizards: your country needs you!

Solve the Financial Crisis (and Make Some Serious Money) is a post from Cato @ Liberty - Cato Institute Blog

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.

The figure below sketches U.S. GDP and government spending (all levels) for the Great Depression era. The wildly fluctuating GDP line clearly marks the Great Contraction of 1929-1932, the Recession within the Depression of 1937–1938, and the return of GDP to pre-crash levels in 1940. In contrast, government spending has only a very mild upward slope over the period (until the 1941 ramping-up for World War II). In 1930, the second year of Herbert Hoover’s administration, government spending totaled $10 billion; at the height of the New Deal spending boom in 1936, government spending reached $13.1 billion. (In comparison, that rate of government spending growth is just below the average for the entire post-WWII era.) This raises the question of whether there was much New Deal fiscal stimulus at all.

We get a somewhat different view if we consider the federal budget surplus/deficit. Much of the benefit of fiscal stimulus is supposed to come from the fact that it’s deficit spending. In essence, government borrowing moves future consumption to the present and hopefully boosts the economy to a permanently higher level. As the figure below shows, the federal government dramatically ramped up deficit spending in the last year of Hoover’s administration, as tax receipts sagged and Hoover enacted his own emergency programs. FDR continued the borrowing to fund components of the New Deal.

However, this borrowing was not dramatic by today’s standards. As a share of GDP, the New Deal deficit peaked at 5.4 percent of GDP ($3.6 billion) in 1934; in dollar terms, it peaked at $5.1 billion (4.3 percent of GDP) in 1936. In contrast, President-elect Obama recently announced that he expects ”trillion-dollar deficits for years to come,” even without the $800 billion stimulus package that his administration is preparing. With a U.S. GDP of roughly $13.8 trillion, the Obama-projected deficit (not counting the stimulus package) represents 7.2 percent of GDP.

Does the New Deal experience thus suggest that, when it comes to fiscal stimulus, just a little bit can have large effects? Interestingly, economic research suggests the opposite. Long before she was named chair of Obama’s Council of Economic Advisers, Christina Romer wrote a short paper for the Journal of Economic History titled “What Ended the Great Depression?” The paper provides empirical evidence that FDR’s fiscal policy provided little stimulus during the Great Depression. As shown in the figure below (reproduced from Romer’s article), the results of the New Deal’s fiscal stimulus (solid line) were little different from what she projects would have resulted from “normal fiscal policy” (dotted line). Both the deficit spending and the multiplier effect from that spending were too small to budge GDP.

What did end the Great Depression? Romer argues that another FDR policy — doubling the fixed exchange rate for the dollar relative to gold — did the trick, though the New Dealers seem to have lucked into that result rather than planned it. The rate change worked as a monetary stimulus, inducing large gold flows into the United States, where they could now buy twice as many dollars. That buttressed bank deposits and increased bank willingness to lend, encouraging investment. The lending resulted in a sharp increase in the money supply, pushing against the Depression’s price deflation and encouraging consumption. From the moment the exchange rate changed, the United States began to climb out of the Depression — albeit slowly; more slowly than many other countries.

Romer’s explanation dovetails with Milton Friedman and Anna Schwartz’s work on the root cause of the Depression: the Federal Reserve’s sharp reduction of the money supply in the late 1920s, in order to moderate the stock market boom and return the United States to the pre-WWI dollar-gold exchange rate. It also dovetails with evidence that other nations’ recoveries from the Great Contraction began soon after they abandoned efforts to return their currencies to pre-war gold exchange rates. My reading of the economic literature indicates that the “monetary policy did it” thesis has been generally accepted by economic historians (contra Cohen’s graf 9).

So it was FDR’s monetary policy that ended the Great Depression, not such New Deal initiatives as the WPA, the CCC, NIRA, and the rest of the alphabet soup. This follows the findings of a later paper that Romer co-authored with husband David Romer on U.S. recessions in the post-WWII era, which found that monetary stimulus proved superior to discretionary fiscal stimulus in restoring the economy.

What, then, to make of our warring pundits? In the fight between Krugman and Will over the stimulatory effects of the New Deal, it seems that opposing sides can both be wrong. Will was incorrect to argue that economic conditions grew worse during the New Deal era — conditions did improve, albeit slowly, and were temporarily reversed by the Recession within the Depression. Krugman, on the other hand, was wrong to argue that FDR’s fiscal stimulus helped to remedy the Depression and that only the large fiscal stimulus of WWII ended the Depression — in fact, GDP had returned to pre-Crash trend (as calculated by Romer) by 1940. And both mischaracterize the 1937–1938 Recession in the Depression. Although federal deficit spending did decrease along with the economy, the recession appears to have been largely the product of onerous new banking regulations that weakened the monetary stimulus (a point that today’s eager-to-regulate Congress should bear in mind).

Concerning Wilson and Cohen, Wilson goes too far in claiming that FDR (and Hoover) “were jointly responsible for turning a panic into the worst depression of modern times.” If anyone merits that distinction, it is the Federal Reserve for its pre-Crash contractionary monetary policy. Cohen is wrong to claim that “as a matter of economics … F.D.R’s spending programs did help the economy.” However, he does have a point that the various New Deal jobs programs provided income for many people who would have otherwise been destitute. As indicated in the figure below, at their height, the programs provided “emergency jobs” to just over 40 percent of laborers who likely would have otherwise been jobless. As state unemployment insurance and federal safety net programs largely did not exist at the time of the Crash, the New Deal jobs programs were likely a godsend for those who got the jobs (though they did little for the millions more who didn’t). Today, however, several government programs provide income and other benefits to the jobless and the poor, so the welfare benefits of the New Deal do not need to be replicated.

Where does all of this leave us in evaluating policy responses to the current recession?

First, the economic history of the New Deal and the rest of the 20th century raises serious doubts about the effectiveness of discretionary fiscal stimulus packages in reversing an economic downturn. Monetary stimulus has a far better track record (which is not to say that we shouldn’t have concerns about such policy — but that is a discussion for another blog post). And though there is no longer a fixed gold exchange rate for the dollar and the Fed has dropped nominal short-term interest rates to near zero, the Fed has other monetary weapons that it can use to fight this recession. Second, the helpful welfare benefits of the New Deal are now carried out automatically by other government programs.

This leaves us with an important question that has so far gone unasked by the commentariat: Given the above, is $800 billion in new government deficit spending worthwhile?

* As Tyler Cowen points out, it’s wrong to think of the New Deal as a comprehensive, unified set of fiscal initiatives; FDR tried many different policies, and sometimes changed approaches, to fight the Depression.

Did the New Deal ‘Help’? is a post from Cato @ Liberty - Cato Institute Blog

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.

Meet the New Boss… is a post from Cato @ Liberty - Cato Institute Blog

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.

Cass Sunstein and the Cato Institute is a post from Cato @ Liberty - Cato Institute Blog

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.

Fannie and Freddie did not issue these higher-risk subprime and “Alt-A” mortgages as part of their traditional operation of purchasing and packaging low-risk “conforming” loans in the secondary market. However, as Charles Calomiris and Peter Wallison explain in their excellent Tuesday WSJ op-ed, Freddie and Fannie became the dominant players in the subprime and Alt-A market, sinking (along with their GSE brethren) more than $1 trillion into the riskier mortgages and growing them from 8 percent of all U.S. mortgage originations in 2003 to more than 20 percent by 2006.

Freddie and Fannie arguably have more government oversight than any other corporations in the United States, with their own federal regulator, regular congressional oversight, and board members appointed by the White House. Yet, all that oversight did not keep the firms from fueling the high-risk mortgage industry; as Chris Edwards notes, their regulator gave them a clean bill of financial health less than a year ago.

Why the forbearance? Because Fannie and Freddie’s government overseers wanted the firms to achieve political goals, despite the risk that posed. Calomiris and Wallison have the money quote from Rep. Barney Frank (D-Mass.), now chair of the House committee that oversees Freddie and Fannie:

“Fannie Mae and Freddie Mac have played a very useful role in helping to make housing more affordable . . . a mission that this Congress has given them in return for some of the arrangements which are of some benefit to them to focus on affordable housing.”

One can appreciate Frank’s sentiment. He highly values homeownership for low-income Americans, and he believed that allowing Freddie and Fannie to play (heavily) in the subprime and Alt-A markets would bring the American dream to poor people without (directly) burdening American taxpayers. However, these machinations proved too clever by half.

If the Paulson-Bernanke plan gives Congress enduring justification to become more involved in financial markets, can you imagine how much more clever lawmakers will get?

Postscript: Hat tip to Susan Semeleer for sending along this Barney Frank quote from the 2003 effort to increase regulatory oversight of Fannie and Freddie:

”These two entities — Fannie Mae and Freddie Mac — are not facing any kind of financial crisis,” said Representative Barney Frank of Massachusetts, the ranking Democrat on the Financial Services Committee. ”The more people exaggerate these problems, the more pressure there is on these companies, the less we will see in terms of affordable housing.” 

Deal or No Deal? is a post from Cato @ Liberty - Cato Institute Blog

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?

Update on Berwyn Heights Botched Raid is a post from Cato @ Liberty - Cato Institute Blog

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.”

Of course, it may end up that Calvo and his wife are part of a drug distribution ring, and the police have gotten their man. But even if that’s true, was a no-knock, shoot-the-dogs raid an appropriate police action for a lousy shipment of pot?

And what if the current, emerging picture is correct, and this is yet another botched police raid and cops-gone-wild? If that’s the case (and I emphazie the “if”), the Prince George’s County SWAT team and its superiors need to be held accountable.

Law enforcement officers have a difficult and dangerous job, and I do not make light of that. But their sworn duty is to protect and serve the public, not blast their way into innocent people’s houses and shoot their dogs. If they cannot fulfill that duty, then they cannot be law enforcement officers.

UPDATE (8/6): It turns out that the Prince George’s County police who no-knock raided Calvo and Tomsic’s home did not have a no-knock warrant. The police did have a standard search warrant (which they apparently failed to show to Calvo, as they are supposed to). If that warrant had been executed properly, it is unlikely that Calvo and Tomsic’s dogs would have been killed or their house damaged. Add one more to the long list of botched police raids.

This also raises an interesting question: If this illegal raid had been visited on someone other than a white mayor, would it be receiving the scrutiny it deserves?

A SECOND, MORE TROUBLING UPDATE (8/7) is here.

Another Police Raid; More Dead Dogs is a post from Cato @ Liberty - Cato Institute Blog

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?

In Krugman’s view, policies to address Weitzman’s 5 percent risk of ecological disaster by the early 23rd century (Weitzman’s time frame, which Krugman didn’t specify) are responsible and moral, but policies to address the economic crisis of Social Security’s insolvency in less than four decades’ time are unnecessary and overly pessimistic. And Krugman clobbers anyone who suggests otherwise .

Make sense to you? Me neither.

Krugman’s double-standard on risk is not confined to Social Security. He has (rightly, IMO) blasted the Bush administration for going to war in Iraq. But couldn’t the war be justified as mitigating a small risk of a great catastrophe? Was there, perhaps, a one-in-20 risk that Hussein’s Iraq would develop weapons of mass destruction and direct them at the United States (in the next 200 years)?

I write this not to argue that the United States should be unconcerned about global warming, or about rogue states’ possession of super-weapons, or about Social Security’s (and Medicare’s) unsustainability. All are risks, and it is right for us to consider policy responses for each of them. My point is that it makes little sense to say one risk must be addressed while we should dismiss another risk with an expected value that’s probably the same order of magnitude.

Moreover, if this dichotomy is simply the product of Krugman’s political allegiances (“Red team fears are stupid, Blue team fears are heroic”), isn’t he being irresponsible, wrong and immoral?

Choosing What to Worry About is a post from Cato @ Liberty - Cato Institute Blog