Growthology

A Crisis of Capitalsim?

The Wall Street crisis is being called a crisis of capitalism.
The cause of the crisis is being called a failure of deregulation. 
The $700 billion bailout is being called the only solution. 

Not. So. Fast.

Joseph Calhoun has a powerful essay today at RCM that informs counter-points to all of the above. Key sentence: "The Treasury does not need to enter the market for it to start functioning; the Fed needs to leave the market."

Look, nothing is as simple as the dire binary pronouncements of this whole dark month. I'm already on record saying the bailout was mishandled politically, and today's vote in the House was a spectacular validation. It doesn't make me happy, but it does confirm my frustration that the armageddon gambit by Paulson was a mistake. It also confirms my faith in the American people who have given this Congress the lowest approval rating ever record, which hit single digits in July.

If you dig for root causes for the financial crisis of 2008 (and soon to be recession of 2009, link to Jim Hamilton), you see that capitalism is built on a political foundation: institutions and rules established by the Constitution, two centuries of legislation, and a massive city full of bureaucracy. The capitalism part is doing fine. The political foundation is rotting.

A 2-party system dumbs down everything into a 1-dimensional spectrum. For economics, that is usually is framed as communist dictators on the left and free market fundamentalists on the right. The great irony is that it was the lightly regulated state-backed Fannie/Freddie who were at the center of the mess. Who watches the watchmen, right?

Let's be honest and admit this crisis didn't start last week, or last month, or last year.  No, Speaker Pelosi, it did not sneak up quietly on "little cat's feet" as you said today.  Housing is the key to this crisis, specifically the NON-market incentives pushed by Washington to get people into unaffordable homes. You were successful.

The story is simple: Washington did not regulate itself.  It interfered with the market, broke the market, and is now blaming the market.

Google's Android (iPhone Killer?) Hits Stores Oct. 22

Insofar as I can tell, there are at least two reasons to love the new Google phone.

1. The cost.

"The data plan for the phone will cost $25 per month on top of the calling service, at the low end of the range for data plans at U.S. wireless carriers. And at $179, the G1 is $20 less than the least expensive iPhone in the U.S."

2. The freedom to innovate on your own terms

"Google is giving away Android, the software that underlies the G1, for free, and opening the operating system to third-party developers who can create their own programs. Google hopes that in turn, mobile phones will provide even more ways for people to interact with the company's advertising network."

If you aren't completely excited yet or convinced that Google will destroy Apple's market share, watch this video from Jonathan Rosenberg, Senior VP for Product Management and Marketing at Google. Apologies for the length, but it is well worth it!

For the record, I bought an iPhone early this year, and I absolutely love it. This whole situation smells a lot like PC vs Mac in the 1980s. I think Apple learned the lesson about supporting 3rd party developers as the path to standardization dominance. We'll see.

Kellner's Calm Perspective

Irwin Kellner, chief economist of MarketWatch:

If you look at the data, you will see more differences than similarities between the 1930s and today:

• In the crash of 1929 the Dow Jones industrials plunged 40% in two months; this time around it has taken a year to fall 22%.
• The jobless rate jumped to 25% by 1933; it is little more than 6% today.
• The gross domestic product shrank by 25% during the early 1930s; it is up over 3% during the past year.
• Consumer prices fell by about 30% from 1929 to 1933; and the last time I looked they were still rising.
• Home prices dropped more than 30% during the Depression vs. about 16% today.
• Some 40% of all mortgages were delinquent by 1934 compared with 4% today.
• In the 1930s, more than 9,000 banks failed compared with fewer than 20 over the past couple of years.

Remember also it was policy errors, not the stock market crash, that caused the Great Depression:

• Instead of increasing the money supply, the Federal Reserve of that era reduced it by one-third.
• Instead of lowering taxes, Herbert Hoover raised them.
• And to channel whatever demand was left into U.S.-made goods, the government enacted the Smoot-Hawley Tariff Act to keep out foreign products; this only provoked our trading partners to do the same.

Add to this today's automatic stabilizers such as unemployment insurance and Social Security, the FDIC to insure bank deposits and circuit breakers to keep stocks from falling too quickly, and you can see why this is not a depression in any way shape or form.

Kellner makes sense - I might have written this. But here are two counterpoints:

1. This recession is just getting started. Many of the stats on the 1930s cover, well, the 1930s.  A whole decade.  Aren't we just getting started?

2.  Many of the firewalls in place now have never been tested, let alone broken. Does this raise the stakes? The point is that the modern economy has more safeguards, but has it not also more complexity, hence systemic risk. Were there anything like hedge funds in 1929? 

My advice on the Paulson Plan

... is halfway between Greg Mankiw and Hillary Clinton and Arnold Kling Kling *Kling* Kling. (Kling is on fire! "It's small business, stupid ... Lower capital requirements for bank lending to small business.")

As for me:

The Paulson plan just does not square with my philosophical principles.  It would if I believed the financial system were about to collapse if not for the $700 billion. But I do not believe that. Nor can I imagine a scenario where banks will suffer a run next week, month, or year. Just not plausible.

The FDIC is in place to secure main street banks, and yes, main street banks can get all the liquidity they need directly from the Fed to head off a run. Worst case scenario is an inflationary spike, not a Great Depression 2.0.

Moreover, if the bill were subject to pay-go rules (which the Democrats promised to adhere to a long, long time ago in a galaxy far, far away ... the election of 2006), there is no way it would pass. In a nation with 300 million people, the price tag on that $700 billion bailout is $2,300 per person. For our family (one spouse, four kids) that means $13,800. Does anyone think this would pass a national referendum if we actually had to pay for it? HT Kling, again.

And yet, like Mankiw, I have great faith in the wisdom of Ben Bernanke. I trust Bernanke. I would give him the benefit of the doubt, but only after I had a bill with transparency and oversight.

Greg structures his advice in terms of if he "were a member of Congress." Let me just say that if I were a Secretary of the Treasury, my approach would look a lot more like what Hillary Clinton is proposing: Relief via Main Street mortgages, not Wall Street mortgage-backed securities:

I've proposed a new Home Owners' Loan Corporation (HOLC), to launch a national effort to help homeowners refinance their mortgages. The original HOLC, launched in 1933, bought mortgages from failed banks and modified the terms so families could make affordable payments while keeping their homes. The original HOLC returned a profit to the Treasury and saved one million homes. We can save roughly three times that many today. We should also put in place a temporary moratorium on foreclosures and freeze rate hikes in adjustable-rate mortgages. We've got to stem the tide of failing mortgages and give the markets time to recover.

I would, as you might suspect, structure the HOLC differently than Hillary. It would be unwise to suspend the fundamental rules of contract law (see underlines above), and it would be doubly unwise to reward people in homes they cannot afford, which is deeply unfair to Americans who lived within their means. A smart policy would enable people continue to reside in place by converting them from home borrowers to renters. A smart own-to-rent HOLC would even subsidize rents for a period of 2-5 years (depending on the level of subsidy they opt for).

Lenders take a bath, but get liquid. Risky borrowers get out of their ARM debts, lose ownership rights to property they never really owned and cannot afford, but keep a roof overhead during the coming recession. Taxpayers benefit from stabilized housing prices and re-activated credit markets.

 

Paulson's Financial Fumbles

Even if the $700 billion Paulson Plan is (let's say was) a good idea, it wouldn't cost taxpayers a dime (a loan, not a bailout), etcetera, I am still appalled at how badly the process has been managed. Let's do a countdown ...

Fumble 4 - Disrespecting Conservatives. The most egregious fumble was ignoring the House Republicans and then expecting them to fall in line. The most conservative, libertarian principles reside in the House minority, making them least likely to support the Paulson plan.  So expecting them to roll over for an Administration they have lost faith in, a Speaker they see as abusively tyrannical, and a Senate coalition that arrogantly declared a done deal, was one of the most naive and downright stupid moves I have ever witnessed.

Fumble 3 - Expecting Speed. Paulson and Bernanke pushed for speedy passage of a clean bill. They overreached, given something this complex, and made it dead on arrival by asking for so much power with so little oversight. Ironically, the dominant Democratic talking points has been that President Bush "rushed to judgment" on the Iraq invasion and it is costing $10 billion a month.  Hmmm.  That seems like a dead line of argument now that Democrats are pushing to pass a compromise. The decision to invade Iraq was glacial by comparison.

Fumble 2 - Losing the Speed Gambit. More to the point, Secretary Paulson and Fed Chairman Bernanke made the "sobering" case that the financial crisis was extremely dire and that an economic meltdown was imminent. Last Thursday, they used their authority to impose a fear message for quick action. We now know it failed.  It is one week later, no bailout and no meltdown. The stock market is suffering, but not melting, and there are no bank runs. Nor will there be. But credibility has suffered. 

Fumble 1 - Expecting Clean. The idea of a "clean" bill in Washington is hilarious. This was a fumble at the handoff.  Why did Paulson think the Democrats (who control both houses in Congress) could resist mucking up the bill with add-ons? No crisis is too serious for politicians to leave unexploited by partisan agendas.  

The slow, agonizing drama of all this has given not just partisans but serious scholars time to build up a resistance. The statement signed by over 200 academic economists against the Paulson plan is extraordinarily powerful. The whole push for speedy passage is based on the psychological notion of credible, peerless authority personified by Secretary Paulson and Fed Chairman Bernanke. The scholars statement nukes that authority, symbolically and substantively.

Pro Sports

It seems absurd that professional sports represent a major growth sector for future jobs, given the U.S. population of 300 million, not to mention the global population of 6 billion. Surely the number of professional atheletes won't rise to a number that is statistically much different than zero in the scheme of things. Even in a world with 100,000 pro atheletes, it is not a realistic proposition that this is a growth sector worth spending much time considering.

That was my thinking before the 232-day baseball strike that led to the cancellation of over 900 games, including the entire post-season and World Series in 1994. That strike hurt more than players and owners. It hurt the workers who sold hot dogs and cold beer in the stands. It hurt neighborhood restaurants and hotels and their workers. It hurt TV moguls!

The whole universe of professional sports employment is multiple times larger than the mere number of players. Armies of coaches, scouts, trainers, media analysts, camera crews, highlight voiceover actors, writers ... even bloggers.

Just consider the television contracts for the National Basketball Association. CBS paid $27 million for the rights to broadcast NBA games during the three seasons of 1973-1975 (ending in the spring of 1976). The current contract gives ABC/ESPN/TNT the network/cable rights for just under $8 billion over the next eight years. A billion a year paid to broadcast something that cost 9 million a year when I was just a boy. I put the numbers for previous contracts back to 1973 (Hat Tip insidehoops.com) in this chart just to see the trend for my own lying eyes to disbelieve:

Granted, in real dollar terms, $1 billion is still not much of a splash in a $14312.5  billion nation. That represents 0.007 percent of the economy. Which of course doesn't include player salaries, coaching and staff, sponsorship deals, tickets, concessions, merchandising, and so on.

And this is just the NBA.  Don't forget Tennis, Football (pro and semi-college-pro), Baseball, Soccer, etcetera, etcetera. Help me out here ... can we get up to 0.1 percent of the economy you think? (ed: Easily, just add stadium deals). Another way to think of it: why let Congress bail out Wall Street when for $700 billion it could easily pay for seven centuries of NBA games instead? 

OK, get serious.  Here's what I am looking for: advice on books. 

Best sports book I have ever read to date is Halberstam's "Playing for Keeps," though "Moneyball" by Michael Lews is in a completely different league.  Not meant as a pun, I swear. Both great. 

What else should I be reading, fellow sports fans? On my potential list are:

• Bowls, Polls, and Tattered Souls by SI's Mandel
• How Soccer Explains the World by Foer
• The Blind Side by Lewis
• The Work of Professional Football (Soccer) by Roderick
• The Meaning of Sports by Mandelbaum

Recession Terminology Needs to Change

Trust the Economist (magazine) to make the case that is both obvious and unsaid. Here the Sirs suggest that the very idea of Recession has evolved, and we need a new lingo.

To the average person, a large rise in unemployment means a recession. By contrast, the economists’ rule that a recession is defined by two consecutive quarters of falling GDP is silly.

...

A rise in unemployment is a good signal that growth has fallen below potential. Better still, it matches the definition of recession that ordinary people use. During the past half-century, whenever America’s unemployment rate has risen by half a percentage point or more the NBER has later (often much later) declared it a recession. European firms are slower at shedding jobs, so unemployment may be a lagging indicator. Even so, the jobless rate has usually started to rise a few months after the start of a recession. (underlining added)

Yes! This was the point I made last year. Economic pundits (including myself) have a nasty habit of pointing to the numbers that make their case, and downplaying others. One must examine which data really work as canaries in the coal mine, and after careful examination, two stand out: the unemployment rate and initial weekly jobless claims. What have they been signalling?

• Jobless claims are now 445,000, compared to 323,250 a year ago.
• The Unemployment rate is now 6.1, compared to 5.0 four months ago.

This is an employment recession. And it is highly suggestive of a full blown recession in 2009.

And it must be said that the four key data series used by NBER for their recession assessment do not include the unemployment rate, but instead include a measure of payroll jobs that tends to be problematic during turning points. Any defenders of the payroll survey want to pipe up now and say those relatively placid numbers are better indicators than the unemployment rate?  Face it, a recession hit on payrolls will produce revised monthly losses like -431 (May 1980) or -208 (Aug 1990), not the paltry (and unrevised) -80 and -60 we're seeing.

Why a Recession Now?

I am tempted to say this is a self-fulfilling recession, and that America's loyal opposition (Democratic party) has been unforgivably negative on the economy for many years. I am also tempted to say that the once-ruling Republican party (which lost Congress to the Democrats in 2006) became unforgivably negative during the immigration debate of 2006-07 when they suddenly blamed Mexicans for hurting an economy that they had moments before said was the best ever. But the downturn today was not so much caused by political negativity as it was by political malpractice.

Oddly, neither party which was supposedly concerned about a weak economy a couple of years ago made a serious effort to fix the housing bubble, even as it was being pumped up by Fannie and Freddie in 2004, 2005, 2006.

It should also be remembered that the "jobless recovery" of 2003-4 was huge. That was when pessimists pointed to weak payroll numbers, and scoffed at anyone who said the unemployment rate (healthy at the time) was a better indicator. Their preferred remedy for the so-called jobless recovery? Lower Interest rates! And that's what we got.  So that's what I mean about a self-fulfilling recession.

1893

The financial crisis gripping Wall Street this week is fascinating because most Americans probably have no idea how serious the issue is.  Look outside, it's a beautiful autumn day with blue skies, warm winds, and green trees gradually coloring their leaves. Don't depressions happen in grainy black and white?

Financial crises to some degree are cyclical, not in the sense of a timely pattern, but in the sense of broadly common causes. The seasons of business are not regular, but the winters are always bitter.

When we gaze back to 1893, the year of Edna Parker's birth (who is the oldest living person in the world), we see the seeds of our modern world at the same time we see a world where the business seasons were much harsher and routine.

The "Panic of 1893" was the result of an economic expansion that became a speculative bubble. It was perhaps the most severe recession in America until the Great Depression. The rate of unemployment rose from 3 percent to at least 12 percent by 1894, and some accounts have it as high 18 percent. The Great Depression saw unemployment rise to 24.9 percent.

The 1880s had seen a period of remarkable economic expansion in the United States. In time, the expansion became driven by speculation, much like the "tech bubble" of the late 1990s, except that the preferred industry was railroads. Railroads were vastly over-built, and many companies tried to take over many others, seriously endangering their own stability so to do.... As concern of the state of the economy worsened, people rushed and caused bank runs. The credit crunch rippled through the economy.

Despite all this 1893 turmoil, baby Edna Parker was born in rural Indiana, the "Hoosier" state that was not yet known for its basketball or industrial prowess. The timing was all the more fascinating because, in fact, the game of basketball had just been invented, and the first college basketball game was played in the spring of 1893. What else was started that year?

• January 13 - The Independent Labour Party of the UK has its first meeting.
• February 1 - Thomas A. Edison finishes construction of the first motion picture studio.
• February 23 - Rudolf Diesel receives a patent for the diesel engine.
• July 11 - Kokichi Mikimoto, in Japan, develops the method to seed and grow cultured pearls.
• September 19 - New Zealand becomes the first country to grant women the right to vote.

So, there you have the seeds two new political forces: women and labor. You also have the seeds of the two main branches of the entertainment industry: motion pictures and sports, as well as the seeds of a luxury jewelry sector in peals. And you have the diesel engine.  All in the simple year of 1893.

Do you think anyone will wear pearls tonight, drive their diesel car to a movie theater, and talk about voting for Sarah Palin?  Or do you think they will just stay home and worry about the credit crisis of 2008? 

FOXO3A

To understand the future, first understand the past. And what better way to appreciate the contrast of economic growth from the past century to the present than by seeing that century from the eyes of those who lived it?

Imagine the perspective of the oldest person in the world, someone born two centuries ago. According to Wikipedia, the oldest living person is Edna Parker, born on April 20, 1893. She is 115 years old.

Think of her this way. Everyone alive the day before she was born is no longer. Everyone alive today was not when she was born. Edna Parker bridges two very different worlds. She was 20 before the U.S. entered World War 1, before scotch tape was invented, and before America was one of the world's Great Powers.

The Shelbyville News, a local Indiana paper, wrote up this a few years ago:

After getting married in 1911, she lived the arduous but rewarding life of a farm wife.

...

The Parkers continued farming in the Bengal area for many years, and she recalls getting out of bed at 4 a.m. to milk cows and feed the pigs, and then returning to the kitchen to make a big breakfast of fried eggs, fresh biscuits and bacon.

Much of her work revolved around the constant preparation of food, and this was especially true when harvesting and planting was taking place. She talked about the large amounts of food needed to feed the men — often as many as eight to 13 — as they labored to bring in the crops.

Neighbors at that time all pitched in and helped each other with their planting and harvesting, and as the men worked in the fields, the wives would gather and help each other prepare the big meals that were eaten at enormous, long, wooden “threshing” tables, which had seven or eight extension leaves.

Parker apparently was quite skilled at killing and plucking chickens — fried chicken being a staple of the large country meals and many a church supper. She said that after catching them and wringing their necks, she would stand on a chicken’s neck, pull it up to stretch it out and then chop off its head. After boiling and plucking seven or eight of the birds, she then peeled and mashed potatoes, cooked green beans and baked numerous pies and cakes.

“We liked fruit pies,” Parker said, “with no crust on top. And we made the cakes in bread pans.”

In fact, the fruit trees on her farm provided apples, cherries and peaches — all of which had to be picked and canned. The same was true of the many vegetables — lots of beans, corn, cabbage cucumbers, mangos and more — that she grew, tended, picked and preserved.

“And rhubarb,” Parker added. “We loved rhubarb. We had good food. There were good cooks back then.”

After fixing the huge noon meal for the hungry men, the women immediately started work on preparing a tasty supper — there were seldom any leftovers during threshing season. The women served the men, washed the dishes and then sat down to eat.

Although the women were expected to help with the farm work, Edna said that housework and caring for children was considered “women’s work.” She couldn’t remember her husband ever making a meal or changing a diaper.

“Oh, I guess he might have been able to do it in an emergency,” she said thoughtfully.

The Wall Street Journal published a science article on September 19th exploring the "wellderly" -- people who live extremely long - and healthy - lives of 100 years and more. Modernity has extended the lifespan of the average person considerably by advancing the basics of nutrition, cleanliness, exercise, treatment and understanding of disease, and so forth. But it appears that extreme longevity is uncontrollable.

Earlier this month, researchers at the Pacific Health Research Institute in Hawaii analyzing elderly Japanese-American men reported that a single biochemical misprint in the DNA typography of a gene called FOXO3A appeared to double or triple the chance of living to be 100 years old. They compared variations of five genes thought to influence aging in 213 men aged 95 or older to DNA samples from a group of 402 men who had died before reaching age 81.

Only the one variant stood out among the eldest. "If you got two copies of this gene -- inheriting one from each parent -- you hit the jackpot," says geriatrics expert Bradley Willcox who conducted the study.

9/22 .... End of (Summer) Capitalism?

With news that Goldman Sachs and Morgan Stanley are ending the era of investment banking as of today, I could not help but wonder if today's date 9/22 will become a shorthand symbol as did 9/11.

The credit crisis is ongoing, but a new and unprecedented government bailout known as the Paulson Plan is being worked out in Congress. Every hour that ticks by reveals the typcial nasty partisan differences, introduces add-ons, but also allows experts to raise questions about deficiencies and unexplored alternatives.

I remain a skeptic for reasons that don't merit too much attention at a time when renowned financial experts are publishing very valuable insights. Here are four worth your time:

• Jim Hamilton, a seer if there ever was one
• Bob Litan, my colleague and a towering expert on finance
• Paul Krugman, in a welcome essay showing his wit and wisdom, rather than rancor
• Luigi Zingales, UofC professor who explains "Why Paulson is Wrong."

As for me, I would happily repeat what I have told all my econ students and countless people in casual conversation the simplest explanation for confidence: "There will never be another Great Depression." It can't happen for a handful of reasons, but perhaps the most important lesson is that the Great Depression resulted not from Wall Street's collapse, but from numerous wrong-headed responses to the crisis that unfolded over many, many years. At a minimum, the Fed will not fail to provide more liquidity, not less (as it did during the early 1930s).

Google's "Computer Navy"

Google has a cool idea for housing its data centers.  Literally.

According to a report in the Times, the "water-based data centres" would use wave energy to power and cool their computers, reducing Google's costs.

This reminds me of Neal Stephenson's novel, Snow Crash, for some reason.

Kauffman's Presidential Economics Webcast TODAY at 4:45

You can view it at www.kauffman.org/economicpolicy

I will be watching it live, but you really should check it out from where you are sitting.

Details from our press release are:

Thank you for your interest in the Webcast: The Next President and the Entrepreneurial Economy. Please check back to this address (www.kauffman.org/economicpolicy) on September 19 from 4:45 to 6:00 EDT to view this event live.

With:

Jason Furman, Director of Economic Policy for Barack Obama

Doug Holtz-Eakin, Director of Economic Policy for John McCain 

Moderated By: Carl Schramm, President and CEO, The Kauffman Foundation

Live from the Inc. 500/5000 Conference in Washington, DC
Friday, September 19
4:45 to 6:00 EDT

Barack Obama, John McCain, and entrepreneurial businesses. How will this historic election influence America’s standing in the global economy and its ability to compete? What specific policies will the new administration pursue, and how will they affect America's entrepreneurs and business owners? Join us for a live webcast from the Inc. 500/5000 Conference as Kauffman Foundation president and CEO Carl Schramm leads a stimulating panel discussion with key economic advisers to John McCain and Barack Obama. Hear about the candidates' thoughts and plans regarding taxes, job creation, credit, innovation, immigration policy, education, the SBA, and other issues that are critical to the growth and success of small and medium-size businesses over the next four years and beyond.

"Eating up the Whole GDP"

Several weeks ago, Bob Litan said to Will Wilkinson during a Bloggingheads.tv chat that unless we solve the problem of health care, it will "eat up the whole GDP."

Robert Samuelson notes in his September 10 column that we spend an overwhelming chunk of the U.S. economy of health care and that it is expected to grow as the incentives to reduce spending simply aren't there.

In 1960, health care accounted for $1 of every $20 spent in the U.S. economy; now that's $1 of every $6, and the Congressional Budget Office projects that it could be $1 of every $4 by 2025. Ponder that: a quarter of the U.S. economy devoted to health care. Would we be better off? Probably not. Countless studies have shown that many tests, surgeries and medical devices are either ineffective or unneeded.

If you're looking for solutions, I'll redirect you to an essay by Paul Howard, who I linked to a little while back.   

Volt News & Reaction

Since the Volt was unveiled this Tuesday, there are a number of interesting reactions:

• Wired's Autopia says "Might Even Be Better" than a Prius.
• CrunchGear on battery progression, and photo from jgadget.com.
• Detroit Free Press notes that it was GM's 100-year anniversary.
• Motortrend's story is even better (calling the Volt a design "hair shirt").
• Make that two great pieces from Motortrend (this one about GM overall)
• Technorati chart on intensity of blog coverage of "Volt".
• The current wikipedia entry on the Volt.
• The boodle here at growthology is skeptical.

What I've learned is that the Volt will face competition, almost right away once the product is actually available to the public sometime in 2010. Perhaps they will shock the world and start selling a limited number of Volt's in early 2009. And the price tag may be steep. And GM may not survive, anyway. But for me, something about the Volt feels like the first really big, really smart thing to happen for the Great Lake State in a long time.

Tom Bevan (founder of RealClear) at CMC

Growthology.org research assistant Charles "Atlas" Johnson had an opportunity yesterday to sit down with Tom Bevan, the founder of Real Clear Politics. Here's his report:

Bevan had a few interesting remarks on tech start ups and what goes into starting up a company and maintaining dominance. Real Clear Politics started in 2000 and weathered the tech bubble burst. But just how?

"We turned Real Clear Politics into a lean, mean, machine," Bevan said. Bevan wakes up at 3:30 am every morning to go looking for good articles to include and to keep up to date before the rest of the country has risen. He went on to describe how unlike some of the other people during the tech bubble, he avoided venture capital money or hiring lots of additional people. Bevan insisted on specializing his Web site, which has since grown to over twenty employees and three sister sites, devoted to world politics, markets, and sports.

Understanding the Crisis: Trust or Transparency?

Arnold Kling's insightful post about trust and transparency help explain the current U.S. financial crisis:

Instead of perfect transparency, what we get in the real world are a variety of specialized functions to monitor and insure intermediaries. Monitoring means that somebody examines the books of the company on a regular basis so that I do not have to. Accounting statements are a form of monitoring. Credit rating agencies are a form of monitoring. Government audits are a form of monitoring.

And I would add: once it was exposed that the credit rating agencies were giving triple A to the worst sub-sub-sub partitions of mortgage-backed securities, trust was destroyed. Destroyed. It will take time to regrow.

Back to the recessionary question, the crisis gets resolved once housing prices find a bottom.  But keep pulling that thread, and ask if housing can find a bottom without a culture of trust in financial markets. Not likely. So that means trust shifts to the last place it can.

Kling concludes:

We have chicken-littled ourselves to the point where the only intermediary we trust is the Fed/Treasury. Is this intermediary solvent? No. See Medicare. Is this intermediary transparent? No. What this intermediary can do is collect taxes and print money.

Step back in wonder. This is a generational moment ... an opportunity. If ever there was a time to demand real fiscal discipline in Washington, this is it. The whole culture of inside deals, public-private scams, unbalanced budgets, national debt, ponzi-scheme social safety nets, third-party medical pay structures, favoring big insiders over entrepreneurs - and pushing the accountabilty onto the next generation's ledger - is now on trial.

I doubt that broken culture will get off on a technicality, and hopeful that finally Americans will demand real reform. 

The Myth of the Myth of the Rational Voter

Bryan Caplan's book The Myth of the Rational Voter is now available in paperback.

Wonderful book, and here are a few reasons why:

1. It exposes the blind faith in democratic aggregation, and puts political science on notice.
2. It identifies four common biases: antimarket, antiforeign, make-work and pessimist. Chapter 2 is essential reading for the media.
3. It is well written. Two gems:

"All models simplify, but that is a poor reason to habitually assume the opposite of what we know." (page 207 hardcover)

"When he affirms that 'science is the great antidote to the poison of enthusiasm and superstition,' [Adam] Smith is not thinking about errors that harmlessly balance out." (page 12 hardcover)

And yet I find myself unpersuaded that democracy in itself is problematic. I dispute Bryan's notion of the "paradox of democracy" because, in his words, I deny that it regulary delivers foolish policies. I don't dispute much of his analysis of voter bias, ignorance, and downright irrationality for the simple reason that I recognize my own bounded rationality. Moreover, I am one of the first to point to the folly of European make-work anti-progress laws.

The myth of the myth of the rational voters is this: irrationality is outweighed, and I think decisively so, by experience.

In the end, voters will cast out public officials that fail. Political parties suffer losses when they fail to deliver good economic results. I don't think there is any clearer case than the 1980 presdential election, when incumbent Jimmy Carter lost to Ronald Reagan.

Historians and intellectuals know that Reagan had very sharp ideogical princples in favor of low taxes, less regulation, and aggressive national security. But voters were largely reacting to high inflation and unemployment rates. To be clear, the lesson was not just that Republicans were "better" for the economy than Democrats. That election, and many since, have profoundly reinforced the principles Reagan espoused and governed by. For example, most observors agree that Bill Clinton was much more economically libertarian than Richard Nixon.

The logic is overwhelming.  Yes, Bryan, voters have a foolish anti-foreign bias and disagree with the theory of free trade. And yet the U.S. continues to export and import a greater percentage of its GDP each decade. Why? Politicians know that voters care much more about results than theory. Some but not all politicians mouth populist theory, and even fewer practice what they preach. They have to face re-election, after all.

250 mpg

250 mpg! That's one estimate of the Volt's fuel efficiency.

Outsourcing Child Birth, Savings Rates, and Government Policy

Economists often speak of consumption goods (what you eat, wear, play) and capital goods (what goes in to making what you eat, wear, play).

What often characterize consumption-based economies are high savings rates. In the U.S., our savings rate is slightly over a U.S. dollar. In China, it is 46 cents on the dollar. Savings rates are comparable, but nowhere near as high in the rest of Asia.

A recent blog post picked up by The American (the magazine of the American Enterprise Institute) makes the case that higher savings rates occur in China as a result of the one child policy. (The suggestion hasn't been empirically tested - one way to do that would be to compare savings rates between Han Chinese, who have to follow the one-child policy, and other Chinese minorities who don't.)

The author, John Hempton of Bronte Capital, writes,

In most poor jurisdictions there is a simple method of saving for oldage. Have six kids. They will have a few each and if you survive there will be lots of grandkids trained to respect their elders who will look after you. This does not work in China. Indeed if everyone has only one child there will potentially be four grandparents per grandchild. You can't expect to get supported.

Hempton's logic raises interesting questions for political economy, but it also begs the question of causality. At first glance, it seems a no-brainer that if the government mandates how many (few) children you can have, the likelihood that citizens will save money increases. Your personal resources are less scarce, right? And if you have no children, you can save even more of your paycheck. But could forcing people to save more - i.e. social security - mean that they are less likely to have children?

Revealingly, many European countries have low birth rates but also low savings rates. Same for Japan. Perhaps it is the strong form of socialized retirement insurance that obviates the need for private insurance of both kinds: financial and familial.

With social security, the assumption is that if other people have children, they'll be able to keep up the welfare state. But because everyone else offloads the decision to have children, fewer children end
up being born. The free rider problem becomes the no rider problem. And then the government must come in and "solve" the problem of low fertility.

Still, there might be a danger in encouraging too much procreation in the hope of paying off what Bob Litan has called the "scary chart." Kerry Howley of Reason writes of government-backed baby boosters in Singapore and elsewhere.

From Hong Kong (0.98) to Italy (1.29) to Russia (1.39) to Canada (1.61), most of the world’s population will soon live in nations where the fertility rate is below the “replacement” level of 2.1. Governments far less authoritarian than Singapore’s are intruding into childbearing choices. After 200 years of exponential population growth, and just four decades after overpopulation doomsaying began filling the bestseller lists, the First World is suddenly gripped with underpopulation hysteria.

. . .

The developed world is experiencing a wave of pro-natalist sentiment that threatens to bully the childless, tax the single, and reorient states toward the production rather than the protection of citizens. In most developed nations with below-replacement fertility, governments are attempting to align incentives so that women will use their bodies for the purpose of childbirth. In the

U.S., right-wing religious groups are calling for a rollback of contraceptive freedom and a return to patriarchal arrangements, all in the name of something called "demographic balance."

Institutions and family decisions are inherently complex, and policy makers need to understand that their tinkering may lead to serious problems in the long run.

Bloggingheads.tv and the Kauffman Foundation

Brink Lindsey of the Cato Institute and Bob Litan of Kauffman sat down for a Bloggingheads.tv chat to discuss Fannie and Freddie, its parallels with the savings and loan crisis of the '80s, declining Democratic support for free trade, the dangers of preferential trade agreements, and why the U.S. needs a competitive educational system.

In the future, expect more diavlogs with us both. I am working on setting one up with GMU econ prof Bryan Caplan soon ....