Category Archives: Economics

Miscellaneous economy stuff

The Bailout, Again

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I’ve disparaged in other posts the Greek people’s response to their economic crisis.  However, the decision of their Prime Minister, Giorgios Papandreou, to put the latest EU offer of a bailout to a plebiscite—to let those Greek people speak directly and for themselves on whether they think the bailout, or its terms, are suitable—has led to an interesting set of responses from the other governments of the Union, and from within the Greek government itself.

On the one hand, there is a great deal of legitimate frustration on the part of those governments over the decision for a plebiscite of the people who would be the “beneficiaries.”  Regardless of what we might think of the bailout itself, a lot of hard work and political capital, and yes, sacrifice and good faith, went into working out the parameters of this latest bailout, and filling in the details will take much more of the same.  On the other hand, how those governments are expressing their frustration says a very great deal about their views of democracy.

French President Nicolas Sarkozy insists, “Giving the people a say is always legitimate, but the solidarity of all countries of the eurozone cannot work unless each one consents to the necessary efforts….”  The Greeks really must have other nations’ permission to speak for themselves.  It’s a cute idea, though; thank you for playing.

Rainer Brüderle, a leader of the Free Democrats Party (part of Germany’s ruling coalition), says in all seriousness, “It’s a strange thing to do [hold a plebiscite], but all you can do is take precautionary steps in case there is a state insolvency in Greece.”  Indeed.  How alien a concept it is, this letting citizens speak and instruct their government.

The Swedish Foreign Minister, Carl Bildt, has Twittered,  “I truly fail to understand what Greece intends to have a referendum about. Are there any real options?”  Aside from the question of whether the Swede’s understanding is necessary to a Greek referendum, his professed inability to understand the matter says more about his understanding of the imperatives of democracy than it does about Papandreou’s decision to consult his employers.

Even from within Greece’s own government, we have a lack of clarity.  “I never expected Papandreou to take such a dangerous and frivolous decision,” huffed Dora Bakoyannis, an independent member of the Greek Parliament.  In the birthplace of democracy, it’s a frivolous thing to have the government’s employers speak up and tell their government what it must do.

Socialist deputy Hara Kefalidou wrote to Papandreou this, among other things: “I cannot back a referendum which is a subterfuge by a government that appears unwilling to govern.”  Letting her constituents, and the constituents of the rest of the government, speak is mere subterfuge, and not democracy in action.  And a government which fulfills this duty is unwilling to govern.  This is interesting….

Even support for the decision to hold a plebiscite is founded, not on recognition of the fundamental tenets of democracy, but on the purely utilitarian grounds of its political practicality: a successful outcome would silence, once and for all, opposition to the bailout in Greece.

Another, ulterior, motive for the EU leadership’s crocodile tears seems apparent.  “While Greece is threatening a vote, nobody will ever give Europe the resources for the enhanced [EFSF],” said Jan Poser, Bank Sarasin’s chief economist.  Those uppity Greeks are going to cause an embarrassment for the EU at this week’s G-20 summit. The EU members had intended to beat the wallets of the other members, especially China and Brazil,  for funding to bail out the now over-committed EFSF, so that it could bailout Greece, and then Portugal, and then Spain, and then Italy, and….  However, with those Greeks so rudely planning to speak for themselves, it seems there will be great difficulty getting anyone from outside the EU to support these efforts.

Apparently, the European view of democracy is that the citizenry very democratically vote politicians into their government, and then the citizens are to shut up, sit down, and let their government speak for them.  But when governments speak for the people, with no obligation to heed those people, governments instead speak in the people’s place.  And the people have ceased to have a voice in their own governance.

No.  Let the Greek citizens speak through their ballot box.  They’ve been speaking in the streets for months, and they’ve been studiously ignored.  It isn’t government’s role to protect people from themselves (leaving aside the minor fact that it has yet to be established that a popular decision to reject the bailout is something from which protection is warranted).  Especially when government does such a terrible job in the attempt.  And putting off the default will only make it worse when it happens.

Supports and Consequences

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Rep. Collin Peterson (D, MN) has proposed a Dairy Market Stabilization Program to replace existing Dairy Product Price Support and Milk Income Loss Contract Programs, but the debates surrounding the proposal misses a key point.

“The Dairy Market Stabilization Program [proposed by Peterson] is specifically designed to increase milk prices,” the Consumer Federation of America says.  “As milk and dairy prices increase, low-income consumers are hit especially hard.”  National Taxpayers Union, Americans for Tax Reform, and Citizens Against Government Waste warn of other results.  Artificially propping up milk prices “will ratchet up budgetary pressures on the government’s food and nutrition programs.”  Further, the DMSP, if passed, would empower government to limit how much milk is to be produced given falling profits; this is intended to strengthen a “safety net” for a government-favored group.

While these are valid arguments; they don’t go far enough.  The key point is the long list of unintended consequences of this sort of program and of subsidies in general.  One narrow consequence has to do with this: the CBO estimates that the DMSP would save us taxpayers $167 million over five years.  How much would we save if we didn’t have any of these three subsidies?

Another consequence comes from this effort to “help strengthen a vulnerable dairy sector.”  Dairy wouldn’t be a vulnerable sector except that government subsidies have protected it from the strengthening and hardening that competition produces.  The sector is soft and “vulnerable” as a direct result of its having become dependent on government for its “protected” profits and its protection from the risk of failure.

This stems from another unintended consequence.  The bailouts of 2008 and 2009 have simply fostered an environment wherein everyone feels entitled to a bailout; no one should have to suffer the consequences of their own decision-making, or even of plain bad luck (and note carefully that a hand up is not a bailout).  All of us are entitled, goes the new plaint, to having taxpayers indemnify us from life.  However, something that was a mistake the first time is not made correct by repeating it.  It remains a mistake.

Yet another consequence is that ratcheting up of budgetary pressures on the government’s food and nutrition programs that was warned of above.  The NTU, ATR, and CAGW are right as far as they go, but they miss the larger point, one hinted at by the CFA: the subsidies, including other subsidies that would be cascade victims of particular subsidies’ budget pressure, all drive up—by design—prices that consumers, including poor consumers, must pay.  (And so we have food stamp programs, and other food and nutrition programs, to help those poorer consumers pay those artificially inflated prices….)

There’s another unintended consequence.  Consumers—taxpayers—in return for our tax money being taken away from us to pay these supports, have even more of our money taken away from us by our having to pay those artificially high prices that are the goal of these supports.  We’re forced to pay twice for the same milk.

There’s the unintended consequence of the moral hazard involved.  Industries that are protected from failure, government-favored small businesses that are protected from failure, have no incentive to control their own costs, have no incentive actually to compete.  They get high prices (which we must pay, both through those high prices and through the epicycles of subsidies on top of subsidies to prop up those prices and then to help others pay those propped up prices), and they have high costs with which to “justify” those high prices.  This is related to those original mistakes of the 2008 and 2009 bailouts.  How can a businessman, or an investor in that business, or a lender to that business, assess his risk accurately when there is no downside from risk?  Another aspect of the moral hazard question is this: one justification for the supports is that dairy farmers would go out of business without them.  But if they can’t compete, why should they be in business?  Why does any particular business or industry have an inherent right to exist, regardless of market competition forces?  Who decides which business or industry should be artificially continued?

Finally, here is a consequence almost as bad as the moral hazard one, a consequence with more concrete and immediate impact on our pocketbooks.  Supporters of the DMSP worry that were there a repeat of 2009’s economic dislocation (we’re out of that one?), a repeat of the problem of falling milk prices coupled with abruptly rising input prices, “I fear we could lose half our dairies,” as Congressman Peterson puts it.  But why did those input prices rise?  One (but not the only) reason is ethanol subsidies.  These diverted food corn away from the dairy herds (and other cattle herds, and people): nearly 30% of corn went to fuel production in 2009; that expanded to 35% in 2010.  The effect from seemingly unrelated subsidies on those input prices for milk production is apparent.  This diversion, in cascading unintended consequence, reduced our supply of food, raised the price of that food that we must pay, and drove cost increases in those food stamp subsidies.

Cutting

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The Tea Party Debt Commission, a project of the FreedomWorks organization, is working on the same goal as the Congressional debt commission [sic], that of devising a means of reducing the nation’s debt.  Rather than playing small ball, the way the Congress’ commission is, though, the TPDC is looking for a $9 trillion reduction over the next 10 years.  Further, the TPDC, unlike the Democrats on Congress’ commission, is looking to do this without raising taxes.

In support of this goal, the TPDC polled “activists across the country,” says The Daily Caller, for the top 10 sources of budget cuts, and they got these:

1.    Repeal Obamacare
2.    Reduce duplicative purchases of Pentagon supplies
3.    Eliminate the Department of Education
4.    Privatize Fannie Mae and Freddie Mac
5.    Reduce discretionary spending to 2008 level
6.    Block grant Medicaid
7.    End ethanol tax credits
8.    Sell needless federal buildings
9.    Eliminate the Department of Housing and Urban Development
10.  Reduce Medicare teaching subsidies

Naturally, I have my own view, and I have a bit more than 10.

1.  Repeal Obamacare
2.  Repeal Dodd-Frank
3.  Privatize Social Security and Medicare
4.  Push the States to privatize Medicaid, and block grant Medicaid’s Federal transfer payments, reducing each State’s payment by 10% of the 2010 total transfer to that State each succeeding year until the block grants are gone
5.  Open insurance to interstate sales on free market principles
6.  Eliminate the Department of Education
7.  Eliminate EPA
8.  Eliminate Fannie Mae and Freddie Mac
9.  Eliminate HUD
10. Eliminate all “green” and all oil and gas subsidies
11. Cap Federal tax collections at 20% of GDP
12. Cap Federal spending at 95% of the average Federal tax collections over the preceding five years, with the excess collections going directly to paying down our national debt.
13. Cap Federal borrowing at 20% of GDP unless the President declares a national emergency and both the Speaker of the House and the Senate Majority Leader concur.
14. When the current national debt falls to that level, re-cap Federal tax collections at 95% of that prior limit.

While it’s useful to reduce Defense spending—and the spending by all the other Departments as well—through efficient-izing the Department’s spending through eliminating duplication, i.e., rooting out fraud, waste, and abuse, in general, this is easier said than done, and we need something done now.  The same difficulty applies to “needless” federal buildings.  It’s always a good idea to get rid of excess, to a point.  Maybe it’s better, though, to keep real estate in the government’s back pocket against future need, and lease the excess, instead.

Privatizing our health and retirement accounts, in addition to saving all those expenditures, leaves the tax money that isn’t funding those programs, anymore anyway, in our hands.  This both gives us the wherewithal to fund our own needs, and it leaves that money in the hands of those who are, empirically, better equipped and more skilled to do intelligent investing than our government has shown itself to be.

On eliminating all energy subsidies, neither “green” nor hydrocarbon energy sources need them.  The oil and gas industry will still make money without the subsidies, especially if impeding regulations also are eliminated.  If the “green” industry can’t compete in a free market without subsidies (and without impeding, or facilitating, regulations), that merely demonstrates that “green” technology isn’t ready for prime time.  In addition to which, the American people are fully capable of making our own decisions, via our free market, concerning our energy needs; we don’t need to be told what to do by government subsidy or EPA diktat.

We don’t need to privatize the FMs.  We need to eliminate them.  If our free market wants a means of “securitizing” mortgage loans—if there really is a market niche for this—the appropriate businesses will start with the appropriate entrepreneurs.  Besides, given the shenanigans of the FMs, there would need to be a 100% replacement of management all the way down to the secretarial pool (to date myself) supervisor before those two institutions could be trusted again.

Reducing discretionary spending to 2008 levels is a nice start, but it doesn’t address the long-term problem of too much spending—unless the pollees want discretionary spending permanently capped at 2008 levels.  There are two reasons such a cap, temporary or permanent, is insufficient, though.  The first is that a fixed, hard number doesn’t take into account future unforeseen, or future economic growth.  It would be better to cap at a percentage of GDP.  Also, capping discretionary spending only addresses a relatively small part of Federal spending; it ignores entitlement spending (which is a terribly indicative name for that category of spending, but it’s what we have).  “Entitlement” spending needs to be severely curtailed, also.

Government Market Intervention

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I’ve written before (here and here) about the damaging risks run by governments intervening in a free market.  I want to talk about a couple of additional examples of such intervention, and then I’ll leave the subject alone for a while.

The Daily Caller wrote today about the President’s attempt, by Executive fiat, to ease the debt burden on students.  The plan, according to early information, is to allow some of the (now graduated) students to ease their debt burdens by consolidating their loans into one loan.  Further, after the original loan contracts have been solemnly entered into, the President’s plan seems to be to allow borrowers to cap their loan payments at 10% of their after-tax income (with the signed contracts capping these payments at 15%).  Finally, unpaid balances can simply be walked away from—”forgiven”—after 20 years, instead of an originally contracted-for 25.  This plan is available, though, only to students whose loans were obtained through a Federal loan guaranty program or directly from the Federal government.  (Thus, not only is a select group being singled out for preferential treatment, only an especially favored subgroup is eligible for this particular intervention.  This, though, is beside the point of this post.)

Early word is that this will be “paid for” by “savings” claimed to occur from the 2010 nationalization of the student loan business which was included in Obamacare legislation.  There are a number of problems with this; I’ll confine myself to the market intervention problem.  With one party able unilaterally to alter the terms of a loan contract, costs will be imposed on the other party absent his agreement—even his discussion.

These costs will include lost interest income and principle repayment from the smaller payments of the loan’s repayment stream, and they will include outright loss of the principle loaned through that earlier forced “forgiveness.”  That five year chop, given the way loans are amortized, means that about 25% of the principle (assuming a 7% loan; the principle loss increases as the interest rate increases) can be written off.  Look at your home mortgages for an example: most of your payments are interest, with only a little principle being paid down until the last years of the loan.  These costs, as I’ve noted, are imposed solely on the borrower’s call.

Then there is the loss to the rest of us taxpayers by using the alleged savings from that nationalization to cover these costs rather than returning those savings to the Treasury to pay down the nation’s debt.  Of course some will point out that these savings, compared to our national debt, is just chump change.  This is disingenuous.  Ask any discount store about the importance of everyone’s nickels and dimes to the millions in profit those chain discounters make in the aggregate—on a slim margin compared to the millions in costs those chains experience, but a positive margin.  And as an Illinois Senator once said, “A billion here, a billion there, pretty soon, we’re talking about real money.”

Then there’s the cost of consolidating those loans—small, generally, compared to the loans themselves, but the fees add up across the six million, or so, prospective eligibles.  This is an unnecessary cost to the taxpayer, though, as anyone who ever has gotten into credit card debt trouble knows: loan consolidation is a standard means of containing, and ultimately paying down, excessive personal debt, and the mechanisms for this are already well established in banks and credit unions.

Some (others) might point out that students might have trouble getting a loan consolidation loan from a bank or credit union; their credit ratings will be too poor.  But wait: if they’re poor risks for a bank, aren’t they poor risks for the National Bank of Taxpayer?  And wasn’t freely lending to poor risks a major contributor to our present mess?

Finally, there’s the moral hazard being created here.  Given that the borrower from, or through, the government can simply change the terms at will, or take advantage of the myriad of loopholes in our current tax system (which I’ve heard no Democrat willing to change) to hold down the dollar size of that 15%10% cap, or simply to wait a now shorter while and then legally walk away from his loan contract, where is the incentive to take his loan obligation seriously in the first place?  Where is the incentive for private lenders to involve themselves in the student loan market?  Oh, wait—what student loan market…?

Another, brief, example is  the travesty of the Chevrolet Volt, built by a car company and union that were the individual, specifically targeted, beneficiaries of an historically huge market intervention.  I suppose, in the end, though, the Volt itself isn’t much of an intervention: even after a taxpayer-funded $7,500 rebate, the $40,000 (post-rebate) Volt isn’t selling, so the taxpayer’s funds aren’t being tapped too hard here.  There’s also no reason why it would be a large intervention.  This marvel of “green” technology gets around 40 miles per charge before it needs help from an on board internal combustion engine (in fairness to the Volt, this is pretty typical of other hybrids, too).  But so does the 1896 [sic] Roberts Electric Car; although the Roberts doesn’t have an internal combustion engine at all, and it’s missing some (unrelated to “green”) comfort features.

In short, what are we getting for these government interventions into our market place?  Moral hazard, higher costs to the taxpayer—and the consumer—and loss of market participation.    This is a big price to pay for interventions that, by their nature, cannot work.

Spending Cuts: Austerity, or Thrift?

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Europe’s search for a solution to its exploding debt crisis is couched in terms of austerity and citizen “sacrifice.”  Indeed, the Greeks riot over “austerity measures” which their government take that they consider to be going too far, and the Italian coalition government is threatened with collapse over the need to engage in further “austerity measures” to control its own long-standing national debt.  The arguments here at home over how deep to cut, if at all, are couched more and more in terms of “austerity measures.”  This raises other questions, though.

Is there no thrift involved in any of this?  Is thrift not a player at all, do the debaters tacitly assume that thrift is wholly subsumed into what is austerity?

When there are true austerity measures being contemplated or enacted, a nation is having to reduce expenditures on more than the highly useful or the nice to have features of its economy—a tax subsidy for this industry, for instance, pay raises for government employees, or expenditures on those national parks, and so on.  It’s also having to reduce or eliminate spending on the things actually necessary to the nation’s independence of action—national defense, roads and communications networks, other infrastructure items, and so on.  Austerity also cries out for tax increases to support its minimally required spending.

When the nation is being thrifty, instead, it’s managing its accounts and making the spending tradeoffs necessary to avoid overstretching is finances to the point where austerity is thrust upon it.  When the nation begins to overstretch—perhaps from a period of drift, perhaps deliberately to acquire a particularly expensive item or capability—it makes further tradeoffs, deferring spending here, eschewing purchasing altogether there—in order to bring its spending back into line.

Thrift, apart from being simply a wise management of the nation’s money, also is a powerful ward against the conditions that force austerity.  But to achieve control over our future, to avoid a need for austerity measures, in short to be thrifty, a government must achieve two things.  It must obtain a net positive income—that is, it must maintain its spending at a level at or below its revenue intake (and it must emphasize the “below” part where the national debt has gotten excessive).  The second thing it must do is commit that budget surplus to the following purposes.  First, government must pay down the national debt until that value is at a properly low level.  Then it must use the surplus to build the same sort of “rainy day” fund that many states accumulate and all responsible families accumulate, so that these accumulated savings can be tapped for unexpected needs, rather than routinely running up the national debt.  Finally, with the debt at a reasonable level and savings accumulated to a useful level, the surplus must be reduced by reducing the taxes collected from the citizens for whom the government works.

There are a couple of things that our government, in particular, can do to achieve that first requirement of achieving a net positive income and so to avoid the need for austerity measures.  One is to carefully and cold-bloodedly identify the things on which it spends that are truly necessary; the things that are useful, but not critical, to have; and the things that are, for lack of a better word, luxuries.  We have, as a nation over the last three generations (primarily spanned by the baby boomer generation after WWII), gotten so wealthy that we’ve simply lost track of the distinctions among these three categories.  Everything is necessary, because we’ve been able to afford it, or so it has seemed.

The other thing our government should do is determine where the responsibility for the spending should lie: with government, or with the individual.  Not everything on which our government spends should be a government expenditure.  One item, for instance, on which the government spent 20% of its 2010 budget, is Social Security.  A well-intended program, it was badly designed and has been badly managed by government to the point that this combination of failure will leave the program bankrupt in just a few short years.  Privatized retirement programs, where each citizen owns and manages his own retirement funding, will be a vast improvement in the government’s thrift.

This recognition of where spending responsibility lies, and an associated shift in who does the actual spending, is critical because this is the force behind thrift: the decisions made when it’s our money on the line vs. the decisions made when it’s votes and other people’s money on the line.  We’re much more likely to take care of our financial house when it’s our money, than is government, whose bureaucrats and politicians have no skin in that game.

Returning to government thrift has another beneficial pathway.  Reduced government spending, more disciplined government spending, reduces the flow of government money and of government debt into our economy.  This reduces crowding out of and competition against private enterprise, fostering their growth (and hiring).  In the end, almost any spending cut, to borrow a phrase from the present administration, is stimulative.  And so not austere.