The Rich Have More

There is an article in the New York Times Magazine by an American expat living in Holland about how having the government take more than half your paycheck isn’t as bad as it seems. It’s a pretty good article, and if America is headed in a more social democratic direction (as I fear we may be) then we would do well to look more towards the sensible policies of some more socially democratic countries, rather than the sort of populist demagoguery that is sometimes popular on the American left.

Anyway, what caught my eye in this piece in particular was the following bit:

The Dutch are free-marketers, but they also have a keen sense of fairness. As Hoogervorst noted, “The average Dutch person finds it completely unacceptable that people with more money would get better health care.” The solution to balancing these opposing tendencies was to have one guaranteed base level of coverage in the new health scheme, to which people can add supplemental coverage that they pay extra for.

Note that the third sentence contradicts the second. The Dutch find it totally unacceptable that the rich should get better health care than everyone else; that’s why they designed their system so that the rich could get better health care than everyone else.

The Great Inflation and Its Aftermath: Review

Robert Samuelson’s The Great Inflation and Its Aftermath tells the story of America’s battle with double digit inflation in the 1970s. As Samuelson tells the story, in the post-WWII period economists and politicians began to think that they could use the insights of Keynesian economics to fine tune the economy. According to Keynes, there was a fundamental economic trade off between inflation and unemployment. By using its control over the money supply, then, the government could induce a small amount of inflation, which would lead to lower unemployment and hence higher overall output.

The problem was that while inflation did in fact lead to a drop in unemployment, the effect was only temporary. At first an infusion of cash into an economy would boost demand for goods and services and lower interest rates (as people mistook the increase in dollars with an increase in wealth). Eventually, however, people would begin to catch on to what was happening, at which point a higher level of inflation would be needed to achieve the same effect. By the early 1970s, the United States was facing both high unemployment, high interest rates, and high levels of inflation, something which according to standard Keynesian theory should have been impossible.

First Do No Harm

On Monday, I listened to President Obama’s prime time press conference, which was focused on the President’s economic plans. When asked how we would know if the stimulus package due to be voted on today was successful, Obama stated that his “initial measure of success is creating or saving 4 million jobs.” The inclusion of the words “or saving” is, of course, a fairly big hedge, since the only way to really say for certain that his plan hasn’t saved 4 million jobs is if things get so bad that there are less than four million people working in this country. Still, I take the President at his word that saving jobs is a priority for him, and motivates his strong support for the stimulus package.

The irony is that even as Obama was speaking, thousands of small businesses in the U.S. were bracing for the effects of a new law that may very well put an entire industry out of business. As you may dimly recall, last year there was a scare involving lead paint in some toys from China. In response, Congress hastily passed the Consumer Product Safety Improvement Act, which required any manufacturer of children’s products to certify, starting on February 10, 2009, that there products did not contain a significant amount of lead.

It sounded like one of those common sense pieces of legislation that no sensible person could oppose. And, in fact, passage of the bill was nearly unanimous. The problem, however, is that the required certification is prohibitively expensive for most small businesses. So whatever the good intentions behind the law, its results are potentially devastating.

Due to public outcry, the Consumer Product Safety Commission agreed to stay enforcement of certain aspects of the new law for one year. Nevertheless, on February 9th the CPSC published guidelines telling thrift stores and other sellers of used goods that they could be held liable for selling uncertified books published prior to 1985, as well as books with metal or plastic components. The results have been far from pretty:

My daughter works in a used bookstore. TODAY they pulled all the books from the children’s section that had any kind of metal or plastic or toy-like attachment, spiral bindings, balls or things attached, board books, anything that might be targeted under this law, and they very quietly trashed them all. I say “very quietly” because the bookstore had a meeting with employees and told them to be careful not to start a panic. If anyone asked what they were doing they were told to say that they were “rearranging their inventory.” No one was allowed to tell anyone about the new law, and no one was allowed to take any of the doomed-for-destruction books home or give them away.

I just came back from my local thrift store with tears in my eyes! I watched as boxes and boxes of children’s books were thrown into the garbage! Today was the deadline and I just can’t believe it! Every book they had on the shelves prior to 1985 was destroyed! I managed to grab a 1967 edition of “The Outsiders” from the top of the box, but so many!

The lesson here, I think, is that laws often have serious and negative unintended consequences, and this danger only increases when a bill is passed in a hurry or out of a perceived necessity to “do something” about a given problem. It’s a lesson, I fear, that we will have to learn again and again over the coming years.

Immigration and the Stimulus

From the New York Times:

“All you need to do is grant visas to two million Indians, Chinese and Koreans,” said Shekhar Gupta, editor of The Indian Express newspaper. “We will buy up all the subprime homes. We will work 18 hours a day to pay for them. We will immediately improve your savings rate — no Indian bank today has more than 2 percent nonperforming loans because not paying your mortgage is considered shameful here. And we will start new companies to create our own jobs and jobs for more Americans.”

Alan Greenspan floated the same idea last summer. Congress, however, seems to have other ideas:

the U.S. Senate unfortunately voted on Feb. 6 to restrict banks and other financial institutions that receive taxpayer bailout money from hiring high-skilled immigrants on temporary work permits known as H-1B visas.

A Case for Libertarian Progressivism

Writing at the New York Times blog Economix, Ed Glaser argues for a “small-government egalitarian” plan for economic stimulus:

Libertarian progressivism distrusts big increases in government spending because that spending is likely to favor the privileged. Was the Interstate Highway System such a boon for the urban poor? Has rebuilding New Orleans done much for the displaced and disadvantaged of that city? Small-government egalitarianism suggests that direct transfers of federal money to the less fortunate offer a surer path toward a fairer America.

Current American political discourse labels people as either anti-government or pro-equality, but wanting to help the poor should not require the abandonment of sensible skepticism about expanding the size of the state. Many of my favorite causes, like fighting land use regulations that make it hard to build affordable housing, aid the poor by reducing the size of government. In the wake of Hurricane Katrina, I also argued that it would be far better to give generous checks to the poor hurt by the storm than to spend billions rebuilding the city, because those rebuilding efforts would inevitably help connected contractors more than ordinary people.

Young and Unemployed

The New York Times had an editorial Monday arguing that Barack Obama ought to give attention in crafting his stimulus/public works program to the plight of teen workers. As the Times puts it:

Young people who fail to find early jobs are more likely to remain underemployed or unemployed into their 20s and beyond. The risks are compounded for low-income youth, who are more likely to leave school and have other problems when they do not find work.

According to a recent analysis by Andrew Sum, an economist at Northeastern University, the percentage of teens employed has fallen from nearly 45 percent in 2000 to about 30 percent today. That is almost 10 times the decrease for adult workers, who are increasingly taking jobs that once went to teenagers.

The situation is far worse in low-income minority areas, where the youth employment rate appears to be hovering not much above 10 percent. That will only get worse as the economy contracts. And even when the recession ends, it could take an additional two or three years before youth employment begins to recover.

More. Of course, one policy that likely contributes to teenage unemployment is the minimum wage.

Natural Regulation

It has been common, in recent days, to hear people talk about how the current financial difficulties show the inherent failings of the free market, and provide a clear proof of the need for increased government regulation. Needless to say I’m skeptical.

Take the two most recent and obviously bubbly events. During the 90’s stock prices, particularly tech stocks and particularly particularly dot.com stocks, were massively overvalued. Eventually the bubble popped, stock prices fell, and many firms went out of business. Likewise, starting in the late 90’s and continuing until recently home prices were massively overvalued. We all know what happened next.

Could these bubbles have been prevented by government action? Certainly. The government could have stopped the stock market from going up and it could have stopped housing prices from rising. Perhaps it could even have done so in a way that didn’t impede non-bubbly growth (though I expect that, even with benefit of hindsight, this would have been a tricky business). But whether or not it would have been good for government do this, to think that government would have done so is, I think, the height of naivete. The same forces that lead to the creation of a bubble are going to make any attempt to stop a bubble highly unpopular politically. So even if there was some government regulation that could have prevented the bubble, the very fact that it would have done so makes it highly unlikely such regulation would be implemented before the bubble pops.

Paulson Repudiates Paulson Plan

George Santayana once said that those who forget the past are condemned to repeat it. Karl Marx said that history repeats itself, first as tragedy, second as farce. If Marx was right then Santayana must be also. What is happening now does have all the elements of farce, but I at least don’t remember this happening before.

To review some recent events: a little under two months ago, Treasury Secretary Paulson came to Congress asking for $700 billion dollars with which to buy mortgage backed securities from distressed firms. At the time we were told that it was essential that this plan was enacted and enacted quickly. There was no time for real debate or examination of the plan or its alternatives. We had to act now! Those who opposed the plan were heaped with scorn. Indeed, some even suggested that the Paulson plan made sense simply as a money making venture, and that ideally the government could do away with taxes altogether in favor of raising revenues through such schemes.

The Specter of Deregulation

There is a specter haunting America – the specter of deregulation.

Or, at least, that is the impression one gets listening to politicians talk these days. During the second Presidential Debate, Senator Obama stated with regard to current economic difficulties the “the biggest problem in this whole process was the deregulation of the financial system.” He did not say what deregulation he was referring to, which is not surprising. Attempting to tie financial problems to a specific piece of deregulation would be complicated, open to falsification in a way that more general claims are not, and would not be as useful in drumming up support for increased regulation in other areas. It is much better, from Obama’s perspective, to speak of “deregulation” and “regulation” as general categories, without either knowing or caring much about the specifics.

McCain, for his part, has largely declined to defend deregulation either specifically or in general, preferring to highlight an instance (Fannie and Freddie) where he favored more regulation of the financial sector than did his Democratic opponents. This is in itself not so surprising. How the author of McCain-Feingold and a supporter of Sarbanes-Oxley is supposed to be tagged as Mr. Deregulation is a little beyond me (in fact, one might question where a Congress that gave us Sarbanes-Oxley and McCain-Feingold could really be as gripped by deregulation-mania as some people are suggesting). But while this is not surprising, it is disappointing. For, as self-described “progressive” economist Glenn Loury has noted, deregulation is an idea that is desperately in need of defending at the moment. Major deregulation over the last few decades in areas such as trucking, the airlines, and telecommunications have brought major benefits to the American economy and to the American people, and there are still plenty of areas that could benefit from being subject to fewer regulations, not more.

Blame It on the Fed

A week or two ago, the Wall Street Journal had an interview with Anna Schwartz in which she blamed the current financial situation on the artificially low interest rates created by the Federal Reserve in the early years of the new millennium:

How did we get into this mess in the first place? As in the 1920s, the current “disturbance” started with a “mania.” But manias always have a cause. “If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.

“The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”

The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.

Schwartz is the co-author of one of the most respected and influential works on the causes of the Great Depression, a work whose thesis has been endorsed by now Fed Chairman Ben Bernanke (money quote: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”) Her opinion on the matter thus cannot be dismissed out of hand. And, for what it’s worth, Alan Greenspan’s recent repudiation of capitalism makes more sense on the assumption that he was trying to deflect blame from himself.