Archive for August, 2010

A principal tenet of libertarianism—perhaps even the first principle of libertarianism—is an injunction against initiating violence. Whatever else you do, you may not harm unwilling others. John Locke, John Stuart Mill, Herbert Spencer, Robert Nozick, and many others—I as wellhave all subscribed to some version of this principle as a starting point. 

Yet Adam Smith in The Theory of Moral Sentiments raises an interesting case that might suggest limited exceptions to the principle. Smith argues that resentment is the sentiment that underlies the proper condemnation of injustice: An injustice arouses resentment, and can properly lead one to take action against the injustice. At one point during his discussion of justified resentment, Smith writes:

Upon some occasions we are sensible that this passion [i.e., resentment], which is generally too strong, may likewise be too weak. We sometimes complain that a particular person shows too little spirit, and has too little sense of the injuries that have been done to him; and we are as ready to despise him for the defect, as to hate him for the excess of this passion. (TMS II.i.5.8)

Smith’s claim that people sometimes show “too little spirit” seems right to me. There are many occasions on which we might reasonably think that a person should have faced a challenge, should have confronted a bully, or should have risen to someone’s defense, and we judged the person negatively when he did not. Indeed, numerous sitcoms and movies have been built on this premise. One of my favorite classic movies, My Bodyguard, takes this lesson as its central theme, and we all cheer when the bullies are finally confronted. (Here is the climactic scene. I bet your heart swells too when Linderman finally takes on Mike and Clifford gives Moody what’s been long coming to him.)

This indicates the possible libertarian conundrum I have in mind: Sometimes people should confront bullies, and sometimes that requires, well, a punch in the nose. Proper resentment, in other words, can justify taking action against others. And this sometimes holds even when the “injustice” against which one is acting has not included physical violence. Sometimes just threats can justify a punch in the nose, and sometimes—under just the right circumstances—even mere words can.

President Andrew Jackson, for example, fought many duels to defend his wife’s honor. He had married Rachel before her prior marriage to an abusive man was finally complete, which meant that for a time their marriage was bigamous. Although the president and Rachel re-married after her divorce was completed, the fact that she was for a time technically married to two men was raised and used against President Jackson again and again. He would not stand for it when it was. If someone suggested that his wife was less than noble, he would ask the person to take it back—or meet him outside to settle the issue in the time-honored, gentlemanly way. President Jackson almost lost his life more than once defending his wife’s honor.

In these cases, President Jackson was acting in response only to words, not phyiscal violence or even the threat of physical violence. But wasn’t he right to do so? Wouldn’t we have judged him harshly had he not acted to defend his wife’s honor? This is a special case, but I think there might be a more general principle at work: Sometimes one should rise to defend another’s honor.

The news program “20/20″ has been airing a series of “What Would You Do?” segments in which they stage scenarios with actors in front of unsuspecting random people to see what they would do. In one segment, they have a man publicly and loudly berating a woman (both are actors). The man does not assault her, but he gets in her face and shouts derogatory and demeaning things. What do passersby do? What should they do? Some act and some do not, but everyone seems to believe that one should do something. Exactly what one should do depends on a lot of factors, but I suggest that there are easily-imagined scenarios in which what a passerby should do is punch the man in the nose.

One more thought, this one even more speculative. In most places in America today, physical violence of any kind is frowned upon as indicative of an earlier, unenlightened, more barbaric age. Yet I wonder whether the fact that people know with a high degree of certainty that they will get no punch in the nose no matter what they say has not contributed to the general coarsening of manners. People today may say the vilest things with relative impunity, and so increasingly more of them do. If, by contrast, they knew they ran a real risk of the punch in the nose if they used coarse language or manners publicly, might that not act as a disincentive to do so—and a greater disincentive than the mere risk of having another use vile language aimed at oneself?

I am not suggesting, then, we should all begin punching one another in the nose. But I am suggesting that showing “too little spirit” can indeed be a vice, and moreover that there are times when a punch in the nose might be just what a situation calls for.


Read Full Post »

In the past, I have been quite interested in “Operation Drain the Swamp.” A piece by Brody Mullins and John McKinnon in  today’s WSJ suggest that Speaker Pelosi has some additional work to do in the final months of her reign if she is going to bring the operation to a successful conclusion. According to the article, a half-dozen members of Congress are being investigated for the common practice of pocketing government funds provided to cover expenses when traveling overseas. Members receive a per diem that can run as high as $250 per day. However, the costs of travel are often covered by their hosts (foreign governments, ambassadors).

Lawmakers routinely keep the extra funds or spend it on gifts, shopping or to cover their spouses’ travel expenses, according to dozens of current and former lawmakers. …Leftover funds can add up to more than $1,000 a trip for longer visits to expensive regions.

Those currently under investigation include: G.K. Butterfield (D-NC), Joe Wilson (R-SC) Alcee Hastings (D-FL), Solomon Ortiz (D-TX), Robert Aderholt (R-AL), and former Representative Mark Souder (R-IN).

Of course, who can blame our representatives for pocketing a thousand here and a thousand there. It must seem trivial when you are used to throwing around billions of taxpayer dollars. Should any of this  come as a surprise? Read the following:

There is no system for lawmakers to return excess travel funds when they return to the U.S. and investigators may conclude that House rules for the use of per diem are unclear. One lawmaker, Sen. Richard Durbin (D., Ill.), said that he mails a personal check to the U.S. Treasury after each trip. Congress doesn’t keep any record of the amount of per diem that is returned to the government.

Elected officials design the institutions and rules by which they are governed. Anyone familiar with principal-agent problems should not be shocked and horrified by more evidence that individuals design institutions to further their own self-interest. Additional evidence? The WSJ piece ends with a reminder:  “Investigators won’t make the probe public until after the election due to a House rule that bars announcements of ethics investigations in the months before an election.”

Read Full Post »

Happy Neocon Day

Given the great success of recent American foreign policy initiatives driven largely by the neoconservatives, the New York Times apparently decided it is “Neocon Day” today.  To celebrate, the Gray Lady published two op-eds on Iraq that sing the praises of our efforts there. 

In the first, David Brooks highlights how successful our nation-building project is going in Iraq.  I wonder if this column will be his “Mission Accomplished” banner should security in Iraq deteriorate, as is suggested by a recent increase in violence and the presence of many unresolved issues.  

With the carelessness of those who talk about natural disasters as good for the economy (displaying Bastiat’s broken windows fallacy), Brooks notes that “It’s hard to know what role the scattershot American development projects have played, but this year Iraq will have the 12th-fastest-growing economy in the world, and it is expected to grow at a 7 percent annual clip for the next several years.”  Hmmmm, blow the hell out of a country for years then pour tons of money into it and voila, a signal success for nation-building!  Moreover, we are told that “Violence is down 90 percent from pre-surge days.”  Talk about cherry-picking a statistic.  And as Celeste Ward of the RAND Corp and others have argued, the decline has had little to do with American efforts or the surge. 

But most egregiously, even if we accept Brooks at his word that things are starting to look bright all over, he fails to examine both sides of the ledger and factor in the cost in terms of our blood (over 4000 Americans killed and multiples of that wounded) and treasure (probably over $2 trillion dollars), not to mention the pain and suffering of millions of Iraqis (and a minimum of 100,000 civilian deaths).  With that accounting in mind, I’d want a lot more bang for the buck than we are seeing in Iraq even if I were a simple utilitarian (and I’m willing to concede that some gains for the living in Iraq have been made). 

In the second piece for Neocon Day, Paul Wolfowitz argues that we must continue our commitment to Iraq and model it on our efforts in South Korea following the Korean War.  Like with most bad analogies, Wolfowitz breezes over the very different situations (the threat of the Soviet Union just for starters) we faced in the 1950′s compared to today.  Moreover, despite the subsequent success in South Korea, a good realist then and now could have questioned whether the commitment was necessary for U.S. interests.  And last I checked, that is the point of our military and foreign policy institutions. 

These two pieces prove that bad ideas are not fated to death.  Neoconservatives should have been run out of town on a rail by now.  Instead, we have the New York Times giving them yet more precious real estate to spread their destructive views.

Read Full Post »

Glenn Beck is an interesting and frustrating character for many libertarians. So often, his arguments appear to unfold in a reasonable fashion and then they turn into a flurry of chalk dust, conspiracy theories, religious imagery and tears.

Many commentators waited breathlessly for Beck’s “Restoring Honor” rally at the Lincoln Memorial this past weekend. While they assumed he would turn things into a vitriolic attack on Obama, what they witnessed has been described as something between a tent revival and a meeting of the Promise Keepers. The focus was less on public policy and Obama than on faith, hope, and charity. There is a fine piece on the rally by James Hohmann at Politico. Reason.tv has an interesting clip entitled “What We Saw at the Glenn Beck Rally in D.C.”

Initially, Beck was going to use the rally to launch what he refers to as The Plan, “specific policies, principles and, most importantly, action steps” to launch “a new national movement to restore our great country.”

In the end, Beck decided to postpone the release of the Plan. According to the Politico piece: “Without specifying why, Beck said Saturday that he came to the realization a political approach would be wrong for this occasion. He attributed part of his idea for what to do in lieu of that to a conversation he claimed he had with God.

“It was about four months ago that we were still kind of lost, and we didn’t know what we were going to do when we got here,” Beck said. “And I was down on my knees, and we were in the office. And I said ‘Lord, I think I’m one of your dumber children. Speak slowly!’ And the answer was, ‘You have all the pieces. Just put them together.’ The pieces are faith, hope and charity and looking for those things inside each of us.’”

Obviously, it is too early to critique the plan without release of the Plan.  Perhaps Beck will be content with calling his viewers to embrace spiritual renewal. His recent emphasis on the spiritual virtues (drawn from Paul’s first letter to the Corinthians) could suggest that this is all he has in mind. As a Christian, I would have no difficulties in a call for spiritual renewal, although given Beck’s performances, I would also question whether he could deliver them without slipping into discussions of everything from the Bavarian Illuminati to the Bilderberg group.

But one wonders whether Beck has concluded that he is now the instrument of God’s will, preparing to lead his followers to construct the Kingdom of God on earth.  Plans to immanentize the eschaton usually involve a heavy role for the state, so one would expect that whatever is left of Beck’s libertarianism would likely be one of the first victims of the Plan.

One also wonders whether evangelicals, having learned some bitter lessons from their past flirtations with partisan politics, would be repelled or attracted by such an effort. I would guess the latter.

What is Beck up to? Should any of us care?

Read Full Post »

There is a fine piece in this morning’s NYT by Peter Goodman (“What Can be Done to Cure the Ailing Economy”).

Let me entice you with three money quotes:

It increasingly seems as if the policy makers attending like physicians to the American economy are peering into their medical kits and coming up empty, their arsenal of pharmaceuticals largely exhausted and the few that remain deemed too experimental or laden with risky side effects. The patient — who started in critical care — was showing signs of improvement in the convalescent ward earlier this year, but has since deteriorated. The doctors cannot agree on a diagnosis, let alone administer an antidote with confidence. This is where the Great Recession has taken the world’s largest economy, to a Great Ambiguity over what lies ahead, and what can be done now.

From Peter Schiff

“The recession is the cure for the disease that affects the economy, but the politicians don’t have the stomach for it,” says Peter Schiff, president of Euro Pacific Capital, a Connecticut-based brokerage house. “They’re going to keep stimulating the economy until they kill it with an overdose. The hyper-inflation that results is going to be far worse than the cure.”

From Alan Blinder:

Six months ago, Alan Blinder, a former vice chairman of the Federal Reserve, and now an economist at Princeton, dismissed the idea that America’s political system would ever allow the country to sink into a Japan-style quagmire. “Now I’m looking at the political system turning itself into a paralyzed beast,” he says, adding that a lost decade now looms as “a much bigger risk.” Congress and the Obama administration have ruled out further stimulus spending. The Fed appears to be running out of powder. “Its really powerful ammunition has been expended,” Mr. Blinder says.

Goodman has written a piece worth reading. The big question remains: where do we go now?

Read Full Post »

Clearly, the recession caused state revenues to fall short of projections, opening up budget deficits. However, some states dealt with more serious fiscal problems than others. California’s, New York’s, and Illinois’ woes have been in the news quite a bit lately.

A new paper by Matt Mitchell at the Mercatus Center finds that states with more less spending as a percentage of income, more growth in spending per capita in the two decades prior, less stringent balanced budget requirements, and less economic freedom have had bigger budget gaps. From the study:

Using Jason Sorens and William Ruger’s measure of economic freedom, I found that other factors being equal, the most-economically free states tended to have budget gaps that were 25 percentage points smaller than the least-free states.

One implication of this research, it seems to me, is that federal bailouts of highly indebted states encourage more spending and less economic freedom in the future.

(Disclosure: Work on the Ruger-Sorens Index of personal and economic freedom was funded by the Mercatus Center.)

UPDATE: corrected & clarified findings on government spending.

Read Full Post »

Hail the lone juror!

Ever since the jury in former Illinois Governor Rob Blagojevich’s recent trial failed to reach a unanimous verdict in all but one count, I’ve been pondering whether our jury trial system in the U.S. makes sense.  There are different ways of looking at this.

1. My first response as a former resident of Chicago was “I wonder how he managed to buy off the juror.” Seriously, this is Illinois we are talking about.

2. Doesn’t this juror—revealed to be a 67-year-old former state employee—know that all Illinois Governors end up in jail?  They must have a special wing in the prison where they all go by now.

3. When Blagojevich left office, he had about the same approval rate as he did in the trial: 1/12.  The mystery continues to be not why his rating was so low, but that 1 in 12 people still thought he was going a good job.  What planet are these people living on?  Maybe the same planet as those who think the President is a Muslim or think that a U.S. government conspiracy was responsible for the twin towers falling (aside from the physics, when has any group of people in government demonstrated that level of competence—not to mention that level of evil).  No matter how nutso the idea is, 1 in 12 people in America will believe it.  Doesn’t this mean we should re-think this unanimous verdict thing?

4. But I’m also impressed by how easy it seems to get 12 people to convict someone who is innocent.  The Innocence Project has worked for the release of hundreds of convicted criminals who were later exonerated, often by DNA evidence.  Apparently even a unanimous standard is not sufficient protection of the innocent in all cases.  Wouldn’t lowering the standard to 11 or 10 votes just send more innocent people to jail?

5.  I wonder if the general persuadability of juries speaks to the idea that we give lawyers too much say in the jury selection process.   Of course we want both sides to eliminate the kooks and crazybirds (the 1 in 12 mentioned above), but what they seem to be shooting for is not wise people, well-schooled in the lessons of life, with good judgment and willing to make hard decisions.  It seems like we end up with people, by and large, who have few opinions, with little engagement in civic affairs and not highly educated.   In short anyone who might think for herself.   Limiting the lawyers’ ability to challenge jurors, for cause or otherwise, would lead to better juries, I think.

6.  Even though I think we had a miscarriage of justice in the Blago case—in the sense that he has been corrupt to the core since his early days in politics, and these charges are only the tip of the iceberg—I still like the image in my mind of the lone juror, standing up to everyone else and saying, “I have reasonable doubt.”  I like it that this is an ordinary person, not a judge or a government bureaucrat.  Just a citizen.

But in spite of bad outcomes—in fact, maybe because of them—I say, hail to the lone juror!   That one lone citizen can grind the system to a halt really is something worth preserving.  Given the many ways in which the government has whittled away our Constitutional protections over the years, I wouldn’t want to give this up as well.

[My one experience with jury duty was actually in Chicago many years ago.  I went downtown to the courthouse and waited for a few hours for my name to be called.  It never was.   Prior to the selection process, the trial judge gave this impassioned speech on the sanctity of trial by one’s peers.  I was genuinely moved.  It was one of the best Constitutional speeches I have ever heard.  I was ready to serve.  The judge gave this speech as an explanation of why he wasn’t going to let jurors off easily; their duty was just too important.  He then proceeded to let juror after juror off the hook for every lame excuse in the book.  Thus began my dissolution with the Chicago justice system.]

Read Full Post »

Conor Friedersdorf says no, but at Mother Jones Kevin Drum totes up the scorecard and says, pretty much, yes:

If you can find liberals who favor charter schools, less regulation of small businesses, and an end to Fannie Mae, that’s well and good. But that’s 10% or less of my worldview. I also favor high marginal tax rates on the rich, national healthcare, full funding for Social Security, more spending on early childhood education, stiff regulations on the financial industry, robust environmental rules, a strong labor movement, a cap-and-trade regime to reduce carbon emissions, a major assault on income inequality, more and better public transit, and plenty of other lefty ambitions… If we lived in Drum World I figure combined government expenditures would be 40-45% of GDP and the funding source for all that would be strongly progressive.

The only problem with this is that Drum underestimates the expense of what he wants to accomplish. According to usgovernmentspending.com, total government spending in the U.S. in 2009 was about 42% of GDP (up from 36% the year before), and we aren’t anywhere close to Drum World. He mentions Sweden favorably – well, Sweden has government spending around 60% of GDP.

Now, I think total government spending somewhat overestimates the true fiscal impact of government on the economy, because much of that spending consists of direct transfers to individuals, who then spend their money in the market, and some of it also consists of building things like roads. Government consumption is a very conservative estimate of the fiscal burden of government, consisting of government spending on its own operations (wages and goods). (Of course, it excludes regulatory burden.) According to the OECD, in 2008 government consumption was 16.7% of US GDP, compared with 26.0% in Sweden and 26.7% in Denmark. The lowest in the OECD? Mexico (10.6%) and Switzerland (10.8%). Switzerland – that land of impoverished people starving in the streets, that dystopia of megacorporations enslaving and brutalizing their employees – has a government more than 35% smaller than that of the U.S… in 2008.

Read Full Post »

New Jersey was just denied its bid for some $400 million from the federal government’s “Race to the Top” initiative. The reason, apparently, is because of a “clerical error” in one paragraph on one page of the 1,000-page application. (Apparently the state was required to provide budget figures for one set of years, and it mistakenly provided figures for a slightly different set of years.)

In a state as far in debt as New Jersey is—its debt is currently estimated to be in excess of $50 billion, approximately 100% of its annual expenditure—the revenue lost because of this clerical error constitutes less than 1% of its debt. But it’s still a lot of money. There is now a lot of finger-pointing going on: The teachers’ union is blaming Governor Christie for his incompetence, Governor Christie is claiming the union signed off on the application too, etc.

Whether the federal government, which itself is in rather shaky financial shape, should be handing out billions of dollars it doesn’t have to states that have spent themselves over their skis is a question of course. But this episode encapsulates brilliantly one of the problems with centralized, that is to say bureaucratic, administration of large-scale enterprises like education.

Because the centralized authorities cannot possess the detailed local knowledge required to make appropriate judgments about the individual cases that fall within their purview, they must instead resort to the expedient of adopting and applying rules to wide swaths of cases. That is, instead of relying on principles, like “reward applicants with the most merit,” they rely instead on rules, like “reject application if box 17(a)(3)(i) on page 1,273 is not fully darkened (an ‘x’ is not acceptable).”* The former requires judgment, which is difficult; the latter requires robots, and is easy.

This explains some of the robotic intransigence for which bureaucrats are infamous. Rules, rules, and more rules, all of which must be followed—even when no one really knows why—and there can be no exceptions made, even when, if we used our independent judgment, everyone on all sides would agree that an exception is warranted. That is why we all still have to take off our shoes at airports, for example.

Of course, the bureaucrats making decisions in the Race to the Top initiative weren’t given enough money to approve every application, so they had to reject some. It’s much easier to reject applications for technical, if pedantic, reasons than to come up with substantive judgments about the relative merits of applications. As someone who has sat on many committees evaluating applicants for jobs and for scholarships, I can attest to the difficulty and time consumption of evaluating each application on its merits. Still, that is what an evaluator should do: resorting to other expedients is, though easier, a breach of the professional responsibility of an evaluator.

That is easy to say. As the number of applicants goes up, however, and as the length of applications increases (New Jersey’s application was allegedly 1,000 pages long), the desire to find expedients and short cuts becomes almost irresistible. Hence expedients are found, and applied—ruthlessly, without judgment.

I don’t think we should have our educational decisions made or funded by centralized authorities; I think that, on balance, the positives of localized control and funding outweigh the negatives, and the negatives associated with centralized control outweigh the positives. But as long as we have the federal government making decisions like this for us, we should not expect anything other than the unthinking application of arbitrary rules that this New Jersey episode has shown.

*I thank economist David Rose for helpful discussion of the distinction between “principles” and “rules.”

Read Full Post »

Those of us in academia have a new pain in the neck to deal with: the “Textbook Affordability” provisions in the Higher Education Opportunity Act.  If you haven’t heard of it yet, you will.  It is the law that will require you to submit your textbook lists to prospective students within 6 weeks of their birth.

OK, a bit of an exaggeration.  But not that much.  I am still trying to prepare for this coming Fall semester (starts Monday: ouch!), and in a few weeks I will be hounded for my list of books for Winter Semester of next year.  That is because students start registering in a few weeks, and the new provisions require that colleges must make their textbooks available to students during registration.  The law has other provisions as well.  Publishers are no longer allowed to sell only “bundles” which included things like CDs or workbooks, for instance, packaged with the text.

The premise underlying these new measures seem to be that the textbook market is broken somehow.  Given that price is nowhere near marginal cost (the usual indicator of market failure), there might be some merit to this.  But I’m not so sure.  Publishing is a risky business; only a fraction of titles are successful; a vigorous resale market provides ample competition; books face competition from free digital copies (often illegal); most fields have a variety of books to choose from; multiple markets for books exist, where books can be received within days for low shipping costs; and information is freely and easily available;

In short, I’m hard pressed to point to anything that indicates a serious market failure here.  I make a lot of effort to make my text offerings as affordable as possible.  For instance, I never update to a new edition of a book until it has been on the market at least a couple of years, thereby generating a secondary market whereby students can get better deals.  I pay close attention to prices, both from the publishers and in the secondary market.  And I get students information in time for them to avoid the local monopoly (the campus bookstore), which, like many monopolies, has high prices and bad customer service.

So is the best solution really to hassle the faculty?  I’m bothered because of the hassle, but most of all this bugs me because it is yet another example of government sticking its nose even further where it has no business being.  As a parent, I can definitely understand the frustration with what seems, at times, like outlandish prices.  But every time something is frustrating or annoying doesn’t mean the government should be creating new regulations!  Interference in markets should only come when the market failures are clear and compelling (not that often!) and when it is clear that government won’t just make matters worse (hardly ever!).

Next week my oldest child is starting college and my youngest is starting kindergarten.  With this new law, I can just buy their textbooks for college at the same time.     Yippee!

Read Full Post »

There is little good news regarding Recovery Summer. Vice President Biden sought to put the best face on things at the roll out for the new administration report, The Recovery Act: Transforming the Economy through Innovation, few seem convinced.

The lead paragraph of the report notes:

With over $787 billion in funding, the American Recovery and Reinvestment Act is one of the single boldest and largest investments in the U.S. economy in the nation’s history. The Recovery Act’s design was three-fold: to rescue a rapidly deteriorating economy; put the country on a path to recovery by putting Americans back to work quickly; and reinvest in the country’s long-term economic future, building a foundation for a new, more robust, and competitive American economy.

Wisely—or tragically—the report skips over the first two goals and examines the investments in renewable energy, car batteries, etc., etc.

Of course, even if as a result of these targeted investments the Chevy Volt could one day go further than 40 miles on a charge, this might be of little solace to those who are currently unemployed, losing their retirement savings, and fearing a long hard slog after the last rays of Recovery Summer have passed.

The GOP is now positioned to take control of the House of Representatives.  The Cook Report is now “raising its House forecast from a Republican net gain of between 32 and 42 seats to a gain of between 35 and 45 seats, with the odds of an outcome larger than that range greater than the odds of a lesser outcome.” Of course, we remain uncertain as to what a GOP victory would mean with respect to economic policy.

There is an old saying: “You can’t be something with nothing.” If Republican House Minority Leader (and likely soon to be Speaker) John Boehner’s remarks at the City Club of Cleveland are any indication, the GOP may prove this old saying to be false. Boehner, doing his best imitation of the always-tan George Hamilton, could articulate, at most, an anemic five point economic plan (his prepared remarks can be read in their entirety here):

1. President Obama should announce he will not carry out his plan to impose job-killing tax hikes on families and small businesses.

2. President Obama should announce that he will veto any job-killing bills sent to his desk by a lame-duck Congress – including ‘card check,’ a national energy tax, and any other tax increases on families and small businesses.

3. President Obama should call on Democratic Leaders in Congress to stop obstructing Republicans’ attempts to repeal the new health care law’s job-killing ’1099 mandate.’

4. President Obama should submit to Congress for its immediate consideration an aggressive spending reduction package.

5. President Obama should ask for – and accept – the resignations of the remaining members of his economic team, starting with Secretary Geithner and Larry Summers, the head of the National Economic Council.

All of this is followed by a painfully vague and rambling discussion that delivers little in the way of a positive agenda.

As Lori Montgomery reports (WaPo):

Boehner offered few ideas for turning the economy around. House Republicans have not released a detailed economic agenda, and Boehner’s speech – delivered amid a bus tour of battleground House districts in Rust Belt states – did little to expand on the GOP’s long-standing platform of lower taxes and less federal regulation.

There are some credible and serious economic plans out there—most notably, that put forth by Paul Ryan (R-WI) as a Roadmap for America’s Future. One wonders whether the man who hopes to be Speaker might benefit from less time on the golf course and the fund-raising trail and more time reading and reflecting on some of the issues addressed by Congressman Ryan.  Certainly, one can beat something with nothing. But the stakes are high enough that Boehner et. al. should do everything possible to avoid this temptation.

Read Full Post »

Ron Paul has stepped into the continuing saga of the “ground zero mosque” with what seems to me to be a reasonable statement, albeit one that will not earn him too many friends on the Right.

Congressman Paul reduces things to their essentials:

The debate should have provided the conservative defenders of property rights with a perfect example of how the right to own property also protects the 1st Amendment rights of assembly and religion by supporting the building of the mosque.

The statement includes a direct shot at the Right and the Left

Conservatives are once again, unfortunately, failing to defend private property rights, a policy we claim to cherish. In addition conservatives missed a chance to challenge the hypocrisy of the left which now claims they defend property rights of Muslims, yet rarely if ever, the property rights of American private businesses.

Defending the controversial use of property should be no more difficult than defending the 1st Amendment principle of defending controversial speech. But many conservatives and liberals do not want to diminish the hatred for Islam–the driving emotion that keeps us in the wars in the Middle East and Central Asia.

Paul has little patience for the “sunshine patriots on both the right and the left who are all for freedom, as long as there’s no controversy and nobody is offended. The list of “sunshine patriots” now includes one Rand Paul, who hopes to become the Senator from Kentucky.

Is Ron Paul correct on this issue? From a libertarian perspective, it would appear that one could reach no other conclusion.  Or am I missing something?

Read Full Post »

Contra some critics of “multiculturalism” (an ill-defined term to begin with), the diversity of the human race enriches us all, and human dignity is better served when individuals can possess multiple, overlapping sources of identity rather than having to face life as a tiny, lonely piece in a huge, undifferentiated mass of humanity.

Nationalism generally predicates itself on cultural attributes, but it often destroys the rich diversity of culture that was the legacy of premodern societies. Nationalism, in turn, was a response to the development of the modern, direct-rule state that swept away local autonomies and particularities. One small example of how this trend is still playing out in the world today can be found in an Economist story about Yemen’s vanishing Jews. These Jewish Arabs no longer find their identity recognized in either Yemen or Israel:

The last hundred or so Yemeni Jews are set to leave after more than two millennia in the country. A century ago some 50,000 of them lived more or less peacefully alongside the Muslim majority, now numbering 23m. Life became harder for them after the creation of Israel in 1948, with outbreaks of violence against Jews. Most were spirited out over the next few years in Operation Magic Carpet on American aircraft. A second, much smaller wave of around 1,200 of them were resettled in the early 1990s.


Elsewhere in the Arab world most Jewish communities have shrivelled. In Beirut, Damascus and Baghdad (where Jews were once the largest single community) numbers have shrunk to a handful of old folk keeping a nervously low profile. Yemen’s few hundred Jews were some of the last who preserved their synagogues and continued to conduct ceremonies in them. Zion Ozeri, a Jewish photographer of Yemeni descent who has documented the last of Yemen’s Jews, says that, for those who settle in Israel, there are “negative undertones” attached to being an Arab Jew. “In Israel or the diaspora, hardly any Jew considers himself of Arab culture.”

The descendants of Arabic-speaking Jews who leave for Israel or the United States will speak Hebrew or English, and the identity will eventually disappear, amalgamated into broad, generic identities politically supported by the states that now depend on nationalist sentiment to help field armies and keep the taxes paid.

Read Full Post »

This is from “Political Diary” at WSJ.com today:

Quote of the Day

“[P]rogressively over these three decades the Republican party has exempted every material component of the budget from cuts, including middle-class entitlements, defense, veterans, education, housing, farm subsidies, and even Amtrak! Like Casey, the GOP has been in the anti-spending batter’s box for 30 years, and has never stopped whiffing the ball. The final proof is that the one GOP spending cut plan with any integrity — the ‘roadmap’ of Congressman Paul Ryan — has the grand sum of 13 co-sponsors, and I dare say half would call in sick if it ever came to a vote” – Former Reagan budget director David Stockman, writing at Minyanville.com.

Read Full Post »

By now, we have all heard the basic argument that a core problem impeding recovery during the 1930s was the uncertainty created by public policy. In Robert Higgs’ words: “the New Deal prolonged the Great Depression by creating an extraordinarily high degree of regime uncertainty in he minds of investor.” New or anticipated taxes and regulations were at the heart of this uncertainty. And as Burton Folsom notes in a recent book: “Roosevelt’s special-interest spending created insatiable demands by almost all groups of voters for special subsidies. That, in itself, created regime uncertainty.”  Obviously, the subsidies were used as a tool of coalition building. But at the same time, they created questions for all: “where would the line be drawn? Who would get special taxpayer subsidies and who would not?” (New Deal or Raw Deal, 251).

Things have changed significantly since the 1930s. Government has more than doubled in size relative to GDP and many of the forms of spending that seemed so novel during the New Deal have become a central component of what many consider to be a minimally functional state.

Another thing that has changed: whereas during the 1930s, the pool of investors was largely limited to the wealthy. In the past quarter century, in contrast, a majority of Americans have stepped into the market, often through a 401(k) or an IRA.  We became a nation of investors.

To bring things full circle, I turn your attention to a piece by Graham Bowley in today’s NYTimes, “In Striking Shift, Small Investors Flee Stock Market.”

The lead: “Renewed economic uncertainty is testing Americans’ generation-long love affair with the stock market.”

“For a lot of ordinary people, the economic recovery does not feel real,” said Loren Fox, a senior analyst at Strategic Insight, a New York research and data firm. “People are not going to rush toward the stock market on a sustained basis until they feel more confident of employment growth and the sustainability of the economic recovery.”

This trend is being reinforced by baby boomers readjusting their portfolios away from equities and toward bond funds and the loss of real estate value (and hence a loss in the capacity to use the house as an ATM).

For decades, political scientists and economists have spoken of a political business cycle wherein elected officials goose the economy in the months leading up to an election to maximize their votes, leaving the long-term economic fallout until after the election. Now that nearly every man and woman is an investor, things may be more complicated. One must ask whether the efforts to prove that something is being done are convincing voters qua small investors that the future is quite uncertain, thereby having the unintended consequence of prolonging the recession?

Read Full Post »

Controlling for everything else, a government employee can expect to make 12% more than a private employee. This shouldn’t be a surprise, since private firms face a profit constraint: if they pay more than employees are worth, they go out of business. Government can always foist extra costs on the taxpayer, who doesn’t have much recourse.

HT: Hit & Run

Read Full Post »

I want to avoid wading into the mosque mess (I’m not very good at avoiding things I should), but Jonah Golderg’s newsletter today had a couple of points I thought were insightful:

Stop calling it a mosque. Defenders of Cordoba House sometimes say, “It’s not a mosque, it’s a cultural-affairs center with a prayer room,” or some such, as if this were a defense. To me, that makes it worse, not better. If this were some small, one-story mosque for the handful of Muslims living nearby to pray in, the arguments over freedom of religion would have more merit. But this would be a 13-story institution with an obvious political component to it. That strikes me as gaudy and an invitation to mischief. This is another point I think non-bigoted Americans understand better than the condescending supporters of the mosque.

The staggering hypocrisy of liberals is really an amazing thing.  Everywhere you look, you hear these scandalized liberals talking as if it were beyond the pale to criticize religion. You’d never know that these overnight stalwarts of religious freedom had been demonizing Christian conservatives, Mormons, and increasingly orthodox Jews for years. It’s as if these people never wanted to ban a crèche, outlaw a Christian group, or claim that Jewish supporters of Israel suffer from dual loyalties. I’m not making a two-wrongs-make-a-right point here. I do think that some of the rhetoric on the right goes too far — Newt’s Nazi analogy, for instance. But it is amazing how establishment liberalism can spend years demonizing organized religion in this country only to turn on a dime when it comes to defending the Islamic equivalent of NikeTown two blocks from Ground Zero.

I’m not sure liberals are more hypocritical than conservatives, in general, but I’ve been thinking the same thing about the left’s passionate desire to defend religion — as long as it isn’t a Western religion.

Consider the following thought experiment.  Suppose there were a devasting domestic terrorism attack by some nutty Christian militia group on a Muslim neighborhood in Michigan that kills hundreds of innocent people.  Suppose now that a Christian evangelical megachurch wanted to open doors in this neighborhood.  Wouldn’t it likely be the case that the left would be talking about sensitivity to the feelings of the victims and the right would be talking about religious freedom?

PS: You can sign up for the Goldberg File here.  (This isn’t a paid endorsement!)

Read Full Post »

Of All the Idiotic…

That was my immediate reaction on seeing this story. The government of Southern Sudan, one of the poorest places in the world, wants to blow $10,000,000,000 on re-engineering the layouts of their major cities in the shapes of animals and fruits.

I have to say: I support their right to independence but have no great expectations about what they’ll do with it if next year’s referendum goes as expected.


Read Full Post »

Let me add to Marc’s laughter something everyone should celebrate: Government Freedom Day. According to Americans for Tax Reform, “This is the day on which the average American has earned enough gross income to pay off his or her share of the spending and regulatory burdens imposed by government on the federal, state, and local levels. In 2010, Cost of Government Day falls on August 19.”

Everyone, now: hip hip, hurray!

Yes, that means that the average worker in America had to work two hundred and thirty-one days to pay for the government, leaving a mere one hundred thirty-four to work for themselves and their families.

I believe this is the latest in the Cost of Government Day has ever fallen (although if anyone has contrary information, please let me know). Two years ago, the COGD was July 16; that means, as the president of ATR put it, “We have lost an additional full month of our income to pay the cost of government in just the last two years.”

Most of us benefit in one way or another from state expenditures; some of us benefit a lot more than others. But that’s really beside the point, as far as I am concerned. I effectively have no choice in this, and neither do you. We are obliged by law to work 63% of our working days for someone else—including some 4.4 million federal non-military employees, up 250,000, or some $1 trillion,  under President Obama.

This state of affairs prompts a number of questions:

1. At what point does that become the moral equivalent of forced labor?

2. At what point do we declare the “American experiment” officially over?

3. At what point do we pass the point of no fiscal return?

And, finally, please allow me, as an old-fashioned liberal, one romantic question: At what point do we free citizens say “enough”?

Read Full Post »

Yes, I know, the new jobless claims have hit a nine month high to 500,000 (see WSJ).

And the CBO has done nothing to cheer us up. As CBO director Douglas Elmendorf tells us on his blog:

CBO projects that the economy will grow by only 2.0 percent from the fourth quarter of 2010 to the fourth quarter of 2011; even with faster growth in subsequent years, the unemployment rate will not fall to around 5 percent until 2014.

But here at Pileus, we like to promote happiness. And thus, we return to one of Nancy Pelosi’s greatest hits: her statement on what would happen to the economy absent the stimulus. Yes, I know, her projections of a 500 million job loss per month might seem exaggerated given the nation’s population, but at least her brain heart was in the right place.

So, as you ponder what the last weeks of Recovery Summer have in store, remember: things could have been much worse. Without the stimulus package, the entire planet would have been unemployed in a year.

Read Full Post »

I’ve attended Pete Jaworski’s excellent Liberty Summer Seminar in Oshawa, Ontario once in the past. Now it seems the municipal government is levying a C$50,000 fine against his parents, the owners of the property, for running a “commercial conference centre” (?!). First of all, it’s not a commercial conference, in that it is not-for-profit, and in general everyone pays his own way. The line between “large gathering of friends” and “commercial conference” may be blurry, but the event seems to fall squarely into the former category. Second, this abuse just goes to show how illiberal zoning, usually sold as a pragmatic solution to externalities in land use, can be. It’s a blunt and crude tool that can all too easily be turned to ill.

Read Full Post »

Frank words by Frank

Our readers will not find Rep. Barney Frank praised often on Pileus, but I did like this quote:

There were people in this society who for economic and, frankly, social reasons can’t and shouldn’t be homeowners…I think we should, particularly, stop this assumption that you put everybody into home ownership.  Public policy has been too much to try to push people into home ownership.

Now my recollection is that Frank was as guilty as anyone in “pushing” people into home ownership.  If more people in Congress had had this view 10 years ago, we might have avoided the whole financial crisis.  Apparently he is a repentant sinner (OK, maybe not that repentant) coming to the alter.  More than a little late, but better than never!

[On Freddie and Fannie: Don't miss Marc's post from earlier today.  See here for more Frank quotes.  In the early days of Pileus, I mocked the concept of predatory lending--which is euphamism the policymakers use to avoid taking credit for the government's enormous success at pushing underqualified people into mortgages.  And see here for a great Arnold Kling quote on predatory lending.]

Read Full Post »

This semester I will be teaching a political philosophy course for the first time since graduate school, and have just finalized my syllabus. For all the ethicists and political philosophers out there – what do you consider to be the most underrated works of political philosophy for each period (ancient, modern, contemporary)? To elaborate, I’m essentially asking what you consider to be the best political philosophy in terms of originality and persuasiveness of argument, which one would not expect to find in standard readers.

Not really being a political philosopher, I haven’t read all that widely in the field, but, off the top of my head, here are a few works that I believe are underrated:

Early Modern

  • Immanuel Kant, Philosophy of Right (often overlooked part of Kant’s oeuvre, and admittedly maddeningly poorly argued at times, such as when Kant argues that no matter how terrible the state, it can never do wrong or be justly resisted, but the first few chapters are a succinct deduction of formal principles of liberty from Kant’s general ethical system. You can’t argue with this: “Freedom is Independence of the compulsory Will of another; and in so far as it can co-exist with the Freedom of all according to a universal Law, it is the one sole original, inborn Right belonging to every man in virtue of his Humanity.”)

19th Cent.

Early 20th Cent.

  • Franz Oppenheimer, The State (perhaps more anthropology than political philosophy, but relevant all the same)


UPDATE: I should note that most of these are not in my syllabus for this class, mostly b/c it’s an intro class, and I want students to be acquainted with the well-known classics first. However, I do recommend them to readers who are already familiar with the “big names.”


Read Full Post »

When Reform Isn’t Reform

In the months leading up to the passage of the financial reform legislation, Congress decided to segregate the issues of financial regulation and the government sponsored enterprises (GSEs) that were central to the collapse. Now that Dodd-Frank is in the bank, Congress and the White House are turning to Freddie and Fannie, the two GSEs that have already  sopped up $150 billion in taxpayer money. Will this process lead to meaningful reforms?  An article by Binyamin Appelbaum in yesterday’s NYT does not give me much hope.

The financial crisis came in the aftermath of the collapse in the real estate bubble. The bubble was created, in part, by government efforts to promote high levels of home ownership, particularly among low income citizens. This was justified in the 1990s through evidence suggesting racial discrimination in credit markets; during the Bush presidency it was promoted as part of the effort to create the so-called “ownership society.”

The Federal Housing Enterprises Financial Safety and Soundness Act of 1992 mandated that the Department of Housing and Urban Development set quantitative targets for GSE purchases of mortgages serving a low and moderate-income clientele.  Between 1993 and 2007, the target increased from 30 percent to 55 percent.  Even if we stipulate arguendo that the goal of extending home ownership to low income borrowers was laudable, it was nonetheless the case that this population—and the speculators that moved in to take advantage of liberalized underwriting standards—were highly vulnerable to economic fluctuations.

Let me be clear: I am not claiming that the housing policy of the Clinton and Bush administrations and Congress was the sole source of the financial crisis. But without the bubble it created (facilitated by a number of other factors, including the Taxpayer Relief Act of 1997, the Fed’s policies, and private sector chicanery), the crisis would not have occurred.  Clinton, Bush, and congressional majorities of both parties embraced a set of social goals and decided to use the GSEs as the instruments of choice in realizing these goals.

The NYT article contains some quotes that should disturb anyone hoping for genuine reform.  Appelbaum reports:

Mr. Geithner said continued government support was important “to make sure that Americans can borrow at reasonable interest rates to buy a house even in a downturn.”

While a range of options are on the table, Appelbaum notes:

The choice will reflect in large part a judgment about how hard the government should try to increase homeownership. Broader guarantees create greater risks for taxpayers, but also lower interest rates, bringing ownership within reach for more families. Shaun Donovan, the housing secretary and a host of the conference with Mr. Geithner, said that the administration remained committed to “broad access to homeownership, including options for those families who have historically been shut out of these markets.”

The conclusion: clear evidence that efforts to use the GSEs to engineer a predefined level of home ownership has had no discernable impact on policymakers’ desire to continue using the GSEs for this purpose.

I can imagine a principled argument from the Right that the level of home ownership is an emergent property of incomes and preferences. Rather than trying to achieve some politically-defined level of ownership, we should create the preconditions for growth and make certain that lenders bear the risk for the loans they make, even if this results in more stringent underwriting standards.

I can imagine a principled argument from the Left that the real problem has been the nation’s failure to invest in public housing for low-income households. Under the sway of neoliberalism, Democrats and Republicans alike gravitated toward “third way” solutions that effectively allowed them to move their responsibility to the poor off budget.

What I cannot imagine is a principled argument for a continuation of the status quo.

Read Full Post »

Since leaving office some 20 months ago, George W. Bush has been mentioned in the press countless times, usually by some whining Democrat, with President Obama the whiner-in-chief.  Apparently, the Democrats only hope this Fall is to keep bashing W.

But has anyone actually seen or heard from W himself?  I don’t think I’ve heard 3 stories in this time on where he is or what he is actually doing with himself.  In the era of Bill Clinton and Newt Gingrich, this is unusual.

I have to say I sort of like it, though.  Not being a W fan, I can be thankful he isn’t trying to contribute to the public debate, given that we endured 8 years of him not contributing meaningfully to the public debate.

But I do think it is admirable that he doesn’t feel the need for public adoration.  He could certainly be earning a nice income speaking to sympathetic groups (maybe he is, but we just rarely hear about it because the media doesn’t like the groups that are sympathetic to W) and trying to get himself on TV doing noble things.   He doesn’t seem to be, however.  Perhaps this is a wasted opportunity for him to do some good, but  I like to envision him out clearing brush on the ranch and spending the evening watching movies with Laura at home.  Could he be a modern Cincinnatus?

Read Full Post »

It is approaching the time of year when high school students will be applying to college and university. That means that rating metrics will again be getting press. Of course there is the standard U. S. News and World Report ratings, which are the biggest, most influential, and among the least dispositive ratings available. (I think a case can be made that nearly every one of the criteria U.S. News uses to rate colleges and universities gives bad, or at least not very instructive, information. Perhaps in a future post I will make that case.)

There are many other ratings, however. Here are two:

1. Forbes.com has released its 2010 “America’s Best Colleges” rankings. Williams, Princeton, Amherst, West Point, and MIT are its top 5, with Stanford, Swarthmore, Harvard, Claremont McKenna, and Yale rounding out the top ten. With the possible exception of Claremont McKenna, the list at the top is not altogether surprising.

More surprises appear outside the top ten. For example: the University of Chicago is only #20, behind the likes of Whitman and Pomona Colleges (U of C is #9 on U.S. News); Dartmouth is #30, Notre Dame is #33, and Penn is #36, all behind Carleton College in Minnesota (#21) and Centre College in Kentucky (#24). Georgetown appears at #52, directly behind Colorado College; Chapel Hill comes in at #62, directly behind Pennsylvania’s Lafayette College; and Johns Hopkins doesn’t appear until #88, directly behind Virginia’s Sweet Briar College.

Forbes arrives at its rankings by claiming to investigate the extent to which colleges and universities meet student needs: “Will my courses be interesting? Is it likely I will graduate in four years? Will I incur a ton of debt getting my degree? And once I get out of school, will I get a good job?” They try to get at these factors by considering indirect, and often unscientific, measures, like teacher ratings on RateMyProfessors.com and graduates’ success as indicated by “the number of alumni listed in a Forbes/CCAP list of corporate officers,” but all ratings use indirect and sometimes dubious measures. If thus taken with a grain of salt—and especially if compared with other ratings—this one is interesting and informative.

2. A very different way of evaluating colleges and universities is by the courses they require students to take and the materials they require students to read and study. One attempt to measure undergraduate education in this way is whatwilltheylearn.com, sponsored by the American Council of Trustees and Alumni. This site allows you to locate schools by name, region, or state, and it grades them on the content of their required curriculum from “A” through “F.” The #1 school on Forbes’s list, Williams, for example, gets an “F” on this rating; my alma mater, Notre Dame, which comes in at 33 on Forbes (and #19 on U.S. News), gets a “B”; and my graduate school, the University of Chicago (#20 on Forbes and #9 on U. S. News), gets a “B” as well.

There were only 16 schools earning an “A” on this list. That list includes Baylor, St. John’s College, the Naval Academy and West Point, Thomas Aquinas College and the University of Dallas; it also, rather surprisingly, includes Kennesaw State University, the University of Arkansas–Fayetteville, and East Tennessee State University.

One of the FAQs they list is: “I’m confused. Are you saying that places like Midwestern State University and Brooklyn College, which get As, offer a better education than institutions like Cornell and Brown, which get Fs?” Their interesting answer:

In terms of their general education curricula, yes. Our report is not intended to offer a comprehensive assessment of all aspects of a university. That some of the best-known colleges earn poor marks for general education doesn’t mean that they don’t do other things well; it means that they are not demonstrating a commitment to a broad-based general education curriculum. Our grades do not place any value on prestige or reputation. Unique among the major college guides, our grades were developed based on applying objective criteria to institutions’ curricula.

Like other ratings, this one too must be taken with a grain of salt. Its criteria are based on a traditional conception of liberal arts, and the extent to which colleges and universities allow undergraduates to avoid taking standard and traditional courses in liberal arts and sciences, they get downgraded. They look for required and substantive courses in composition, literature, American history, foreign language, mathematics, science, and economics—not a bad list, all told, and not a bad idea for what an undergraduate education should include. Indeed, this approximates what most schools already claim they provide for their students; this ranking is evaluating them on their relative success at their stated goals.


Read Full Post »

The poor performance in the market and the dramatic loss of retirement savings and home values has raised some interesting questions about what the future holds for the boomers. A piece by Mark Whitehouse in today’s WSJ focuses on the plight of baby boomers who have lost so much of their retirement savings.  Will their efforts to save in the final years of their work lives undermine demand?

Whitehouse notes:

Before the recession hit, many economists assumed people would solve their retirement problems simply by staying in the work force longer. Now, “the recession has blown that idea out of the water,” says Alicia Munnell, director of the Center for Retirement Research at Boston College and co-author of a 2008 book that advocated working longer.

The same problem will likely manifest itself much differently in the professoriate. We have discussed the (de)merits of tenure here before. The NYT has an interesting forum on professors who won’t retire.

Arguably, the non-tenured population might hope to work longer given their scarce retirement funds. But as the WSJ piece notes, they have been hit particularly hard by layoffs.     Not so in the nation’s universities and colleges where tenure has taken layoffs and mandatory retirements off the table.

Let me offer a few observations gained after a few decades as a university professor.

First, most professors do not save adequately for retirement. Having served on the university’s compensation committee on several occasions, I was struck by the large percentage of professors who refused to establish supplemental retirement accounts even if the university provided matching funds (i.e., literally a free lunch).

Second, most professors have far better health profiles than their non-academic counterparts.  My university self-insures and saves money because, as a generalization, academics don’t smoke and are pretty health conscious. Like it or not, they are going to out-live most of the population.

Third, many (perhaps most) professors are socially awkward and find what companionship they have through their professional contacts with other “aggressive loners.” To lose their offices is to be stripped of most of their social connections and the books and computer accounts that have served as their primary source of enjoyment.

Fourth, because compensation for scholarly output (merit pay) is added to the salary base, salary peaks at the end of one’s career. I am at the middle of my career and make approximately twice what a newly minted PhD could make. Some of my colleagues who are two decades older make considerably more.  It would be hard for me to argue that these differentials reflect current levels of scholarly output.

Finally, it is nearly impossible to fire a tenured professor.  Any tenured professor can regale you with tales of significant professorial misconduct that have not been met with any punishment whatsoever.  The same professors might have a very difficult time pointing to cases in which tenured professors have actually lost their jobs.  In this context, even if an aged professor can do no more than  stumble into class for 4-6 hours of dated lectures per week, he or she is more or less untouchable.

Combine these observations and one can easily make sense of the graying professoriate and the problems that will be created for junior scholars hoping to have the opportunities enjoyed by previous generations.

Is there a solution short of eliminating tenure?  Certainly, one can create incentives for early retirement.  But consider the following tale told to me by a former provost. An aging professor with poor teaching evaluations was offered a nice early retirement package. The exchange:

Provost: “If you agree to retire, we will agree to pay you half of your salary for the next  three years and all you have to do is teach two classes a year.”

Professor: “Not interested.”

Provost: “Why? That would be half pay for an average of ten hour of work per week.”

Professor: “I work less than that now and I get full pay.”

Read Full Post »

Right wing discipline

It came out this morning that the Supreme Court refused to block the $20,000 fine of  “birther” Orly Taitz for filing a frivolous lawsuit challenging President Obama’s citizenship.

This time it was  Samuel Alito who rejected the request.  Before it was Clarence Thomas.

So the two most conservative Justices reject this silliness out of hand, as they should.  Any bets this angle on the story won’t get much coverage at MSNBC?

Read Full Post »

I could write a post like this after every Krugman column, which would get tedious.  But I can’t help it this time.  In the same breath as he is accusing others of “bad faith accounting,”  Krugman offers this whopper.

Social Security has been running surpluses for the last quarter-century, banking those surpluses in a special account, the so-called trust fund. The program won’t have to turn to Congress for help or cut benefits until or unless the trust fund is exhausted…

Repeating the standard fable I mocked a few days ago (see here), Krugman wants to convince the feeble-minded that the “trust fund” really exists, that surpluses have been “banked.”  Gibberish.  No money has been banked; it has all been spent.  There are no Social Security funds at Citibank, or a Fort Knox, or at the Federal Reserve, or the Treasury, or anywhere else.  There are only special bonds held by the SSA, which are promises by the Treasury to raise money in the future.  How do they do that?  By taxing and borrowing from people in the future.  All those FICA taxes you have been paying for years?  Gone.

While it is true that the Social Security Administration does not have to ask Congress for for permission to spend out of the trust fund, these entitlements have to be paid for just like the other entitlements and so are part of the overall fiscal mess in DC.  I agree with Krugman and others that Social Security is not in a “crisis.”  The right tries to inflame the fears with unhelp rhetoric at the same time the left is trying to pull the wool over people’s eyes.  But feeding the public half-truths serves only his ideological agenda (which is, let’s be honest here, a cradle-to-grave, European-style welfare state).

In short the question isn’t whether Social Security will be solvent 25 years from now.  The question is whether the federal government will be solvent.  Or, more realistically, will we be headed for decades of stagnation and economic malaise because of our unfunded entitlement programs?

As my colleague Marc has expertly detailed, the long run balance sheets of the federal government are not pretty.  He is actually more worried about them than I am (because I’m more bullish on future economic growth than Marc is), but tackling this problem is not helped by references to phony trust funds.


Read Full Post »

An interesting but occasionally infuriating article by Drake Bennett in the Boston Globe argues that research into the psychology of disgust undermines systems of morality. Here are some claims that I find particularly poorly justified:

The agnosticism central to scientific inquiry is part of what feels so dangerous to philosophers and theologians. By telling a story in which morality grows out of the vagaries of human evolution, the new moral psychologists threaten the claim of universality on which most moral systems depend — the idea that certain things are simply right, others simply wrong. If the evolutionary story about the moral emotions is correct, then human beings, by being a less social species or even having a significantly different prehistoric diet, might have ended up today with an entirely different set of religions and ethical codes. Or we might never have evolved the concept of morals at all.


To Haidt, all of these results buttress his belief that moral reasoning is simply an after-the-fact story we create to explain our instinctive emotional reactions, in this case a strongly held but arbitrary feeling of disgust. “Moral reasoning is often like the press secretary for a secretive administration — constantly generating the most persuasive arguments it can muster for policies whose true origins and goals are unknown,” he wrote in a 2007 paper in Science.

I’m sure that for some people on some issues disgust can ground their moral judgments. But that’s not the same as saying that moral judgment simply is disgust – which is a philosophical question that no amount of empirical science could ever answer. (The article doesn’t give any space to philosophical views on the matter.) Moreover, I think it far more likely that in most circumstances disgust is a post facto emotional response to something we already believe to be wrong on other grounds. Indeed, the article does present some evidence on this score:

But to David Pizarro, the most interesting — and perhaps most important — question to answer is how flexible disgust is, how much it can change. Fifty years ago, many white Americans freely admitted to being disgusted by the thought of drinking from the same drinking fountain as a black person. Today far fewer do. How did that change? Did their sense of disgust ebb as they spent more time in integrated restaurants and workplaces and buses, or did they find ways to actively suppress their feelings? Pizarro isn’t sure, but he’d like to find out.

Did people stop being racist because they stopped finding integration disgusting, or did they stop finding integration disgusting because they decided it was OK? The latter seems like the only plausible account.


Read Full Post »

Just a quick question here from one who is confused. Conservative reaction to President Obama’s statement on the Cordoba House mosque has faced uniformly hostile reaction from the right. They wanted him to take a strong stand against the mosque on the grounds that it is insufficiently sensitive to non-Muslim Americans, who cannot stand the thought that Muslims might worship two blocks from the place where their coreligionists committed an act of terror. So how is this newfound conservative concern for “sensitivitiesnot political correctness?


Read Full Post »

The people win one

Target just recently opened its first store in Manhattan (more specifically, Harlem).  The NY Times has a piece today on the wooing and cajoling that Target had to do over 10 years to be able to build this store.

This Target is an exception, though.  Few urban neighborhoods have Big Box retailers, though Target, Wal-Mart and others have been trying for years to gain access to these markets — which are largely poor, minority neighborhoods with relatively few consumer options.  Sometimes I think there is a conspiracy among the Left to make sure the urban poor stay poor, miserable and unhealthy.  These neighborhoods need jobs (which Wa-Mart and others provide aplenty), and they also need access to low price, good quality consumer goods, which is something they desperately lack.

It is sad that it took 10 years of hard work to get this store built.  A victory for the market, and a victory for the people! (sorry, that was a bit redundant).

Read Full Post »

With but a few weeks left in “Recovery Summer,” this past week was not what many would have hoped. On Tuesday, the Federal Reserve’s FOMC announced that “the pace of recovery in output and employment has slowed in recent months” and “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”  Conditions “are likely to warrant exceptionally low levels of the federal funds rate for an extended period.” The market responded to the Fed’s optimistic forecast much as one might have predicted.

The front page article in today’s NYT by  Graham Bowley and Christine Hauser provides a sobering description of where we are economically:

The optimism that had pervaded Wall Street only weeks ago has faded quickly. In its place is a growing realization of what many Americans have been feeling in their bones: this is not the economic recovery the nation had hoped for. While the economy is growing again, it is growing too slowly to create many jobs or to increase household incomes. Given the uneven rebound in the United States, and now signs that the world’s other economic engines are slowing, economists say Americans may confront high unemployment and lackluster growth for some time to come.

The Goldman Sachs Group added to the sense of malaise when it  informed its clients that there is a 25 to 30 percent chance that the U.S. economy will fall back into recession. (Bloomberg).

But wait…

While things are increasingly dismal in the US, there are rays of hope across the Atlantic…more precisely, in Germany.

As Roddy Thompson reports: “Germany posted Friday its best quarterly growth since reunification.” The growth rate between April and June was 2.2 percent, compared with 0.6 percent in the US. In the words of senior ING economist Carsten Brzeski,  Germany is “playing in a league of its own.” By any one’s account, an annualized rate of growth approaching 9 percent is quite impressive. Kay Murchie notes at the Financial Markets blog that the growth in Germany has been largely export driven: “Earlier this week, Germany’s federal statistics office reported exports grew 3.8% in June compared with May. On an annual basis, exports were 29% higher.”

According to the Economist blog, Free Exchange, the surge in exports is only part of the story. Growth must also be attributed “to investment by firms at home looking to upgrade and expand their capital stock to meet that demand.” German firms are not worried by

American complaints that Germany is living off the spending of others and adding little to global demand have much impact. There are some signs that Germany’s recovery is leading to more spending at home. The German statistical office said that consumer spending made a positive contribution to GDP. Some firms are already reporting skill shortages, which ought to be good for jobs, wages and (eventually) consumption. Even so, a more balanced recovery in Germany may yet be thwarted by fragile banks and by the inherent thrift of consumers.

Germany’s impressive growth must come as a surprise to the Obama administration. If you will recall, in the early days of “recovery summer,” the administration chastised the Germans at the G-20 for providing insufficient stimulus to domestic demand and relying too heavily on exports. Chancellor Angela Merkel rejected the administration’s advice. As Marcus Walker and Matthew Karnitschnig (WSJ) reported at the time, Merkel claimed that the core argument “that increased deficit spending promotes growth— doesn’t apply in Germany.”

Continuing to run big deficits could backfire here, she said, because of Germans’ angst over their aging society and rising public debt. Fear that the German welfare state could run out of money leads individuals to save their income as a precaution, she said. If Germany cuts its budget deficit instead, “then the citizen is more willing to spend money,” she said, “because he knows that he can count on the pension, health and elderly-care systems.”

So, lets sort this out: if the government reduces the budget deficit, citizens have greater faith in the future and, as a result, are more willing to spend? Fiscal stability creates a comparable faith for corporations, leading them to invest in their capital stock? And all of this promotes growth?


Read Full Post »

I’m not a regular reader of Macleans, but this headline linked by Real Clear Politics caught my attention: “Outraged Moms, Trashy Daughters.”  I’ve seen different versions of the same idea before, so I wouldn’t flout it as original (if you must read it, see here).

The basic argument in these stories is that middle-aged feminists are distraught by their daughters’ disinterest in old-line feminism, particularly the notion that being the object of male desire is not empowering.   They are distressed about the hyper-sexualized media culture that girls are bombarded with (of course what parent with any sense isn’t distressed?) and apparently are imitating through dressing and acting in a sexually provocative manner—“trashy” as the headline says.  As one woman quoted in the article says, “girls…are being groomed to believe their purpose in life is to be sexual beings that please men.”

There has always been a problem with the feminist argument that being seen as an object of male desire reduces women to being only an object of desire.  This is the essence of MacKinnonesque feminist ant-pornography arguments, for instance, but it is a complete non sequitur (there are other, good, arguments against pornography, of course).  Apparently girls these days don’t buy that silly argument either.   They don’t think that being attractive to guys diminishes other aspects of their personalities, like being smart or ambitious.

I had two very different reactions to the story.

1. Girls trying to attract boys is Biology 101, but so is girls vying for higher social status and recognition by other girls.  When a girl gets a new outfit, what she cares most about is not what the boys will think of her, but how other girls will respond.  If the boys turn their heads, it’s a bonus.  But if her girlfriends don’t comment on the new outfit, it’s devastating.  The implication of this argument is that girls are dressing “trashy” mostly to gain status, praise and recognition from other girls.  This may be troubling for other reasons, but is it anti-feminist?

2. Nowhere in the story is the idea that old-fashioned feminine modesty might be something worth preserving — a valuable asset for women that has been tossed aside, along with most other social mores that developed over thousands of years of Western civilization (and other places, too).   Even most fans of the sexual liberation movement would argue that sexual activity is better postponed to adulthood, when emotional maturity is a better match for the physical maturity that took place years earlier.  But could more modesty also have an advantage for adult women that makes them better off in ways that go beyond power politics.  Maybe something that has to do with the way women and men are, by nature, and something to do with the wisdom of the past?

Read Full Post »

Dan Rostenkowski, R.I.P.

Former Ways and Means Chairman Dan Rostenkowski (D-IL) died Wednesday at the age of 82.  Rosty had a reputation as a consummate dealmaker, working adeptly to create coalitions often with Republicans (yes, there was a time when people built coalitions to support important pieces of legislation). The Tax Reform Act of 1986 would not have seen the light of day without Rosty’s efforts.  Unfortunately, his career ended ignobly following a plea agreement that landed him in the federal prison in Oxford, Wisconsin.  The New York Times obit is worth reading and National Journal has reprinted a summary of his life and legacy.

For all of his accomplishments, the most enduring image of Rosty was his ambush by senior citizens following passage of the Medicare Catastrophic Coverage Act of 1988. The video of the episode remains a classic.

One can only imagine that this event will be repeated should Congress ever get serious about entitlement reform.

Read Full Post »

A fable for our times…

Tim and Nancy have a fairly typical marriage.  Tim keeps the books, and Nancy decides how much to spend.   Nancy really, really likes to spend.  So much so that in almost every year, she spends more than the couple takes in.  Tim gets the job of borrowing money to make up the excess.  Nancy tells Tim how much he is allowed to borrow but leaves the details up to him.

Tim is really good at borrowing money.  Even though most of the people in the neighborhood think that Tim and Nancy are big bullies who don’t care about the feelings of others, they all want to lend Tim money.  Perhaps it is because Tim and Nancy are very well-armed and, compared with other people in the neighborhood, they have the nicest place and their family more or less gets along.  Plus, Tim has never failed to pay back their debts (though mostly by borrowing more money).

Every year, part of their large income is supposed to go into a trust fund to pay for their kids’ education.  But it didn’t take Nancy very long to figure out something about the money in the trust fund: she could spend it.  Their conversation went something like this:

Nancy:  We said we’d make this trust fund for the kids, but I really want to spend it now.

Tim: Go ahead, Dear.  Whatever you say.

Nancy: OK then.  But the kids might get really ticked about not having any money in the trust fund.

Tim: No problem.  I can cover it.  I always do, don’t I?

Nancy: Oh, so we’ll get some money from your buddies to replace the money in the trust fund.  That’s cool.

Tim: Not exactly.  I’m thinking more along the lines of writing a little note to the kids saying I’ll give them the money when they ask for it.  We’ll put these notes in the trust fund; won’t even take up much space.

Nancy: Hey, but the kids know that you never do anything unless I tell you to, and they don’t trust me anymore.  They think I never see a dollar I don’t want to spend.  They just don’t understand that I do it all for them.  Why can’t they get that?

Tim: Well…they kinda have a point don’t they?

Nancy: Oh, shut up.  Just tell me where the money is coming from.

Tim: Well, we’ll do it this way.  We’ll get Uncle Mike to hold onto the notes I write, and he’ll be in charge of giving the kids their money when it is time.  And here is the kicker: we’ll tell them that you don’t get to stop Mike from giving them their money.  He has the notes.  We’ll even call the notes bonds. Sounds much more secure.

Nancy: Come on!  Mike is a wimp.  He does whatever I tell him.  The kids won’t believe it.  They are not stupid.

Tim: You’d be surprised.

Nancy: Fine.  We’ll let Mike hold the money.

Tim: Ummm…Remember there isn’t really any money.  You already spent that.

Nancy: Yea, I know, but we gotta get our story straight, don’t we?  It’s for the kids.

Tim: Absolutely.  They should trust us more.

Nancy: You’re telling me.


Read Full Post »

The media is seeking to draw lessons from the primaries that were held yesterday in a number of states, including Connecticut. As a resident of the Nutmeg State, the victory of Linda McMahon of World Wide Wrestling fame was entertaining.  But the most interesting and potentially revealing event was the Democratic primary for governor where Dan Malloy defeated Ned Lamont.

Hope and Change?

Some of you may remember Ned Lamont. He successfully defeated Joe Lieberman in the 2006 Democratic primary for the Senate (Lieberman ended up winning in the general election as an independent).  Lamont was a dark horse candidate.  He rose to prominence through the support of MoveOn.org, the netroots, and young voters (precisely the kind of coalition that would prove so influential in the 2008 presidential election).

Yesterday, this coalition—combined with $7 million of Lamont’s personal fortune—proved insufficient. Dan Malloy, who had the support of the party machine and organized labor, claimed an easy victory (58 to 42 percent).

Some questions that Democrats should be asking themselves:

  1. What explains this outcome?
  2. Has the anti-war position that was so productive for Lamont in 2006 lost its appeal?
  3. More troubling: is the “hope and change” coalition less durable than many might have hoped?
  4. What are the implications, if any, for the 2010 midterms?

Read Full Post »

The left-of-center commentariat has been doing their level best to provide some kind of defense of the recent explosion in public sector pay and pensions [1] [2]. In the process, they don’t do much to dispel the common impression of progressives as being clueless on economics. At TNR, Jonathan Cohn writes:

To what extent is the problem that the retirement benefits for unionized public sector workers have become too generous? And to what extent is the problem that retirement benefits for everybody else have become too stingy? I would suggest it’s more the latter than the former… In the long term…, it seems like we should be looking for ways make sure that all workers have a decent living and a stable retirement, rather than taking away the security that some, albeit too few, have already.

At Mother Jones, Kevin Drum endorses private-sector unionization as the solution to the problem:

So now it’s going to be a war of taxpayers against unionized public employees. It won’t be hard, especially in lousy economic times, to convince envious clerks and factory workers that these guys need to be brought down a peg or two. It’s just human nature. But wouldn’t it be better if all these envious clerks and factory workers were instead asking why their pay and benefits haven’t kept up with overall economic growth — which, after all, is all that public sector workers have accomplished? I don’t know what the future of unions is in America, but for now they’re really the only ones who are asking that question and putting some muscle behind it. Until someone else starts doing a better job of it, we still need them.

So let’s say that these commentators get their wish, and through “card check” or some other policy the government manages to increase private sector unionization significantly, meaning that a larger percentage of the work force is covered by collective bargaining agreements. I agree that it is likely that these agreements will include more generous wages and benefits for the workers covered by them.

But where does the money come from? Do progressives think that unionization causes the rate of profit in the economy to fall, redistributing wealth from investors to workers? Because that’s just not right. If you force businesses to pay above-market wages, they hire fewer workers. You get structural unemployment, which disproportionately harms the poorest and most vulnerable. Young people find it harder to acquire skills that will allow them to increase their own productivity, because they find it hard to find jobs in the first place. Eventually, economy-wide productivity declines, ultimately leaving everyone poorer.

Now, in “corporatist” countries that have comprehensive labor unions that essentially represent the country’s entire labor market, such as Sweden, the unions “internalize” to some degree the costs of unemployment and moderate their wage demands, thus vitiating both the costs and benefits of unionization relative to a competitive job market. Labor centralization is not going to happen in the U.S., but even if it did, it wouldn’t increase wages and benefits across the board, because a comprehensive labor union acts more or less as if it were trying to replicate a competitive job market – just with less flexibility and dynamism. And increasingly, even these corporatist countries are facing higher long-term unemployment, as collective bargaining agreements that comprehensively set wages throughout the economy turn out to do a mediocre job of matching wages and marginal productivity.

Given a distribution of marginal productivities in the workforce, there’s literally nothing government can do to reduce inequality in market wages. If the government administratively sets wages for the entire economy, there would not only result the irrationalities attendant upon central planning, but in addition any attempt to reduce the market income of capital will reduce investment, either through outsourcing or through the withholding of investment in favor of consumption. Less investment means lower labor productivity, which means less wealth for everyone in the long run.

The only way to reduce market inequalities through public policy is to adopt reforms that increase the productivity of the least well off. The sooner progressives face this fact, the better off we’ll all be. School choice, anyone?


Read Full Post »

Al goes live

Some have been criticizing Senator Al Franken for has lack of decorum by pulling faces while presiding over the Senate during a speech by GOP Minority Leader Mitch McConnell.  McConnell responded by uttering the line every Republican has been itching to say since Franken joined the Senate: “This is not ‘Saturday Night Live, Al.’ ”  The Hill quoted Senate aids as saying that they were “shocked that Franken would flout the decorum of the chamber during such a solemn occasion.”

Actually, the main difference between SNL and the Senate chamber is that there is at least a chance that something novel or meaningful will be said on SNL.  The Senate used to be referred to as “the world’s greatest deliberative body,” which is a bigger joke than Al ever came up with on SNL.  Indeed, there is no room in the entire nation less likely to host any kind of deliberation than the Senate chamber.  It has been reduced over time to a staging area where the most self-important people on the planet give self-serving, inconsequential, aide-written speeches that no one listens to and which can be changed after-the-fact before they enter the official record.  Can anyone alive remember the last time two or more people actually deliberated anything in the Chamber?

It wasn’t a wise or respectful move by Franken, clearly.  But rather than seeing it as mocking a “solemn occasion” (The Hill), it is better interpreted as an unintended “The Emporer has no Clothes” type of action — like a small child would do (or a child-like Senator).  Kinda touching, really.

Read Full Post »

Freddie and Fannie are in the news again.

Freddie is currently seeking an additional $1.8 billion in funding (to be added to the $160 billion that has already been spent on the two government sponsored enterprises or GSEs). This recent news has led me to pose an account of how a standard political choice story of political exchange evolved into one of state vampirism. Let us review some of the facts.

The financial collapse revealed the weakness of many institutions, much to the surprise of regulators. No one in government fully appreciated the fragility of AIG or Lehman, for example.  But the same cannot be said of the GSEs. A partial accounting of the warning signs:

  • When accounting scandals led to the collapse of Enron in 2001 and WorldCom a year later, attention turned to the misapplication of accounting standards in other large firms. In January of 2003, Freddie Mac admitted that it had engaged in creative accounting to “smooth out” its earnings growth and mask underlying volatility.
  • That same year, the IMF  identified a host of problems at the GSEs including the “systemic risks inherent in the agencies’ large mortgage portfolios and their hedging operations” and the “lack of transparency.”
  • In 2004, the OMB warned: “The GSEs are highly leveraged, holding much less capital in relation to their assets than similarly sized financial institutions….a misjudgment or unexpected economic event could quickly deplete this capital, potentially making it difficult for a GSE to meet its debt obligations. Given the very large size of each enterprise, even a small mistake by a GSE could have consequences throughout the economy.”
  • Congress held hearings over the course of the next several years to consider strengthening the oversight of the GSEs  and limiting the size of their portfolios. Greenspan—usually skeptical of regulation—testified that the GSEs should be forced to reduce their trillion dollar portfolios to $100 or $200 billion, a position echoed by Treasury officials. Although proposals to create a new agency to oversee the GSEs were introduced in both chambers, Republicans and Democrats blocked reforms—refusing to place restrictions on the size of their portfolios, preventing the regulator from considering systemic risk, or tying passage to the creation of an affordable housing fund to make grants to advocacy groups.

The GSEs avoided the kinds of regulations that, if introduced early enough, might have limited the extent of the crisis.

Making Sense of Nonsense

The above pattern might not seem to make sense until once considers it through the lens of public choice.   The GSEs, although private in the pre-crash days, benefitted dramatically from the implied backing of the US government. They were able to attract capital more cheaply because investors believed that their debt was as good as T-bills.

The GSEs preserved their status by funneling large amounts of money into politics. As Open Secrets noted in a brief 2008 piece on Freddie, Fannie, and political giving:

Fifteen of the 25 lawmakers who have received the most from the two companies combined since the 1990 election sit on either the House Financial Services Committee; the Senate Banking, Housing & Urban Affairs Committee; or the Senate Finance Committee. The others have seats on the powerful Appropriations or Ways & Means committees, are members of the congressional leadership or have run for president.

During the 1989-2008 period, Open Secrets reported that “Current members of Congress have received [as of 2008] a total of $4.8 million from Fannie Mae and Freddie Mac, with Democrats collecting 57 percent of that.” Top recipients of GSE largess for the period 1989-2008:

  1. Christopher Dodd (D-CT)
  2. John Kerry (D-MA)
  3. Barack Obama (D-IL)
  4. Hilary Clinton (D-NY)
  5. Paul Kanjorski (D-PA)

Obama’s performance is pretty amazing given his short tenure in the Senate. In case your are wondering, the top 25 also included Barney Frank (D-MA), Rahm Emaunuel (D-IL), Nancy Pelosi (D-CA), and Steny Hoyer (D-MD) were also in the top 25. And even if the top of this list was full of Democrats, Republicans were recipients of GSE funds as well, claiming a majority in 2006.

So, we have profit-maximizing firms (in this case the GSEs) investing in vote-maximizing politicians (see above) and receiving special regulatory treatment. The costs were borne by consumers and taxpayers. Many members of Congress undoubtedly thought they were doing good while doing well. By requiring via statute that the GSEs make 55 percent of their mortgage purchases from low and moderate income borrowers, they were furthering pressing social goals and contributing to the creation of an ownership society.

From Political Exchange to Political Vampirism

As we know, in 2007-2008, many of the misguided policies interacted to produce a daunting financial crisis and the largest issuance of debt relative to GDP since World War II.  Freddie and Fannie, carrying large portfolios that had been politically insulated by Congress, all but collapsed, forcing a government bailout that has cost, to date, $160 billion.

In 2010, Congress passed the financial reform legislation (formally, the Dodd-Frank Wall Street Reform and Consumer Protection Act).  As noted in a previous posting, Dodd-Frank was expansive enough to cover everything from conflict metals to the racial composition of financial institutions. What was left out? The provisions of the act did NOT cover the GSEs.

One reason for leaving the GSEs alone may have been their continued utility as instruments of social policy.  As Zachary Goldfarb notes in today’s WaPo:

Since then [the collapse], they have been run by government overseers who have told the companies to help carry out the Obama administration’s housing policy. They have focused on continuing to guarantee mortgages to keep interest rates low and on reworking unaffordable home loans so borrowers can avoid foreclosure. The federal government has pledged to keep the companies solvent.

One might be surprised that the administration is using the GSEs to promote the same kind of credit policies that contributed to the housing bubble—on second thought, who would be surprised, since the clownish and melodramatic explanations of the collapse are the ones that have prevailed politically.

Some things did change with the collapse of the GSEs. When the government stepped in with a bailout, new bans were placed on campaign donations. Amazingly enough, Congress believed that once it owned an entity, it might be somewhat unseemly for it to extract donations from it.  Some predicted that after decades of Freddie and Fannie dominance of housing policy, this would have some profound implications. As the WaPo noted on August 7: “now Fannie Mae and Freddie Mac, titans of the mortgage finance industry, are wards of the state, bailed out by Washington to the tune of $160 billion and banned from political activity.”

But even if political donations are temporarily off the table, there are other ways to extract blood from Freddie and Fannie.  From today’s WaPo:

The firms are also paying steep dividends to the government in return for the aid. The dividend rate, 10 percent, is far more than the companies would pay to raise money in the capital markets. After the latest round of assistance, Freddie will be required to pay $6.4 billion in annual dividends to the government. “This dividend amount exceeds the company’s annual historical earnings in most periods,” Freddie said in a statement. “Freddie Mac expects to request additional draws under the Purchase Agreement in future periods.”

So let us review the key facts: Initially, Congress provides the GSEs with an implicit guarantee in exchange for a steady flow of donations and lax oversight. That equilibrium proved quite stable for decades and delivered the goods for legislators regardless of their political stripe. However, exogenous and endogenous shocks punctuated this equilibrium and gave rise to the political vampirism witnessed today. The GSEs are given a lease on life, but a life that might feel more like a slow death as its resources are being drained away.

How are things working out? In Goldfarb’s words: “Now, it is government decisions that are driving a good bit of the companies’ losses.”  How great are these losses? Since the collapse, Freddie has received over $60 billion from the public coffers, and now it is approaching Congress for an additional  $1.8 billion in government aid.  The combined GSE bailout has cost a mere $160 billion, as if anyone other than bondholders are counting.

Read Full Post »

Older Posts »


Get every new post delivered to your Inbox.

Join 1,002 other followers

%d bloggers like this: