Saturday, December 20, 2008

Sundown for California

Joel Kotkin writes of California's decline in his column Sundown for California
Twenty-five years ago, along with another young journalist, I coauthored a book called California, Inc. about our adopted home state. The book described “California’s rise to economic, political, and cultural ascendancy.”

As relative newcomers at the time, we saw California as a place of limitless possibility. And over most of the next two decades, my coauthor, Paul Grabowicz, and I could feel comfortable that we were indeed predicting the future.

But much has changed in recent years. And today our Golden State appears headed, if not for imminent disaster, then toward an unanticipated, maddening, and largely unnecessary mediocrity.

Since 2000, California’s job growth rate— which in the late 1970s surged at many times the national average—has lagged behind the national average by almost 20 percent. Rapid population growth, once synonymous with the state, has slowed dramatically. Most troubling of all, domestic out-migration, about even in 2001, swelled to over 260,000 in 2007 and now surpasses international immigration. Texas has replaced California as the leading growth center for Hispanics.

Government policies and the financial crisis

Peter J. Wallison, the Arthur F. Burns Fellow in Financial Policy Studies at the American Enterprise Institute, has written an analysis of the current financial crisis titled Cause and Effect: Government Policies and the Financial Crisis. Here are some excerpts.
Expansion of homeownership could be a sound policy, especially for low-income families and members of minority groups. The social benefits of homeownership have been extensively documented; they include stable families and neighborhoods, reduced crime and delinquency, higher living standards, and less depreciation in the housing stock. Under these circumstances, the policy question is not whether homeownership should be encouraged but how the government ought to do it. In the United States, the policy has not been pursued directly--through taxpayer-supported programs and appropriated funds--but rather through manipulation of the credit system to force more lending in support of affordable housing. Instead of a direct government subsidy, say, for down-payment assistance for low-income families, the government has used regulatory and political pressure to force banks and other government-controlled or regulated private entities to make loans they would not otherwise make and to reduce lending standards so more applicants would have access to mortgage financing.
Many culprits have been brought before the bar of public humiliation as the malefactors of the current crisis--unscrupulous mortgage brokers, greedy investment bankers, incompetent rating agencies, foolish investors, and whiz-kid inventors of complex derivatives. All of these people and institutions played their part, of course, but it seems unfair to blame them for doing what the government policies were designed to encourage. Thus, the crisis would not have become so extensive and intractable had the U.S. government not created the necessary conditions for a housing boom by directing investments into the housing sector, requiring banks to make mortgage loans they otherwise would never have made, requiring the GSEs to purchase the secondary mortgage market loans they would never otherwise have bought, encouraging underwriting standards for housing that were lower than for any other area of the economy, adopting bank regulatory capital standards that encourage bank lending for housing in preference to other lending, and adopting tax policies that favored borrowing against (and thus reducing) the equity in a home.

As a result, between 1995 (when quotas based on the CRA became effective during the Clinton administration) and 2005, the homeownership percentage in the United States moved from 64 percent, where it had been for twenty-five years, to 69 percent; in addition, home prices doubled between 1995 and 2007. In other words, the government is responsible for the current crisis in two major respects: its efforts to loosen credit standards for mortgages created the housing bubble, and its policies on bank capital standards and the deductibility of interest on home equity loans made the current crisis inevitable when the bubble collapsed. This Outlook will explore the strong relationship between the intervention of the U.S. government in the housing market and the worldwide financial crisis that has resulted.

Thursday, December 18, 2008

Government stimulus doesn't work, says Dan Mitchell

Here's an excellent video of Dan Mitchell, on behalf of the Center for Freedom and Prosperity, arguing against the notion that increased government spending can stimulate the economy.

Tuesday, December 16, 2008

The Decline of the Big Three

Michael Barone discusses Who Is at Fault for the Decline of the Big Three? in a column of same title.
Mickey Kaus, pretty much alone among the commentators I've been reading, indicts "Wagner Act unionism" for the decline and fall of the U.S. auto industry. The problem, he argues, is not just the high level of benefits that the United Auto Workers has secured for its members but the work rules—some 5,000 pages of them—it has imposed on the automakers. As Kaus points out, unionism as established by the Wagner Act is inherently adversarial. The union once certified as bargaining agent has a duty not only to negotiate wages and fringe benefits but also to negotiate work rules and to represent workers in constant disputes about work procedures.
The UAW also created a constituency within itself of retirees who have voting rights in union elections just as actual workers do, and there are now something like three times as many GM retirees as GM employees as voting members of the UAW. Retiree benefits account for the lion's share of the difference between GM's labor costs and the labor costs of foreign automakers in the United States.

General Motors in 1970 thought it could afford this. Didn't it "control" half the U.S. auto market? Couldn't it generate any level of demand it wanted through advertising? That's what as learned a sage as John Kenneth Galbraith had argued in his bestselling The New Industrial State, published in 1967. GM in 1970 didn't fear competition; its greatest fear was that the Justice Department would bring an antitrust case to break it up.

But of course it turned out that GM and Ford and Chrysler were in 1970 just on the verge of getting serious competition from foreign automakers.

Failed ideas of economists

Here's John Tammy, a senior economist with H.C. Wainwright Economics, writing of Joseph Stiglitz, and the Failed Ideas of Economists
In a recent article for Vanity Fair, Stiglitz engaged in falsehoods and contradictions in order to blame capitalism for our present troubles. It would perhaps be better for him and other elite economists to simply look in the mirror.

Indeed, while Alan Greenspan’s light trashing of free markets has surely earned him a place in economic purgatory, the blame being passed his way for the housing boom and bust is not rooted in reality. Many even on the Right blame low nominal rates of interest on Greenspan’s watch for the latter, but then history shows housing has traditionally done best when interest rates are rising.

More realistically, weak currencies are the biggest drivers of nominal home-price gains, and for evidence we need only study Richard Nixon’s second presidential term and Jimmy Carter’s lone term to find that much like this decade, housing was frothy under both. Stiglitz argues that Greenspan had a role here for turning on “the money spigot” with “full force” earlier in the decade, but then money supply is vastly overrated as an indicator of a currency’s direction. For evidence, we need only compare the ‘70s and ‘80s when money creation by the Fed was the same, but achieved opposite results. If Stiglitz is looking for someone to blame here, he would do better to finger a Bush Treasury that embraced a weak dollar with great vigor.

Stiglitz says Greenspan should have been more vigilant about curbing “predatory” lending to low-income households and “liar loans”, but when we consider how the Right talked up “America’s Ownership Society” in concert with politicians from the Left eager for Fannie and Freddie to expand their mandate into the subprime space, it seems folly to assume that Greenspan could have blunted this bipartisan bout with political correctness. Stiglitz decries the innovation that made these loans possible, but then loans are always risky, and they’re only problematic when the very regulators and politicians whose actions he espouses seek to privatize the gains from same, while socializing the losses.

While he served President Clinton, Stiglitz claimed he did not support the repeal of Glass-Steagall, and that repeal changed the culture of banking, thus making way for the various failures in our midst. What he ignores is that with the exception of Citigroup, the majority of financial failures involved investment banks lacking a commercial-bank affiliation. Indeed, imagine what might have happened if regulations had kept commercial banks from serving as White Knights in this whole financial mess (see J.P. Morgan & Bank of America), and more broadly, what a shame that regulations kept other cash rich companies such as Wal-Mart from buying greatly weakened financial institutions in order to enter the banking space themselves.

Stiglitz regularly seeks to elevate regulation as the path to financial health, but then contradicts himself in decrying a 2004 SEC decision in which investment banks were allowed to increase their debt-to-capital ratios “from 12:1 to 30:1, or higher”. The question Stiglitz fails to ask is whether regulation was in fact the problem. Indeed, the ’04 SEC decree essentially allowed risk-oriented banks to hide behind the very regulations that Stiglitz would like more of. Did it ever occur to him that absent a muscular SEC, self-interested investors with their money on the line might have regulated the investment banks themselves; allowing firms with a history of investment success higher debt-to-capital ratios, while curbing the activities of those thought to be unworthy?

On the tax front, Stiglitz claims that the 2001 and 2003 Bush tax cuts “played a pivotal role in shaping the background conditions of the current crisis.” According to him, “they did very little to stimulate the economy.” About the 2001 “reductions”, he would have a point in that stimulus and tax breaks for select industries are by definition an economic retardant. But there again lies a contradiction in that while he correctly decries the imposition of Henry Paulson’s awful TARP, his reasoning has to do with Paulson’s failure to do anything “about the source of the problem, namely all those foreclosures.” Put simply, Stiglitz didn’t like the welfare that characterized Bush's Stimulus I, but somehow welfare for irresponsible homebuyers is a good thing.

Regarding the ’03 cuts, if economic growth is the certain result of productive work effort bolstered by investment, and it is, how is it that lower penalties on both would harm ours or any economy? More important, Stiglitz contradicts himself again in noting the massive amount of “foreign” oil that reached our shores in subsequent years. Indeed, imports of any kind are merely a reward for productive economic activity. If the ’03 cuts had hurt the economy, this would have revealed itself through less, not more in the way of imports. Stiglitz would also do well to remember that we’re not “independent” when it comes to all manner of goods, but far from economically enervating, this lack of self-sufficiency is a positive for Americans mostly doing that which they do best. Put simply, self-sufficiency of the economic variety is merely a kind term for poverty.

Obama-nomics failed in Japan

President-elect Barack Obama's plan to stimulate the economy by increasing government spending was tried in Japan and led to Japan's "lost decade," in which the economy grew hardly at all. The Wall Street Journal editorial page recounts the details in their column titled Barack Obama-san
As January 20 nears, Barack Obama's ambitions for spending on the likes of roads, bridges and jobless benefits keep growing. The latest leak puts the "stimulus" at $1 trillion over a couple of years, and the political class is embracing it as a miracle cure.

Not to spoil the party, but this is not a new idea. Keynesian "pump-priming" in a recession has often been tried, and as an economic stimulus it is overrated. The money that the government spends has to come from somewhere, which means from the private economy in higher taxes or borrowing. The public works are usually less productive than the foregone private investment.

In the Age of Obama, we seem fated to re-explain these eternal lessons. So for today we thought we'd recount the history of the last major country that tried to spend its way to "stimulus" -- Japan during its "lost decade" of the 1990s. In 1992, Japanese Prime Minister Kiichi Miyazawa faced falling property prices and a stock market that had sunk 60% in three years. Mr. Miyazawa's Liberal Democratic Party won re-election promising that Japan would spend its way to becoming a "lifestyle superpower." The country embarked on a great Keynesian experiment:

August 1992: 10.7 trillion yen ($85 billion). Japan passed its largest-ever stimulus package to that time, with 8.6 trillion yen earmarked for public works, 1.2 trillion to expand loan quotas for small- and medium-sized businesses and 900 billion for the Japan Development Bank. The package passed in December, but investment kept falling and unemployment rose. By the end of the year, Japan's debt-to-GDP ratio was 68.6%.
Now we're told that a similar spending program -- a new New Deal -- will revive the U.S. economy. How do you say "good luck" in Japanese?

Friday, December 12, 2008

Bankruptcy Before Bailouts

United States Senator Jim DeMint, Republican from South Carolina, was interviewed by National Review Online regarding a possible federal bailout of the Big Three automobile industry.
GM had its best sales year ever in 2007. It sold over 9 million cars around the world — the same number as Toyota. But Toyota made $20 billion, and GM lost $40 billion. Their viability is not going to change if the cost structure is such that they cannot succeed. Until they restructure, we’d just be throwing good money after bad to prop them up for a few months.
It is a dangerous and socialist idea that the government can intervene and guarantee outcomes. We can’t guarantee outcomes. And in fact, the reason we are in a financial crisis in our country is because of government involvement — such as the mismanagement of Fannie Mae. In the financial industry, for years, we forced banks to make loans to people who didn’t have good credit as part of a social-engineering strategy.

Likewise with the unions in Michigan. We’ve forced people to join unions in Michigan if they want to work for the auto industry, and thus we’ve forced them basically to fund a political party through their dues. They’re the only kind of organization that is given that kind of government protection. And so forced unionization, sanctioned by government, has essentially put the backs of these American auto companies to the wall. And now the government is going to come in and say we have to save them.

Government has been doing that on many fronts. Our policies create a crisis, and once there’s a crisis, we say we need to get the government more involved. We’re inching our way toward a European style of socialism. The auto bailout is just one more big step in the wrong direction.

Saturday, December 6, 2008

Senator Corker has a plan for the Big Three

‘Corker Plan’ Outlined in Hearing with Detroit Three and UAW
“At today's hearing I suggested a number of very specific and rigorous measures that should be in place before we even discuss making a loan to any of these companies.

• “One, give existing bondholders 30 cents on the dollar to help reduce their overall debt load.

• “Two, bring wages immediately in-line with companies like Nissan and Volkswagen.

• “Three, GM owes $23 billion to the United Auto Worker’s VEBA (voluntary employees’ beneficiary association) account. The union must agree to take half of that payment in GM stock.

• “Four, the union must agree to do away with payments to workers who are still receiving almost full compensation up to four years after their jobs have ended.

“These are the same types of conditions a bankruptcy judge might require to ensure that these companies become viable and sustainable into the future, and if they will agree to these terms then we have something to talk about. The process I have suggested would allow them to avoid the problems and stigma that accompany a formal bankruptcy, while forcing them to do the things they need to do to be successful companies.”

Sunday, November 30, 2008

Krauthammer and Will discuss the economy

Charles Krauthammer and George Will are the latest columnists to discuss the economic agenda of the incoming Obama administration. George Will's column is titled New New Deal Won't Help the Economy
Early in what became the Great Depression, John Maynard Keynes was asked if anything similar had ever happened. "Yes," he replied, "it was called the Dark Ages and it lasted 400 years." It did take 25 years, until November 1954, for the Dow to return to the peak it reached in September 1929. So caution is sensible concerning calls for a new New Deal.

The assumption is that the New Deal vanquished the Depression. Intelligent, informed people differ about why the Depression lasted so long. But people whose recipe for recovery today is another New Deal should remember that America's biggest industrial collapse occurred in 1937, eight years after the 1929 stock market crash and nearly five years into the New Deal. In 1939, after a decade of frantic federal spending -- President Herbert Hoover increased it more than 50 percent between 1929 and the inauguration of Franklin Roosevelt -- unemployment was 17.2 percent.
Charles Krauthammer's column is titled The Washington Stock Market
Even more egregious will be the directives to a nationalized Detroit. Sen. Charles Schumer, the noted automotive engineer, declared "unacceptable" last week "a business model based on gas." Instead, "We need a business model based on cars of the future, and we already know what that future is: the plug-in hybrid electric car."

The Chevy Volt, for example? It has huge remaining technological hurdles, gets 40 miles on a charge and will sell for about $40,000, necessitating a $7,500 outright government subsidy. Who but the rich and politically correct will choose that over a $12,000 gas-powered Hyundai? The new Detroit churning out Schumer-mobiles will make the steel mills of the Soviet Union look the model of efficiency.

The ruling Democrats have a choice: Rescue this economy to return it to market control. Or use this crisis to seize the commanding heights of the economy for the greater social good. Note: The latter has already been tried. The results are filed under "History, ash heap of."

Shlaes and Krugman debate Great Depression

It looks like a debate between two economists has heated up over the effectiveness of the New Deal during the Great Depression. Paul Krugman has accused Amity Shlaes of referencing "misleading data" in her book The Forgotten Man: A New History of the Great Depression.

Amity Shlaes responds to Krugman's accusation and discussion the Great Depression and President-Elect Obama's economic policies in a column titled The Krugman Recipe for Depression: Massive government spending is no solution to unemployment
.....Mr. Krugman has mentioned me by name. He recently said that I am the one "whose misleading statistics have been widely disseminated on the right."

Mr. Krugman is a new Nobel Laureate, teaches at Princeton University and writes a column for a nationally prominent newspaper. So what he says is believed to be objective by many people, even when it isn't. But the larger reason we should care about the 1930s employment record is that the cure Roosevelt offered, the New Deal, is on everyone else's mind as well. In a recent "60 Minutes" interview, President-elect Barack Obama said, "keep in mind that 1932, 1933, the unemployment rate was 25%, inching up to 30%."

The New Deal is Mr. Obama's context for the giant infrastructure plan his new team is developing. If he proposes FDR-style recovery programs, then it is useful to establish whether those original programs actually brought recovery. The answer is, they didn't. New Deal spending provided jobs but did not get the country back to where it was before.

This reality shows most clearly in the data -- everyone's data. During the Depression the federal government did not survey unemployment routinely as it does today. But a young economist named Stanley Lebergott helped the Bureau of Labor Statistics in Washington compile systematic unemployment data for that key period. He counted up what he called "regular work" such as a job as a school teacher or a job in the private sector. He intentionally did not include temporary jobs in emergency programs -- because to count a short-term, make-work project as a real job was to mask the anxiety of one who really didn't have regular work with long-term prospects.

The result is what we today call the Lebergott/Bureau of Labor Statistics series. They show one man in four was unemployed when Roosevelt took office. They show joblessness overall always above the 14% line from 1931 to 1940. Six years into the New Deal and its programs to create jobs or help organized labor, two in 10 men were unemployed. Mr. Lebergott went on to become one of America's premier economic historians at Wesleyan University. His data are what I cite. So do others, including our president-elect in the "60 Minutes" interview.
The column is worth reading in its entirety because debates such as this once between Krugman and Shlaes are certain to reappear often in the coming months, as debate over Obama's "New, New Deal" begin.

Saturday, November 22, 2008

New York City needs better leadership

A recent Wall Street Journal editorial describes the problems New York City has faced over the last 50 years and explains why it has lost jobs to other locations. The editoral it titled New York Is Headed for Dark Days Unless Bloomberg Changes Course by Nicole Gelinas and it represents a warning to President Elect Obama.
Last week, Mayor Mike Bloomberg announced a grim update to New York City's $60 billion budget. To meet falling revenues he proposes spending cuts and property-tax hikes, and he may increase income taxes by 15%.
The challenges New York City faces are more significant than those facing other large cities.
To understand just how dependent upon Wall Street New York City's budget has become, consider these facts. Two years ago, a third of all the wages and income in the city came from the finance, insurance and real-estate industries, up from just a quarter a decade earlier. The securities industry alone was responsible for a quarter of wages, up from 17% from a decade earlier.

The city also depends on its top 1% of earners -- many of them tied to the financial industry -- for nearly half of its personal-income tax revenue, up from 41% from last decade. The financial sector provides more than a third of business taxes. Last year, Wall Street bonuses alone comprised 8% of the city's personal income. In 2000, the peak year for tech-bubble bonuses, they comprised 6.6%.

Wall Street's boom, moreover, papered over the precarious structure of New York City's budget. Two years ago, New York took in 41% more in tax revenues than it had in 2000, after inflation. But the city's long-term, big-ticket budget items -- pensions and health care for city workers, Medicaid and debt costs -- had increased by more than half.

The mayor calls these costs "uncontrollable" because cutting them requires long-term planning. They now comprise more than half of the budget funded by city tax revenues, and will continue to grow if left unchecked. The budget in general is 22% bigger, after adjusting for population and inflation, than it was at the height of the 1970s fiscal crisis. Most of that growth came in the past seven years.
For the United States to recover quickly from its current economic problems, the federal government must make it less expensive to invest in the United States. The Democrats' Union Card Check proposal and their desire to raise taxes are moves in the wrong direction.

Friday, October 24, 2008

Great Britain's Economy Shrinks

For the record, I'm not blaming the contraction of Great Britain's economy on Barack Obama. But it is important economic news.

Great Britain's economy contracts by 0.5 percent
The U.K. economy shrank more than forecast in the third quarter, evidence that Britain is in the grips of its first recession since 1991. Gross domestic product dropped 0.5 percent from the second quarter, the first contraction in 16 years, the Office for National Statistics said today.
It looks like a worldwide recession is on the horizon, if it has not already started. How long it lasts will have something to do with what kinds of economic policies are enacted.

Sunday, October 19, 2008

Soup Lines Instead of Bread Lines

Columnist John Kass is probably going to be running a blog that competes directly with mine called The Obama Soup Lines.
"Spread the wealth around" is regular Joe speak for redistributionist tax policy, in which the government takes from the Joes and keeps a fee for handling Joe's money, then gives it out to other folks who want Joe's money, so the other folks will love the politicians who run the government and vote for them again and again.

This is a system that works remarkably well for politicians, government workers with fat pensions and others who get Joe's money. It doesn't work out for the Joes, but there aren't as many of them as there used to be. Increasingly, Joes are encouraged to get in the government soup line for what is called "their fair share."

Anybody from Illinois understands how this works. In Illinois, it is an art form. Illinois Republican politicians do it. Illinois Democratic politicians really, really do it. Soon, perhaps, the rest of the nation will understand our way of doing it.

Obama's Health Care Plan

Greg Mankiw, a professor of economics at Harvard, has an interesting post regarding Barack Obama's health care plan titled, Taxing the Uninsured.
Now consider the Obama health plan. A major element of the plan is an extra payroll tax on firms that do not give their workers health insurance. By the basic theory of tax incidence, this is equivalent to a tax on workers without insurance.

In other words, the Obama plan is much the same as imposing a health insurance mandate, backed up by the penalty of a tax surcharge on your earnings if you fail to have coverage.

One difference: If an individual buys his own health policy, rather than getting it through his employer, he still pays the tax. That is, the Obama policy continues, even reinforces, a strong policy-induced preference for employer-provided over individually-purchased health insurance.
The post goes on to say that McCain's plan is attempting to partially sever the link between where one works and their health insurance. We should change the economic incentives of health insurance so that one's employer has less to do with an employee's health insurance.