Bastiat’s Bastions

Responding to McCain’s sole zinger line in the final debate, “If you wanted to run against George Bush, you should have run for president four years ago,” Obama compared McCain’s voting record with the White House position and pointed out that McCain voted with the Bush White House 90 percent of the time. Then Obama repeated that old line “And if it walks like a duck….”

In a now well-known interview, Obama’s running mate, Joe Biden, laughed off a question about Obama being a socialist. Well, there are very few admitted socialists elected to office in this country. And to my knowledge, only one avowed socialist elected to any national office in the last 30 years, Bernie Sanders from the state of Vermont (see this article in the New York Times Magazine from January 21, 2007 by Mark Leibovich). Sanders calls himself a social democrat but has officially run as an Independent over the years.

I started to wonder how close Obama’s voting record was to Senator Sanders, since the closeness of McCain’s vote turned him into George W. So I went to the website of the U.S. Senate and found the Senate roll call votes here. Both Obama and Sanders are freshmen Senators in the 110^th Congress, so it makes their voting records easy to compare.

In one crucial respect, their voting records are quite different. Senator Sanders missed only 6 out of 655 votes held in the Senate in the 110^th Congress, voting over 99% of the time. Obama, on the other hand, had voted only 36% of the time in 2008 and slightly less than 54% of the time in the 110^th Congress (2007 and 2008 combined). Of course, Obama ran for president and Sanders did not. Still, by August 3, 2007, Obama had already missed more votes in the U.S. Senate than Sanders had by October of this year. And there weren’t any primaries to run for before that August date.

After excluding the many votes that Obama did not cast and the few that Sanders could not cast, there were 348 votes where both voted. Of these 348 votes, Obama voted with Sanders 320 times, or 92% of the time.

Certainly, Obama’s redistribution policies and his proposed takeover of the U.S. health care system, his agreement (like McCain and Bush) to take over banks and help out the auto industry, his plan to take away the secret ballot from workers for union representation elections and his proposal to lift the minimum wage to one that compares to what the French have (which has led to widespread minority youth unemployment and riots there), all show that

Obama has the socialist walk and quack down pat.

With a voting record that matches the voting record of an avowed socialist, how can Obama deny being a socialist? Bernie Sanders doesn’t.

-MC

The Drudge Report headline, all day, was: It Shrinks! The word “it” refers to the economy, and the headline went up shortly after the Bureau of Economic Analysis (BEA) announced that third quarter GDP declined. Yes, we’re in the fourth quarter, but that’s not the point.

Naturally, the news cycle was filled with proclamations of economic gloom. One story noted “The U.S. economy contracted in the third quarter, marred primarily by the weakest consumer spending in nearly three decades, the Commerce Department reported Thursday.” Another report waxed “The U.S. economy suffered its sharpest contraction in seven years in the third quarter as consumers cut spending and businesses reduced investment at the onset of what may be a severe and long-lasting recession.”

Maybe we’ll get somewhere down the road and find out all of this is true. But what none of these stories mentioned was that the new BEA numbers are “advanced” estimates. In fact, an updated set of estimates will be available at the end of November. These updated estimates are deemed “preliminary.” That’s right, today’s numbers are pre-preliminary. (It’s all in the BEA release.)

Eventually, we’ll get the “final” estimates. The first two releases are based on incomplete data and are subject to revision – sometimes in the other direction. But why let something like this get in the way of great headlines?

If the numbers remain the same after their upcoming revisions, then one of the key contributors to our economic malaise will have been that durable goods purchases decreased by 14 percent in the third quarter. The largest decrease within the durables category was “motor vehicles and parts.” I’m not sure what to make of quarterly decreases like these, though, because common sense tells us that these numbers will not constantly rise.

Individuals can only buy so many new cars and refrigerators. The chances that most consumers won’t have to buy a new item in the same quarter, at least once in awhile, seem to be pretty good. Regardless, my ability to earn income, produce goods or services, and purchase goods or services, cannot be accurately predicted by whether I purchased a car last quarter. Why should the aggregate information in GDP be any different?

NM

New Orleans Mayor Ray Nagin has announced he is going to “dissolve” his “recovery department.” This is the department that has spent almost three years coming up with plans to help New Orleans recover from hurricane Katrina. For some reason, though, Nagin also went out of his way to mention that he is trying to convince the Director of the recovery department, Ed Blakely, to stay on the City’s payroll. I’m not exactly sure in what roll because the Mayor did not say.

The only specifics were: “Nagin announced his plan to convert Blakely’s Office of Recovery and Development Administration into a Community Development Department by June. When asked how that would affect Blakely, he said the focus had shifted from recovery planning to implementation, the specialty of a new Nagin aide, Bill Crissman. The mayor then left Blakely’s future up to the longtime urban planning professor.” Apparently, Blakely calls Australia home and is contemplating a return to the land down under.

I have to confess, though, that the reason I noticed this article is because I’ve closely followed Blakely in the news. Back in 2006/2007 (I prefer to forget which), I was given the task of teaching an upper-level economics class called Local and Regional Economic Development. The most positive result from me teaching this class? We no longer offer the class at Nicholls.

Prior to teaching the class, I had virtually no knowledge of the scholarly work done in this area. Since I do take my job rather seriously, though, I immersed myself in the subject by reading papers and every and any “textbook” I could get my hands on. In general, I can quickly sum up the findings: none of this stuff works. Making my class all the more interesting is that Dr. Blakely has written several books and articles on local/regional economic development and, as far as I could tell, was supposed to be one of the most successful urban planners in the country.

So, how has the experiment worked out in New Orleans? My own opinion is something along the lines of not at all. I say this not only as an impassionate economist, but as a passionate property owner and former resident of Lakeview, the neighborhood that remained under 14 feet of water for a few months. But don’t take my word for it, just read the comments posted below the Times article. You can sort of get a sense for how many New Orleanians feel right now from my favorite comment: “Maybe he’ll take Nagin back to Australia with him … but why do that to defenseless kangaroos?”

NM

Andrew Napolitano has an article in the Wall Street Journal today titled: Most Presidents Ignore the Constitution. The article analyzes several of the constitutionally unfriendly actions of past presidents and notes “In virtually every generation and during virtually every presidency (Jefferson, Jackson and Cleveland are exceptions that come to mind) the popular branches of government have expanded their power.” I may have to take issue with Jefferson being an exception (I was born in Louisiana), but that’s another post.

Anyway, the article brings up specific aspects of the Constitution which show how concerned the founders were with economic freedom. Napolitano writes:

There is no power in the Constitution for the federal government to enter the marketplace since, when it does, it will favor itself over its competition. The Contracts Clause (the states cannot interfere with private contracts, like mortgages), the Takings Clause (no government can take away property, like real estate or shares of stock, without paying a fair market value for it and putting it to a public use), and the Due Process Clause (no government can take away a right or obligation, like collecting or paying a debt, or enforcing a contract, without a fair trial) together mandate a free market, regulated only to keep it fair and competitive.

When the government does enter the marketplace, we lose some of the basic protections we were guaranteed in the Constitution and we frequently end up with bad economic policies. The really interesting question for me is this: Why does the public regularly elect (and re-elect) officials who enact bad economic policies and/or chip away at the Constitution?

Napolitano seems to think (and I’m not quoting him) the answer lies in the “pigs at the trough explanation,” whereby voters send to Washington those politicians they believe will bring the most tax dollars home for them. Regardless, I thought of another explanation from Bryan Caplan’s Myth of the Rational Voter.

Caplan’s research uses data from the Survey of Americans and Economists on the Economy. The survey asks both economists and members of the general public an array of questions on how the economy works. There are significant disagreements between professional economists and laymen (on 33 out of 37 questions).

Caplan is simply verifying what most economics professors understand quite well: many people have no idea what good economic policies are. Students enter economics classes with severe biases against sound economics (war is good for the economy, protectionist policies protect jobs, etc). These biases, consequently, lead to popular support for policies that most economists would deem (economically) harmful. It’s at least plausible that the same phenomenon occurs in regard to our Constitutional protections.

In other words, it’s possible that voters don’t throw out politicians who chip away at the constitution because they don’t realize the benefits of our constitutional protections. Just as few people understand the importance of opportunity costs unless they study economics, few recognize the significance of the Takings Clause unless they study the philosophy behind the Constitution. By not fully understanding these ideas, the public makes it fairly easy for politicians to push “popular” policies. Just tell the people we need more financial regulation, they really don’t know what credit default swaps are anyway.

The only hope that Caplan’s work offers is that most politicians aim to sound more populist than they really are. Thus, Obama does not really want to redistribute too much wealth because he knows that sort of policy will kill the incentives needed to generate wealth in the first place. Any politician who, for example, calls for Constitutional guarantees for a job or a living wage, doesn’t really want to go that far because they realize the economy will suffer (and then they will be judged poorly).

I’m very much convinced that few people can describe what a socialist economic system is (based partly on my informal polling of many college students). And I’m very much convinced that even fewer people understand that socialism fails as an economic system because of what it does to economic incentives. I just hope that Caplan is right and the current crop of politicians doesn’t really want to go as far as they say. If you’ve been reading any of my recent posts, you’ve probably guessed that I’m not exactly convinced yet.

NM

In my recent post “What’s so bad about redistribution?” I showed how large amounts of funds available to deal with some crisis, such as the credit bailout, caused businesses and people to compete over getting someone else’s money rather than do something productive to make their own. And in another recent post, I mentioned that in the 1950s, GM produced and distributed a comic book version of Hayek’s “The Road to Serfdom.” Hayek’s book was about how socialism is the “road to serfdom,” leading us along a path to poverty and to a loss of our freedoms, as we all become wards of the state. (The entire Reader’s Digest “condensed” version of Hayek’s book is here.)

Well, irony of ironies, in this article from CNBC we now see GM, along with Chrysler, engaging in the socially wasteful lobbying or rent seeking for an extra $10 billion in equity funds from the federal government to support GM-Chrysler merger which is in addition to $25 billion already in the bailout to provide low-interest loans to the US automakers to help them retool to make more fuel efficient cars. On top of that, GM and Chrysler are asking for the federal government to take on nearly $3 billion of their pension obligations.

Have you ever noticed those highway signs “Your tax dollars at work,” or “Built under Governor So-and-So’s Administration.” If McCain and Palin pull out the election, there will be ads for Dodge trucks, “Built Bulldog Palin Tough,” or ads about how so many of their cars are on the road with over 500,000 miles on them, urging buyers to “Drive a McCain.” Or if Obama wins as he probably will, I can see an ad about the comfort and stylish, fuel-efficient Barack that comes with a free tire gauge.

Yes, it is rather ironic that GM, the very company that produced the very serious, but inexpensive comic book version of “The Road to Serfdom” has its hand out, asking much less meekly than Oliver Twist for “more, please,” trying to get taxpayers into GM and Chrsyler’s Hummers, Corvettes and Vipers careening down that “Autobahn to Serfdom.”

-MC

In 1944, an Austrian economist, Frederick Hayek wrote the book, The Road to Serfdom. His book was later shortened and released by Reader’s Digest, and even came out in comic book format and distributed by General Motors. Hayek dedicated his book to socialists of all parties. The central idea of the book is that socialism or collectivism has the same result, whether it is the sort we see in the old Soviet Union and China, and now in North Korea and Cuba, or Fascism of the sort we have seen in Hitler’s Nazi Germany, Il Duce’s Fascist Italy. Hayek’s thesis was that collectivism leads down the same road to tyrannical dictatorships by tyrannical dictators, and he has a very intriguing chapter on “why the worst get on top” in socialism. That very same road, of socialism or collectivism, whether the communist or fascist variety, where people surrender their freedom for the good of the country or the good of the universe, and fall under the spell of the idea that somehow something can be good for the country without being good for any particular person in that country.

Hayek put Fascism and the Naziism in the same category of the Marxism of the Russians, incensing political leaders and academicians in the U.S. as well as with our allies.

Why? The Russians were our allies and the Nazis our enemies. Also, many academicians, even academic economists, were taken in by the ideas of the Marxists. Their societies could not possibly be two sides of the same coin. Or could they?

Well, as my title suggests, we are not only on a road to serfdom, but we are speeding down it as fast as we can go, with little to slow us down.

It is not just that we are about to elect a radical left progressive to the White House. It is also not that both houses of our legislature are also going to have heavy progressive majorities.

No, we are not about to get on the autobahn to serfdom, we have been traveling on it awhile. Certainly policies passed under FDR’s New Deal got us on that road. And that was about the time that the real Autobahn in Germany was being built. It was started before Hitler came to power, but much progress was made on the roads under Herr Hitler, and much of it, fittingly, with slave labor.

The lanes widened with LBJ’s “War on Poverty,” a war that we should all agree did nothing to alleviate poverty, but perhaps only entrenched it and made it more durable, more systemic.

The highway was then super-sized, going from four to eight lanes, and all headed in the same direction, with banking of the curves added to keep us from crashing, but only encouraging us to go faster still. This was accomplished this past month with Bush’s gigantic bailouts with equity positions taken in banks worldwide.

Here are a few signposts along this “Autobahn to Serfdom:”

1. Abolition of property in land and application of all rents of land to public purposes.
2. A heavy progressive or graduated income tax.
3. Abolition of all rights of inheritance.
4. Confiscation of the property of all emigrants and rebels.
5. Centralization of credit in the banks of the state, by means of a national bank with state capital and an exclusive monopoly.
6. Centralization of the means of communication and transport in the hands of the state.

Notice that # 5 was pretty much taken care of in the U.S. and abroad with the giant bailouts. Both #2 and #3 seem to be well on their way with the next president and the next congress. You should note that these signposts are taken from Marx’s own Communist Manifesto.

Zoom, zoom, zoom!

-MC

In the now-famous incident where “Joe the Plumber” questioned presidential candidate, Barack Obama, over his intentions to raise taxes on individuals earning more than $250,000 per year, Obama said “when you spread the wealth around, it’s good for everybody.” So, what is wrong with that, what is wrong with taking from some to give to others? Let me count the ways that wholesale redistribution should be cause for concern:

1. If the government has the right and ability to take from the rich to give to the poor, or from someone you don’t favor to give to someone you do favor, it also can take from those you do like to give to those you do not.
2. Reducing the incomes of the rich in order to increase the incomes of the poor reduce incentives to save, to invest in further education and to work hard. Certainly, our forefathers saw this in Plymouth when the Pilgrims came to this land. Great harvests, for which our first Thanksgiving was celebrated, came on the heels of starvation. What made the difference? Private property in farm land that gave families an incentive to work on their own lands, and to feed their own families. When everyone shared equally in the harvests, incentives were so weakened that they barely were able to survive. See this 2006 post I penned with my student, Amanda Walker, on Thanksgiving.
3. The third way is one that people often do not see, which is that resources that could be very productive elsewhere suddenly get devoted to fighting to come out winners in redistributive efforts, while other resources fight to keep from becoming losers in the redistribution game. A good indication as to what awaits in the fight over funds to be redistributed can be seen now in the current lobbying competition for the bailout funds in Washington. This wasting of resources in non-productive fights over who gets what and who has to pay is what economists have termed “rent seeking,” the competition for goodies out of someone else’s pockets. Take a look at this article to get an idea of where we are headed. Lobbying is an expensive undertaking and is done by very talented individuals. These resources just tend to cancel each other out instead of producing anything of value. And when resources are diverted from productive activities to non-productive activities, our economy underperforms and grows at a slower rate.

Now both points 2 and 3 tell us that economic growth will be slower with substantial redistribution than without it. Now suppose that economic growth over the next 100 years would be 5% without redistribution, but a whole percentage point less, 4%, with it. Think of someone putting aside $1500 a year each of those years, say by making contributions to an IRA. Of course, somewhere in there money passes from generation to generation, but let us suppose that funds are added at the same amount year after year. At the slower rate, the sum grows to a whopping $1.93 million after those 100 years, but at just 1% faster rate of growth, the sum grows to $4.1 million in that same time period. That more than twice the wealth can support more than twice the annual income flow from that wealth. Even with a substantially wider distribution of wealth, the higher rate of growth allows much more to be done in the economy for those at the bottom.

But perhaps the best illustration of mass redistribution to equalize outcomes is from that master story teller, Kurt Vonnegut, in “Harrison Bergeron.”

Be sure to read these few pages by Vonnegut as he portrays a future society that has equalized society in the only way it can truly do this, by handicapping the very talented and the very bright, by bringing everyone down to the same low level. Notice that everyone is made worse off as a result, as even entertainment is reduced to a low level. Spreading wealth around not only fails to make everyone better off, it makes very many of us worse off.

-MC

I’ve felt kind of left out discussing the bailout.

Dr. Michel does research on fiscal policy – particularly taxes – and financial economics, and thus this is right up his alley. Dr. Coats does research on public choice – government spending, pork, attempting to get reelected – again, right up his alley.

And I, at least according to my vita, am but a lowly labor economist.

Labor economists can’t claim to have domain (over other types of economists) about incentives. At its heart, all of economics is really a study of the incentives people have and the constraints they have. However, there are some labor economics issues that are floating around in the background of this financial mess that I think are not getting lip service, at least not on this blog.

I’d wanted to post about the incentives that various players have had in the housing market for a while, hence the post. Then I came across an article, linked here, to a short commentary on the housing market mess written by John Quigley, an economist at UC-Berkeley.

Quigley suggests a large part of what got us into this mess was a really simply problem with labor market incentives – the way the people were compensated. I couldn’t agree more.

Not all people are paid on hourly pay or even salaries – some people’s compensation is structured differently. These different compensation structures give people different incentives. They are done with a reason – to solve one problem – but all forms of compensation schemes have drawbacks.

Back to the housing market mess. You’ll have to go to the link above, and then download the article (there is a download button on the upper right part of the page), but it is free, and only 3 pages long.

Here’s the background, lifted from the article:

The incentive structure that arose for firms in this specialized industry set the stage for the collapse. The incomes and fees generated are all transactions-based, that is, payments are made at the time the transaction is recorded. The originator of the loan, typically a mortgage broker, is paid at the time the contract is signed. Brokerage fees have varied between 0.5 and 3.0 percent. The mortgage lender earns a fee, between 0.5 and 2.5 percent, upon sale of the mortgage. The bond issuer is paid a fee, typically between 0.2 and 1.5 percent, when the bond is issued. On top of this, the rating agency is paid its fee by the bond issuer at the time the security is issued. All these fees are earned and paid in full within six to eight months after the mortgage contract is signed by the borrower.

And now the punchline, at least of the labor econ stuff:

Thus, no party to the mortgage transaction has any economic stake in the performance of the underlying loan. In fact the mortgage broker is paid a larger percentage, termed a “yield spread premium,” if he convinces his clients to accept a higher and more default-prone interest rate. With this structure of incentives, it is not hard to understand why many risky loans were originated, financed, sold, and securitized, especially during the period of rapidly rising house prices from 1999 through 2006.

Read that first sentence again.

Thus, no party to the mortgage transaction has any economic stake in the performance of the underlying loan.

That, folks, is a big problem.

And for the record, Quigley goes on to make some suggestions about how the system could be changed to make things better. Read it!

For my next trick, what labor economics has to do with this whole ACORN voting registration mess…

–CT

Many economists have been going back and forth, arguing whether there really was a severe financial crisis that required a massive Federal bailout. I put my initial two cents worth in here.

Now, a new report from the Minnesota Federal Reserve has re-sparked a debate between Alex Tabarrok and Mark Thoma and Tyler Cowen (Joe Weisenthal and Felix Salmon are involved in this too, but, as far as I can tell, they are economic journalists; not that there’s anything wrong with that).

Alex essentially argues (as I have): the question of whether we have a credit crisis revolves around the amount of lending taking place – what quantity of credit is available and who is able to get it. If the majority of both financial and nonfinancial firms cannot raise capital, we have a major crisis (we will quickly lose consumer goods).

Thoma argues (now I’m quoting):

While rates on the highest quality non-financial commercial paper have behaved fairly well in recent weeks, rates for lower quality stuff have soared. The spread between the two, actually, is one of Calculated Risk’s credit market indicators. …we might suspect that the increase in bank lending was itself a product of tight credit conditions elsewhere—that borrowers were falling back onto lines of credit they normally wouldn’t use thanks to the severity of lending conditions.

My translation of Thoma is as follows: The spread between the rates on good and bad commercial paper is out of line, which is an indication of higher risk in the credit markets. Yes, bank lending has gone up, but that’ simply because firms can no longer access non-bank sources of finances (such as commercial paper), so they are using lines of credit they had not previously relied upon.

Although I would like to see more data, I think the Fed paper has some interesting information on the quantity of lending. Here are some highlights (all direct quotes):

– …while commercial paper issued by financial institutions has declined, commercial paper issued by nonfinancial institutions is essentially unchanged during the financial crisis.

- Figures 5A and 5B display data for interbank loans made by all U.S. commercial banks. These Figures show that, at least in the aggregate, interbank lending is healthy.

- bank credit has not declined during the financial crisis.

- Figures 2A and 2B display analogous data for loans and leases made by U.S. commercial banks. Again, we see no evidence of any decline during the financial crisis.

- …no evidence that the financial crisis has affected consumer lending.

- Where are banks obtaining the funds to increase bank credit? The large recent rise in deposits indicates that a substantial amount of these funds is being raised from deposits.

- One story we have heard is the following. The rise in loans is in large part due to nonfinancial firms drawing on their loan commitments and lines of credit and that loans to nonfinancial firms without such commitments have declined. Furthermore, this decline in loans to nonfinancial firms without commitments signals a dramatic future decline in bank lending. Data that support this story, especially data that support the signaling view, would be extremely useful. We have seen no data from the current crisis that support this story, especially the signaling view component of it.

Wow. Unless these Fed employees are trying to sabotage Bernanke and Paulson’s efforts, perhaps someone should listen? At the very least, can we please stop throwing tax dollars at a problem before we can confirm its existence? I’m betting heavily on the negative.

NM

So, I’m in the middle of researching for another post on the financial crisis when I come across a new Barney Frank story. At first, I thought I had simply stayed up too late.

But Frank really does say this: “There should be a moratorium on bonuses.” “They have a negative incentive effect because they are the ones that say if you take a risk and it pays off you get a big bonus…and if it causes losses…you don’t lose anything.” (A little aside: apparently, he’s not just talking about bonuses for top-executives of financial companies.)

This is econ-incentives 101: Bonuses provide helpful incentives precisely because they reward only productive behavior. Did this guy ever have a job before going into public office?

NM