Tag Archives: policy

The Fed’s Move

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In the last week, the Federal Reserve Bank has said that it’s going to keep on buying mortgage debt (euphemistically called “mortgage-backed securities (MBS)”), and that it’s actually going to increase the purchase rate.  In addition to buying up MBS at $40 billion per month, they’re also going to buy $45 billion/mo of T-bonds.  Astonishingly, they’re going to pay for both by issuing new reserves to banks.  The Fed will continue to do this until certain unemployment thresholds are crossed.

James Pethokoukis, writing for Ricochet, suggests in quoting Economist David Beckworth, that this is a good thing:

It makes very clear to the public that the Fed will not stop until these targets are hit.  Markets, in turn, should respond in anticipation of these goals being hit.  That is, the elevated demand for liquid assets should start declining as households and firms start moving their funds into higher yielding assets.  This rebalancing should raise asset prices, help repair balance sheets, and ultimately spur nominal spending.  In other words, by better managing expectations, the Fed should cause the public to do the heavy lifting—and they already have started.  If all goes according to plan, the Fed may not have to actually purchase that many additional assets.  Ironically, this means that had the Fed been doing this all along its balance sheet would be much smaller now

On the other hand, King Banaian, also for Ricochet, writes

This would induce private lenders to leave the MBS market and hopefully make loans to the business sector.  Meanwhile, short-term interest rates would rise.

…

Reserves eventually become money.  Currently, most reserves are held by banks who receive interest on them from the Fed.  In short, the Fed is using its profits from operating in money markets to induce banks not to lend the reserves they are printing with one hand, while manipulating interest rates to encourage borrowing with its other.  And this process threatens to debase our currency.  The lone dissenting vote from Wednesday’s meeting, Richmond Fed president Jeremy Lacker, noted the Fed had only a few years ago agreed with Treasury that steering credit is not a job for monetary policy. Yet now that’s precisely what they’re doing.

The problem is that the power of all that additional money in the economy, when it does start to get spent (assuming the Fed’s credit manipulation works and “higher yielding assets” do turn into increased spending)—and lent, which exponentially expands the capacity to spend—is explosively inflationary.  By the time that inflation is recognized to be on the horizon, though, it’s actually already in full throat.  That inflation will then destroy the value of all that extra money poured into the economy, leaving us all where we are today—only with three times as much money, each dollar of which is capable of buying only one-third as much.

Maybe the Fed should stop.  Maybe the Fed should simply get out of the way and let our economy recover without the strait jackets of Fed debt-buying and of Progressive Do-Good welfare pushing.  The Fed can’t do anything about the one.  But it doesn’t have to do the other.

And this doesn’t even get into the smoke and mirrorsexpectation management that the Fed now admits is the sum and total of all that it’s doing.

Are We Like Europe Now?

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Current Democratic Presidential Candidate Barack Obama got the Nobel Peace Prize four years ago on his ascension to the American Presidency for his flowery rhetoric during his campaign tour of Europe.  (I’ll skip over his…flowery…behaviors in pursuing his own agenda in the ensuing years.)  Now the European Union also has received the accolade, for—flowery rhetoric?  (I’ll skip over the…flowery…responses within the EU’s member populations to being held accountable for their budgetary decisions.)

As the editorialists of The New York Sun put it,

Our own view is that…[i]creasingly the Nobel Peace Prize is political prop—its recent American winners have been Vice President Gore, President Obama, and President Carter—whose lessening luster will offer little to a European Union that itself has become a shackle of socialism.  It is a sad story.  And maybe some day, it will take a surprising turn.  One can always hope.  We intend no slight to the great strivers for a better Europe when we observe that in the coming generation the dreamers will look elsewhere than Brussels for the beacon of liberty.

There is that similarity, too, it seems.  Those American recipients also have steadfastly tried to move America toward more government control over our economy and over the decisions we individual Americans and our businesses make in that economy.  Indeed, the present administration, with its outright takeover of the one-sixth of our economy represented by the health insurance and health care industries, its ownership of two of the major car companies in our auto manufacturing industry (which ownership this administration is loath to quit), and its diktats to our financial industry, seems bent on a path of interventions associated with corporatism, a sub-genre of socialism.

Student Subsidies and the Federal Government

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I’ve written before about the failure of subsidies, their feel-good and superficial benefits notwithstanding.  The student subsidy that is a Pell Grant is a case in point.

Jenna Robinson and Duke Cheston, of the Pope Center for Higher Education, reported a bit ago on the growing excesses of the Pell Grant program (the full report can be read here or here).  The program consumed some $36 billion in the 2009-2010 academic year, half the Department of Education’s budget.  This also is—surprise—the Federal government’s largest education expenseinvestment.

Here’s what’s been done over the last several years, of which those $36 billion are only the latest, with/to a program that began life 30 years ago as a well-intensioned program to help the poor go to college.

  • In the 2009-2010 academic year, 60% of all college students received a grant—9.6 million students.  Between 2008 and 2010, the number of Pell recipients increased by almost 50%, roughly doubling taxpayer cost (this is a government charity, not a private one).
  • The maximum grant was raised to $5,550 beginning 2011 from 2008’s $4,731 per year.  This further encourages creative accounting: a 2009 study by Christina Chang Wei and Laura Horn (“A Profile of Successful Pell Grant Recipients: Time to Bachelor’s Degree and Early Graduate School Enrollment”) found that 60% of Pell Grant recipients were “financially independent” of their parents, compared with 34% of non-recipients.  Being “financially independent” means the parents’ finances have no bearing on student need or eligibility.
  • Better-off students often take their large Pell Grants and go to more expensive schools.  In that 2009-2010 academic year, 20% of Pell grantees from families making over $60,000 (so much for “financially independent”) went to schools that cost $30,000 or more per year with the aid of those Pell Grants.  Students from lower income families, without that wealthier base underlying their own grants, attended those higher-cost schools at a significantly lower rate—13%.  (By itself, this should be no big deal; people should go where they can afford to go with their money.  But this isn’t their money, it’s our taxpayer money—and our charity should help folks get by, and get a leg up, not help them live large.)

What did we gain from this…government largesse?  The usual subsidy distortions, but no improvement in academic performance or ultimate success.

  • An apparent increase in college enrollment by poor students—from 46% in 1970 to 59% in 2009, but
  • Poor actual performance, at least comparatively: graduation rates were lower for students who received Pell Grants than for those who didn’t.

And, as the WSJ points out, in the manner of all subsidies

  • Pell Grants contribute to the ever-rising tuition spiral: colleges and universities learned long ago how to capture that extra cash, and they adjust their price schedules accordingly.

Hmm….

Pause for Commercial

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My book, A Conservative’s Manifesto: A Brief Discussion of some Principles, has been published, and it can be found, among other places, at Amazon.com (paperback, Kindle, or hardcover) and at Barnes & Noble (paperback, Nook, or hardcover). Links also can be found nearby in the column to the right and on the newly added Books page.

The book lays out, in so many words, a set of (modern) Conservative principles that are tied back to the 18th Century Liberal principles that guided our Founding Fathers in developing our American social compact.  I begin with a description of those 18th Century Liberal principles and continue with a description of our drift away from them over the last 80 years, beginning with FDR’s administration.  I also describe a modern Conservatism that is those 18th Century Liberal principles brought forward to today, and I apply those principles to a number of critical aspects of American life: faith, citizenship, the nation, our economy, and our government.  I close by contrasting modern Liberal/Progressive concepts with these modern Conservative concepts and offering a path back to those modern Conservative tenets that made our country so exceptional and so great.

I hope you find it both enjoyable and useful.

Gridlock Works

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Lost in the hoo-raw over the payroll tax reduction extension at the end of the year was Congressional inaction on a couple of other weighty matters—and this inaction redounds to our benefit.

Congress failed to continue a 45 cent per gallon tax credit for corn-based ethanol and a 54 cent per gallon tariff on imported ethanol (mostly from Brazil—Obama wants us to be one of their best customers).  Since these two items were among the few things Congress even constructed reasonably—they actually had sunset clauses—they expired Dec. 31.  Of course we can expect the Progressives to attempt to redress this egregious failure or to score the evil Republicans for stopping a resumption—that is, if the Republicans find their courage, lost in the debt ceiling fiasco and which loss was underscored by their screw-up on the payroll tax reduction, and block a resumption.

Another useless “green” subsidy expired through Congress’ inaction, also: the thousand dollar tax credit for installing an electric car charging station in a residential garage expired, as did the related tax credit (up to $30 thousand) for installing a commercial charging station.

Unfortunately, the gridlock didn’t achieve a sweep: fuel refiners still are required to add 36 billion gallons of ethanol to their fuel mixes by 2022, and the (maximum) $7,500 tax credit for buying an electric car remains in place.

Of course, as with all subsidies, these had just made the subsidized items more expensive.  The 45 cent credit for the ethanol-in-gasoline just followed the fuel right into your cost at the pump, for instance.  The $6 billion per year we taxpayers were being hit for this credit bought everyone else’s ethanol gasoline.  And we paid those $6 billion even when we bought an electric car, instead.  Those of us that have bought one; sales are steady, but far from outstanding.

That credit for buying the electric car is interesting in its own right.  Just to take an anecdote for an illustration, a Ford Fusion (ignoring the usual haggling, and only looking at MSRP) runs around $20 thousand.  The correspondingly ungussied-up Fusion Hybrid is a bit under $29 thousand.  With the subsidytax credit, that drops the Hybrid to a shade over $21 thousand.

In some cases, the credit doesn’t do the buyer as much good, though.  The Tesla’s Model S is a $50 thousand electric car, and their Roadster seems, from Tesla‘s Web site, to be of a price that if you have to ask, you can’t afford it.  The tax credit doesn’t have so much practical effect here.  As to the Fisker Karma, well, that electric car isn’t available at any price, at least for a while: its batteries are…defective.  The credit is useless for it.

Maybe instead of renewing the ethanol subsidies, we can get Congress to eliminate the electric car subsidy and the requirement to dump ethanol into our gasoline, too.  Keep in mind that ethanol is hard on your car‘s engine.

Or am I hoping for too much change this year?