Posts filed under ‘Public Policy / Political Economy’
The Recipe for Recovery Is Revealed
| Mike Sykuta |
The Obama administration has apparently revealed its recipe for economic recovery. Based on the rhetoric and policy proposals fronted thus far, the recipe appears as follows:
- Do everything possible to discourage potential high-value executives from working in troubled industries by capping executive pay in struggling industries.
- Eliminate high-powered market-based incentives for mid-level employees to perform their jobs well.
- Encourage distressed companies to renege on long-term contracts that populist politicians find offensive (or consider easy to target so as to appear they are being responsible with taxpayers’ money).
- Dole out a trillion dollars of taxpayer funds to pet projects and interest groups in the name of “economic stimulus” (enabled by the perception of “responsibility” created by their railing against the targets of #1-3).
- Ignore the economic consequences of the incentives created (or destroyed) in #1-3 as well as the fact that someone at some point will have to pay that trillion dollar bill.
- Half-bake under the heat of political pressure and serve to the masses who are starved for quick-fix solutions that only impose costs on “that other guy” or “the rich fat-cats of corporate America.”
I don’t know about you, but I think it will be interesting to see how quickly the soufflé crashes . . . though I’m not looking forward to it being force-fed.
Yet More “Shameful” Interventionist Rhetoric
| Mike Sykuta |
It’s obviously not enough for regulators from the Obama administration to march down Wall Street and mandate changes in the incentive systems of rank-and-file workers or even mandating that these “bonus” payments be rescinded (see here and here). Now banks that received bailout money are being chastised and brow-beaten from the bully pulpit of the White House for honoring long-term contracts signed years before the current “crisis.”
Today’s Wall Street Journal reports Citigroup is considering reneging on its 20-year stadium naming rights deal with the New York Mets to appease the White House and the populist press. Citi has already caved on its commitment to purchase a new corporate jet to replace two aging planes (a move that would likely have enhanced both fuel and environmental efficiency, ironically enough). Although Citi and the Mets claim the deal is still on, the attitude from Washington is remarkable in its complete disregard for the complexity of business deals, if not for the very essence of the institutional structures that support exchange (and contracting).
First, despite all the clamoring about Citi spending $400 million on naming rights while receiving $350 million in TARP funds, the reality is Citi is obligated to pay $20 million a year for 20 years. So while taxpayers are being told they are paying to name the new Mets stadium Citi Field, only a relatively small amount — certainly by bailout standards — is being spent this year. If the purpose of the bailout is to get firms through these troubled times and into a more stable future, we’re not talking about taxpayers taking on a 20-year commitment. (more…)
Raising Rivals’ Costs
| Peter Klein |
Last spring, Microsoft supported bills in the New York and Connecticut legislatures to impose strict regulations on businesses that gather personal information online for marketing purposes. The bills would hurt Microsoft, too, given that it also wants to sell advertisements based on customer behavior. But the self-inflicted wound may be worth it for the damage it causes Google.
Thanks to Jesse Walker for finding the passage in Wired’s very interesting story on the political economy of digital competition, which is just as nasty as in “old economy” industries. And don’t even get me started on Apple’s threat to go nuclear on Palm.
Stimulus Haiku
| Peter Klein |
From the great Bob Higgs:
Billions come bursting
From huge hydrants of money
I am stimulatedCredit freeze thaws now
Fed heats pipes until they steam
Winter is lovelyConsumers feel fine
Ready to mortgage their souls
John Maynard Keynes smilesSaving’s so passe
Capital stock may be assumed
Let K be capitalGiant debt you bet
Chinese will serve fine dinner
Children cannot voteLike rose in springtime
Welfare state blossoms anew
Laughter heard in hell
Feel free to try your hand in the comments section below. See also Bob’s reflections on the Inauguration.
Update: See also Morgan Reynolds’s bailout version of “I Fought the Law.”
Chapman on the US Economy
| Peter Klein |
My colleague, coauthor on several forthcoming projects, and former PhD student John Chapman was on Hugh Hewitt’s show last night, talking about the US economy. Like me John blames the Fed, not hedge funds and derivatives markets, for the housing bubble and crash. John’s investment advice: “Short the dollar and prepare for the 1970s.” Listen here (John comes on around 25:10).
Disaster Socialism
| Peter Klein |
As I noted elsewhere yesterday, the “stimulus” bill making its way through Congress is a fine illustration of the Higgs effect, the tendency of government to expand massively in response to “crises,” real or imagined. Naomi Klein’s “Disaster Capitalism” thesis is exactly backward: “disasters” are inevitably followed by huge increases in the public sector at the expense of the private. Anyway, if you have any doubt that the current legislation has precious little to do with economic stimulus, consider the details of the House’s proposed $825 billion package, which includes:
- $1 billion for Amtrak
- $2 billion for child-care subsidies
- $50 million for the National Endowment for the Arts
- $400 million for global-warming research
- $2.4 billion for carbon-capture demonstration projects
- $650 million for digital TV conversion coupons
- $8 billion for renewable energy funding
- $6 billion for mass transit
- $600 million for the federal government to buy new cars
- $7 billion for modernizing federal buildings and facilities (including $150 million for the Smithsonian)
- $252 billion is for income-transfer payments ($81 billion for Medicaid, $36 billion for expanded unemployment benefits, $20 billion for food stamps, and $83 billion for the earned income credit for people who don’t pay income tax)
- $66 billion for education
Now I should state, for the record, that unlike other critics of this particular stimulus package, I don’t favor government “stimulus” packages of any kind. I’m not a Keynesian, after all.
Department of Irony, Cass Sunstein Edition
| Peter Klein |
Harvard’s Cass Sunstein has been tapped by Obama to head the Federal Office of Information and Regulatory Affairs (to be “regulation czar,” in the vernacular). One of his main tasks, presumably, will be to sell the new financial-market and related regulations accompanying the “stimulus” bill. I hope Sunstein will re-read his recent working paper with Richard Zeckhauser, “Overreaction to Fearsome Risks”:
Fearsome risks are those that stimulate strong emotional responses. Such risks, which usually involve high consequences, tend to have low probabilities, since life today is no longer nasty, brutish and short. In the face of a low-probability fearsome risk, people often exaggerate the benefits of preventive, risk-reducing, or ameliorative measures. In both personal life and politics, the result is damaging overreactions to risks. We offer evidence for the phenomenon of probability neglect, failing to distinguish between high and low-probability risks. Action bias is a likely result.
Cass, will you please explain “action bias” to the President and Congresssional leaders before they completely restructure the US economy in response to the current economic downturn?
Keynesian Economics in Four Paragraphs
Courtesy of Robert Barro:
[A]ssume that the multiplier was 1.0. In this case, an increase by one unit in government purchases and, thereby, in the aggregate demand for goods would lead to an increase by one unit in real gross domestic product (GDP). Thus, the added public goods are essentially free to society. If the government buys another airplane or bridge, the economy’s total output expands by enough to create the airplane or bridge without requiring a cut in anyone’s consumption or investment.
The explanation for this magic is that idle resources — unemployed labor and capital — are put to work to produce the added goods and services.
If the multiplier is greater than 1.0, as is apparently assumed by Team Obama, the process is even more wonderful. In this case, real GDP rises by more than the increase in government purchases. Thus, in addition to the free airplane or bridge, we also have more goods and services left over to raise private consumption or investment. In this scenario, the added government spending is a good idea even if the bridge goes to nowhere, or if public employees are just filling useless holes. Of course, if this mechanism is genuine, one might ask why the government should stop with only $1 trillion of added purchases.
What’s the flaw? The theory (a simple Keynesian macroeconomic model) implicitly assumes that the government is better than the private market at marshaling idle resources to produce useful stuff. Unemployed labor and capital can be utilized at essentially zero social cost, but the private market is somehow unable to figure any of this out. In other words, there is something wrong with the price system.
Barro thinks a multipler of zero is a more plausible baseline assumption. Of course, if GDP is adjusted for quality, the multipler is most likely negative, as resource allocation is directed by government officials, not consumer demands. In prior work Barro has estimated wartime multiplers of 0.8, but this seems high based on Robert Higgs’s important work [1, 2]. More important, there the Austrian point that resources are heterogeneous, and the additional goods and services financed by government spending will tend to be in the “wrong” place in the economy’s intertemporal structure of production. Keynes rejected the idea of capital heterogeneity, so this problem was lost on him.
Philosophy Bites
| Peter Klein |
Philosophy Bites is a philosophy podcast site run by David Edmunds (co-author of Wittgenstein’s Poker) and Nigel Warburton. The political philosophy section is quite good (and features our friend Chandran Kukathas a couple of times). Via 3quarks.
The Failure of the Journalists, Part II
| Peter Klein |
Another aspect of journalists’ remarkably credulous and fatuous attitude towards policymakers is their view that rhetoric, not substance, is what matters. Hence the constant references to the Bush Administration’s “dedication to free-market principles,” its “aversion to regulation,” its “belief in letting markets work by themselves.” This is of course sheer balderdash and piffle, virtually the reverse of the truth. Bush and Paulson and Greenspan and their clique are “free marketeers” in the same way (to borrow from A. J. Jacobs) that Olive Garden is an Italian restaurant. They adopt the language, and some of the form, of market advocacy without any of the content. The Bush Administration was already, before the “financial crisis,” the most economically interventionist since LBJ; it now ranks with Hoover and FDR as the most aggressively anti-market in US history. Greenspan and Bernanke expanded the money supply like none before; Bush and Cheney borrowed and spent trillions to finance overseas adventures; the Federal Register added pages at a record-setting pace; now the banking and automobile industries have become GSEs. Lassiez-faire, indeed! (BTW can anyone name a specific act of “deregulation” that contributed to the financial crisis? Gramm-Leach-Bliley? No way. And GLB was under Clinton, as was the infamous WGFM. What specific regulations, e.g. on hedge funds or mortgage-backed securities or executive compensation, did the Bush Administration oppose?)
And yet, there was Juan Williams on yesterday’s Diane Rehm show explaining, matter-of-factly, how Bush and Paulson had allowed their “free-market ideology” and “resistance to regulation” to “commitment to the idea that the market works itself” to lead the nation into ruin. Williams may be a good news reporter, but he has the political-economy understanding of a fifth-grader. Does it ever occur to these “watchdogs” to investigate what government officials actually do, rather than simply repeat what they say?
Indigenous Entrepreneurship in Rural China
| Peter Klein |
A very interesting article in the McKinsey Quarterly by MIT’s Yasheng Huang: “Private Ownership: The Real Source of China’s Economic Miracle.” The key to China’s recent economic is not state-led capitalism (call it “Bush-Bernanke-Paulson capitalism”) but private property and financial-market liberalization, leading to a burst of indigenous rural entrepreneurship. Writes Huang:
Big cities like Beijing, Shanghai, and Shenzhen are routinely extolled in the Western press as vibrant growth centers. China’s rural areas, if mentioned at all, typically figure as impoverished backwaters. But a close analysis of the economic data reveals that these breathless descriptions of China’s modern city skylines have it exactly backward: in fact, the economy was most dynamic in rural China, while heavy-handed government intervention has stifled entrepreneurialism and ownership in the urban centers.
Particularly interesting is Huang’s account of why so many Western economists fail to understand this. (more…)
Mainstream Journalism, RIP
| Peter Klein |
Last week’s WSJ carried an op-ed from SEC Chair Christopher Cox, “We Need a Bailout Exit Strategy.” The op-ed was nothing special (mostly defending the SEC, of course, though there was a nice Hayekian line about “decentralized decision-making, in which millions of independent economic actors make judgments using their own money, [resulting] in the wisest allocation of scarce resources across our complex society”). What caught my eye was the headline, which suggests a connection between the bailout and the Iraq war, a connection I’ve been meaning to write about.
Remember how journalists felt deceived by the Bush Administration about the war? President Bush said that Saddam Hussein was a “grave and growing threat,” and the media repeated this line. Colin Powell showed pictures of the mobile weapons trailers and the New York Times reprinted them with enthusiasm. When the Administration’s claims proved false, the mea culpas began. Judith Miller resigned in disgrace. Never again, the media cried, will we be used as house propaganda organs. And yet, once the financial crisis began, the exact pattern was repeated. Bernanke and Paulson say there’s a “credit freeze,” that the financial sector is on the verge of collapse, that they alone know what to do — so that’s what the newspapers print. No time to investigate, to interview anyone outside the government, to hold these claims up to any critical scrutiny. If high officials say credit markets are frozen, that only “bold action” from the Treasury, the Fed, and Congress can prevent total meltdown, then that’s the way it is. Virtually every news report on the crisis followed the official script. It’s as if the financial reporters from the Times, the WSJ, the Washington Post, CNN, etc. were embedded with the Treasury. News reports have been little more than government press conferences. Shame, journalists, shame!
Why Oh Why, as Brad DeLong would say, can’t we have a press corps that investigates, rather than simply repeating what the government asserts?
Rizzo and Whitman on the New Paternalism
| Peter Klein |
Mario Rizzo and Glenn Whitman offer a Hayekian critique of Richard Thaler and Cass Sunstein in their new paper, “The Knowledge Problem of New Paternalism.” From the abstract:
The “new paternalism” is a set of policy prescriptions based on recent findings in behavioral economics whose purpose is to help individuals overcome a wide variety of behavior and cognitive biases. According to its proponents, it does not aim at replacing the preferences of individuals with those of the paternalist but rather to uncover the “true” preferences of individuals, that is, the preferences they would have if they had perfect knowledge, unlimited cognitive abilities and no lack of willpower.
The purpose of this Article is to show that new paternalist policies founder on the shoals of a profound knowledge problem revealed in Friedrich Hayek’s famous critique of central planning. Feasible policies require not only accurate scientific knowledge but also accurate knowledge of “the particular circumstances of time and place” that constitute the local and personal knowledge of individuals. This knowledge is not accessible by paternalists.
See also this exchange between Rizzo and Thaler in last year’s WSJ.
The New World Order
| Peter Klein |
Jim Surowiecki at the New Yorker:
When news broke that Timothy Geithner was Barack Obama’s pick for Secretary of the Treasury, the stock market jumped more than six per cent in the space of an hour. Obviously, this was a good thing, but there was also something weird about the spectacle of the Street’s once fearless free marketeers exulting over a government appointment, as if they were nomenklatura members cheering a new Politburo chief. It showed just how central a few government officials have become to the well-being not just of the markets but of the economy as a whole. For better or worse, we now live in a world in which the Treasury Secretary controls hundreds of billions of dollars in spending and shapes the fate of some of the nation’s biggest companies. That’s quite a job to ask someone to do.
I think Surowiecki overstates the newness of all this — government has been heavily involved in running Wall Street since at least the 1930s, and I don’t know how many of the Street’s big players were ever “fearless free marketeers” — but the point is well taken.
Government and the Corporation
| Peter Klein |
What is the net effect of government intervention on firm size, scope, complexity, and ownership? Roderick Long thinks government intervention makes firms larger and more hierarchical than they would otherwise be, and that a pure market economy would be dominated by small firms like worker-owned cooperatives. I think the net effect of government intervention on firm characteristics is ambiguous, because there are so many interventions affecting different types of firms. Here’s some back-and-forth between Roderick and me: his original essay on Cato Unbound, my comment on Mises.org, his reply, and my rejoinder.
Update: See also Caplan.
Pay For Performance, Robert Rubin Edition
| Peter Klein |
Remember, it’s not how much you pay, but how. Today’s WSJ profile of Robert Rubin provides some interesting numbers. Citigroup losses over the last year: $20 billion. US government bailout money going to Citigroup in the last month: $45 billion. Rubin’s compensation since becoming senior counselor and a director at Citigroup in 1999: $115 million. Naturally, Rubin says Citi’s near bankruptcy has nothing to do with his leadership. Critics say he encouraged the firm to increase its risk taking in 2004 and 2005. Ah well, another former Golden Boy brought down to earth. Thank goodness something positive is coming out of this mess.
Consider this today’s friendly reminder that corporate welfare is a bipartisan scam.
Update: See also Larry Ribstein.
Hayek Speaks on Inflation and Unemployment
| Peter Klein |
Kudos to Jeff Tucker for unearthing this 1975 interview from Meet the Press. Notes Jeff:
The line of questioning he endures is hilariously naive and idiotic. We think we have a Keynesian problem now; it’s clear that these people really believe that policy makers can manipulate the economy like a machine, trading off unemployment for inflation and back again, with no trouble.
John Cochran suggests another Hayek appearance from 1975, this one a lecture at the University of Colorado (provided by Fred Glahe). Here are a few more from the Mises.org audio archive. And see also the new book.
Christina Romer to Head CEA
| Peter Klein |
Obama has named Christy Romer, one of my old professors, to head the Council of Economic Advisers. She’s smart, organized, a great communicator; I expect her to be highly effective. She is a moderate Keynesian, of the New Keynesian variety, best known for her revisionist work challenging the postwar Keynesian consensus view that activist monetary and fiscal policy has lessened the severity of the business cycle compared to the bad old laissez-faire days. See, for example, “Is the Stabilization of the Postwar Economy a Figment of the Data?” AER, June 1986, and “Remeasuring Business Cycles,” JEH, September 1994. A recent Journal of Economic Perspectives piece and her entry on business cycles in the Concise Encyclopedia of Economics summarizes this work. Here is more. (Of course, doubts about the effectiveness of Keynesian stabilization policy have not dampened most macroeconomists’ enthusiasm for, well, Keynesian stabilization policy.)
I met Christy in my first year of graduate school when she co-taught, with Barry Eichengreen, my course in US economic history. I subsequently served for two semesters as her head TA in the large economics principles course (600 students, 16 TAs, one head TA, one professor — quite an operation). Berkeley had in those days a system in which the dissertation adviser (in my case, Oliver Williamson) does not serve on the dissertation proposal committee, and Christy kindly chaired the proposal committee for me, even though the topic (conglomerate diversification) was not in her general area. She is a great teacher and a great manager, careful, patient, and fair. Naturally my top choice for CEA chair would have been somone with views just like, um, mine, but of the realistic candidates Christy is an excellent choice.
In Praise of the US Auto Industry
| Peter Klein |
The proposed bailout of GM, Ford, and Chrysler overlooks an important fact. The US has one of the most vibrant, dynamic, and efficient automobile industries in the world. It produces several million cars, trucks, and SUVs per year, employing (in 2006) 402,800 Americans at an average salary of $63,358. That’s vehicle assembly alone; the rest of the supply chain employs even more people and generates more income. It’s an industry to be proud of. Its products are among the best in the world. Their names are Toyota, Honda, Nissan, BMW, Mercedes, Hyundai, Mazda, Mitsubishi, and Subaru.
Oh, yes, there’s also a legacy industry, based in Detroit, but it’s rapidly, and thankfully, going the way of the horse-and-buggy business.
I pulled these numbers from Matthew Slaughter’s fine piece in yesterday’s WSJ, “An Auto Bailout Would Be Terrible for Free Trade,” which points out that the US is one of the the world’s largest recipient of Foreign Direct Investment and that an auto industry bailout would surely reduce the flow of FDI, at the expense of the US economy. “Ironically, proponents of a bailout say saving Detroit is necessary to protect the U.S. manufacturing base. But too many such bailouts could erode the number of manufacturers willing to invest here.” Bailouts may also spur retaliatory actions by governments in US export markets, doing further damage to free trade. In short, what the Big Three and their supporters want is the most crass form of protectionism, a blunt demand that US taxpayers, consumers, and producers fork over the cash, now and in the future, to prop up an inefficient, failing industry.
NB: In 2001 I was part of a delegation of US officials visiting Singapore in advance of negotiations over a possible bilateral free trade agreement. The issue was Singapore’s Government-Linked Enterprises (GLCs), nominally private firms partially owned by the Singaporean government. Did these links constitute a trade barrier, putting US firms doing business in Singapore at a competitive disadvantage? We interviewed US executives based in Singapore and learned that the government did not seem to offer the GLCs special favors in input or output markets (though they did benefit from a lower cost of capital). Anyway, as I read Slaughter’s piece I imagined myself as a Singaporean official visiting the US, interviewing foreign executives in the financial-services and, perhaps, automobile industries, asking if they thought US companies got special government protection. To ask this question is to answer it.
Bailout Bingo
| Peter Klein |
You’re probably familiar with Buzzword Bingo. Let’s create a version to accompany news reports, editorials, and political speeches on the financial-market and other bailouts. Keep a card with you as you read the newspaper, watch or listen to broadcast news, visit with Barney Frank, or follow the conversation at your next hoity-toity dinner party. Check off each term as you hear or read it and shout “Bingo!” when you have five in a row, vertically, horizontally, or diagonally. Here’s a sample card. Please add suggestions for additional words and phrases in the comments.
| Protecting jobs | Ripple effect | Necessary intervention | Can’t afford to do nothing |
Life blood of the economy |
| Corporate greed | Market failure | Temporary relief | Decisive action | Frozen markets |
| Nonpartisan solution | Maintain competitiveness | F R E E S P A C E |
Sit idly by | Domino effect |
| No fault of their own | Stability | Public investment | Congressional authority | Too big to fail |
| Head in the sand | Conservatorship | Critical industry | Creative solutions | Public-private partnership |
Organizations and Markets 
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