Rent-Seeking and The Housing Crisis

Recently, a scandal has broken out that provides great insight into the housing crisis. Countrywide Mortgage brokers have been treating Congress to VIP lending rates. Accepting donations of $100 or more is illegal for these politicians, but scandals like this are not uncommon. The deeper question is why a profit-seeking business like Countrywide would want to offer discount rates to government officials in the first place. It is, of course, because they expect something in return.

If government could not offer these businesses any preferential legislation, exemptions from taxes or relief from anti-business regulations, there would be no incentive to buy them off.

Economists call this kind of activity rent-seeking. When firms spend money – or decrease their profit – in order to ensure favorable treatment by government it is not efficient. They produce no more output, and instead the resources are wasted. The favorable treatment gives them a monopoly position or an advantage over their competitors and the consumer suffers.

It also encourages government officials to pass more kinds of regulations that strangle business so that there are more chances to offer relief in exchange for pay-offs from the businesses. So, it creates a feedback loop leading to more regulations, more bribes and then even more regulation.

The only way to end the cycle is to limit the scope of government with a clear line preventing government from offering any kind of preferential treatment to firms.

But rather than moving toward a smaller scope of government, we are currently headed in the opposite direction. The new housing bill is set to bail out firms on a preferential basis – often by helping those, like Countrywide, who made the most risky sub-prime loans. In the future, these businesses will remember the compassion of Congress and will take these risks again.

Local governments will benefit too – with $3.9 billion in community development block grants. These grants are provided so that local governments can purchase, renovate and resell foreclosed homes. The proceeds can then be used to do this again next time that government subsidies followed by government bailouts lead to a new round of foreclosures. In this way, government can cause a crisis, solve it, and cause a new one, little by little expanding its scope in the process.

Have we not learned the lessons of the National Recovery Administration, when subsidies and bailouts, public works programs, and stringent regulations led us to a consolidation of government and big business that strangled private initiative and threatened the liberties we hold dear? Apparently we have not – a recent Time Magazine poll showed that 82% favor public works projects and 70% say more government programs are needed for those struggling.

The more that we allow government to solve our economic woes, the more that it expands its scope and creates new woes, just to have something more to solve. This is the rent-seeking power of government at its most frightening.

Cross-posted at the Heritage blog.

Note that the Center for American Progress was very enthusiastic about the community development block grants - HT Econlog for that.

In Soviet America

The American soviet government will take firm possession of the commanding heights of your business system: the banks, the key industries and the transportation and communication systems. It will then give the farmers, the small tradespeople and businessmen a good long time to think things over and see how well the nationalized section of industry is working.

The commanding heights - the corporatist controls of the reigns - leading the United States, step my step toward socialism. Circa 1934, under the New Deal.

The most daring proposals of the Hoover commission on standardization and rationalization will seem childish compared to the new possibilities let loose by American communism.

Writing in 1934, Trotsky spoke of the "Hoover commission on standardization and rationalization" but this is not the official Hoover Commission, which was not enacted until 1947. He was writing during Roosevelt. I'm not sure what he was referring to but Hoover did talk about standardization and rationalization of the economy by business; he was influenced by Tugwell (who, by the way, is very interesting - I am reading him right now - and I will post on him soon).

Trotsky imagined much more than we had in terms of planning, but he saw the potential within the New Deal. Indeed, as a step along the way:

In the United States, through the science of publicity and advertising, you have means for winning the support of your middle class that were beyond the reach of the soviets of backward Russia with its vast majority of pauperized and illiterate peasants. ... Even the intensity and devotion of religious sentiment in America will not prove an obstacle to the revolution. If one assumes the perspective of soviets in America, none of the psychological brakes will prove firm enough to retard the pressure of the social crisis. This has been demonstrated more than once in history. Besides, it should not be forgotten that the Gospels themselves contain some pretty explosive aphorisms.

As I have argued! Or anyway, that religion is not so far from communist Utopian dreaming... one could say the same about a Utopian dream of anarchy too, of course. Of course, Trotsky argued that the NRA was not in place in order to deliver communism (I would not argue that it had those conscious intentions either, for the most part) but that it would contain the seeds of its own crawl toward communism-- as it corrected itself with further intervention.

The NRA aims not to destroy but to strengthen the foundations of American capitalism by overcoming your business difficulties. Not the Blue Eagle but the difficulties that the Blue Eagle is powerless to overcome will bring about communism in America.

He then speaks about the public mind:

The “radical” professors of your Brain Trust are not revolutionists: they are only frightened conservatives. Your president abhors “systems” and “generalities.” But a soviet government is the greatest of all possible systems, a gigantic generality in action.

The average man doesn’t like systems or generalities either. It is the task of your communist statesmen to make the system deliver the concrete goods that the average man desires: his food, cigars, amusements, his freedom to choose his own neckties, his own house and his own automobile. It will be easy to give him these comforts in Soviet America.

I'm not sure that we abhor generalities; but certainly people respond to these materialist incentives. Choosing one's own necktie is not the first thing I think of when I think of "Soviet America" though; nor one's own house and automobile.

And then he describes the role of the monetary system, which once communism emerges, will not be initially used to control the economy - at that point, it should be stable:

Your almighty dollar will play a principal part in making your new soviet system work. It is a great mistake to try to mix a “planned economy” with a “managed currency.” Your money must act as regulator with which to measure the success or failure of your planning.

Your “radical” professors are dead wrong in their devotion to “managed money.” It is an academic idea that could easily wreck your entire system of distribution and production. That is the great lesson to be derived from the Soviet Union, where bitter necessity has been converted into official virtue in the monetary realm.

There the lack of a stable gold ruble is one of the main causes of our many economic troubles and catastrophes. It is impossible to regulate wages, prices and quality of goods without a firm monetary system. An unstable ruble in a Soviet system is like having variable molds in a conveyor-belt factory. It won’t work.

Only when socialism succeeds in substituting administrative control for money will it be possible to abandon a stable gold currency. Then money will become ordinary paper slips, like trolley or theater tickets. As socialism advances, these slips will also disappear, and control over individual consumption – whether by money or administration – will no longer be necessary when there is more than enough of everything for everybody!

Through stable money will socialism slip into pure communism. Some intriguing ideas in Trotsky. I forgot how much I enjoy him. More Trotsky to come!

Corporatism in America Part V

(this post is new)

To follow up on the earlier posts which were based on the Cato article and Fools Gold (see below), I will now add some thoughts from NRA Economic Planning. I hope to follow up with lots more from that excellent book later.

"...industrial planning implies the standardization of production,employment and prices; the standardization of materials, products and methods, and the substitution of concerted action and forethought for unco-ordinated and predatory competition either in a single industry or over the entire area of industry. It means the shaping of individual and corporate industrial activities into a co-ordinated whole...Industrial planning is the conscious guidance of our industrial life by collective methods"

Who said this?

George B. Galloway, chief of the planning division of the NRA. He went on to admit the areas of freedom which might be lost under his collective planning:

"To be sure, the execution of group plans involves some limitations upon the economic decisions of individuals or corporations whose activities must be adjusted to the policies adopted for the industry as a whole. The decisions subject to limitation include those pertaining to production, prices, hours, wages, savings, investment, trade practices and the use of property."

Oh, is that all? Just production, prices, hours, wages, savings, investment, trade practices and the use of property? That's not too bad then.

One interesting are of research is the effect of rent-seeking by labor unions and corporations, using the powerful levers of the NRA's more discretionary rulings, or the laws for which they can offer exemptions to industry. It is well known that in countries with more bureaucracy and less free markets, corruption and political wrangling replace market entrepreneurship. In the case of the NRA laws, overtime pay was suggested as a replacement for maximum hours; but interest groups and corporations could battle for exemptions to maximum hours instead. Labor unions did so because they wanted monopolistic control over wage setting; firms, meanwhile, wanted exemptions rather than having to incur overtime pay costs.

Hence, while a rule of overtime pay applied equally to all industry would have been simpler and would have given firms more flexibility, it was never enacted and instead dozens of codes for dozens of industries (many completely unenforceable) were supplemented with dozens of exceptions each.

And, the evidence suggests that this somehow did not help relieve unemployment. Go figure.

Corporatism in America Part IV

Some thoughts
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Most of what I've posted up to here was from that Cato article. The bit about North Dakota and maybe a snippet here or there was from the book I mentioned, Fool's Gold. These thoughts and quotes are mostly from the latter.

1. FDR ran on a platform promising to cut government spending by 25%

...Franklin D. Roosevelt was elected as a Democrat on a platform that declared for sound money, a balanced budget, a reduction in the expenses of federal government, and the abolition of the many useless boards and bureaus...
...The direct pledge was made by the Democratic candidate that the cost of conducting federal government would be reduced by twenty-five per cent. That had a nationwide appeal. The direct pledge was also made that a system of sound money would be maintained, by which the people believed he meant the retention of the gold standard. That also had nationwide appeal.

a) Wow - who even suggests that these days? Doesn't that show where the America public was at that time.
b) How could he get away with doing not just the opposite, but actually growing government more than 3-fold -- from 3% of GNP to 10% of GNP. Obviously the crisis of the onset of the depression was the excuse, but what an incredible 180, what a wildly dishonest turnaround. And yet he is so fondly remembered(!?)


2. In a letter from the Comintern to the communist and socialist parties (who were all pro-Soviet and from whose ranks many in government later came) in the US in 1921, urging communists to take part in all elections including the general election from within one or the other of the two major parties (and also to continue their good work in infiltrating trade unions and other organizations, and schools and so forth) it was said:

The Communist party must remember that it is not its purpose to reform the capitalist state. The purpose of the Communist is, on the contrary, to cure the working masses of their illusions, through bitter experiences. Demands upon the state for immediate concessions ... to the workers are formulated, not to be 'reasonable' from the point of view of capitalism, but to be reasonable from the point of view of the struggling workers, regardless of the state's power to grant them without weakening itself. Thus, for instance, a demand for payment out of the Government treasury, of full union standard wages for millions of unemployed workers is highly reasonable from the point of view of the unemployed workers but damaging from the point of view of the capitalist state.

And some strange decisions were made.

...farmers could not find sufficient help to enable them properly to harvest their crops. Thousands of idle men loafed around the towns and villages but disdained to work because the dole they received from the government was as much, or nearly as much, as the farmers could afford to pay them in wages.

Originally it had been argued to give relief money to the Red Cross-- but that would not allow the money to funnel properly through government and into the right pockets:

Officious bureaucrats and designing individuals...have used the money to build gigantic political machines...
...The thing, however, that has caused an uproar--and rightfully--is the established fact that relief agencies in many cities appear to be dominated largely by communists, and that the communists are using the public money they thus secure to carry on their battle to destroy our form of government and our system of economics. General Hugh S. Johnson, sent to New York by the Roosevelt administration to "put men to work," found it necessary to establish a special department to ferret out the large number of communists who "chiseled in" on public funds. He expressed himself rather forcefully on the subject when he left his job. His successor, Victor Ridder, however, according to the press, immediately disbanded the special committee.

3. Some other things you might not know about the policies enacted at that time:

Fined and imprisoned for competitive pricing: A little tailer in New Jersey was fined and sent to jail because NIRA asked him to charge forty cents for pressing a pair of pants and he charged thirty-five. Sent to jail for violation of government set prices -- in the United States. Wait, can that still happen if it is housing or some other area where government controls prices?

NIRA labor laws were really enforced: Some employees of Harriman Hosiery Mills Company went on strike, others did not. The company was told by NIRA to discharge loyal employees and take back the strikers, it refused. General Johnson, head of administration of NIRA in charge withdrew their Blue Eagle and set up a government boycott to prevent products of the mill from being sold. The company was forced to close, with great financial loss.

Farmers told how much and which crop to plant: The Potato Control bill reads like Soviet agriculture, with farmers being told not to plant certain crops and how many acres of another crop he must plant.

Corporatism in America Part III

The Decline and Fall of American Corporatism
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WWII may have been the height of Corporatism, but the end of the war did not signal a drop back to pre-NRA levels. In fact, it took many years to unravel the regulations and restrictions put in place during the corporate years.

Libertarians often argue that in fact we may be becoming less free and more state run today. I don't think this is the case. Over the 50 years following the union-peak (34% unionized, still a far cry from Sweden's 80-90%) there was a matching fall in regulation. Corporatist restraints slowly uncoiled.

Regulatory timeline:

1940s: After NIRA is overturned, antitrust law and policy becomes "pro-competitive" and for low-price rather than fair-price.

1945: End of major price controls, output controls, nationalization and other firm controls. Some nationalization left in place, along with regulation and some price controls.

1947: Taft-Hartley reinstated the right to not join a union, the right to fire unionized workers and some other basic rights in the labor market.

Korean War: A return to price controlling and regulation during wartime.

1961: JFK still used his powers to force the hand of the steel industry, on the wage front explicitly and on the price front through threats. No corporation felt safe firing unionized workers for fear of this kind of government intervention.

1970s controls: Nixon and Carter impose price controls, Nixon as part of ending gold-backing of Bretton Woods and then "due to the oil crisis"; Carter as part of trying to keep gas cheap for consumers. These were the last national-level price controls to be explicitly enacted. There are some calls for healthcare-related price controlling but there is no longer unanimous support for such things.

1970s deregulation: Ford proposes deregulating the airline industry, becomes law under Carter (ADA); Deregulation in utilities (PURA and NGPA); ICC ended with MCA; Deregulation (and breakup) of AT&T.

1981: Reagan signals to firms that they can fire unionized workers by himself firing the striking government airline workers.

1992: Caterpillar hires replacements for (fires) UAW members after a 5 month strike.


Theory and public opinion (summarized from the Cato article):
1. Competitive pricing is understood, above-competition prices cause unemployment. This comes with changes to anti-trust, the neoclassical wave in economics etc.
2. Union political power is recognized as having its own problems. Hayek and Friedman and others weigh in.
3. Public choice economics takes this to the next stage, on the economic side: unions do not create offsetting productivity to pay for higher wages but just collect rents; on the political side: rent-seeking means consolidation of power and garnering of public funds for private use. The main beneficiaries of regulation turn out to be the regulated companies (which explains why they were always the ones fighting for it!).
4. The old assumptions about competition leading to conglomeration fail to emerge.
5. Unions are only useful with the rest of corporatism in place-- when prices are controlled to allow for union wages, for example. Unions remain interesting only to public employees.


What about intra-corporate questions:
Unocal v. Mesa Petroleum (see also "Revlon v. McAndrews & Forbes Holdings, Inc.") -- can a director of a corporation reject a takeover because the takeover would be bad for workers, even if it is good for shareholders (or what about, just because he feels like it)? Isn't that intra-firm and should be left to the private actors to battle it out? Cato represents this case as anti-corporatist because the director must do what is in the interests of shareholders, of the firm, rather than the firm being subjected to labor control. I'm not buying it.

Corporatism in America Part II

American Experiments in Socialism
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1. The Non-Partisan League built socialism in North Dakota, circa 1917. With near complete control of the legislature they took control of the mills and grain elevators, put controls on all banks and established a state bank, created dozens of new state offices and worked toward the "general socialization of all industry."

The Non-Partisan League (NPL) was not the brain-child of one man (Townley), it was discussed in socialist publications for years ahead of time and advertisements for organizers for the new league to organize in many Midwestern states appeared in a Kansas socialist weekly in 1916.

The policies failed and the farmers - the voters - turned against the NPL. The NPL then threatened to destroy their crops by fire or other sabotage if farmers did not employ strictly IWW members - to ensure socialist keeping of power. IWW then formed wage committees to plan the wages and hours of North Dakota farmers. Their plans were laid out in their publication Solidarity in 1917.

Many of the socialists who founded the NPL and were involved in the North Dakota experiment went on to become part of the Roosevelt administration.


2. NIRA and NRA

Under NIRA, firms could group as cartels, set "fair" prices and those prices once accepted by the NRA would be enforced by law on the industry; labor unions gained political power and government promised to intervene if wages were not "fair".

The passage of NIRA ushered in a unique experiment in U.S. economic history—the NIRA sanctioned, supported, and in some cases, enforced an alliance of industries. Antitrust laws were suspended, and companies were required to write industry-wide "codes of fair competition" that effectively fixed prices and wages, established production quotas, and imposed restrictions on entry of other companies into the alliances.

NIRA was a failure due to competitive cheating and was also declared unconstitutional, However the NLRA left unions in an even more powerful position, making it mandatory to join or pay dues and making it illegal for employers to fire workers for striking. Thankfully, this was overturned in 1947 with Taft-Hartley, and today NIRA is better known for its rodeo, and NRA for their guns.


3. Corporatism got its second wind when during WWII industries became directed more than just regulated by the Interstate Commerce Comission, the Civil Aeronautics Board, the Federal Power Commission and others. These boards set prices for the industry and regulated entry and exit. And Roosevelt intervened during any dispute between labor and management and nationalized (by executive order) any firms which would not obey his command. Between 1941 and 1945 more than 1/3 of the top 100 American corporations were seized either in whole or in part. Among those seized were railroads, mines and even the Montgomery Ward department store. In 1944 Roosevelt, angry at union strikes which were still going on, supported a National Service Act which would require Americans to either work or fight. The latter did not pass, and most of the price controls and much of the regulation and nationalization was dismantled after the war. This experiment went better than the others though it is hard to say how well and also how much of the success was due to short-term war-induced nationalism, mobilization, war industry and of course massive debt.

Corporatism in America

(this series originally posted on Facebook some months ago)

An excellent article in Regulation magazine (a Cato publication) describes the rise and decline of unions in America and the relationship of union legal power to "corporatism" in America. Corporatism is explained - it is in fact a regulated economy that depends on both corporations and unions having price control power in the market, so that corporations are promised a "fair" price and unions are promised a "fair" wage. It is a kind of soft planning.

The history of corporatism in America is fascinating, the period when it reigned can easily be seen as an experimental step toward socialism (or fascism) which indeed is what corporatism is -- a socialism-lite that lends government power to both firms and workers but stops short of directing output or completely owning the profits and losses.

As I have learned from the book Fool's Gold, many in the administration at the time of the NLRA and NRA were in fact socialists and wanted to take the next step after corporatism, toward a fully planned economy. Whether you believe that this was widespread, whether you would favor it or not, it is interesting when comparing the economic systems to consider how corporatism would indeed have been an appropriate and necessary step toward a fully planned economy.

While corporatism is a regulated economy, with regulated prices in the major industries and regulated wages, a fully planned economy - socialist or fascist - would also involve regulated output and regulated profit - with "excess" profit from one industry offsetting "planned losses" in another.

Under fascism, the firms would still be nominally owned by private individuals but those individuals would have power within the government; under socialism they would be described as "public" and those in charge would be government officials -- the names would change but the structure would be the same. The government would be setting the profit, prices and wages, determining who is to thrive and who to starve and what the economy is to produce.

(to be continued)