If You Support Offshore Drilling…
…then you might want to let the Mineral Management Service know. They are taking public comments on the issue up through September 15. Naturally, IER has made it easy for you to get your message across; just click here.
I don’t know whether a large public outcry would make a difference. I can say with a high degree of confidence that the time it will take you to follow the above process is worth less than $1, unless you are on your deathbed with your estranged firstborn by your side.
Free Market Bush Administration Nationalizes Mortgage Market
When I taught at Hillsdale College, I heard one of my colleagues (whose office was right next to mine, and our doors were open) listening to a student ask if he could take the class final early, because he wanted to go participate in a rally for newly-reelected President Bush. My colleague wearily asked, “Why do you support him? He’s not a conservative. Look at how much he increased spending during his first term, even non-defense spending.” Exacta-mundo, to quote the Head & Shoulders commercial. Just as Republican Richard Nixon took the U.S. off the gold standard and instituted explicit wage and price controls, so too it has happened under a Republican administration that the Federal Reserve has engaged in unprecedented actions to interfere in financial markets, and the Treasury has now “seized control” of Fannie and Freddie. (See this article for the details.)
One of Tyler Cowen’s readers had the temerity to ask why taxpayers should be put on the line to bail out fraudulent financial players, and Tyler’s answer was that if the government allowed Fannie and Freddie to fail, basically the world would end. (Go read his post to see how little I am exaggerating.) After warning of a collapsing dollar and stock market, as well as boils and frogs, he at least links to a Jeffrey Rogers Hummel article on why libertarians should welcome a default by the U.S. government.
I will post more on this topic in the coming days, but for now I want to make the simple point that the government per se cannot create wealth or financial stability. It is not as if the people running Freddie and Fannie were stumped, and then Paulson sprang up in his bed Sunday at 3 a.m. with a brilliant new way to securitize mortgages. All the government can do is inject money into sinking operations by (a) stealing it from taxpayers and/or (b) creating more dollar bills through the printing press. Either way, “America” is paying for the bailout. Any increased “confidence” in the rescued sector is counterbalanced by an increase in uncertainty in other areas, like, “How much are my taxes going to go up over the next ten years to pay for this?!” or “What in the world will a gallon of milk cost next year?!”
I want to stress that these interventions have been getting progressively bolder. If, back in August 2007 when the credit crunch first hit, Paulson had announced all of the measures that have been unveiled in the last 13 months, most “right-wing” analysts would have cried foul. They would have labeled him a socialist and compared him to FDR. But instead of throwing the private sector into the boiling pot, instead Paulson and Bernanke have just been turning up the dial incrementally.
The reason we are in the current fix, where “libertarian” Tyler Cowen and others are saying it is necessary for the government to take over Freddie and Fannie, is that Paulson and Bernanke chickened out and didn’t simply let a bunch of banks fail back in September 2007. It would have been painful–there would have been billions in losses, house prices would have plummeted, the dollar may have fallen, etc. But guess what? All those things happened anyway, and the fundamental problems in the economy merely festered.
The same will happen with this “rescue.” The housing market is not suddenly fixed with the promise of hundreds of billions in Treasury injections. On the contrary, it relieves pressure on the systemic problems that led to these massive malinvestments in the first place.
What happens as the recession deepens, and other institutions that are “too big to fail” line up for their injections of hundreds of billions? Will the federal government take over the Big Three automakers, the pension funds of homebuilders, etc.?
The government can only rearrange–and in the process, dissipate–wealth. The federal takeover of Fannie and Freddie is just one more example that there is no difference between Republicans and Democrats. It doesn’t matter whether McCain or Obama wins; your taxes are going up. How else is the government going to pay for all of the “compassionate conservatism”–not to mention the “humble foreign policy”–that has been ladled out the last eight years?
The Bible Says Children Are an Investment
My mother-in-law gave me The Bible Promise Book, and I came across the following intriguing verse under the topic of “Children”:
3 Sons are a heritage from the LORD,
children a reward from him.
4 Like arrows in the hands of a warrior
are sons born in one’s youth.
5 Blessed is the man
whose quiver is full of them.
They will not be put to shame
when they contend with their enemies in the gate.
As an economist with a specialty in capital theory, it is unavoidable that I have looked upon my own son at times as a capital good. (At other times I view him as a poop factory.) It sounds crass, I grant you, but in terms of wanting to influence the world, one very influential but long-term strategy is to raise a child or children. Incidentally, this is the single most compelling argument I could give to someone considering becoming a suicide bomber: If your goal were to, say, get the United States out of the Middle East, you could achieve a lot more by staying alive, protesting nonviolently, and then raising your kids with your worldview. It takes a lot longer for that investment to bear fruit, but as Bohm-Bawerk conjectured, there always exist more productive techniques for achieving your ends, the longer you are willing to wait for the results.
The principle of viewing your children as an investment is most obvious in poorer regions where parents literally have to rely on children as old-age insurance, but even in richer cultures it’s the same thing. Whether you are a Christian and want to spread the gospel, or are a Marxist and want to abolish private property, one of the most influential things you can do is have children and lavish them with attention. My pointing out this fact doesn’t mean children exist just to become extensions of their parents; of course not. (Otherwise, you should just be blindly doing whatever your parents told you to do–although let’s face it, unconsciously you are trying to live up to the expectations they put into you, for good or ill.)
This leads to another point: I taught at the undergraduate level but I always thought teachers at the lower grades were far more influential. Think of the teachers that have influenced you in your own life. For me, my kindergarten teacher was super “nice” (I had a crush on her too) and that was the standard for how you were supposed to be as a person; nice to everyone, share, etc. And then, I remember a science teacher in junior high who lent me a book about special relativity (this wasn’t the class material) and that totally influenced me; I might not be half the geek I am today, were it not for him.
In contrast, even someone whom we would expect to have greatly influenced me–like Mario Rizzo, my dissertation advisor at NYU–didn’t really mold me very much, except perhaps to make me think that any American living outside of New York City is necessarily a hick. By the time he got ahold of me, I was already far too set in my ways.
It goes without saying that these observations underscore the absolute insidiousness of government involvement in schooling. Boo! Hiss!
Unemployment Rate
Everyone is of course commenting about the recent unemployment figures–the highest in five years–and so I will naturally weigh in. Sean Hannity said that the liberal media was doing its best to distort things and usher in Democratic wins in November, but in reality (Hannity claimed) the average unemployment rate during George Bush’s presidency has been lower than the average of the 1960s, ’70s, ’80s, and ’90s.
At first I thought this was wrong; I was pretty sure the average in the 1990s was lower than under W., and I thought that even if not, it would only be because of the high rates under George Herbert Walker Bush. However, I was wrong: The average unemployment rate during the 1990s was 5.8%, while under W. it’s been 5.2%. And this also is exactly tied with Bill Clinton, measuring the Clinton years from January 1993 through December 2000, he also presided over a 5.2% average unemployment rate.
According to my Excel skills, Hannity was only wrong about the 1960s: they had the lowest rate of 4.8%. The 1970s was 6.2%, and–surprise!–the worst period was the 1980s, with a rate of 7.3%. The official chart is below (click to enlarge).
Of course, in all of this I am taking the BLS’ numbers at face value. People whom I respect say that (during the Clinton years) the BLS changed the way it computes the number, for example by excluding people who have become “discouraged” and stop seeking a job. If this is true–and I have yet to personally investigate–then it makes our current numbers rosier than they really are; i.e. our current unemployment rate would be higher, under the old method of computation.
Sarah Palin Averts World War III?
Hear me out. For some time now I have been worried about an Israeli and/or American airstrike on Iran. (The financial implications are obvious: Ramp up your exposure to gold at least until the election has passed.) In a recent column, “September Surprise,” Justin Raimondo explains that Israel has been in secret negotiations with Georgia to use its airfields, making an Israeli attack a real possibility. If this is true, it puts obvious pressure on the United States to do it, since a U.S. attack is less likely to provoke an all-out war in the Middle East.
So what does Sarah Palin have to do with this, besides newsworthiness? I’ll tell you. The more likely it is that McCain will win in November, the less benefit of a US strike on Iran to the “War Party” (which is not identical to the Republican Party, and I use the term only because Raimondo does and I have yet to invent something better). In other words, if it looked like McCain was going to get trounced, a sudden American attack on Iran–in self-defense, it goes without saying–would possibly scare Americans into voting for the guy who has military experience. (This raises an interesting question: Should the Democrats try to start a race riot in late September? Maybe pay some police officers to beat up black suspects, and then pay some judges to give them a slap on the wrist? Oh wait, the government already does pay people to behave in this way. Never mind.)
But now, Sarah Palin has singlehandedly given the momentum back to the Republicans. I am ashamed to admit that I am now listening to media commentary about the Republican Convention, and I’m getting upset at the Obama camp’s attacks. I assure you, if they had said, “Mitt Romney eats Christians for breakfast!” I would not have cried foul. But for liberal Democrats to loudly wonder whether a mother of five is capable of holding an important job?!?! Are you kidding me!?!
So this is why Sarah Palin may have averted World War III and saved millions of lives. If the people who run the world (and they know who they are, though I do not) think McCain is probably going to win, then maybe they will hold off on bombing Iran.
Of course, Sarah Palin’s boss will probably order it himself in 2009, when inflation breaks an annualized rate of 10%. But I think the Iranians should still thank her for those extra 6 or 7 months.
What Do Sarah Palin and Ron Paul Have in Common?
(a) They’re both Republicans.
(b) They were both in Minnesota this week.
(c) They both rely on others to organize their message.
(d) They are both pit bulls.
(e) They are both pit bulls with lipstick.
(f) Answers (a) through (d).
The critics of both have pounced because of (truthful) answer (c). The Washington Post reported with shock that Ron Paul had help from (disclosure: my friend) Tom Woods in crafting his bestseller, while today one of the counterattacks on Sarah Palin is that she “didn’t write her own speech.”
This stuff is a riot. I realize if you’re Team Obama and you’ve got millions of people who desperately want you to win, some of them are going to throw out goofy arguments (like the objection that Palin didn’t write her own speech). Still, that’s pretty funny, especially in light of Biden’s past flirtations with plagiarism.
What’s really strange about the Ron Paul story is that I would’ve thought they could pull choice quotes from people’s speeches in order to portray the Paulians as nutjobs, rather than going the he-had-a-ghostwriter route. I guess that’s why I’m not in charge of a newspaper.
Oh one final thing. This is supposed to be a blog about financial advice, so here ya go: Don’t bet on the political attacks (from either side) getting any more intelligent.
Should We Cheer or Fear the Drop in Oil?
I realize the people running CNBC need to generate new financial articles every day, even if there’s nothing to say–as the runner of this blog, believe me, I understand the predicament. Yet today’s “Cheer or Fear Drop in Oil?” strikes me as particularly absurd. I think they should just rename CNBC as “Sure that’s what common sense says, but on the other hand…”
I have no doubt that if next month’s housing numbers are up 10%, they will quote traders saying, “Hmm this will catch a lot of young couples by surprise who were in the market for a cheap house. It could bode ill for consumer spending during the holidays, and just might push us into recession by first quarter ’09.”
Let’s Really Privatize Social Security
In my previous post, I explained why I never got on board with President Bush’s plan to “privatize” Social Security. Because Bush wasn’t going to raise anyone’s taxes or cut any government spending, any revenues redirected from the SS trust fund into the stock market, would have to be borrowed right back by the government. On net, there would be no increase in saving and investment in the economy, and so it would be impossible for the plan to make workers richer over time, as the plan’s proponents claimed.
If you really want to get complicated about it, you have to deal with risk. The reason the government can borrow from the private sector at, say, 3% and invest in the market at, say, 8%, is that the government can always resort to taxation and/or the printing press to cover its bonds. So from the individual worker’s point of view, any gain in expected returns is counterbalanced by the risk that the government has to increase taxes and/or debase the currency in the future, in order not to default. As I said, the Bush plan offered no net increase in savings and investment, and so there is nothing to fund this alleged increase in workers’ wealth. At best, the plan could have redirected funds from less risky to more risky investments, which would have a higher expected rate of return. Yet this is hardly what the advocates of the Bush plan thought they were proposing. (I.e., my point about total saving and investment being the same is still valid, but the people who say “Higher market returns!!” could still be correct. What happens is that the same level of investment gets redirected into different channels, because of the Bush plan. Expected returns can be higher, but only with an increase in risk.)
Also, Lew Rockwell made a great point in the last year or so on this: If Bush had pushed his plan through, then the “higher stock market returns” would have been disastrous thus far–can you imagine if 1/3 of workers’ Social Security contributions had been pumped into SPDRs since, say, 2006?!
Anyway, notwithstanding all of my criticism of the Bush plan, I should make it clear that I do think Social Security–which is neither social nor secure, discuss–should be truly privatized. As I explain in this article, all of the demographic problems with Social Security are due to its paygo nature; in a genuine pension plan, it doesn’t matter how many young people come after you, because you are living off the wealth you accumulated during your career–you’re not living off of the labor of the younger generation. At first this seems impossible: Aren’t young people ultimately the ones growing food, making clothes, and producing electricity for retirees, no matter the financial system? Yes that’s true, but with genuine savings and investment, those younger workers are equipped with more and better tools because of the old fogeys who came before them (under a private pension system), and so the young people’s labor is augmented. This is simply not true under the Ponzi scheme established by FDR. The money taken out of your paycheck during your working career isn’t contributing to a growing pile of new equipment, to augment young folks’ labor when you retire; no, it’s being consumed as you earn it, by present retirees.
So how do we move away from the present system, and into a truly private one? Well, as my critique of Bush’s plan suggests, there’s no painless way to do it. Once a Ponzi scheme is in motion, someone has to bite the bullet to break free. I think one way to do it would be to allow everybody to opt out, including those who are in their 40s and have already “paid in” a lot. Then implement a means test to give true welfare payments to the elderly, widows, etc. whom the public doesn’t want to leave out in the cold. It’s true, I don’t like this system either, but it seems like the only feasible way to get out of the present arrangement.
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