The GM ‘Turnaround’ in Bastiat’s View
GM’s long-rumored initial public stock offering will take place Thursday and self-anointed savior of the U.S. auto industry, Steven Rattner, is pretty bullish about the prospect of investors turning out in droves.
I’ve been saying for a while that I thought the government’s exposure [euphemism for taxpayer losses] in the auto bailout was in the $10-billion to $20-billion range.
But since investor interest has pushed the initial price up from the $26-to-$29 per share range to the $32-$33 range, Rattner now believes:
[T]his exposure is in the single-digit billion range, and arguably potentially better.
I won’t argue with Rattner’s numbers. After all, they affirm one of my many criticisms of the bailout: that taxpayers would never recoup the value of their “investment.” My bigger problem is with Rattner’s cavalier disregard for the other enduring—and arguably more significant—costs of the auto bailouts.
Rattner is like the foil in Frederic Bastiat’s excellent, but not-famous-enough, 1850 parable, That Which is Seen and That Which is Unseen. Rattner touts what is seen, namely that GM and Chrysler still exist. And they exist because of his and his colleagues’ commitment to a plan to ensure their survival, along with the hundreds of thousands (if not millions, as some “estimates” had it) of jobs that were imperiled had those companies vanished. (For starters, I very much question even what is seen here. I am skeptical of the counterfactual that GM and Chrysler would have disappeared and that there would have been significantly more job loss in the industry than there actually was during the recession and restructuring. But I’ll grant his view of what is seen because, frankly, the specifics are irrelevant in the final analysis).
Obama to Increase FHA Risk
The Federal Housing Administration is heading toward a taxpayer bailout, yet the president’s latest mortgage modification plan would further increase the agency’s exposure to risky mortgages. Mark Calabria calls it a “Backdoor Bank Bailout.”
The administration’s plan would encourage borrowers who owe more than their house is worth to refinance into FHA-insured mortgages. Therefore, the risk of a future foreclosure on these mortgages would fall to the government and taxpayers instead of private lenders.
A recent study from economists at New York University found that the FHA is underestimating its risk exposure. One of the problems is that the FHA isn’t properly accounting for the risk to underwater FHA mortgages that have been refinanced into new FHA mortgages. So it’s hard to see how the president’s plan to refinance private underwater mortgages into FHA mortgages won’t further exacerbate the situation.
To get these mortgages in better shape so the FHA can insure them, $14 billion in TARP money is going to be used to pay private lenders to reduce the amount borrowers owe on their mortgages. Some of this money will also be used to cover eventual losses on these loans. As a taxpayer whose mortgage is underwater, and who would rather go bankrupt than accept a government handout, I find it infuriating that my tax dollars are being used to bail out others in a similar situation.
But with government housing programs, it’s standard practice for officials to cannonball into the pool and worry about who gets splashed by the water later. On Sunday, CNN.com reported on “FHA’s Florida Fiasco,” where the collapse of the heavily FHA-insured condo market has contributed to the possibility of a FHA bailout. The FHA has now tightened its condo standards, but once again it’s a day late and possibly more than few bucks short.
The new FHA initiative is the latest in a series of efforts to “stabilize” the housing market with more subsidies. Policymakers seem oblivious that it was government interventions that helped instigate the housing meltdown to begin with. The housing market would stabilize itself if the supply of and demand for housing was allowed to be brought back into equilibrium. There would be pain in the short-term, but in the long-term we would have a smoother functioning housing market. Unfortunately, for politicians the long-term means the next election.
Will America Keep “Bending the Productivity Curve”?
Most international comparisons conclude that America’s health care sector under-performs those of other advanced nations. Aside from other serious flaws, those studies typically ignore each nation’s contribution to medical innovation — the discovery of new knowledge and practices that improve health in all nations. Today, the Cato Institute releases a new study — the most comprehensive study of its kind — that helps fill that void.
In “Bending the Productivity Curve: Why America Leads the World in Medical Innovation,” economist Glen Whitman and physician Raymond Raad conclude that the United States far and away outperforms other nations on medical innovation, but that the legislation moving through Congress threatens America’s ability to innovate. From the executive summary:
To date…none of the most influential international comparisons have examined the contributions of various countries to the many advances that have improved the productivity of medicine over time…
In three of the four general categories of innovation examined in this paper — basic science, diagnostics, and therapeutics — the United States has contributed more than any other country…In the last category, business models, we lack the data to say whether the United States has been more or less innovative than other nations; innovation in this area appears weak across nations.
In general, Americans tend to receive more new treatments and pay more for them — a fact that is usually regarded as a fault of the American system. That interpretation, if not entirely wrong, is at least incomplete. Rapid adoption and extensive use of new treatments and technologies create an incentive to develop those techniques in the first place. When the United States subsidizes medical innovation, the whole world benefits. That is a virtue of the American system that is not reflected in comparative life expectancy and mortality statistics.
Policymakers should consider the impact of reform proposals on innovation. For example, proposals that increase spending on diagnostics and therapeutics could encourage such innovation. Expanding price controls, government health care programs, and health insurance regulation, on the other hand, could hinder America’s ability to innovate.
Raad will discuss the study this Friday at noon at a policy forum at the Cato Institute.
The Constitution? Not That Old Thing!
Over at Flypaper, Andy Smarick can’t figure out what the Obama administration thinks is the proper federal role in education.
A couple of weeks ago, commenting on a speech by U.S. Secretary of Education Arne Duncan, Smarick couldn’t tell whether Duncan was advocating that the feds be friendly Helpy Helpertons, no-excuses disciplinarians, or something in between. Yesterday, Smarick revisited the whither-the-feds theme, pointing out the frustrating contradiction when Duncan both praises local and state education control and blasts states for doing stuff he doesn’t like.
But Duncan isn’t alone in his fuzziness, according to Smarick, who says he’s ”yet to come across anyone with a comprehensive, water-tight argument for what the feds should and should not do.”
I’m sure this is not the case, but from reading that you’d think Smarick had never run across a little thing called “the Constitution,” which furnishes just the “water-tight argument for what the feds should and should not do” that he seeks. It also appears that he’s never encountered numerous things that I’ve written pointing this out. For instance, in Feds in the Classroom I wrote:
Because two of the sundry words that do not appear among the few legitimate federal functions enumerated in the Constitution are “education” and “school,” the federal government may have no role in schooling.
Ah, but what of the “general welfare” clause that comes before the enumerated powers in the Constitution’s Article I, Section 8? Doesn’t that give the feds authority to do anything that is in the nation’s best interest? At the very least, doesn’t it break the water-tight seal against federal education intervention?
Nope. I give you James Madison on the general welfare clause in Federalist no. 41:
For what purpose could the enumeration of particular powers be inserted, if these and all others were meant to be included in the preceding general power? Nothing is more natural nor common than first to use a general phrase, and then to explain and qualify it by a recital of particulars.
The general welfare clause confers no authority on the federal government, it just introduces the specific, enumerated powers that follow it. Among them, you’ll find not a peep about education.
Many educationists will think me hopelessly retrograde for bringing up the Constitution, although Duncan at least mentioned the dusty old document in his recent federalism speech. Unfortunately, he engaged it with all the courage and gusto of Sir Robin. But at least he acknowledged its existence — too many policymakers and wonks ignore the Constitution completely because it forbids Washington from doing the sundry things they want it to do.
But why shouldn’t the Constitution be treated like an ancient grandfather, a nice old guy whose utterances, in a half-hearted effort to be respectful, we acknowledge in the same tone we’d use with a toddler and then promptly ignore?
Because it is the Constitution that clearly establishes the bounds of what the federal government can and cannot do, that’s why! And because when we ignore the Constitution we get exactly the sort of government that is confounding Smarick: government that is capricious, often incoherent, and is ultimately an existential threat to freedom because government officials can claim power without bounds. See TARP, campaign finance, and executive pay for just a few examples of this last threat coming to fruition.
Which leaves all of the people who want Washington to have some role in education, but are frustrated by not knowing what else the feds might do, with only one choice. They can either continue to face inscrutable and ultimately unlimited federal power in hopes of getting what they want, or they can acknowledge what they keep choosing to ignore: That the Constitution is the supreme law of the land, and it gives the federal government no authority to govern American education.
Understanding the Consequences of Internet Regulation
In an effort to achieve “network neutrality” online, the FCC is starting to write new regulations for Internet providers. Reuters reports:
U.S. communications regulators voted unanimously Thursday to support an open Internet rule that would prevent telecom network operators from barring or blocking content based on the revenue it generates.
The proposed rule now goes to the public for comment until Jan. 14, after which the Federal Communications Commissions will review the feedback and possibly seek more comment. A final rule is not expected until the spring of next year.
Cato Director of Information Policy Studies Jim Harper appeared on Fox News this week to discuss the FCC decision. “This is governmental tinkering with a market place that is working really well and growing right now,” said Harper. “The last thing we need is to cut that off.”
There are ways to achieve net neutrality without regulation, says Timothy B. Lee:
An important reason for the Internet’s remarkable growth over the last quarter century is the “end-to-end” principle that networks should confine themselves to transmitting generic packets without worrying about their contents. Not only has this made deployment of internet infrastructure cheap and efficient, but it has created fertile ground for entrepreneurship. On a network that respects the end-to-end principle, prior approval from network owners is not needed to launch new applications, services, or content.
…Like these older regulatory regimes, network neutrality regulations are likely not to achieve their intended aims. Given the need for more competition in the broadband marketplace, policymakers should be especially wary of enacting regulations that could become a barrier to entry for new broadband firms.
Wednesday Links
- More policymakers coming around to the idea that it is wrong to jail drug users as criminals.
- How Obama’s protectionist policies are hurting the poor.
- “Checks and balances” be damned: “In a democratic country, you’d think that before the executive branch could regulate CO2–a ubiquitous substance essential to life–the legislature would have to vote on the issue. But you’d be wrong.” Somewhere, Thomas Friedman is smiling.
- Podcast: Next week marks eight years since the U.S. invaded Afghanistan. It’s time to get out. Read the exit strategy.
Curb Your Enthusiasm: Americans Should Not Expect Much from Obama’s Visit to the UN
President Obama’s address to the United Nations General Assembly this morning, and his chairing of the UN Security Council on Thursday, is a grand attempt to tell the world–after eight years of George W. Bush–that the United States will no longer go it alone.
The president has a very difficult task, however, if he expects to invest the United Nations with renewed credibility. The UN is a weak and fractured institution, whose limited power and authority has been steadily undermined by a progression of U.S. presidents, both Democrats and Republicans. We should not forget that President Bill Clinton explicitly circumvented the UN Security Council when he chose to intervene militarily in Kosovo in 1999. Clinton’s evasion of the UNSC established a precedent for future military intervention that the Bush administration happily capitalized upon to send troops into Iraq in 2003.
Susan Rice, our current UN ambassador, endorsed this approach in 2006 when she called for U.S. military action against Sudan. Prior UN approval of such a mission was unlikely, but ultimately unnecessary, Rice argued at the time, because of the precedent set by President Clinton in Kosovo.
For American policymakers who have demonstrated such disdain for the UN in the past to now profess great respect for the institution should not surprise us. The UN is only as relevant as the member states wish it to be. In areas of common concern, the desire to cooperate and compromise may temporarily trump concerns over protecting state sovereignty and preserving freedom of action to deal with urgent security threats. In most cases, however, we can expect the member states, with the United States in the lead, to pursue policies that they believe (not always correctly, as we learned in Iraq) will advance their security. And if the UN weakly sanctions such actions after the fact, or refuses to do so, that will only reveal its irrelevance.
Wednesday Links
- Should more troops be sent to Afghanistan? Cato’s Malou Innocent weighs in alongside the policymakers.
- What does the end of the missile defense system in Central Europe means for U.S.-Russian relations?
- Signals indicate that the market just might be on the rebound. That’s great, but it’s important not to get ahead of ourselves, says Johan Norberg. “We must never forget that the light at the end of the tunnel can be an approaching train.”
- A few thoughts on the new rise of the Taliban in Afghanistan, and what it means for Pakistan and India.
- Michael Cannon continues his debate in the LA Times: The dirty little secret is that “Obama-care” isn’t about reducing health care costs or making coverage more secure. It’s about robbing Peter to pay Paul.
- Podcast: If you’d like to see what Obama wants to do to the U.S. health care system, don’t listen to his rhetoric…look at what he’s doing to Medicare.
Pervasive Illiteracy in the Afghan National Army
Matt Yglesias has a lot of smart things to say about the pervasive illiteracy plaguing the Afghan National Army. Upwards of 75 to 90 percent (according to varying estimates) of the ANA is illiterate.
As Ted Galen Carpenter and I argue in our recent Cato white paper Escaping the Graveyard of Empires: A Strategy to Exit Afghanistan, this lack of basic education prevents many officers from filling out arrest reports, equipment and supply requests, and arguing before a judge or prosecutor. And as Marine 1st Lt. Justin Greico argues, “Paperwork, evidence, processing—they don’t know how to do it…You can’t get a policeman to take a statement if he can’t read and write.”
Yglesias notes:
This strikes me as an object lesson in the importance of realistic goal-setting. The Afghan National Army is largely illiterate because Afghanistan is largely illiterate…we just need an ANA that’s not likely to be overrun by its adversaries. But if we have the more ambitious goal of created [sic] an effectively administered centralized state, then the lack of literacy becomes a huge problem. And a problem without an obvious solution on a realistic time frame [emphasis mine].
Such high levels of illiteracy serves to highlight the absurd idea that the United States has the resources (and the legitimacy) to “change entire societies,” in the words of retired U.S. Army lieutenant colonel John Nagl. Eight years ago, Max Boot, fellow for National Security Studies at the Council on Foreign Relations, likened the Afghan mission to British colonial rule:
Afghanistan and other troubled lands today cry out for the sort of enlightened foreign administration once provided by self-confident Englishmen in jodhpurs and pith helmets…This was supposed to be ‘for the good of the natives,’ a phrase that once made progressives snort in derision, but may be taken more seriously after the left’s conversion (or, rather, reversion) in the 1990s to the cause of ‘humanitarian’ interventions. [emphasis mine]
But as I highlighted yesterday at the Cato event “Should the United States Withdraw from Afghanistan?” (which you can view in its entirety here), policymakers must start narrowing their objectives in Afghanistan, a point Yglesias stresses above. Heck, as I argued yesterday, rational people in the United States are having difficulty convincing delusional types here in America that Barack Obama is their legitimate president. I am baffled by people who think that we have the power to increase the legitimacy of the Afghan government. It’s also ironic that many conservatives (possibly brainwashed by neo-con ideology) who oppose government intervention at home believe the U.S. government can bring about liberty and peace worldwide. These self-identified “conservatives” essentially have a faith in government planning.
Yet these conservatives share a view common among the political and military elite, which is that if America pours enough time and resources—possibly hundreds of thousands of troops for another 12 to 14 years—Washington could really turn Afghanistan around.
However, there is a reason why the war in Afghanistan ranks at or near the bottom of polls tracking issues important to the American public, and why most Americans who do have an opinion about the war oppose it (57 percent in the latest CNN poll released on Sept. 1) and oppose sending more combat troops (56 percent in the McClatchy-Ipsos survey, also released on Sept. 1). It’s because Americans understand intuitively that the question about Afghanistan is not about whether it is winnable, but whether it constitutes a vital national security interest. An essential national debate about whether we really want to double down in Afghanistan has yet take place. America still does not have a clearly articulated goal. This is why the conventional wisdom surrounding the war—about whether we can build key institutions and create a legitimate political system—is not so much misguided as it is misplaced.
The issue is not about whether we can rebuild Afghanistan but whether we should. On both accounts the mission looks troubling, but this distinction is often times overlooked.
Housing Bailouts: Lessons Not Learned
The housing boom and bust that occurred earlier in this decade resulted from efforts by Fannie Mae and Freddie Mac — the government sponsored enterprises with implicit backing from taxpayers — to extend mortgage credit to high-risk borrowers. This lending did not impose appropriate conditions on borrower income and assets, and it included loans with minimal down payments. We know how that turned out.
Did U.S. policymakers learn their lessons from this debacle and stop subsidizing mortgage lending to risky borrowers? NO. Instead, the Federal Housing Authority lept into the breach:
The FHA insures private lenders against defaults on certain home mortgages, an inducement to make such loans. Insurance from the New Deal-era agency has enabled lending to buyers who can’t make a big down payment or who want to refinance but have little equity. Most private lenders have sharply curtailed credit to those borrowers.
In the past two years, the number of loans insured by the FHA has soared and its market share reached 23% in the second quarter, up from 2.7% in 2006, according to Inside Mortgage Finance. FHA-backed loans outstanding totaled $429 billion in fiscal 2008, a number projected to hit $627 billion this year.
And what is the result of this surge in FHA insurance?
The Federal Housing Administration, hit by increasing mortgage-related losses, is in danger of seeing its reserves fall below the level demanded by Congress, according to government officials, in a development that could raise concerns about whether the agency needs a taxpayer bailout.
This is madness. Repeat after me: TANSTAAFL (There ain’t no such thing as a free lunch).
Good News: Health Care Express Slows
Health care “reformers” (meaning those who want to effectively nationalize America’s medical system) have long understood that their best hope in the new political environment is to ram through legislation with the claim that it is an emergency and won’t wait. The longer the American people think about the increased cost, decreased choice, and other negative impacts of a a government takeover, the less likely they are to support it.
Thankfully, the government health express has slowed noticeably in recent weeks. Even supporters are coming to doubt that legislation can be approved before Congress goes home in August. Reports Politico:
Health care reform proponents are growing pessimistic that they can meet President Barack Obama’s August target for passing a bill — saying the next four weeks must fall together perfectly, without a hitch or a hiccup.
The number of weeks that’s happened recently? Zero.
A series of setbacks has made the task of completing floor votes in both chambers virtually insurmountable, given the plodding pace of the Senate. The official line from the White House and the congressional leadership is it’s possible, but privately, there are a dwindling number of aides who would put money on it.
And without a deal by August, the ripple effects could start to endanger the prospect of health care reform this year altogether — chief among them, the closer it gets to the 2010 midterm elections, the harder it will be to get members to make the toughpolitical decisions needed to vote on a bill.
This is good news. The U.S. health system needs fixing. But the more rushed they are, the less likely policymakers are to do the right thing. We need a medical system that is more responsive to consumers and market forces rather than to political forces and government dictates.
Who Said “No Comment”?
In this morning’s Washington Post, former Deputy Secretary of Defense Paul Wolfowitz has some advice for the Obama administration regarding the protests in Iran:
[T]he reform the Iranian demonstrators seek is something that we should be supporting. In such a situation, the United States does not have a “no comment” option. Coming from America, silence is itself a comment — a comment in support of those holding power and against those protesting the status quo.
I just did a quick search on www.WhiteHouse.gov, and I did not find the words “no comment” as it pertains to the Iranian elections. I did, however, find two statements on the protests by President Obama:
- Speaking to reporters following a meeting with Italian Prime Minister Silvio Berlusconi on June 15th, President Obama said:
I am deeply troubled by the violence that I’ve been seeing on television. I think that the democratic process — free speech, the ability of people to peacefully dissent — all those are universal values and need to be respected. And whenever I see violence perpetrated on people who are peacefully dissenting, and whenever the American people see that, I think they’re, rightfully, troubled.
and
I think it would be wrong for me to be silent about what we’ve seen on the television over the last few days. And what I would say to those people who put so much hope and energy and optimism into the political process, I would say to them that the world is watching and inspired by their participation…
and
[P]articularly to the youth of Iran, I want them to know that we in the United States do not want to make any decisions for the Iranians, but we do believe that the Iranian people and their voices should be heard and respected.
- The following day, the president hosted South Korean President Lee Myung-Bak. Despite the fact that they had a number of very urgent topics to discuss, President Obama took time to state that while it was “not productive, given the history of U.S.-Iranian relations,” for the U.S. president to be “meddling in Iranian elections,” he wished to repeat his remarks from the previous day:
[W]hen I see violence directed at peaceful protestors, when I see peaceful dissent being suppressed, wherever that takes place, it is of concern to me and it’s of concern to the American people. That is not how governments should interact with their people.
and
I do believe that something has happened in Iran where there is a questioning of the kinds of antagonistic postures towards the international community that have taken place in the past, and that there are people who want to see greater openness and greater debate and want to see greater democracy. How that plays out over the next several days and several weeks is something ultimately for the Iranian people to decide. But I stand strongly with the universal principle that people’s voices should be heard and not suppressed.
So, President Obama has not been silent, and he has never said “no comment.”
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