The Tea Party Protests

I am getting a little annoyed that some people have argued that the Tea Party protests were somehow a corporate funded "astroturf" effort, coordinated by the Republican Party, and that policy wonks rebuttal of that perception is defensive and proves them right. Yes, Republicans and old partisan-oriented groups have jumped on board, but they could not do it without genuine outrage, which is evident in the polls, and they did not organize the 750 protests across the country on tax day.

The people have a message: 84% of Americans are against the current government expansion in the longer term. 44% of Americans are against it even in the short term. The protests were coordinated by different groups in each city--some by Ron Paul groups, some by young conservatives, some by coalitions of different groups. This is no different than the anti-war protests by hodgepodge groups, including partisan ones like Move On, and radical ones, and apolitical ones.

Now, here is a round up of great, and disparate, highlights from the protests.

In NY:

“I think Newt Gingrich is – I think he’s a slime ball,” said Roy Delduco, a self-described Constitutionalist with tattoos up his arm and a shaved head. “I don’t like Republicans. I don’t like liberals either. I don’t like the whole bipartisan system. I think it’s part of the problem.”

Delduco said he wants the Federal Reserve disbanded, the IRS “put in jail” and his taxes lowered. He complained about government spending under both Presidents Obama and Bush.

“We’ve basically bankrupted the dollar, and I’m scared,” he said.

...One young man handed out feathers in homage to the Boston Tea Party; another offered stickers in support of John Galt, the hero of Ayn Rand’s “Atlas Shrugged.”

...Raymond Kwai stood alone in the crowd, holding up a sign that said, in all capital letters, “IF I WANTED TO BE A COMMIE, I’D STAY IN CHINA.”

In San Francisco:

"The government is growing too big," Bernstein said in an interview with CBS News after her speech. "And I grew up in socialism and I've seen it. And this is reminding me more and more of what Poland used to be. I was fortunate to see the transfer from socialism to a free market economy in Poland and i'm very sad to see that the opposite is happening here."

...The San Francisco rally was non-partisan: it attracted Democrats, Republicans, Libertarians, Greens, and independents, many of whom appeared to be supporters of Texas Rep. Ron Paul's 2008 presidential bid

Overall favorite quote: "You can't put lipstick on socialism."

Here is a roundup. Also, check out the coverage by Pajamas Media.

The Golden Age of Political Entrepreneurship is Here

(Cross-posted at Heritage)

As Joel Kotkin detailed in the Washington Post this weekend, the Wall Street Bailout and Trillion Dollar Deficit Plan being pushed through Congress this month mark the transfer of power from commercial cities like Chicago, New York, and San Francisco, to Washington DC.

In the business world, campaign contributions and lobbying efforts have replaced cost cutting as the way to maximize profit. Going to Washington with hands outstretched can prevent bankruptcy, and can provide a stimulus to the bottom line. Competing without such government aid is becoming more and more difficult, and rebels who shun such tactics are a dying breed.

This “political entrepreneurship,” or use of political power in place of competition, is not new. In fact, as far back as the “robber baron” age, some businesses preferred to use the power and purse of Congress, rather than have to do the hard work of cost cutting and innovation necessary to be a successful market entrepreneur. The true “robber barons” were not businessmen competing freely in the market, but those businessmen who gained monopoly advantage by lobbying Congress and buying market power.

Today, we still have some “robber barons,” protected by government and producing shoddy products, but we also have endless more miles of red tape on regular business, an incomprehensible tax code with favors for special interests, and subsidies and “pork” for every conceivable interest group request. It. Yet with all this spending and protection, we’re told we need more “stimulus,” and we need to “protect” more jobs.

In the academic world, two developments are driving the movement from economics to politics. The all-round analysis of economics, which can take into account all interactions and effects of various policies, has been abandoned for narrow subtopics and mathematical abstractions. Meanwhile the economists themselves have taken political views and ignored economics in their policy recommendations (for example, Paul Krugman).

But, the movement away from rational and realistic economics – the realization that there are limited resources and limited time, and that we cannot at once waste time digging holes and filling them up again, and also be productive and create prosperity – and toward politics – the art of deception, favoritism and trading favors – will necessarily bankrupt the country.

The Real Danger of World Government

(Cross-posted at Heritage)

Even more than rent-seeking and government expansion here at home, the greatest danger of a left-leaning Obama administration may be the danger of capitulation to a new world government.

In the past, “One World Government” has been seen as a rallying cry of a fringe group, not something that many in the mainstream would either fear or desire. But, suddenly today it is on the lips of world leaders. The recent financial crisis is being blamed on a lack of world government.

The Financial Times reports:

Jacques Attali, an adviser to President Nicolas Sarkozy of France, argues that: “Global governance is just a euphemism for global government.” As far as he is concerned, some form of global government cannot come too soon. Mr Attali believes that the “core of the international financial crisis is that we have global financial markets and no global rule of law”.

But, the financial crisis was not caused by a lack of international regulation. Financial crises in the past have tended to occur more due to intervention than due to lack of regulation, and each of the banks that failed in this crisis was regulated by at least one country. Monetary policy was a major cause of the 1929 stock market crash and is implicated in just about every other crash.

In addition to dangerous monetary policy, one of the underlying causes of the Asian financial crisis of the late 1990s was government industrial policy, “As part of their industrial policy, governments have directed funds toward favored industries at low rates of interest… This leads to excess lending to the companies that are well-connected and who may have bought influence with government officials.”

This is the same kind of corruption and rent-seeking we’ve been seeing back here at home, with Fannie Mae and Freddie Mac, and in other areas of government. Extensive government reach into markets is what causes crashes and recessions – not a lack of even more expansive government reach.

These leaders want not only to abandon capitalism as we know it, but they want to force these ideas upon all countries by regulating companies at the international level. This kind of anti-market world governance would not make peace more likely, nor would it make free trade more possible or financial crises less frequent.

A Collective Delusion

Pete Boettke, over at AE, posted about the Keynesian legacy. I have some thoughts on that, in particular, I agree that belief in those models represent the economists' collective delusion. I question why we have fallen for them - for private joy or public purse - and I fear that our policies are still colored by them.

I fear that economists have a herding mentality that grasps onto popular figures and then economists cling to the models of these "brilliant" chosen ones. But those who are chosen are not brilliant, they are only popular -- they generally have, like Keynes or Marx, gotten the ear of government. They come up with simplistic models that are easily used to churn numbers or explain phenomena, even though a child could see right through them.

When I took intermediate macro we used Mankiw's book. It was filled with Solow, Keynesian AS/AD, phillips curve, and on and on. I could barely believe that it was for real. None of it made any sense, none of it had any microfoundations (read: basis in reality).

I spent class time with a horrified gawking stare frozen on my face, wondering about the future of mankind if these were our leading economists, and asking the most basic of questions ("If savings is what drives growth according to the Solow model, then wouldn't communism work just as well or better than capitalism? Where are policies and institutions in this model?") and get answers such as "Well, this is just to simplify and explain the basics. Those details can be added later."

And I would be left wondering, about Solow and Keynes: who decided that the aggregate level of saving is more important than whether an individual, or a collective or government owns that savings? Who decided that aggregate investment is more important than whether it is private investment or investment by government in make-work programs? Doesn't it matter if the economy is split 90/10 private or 50/50 private or 10/90? When these models were being made economies spanned that whole spectrum, and yet these guys did not seem to think it mattered who was consuming resources - government or private consumer - who was investing or saving, just so long as the aggregate totals fit into the equations and made them balance nicely.

There were other problems - contradictions about what was better, savings or consumption? and so on - but the idea that private and public spending could be considered equal after the experiment with socialism and the interventionist state was well under way was just crazy. How could anyone think these models were useful at all? These seemed like child's play, fantasy, mind candy maybe. But not important, not something economists or policymakers should be using.

Why would economists fall for these models? And perhaps even worse: why do so many economists still cherish them, and hold them in esteem? What is this collective delusion? Is it that they love the "logic game" of it? Or is it the political clout they love? If they feed politicians with what they want to hear, they will be famous and win a Nobel -- isn't that better than being a no-name who sticks to reality? Isn't it more fun to make convoluted logic games, and be out in the public square?

Clearly for personal gain it is better for economists to engage the delusion. But this kind of absurd modeling still finds voice, and still drives our policies: "President-elect Obama's economic team is counting on investment in America's wind energy infrastructure to create thousands of jobs in a wide range of industries and help preserve existing jobs in other areas, particularly manufacturing."

Our government officials must "create jobs" by subsidizing or publicly providing work in specific targeted sectors. This will spur consumption (aggregate demand) and prevent collapse. This is all based on aggregate factors, and entirely devoid of microeconomic factors. We're also planning on propping up sectors despite their paying 3x normal salaries, by taxing regular workers, without concern over the need for the industry or the company to fail if it isn't profitable. We prevent jobs from "going overseas" as if trade is a bad thing.

Have we learned nothing about the failure of these models? Is this all political, is it useless to appeal to common sense?

Bailouts Making the Crisis Worse?

Economic policies often have unintended consequences. While the decentralized actions of individuals in the market can effectively coordinate the supply of goods – Adam Smith’s invisible hand – centralized government actions cannot. So, when market crises come about, it is important to ask certain questions before looking to government to correct the failure.

First, was it a failure of decentralized actors? Was a market failure, or irrational speculation, at the root of the problem, or was it government intervention that caused it? The financial markets have not been free of regulation, and they have been bailed out before. Those companies most regulated were the ones that led the crisis. Similarly, in countries with even more regulated and state owned financial sectors, the crisis has taken down those nationalized firms.

If it was intervention that caused the problem, then there may be no need to tie the hands of the market to prevent future crises. Instead we could roll back the interventionist policies we’ve been using, potentially allowing firms more flexibility to solve market failures on their own. Even the most benign regulation might prevent the market from innovating, adapting and spurring growth. Literally throwing money at the problem, and then seizing companies at will, cannot solve the underlying problems.

Second, it is important to ask both what would happen without bailouts and what is likely to happen with them. Many commentators simply consider the first, and have a doomsday scenario, but they have not considered carefully how the bailing out itself might cause both short term, and of course long term, damage. In the short term some say that the bailouts “are actually making it harder for financial firms to raise the money they need to muddle through the credit crunch.”

Further intervention is likely to make it worse if intervention caused the crisis in the first place. In the long run you have serious moral hazard problems – this is well known. Trying to dodge some of these problems, the Fed is being inconsistent in its bail out policy. Playing favorites is a well loved perk of discretionary policy making because it allows for rent-seeking by firms and politicians. With bail outs and subsidies, bad firms and bad investments are propped up like petty dictators, serving themselves but not the people. All this waste is laid at the foot of the tax-payer.

Finally, if we create a crisis through use of intervention and then respond to the crisis with more intervention, which in turn makes the crisis worse, and then respond to that crisis with yet more intervention – when will it ever stop?

As CNN reports, “This is the federal government's most far-reaching intervention in the financial markets since the Great Depression of the 1930s.” It will cost hundreds of billions now, and much more later, if it causes more crises down the road. So, it is critical that we ask: do we need these bail outs, and what are we setting ourselves up for?

Mortgage Socialization

Cross-posted at Heritage.

Fannie Mae and Freddie Mac were created during the New Deal by the Roosevelt administration in order increase home ownership. With government backing and price controls, the supply of housing was artificially increased, with the funds coming from the taxpayer.

Even when Fannie and Freddie were made into government sponsored enterprises (GSEs) in the 1960s, they were still provided the financial support of the Federal Government. Because of their implicit government guarantees, these policy-based suppliers came to dominate the housing market.

As GSEs, Fannie and Freddie purchased 44% of subprime mortgage securities and were the biggest buyer of Countrywide loans. They became an industry duopoly, owning or guaranteeing about half the $12 trillion mortgage market. Risk was socialized, spread across all taxpayers through government guarantee, while profit was concentrated and private. This is a prototype case of government thriving on “concentrated benefits and dispersed costs.”

The ability to do this is what drives government expansion, taking from the masses and channeling the money to a minority – or special – interest. With these special interests, campaigns were launched, politicians entrenched and bureaucracy expanded. Hence Fannie and Freddie represent a massive rent seeking operation, to funnel money into the hands of officials at the expense of the taxpayer.

And yet none of this was sustainable, because it wasn’t profitable. Inevitably there would be collapse. Fannie and Freddie engaged in Enron-style accounting, and mafia-like corporatist tactics. It was their privileged status that led to the corruption, and that distorted the housing market and helped to inflate the housing bubble (also made possible by loose monetary policy).

The government takeover only makes all of these things worse. In the short run there is relief that a market collapse won’t occur imminently, but like the Soviet Union during perestroika, the fear of pain during reform can only lead to the delay of collapse and a more painful landing. Further concentration can only cause further waste, as competition, profit guidance and valuable price signals give way to bureaucracy, rent-seeking, inflation and misdirected investment.

As nationalized firms, Fannie and Freddie are government agencies, relying entirely on public funding. They have no reason to keep costs low, and every reason to allow short-term political objectives to guide their choices instead. Indeed, the Treasury has made it very clear that they will specifically move away from profit guidance. Treasury secretary Paulson said on Sunday that the entities “will no longer be managed with a strategy to maximize common shareholder returns.”

Paulson has promised that the fees they charge banks for loan securitization services will be examined “with an eye toward mortgage affordability,” even as they are neck deep in bankruptcy. This reminds me, again, of the logic of perestroika – instead of freeing prices up and allowing some market adjustment, so that the economy could finally get on track, a compromise was made. Prices would be “based on social costs,” companies were allowed to “take into consideration cost-effectiveness” but “speculative price increases aimed at excessive profit” were forbidden.

The logic of the expanding U.S. government is becoming just as warped. The socialization of risk caused the housing crisis, and the response is to nationalize. Risky lending driven by policy not profit caused the collapse and the “reforms” will reduce fees and shun profitability. If we keep moving in this direction, we’ll pass through our own reverse perestroika, and end up a socialist state.

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.