Tuesday, May 31, 2011

Left Still Clueless about Financial Crisis

See this post by Peter J. Wallison of AEI.
"Last week, the left-wing blogs were abuzz with renewed criticism of Ed Pinto’s data on subprime and Alt-A lending. Mike Konczal and Paul Krugman triumphantly displayed a graph from a February 2011 paper by David Min of the Center for American Progress that they claimed as proof that Pinto’s numbers—which I relied on in my dissent from the majority report of the Financial Crisis Inquiry Commission—were fraudulent. The graph is copied below.

Honestly, it’s hard to believe anyone gives these characters the time of day, let alone reads their work. The Min graph is grossly deficient in almost every way possible, and the fact that it would be cited by both Konczal and Krugman confirms their utter ignorance of this subject.

Let’s start with a basic problem. The chart is a fake. It’s mislabeled as coming from the Mortgage Bankers Association (MBA) National Delinquency Survey for the second quarter of 2010, but only the two bars labeled “Conforming” and “Actual Subprime” actually come from the MBA’s survey. The MBA survey includes only three categories—government loans, prime loans, and subprime loans. The survey does not include any of the data in the two bars to the left, labeled “Pinto high risk: Freddie>90 LTV” and “Pinto high risk: Freddie 620-659 FICO.” Accordingly, the data in those two bars had to come from somewhere else, namely Freddie Mac, but is misrepresented as coming from the MBA survey.

There are many other material deficiencies. In fact, just about everything in the graph is deceptive. If this were sales material, Min, Konczal, and Krugman would all be jailed by Elizabeth Warren. Let’s take for example the bar called “Pinto high risk: Freddie 620-659 FICO.” It shows a 10.04 percent serious delinquency rate for these mortgages. The implication is that these are all the mortgages below 660 FICO. But these are not all the mortgages in that category. Min (perhaps) neglected to mention the mortgages below 620 FICO. It turns out that 14.4 percent of those mortgages were also seriously delinquent. So Min has selected one limited group and tried to demonstrate that it is considerably smaller than the delinquency rate on the “Actual Subprime” in the chart. It’s like saying that a mortgage has an loan-to-value ratio of 80 percent, but forgetting to mention that there’s a second mortgage for the additional 20 percent.

Min’s chart is misleading for two more reasons. His argument—dutifully accepted by Konczal and Krugman—was that “Actual Subprime” (which Min never defines but are loans made and securitized by the private sector) had a much higher rate of delinquency than the portion of Freddie’s exposure that was represented by loans to borrowers with FICO scores of less than 660—which Pinto had labeled as “subprime.” This comparison is offered to demonstrate that the loans made by the private sector were worse than Fannie and Freddie’s loans.

But Min doesn’t tell us—perhaps he doesn’t know—that Fannie and Freddie were the largest buyers of these “Actual Subprime” loans, so that many fewer would have been outstanding if Fannie and Freddie hadn’t needed them to meet their affordable housing requirements. In addition, the percentages Min presents are meaningless because he doesn’t tell us the actual numbers of loans involved. For example, if there are 1000 “Actual Subprime” loans and 1 million Freddie loans to borrowers with FICO scores between 620 and 659, the latter are of course going to be more significant in terms of their effect in the financial crisis. Pinto found that what Min labels as “Actual Subprime” (and Pinto calls “self-denominated subprime”) were less than one-third of the total number of all subprime and Alt-A loans outstanding in 2008. If you want to see Pinto’s actual numbers for these low quality loans, compared to Fannie and Freddie prime loans, see Table 3, page 21 of my dissent.

Finally, even if we stipulate that the “Actual Subprime” is a significant number—enough to contribute significantly to the financial crisis—the fact that it might have been of even lower quality than the other subprime loans made by Fannie and Freddie is not relevant to Min’s claims that Pinto made Fannie and Freddie’s loans look worse than they actually were. The loans that Fannie and Freddie acquired—and Pinto identified—were of sufficiently low quality to cause these giant companies to become deeply insolvent. They have already required over $150 billion of assistance from the Treasury just to stay afloat, and their regulator has estimated that their losses may eventually total between $221 and $363 billion. Thus, they were bad enough to sink Fannie and Freddie and drive down housing prices all over the United States.

There is no end of the deceptions that the Krugmans, Konczals, and Mins will cook up in order to avoid the truth: Fannie Mae and Freddie Mac, as required by the affordable housing goals established by HUD, acquired 12 million subprime and Alt-A loans by 2008 and in the process destroyed themselves and triggered the financial crisis."

Right-Sizing the Federal Workforce

See this post By Andrew G. Biggs of AEI.

"Chairman Ross, Ranking Member Lynch, and Members of the Committee. Thank you for granting me the opportunity to discuss the size of the federal workforce and efforts to right-size federal employment going into the future.

A score of academic studies have confirmed that individual federal employees receive significantly higher salaries than private sector workers with similar education and experience. My own work with Jason Richwine of the Heritage Foundation has extended the analysis to benefits and job security - including benefits, the federal pay premium reaches 35 percent, and adding the value of better federal job security raises the premium to 54 percent.

However, much less is known regarding the appropriate size of the federal workforce. Do federal agencies carry larger staffs than similar private entities? Is the U.S. government workforce large relative to that of our economic competitors? These questions are more difficult than assessing the pay of individual workers and far less research has been done in these areas."

Click here to read the full testimony

The Important Role of Speculators And Futures Markets

See Oil Speculators Are Your Friends by Jerry Taylor and Peter Van Doren in Forbes. Excerpt:
"Are futures markets a friend or foe of consumers? To hear the political class tell it during this season of soaring gasoline prices, they are clearly an enemy of nearly all mankind, a playpen for wild speculative orgies where nothing is produced--except higher fuel prices--and no services are rendered except to those who profit from the resulting price volatility.

Economists, however, argue that futures markets serve two essential functions. First, they allow us to learn about the future prices of commodities given the best information available to the market. This price discovery is helpful to consumers and investors because it assists them in deciding whether certain expenditures or investments today make sense. Second, the existence of futures markets allows people to buy insurance against price increases (or declines). Given the volatility of oil prices, the ability to purchase certainty is very useful. Allowing risk to trade from those who don’t want to bear it to those who do enhances efficiency."

Then they cite research that shows that futures markets generally reduce volatility.

How Fannie and Fed Caused the Crash

See this post by David Boaz of Cato.

"Economist John B. Taylor reviews Reckless Endangerment by Gretchen Morgenson and Joshua Rosner:

The book focuses on two agencies of government, Fannie Mae and the Federal Reserve. The mutual support system is better explained and documented in the case of Fannie, the government-sponsored enterprise that supported the home mortgage market by buying mortgages and packaging them into marketable securities which it then guaranteed and sold to investors. The federal government supported Fannie Mae — and the other large government-sponsored enterprise, Freddie Mac — by implicitly backing up those guarantees and by providing favorable regulatory treatment and protection from competition. These benefits enabled Fannie to rake in excess profits — $2 billion in excess, according to a 1995 study by the Congressional Budget Office.

The book then gives examples where Fannie’s executives — Jim Johnson, CEO from 1991 to 1998 [and also top aide to Vice President Walter Mondale, campaign manager for Mondale, head of vice presidential selection for both John F. Kerry and Barack Obama, and chairman of both the Kennedy Center and the Brookings Institution], is singled out more than anyone else — used the excess profits to support government officials in a variety of ways with plenty left over for large bonuses: They got jobs for friends and relatives of elected officials, including Rep. Barney Frank, who is tagged as “a perpetual protector of Fannie,” and they set up partnership offices around the country which provided more jobs. They financed publications in which writers argued that Fannie’s role in promoting homeownership justified federal support. They commissioned work by famous economists, such as Nobel Prize-winner Joseph Stiglitz, which argued that Fannie was not a serious risk to the taxpayer, countering “critics who argued that both Fannie and Freddie posed significant risks to the taxpayer.” They made campaign contributions and charitable donations to co-opt groups like the community action organization ACORN, which “had been agitating for tighter regulations on Fannie Mae.” They persuaded executive branch officials — such as then Deputy Treasury Secretary Larry Summers — to ask their staffs to rewrite reports critical of Fannie. In the meantime, Countrywide, the mortgage firm led by Angelo Mozilo, partnered with Fannie in originating many of the mortgages Fannie packaged (26 percent in 2004) and gave “sweetheart” loans to politicians with power to affect Fannie, such as Sen. Chris Dodd of Connecticut. The authors write that “Countrywide and Fannie Mae were inextricably bound.”

But don’t ignore the role of the Fed:

Early on the authors take on the Boston Fed, and in particular its research director Alicia Munnell, for using a study documenting racial discrimination in mortgage lending to justify the relaxation of credit standards, even though the study’s findings were found to be flawed by other researchers. And they criticize the very low interest rate set by the Fed when Alan Greenspan was chairman and Ben Bernanke was a Fed governor, saying it “contributed mightily to the mortgage lending craze,” adding that “with the Fed on a rate-cutting rampage, demand for adjustable-rate mortgages with relatively low initial interest costs had become incendiary.”

If you watched the HBO movie Too Big to Fail, you wouldn’t get much sense that government actions — easy money, the homeownership mania, HUD and Fannie’s push to lend to non-creditworthy borrowers — played a major role in the housing bubble and subsequent financial crisis. Sounds like this book would make good supplemental reading for viewers, along with Johan Norberg’s Financial Fiasco."

Antidumping Reform Crucial to U.S. Competitiveness

See this post by Daniel Ikenson of Cato. Excerpt:

"The Cato Institute today published its 13th policy paper on the topic of antidumping. “Economic Self-Flagellation: How U.S. Antidumping Policy Subverts the National Export Initiative” describes with compelling anecdotes and data how the outdated assumptions of a 90-year-old law—one purported to “level the playing field” and protect U.S. companies from “unfair” foreign competition—conspire with its overzealous application to erode the competitiveness of U.S. firms.

During the decade from January 2000 through December 2009, the U.S. government imposed 164 antidumping measures on a variety of products from dozens of countries. A total of 130 of those 164 measures restricted (and in most cases, still restrict) imports of intermediate goods and raw materials used by downstream U.S. producers in the production of their final products. Those restrictions raise the costs of production for the downstream firms, weakening their capacity to compete with foreign producers in the United States and abroad.

In all of those cases, trade-restricting antidumping measures were imposed without any of the downstream companies first having been afforded opportunities to demonstrate the likely adverse impact on their own business operations. This is by design. The antidumping statute forbids the administering authorities from considering the impact of prospective duties on consuming industries—or on the economy more broadly—when weighing whether or not to impose duties.

That asymmetry has always been insane, but given the emergence and proliferation of transnational production and supply chains and cross-border investment (i.e., globalization)—evidenced by the fact that 55% of all U.S. import value consists of raw materials, intermediate goods, and capital equipment (the purchases of U.S. producers)—it is now nothing short of self-flagellation.

Most of those import-consuming, downstream producers—those domestic victims of the U.S. antidumping law—are also struggling U.S. exporters. In fact those downstream companies are much more likely to export and create new jobs than are the firms that turn to the antidumping law to restrict trade. Antidumping duties on magnesium, polyvinyl chloride, and hot-rolled steel, for example, may please upstream, petitioning domestic producers, who can subsequently raise their prices and reap greater profits. But those same “protective” duties are extremely costly to U.S. producers of auto parts, paint, and appliances, who require those inputs for their own manufacturing processes."

Monday, May 30, 2011

Gretchen Morgenson on Fannie Mae, Barney Frank, June O'Neill, and Walker Todd

Great post by David Henderson of EconLog.

"Last week, NPR did a great interview with Gretchen Morgenson of the New York Times in which she discusses highlights of her recent book, Reckless Endangerment: How Outsized Ambition, Greed and Corruption Led to Economic Armageddon. It's co-authored with Joshua Rosner. Walker Todd and June O'Neill come out smelling like roses: they saw through some of this early on. Barney Frank? The opposite.

On Barney Frank:

One of the really big beneficiaries, albeit indirectly, was Congressman Barney Frank of Massachusetts. Back in 1991, when Congress was writing the legislation that would, you know, enhance or improve the oversight of Fannie Mae, or so they thought, Frank actually called up the company and asked them to hire his companion, who had just gotten an MBA from the Amos Tuck School of Business.

So that was an example of the kind of thing that Fannie Mae would do. Now, when I asked Mr. Frank about this, I asked him, did it have any impact on his approach to the company. You know, was it a conflict? Did he feel that it had been a conflicted, put him in a conflicted spot? And he said absolutely not, that he didn't really remember being interested or having much to do with the 1992 legislation.

But the record shows that he was very aggressive and really tough on those who were testifying in Congress about reining in Fannie Mae and Freddie Mac. He was very aggressive to, for instance, the head of the Congressional Budget Office at that time, who was trying to call for increased capital requirements and to call for a focus on safety and soundness at Fannie Mae, that Frank really took him apart in testimony.

On June O'Neill [who, by the way, did the article, "Comparable Worth," for the first edition of The Concise Encyclopedia of Economics."]

Ms. MORGENSON: Well, first of all, before the report was published, Fannie Mae sent a couple of its top executives to see June O'Neill [at the time, head of the Congressional Budget Office], to try to persuade her not to publish the paper.

She described it as being visited by the mafia, and it was an interesting meeting because these two executives could not really explain why the CBO report was wrong. They couldn't pinpoint the errors in the analysis.

But what they ended up doing was again speaking in these bromides about homeownership, the costs of homeownership, how Fannie Mae, you know, wrapped itself in the American flag, essentially.

And so they tried to get her to tone it down, to not publish it as is, and she stood up to them. But that was not the end of it. She had to go and deliver her report to Congress, as required under the 1992 act.

And when she did, she had to withstand a firestorm of criticism from Fannie's friends in Congress who were literally reading from scripts that the company had supplied to them.

On Walker Todd:

So it was an interesting moment in the writing of that law, that there came a sort of an amendment that had been brought to the floor by Chris Dodd which enabled insurance companies, brokerage firms, non-bank financial companies to tap into the Federal Reserve's special powers in time of crisis.

What that means is that these firms that had not been able to gain access to Federal Reserve borrowings in time of crisis - insurance companies did not have access. Brokerage firms had not had access. It was really only banks that were able to call on the Fed in times of trouble. This small, unnoticed part of the bill that was carried by Dodd expanded the federal safety net to include these companies.

It was a moment nobody noticed, except for Walker Todd, who was a research fellow at the Federal Reserve Bank of Cleveland. He thought this was fascinating, because the law that this was buried in was supposed to, you know, restrain the ability of financial companies to harm the taxpayer and to create losses that would be funded by the taxpayer. So it was counterintuitive. It was a paradox to Walker Todd that this small thing was inserted into the bill.

He tried to write about it. He, in fact, did write about it. He discovered that it had been inserted by the financial services companies at their request, and he tried to publish a paper talking about this expansion of the federal safety net. He came up against a buzz saw of criticism from the Federal Reserve Board in Washington. They tried valiantly to prevent the Federal Reserve Bank of Cleveland from publishing Walker Todd's report.

They failed, happily, and the report was published. But it was very, very interesting the degree to which the Federal Reserve Board seemed to want to keep that little amendment under wraps and to keep it from having the sunlight shone on it by this report that Walker Todd had produced."

China Easily Avoids Tariffs On Furniture

See Do Anti-Dumping Tariffs on Furniture from China Create U.S. Jobs? Only for Washington Lawyers by Mark Perry of Carpe Diem.

"From the Washington Post article "From China, An End Run Around U.S. Tariffs"
"To avoid a 2005 U.S. tariff on Chinese-made wooden bedroom furniture, Chinese furniture companies moved operations to other Asian countries, thwarting U.S. efforts to curb “dumping,” the export of goods at unfairly low prices (see chart above).

The result: Imports now account for about 70 percent of the U.S. market for beds and similar items, up from 58 percent before Washington intervened to try and protect domestic manufacturers from Chinese “dumping,” or the export of goods at unfairly low prices.

The only Americans getting more work as a result of the tariffs are Washington lawyers, who have been hired by both U.S. and Chinese companies. Their work includes haggling each year over private “settlement” payments that Chinese manufacturers denounce as a 'protection racket.'""

He then shows a chart showing about a 13% "decline in the CPI for Furniture and Bedding over the last ten years."

Elliot McGucken's Hero's Journey Mythology video set to Beethoven!

Go to


It is filled with great pictures, music and interesting and inspiring quotes from many great philosophers and entrepreneurs. He is working on a book on this topic.

Elliot created the HERO'S JOURNEY ENTREPRENEURSHIP FESTIVAL: THE GREAT BOOKS RIDE AGAIN and like me he has related the work of Joseph Campbell on the hero in mythology to entrepreneurship.

Click here to go to Elliot's website

Wednesday, May 25, 2011

Hidden Costs Of The Government Owning AIG

See AIG Bailout’s True Costs to Taxpayers, Innovation, and Competition by John Berlau of the Competitive Enterprise Institute Blog.
"The Treasury Department today is patting itself on the back for finally selling some of the government’s shares in American International Group, with Treasury Secretary Tim Geithner breathlessly praising the action as an “important milestone.”

But hold on there, Mr. Secretary. This sale of shares doesn’t come close to what taxpayers have put into AIG, and the government will still have a supermajority stake. The sale of shares should raise $5.8 billion for the federal government — out of $173 billion spent propping it up.

And when this stock sale is over, the government will have reduced its ownership stake in AIG from 92 percent to 77 percent. A company is going from being nine-tenths government-owned to three-fourths government-owned. Big wow!

But even if AIG were somehow to pay every dollar back, that still wouldn’t justify the bailout and takeover. There are a number of “hidden costs” which I have gone over before and will revisit in later posts

Chief among these is, as with Fannie and Freddie, having a government-sponsored behemoth competing against unsubsidized competitors. As then-CEI research associate Jonathan Moore and I wrote last year in an op-ed in Politico, AIG has appeared to use its government backing to slash its premiums below a level commensurate with risk in a free market, putting taxpayers even more at risk and harming unsubidized rivals, which has the long-term effect of slowing innovation in risk management.

As we argued in the piece, AIG is now the “public option” for property and casualty insurance and will continue to distort the market until the government’s exit is complete."

Government Report On For Profit Colleges Filled With Errors

See Education Department’s Gainful Employment Rule Was Based on Falsehoods by Hans Bader of the Competitive Enterprise Institute Blog.
"Earlier, CEI issued a study on an Education Department rule that is likely to backfire on students: the so-called “gainful employment rule” that is being used to crack down on for-profit colleges. Now we learn that a General Accounting Office (GAO) report that was used to justify the rule was not “accurate,” as an internal GAO memo concedes. For example, the GAO repeatedly included erroneous claims that “15 out of 15 schools” investigated by the GAO engaged in various deceptive practices, when in fact far fewer of the 15 schools had been found to have done so. “According to the GAO memo, ‘because a summary of X of 15 schools was requested, we then went back and stretched whatever we could find to come up with a number for the testimony.’”

Other inaccuracies in the GAO report resulted because “congressional staffers” hostile to for-profit schools “demanded the inclusion of numerous details as it was being finalized.” “The [GAO] team’s unwillingness to say no to the additional insertion of details at the end of a job created some of our most obvious inaccuracies.”

As the Daily Caller notes, “The report was crucial because it helped the push for strict new regulations at the Department of Education on the for-profit colleges. The most controversial part of the regulations, called gainful employment, is pending at the White House Office of Management and Budget.”

As Norton Norris notes, the GAO’s “error-riddled report” was “a completely inaccurate portrayal of the for-profit college industry”: “only 14 of the GAO’s original 65 findings could be supported based upon the available recordings. The other alleged 41 findings were not valid and served no meaningful purpose to be included in the GAO report.”

The Education Department recently issued another perverse rule that effectively required some private colleges to raise their tuition, by banning them from limiting their tuitions to the amount of financial aid that students receive.

It is also seeking to impose changes on campus disciplinary proceedings that would reduce accuracy and due process in sexual harassment cases."

The Price Of Manufactured Goods Has Been Falling In Real Terms Due To Increased Productivity

See Manufacturing Efficiency and Falling Consumer Prices = Manufacturing's Falling Share of GDP by Mark Perry of "Carpe Diem." He has some great graphs.

"The top chart above shows the long-term trends in the shares of GDP for: a) private services-producing industries and b) private goods-producing industries. From being close to parity in 1947 with services representing 48% of GDP vs. 40% for goods, the services/GDP ratio is now almost 69% compared to the goods/GDP share of less than 18%. In 1948 there was $1.20 in services produced in the U.S. for every $1 of goods produced, and by 2010, that services-goods ratio had increased to $3.9 to $1.

The bottom chart above helps explain some of the shift over time from goods to services, by showing that the CPI for services has increased more than the overall CPI by almost 1% per year, while the CPI for durable goods has increased almost 2% less than the overall CPI. In other words, the real price of services has been rising by almost 1% per year, and the real price of durable goods has been falling by almost 2% per year. To put it in perspective: on average, $100 of goods and services purchased in 1947 would have cost $820 by 2010. But consider this difference - $100 of services purchased in 1947 would cost $1,250 today; $100 of durable goods in 1947 would only cost $314 today by comparison. In other words, manufactured goods are a real bargain and they keep getting cheaper over time.

What's behind the difference in price trends? Productivity gains in manufacturing have been greater than the gains for services, which has lowered real consumer prices for manufactured goods relative to services, resulting in a lower goods/GDP ratio and a higher services/GDP ratio. The trend for manufacturing of: a) increased productivity leading to b) lower real consumer prices resulting in c) a lower share of GDP follows the same pattern for agriculture over the last two hundred years. And yet when have you heard anybody talk about "the decline of U.S. farming," or make the claim that "we just don't produce any agricultural products any more"? It's not true for farming, and it's not true for manufacturing."

US ranks low in share of total health spending paid out-of-pocket by patients

See A Headline You Probably Won’t Hear from the Left by Andrew Biggs of AEI. Here it is, but he also has a great graph.
"I recently wrote about comparisons of Social Security’s generosity relative to pension plans in other countries (with follow-up here). Left-leaning think tanks often compare the average benefit offered by Social Security to that of other OECD countries, finding that we’re ranked near the bottom. I countered that, when compared to other Anglo countries that share our values regarding the role of government versus the private sector, we’re right in the middle: slightly more generous than some countries like the U.K., but slightly less generous than others like Canada.

But here’s another ranking relative to OECD countries that I’m betting you won’t find liberal think tanks citing: it’s the share of total health spending paid out-of-pocket by patients. This share is important, as it gives patients some “skin in the game,” generating incentives to monitor quality and trade health spending against other goods and services we value. Health savings accounts, premium support, and other market-oriented health proposals are designed to improve these incentives. So where does the United States rank in out-of-pocket shares compared to 30 other developed countries? We’re 26th, with 12 percent of health costs paid out of pocket. This is almost identical to the U.K., which may be the most socialized health program in the world.

In fact, the U.S. out-of-pocket share is one-third below the OECD average of 19 percent and the only countries where patient payments make up significantly less of health costs are France and the Netherlands. Compared to our Anglo brethren we’re also on the low end: in Australia patients pay 18 percent of costs; in Ireland 14 percent; in Canada 15 percent; and in New Zealand 14 percent.

I hereby join hands in solidarity with my left-leaning think tank brothers in asking—no, demanding!—that the patient contributions to U.S. healthcare costs be made compatible with the standards of the civilized world."

Unions Seem To Get A Disproportionate Share Of ObamaCare Waivers

See Obama Skirts Rule of Law to Reward Pals, Punish Foes by Michael Barone of AEI. Excerpts:
"Question: What do the following have in common? Eckert Cold Storage Co., Kerly Homes of Yuma, Classic Party Rentals, West Coast Turf Inc., Ellenbecker Investment Group Inc., Only in San Francisco, Hotel Nikko, International Pacific Halibut Commission, City of Puyallup, Local 485 Health and Welfare Fund, Chicago Plastering Institute Health & Welfare Fund, Blue Cross Blue Shield of Tennessee, Teamsters Local 522 Fund Welfare Fund Roofers Division, StayWell Saipan Basic Plan, CIGNA, Caribbean Workers' Voluntary Employees' Beneficiary Health and Welfare Plan.

Answer: They are all among the 1,372 businesses, state and local governments, labor unions and insurers, covering 3,095,593 individuals or families, that have been granted a waiver from Obamacare by Secretary of Health and Human Services Kathleen Sebelius.

All of which raises another question: If Obamacare is so great, why do so many people want to get out from under it?

More specifically, why are more than half of those 3,095,593 in plans run by labor unions, which were among Obamacare's biggest political supporters? Union members are only 12 percent of all employees but have gotten 50.3 percent of Obamacare waivers.

Just in April, Sebelius granted 38 waivers to restaurants, nightclubs, spas and hotels in former House Speaker Nancy Pelosi's San Francisco congressional district. Pelosi's office said she had nothing to do with it.

On its website HHS pledges that the waiver process will be transparent. But it doesn't list those whose requests for waivers have been denied.
It does say that requests are "reviewed on a case by case basis by Department officials who look at a series of factors including" -- and then lists two factors. And it refers you to another website that says that "several factors . . . may be considered" -- and then lists six factors."

Tuesday, May 24, 2011

Decreases in Manufacturing's Share of GDP and Employment Are a Result of Increasing Productivity

Great post from Mark Perry of "Carpe Diem."

"From Paul Krugman's book "Pop Internationalism" (updated, original source):

"Between 1970 and 1990 manufacturing declined from 25.0 to 18.4 percent of GDP. International trade explains only a small part of the decline in the relative importance of manufacturing to the economy. Why then has the share of manufacturing declined?

The immediate reason is that the composition of domestic spending has shifted away from manufactured goods. In 1970, U.S. residents spent 46 percent of their outlays on goods (manufactured, grown, or mined) and 54 percent on services and construction. By 1991, the shares were 40.7 percent and 59.3 percent respectively, as people began spending comparatively more on, for example, health care, travel, entertainment, legal services, fast food and so on. It is hardly surprising, given this shift, that manufacturing has become a less important part of the economy.

In particular, U.S. residents are spending a smaller fraction of their incomes on goods than they did 20 years ago for a simple reason: goods have become relatively cheaper. Between 1970 and 1990 the price of goods relative to services fell 22.9% percent. Goods have become cheaper primarily because productivity in manufacturing has grown much faster than in services. The growth has been passed on in lower consumer prices.

Ironically, the conventional wisdom here has things almost exactly backward. Policymakers often ascribe the declining share of industrial employment to a lack of manufacturing competitiveness brought on by inadequate productivity growth. In fact, the shrinkage is largely the result of high productivity growth, at least as compared with the service sector. The concern that industrial workers would lose their jobs because of automation is closer to the truth than the preoccupation with a presumed loss of manufacturing because of foreign competition."

MP: The chart above shows the incredible increases in U.S. manufacturing productivity, which has made American manufacturing increasingly more efficient and more competitive, leading to lower prices for manufactured goods. Because the productivity gains for manufacturing have exceeded productivity gains for services-producing industries, the prices for manufactured goods have fallen relative to prices for services, which had led to decreases (increases) in manufacturing's (service's) share of GDP and employment."

Bad Energy Policy In The UK

See Quintuple whammy by Matt Ridley of "The Rational Optimist." Excerpts:
"The industrial revolution, when Britain turned to coal for its energy, not only catapulted us into prosperity (because coal proved cheaper and more reliable than wood, wind, water and horse as a means of turning machines), but saved our landscape too. Forests grew back and rivers returned to their natural beds when their energy was no longer needed. Land that had once grown hay for millions of horses could grow food for human beings instead – or become parks and gardens.

Whether we like it or not, we are now reversing this policy, only with six times the population and a hundred times the energy needs. The government’s craven decision this week to placate the green pressure groups by agreeing a unilateral tough new carbon rationing target of 50% for 2027 -- they wanted to water it down, but were frightened of being taken to judicial review by Greenpeace -- condemns Britain to ruining yet more of its landscape. Remember it takes a wind farm the size of Greater London to generate as much electricity as a single coal power station – on a windy day (on other days we will have to do without). Or the felling of a forest twice the size of Cumbria every year."

"The RO (Renewable Obligation) already adds an astonishing £1.1 billion to the electricity bills of Britons per year already; by 2020 it could be £8 billion, or 30% extra. Unlike the poll tax, which was merely not progressive, this tax is highly regressive. It robs the poor – including those too poor to pay income tax – and hands much of the money to the landed rich in three different ways: higher wheat and wood prices; rents for wind farms; and the iniquitous `feed-in tariff’, by which the person who produces electricity by `renewable’ means is paid three times the market rate. As a landowner myself I refuse to join the feeding frenzy of the last two, but I cannot avoid the first."

"Driving up the price of electricity this way destroys jobs. One Spanish study suggests 2.2 jobs lost for each one created by green energy schemes, another Scottish one finds 3.7. If you don’t believe the numbers, ask a local widget maker if the size of his electricity bill affects his ability to take people on or lay them off."

" Does any of this actually lower carbon emissions? With the single exception of hydro, not one of the renewables has managed to save an ounce of carbon. Wind is so unreliable that coal-fired stations have to be kept spinning in the background (powering them up and down wastes even more energy and carbon). Wheat for ethanol is grown using tractors running on almost the same amount of diesel – and is anyway full of carbon itself (infra-red rays do not distinguish between carbon atoms from plants that grew yesterday and from plants that grew 300 million years ago). Solar will always be a statistical asterisk in cloudy Britain.

As for wood, consider the effect of a simple rule passed by the London borough of Merton in 2003 and slavishly emulated by planners all over the country. The Merton rule requires all developers who build a building of more than 1,000 square metres to generate 10% of energy `renewably’ on site. The effect has been to make it worth my while to thin my woods in Northumberland for the first time in decades.

How so? Faced with the need to find an energy source sufficiently dense to fit on site, developers have turned en masse to wood (or biomass as they prefer to call it). This has led to convoys of diesel lorries chugging through the streets of London to deliver wood to buildings – how very thirteenth century! Delivering, drying and burning this wood produces far more carbon dioxide than delivering gas would."

"According to one estimate, Britain is producing about six million extra tonnes of carbon dioxide each year as a result of redirecting its wood supply from current use by the wood-panel and other related industries into energy supply."

Shale gas emissions are lower

See this post by Matt Ridley of "The Rational Optimist."
"It turns out I was right to be sceptical about the Howarth study claiming that shale gas production produces more greenhouse gases than coal.

Ther's now a definitive study here thoroughly debunking Howarth and showing that shale gas results in 54% less GHG production. Howarth claimed that the gap between gas produced and gas sold indicated leakage. Instead it indicates usage in powering equipment.

This is Howarth's second big mistake. His first last year was to assume that coal mining produced no methane.

Using a 100-year global warming potential and assuming an average power plant, unconventional gas results in 54% less lifecycle greenhouse gas emissions than coal does. Even using a 20-year global warming potential, as Howarth controversially argues one should, the savings from substituting unconventional gas for coal are almost 50%. The NETL study acknowledges – and explores – a range of uncertainties. But it finds nothing close to the problems that Howarth claims."

Monday, May 23, 2011

More On The Danger Of Higher Marginal Tax Rates

See Megan McArdle and Kevin Drum on the Impact of Marginal Tax Rates by Reihan Salam of The National Review. Excerpt:
"In particular, they finds that 32% of a labor tax cut, and 51% of a capital tax cut are self-financing, in the sense that lowering those taxes raises economy activity, which itself generates additional taxes, and partially offsets lower tax revenue.

By the same token, higher taxes – particularly higher capital gains taxes – will reduce economic activity, especially in the long run. This will result in a substantial amount of foregone income, as a result of the “deadweight loss” incurred through taxation. As the tax rate approaches the top of the Laffer curve, this loss grows higher and higher.

In other words, future tax hikes, which are necessary to pay for the projected path of spending, will come at a high cost. Even if they are sufficient to balance the budget and eliminate the deficit, and even if higher tax rates still result in more revenue, high taxes will still result in less output for all Americans."

David Friedman On Why Free Markets Work Better Than Government Bureaucracies

See Learning from Evidence: Not.

"This morning I listened to a commencement address by a former judge. It struck me as an interesting example of the failure to modify beliefs on the basis of evidence.

The speaker began by saying that every American had a legal right to health care, education, financial aid. He took for granted, and obviously approved of, one of the major changes in America over the course of the past century, the shift from a system where almost all goods and services were provided by voluntary transactions on the marketplace to one where many are provided by government, paid for by taxes, allocated by government bureaucracy.

Much of his talk dealt with his own experience with the latter system, the result of his and his wife taking responsibility for, eventually adopting, a young relative with severe autism and related developmental disabilities. Under existing law, she was entitled to a wide range of medical and educational services. When he tried to obtain those services for her, however, he found himself involved in a tangled web of bureaucracy, detailed and inconsistent rules, phone conversations with a computer on the other end. He suspected that insofar as he finally succeeded in working his way through that tangle to a successful outcome, it was at least in part because a federal judge was better able to get attention and favorable treatment from government bureaucrats than most other people would have been. He concluded that the young law graduates to whom he was speaking should devote their lives, at least in part, to seeing that poor Americans got from the government the things to which they were legally entitled.

It apparently did not occur to him that the contrast between his experience in getting services provided by government and his experience buying groceries on the private market, where you simply pay your money and walk out with what you have bought, might say something about the relative workability of the two systems for providing goods and services. Nor that if a system introduced in large part on the theory that it would even out differences between rich and poor turned out to serve higher status people much better than lower status people, perhaps the theory was wrong, perhaps government production and distribution was creating, rather than eliminating, inequality. When a judge goes to the grocery store, he gets the same groceries at the same price as anyone else.

His conclusion was that these were real problems with the existing system, and the solution was to make that system work better. Institutions which, on the evidence of his own first-hand experience, were still functioning badly seventy or eighty years after they were first designed and built, were to be reformed by the wave of a magic wand with the aid of lots of well intentioned young lawyers inspired by a commencement address.

The experience reminded me of a passage by George Orwell that I recently read. Orwell spent his final months in a private hospital, attempting to recover from the tuberculosis that ultimately killed him. Commenting on the difference between that and the (presumably government supported, although he does not say) hospital he had been in earlier, he wrote:

"The routine here ... is quite different from that at Hairmyres Hospital. Although everyone at Hairmyres was most kind & considerate to me—quite astonishingly so, indeed—one cannot help feeling at every moment the difference in the texture of life when one is paying one's own keep."

Orwell was a convinced socialist. One cannot tell from the comment whether it occurred to him that he was observing one of the advantages of the free market.

That observation would not, of course, have been a sufficient reason for him to have changed his views; he could reasonably enough have pointed out that a few years earlier, before the success of Animal Farm, he could not have afforded the private hospital, and the public one was considerably better than nothing. But one would like to know whether he thought about the question, whether, if he had lived a few years longer and considered the implications of a variety of observed contradictions between his socialist beliefs and his experiences, his beliefs might have changed.

Unfortunately, he didn't."

To Maximize Wealth, Government Should Stick To Core Functions

See "On the Relevance of Freedom and Entitlement in Development" from Division of Labor and On the Relevance of Freedom and Entitlement in Development: New Empirical Evidence (1975–2007) by Jean-Pierre Chauffour, Lead Economist, International Trade Department, World Bank.
"The World Bank's Jean-Pierre Chauffour has a nifty new working paper "On the Relevance of Freedom and Entitlement in Development".

Reviewing the economic performance—good and bad— of more than 100 countries over the past 30 years, this paper finds new empirical evidence supporting the idea that economic freedom and civil and political liberties are the root causes of why some countries achieve and sustain better economic outcomes. For instance, a one unit change in the initial level of economic freedom between two countries (on a scale of 1 to 10) is associated with an almost 1 percentage point differential in their average long-run economic growth rates. In the case of civil and political liberties, the long-term effect is also positive and significant with a differential of 0.3 percentage point. In addition to the initial conditions, the expansion of freedom conditions over time (economic, civil, and political) also positively influences long-run economic growth. In contrast, no evidence was found that the initial level of entitlement rights or their change over time had any significant effects on long-term per capita income, except for a negative effect in some specifications of the model. These results tend to support earlier findings that beyond core functions of government responsibility—including the protection of liberty itself—the expansion of the state to provide for various entitlements, including so-called economic, social, and cultural rights, may not make people richer in the long run and may even make them poorer."

China, India Seem To Be Losing Their Cost Advantage

See Labor Arbitrage is Disappearing for Outsourcing Manufacturing to China and Services to India by Mark Perry of Carpe Diem.
"I've reported recently (see posts here and here) about the Boston Consulting Group's prediction of a pending manufacturing renaissance in America because the labor arbitrage gains from manufacturing products in China are starting to shrink and will eventually disappear. Cost advantages for manufacturing are starting to shift back to America because of rising wages in China, along with rising prices there in general and an appreciating currency.

A story in today's Washington Post is predicting the same erosion of labor arbitrage for outsourcing service-sector jobs to India:

"India’s outsourcing giants — faced with rising wages at home — have looked for growth opportunities in the United States. But with Washington crimping visas for visiting Indian workers, some companies such as Aegis are slowly hiring workers in North America, where their largest corporate customers are based. In this evolution, outsourcing has come home.

Tata Consultancy Services, for example, is ramping up its North American presence in major deals with Citibank, Dow Chemical and Hilton Worldwide. It plans to hire more than 1,000 Americans in 2011 and to base 10,000 of its 185,000 global employees in the country."

MP: Wages are increasing 11% per year in China and by 10% in India, which means that labor costs there are doubling every 7 or 8 years if those wage increases continue. Wages in the U.S. are rising by only 1.9% annually and at that rate it would take 37 years before wages would double here. At some point, the labor arbitrage advantages for China and India have to disappear. BCG predicts that “Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America.""

Sunday, May 22, 2011

John Stossel On Fracking, Natural Gas And The Environment

See Plentiful Fuel: The facts about fracking.
"I just learned I'm going to save money! My apartment building in New York will switch from heating oil to cleaner natural gas. Gas is much cheaper than oil now because energy companies found ways to get more of it out of the ground.

Even more astounding is that by using this technique, America won't run out of natural gas for 100 years or more! Time to break out the Champagne?

Not so fast, say environmentalists. To get gas out of the ground, companies use pressurized chemicals to blow up rock. It's called hydraulic fracturing—fracking. An Oscar-nominated movie, Gasland, says that fracking contaminates our water supply with chemicals. In the movie, some homeowners set their tap water on fire.

That got my attention. I've seen Michael Moore's movies and environmental documentaries, which I thought were nonsense. But Gasland is more convincing. I thought it merited discussion on my Fox Business show last week.

Unfortunately, Gasland producer Josh Fox turned down my invitation, as did representatives of the big national environmental groups that oppose fracking. I think I know why. The movie and the left's arguments against fracking are deceitful.

First, the movie implies that nasty chemicals get into the water table. That seems logical, since they shoot them down into gas wells. But it turns out that the shale gas wells are thousands of feet below the water table. Do the chemicals flow up—against gravity?

But then what's the explanation for the most dramatic part of the movie: tap water so laden with gas that people can set it on fire?

It turns out that has little to do with fracking. In many parts of America, there is enough methane in the ground to leak into people's well water. The best fire scene in the movie was shot in Colorado, where the filmmaker is in the kitchen of a man who lights his faucet. But Colorado investigators went to that man's house, checked out his well, and found that fracking had nothing to do with his water catching fire. His well-digger had drilled into a naturally occurring methane pocket.

"There are lots of ... naturally causing effects that occur," says Matthew Brouillette of the Commonwealth Foundation, a think tank in Pennsylvania—where much of the film was shot. "It's really no surprise. We find that 40 percent of the wells in Pennsylvania have some sort of naturally occurring methane gas and other types of things."
John Hanger, former director of Pennsylvania's Department of Environmental Protection, who also appeared in the film, is less sanguine:

"Gas can migrate ... from poor drilling into people's private water wells. ... We have had gas move from poorly done gas drilling through the ground and reach people's water wells. So there is a need for oversight ... gas does have some impacts. It is not perfectly clean. But compared to coal and oil, which are more dirty fossil fuels, natural gas can be produced and consumed in a manner that is cleaner than coal."

Filmmaker Josh Fox concedes that the states concluded that the fire wasn't caused by fracking, but he says the government regulators collude with industry, or don't use good science. His movie portrays Hanger as an indifferent bureaucrat. Hanger says the movie is just inaccurate. "Josh Fox has a mission. ... He is trying to shut down the gas-drilling industry."

Frankly, I'm skeptical of all of them: lefty moviemakers who smear companies, companies with economic interests at stake, and the regulators, who are often cozy with industry and lack essential knowledge. The surest environmental protectors are property rights—and courts that assign liability to polluters.

But hydraulic fracturing is a wonderful thing. It's not new. Companies have done it for 60 years, but now they've found ways to get even more gas out of the ground. That's the reason gas is getting cheaper and panicky politicians no longer rant about America "running out of fuel."

Natural gas is not risk-free, but no energy source is. Perfect is not one of the choices."

Cutting Spending Is The Way To Sovle A Budget Crisis

See Most Successful Fiscal Rescue Plans Around the World Have Cut, Cut, Cut By Bridget Johnson of AEI.
"At today’s debt-crisis event with Senator Pat Toomey, AEI President Arthur Brooks referenced a fascinating study conducted by economic-policy heavyweights Kevin Hassett and Andrew Biggs in which they scrutinized the fiscal consolidations of 21 countries over the past 37 years. Published last December, the study serves as an especially pertinent tool in weighing the best options to solve the debt crisis and put our country back on sound fiscal footing, so it’s worth outlining again.

The keys of what they found:

— The typical consolidation that failed relied on 47 percent spending cuts and 53 percent tax increases.

— The typical consolidation that succeeded consisted of 85 percent spending cuts and 15 percent tax increases.

— The “most wildly successful” efforts by nations, as Brooks put it, went into tax cut territory: Finland in the late 1990s, pointed out by Biggs and Hassett as a model of successful consolidation, had 108 percent spending cuts along with modest tax cuts.

— In the third-rail department, they found that the typical successful consolidation allocated 38 percent of spending cuts to entitlements. In the howling unions department, they found that 25 percent of the cuts were in government salaries.

“If your problem is government spending, the solution is less government spending,” Brooks said today. Arguments against such cuts “generally are not practical,” he added, but instead are based on moral reasoning centered on notions of “fairness.”"

Government Role in Causing Financial Crisis Much Bigger than Thought

Great post by Hans Bader of the Competitive Enterprise Institute Blog.
"Analysts who once downplayed the government’s role in causing the financial crisis now have changed their tune, concluding that government regulations that promoted risky loans played a major role in spawning the crisis. In a May 3 note to clients, Michael Cembalest, the Chief Investment Officer of JP Morgan Private Bank, revised his 2009 account of what caused the financial crisis. Under the heading, “Retractions – the primary catalyst for the US housing crisis,” he wrote:

“US Agencies played a larger role in the housing crisis than we first reported. In January 2009, I wrote that the housing crisis was mostly a consequence of the private sector… However, over the last 2 years, analysts have dissected the housing crisis in greater detail. What emerges from new research is something quite different: government agencies now look to have guaranteed, originated or underwritten 60% of all “non-traditional” mortgages, which totaled $4.6 trillion in June 2008. What’s more, this research asserts that housing policies instituted in the early 1990s were explicitly designed to require US Agencies to make much riskier loans, with the ultimate goal of pushing private sector banks to adopt the same standards.” (emphasis in original)

Clinton-era affordable housing mandates were also a key reason for the risky lending. The Washington Examiner cited a recent study by Peter Wallison, who had prophetically warned about risky financial practices for years, finding that two-thirds of all bad mortgages were either “bought by government agencies or required to be bought by private companies under government pressure.”

As the economist Thomas Sowell noted, liberal lawmakers and others ignored warnings about the dangers of these mandates:

“It was liberal Democrats, again led by Dodd and Frank, who for years pushed for Fannie Mae and Freddie Mac to go even further in promoting subprime mortgage loans, which are at the heart of today’s financial crisis. Alan Greenspan warned them four years ago. So did the Chairman of the Council of Economic Advisers . . . . the facts show that it was the government that pressured financial institutions in general to lend to subprime borrowers, with such things as the Community Reinvestment Act and, later, threats of legal action by then Attorney General Janet Reno if the feds did not like the statistics on who was getting loans and who wasn’t.”

The massive harm caused by these affordable-housing mandates is discussed in a study by Ed Pinto, a former executive of Fannie Mae, a government-sponsored mortgage giant that later had to be bailed out at a cost of hundreds of billions of dollars, partly as a result of such mandates. (Pinto was a Fannie Mae executive well before its fortunes deteriorated.)

Banks and mortgage companies have long been under pressure from lawmakers and regulators to give loans to people with bad credit, in order to provide “affordable housing” and promote “diversity.” That played a key role in triggering the mortgage crisis, judging from a story in the New York Times. For example, “a high-ranking Democrat telephoned executives and screamed at them to purchase more loans from low-income borrowers, according to a Congressional source.” The executives of government-backed mortgage giants Fannie Mae and Freddie Mac “eventually yielded to those pressures, effectively wagering that if things got too bad, the government would bail them out.”

The Obama administration is now stepping up pressure on banks to make more risky loans, as I explain at the Washington Examiner, including setting up a Justice Department task force to sue banks that refuse to make such loans."

Saturday, May 21, 2011

Waste At HUD

See HUD’s ‘Wastelands' by Tad DeHaven of Cato.
"A year-long investigation by the Washington Post into the Department of Housing & Urban Development’s HOME affordable housing program uncovered systemic waste, fraud, and abuse. The tale is yet another example of why the federal government should extricate itself from housing policy and allow the states to chart their own course.

The piece is lengthy and should be read by interested readers in its entirety, so I’ll just excerpt the Post’s findings:

•Local housing agencies have doled out millions to troubled developers, including novice builders, fledgling nonprofits and groups accused of fraud or delivering shoddy work.
•Checks were cut even when projects were still on the drawing boards, without land, financing or permits to move forward. In at least 55 cases, developers drew HUD money but left behind only barren lots.
•Overall, nearly one in seven projects shows signs of significant delay. Time and again, housing agencies failed to cancel bad deals or alert HUD when projects foundered.
•HUD has known about the problems for years but still imposes few requirements on local housing agencies and relies on a data system that makes it difficult to determine which developments are stalled.
•Even when HUD learns of a botched deal, federal law does not give the agency the authority to demand repayment. HUD can ask local authorities to voluntarily repay, but the agency was unable to say how much money has been returned.
In a Cato essay on HUD community development programs, I cite similar examples of HOME funds being wasted. And an essay on HUD scandals shows that mismanagement and corruption in federal housing programs is hardly new. Indeed, a follow-up story from the Post that focuses on related affordable housing shenanigans in the DC area explains that housing speculators who bilked HUD in the 1980s are involved in the current troubles:

All three were convicted in a scheme in the 1980s that involved getting straw buyers to purchase properties in the District at inflated prices using fraudulent appraisals. HUD backed the loans and ultimately lost millions of dollars. The Post called it the largest real estate fraud of its kind in the city’s history; about 30 people were convicted.

The response from Congress to the Post’s expose isn’t any more surprising than the findings: it’s time for a probe! This is where members of Congress point the finger at everybody else except themselves, promise to “fix” the problems, and pay lip-service to the concerns of taxpayers.

From the statement issued by Senate Banking Committee chairman Tim Johnson (D-SD) and ranking member Richard Shelby (R-AL):

We are deeply concerned by these reports, particularly at a time when so many Americans are in need of affordable housing. Many communities across the country have successfully used HUD programs to create vital housing opportunities for their citizens. However, the Department of Housing and Urban Development, like any government agency, has a duty to safeguard taxpayer funds. The Committee takes its oversight responsibilities very seriously, and we plan to get to the bottom of this issue.

Republicans are having a difficult time naming federal programs to abolish, while Democrats would have us believe that only the federal government can take care of the “less fortunate.” For Republicans who are serious about spending cuts, HUD’s latest black eye offers an opportunity to challenge the existence of federal housing programs. For Democrats, well, perhaps one or two will start to question the sanctity of these programs."

Some Medical Wait Times In England

See Coming Soon to America: Increased Wait Times? by Mark Perry of "Carpe Diem."
"GUARDIAN -- "Doctors in the U.K. are blaming financial pressures on the National Health Service (NHS) for an increase in the number of patients who are not being treated within the 18 weeks that the government recommends. New NHS performance data reveal that the number of people in England who are being forced to wait more than 18 weeks has risen by 26% in the last year, while the number who had to wait longer than six months has shot up by 43%.

In March, 34,639 people, or 11% of the total, waited more than that time to receive inpatient treatment, compared with 27,534, or 8.3%, in March 2010 – an increase of 26% – Department of Health statistics show. Similarly, in March this year some 11,243 patients who underwent treatment had waited for more than six months, compared with 7,841 in the same month in 2010 – a 43% rise.""

Thursday, May 12, 2011

GM Might Still Be Cost The Tax Payers Money

See GM's Profits are Still a Huge Net Loss For Taxpayers by Megan McArdle. Excerpt:

"About $40 billion of the money that the government gave GM was converted to GM common stock. In the November IPO, the government made about $20 billion selling 478 million shares, leaving us with around $20 billion more to recoup on our remaining 26.5% stake in the company. That means we need to sell the approximately 365 million shares we have left at about $55 per share, net of underwriting and legal costs. At the current share price of $31, we'd be left with a loss somewhere north of $9 billion--plus the $1 billion we gave the "old GM" to wind things up, and the $2.1 billion worth of GM preferred stock we own. Since I don't know the details of the preferred transaction, I'll leave that out, which gives us a loss after expenses of $10 to $11 billion on our investment in GM.

But of course, that assumes that the current share price holds. It could well fall over the next few months--or when the government dumps an enormous new supply of GM stock on a market that isn't showing all that much enthusiasm for the product.

It also leaves out a very important extra: the $14 billion gift that the government seems to have handed the company, in the form of a special tax break (quoting a Chris Isidore story at CNN):

"That break will reduce GM's U.S. tax bill by an estimated $14 billion in the coming years, and its global taxes by close to $19 billion, according to a company filing.

Companies typically get a break on future taxes because of past losses. But in most cases they lose that tax break during bankruptcy, because the losses are offset by the "income" the company receives from shedding its debt.

Since the company shed $30 billion in debt during bankruptcy, it should have wiped out most of the tax break. GM even warned it expected to lose those tax breaks shortly before filing for Chapter 11 protection.

But somehow, that never happened, and the automaker was able to keep most of its tax breaks, essentially receiving a $14 billion "gift" from the government.

While it's unclear why GM was allowed to carry over its losses, some experts insist that GM got preferential treatment."

"What lesson, exactly, are we supposed to learn from this "success"? What question did it answer? "Can the government keep companies operating if it is willing to give them a virtually interest free loan of $50 billion, and a tax-free gift of $20 billion or so?" I don't think that this was really in dispute. When all is said and done, we will probably have given them a sum equal to its 2007 market cap and roughly four times GM's 2008 market capitalization.

No, the question was not whether GM could make a profit after a bankruptcy that stiffed most of its creditors and shed the most grotesque burdens of its legacy costs, nor whether giving companies money will make them more profitable. The question is whether it was worth it to the taxpayer to burn $10-20 billion in order to give the company another shot at life. To put that in perspective, GM had about 75,000 hourly workers before the bankruptcy. We could have given each of them a cool $250,000 and still come out well ahead compared to the ultimate cost of the bailout including the tax breaks--and over $100,000 a piece if we just wanted to break even against our losses on the common stock.

And if we'd done that, we'd have saved ourselves in other ways. We would have reduced some of the overcapacity that plagues the global industry. We would not have seen the government throwing its weight into a bankruptcy proceeding in order to redistribute money from creditors to pensioners, which isn't a good precedent."

Some Problems With Romneycare

See Health Care Solutions: Market (Same-day House Calls) vs. Government (36 Days to See Family Doc) by Mark Perry of "Carpe Diem." Excerpts:

"...consider the situation in Massachusetts, after five years of government-managed "Romneycare," which is frequently mentioned as a model for how "Obamacare" will operate nationally. According to the recently released study "2011 Study of Patient Access to Health Care" from the Massachusetts Medical Society (press release here, full report here):

a. "Access to primary care physicians is becoming more restricted, as more than half of primary care practices – 51% of internists and 53% of family physicians – are not accepting new patients. These figures remain close to those of last year’s survey which showed 49% of internists and 54% of family physicians not accepting new patients.

Medical Society officials say the percentage of practices closed to new patients reflects the persistent shortages of primary care physicians in the Commonwealth. For five consecutive years, the Medical Society has recorded critical and severe shortages of both internists and family physicians.

b. Long wait times continue for the primary care physicians of internal medicine and family medicine who are accepting new patients. The average wait time for an appointment for internal medicine is 48 days, five days shorter than last year, and the average wait time for family medicine is 36 days, up 7 days. Internal medicine was the only specialty reporting a shorter wait time, yet at 48 days it has the longest wait time of any of the seven specialties surveyed.

All four specialty care categories reported longer wait times: gastroenterologists, 43 days, up from 36 days; obstetricians and gynecologists, 41 days, up from 34 days; orthopedic surgeons, 26 days, up from 17 days; and cardiology, 28 days, up from 26 days.""

The Oil Industry's Profit Margin Is Not Unusual

See Oil Industry Profit Margin Ranks #114 out 215 by Mark Perry of Carpe Diem. Excerpt:

"The top five oil companies (Chevron, Shell, BP, ExxonMobil and BP) are part of the "Major Integrated Oil and Gas" industry, and the CEOs of the "Big Five" are appearing today before the Senate Committee on Finance, to get grilled about the "taxpayer subsidies" and "tax breaks" they receive, explain why they deserve to earn record "windfall" profits, and explain the role they play in higher oil and gas prices.

... the Integrated Oil and Gas industry made an average profit of 6.2 cents per dollar of sales, which ranks #114 out of 215 industries by profit margin, and puts oil companies right in the middle of industries by profitability."

Wednesday, May 11, 2011

Uninsured Health Care Costs Are Low

See HHS Plays Chicken Little — Again by Michael F. Cannon of Cato. Excerpt:

"“Uncompensated care” for the uninsured accounts for just 2.8 percent of health care spending. To put that in perspective, 30 percent of Medicare spending is pure waste, according to the Dartmouth Atlas. Moreover, studies show that the uninsured who do pay their bills pay so much more than private insurance does that they more than make up for the uninsured who don’t pay their bills. That is, total uncompensated care may be negative."

Mexican Trucks Are Safe

See Let Them [Safety Certified Mexican] Truckers Roll, 10-4” by Daniel Griswold of Cato. Excerpt:

"Despite the hundreds of complaints already posted in the Federal Register, the Mexican trucking issue has never been about safety. The proposed pilot program would require Mexican trucks entering the United States to meet all federal regulations on driver qualifications, truck safety, emissions, fuel taxes, immigration and insurance.

Experience from the previous pilot program in 2007-09 demonstrated that Mexican trucks and their drivers are fully capable of complying with all U.S. safety requirements.

An August 2009 report from the Department of Transportation’s Inspector General found that only 1.2 percent of Mexican drivers that were inspected were placed out of service for violations, compared with nearly 7 percent of U.S. drivers who were inspected. In February 2010, the Congressional Research Service reported that recent data provided by the Federal Motor Carrier Safety Administration found that “Mexican trucks are as safe as U.S. trucks and that the drivers are generally safer than U.S. drivers.” What the Teamsters and their congressional allies really object to is that these trucks will be driven by Mexicans."

Tuesday, May 10, 2011

New Study Questions Justification For Quantitative Easing

See this post from John Taylor at "Economics One."

"Proponents of Quantitative Easing frequently cite—inappropriately in my view—the Taylor Rule as support, saying that the rule calls for a federal funds rate as low as minus 6 percent, well below the zero bound. But in various pieces over the past year, such as Taylor Rule Does Not Say Minus 6 Percent, I have argued the contrary. If you simply plug in current inflation and output (gap) you will find that the interest rate is above zero with the policy rule coefficients I originally derived. But QE II proponents change the coefficients. Frequently they use a higher coefficient on output (around 1.0) rather than the lower coefficient (0.5) which I originally recommended. The higher coefficient on output gives a much lower interest rate now and is thus used by proponents of quantitative easing.

A new paper by Alex Nikolsko-Rzhevskyy and David Papell provides important evidence relevant to this debate. They show that, if history is any guide, the higher coefficient would lead to inferior economic performance compared with the original coefficient I recommended.

First, they look at the 1970s when monetary policy was too easy: in much of this period the interest rate was too low creating high inflation and eventually high unemployment. They show that the higher coefficient on output would have perpetuated the bad policy while the lower coefficient would have prevented it.

Second, they look at years in the 1990s when monetary policy is widely viewed as good, helping to create a long expansion. Here they show that the higher coefficient would have prevented this good policy. Actual policy was more consistent with the lower coefficient which I had proposed.

In sum, they find no reason to use a higher coefficient, and that the lower coefficient works better. David Papell’s guest blog yesterday on Econbrowser nicely puts these new results into the context of today’s policy debate and provides more details. He emphasizes that his paper with Nikolsko-Rzhevskyy does not endeavor to estimate the impact of QEII, but rather shows that the typical policy rule rationale for this discretionary action is flawed. In my view it is an example of “discretion in policy rule’s clothing.”"

Some Empirical Evidence In Support Of Creative Destruction Being Good

See Why Is Failure a Sign of a Healthy Economy? A Guest Post by Tim Harford at Freakonomics. Excerpt:

"A more rigorous attempt to look at this question, a study by Kathy Fogel, Randall Morck, and Bernard Yeung, found statistical evidence that economies with more churn in the corporate sector also had faster economic growth. The relationship even seems causal: churn today is correlated with fast economic growth tomorrow. The real benefit of this creative destruction, say Fogel and her colleagues, is not the appearance of “rising stars” but the disappearance of old, inefficient companies. Failure is not only common and unpredictable, it’s healthy."

Earlier he mentioned:

"In 1982, the management consultants Tom Peters and Robert Waterman published In Search of Excellence, a colossally popular business title. The book aimed to learn lessons from the world’s best companies, and Peters and Waterman produced a list of 43. But just a couple of years after In Search of Excellence had been published, BusinessWeek ran a cover story with the simple title: “Oops! Who’s Excellent Now?” Almost a third of the companies singled out for praise by Peters and Waterman were in financial trouble."

Monday, May 9, 2011

Francis Fukuyama Gets Hayek Wrong, From Don Boudreaux, Part 2

See “I Want Plans by the Many, Not by the Few”.

"Here’s a second response to Fukuyama’s review of Hayek’s Constitution of Liberty:

Reviewing F.A. Hayek’s The Constitution of Liberty: The Definitive Edition, Francis Fukuyama writes that “there is a deep contradiction in Hayek’s thought. His great insight is that individual human beings muddle along, making progress by planning, experimenting, trying, failing and trying again. They never have as much clarity about the future as they think they do. But Hayek somehow knows with great certainty that when governments, as opposed to individuals, engage in a similar process of innovation and discovery, they will fail” (“Friedrich A. Hayek, Big-Government Skeptic,” May 8).

Hayek was guilty of no such contradiction. Mr. Fukuyama wrongly convicts Hayek on this count by mistaking government planning and “muddling along” as being “a similar process of innovation and discovery” that occurs so successfully in the private markets that Hayek championed. The two processes aren’t remotely similar.

Plans in private markets are decentralized; government plans are centralized. Private-market planners risk their own money; government planners risk other-people’s money. Plans in private markets face constant competition from rival private plans; government plans are monopolies which face no such competition. This competition prevents plans in private markets from growing in scope to outstrip the knowledge and capacities of persons who make and carry them out. No such competitive check constrains the scope of government plans. Finally, plans in private markets – unlike government-made plans – often cross-pollinate with each other to inspire the creation and discovery of entirely new possibilities that would remain unknown without such decentralized planning within competitive markets. Government ‘plans’ almost inevitably suppress such possibilities of cross-pollination, creation, and discovery.

Donald J. Boudreaux

Or, more eloquently, as Hayek raps to Keynes in “Fight of the Century“:

I don’t want to do nothing, there’s plenty to do
The question I ponder is who plans for whom?
Do I plan for myself or leave it to you?
I want plans by the many, not by the few.

Finally, my friend Tibor Machan nicely challenges Fukuyama’s pronouncements about Hayek’s system of ethics."

Francis Fukuyama Gets Hayek Wrong, From Don Boudreaux, Part 1

See Not the End of Hayek.

"Here’s a letter to the New York Times Book Review:

Reviewing on the 112th anniversary of the birth of F.A. Hayek that economist’s The Constitution of Liberty: The Definitive Edition, Francis Fukuyama gets much right but also much wrong (“Friedrich A. Hayek, Big-Government Skeptic,” May 8). Two errors warrant correction.

First, Hayek never argued that (in Mr. Fukuyama’s words) “the smallest move toward the expansion of government would lead to a cascade of bad consequences that would result in full-blown authoritarian socialism.” (Mr. Fukuyama should have detected the absurdity of this interpretation of Hayek when Mr. Fukuyama himself noted four paragraphs earlier that Hayek didn’t object to government provision of health insurance.) Rather, Hayek’s famous “road to serfdom” is paved by government efforts to protect everyone against any and all disappointments that might arise as a result of economic change and growth.

Second, it was no “deep contradiction” for Hayek to argue that we cannot predict the future and for him to predict that government efforts to centrally plan the economy will fail. Precisely because the planning and “muddling through” done by individuals pursuing their own ends in competitive markets are subject to ceaseless, detailed feed-back from other individuals pursuing their own ends – and because no individual plan in decentralized markets requires its maker to know the goo-gah-gillions of details that a central planner must know in order to succeed – it was perfectly consistent of Hayek to predict the failure of central plans made by officials who are oblivious to the impossibility of gathering and processing all the knowledge that must be gathered and processed centrally for central plans to work.

Donald J. Boudreaux

Other flaws mar Fukuyama’s interpretation of Hayek. For example, Fuyuyama gets the title of Hayek’s famous 1945 article wrong (forgivable), and (less forgivably) singles out Joseph Schumpeter as the chief proponent of the mid-20th-century belief among many economists that centrally planned socialism can work. (Oskar Lange and Abba Lerner, among others, were far more insistent proponents of this view than was Schumpeter. Indeed, Thomas McGraw argues – not entirely convincingly, I concede – that Schumpeter intended his claim that “of course” socialism can work to be a joke.)"

Francis Fukuyama Gets Hayek Wrong, From Bill Easterly

See Saving Private Hayek. Here it is:

"F.A. Hayek continues to be the most mis-characterized economist of all time. As if Glenn Beck were not doing enough damage, now even someone I greatly respect — Frank Fukuyama– has gotten Hayek wrong yet again. In a review of a new edition of the Constitution of Liberty in the NYT book review, Fukuyama says at the end:

"In the end, there is a deep contradiction in Hayek’s thought. His great insight is that individual human beings muddle along, making progress by planning, experimenting, trying, failing and trying again. They never have as much clarity about the future as they think they do. But Hayek somehow knows with great certainty that when governments, as opposed to individuals, engage in a similar process of innovation and discovery, they will fail. He insists that the dividing line between state and society must be drawn according to a strict abstract principle rather than through empirical adaptation. In so doing, he proves himself to be far more of a hubristic Cartesian than a true Hayekian."

To say Hayek’s skepticism about government was based on “great certainty” is not just wrong, it is so much the opposite of Hayek, it’s like accusing Michele Bachmann of excessive belief in the Koran.

Hayek’s view of knowledge was that it was partial and dispersed among many. The market gave individuals the incentives to apply this knowledge, and coordinated the uses of this local knowledge in a way that rewards each of us who knows best about any particular narrow area. (Frank notes this insight in an earlier paragraph, which makes the paragraph above even more puzzling.) Government usually lacks both the incentives and the coordination mechanism. In government we don’t know who knows best, so which knowledge wins the argument could often be wrong.

This does NOT imply the caricature that Hayek always opposed government action. As Fukuyama notes:

"It may, however, surprise some of Hayek’s new followers to learn that “The Constitution of Liberty” argues that the government may need to provide health insurance and even make it ­compulsory."

A government based on individual liberty will have some feedback and reward mechanisms that would produce better government outcomes in such areas than under tyrannical outcomes, and will make possible some kinds of government innovation and discovery that Fukuyama likes. But the political feedback mechanisms even under liberty (like majority voting, protesting, freedom of speech, or lobbying) are much cruder and less likely to align individual and social payoffs than the market feedback mechanisms, so one should be cautious about the scope of activities in which government programs will be effective. One should be particularly wary of large-scale government plans that require a type of centralized knowledge that Hayek argued forcefully does not exist (down with Robert Moses, up with Jane Jacobs!)

To sum up, Hayek’s skepticism about government was NOT based on his certainty, as Fukuyama would have it, but on his awareness of his ignorance. (and everyone else’s)

Us public intellectuals who are communicating ideas of Hayek to a broader public are NOT fond of ideas that highlight our own ignorance, so one prediction that can be made with a higher degree of certainty than usual is that Hayek will continue to be misunderstood."

Sunday, May 8, 2011

State Income Taxes Can Be A Burden

See The 'Anti-Christie': What Connecticut Governor Dannel Malloy's tax hike plan tells us about liberal governance, WSJ, 4-30-11. Excerpts:

"For anyone who thinks income tax hikes are the financial salvation of states, Connecticut's history is instructive. Governor Lowell Weicker sold an income tax in 1991 as a one-time reform that would keep sales and property taxes low. Instead, a state that paid its bills for 200 years without an income tax and had become one of the richest states in per capita income is now raising income taxes for the fourth time in 20 years.

This is what always happens when a state introduces an income tax: A gusher of new revenue leads to higher spending, which leads the politicians to demand higher rates; rinse the taxpayers and repeat."

"What started in Connecticut as a 4.5% top marginal rate is now 6.5%, and yet the state is still running a $3.5 billion deficit. As the nearby table shows, state spending growth has far exceeded gains in median income since the income tax was introduced. Spending growth also roughly doubled the increase in population plus inflation (about 72%) over the period."

More Evidence Showing That Vouchers Are A Good Idea

See The Evidence Is In: School Vouchers Work: A study published last year found that D.C. voucher recipients had graduation rates of 91%. That's significantly higher than the public school average of 56% by JASON L. RILEY, WSJ, 5-3-11. Excerpts:

"...a federal study showing that voucher recipients, who number more than 3,300, made gains in reading scores and didn't decline in math." (a program in DC)

"In a study published last year, Patrick Wolf of the University of Arkansas found that voucher recipients had graduation rates of 91%. That's significantly higher than the D.C. public school average (56%) and the graduation rate for students who applied for a D.C. voucher but didn't win the lottery (70%). In testimony before a Senate subcommittee in February, Mr. Wolf said that "we can be more than 99% confident that access to school choice through the Opportunity Scholarship Program, and not mere statistical noise, was the reason why OSP students graduated at these higher rates.""

"The positive effects of the D.C. voucher program are not unique. A recent study of Milwaukee's older and larger voucher program found that 94% of students who stayed in the program throughout high school graduated, versus just 75% of students in Milwaukee's traditional public schools. And contrary to the claim that vouchers hurt public schools, the report found that students at Milwaukee public schools "are performing at somewhat higher levels as a result of competitive pressure from the school voucher program." Thus can vouchers benefit even the children that don't receive them.

Research gathered by Greg Forster of the Foundation for Educational Choice also calls into question the White House assertion that vouchers are ineffective. In a paper released in March, he says that "every empirical study ever conducted in Milwaukee, Florida, Ohio, Texas, Maine and Vermont finds that voucher programs in those places improved public schools.""

Rich Who Want Higher Taxes Could Donate Money To Government But The Don't

See The Tax-Me-More Lobby Doesn't Pay More: The same people who say they want to pay higher taxes don't bother to contribute more voluntarily, by Stephen Moore, WSJ, 5-6-11.

"But the president is right that there is a seemingly endless number of terribly wealthy, guilt-ridden individuals who want Americans to pay more taxes.

So why don't they? There is a special fund at the Treasury Department for taxpayers who want to make "gift contributions to reduce debt held by the public." But very few do. Last year that fund and others like it raised a grand total of $300 million. That's a decimal place on Mr. Zuckerberg's net worth and pays for less than two hours worth of federal borrowing.

There are also a handful of states, including Arkansas, Massachusetts, and New Hampshire, that have set up accounts for people who want to contribute more to the public fisc, but the amount raised in these states is generally in the thousands of dollars, the equivalent of a rounding error in state budgets.

When taxpayer groups in Massachusetts won an income tax rate cut to 5.3% from 5.85% in 2001, they created an option for those opposed to the cut to file at the old rate. But according to Massachusetts tax records, each year only about 1,000 tax-me-more enthusiasts—fewer than 0.1% of the state's residents—choose the optional higher tax rate. The total raised in voluntary tax contributions for the past tax year was a pitiful $69,000, which means the average income of the donors was less than $25,000—hardly John Kerry territory. And this is arguably our most liberal state, where Mr. Obama won over 60% of the vote. So much for the irresistible liberal urge to "give back to the country."

Groups like Responsible Wealth, a network of more than 700 individuals in the top 5% of income in the U.S., have raised millions of dollars in contributions from their "patriotic members," arguing for the need for more income and estate taxes to balance the budget. But that money isn't used to help balance the budget. It's used in lobbying efforts to force higher taxes on millions of other, often less wealthy Americans—which is hardly a self-sacrifice."

Saturday, May 7, 2011

Some Notorious History Of The Minimum Wage Law

See The Wages of Domestic Protectionism by Don Boudreaux at Cafe Hayek.

"Here’s a letter to the Wall Street Journal:

The National Labor Relations Board is trying to stop Boeing from moving the production of some of its jetliners from Washington state to South Carolina where less-burdensome labor-union privileges will allow Boeing to produce at lower cost (Letters, May 7). One unintended by-product of Boeing’s move, of course, would be greater competition for workers in the south and, hence, rising wages there.

Uncle Sam’s willingness to deploy brute force to prevent the movement of industries to the lower-cost American south isn’t new. The most notorious instance of this nasty habit occurred in 1938 when, to strip away the cost advantage enjoyed by their rivals in lower-wage Georgia and the Carolinas, owners of textile mills in New England successfully lobbied Congress and FDR to enact America’s first national minimum-wage statute.

Then as now, Uncle Sam – despite all his blah, blah, blah about ‘justice’ and being on the side of ‘working families’ – kept the wages of higher-paid Americans artificially high by keeping the wages of lower-paid Americans artificially low.

Donald J. Boudreaux"

Amazing U.S. Manufacturing Productivity Gains

Another great post by Mark Perry at Carpe Diem.

""We constantly hear about the “decline of U.S. manufacturing” and how America “doesn’t make anything anymore.” The reality is that the United States produces a lot of manufacturing output. In 2009, America produced more manufacturing output than the manufacturing output of the countries of Germany, Italy, France, U.K., Brazil and S. Korea combined. And one of the reasons that America has been the world’s leading manufacturing nation for more than one hundred years is the continually increasing productivity of our manufacturing workers.

The chart above helps to tell the story of rising worker productivity in America’s manufacturing sector based on new GDP (value-added by industry) data released last week by the Bureau of Economic Analysis for 2010. Between 1947 and 1980 real manufacturing output per worker doubled from $35,000 to $70,000, and since 1980 output per worker has more than doubled to almost $150,000 in 2010, a new record high. The ongoing gains in the productivity and efficiency of American manufacturing workers allow the U.S. to produce ever greater amounts of manufacturing output with fewer workers, and that’s a sign of a thriving and vital industry, not an industry in decline."

Originally posted on the Enterprise Blog.

MP: In 2010, manufacturing output per worker increased to almost $149,000 from $135,000 per worker in 2009, for a 10.3% increase. That's the largest annual increase in U.S. manufacturing worker productivity going back to at least 1947, and follows a 7.85% increase in 2009."

Negative Effects Of Rent Control In San Francisco

See Due to Rent Control, S.F. Has 31,000 Vacant Housing Units As Frustrated Landlords Give Up by Mark Perry at Carpie Diem.

"The Bay Citizen -- "In San Francisco, one of the toughest places in the country to find a place to live, more than 31,000 housing units — one of every 12 — now sit vacant, according to recently released census data. That’s the highest vacancy rate in the region, and a 70 percent increase from a decade ago."

The reason? The city's pro-tenant, outdated rent control laws that make it difficult to raise rents or evict a tenant.

"Increasingly, small-time landlords are just giving up, like one who has left two large apartments on the second and third floors of her building vacant for more than a decade, after a series of tenant difficulties. It’s just not worth the bother, or the risk, of being legally tied to a tenant for decades.

“Vacancy rates are going up because owners have decided to take their units off the market,” said Ross Mirkarimi, a progressive member of the Board of Supervisors. He attributes that response to “peaking frustrations in dealing with the range of laws that protect tenants in San Francisco that make it difficult for small property owners to thrive.”

Perversely, that is hurting the city’s renters as well, as a large percentage of the city’s housing stock is allowed to just sit vacant, driving up rents that newcomers pay for market-rate housing."

MP: As we know from basic economic theory, rent control laws are doomed to fail with many predictable unintended consequences in the long run: fewer new rental units are built or made available, many apartments are removed from the market, a decline in the quality of housing, lower rental rates for long-term tenants but much higher rents for new tenants, inefficient use of housing space, etc. In other words, rent control laws guarantee that there will be less affordable housing in the long run, not more."