My kids' Dad

The New Deal's broken promises

The recent headlines about massive layoffs, global economic downturn and how the trillions of dollars in bailouts and proposed bailouts are not considered enough by most economists. This leads one to wonder what the real solution is. But to get to the solution we must first look at the source of the problem.

Popular misconceptions point the finger at the personal greed of the wealthy or corporate America; some politicians claim the problem is a lack of government regulations and a few even claim that this is just proof of the failure of capitalism.

When we look at history we see the reality: the more an industry is regulated - the more likely its failure.

Examples:

Highly Regulated		Deregulated		Less regulated
Financial institutions		Telecom		Technology
Automobile manufacturing		Transportation		Entertainment
Cable companies		Postal services		Education
Oil companies				Publishing
Health care

A clinical analysis shows that the current crisis was spawned by regulatory zeal in the 1970's to force banks to loan money to those with poor credit. Under Clinton these regulations were put on steroids to ensure that loans were given to more lenders who were unqualified and indeed were not at all likely to be able to repay. This was done under the rubric of social justice so that everyone would get a home (remember we were all celebrating the wealth of this country?). As the Reverend Wright would say, 'our chickens came home to roost', as the government solution was to ignore the problem and find creative ways to repackage the loans. When some lawmakers tried to raise an alarm they were shouted down by the same politicians that were overseeing the system. Similar scapegoating will be found in the health-care and oil businesses.

We can trace this legacy of government intervention back to the New Deal (or perhaps as far back as Theodore Roosevelt). The New Deal was a loose collection of regulations aimed to reassure the public that the Federal government was doing everything possible to end the Great Depression and provide security. A notable product of the New Deal was Social Security which is now the poster child for government programs that resemble a 'Ponzi scheme' more than a 'trust fund'. We continue to look at programs from the 'War on Poverty' to the 'Highway Trust Fund' which have also failed to deliver on their noble promises.

So then what is the solution in general and specifically to today's malaise?

Generally the answer is to unregulate wherever possible. There are certainly some cases where regulation is appropriate but the strength of our system is in a legal system that protects businesses and individuals from illegal acts (theft, fraud, etc). Coincidentally the Cato Institute has been running an ad along these lines. The history of the US as the most successful entity in modern history due to economic freedom and liberty is proven. Modern history is also littered with stories of failures of competing systems like socialism and communism.

A specific solution that suits today's context of economic stagnation coupled with regressive fuel prices is to spur energy production through safeguards to businesses that want to pursue solutions. These solutions include oil exploration, natural gas exploration; nuclear power production; and various alternative fuel source development. The greatest investments would be in oil, gas, coal and nuclear power. The restrictions on exploration and development must be lifted with legal guarantees of indemnity from government interference for a suitably long period (such as 50 years) so that investors would have manageable risk levels and expectations for returns. These industries would reignite manufacturing and production systems throughout the U.S. as well as the dependent businesses such as transportation, distribution, and services that support these.

The other side of this coin is to reduce government spending at all levels of government. Data shows that government spending is approaching 40% of our Gross Domestic Product. This huge spending produces very little economic value but consumes vast amounts of the fruits of our labors. There are plenty of complex and contradictory models to prove almost any position but let's boil it down to a simple analogy. If you are broke the last think you would do is to suggest a spending spree to solve your problem. The government needs to back off and allow the economic engine that has worked for this nation for hundreds of years to do what it is good at - produce wealth. (Not all debt is bad - most of us have mortgage debt to help us finance a home, but when you are living in a home that is far too expensive for your earning potential you can expect an ignoble end. The same principle applies to businesses that require loans to start and grow but a bank would ordinarily only lend to those deemed to have a sound way to repay those loans.)

UPDATE: A new level of pork spending from the WSJ: (hat tip to Lynn Van Note)

"Never let a serious crisis go to waste. What I mean by that is it's an opportunity to do things you couldn't do before."

So said White House Chief of Staff Rahm Emanuel in November, and Democrats in Congress are certainly taking his advice to heart. The 647-page, $825 billion House legislation is being sold as an economic "stimulus," but now that Democrats have finally released the details we understand Rahm's point much better. This is a political wonder that manages to spend money on just about every pent-up Democratic proposal of the last 40 years.

Doing good using ROI

Very rarely do we hear about the economics of doing good. Using Return on Investment is a classic way to measure this and that is exactly what Bjorn Lomborg recommends in today's Wall Street Journal Op-Ed piece called How to Get the Biggest Bang for 10 Billion Bucks.

For every dollar spent you get:

• 30 cents stopping average terrorism
• 90 cents preventing climate change
• $9 preventing a catastrophic terrorist event
• $11 researching clean alternative energy sources
• $16 or $17 reducing hunger and improving nutrition to poor nations
• $20 combating malaria and other communicable diseases
• $25 combating heart disease

To join in the discussion go to the link at the end of the article.

Danish Sense

Some times you need to go to Denmark to find some common sense.  Flemming Rose, editor for the biggest Danish newspaper, Jyllands-Posten and Bjorn Lomborg, professor at the Copenhagen Business School, contributed a commentary in today's Wall Street Journal titled Will Al Gore Melt?. In this well written piece they make three points:

1) Al Gore backed out of an interview with the paper at the last minute despite the paper acceding to his conditions showing us that Mr. Gore is unable to defend his positions and answer critics:

... he [Mr. Gore's agent] came back to tell us that Bjorn Lomborg should be excluded from the interview because he's been very critical of Mr. Gore's message about global warming and has questioned Mr. Gore's evenhandedness.

2) The economic cost of countering global warming is devastating with the world's poor bearing the brunt:

... the U.N. Climate Panel suggests that if we follow Al Gore's path down toward an environmentally obsessed society, it will have big consequences for the world, not least its poor. In the year 2100, Mr. Gore will have left the average person 30% poorer, and thus less able to handle many of the problems we will face, climate change or no climate change.

3) The claims in "An Inconvenient Truth" are at the very least an exaggeration.

In his movie he shows scary sequences of 20-feet flooding Florida, San Francisco, New York, Holland, Calcutta, Beijing and Shanghai. But were realistic levels not dramatic enough? The U.N. climate panel expects only a foot of sea-level rise over this century. Moreover, sea levels actually climbed that much over the past 150 years. Does Mr. Gore find it balanced to exaggerate the best scientific knowledge available by a factor of 20?

Although they offer several reasoned examples of some rather inconvenient facts, a publication which is friendly to Al Gore has the same criticisms of these exaggerations aptly titled An Inconvenient Truth, Gore as climate exaggerator as well as exposing the heavy handed tactics more common in politics than science:

In An Inconvenient Truth, Gore makes a big deal about how his Harvard professor, oceanographer Roger Revelle, influenced his views about the dangers of global warming. However, Professor Revelle co-authored an article in the house journal of the Cosmos Club in Washington, DC in 1991 which concluded, "The scientific base for a greenhouse warming is too uncertain to justify drastic action at this time." Professor Revelle died shortly after the article appeared. This conclusion apparently dismayed Gore whose staff worked behind the scenes to spread the rumor that Revelle's co-authors had taken advantage of a senile old man and that Revelle's name should be taken off the article. This sorry episode ended with a lawsuit in which another Harvard professor who had conferred with Gore's staff formally apologized for making his insinuations.

Reason Magazine also continues with:

What does Gore recommend? He focuses on policies the cut emissions, but largely ignores those that would enhance our ability to adapt to future temperature changes. So An Inconvenient Truth ends with suggestions for how viewers can personally cut back on their carbon emissions—install compact fluorescent light bulbs...

This reminds me of an issue I have brought up with those enamored of the 'global warming crisis' which is how does replacing incandescent lamps with fluorescent lamp actually help? After the movie I mentioned in a previous post I brought this same point up to my Rabbi who has also been unable to get an answer from those promoting the film and advocating such action. My explanation (please let me know if I am missing something here) is that reducing the power consumption of a light bulb will have no impact upon CO2 gas emissions (certainly in Michigan) where like most of the nation a base level of electricity is generated regardless of demand. The excess electricity that is not used is not stored - it simply is wasted - changing light bulbs will not change that formula. Even more specifically peak electricity is typically required during the middle of the day when most light bulbs aren't even being used - in my home my incandescent lights are used for a few hours at night and for a few minutes in the morning. This simply does not add up to saving the planet. I have tried going to 'green' sites to get answers to this example and have come up empty handed. This bit of nonsense is not just hyped by Al Gore but by many others including high profile ads by Chevron (I have sent them the same queries as well as their green site to no avail.) I also wonder how much extra energy goes into producing compact fluorescents as well as the more toxic elements (plastics and electronics) that are a source of pollution. I suspect that the CO2 savings effects of lights was calculated using a false assumption: CO2 emissions per hour from a coal fired electricity plant divided by electrical capacity (in watt hours) equal CO2 emissions per watt hour. The fallacy is that the emissions vary per watt consumed.

Don't think that I advocate waste - I do not and if anything I am personally bothered by my wasting anything. The cost of lamp replacement is not justified when I factor in my usage and the problem of breakage which is more frequent with young children and pets in the house. If I believe something is more economical for me then I gladly adopt it - that's me - sensible economics is far more reasonable than jumping on the latest trend.

I heartily support the line of inquiry that the Danish authors put forth:

Getting answers to hard questions is not an unreasonable expectation before we take his project seriously. It is crucial that we make the right decisions posed by the challenge of global warming. These are best achieved through open debate...

Amen.

Economics

One of the most significant figures of our time, Milton Friedman, passed away less than two weeks ago. He brought us economics as the world knows it today. He championed the free market with minimal government intervention and espoused mechanisms such as the school voucher about a half decade ago. In an earlier post I mentioned the fine interviews that Russell Roberts has available as podcasts - I found his interviews with Milton Friedman here and here where he demonstrates the proper role of the Fed in setting interest rates. Jim Cramer (not that he is an economist but rather as one of the greatest experts and practicioners in the stock market) regards the Fed's over manipulation of the interest rates to be a prime factor in the stock market crash in the early 2000's producing an economic recession. I have read many pieces since his passing the more memorable are here and here with a nice summary of his views here.

Recently Senator John Edwards was seen in a witch hunt against Wal-Mart which is a fearful thing when you consider that harming Wal-Mart will ultimately harm the most economically vulnerable classes in our society today. Perhaps Senator Edwards should have read this article.

Perhaps the successor to Milton Friedman will be Hernando de Soto who in his work "The Mystery of Capital" describes the forgotten secret of capitalism which is the fair legal framework underpinning a society which permits individuals to unleash the potential of their investments (primarily their homes). He demonstrates that poverty around the world is misunderstood and that tremendous capital is held by the poor but they are unable to tap into it.

In Mystery of Capital, de Soto also shows how guilds working with government hampered freedom and harmed society. It is easy to see this in action today as the Democratic Party and big Labor have long worked against the interests of the citizen. When one hears candidates speak about increasing protectionism (remember Kerry in 2004?) you can almost see the special deals being cut - even Mr. Straight Talk Express did a flip flop on ethanol in order to garner support of a new found special interest... Our American ethic long despised hand outs especially when they would benefit us - let's hope we remember this ethic.

Like Friedman, de Soto points a way to relieve suffering and hopefully we have the intelligence to adopt it. 

More Good and Evil

Arthur Brooks has an interesting piece today in the WSJ about the demographic fertility slide Liberals are losing. (This is not in the classic sense of liberal or conservative I mention in this post.)

But all things considered, if the Democrats continue to appeal to liberals and the Republicans to conservatives, getting out the youth vote may be increasingly an exercise in futility for the American left.

An even better opinion piece (requires subscription) is offered by Shelby Steele about the difference between the culture of death of Islamists and the culture of life by the rest of us. Thinking about good and evil (mentioned in the article) it is natural to equate hatred with selfishness and love with selflessness in all but the rare cases. [One may 'hate' those who target children but more likely this is loathing and pity.]

As Sartre says in his great essay on the subject, the anti-Semite "is a man who is afraid. Not of Jews of course, but of himself." By hating Jews, he asserts that his own group represents the kind of human being that God truly wants.

For those relentless Noam Chomsky supporters, although Chomsky is nominally Jewish his 'own group' really is the crowd that reveres intellectualism above justice and humanity and to prove their subservience would burn their 'own' at the stake. [While I abhor group think one should never throw the baby out with the bathwater and lose track of fairness.]

Steele goes further then to associate 'white guilt' (Liberals who legitimize Islamic fanaticism as a response to Western 'oppression') with stoking the fires of extremism.

...the fact that Islamic extremism is the most explicit and dangerous expression of human bigotry since the Nazi era.

But white guilt's most dangerous suppression is to keep from discussion the most conspicuous reality in the Middle East: that the Islamic world long ago fell out of history. Islamic extremism is the saber-rattling of an inferiority complex.

This brings me to a wonderful political theory podcast on EconTalk featuring NYU political scientist Bruce Bueno de Mesquita about the economics [that is the field of study about human decision making] of political power. He creates a model (based on mathematical research) of the difference and impact of dictatorships and 'democracies'. It offers keen insight into the problem of building democracies as well as mentioning in passing that dictators may be good or evil (or even both). It is 1 hour 28 minutes of though provoking material. Along the way he slays numerous dragons such as the danger of direct financial aid and the unintended consequence of term limits.  Bravo Russ Roberts!