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Fed to Close Lending Programs

Tuesday, February 2nd, 2010

In a sign that the financial sector has returned to stable operation, the Federal Reserve closed many special lending programs started in the midst of the financial crisis in 2008:

Monday saw the end of initiatives aimed at supporting various parts of the commercial-paper market, where companies get short-term financing, along with programs to ensure key investment banks could get liquidity. Also shuttered: currency swap arrangement the Fed had with other major central banks.

Over the next several months other emergency lending programs will also make their last stands. The end of these facilities represents a move by policy makers to normalize their relationship with healing financial markets. Emergency aid withdrawn, an eventual tightening in monetary policy will follow.

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Federalism: New Arguments for an Old Idea

Wednesday, January 27th, 2010

Two good pieces have come out recently advocating distributing power away from the federal government in Washington towards the states and the counties: one by Alex Castellanos and the other by Arnold Kling. Castellanos writes to give the GOP a message for the 2010 electoral cycle that can reach the ears of the Millennial generation. He puts the ideas of individual liberty and free markets in terms of networks, such as Facebook. Free markets work, he argues, because their network-like structure allows coordination among individuals more efficiently than a hierarchical, top-down, command structure.

Kling, on the other hand, notes that those hierarchical command structures simply don’t work. A national government must institute a uniform policy, which can never satisfy everyone in a large country like the United States. State governments can create a variety of policies, each tailored to the different preferences of their residents. State and local governments can also respond more quickly to policy challenges because of the reduced chain of command.

Yet, neither of these articles presents any radically new ideas. James Madison outlined the federal nature of the Constitution in Federalist No. 10 and Federalist No. 39. In the Federalist No. 10, Madison argues for a large nation, so as to diminish the influence of any one faction in the body politic. With many competing interests, a government could not pass laws that benefited one group at the expense of another, such as the recent Senate heath care bill where all 49 states would pay for the costs of Nebraska’s heath care.

In Federalist No. 39, Madison explains how the Constitution conforms to republican principles and creates a government that is neither wholly federal nor wholly national. Though the federal government derives some of its powers directly from the people, but it mostly coordinates actions between the states and leaves most of the powers of government to the states:

The idea of a national government involves in it, not only an authority over the individual citizens, but an indefinite supremacy over all persons and things, so far as they are objects of lawful government. Among a people consolidated into one nation, this supremacy is completely vested in the national legislature. Among communities united for particular purposes, it is vested partly in the general and partly in the municipal legislatures. In the former case, all local authorities are subordinate to the supreme; and may be controlled, directed, or abolished by it at pleasure. In the latter, the local or municipal authorities form distinct and independent portions of the supremacy, no more subject, within their respective spheres, to the general authority, than the general authority is subject to them, within its own sphere. In this relation, then, the proposed government cannot be deemed a NATIONAL one; since its jurisdiction extends to certain enumerated objects only, and leaves to the several States a residuary and inviolable sovereignty over all other objects.

You can find the complete Federalist Papers here: It’s like an owner’s manual for the Republic.

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How Much is a Zero Rupee Note Worth?

Tuesday, January 26th, 2010

The World Bank has post on one of its blogs explaining the rise of zero rupee notes in India as a protest against bribery and corruption in the governement. The notes are printed by 5th Pillar, a local NGO. 5th Pillar has distributed over a million of the zero rupee notes, which have effectively reduced corruption in India. For example, one old lady outside Chennai City needed to pay a bribe to obtain a title for the land she owned.

Fed up with requests for bribes and equipped with a zero rupee note, the old lady handed the note to the official. He was stunned. Remarkably, the official stood up from his seat, offered her a chair, offered her tea and gave her the title she had been seeking for the last year and a half to obtain without success. Had the zero rupee note reached the old lady sooner, her granddaughter could have started college on schedule and avoided the consequence of delaying her education for two years. In another experience, a corrupt official in a district in Tamil Nadu was so frightened on seeing the zero rupee note that he returned all the bribe money he had collected for establishing a new electricity connection back to the no longer compliant citizen.

Is the zero rupee note money? It’s not official in any way, and, by definition, it isn’t worth anything. Does it function as a store of value when it is intended to store no value? (Think about that one for a while.)

Yet, I say that it does function as money, at least in the case above. The old woman presented a object worth the advertised price of the service she wanted and exchanged it for that service. I doubt that she could have gotten the same effect out by writing “zero rupees” on a piece of paper and handing it to the official.

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Coakley Doubles Down on Stupid Comment

Saturday, January 16th, 2010

Martha Coakley, the Democrat candidate for Senate in Massachusetts, spoke on a radio show earlier this week about hospital employees who refuse to provide certain types of care (emergency contraception, abortion) because of religious objections:

Ken Pittman: Right, if you are a Catholic, and believe what the Pope teaches that any form of birth control is a sin. ah you don’t want to do that.

Martha Coakley: No we have a separation of church and state Ken, lets be clear.

Ken Pittman: In the emergency room you still have your religious freedom.

Martha Coakley: (……uh, eh…um..) The law says that people are allowed to have that. You can have religious freedom but you probably shouldn’t work in the emergency room.

The remark got a lot of negative press, and deservedly so. Separation of church and state implies that the state will not inject itself into matters of religious conscience that do not interfere with its ability to establish a secular order. Those with religious beliefs that condemn contraception should have the freedom to follow their convictions. State Senator Scott Brown, Coakley’s opponent, sponsored an amendment that would have preserved that freedom to a 2005 bill that mandated hospitals provide emergency contraception.

So in response, Coakley released this ad, which reads:

1,736 women were raped in Massachusetts in 2008.
Scott Brown wants hospitals to turn them all away.

Wanting some people to have the option to refuse to provide some kinds of care is not at all the same thing as actively wishing that all hospitals refuse all care to rape victims. Brown’s campaign just held a press conference announcing they will press charges in response to the flyer.

In this country, health care is the free exchange of a service and money between two individuals. If the doctor or nurse isn’t willing to provide a service, he or she should not be compelled to do so.

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White House Drops “Saved or Created”

Tuesday, January 12th, 2010

The administration has decided to change the way in which it counts the number of jobs affected by stimulus spending. Previously, it used the measure “saved or created,” which counts jobs that would have been lost or would never have existed without stimulus spending. Since we don’t know for sure what would have happened without the stimulus, the measure depended heavily on subjective projections.

The new measure tracks the number of jobs funded by the stimulus, a much more objective count. However, it isn’t particularly useful for gauging the stimulus’ effectiveness. The government is just one employer among many; the number of new employees it has signals the strength of the economy no more than the number of new hires at Google or Citibank. Additionally, the fact that the government funded a job doesn’t mean that the new employee creates anything of value. For example, spending $1.1 million dollars to fix a guard rail in a little used stretch of Oklahoma highway doesn’t add much value to the economy. Google could probably put that $1.1 million to use more effectively.

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Are Economists Cheapskates, or are Cheapskates Economists?

Thursday, January 7th, 2010

Justin Lahart has a great piece in the Wall Street Journal chronicling stories of economists who practice what they preach by acting “rationally” — maximizing personal utility. For instance, John Sigfried, a professor at Vanderbilt, bought a black car instead of a gray one, even though he preferred gray, because it was $100 cheaper. Robert Hall, a Stanford professor, wants to hire someone to trim his Christmas tree so he can use the time for more productive things.

Economists typically posit that people act in their own interest — they maximize their own utility, or happiness. It explains why studies have shown that economists free ride — get others to pay for things from whcich they themselves benefit — and contribute less to charity. A purely self-interested person would never give to charity; yet people give to charities all the time.

All of which give rise to the question: are economists cheap because they assume people are self-interested, or do self-interested people gravitate to studying economics?

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Colorado’s Minimum Wage Falls

Tuesday, January 5th, 2010

On New Years’s Day, Colorado lowered its minimum wage, the first state in the nation to do so. Colorado ties its minimum wage to the state’s consumer price index, which fell 0.6% over the past year. To accurately adjust for the change in prices, Colorado’s minimum wage should have fallen four cents, from $7.28 to $7.24, but it cannot go below the federal minimum of $7.25.

“It is hard to make it, hard to get by,” said John Mullen, 50, an out-of-work construction worker waiting for a bus on a bitterly cold New Year’s Eve in Denver. Mullen said he remembers making minimum wage at a factory and having enough for small comforts.

“You’d get paid every Friday, have enough money to go catch a poker game or take your girl out to a dinner,” Mullen said. “But the law is the law. What can you do?”

Others said that even a tiny drop for the lowest-paid workers will be felt.

“Yeah, it’s 3 cents an hour. But that 3 cents an hour adds up at the end of 12 months,” said 59-year-old Gary Foeller of Denver, a house painter who hasn’t worked in weeks but usually earns more than the minimum wage when he has a job.

The 3-penny difference would amount to about $62 a year for someone who works 40 hours a week and doesn’t take time off.

But remember, the minimum wage decreased because the price of goods fell. So while someone making the minimum would earn $62.40 less over the year, that same person would, on average, spend $83.20 less to purchase the same goods. In effect, someone making the minimum will have an extra $20.80 to spend over the year.

While the nominal minimum wage — the minimum wage in terms of dollars — might have fallen, the real minimum wage — the minimum wage in terms of goods — has risen.

Posted in Unconventional Wisdom | No Comments »

Fannie and Freddie Losses Have No Limit

Monday, December 28th, 2009

From Peter Wallinson:

It’s a favorite government trick to announce bad news on a Friday afternoon, so it appears in Saturday’s paper, the least likely edition to be read. By Sunday and Monday, it’s old news. The Obama Treasury just went one better, announcing on Christmas Eve that they were uncapping the amount they believe will have to be invested in Fannie and Freddie. The Bush Treasury first estimated the government-sponsored enterprises’ (GSEs) losses at $100 billion each. The Obama administration, which has been using the GSEs to stabilize the housing market by reducing their underwriting standards, upped the ante to $200 billion each. Now the administration has thrown in the towel completely, and dropped a large lump of coal in each taxpayer’s stocking—it won’t even try to estimate the total losses of Fannie and Freddie.

The phrase “capitalism on the way up, socialism on the way down” comes to mind.

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A Better GOP Platform

Thursday, December 3rd, 2009

James Bopp, Jr., the vice chairman of the Republican National Committee, has circulated a draft proposal of a ten point platform for the RNC to adopt in its January meeting. The resolution would require that candidates to support at least eight of the ten points before receiving RNC funding, which has prompted some media outlets to label it a “purity test.”

I don’t see the big deal about the resolution. All parties adopt a platform. They exist to advance an agenda, and they have to define an agenda and agree to it before they can advance it. Besides, it’s mostly Democrat strategists telling the Republicans that they need to have a “big tent” and that they must moderate (i.e. adopt Democrat talking points) or get permanently relegated to minority status. If that were really the case, why wouldn’t the Democrats welcome a GOP purity test?

Anyway, the 10 points are:

1. We support smaller government, smaller national debt, lower deficits and lower taxes by opposing bills like Obama’s “stimulus” bill;
2. We support market-based health care reform and oppose Obama-style government run healthcare;
3. We support market-based energy reforms by opposing cap and trade legislation;
4. We support workers’ right to secret ballot by opposing card check;
5. We support legal immigration and assimilation into American society by opposing amnesty for illegal immigrants;
6. We support victory in Iraq and Afghanistan by supporting military-recommended troop surges;
7. We support containment of Iran and North Korea, particularly effective action to eliminate their nuclear weapons threat;
8. We support retention of the Defense of Marriage Act;
9. We support protecting the lives of vulnerable persons by opposing health care rationing, denial of health care and government funding of abortion; and
10. We support the right to keep and bear arms by opposing government restrictions on gun ownership.

I wonder how many Republicans already disagree with three or more of these positions? They are defined broadly and simply stated. For instance, what does “victory” in Iraq and Afghanistan mean? Does it mean building functioning democratic states, or does it mean preventing al Qaeda from using the countries as operating bases? As AllahPundit notes at Hot Air, only points five and eight are seriously contested within the party.

Moreover, the list is not inspiring in any way. As much as it positively defines what the party should stand for, the list seems composed as a response to the current Democrat agenda. Republicans will not return to power unless they can get Obama out of their minds. The party needs candidates in 2010 and 2012 that can clearly articulate conservative thought. Simply stating positions won’t get the job done; they need someone who can put together an argument, educate the public, and explain why the party has its platform.

Nonetheless, here’s what I’d propose as the party platform that articulates those first principles that should motivate the next elections:

1. We respect human individual freedom and the ability of the individual to dispose of his reason with respect for the law.
2. We support abliity of individuals to acquire personal property through labor and the ability of individuals to freely exchange their property in markets.
3. Given that monopolies discourage opportunity and choice, we support limited regulation that keeps markets free, open, and competitive.
4. All Americans are equal before the law. However, individual Americans have a diverse array of talents, which are not all distributed equally. Our republic should allow individuals to use their talents to the best of their abilities.
5. No two American cities or states are alike. Where possible, local solutions at the city, county, and state level will provide better outcomes than a uniform solution imposed from the federal government.
6. We support public discourse that welcomes religious dialogue, but recognizes that Americans have many beliefs.
7. We support a national defense that protects the life and limb of every American and protects our international commercial interests.
8. We support government policies that recognize human nature as it is. We oppose government attempts to change human nature through social engeneering. People are not pawns in a social science experiment; they are not objects under the control of some social planner.
9. We support incremental reform of our political system — reform that preserves what is good and seeks to improve what can be improved. We oppose any attempt to completely remake our society in an untested and unseen manner. Reforms should fall in line with our Constitution and the intents of our Founders.

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I’d Rather be Fishing: Why Subsidies Don’t Always Work

Tuesday, December 1st, 2009

NPR reports that the island nation of Kiribati recently implemented a fishing subsidy that created unintended consequences. Kiribati has two major industries: fishing and coconut harvesting. Concerned about overfishing, the local government decided to subsidize coconut harvesting. They argued that by raising the incomes of coconut farmers, that some fisherman would give up fishing to start farming. In economic terms, the government increased the opportunity cost of fishing — the money a fisherman could have made by farming.

Unfortunately for the government, a subsidy affects the quantity of coconut harvesting in two ways. The government meant for the substitution effect, the increase in the cost of fishing, to discourage the island’s residents from fishing. Instead, the substitution effect was dominated by the income effect; coconut farmers could obtain the same level of utility with less work, allowing more time for leisure. And in their leisure time, the farmers went fishing. Rather than decreasing, the level of fishing increased 33%.

Whether the substitution effect or the income effect dominates depends on the preferences of the island’s residents. Since the farmers prefer leisure to work, they will consume more leisure with a subsidy. If they had preferred the extra income from work over additional leisure time, then the substitution effect would have dominated.

Congress should consider both effects when deciding whether or not to continue subsidizing unemployment, now two years after the start of the recession. If Congress wants people to get back to work, it might be better to stop writing checks for unemployment benefits.

(h/t Freakonomics)

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