Confusion over Confusion
On August 29th, I penned “Lagarde Confused, Again.” In it, I argued that Christine Lagarde, the new managing director of the International Monetary Fund, misdiagnosed Europe’s banking crisis.
Ms. Lagarde’s assertion that Europe’s banks “need urgent recapitalization” is based on faulty economics. While the higher capital-asset ratios that Ms. Lagarde extols are intended to strengthen banks (and economies), higher ratios destroy money and are “deflationary.” This is not what a struggling Europe needs. Indeed, higher capital-asset ratios imposed on Europe’s banks at this juncture would virtually ensure that Euroland would take another dive. In consequence, some of the banks that were made “safer” by Ms. Lagarde’s medicine would go to the wall.
Today, the Wall Street Journal‘s lead editorial “A TARP for Europe?” adds to the confusion by enthusiastically endorsing Ms. Lagarde’s prescription.
Campaign Finance: Don’t Confuse Me with the Evidence
Today POLITICO Arena asks:
Is it worrisome that Americans spend on political advocacy – determining who should make and administer the laws – much less than they spend on potato chips, $7.1 billion a year?
My response:
For decades among modern liberals it has been an article of faith — devoid of evidence — that money corrupts politics and that there is too much money in politics — “unconscionable” amounts, we’ve been told, repeatedly. Thus the crusade to restrict and regulate in exquisite detail every aspect of campaign finance, beginning in earnest with the Federal Election Campaign Act of 1971 and culminating with the Bipartisan Campaign Reform Act of 2002 (McCain-Feingold). Yet after every new restriction along that tortuous course, ever more money has flowed into our political campaigns. But for all that, they’re no more corrupt than they’ve ever been. In fact, the best evidence of the fool’s errand that campaign finance “reform” has been all along is found in comparisons between states with little and states with extensive campaign finance regulations: When it comes to corruption, there’s not a dime’s worth of difference between the regulated and the unregulated states.
But all those regulations have accomplished two things that should give liberals pause. First, by virtue of their sheer complexity and cost, they pose a serious impediment to those who would challenge incumbents, who already have a major leg up on reelection. And second, because we cannot limit private campaign contributions and expenditures altogether, thanks to the First Amendment, the regulations have led to money being diverted away from candidates and parties and into other, often unknown, hands, over which the candidates and parties have no control — by design. As a result, we see candidates today having to disavow messages underwritten by people who would otherwise, but for the regulations, have given directly to the candidate or the party. But that outcome was absolutely predictable – and was predicted. Two good reasons to end this campaign finance regulation folly and let individuals and organizations contribute and spend as they wish. What are we afraid of, freedom?
Time to End the Campaign Finance ‘Reform’ Ruse
Today POLITICO Arena asks:
Looking at the repeated failures of campaign finance reforms, is it time to end the restrictions?
My response:
Funny, we didn’t hear the primal scream about campaign finance from liberal Democrats during the 2008 campaigns, when money was pouring into their coffers from everywhere. Do we need any better evidence of the hypocrisy surrounding their screams this year? If so, turn to the lead editorial in this morning’s Wall Street Journal. It’ll tell you all you need to know about the campaign finance “reform” ruse that has been going on for years.
Public Schools = One Big Jobs Program
Who said public schooling is all about the adults in the system and not the kids? Everyone knows it’s even more basic than that: Public schooling is a jobs program, pure and simple. At least, that’s what one can’t help but conclude as our little “stimulus” turns one-year old today.
“State fiscal relief really has kept hundreds of thousands of teachers and firefighters and first responders on the job,” declared White House Council of Economic Advisers head Christina Romer today.
Throwing almost $100 billion at education sure as heck ought to have kept teachers in their jobs, and the unemployment numbers suggest teachers have had a pretty good deal relative to the folks paying their salaries. While unemployment in “educational services” – which consists predominantly of teachers, but also includes other education-related occupations – hasn’t returned to its recent, April 2008 low of 2.2 percent, in January 2010 it was well below the national 9.7 percent rate, sitting at 5.9 percent.
Of course, retaining all of these teachers might be of value to taxpayers if having so many of them had a positive impact on educational outcomes. But looking at decades of achievement data one can’t help but conclude that keeping teacher jobs at all costs truly isn’t about the kids, but the adults either employed in education, or trying to get the votes of those employed in education. As the following chart makes clear, we have added teachers in droves for decades without improving ultimate achievement at all:
(Sources: Digest of Education Statistics, Table 64, and National Assessment of Educational Progress, Long-Term Trend results)
Since the early 1970s, achievement scores for 17-year-olds — our schools’ “final products” — haven’t improved one bit, while the number of teachers per 100 students is almost 50 percent greater. If anything, then, we have far too many teachers, and would do taxpayers, and the economy, a great service by letting some of them go. Citizens could then keep more of their money and invest in private, truly economy-growing ventures. But no, we’re supposed to celebrate the endless continuation of debilitating economic – and educational — waste.
You’ll have to pardon me for not considering this an accomplishment I should cheer about.
Obama Small Business Lending Fund Likely A Bust
President Obama has announced his intention to use $30 billion in TARP funds to create a new small business lending fund. In all likelihood, this is $30 billion the taxpayers will never see returned.
First of all, the problem facing small business, outside of the massive uncertainty being created by Washington, is one of credit availability, not cost. For those who can get credit, its quite cheap, arguably too cheap. So if the president doesn’t intend to lower the cost of credit, the plan must be to lower the quality; using the $30 billion to cover expected credit losses. Of course, we tried throwing lots of taxpayer money at unsustainable homeownership, is there any reason to believe throwing taxpayer money at unsustainable businesses is going to work any better?
Using TARP funds for this program is also somewhat disingenuous. This program adds $30 billion to the deficit regardless of whether it’s funded by TARP or by Congressional appropriations. Taking from the TARP only allows the President to keep treating the TARP as his personal slush fund. Nowhere in the TARP legislation can you find language authorizing the use of funds to cover credit losses on new loans. Being a constitutional scholar, the President should know very well that the spending power rests with Congress, not the President. If we are to have a new small business lending program, it should be designed and funded by Congress, not bureaucrats at the Treasury Department.
Historically the two main sources of small business start-up funding have been home equity and credit cards. Clearly the availability of home equity has declined. Sadly as well, with the passing of credit card “reform” the availability of credit card lending has also declined. If the President truly wants to help small business, then the first thing to do is ask Congress to repeal the credit card bill and then just get out of the way.
Credit Card Dementia and Boundary Cases
The most interesting libertarian-related conversation I’ve read today comes from Rortybomb, by way of Andrew Sullivan, with commentary by Megan McArdle. Here’s a challenge to libertarians from Rortybomb, aka Mike Konczal:
I want to pitch to the credit card and financial industry a new innovative online survey. It is targeted for older, more mature long-time users of our services. We’ll give a $10 credit for anyone who completes it. Here is a sense of what the questions will look like:
- 1) What is your age?
- 2) What day of the week are you taking this survey?
- 3) Many rewards offered are for people with more active lifestyles: vacations, flights, hotels, rental cars. Do you find that your rewards programs aren’t well suited for your lifestyle?
- 4) What is the current season where you live? Are any seasons harder for you in getting to a branch or ATM machine?
- 5) Would rewards that could be given as gifts to others, especially younger people, be helpful for what you’d like to do with your benefits?
- 6) Would replacing your rewards program with a savings account redeemable for education for your grandchildren be something you’d be interested in?
- 7) Write a sentence you’d like us to hear about anything, good or bad!
- 8 ) How worried are you you’ll leave legal and financial problems for your next-of-kin after your passing?Did you catch it? Questions 1,2,4,7 are taken from the ‘Mini-mental State Examination’ which is a quick test given by medical professionals to see if a patient is suffering from dementia. (It’s a little blunt, but we can always hire some psychologist and marketers for the final version. They’re cheap to hire.) We can use this test to subtly increase limits, and break out the best automated tricks and traps mechanisms, on those whose dementia lights up in our surveys. Anyone who flags all four can get a giant increase in balance and get their due dates moved to holidays where the Post Office is slowest! We’d have to be very subtle about it, because there are many nanny-staters out there who’d want to coddle citizens here. . .
I smell money — it’s like walking down a sidewalk and turning a corner and then there is suddenly money all over the sidewalk. One problem with hitting up sick people, single mothers, college kids who didn’t plan well and the cash-constrained poor with fees and traps is that they’re poor. Hitting up people with a lifetime of savings suffering from dementia is some real, serious money we can tap as a revenue source.
Clearly, only an evil person (or a libertarian!) would allow a scam like this one. Megan responds, I think rightly:
I’m not sure why this is supposed to be a hard question for libertarians. I mean, I might argue that preventing people from ripping off the marginally mentally impaired would, in practice, be too difficult. Crafting a rule that prevented companies from identifying people who are marginally impaired might well be impossible — I’m pretty sure that if I wanted to, I could devise subtler tests than “What day of the week is it?” And while the seniors lobby is probably in favor of not ripping off seniors, they’re resolutely against making it harder for seniors to do things like drive or get credit, which is the result that any sufficiently strong rule would probably have.
But it’s pretty much standard libertarian theory that you shouldn’t take advantage of people who do not have the cognitive ability to make contracts. Marginal cases are hard not because we think it’s okay, but because there is disagreement over what constitutes impairment, and the more forcefully you act to protect marginal cases, the more you start treating perfectly able-minded adults like children.
The elderly are a challenge precisely because there’s no obvious point at which you can say: now this previously able adult should be treated like a child. Either you let some people get ripped off, or you infringe the liberty, and the dignity, of people who are still capable of making their own decisions.
I’d add two responses of my own.
First, I can’t believe there’s all that much money to be had here. Anyone who wanders into Tiffany’s and back out again without remembering what they bought is, generally speaking, a bad credit risk. Mildly irresponsible people — those who slightly overspend, then have to make it up later — those are probably great for creditors. Lesson learned: If you’re not demented, don’t be irresponsible. (If you are demented, you’re not going to follow my advice anyway.)
Second, I am always amazed at how border cases are dragged out, again and again, as if they proved something against libertarianism. Border cases — How old before you can vote? How demented before a contract doesn’t bind? — are a problem in all political systems, because all systems start with a presumed community of citizens and/or subjects. We always have to draw boundaries between the in-group and the outliers before we have a polity in the first place.
What makes the classical liberal/libertarian approach so valuable is in fact that it draws so few boundaries. Where other systems depend on class boundaries, race boundaries, religious boundaries, and so forth — with annoying boundary issues at every stop along the way — libertarians make it as simple as I think it can be. We presume that all mentally competent adults are worthy of liberty until they prove themselves otherwise.
The boundary cases are still there, but they are fewer and more tractable. Konczal just wandered into one of them. It proves much less than he thinks.
Spending Our Way Into More Debt
Huge deficit spending, a supposed stimulus bill, and financial bailouts by the Bush administration failed to stave off a deep recession. President Obama continued his predecessor’s policies with an even bigger stimulus, which helped push the deficit over the unimaginable trillion dollar mark. Prosperity hasn’t returned, but the president is persistent in his interventionist beliefs. In his speech yesterday, he told the country that we must “spend our way out of this recession.”
While a dedicated segment of the intelligentsia continues to believe in simplistic Kindergarten Keynesianism, average Americans are increasingly leery. Businesses and entrepreneurs are hesitant to invest and hire because of the uncertainty surrounding the President’s agenda for higher taxes, higher energy costs, health care mandates, and greater regulation. The economy will eventually recover despite the government’s intervention, but as the debt mounts, today’s profligacy will more likely do long-term damage to the nation’s prosperity.
Some leaders in Congress want a new round of stimulus spending of $150 billion or more. The following are some of the ways that money might be spent from the president’s speech:
- Extend unemployment insurance. When you subsidize something you get more it, so increasing unemployment benefits will push up the unemployment rate, as Alan Reynolds notes.”
- More infrastructure spending. This will lead to misallocation of resources since only markets can allocate resources efficiently. Governments allocate capital on the basis of politics instead of economics.
- “Cash for Caulkers.” This would be like Cash for Clunkers except people would get tax credits to make their homes more energy efficient. Any program modeled off “the dumbest government program ever” should be put back on the shelf.
- More Small Business Administration lending. A little noticed SBA program created by the stimulus bill offered banks an “unprecedented” 100 percent guarantee on loans to small businesses. The program has an anticipated default rate of 60 percent. Small businesses need lower taxes and fewer regulations, not a government program that perpetuates more moral hazard.
- More aid to state and local governments. State and local government should be using the recession to implement reforms that will prevent them from going on another unsustainable spending spree when the economy recovers. Also, we need fewer state and local government employees – not more – as they’re becoming an increasing burden on taxpayers.
The president said his administration was “forced to take those steps largely without the help of an opposition party which, unfortunately, after having presided over the decision-making that led to the crisis, decided to hand it to others to solve.” Mr. President, nobody has forced you to do anything. You’ve chosen to embrace – and expand upon – the big spending policies that were a hallmark of your predecessor’s administration.
U.S. Cutting Pay for Bailed Out Company Executives
According to reports, executives from bailed out companies Citigroup, Bank of America, GM, Chrysler, GMAC, Chrysler Financial and AIG are going to see major pay cuts this year, which will be enforced by the president’s “pay czar,” Kenneth R. Feinberg. WaPo:
NEW YORK — The Obama administration plans to order companies that have received exceptionally large amounts of bailout money from the government to slash compensation for their highest-paid executives by about half on average, according to people familiar with the long-awaited decision.
The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.
The American people have every right to be upset about generous compensation packages for executives at financial firms that are being kept alive by subsidies and bailouts.
But their ire should be directed at the bailouts, because that is the policy that redistributes money from the average taxpayer and puts it in the pockets of incompetent executives. Unfortunately, rather than deal with the underlying problems of bailouts and intervention, some politicians want to impose controls on salaries. This might be a tolerable second-best (or probably fifth-best) outcome if the compensation limits only applied to companies mooching off the taxpayers, but some politicians want to use the financial crisis as an excuse to regulate compensation at firms that do not have their snouts in the public trough.
This would be a big mistake. So long as rich people make money using non-coercive means, politicians should butt out. It should not matter whether we are talking about Tiger Woods, Brad Pitt, or a corporate CEO. The market should determine compensation, not political deal making. Markets don’t produce perfect outcomes, to be sure, but political intervention invariably produces terrible outcomes.
I debate this further on CNBC:
C/P The Hill
Sound Money Essay Contest
Our friends at the Atlas Economic Research Foundation are offering prizes for the best essays on sound money by students and young faculty and policy analysts:
The Atlas Economic Research Foundation invites you to participate in its Sound Money Essay Contest, which has a deadline of November 24th, 2009.
The contest is open to students, young faculty, and policy writers who are interested in the cause of sound money. It aims to engage you in thinking about sound money principles with relevance to today’s economic challenges.
The overall winner will receive a cash prize of $5000. Two additional prizes of $1000 each will be given to outstanding essays written by junior faculty, graduate students, or policy writers. And three additional prizes of $500 each will be given to outstanding essays written by undergraduate students.
Essay topics include:
· “Money and the Free Society: Can Money Exist Outside of the State?”
· “The Ethical Implications of Monetary Manipulation”
· “Monetary Policy and the Rule of Law in the United States”
To be eligible, you must be a legal resident of the U.S. or engaged as a full-time student or faculty in the U.S. You must also be no more than 35 years old on the date of the contest deadline (November 24, 2009). Atlas welcomes involvement of older and non-U.S. scholars in its discussions and ongoing work on sound money, but this essay contest is targeted to the audience described above.
For a list of reference materials and writing guidelines, please visit the Atlas website.
And for Cato research on sound money, check here.
Bob McDonnell: The Modern Republican
This is from the Reagan administration’s deregulatory 1981 energy plan: “All Americans are involved in making energy policy. When individual choices are made with a maximum of personal understanding and a minimum of government restraints, the result is the most appropriate energy policy.”
Many modern Republicans claim devotion to Ronald Reagan’s ideas, but they often seem to forget about the “minimum of government” thing. The following points are from Republican Virginia gubernatorial candidate Bob McDonnell’s “More Energy, More Jobs” plan:
- “McDonnell was the chief sponsor of legislation creating the Virginia Hydrogen Energy Plan.”
- “McDonnell also supported grant programs for solar photovoltaic manufacturing, tax exemptions for solar energy and recycling property, and tax credits for solar energy equipment.”
- “In order to protect Virginia’s citizens from the skyrocketing wholesale prices of electricity seen in other states, McDonnell brought together all the necessary stake holders to re-regulate electricity in Virginia.”
- “Currently, Virginia is the second largest importer of electricity behind California. This is unacceptable.”
- “Bob McDonnell will establish Virginia as a Green Jobs Zone to incentivize companies to create quality green jobs. Qualified businesses would be eligible to receive an income tax credit equal to $500 per position created per year for the first five years.”
- “The Virginia Alternative Fuels Revolving Fund was established to assist local governments that convert to alternative fuel systems . . . Bob McDonnell will expand the purpose of this fund to include infrastructure such as refueling stations, provide seed money and aggressively pursue additional grants.”
- “Bob McDonnell will make Southwest and Southside Virginia the nation’s hub for traditional and alternative energy research and development…To assist with the attraction, building and operation of major energy facilities in Southside and Southwest Virginia, we will also support the establishment of the Center for Energy.”
- “To help Virginia universities gain access to federal stimulus money, as Governor, Bob McDonnell will establish the Virginia Universities Clean Energy Development and Economic Stimulus Foundation.”
- “As Governor, Bob McDonnell will leverage stimulus funding to incentivize individuals and businesses to conduct energy audits and encourage public private partnerships between small businesses and government.”
It’s true that McDonnell’s plan has some free market elements, and also that Ronald Reagan supported some wasteful energy boondoggles. However, the degree to which the modern Republican wants to micromanage and manipulate the energy industry is remarkable. McDonnell is almost setting out a Soviet five-year plan for a substantial part of the Virginia economy. For goodness sakes, he wants to treat Virginia like a separate country and try to fix the supposed problem that it is “importing” too much energy from other states!
It’s not just energy. Look at the top-down central planning ideas that McDonnell has for “creating jobs”:
NYT Nonsense on SAFRA
With the Student Aid and Fiscal Responsibility Act (SAFRA) likely to be voted on by the full House or Representatives today, the media is finally giving some space to debate over the bill. Unfortunately, the New York Times only pays attention to the parts it likes, writing in an editorial today that:
The private lenders and those who do their bidding in Congress have recently taken issue with a Congressional Budget Office analysis that showed that the bill would save about $87 billion over the next 10 years.
They argue, absurdly, for example, that the savings would be smaller if the system were analyzed under accounting rules other than the ones that the federal government is required to use. The aim is to mislead taxpayers and members of Congress into believing that the C.B.O. estimate is dishonest.
Um, excuse me New York Times, but the CBO has never said the bill — not just going from subsidized to direct lending, but the whole bill — would save $87 billion over ten years. Moreover, it has been a series of analyses from the CBO — albeit driven by requests from members of Congress – that have continually increased the cost estimates for SAFRA. (I have linked to all the CBO analyses here.) CBO’s very first estimate of the bill’s likely net cost put it at around $6 billion over ten years, and it only went up from there after incorporating such things as lending risk and potentially higher Pell grant costs.
Of course, the Times isn’t alone in its refusal to talk honestly about SAFRA. Despite all of the CBO estimates, yesterday U.S. Secretary of Education Arne Duncan said SAFRA would give college students and numerous other interests the world without costing taxpayers a dime. “We’re not asking the taxpayers for one single dollar,” he said. And SAFRA’s sponsor, Rep. George Miller (D-CA), has been touting his bill as a revolutionary money saver since day one.
The truth on this thing is out there, but it’s definitely not in the New York Times.
Sticking Around Afghanistan Forever?
I’ll confess one of the arguments that I’ve never understood is the claim that the U.S. “abandoned” Afghanistan after aiding the Mujahadeen in the latter’s battle against the Soviet Union. Yet Secretary of Defense Robert Gates apparently is the latest proponent of this view.
Defense Secretary Robert M. Gates said in an interview broadcast this week that the United States would not repeat the mistake of abandoning Afghanistan, vowing that “both Afghanistan and Pakistan can count on us for the long term.”
Just what does he believe we should have done? Obviously, the Afghans didn’t want us to try to govern them. Any attempt to impose a regime on them through Kabul would have met the same resistance that defeated the Soviets. Backing a favored warlord or two would have just involved America in the ensuing conflict.
Nor would carpet-bombing Afghanistan with dollar bills starting in 1989 after the Soviets withdrew have led to enlightened, liberal Western governance and social transformation. Humanitarian aid sounds good, but as we’ve (re)discovered recently, building schools doesn’t get you far if there’s little or no security and kids are afraid to attend. And a half century of foreign experience has demonstrated that recipients almost always take the money and do what they want — principally maintaining power by rewarding friends and punishing enemies. The likelihood of the U.S doing any better in tribal Afghanistan as its varied peoples shifted from resisting outsiders to fighting each other is a fantasy.
The best thing the U.S. government could do for the long-term is get out of the way. Washington has eliminated al-Qaeda as an effective transnational terrorist force. The U.S. should leave nation-building to others, namely the Afghans and Pakistanis. Only Afghanistan and Pakistan can confront the overwhelming challenges facing both nations.
Cato on Facebook
Cato on Twitter
Cato on Google+
Cato on YouTube
