Archives: 09/2008

Bailout Nation

“If only we had a Republican administration in office, none of this would have happened,” my friend Deroy Murdock emailed me this morning. He meant the nationalization of two large companies, of course, though he could have been talking about a trillion-dollar spending increase, the expansion of entitlements, the federalization of education, or indeed the great leap forward to the imperial presidency.

But the bailout of Fannie Mae and Freddie Mac is another giant step toward government control of the economy. NPR reported this morning that the government takeover “could turn out to be a smart one.” Yes, if you think nationalization of the means of production just might work. The government is writing a blank check on the taxpayers. It might cost nothing, it might cost $25 billion, it might end up costing trillions of dollars, given the size of Fannie Mae and Freddie Mac’s portfolios and the risk of further large declines in housing prices.

And speaking of the imperial presidency–all these huge new powers and expenditures are being conducted without any sanction from Congress and with little public debate. This isn’t Venezuela, but the executive branch is certainly expanding its powers on its own authority. If only President Bush would put his new powers to a public referendum, maybe a Yon Goicoechea could arise to block them. Certainly no Friedman Prize candidate has stood up in Congress.

But the Fannie-Freddie takeover is not the only bailout in the works these days. There was the Bear Stearns bailout back in March. Which might not be considered a real bailout, as Bear Stearns shareholders lost most of their investment, though it was certainly a then-unprecedented assertion of federal power. Arnold Kling noted in April that the housing bill, at least, was a pure bailout for homebuilders. Now the Big Two and a Half automobile makers are asking for $50 billion of federal help. (Didn’t we already bail out Chrysler once? How many bailouts does one company get?) And now Congress is talking about “a second economic stimulus package, totaling $50 billion in the form of money for infrastructure projects, relief for state governments struggling with rising Medicaid costs, home heating assistance for the Northeast and upper Midwest, and disaster relief for the Gulf Coast and the Midwestern flood zone.” And Transportation Secretary Mary Peters wants “an $8 billion infusion” for the federal highway trust fund. It’s a good thing that the federal government is so flush with money these days, or we might be risking a large deficit.

Capitalism is a system of profit and loss. It works because each person and each company, in seeking its own interest, is led “as if by an invisible hand” to supply goods and services that others want. Companies that satisfy consumers prosper. Companies that can’t produce goods that consumers want–like Chrysler, repeatedly–suffer and sometimes go out of business. The failures are often painful. But as Dwight Lee and Richard McKenzie wrote in their book Failure and Progress (or at least in this column based on the book), “Economic failure is to the economy what physical pain is to the body. No one enjoys pain, but without it the body would lack the information needed to maintain its health.” Government subsidies to prevent business failure simply keep pouring money into businesses that are relatively unsuccessful at satisfying consumer desires. They are, among other things, censorship of vitally needed information. Employees, entrepreneurs, and investors need to know where their money and talent are most valuable. Profits and losses are key indicators of that.

When businesses make bad decisions, they should suffer economic losses. That’s how we keep the system honest and productive. Caroline Baum of Bloomberg points out that the bailout for subprime borrowers involved helping people to stay in homes that they couldn’t afford, in many cases because they misled lenders or connived with lenders who knew they could package and resell bad mortgages. When governments make bad decisions, they should not pour good money after bad. Instead, they should try to repeal burdensome regulations, privatize functions that ought to be private, and be willing to sell purchases they shouldn’t have made, even at a loss.

Plenty of people had warned about the problems of Fannie Mae and Freddie Mac. As Arnold Kling notes in a new Cato Briefing Paper, the current crisis ” may have been the most avoidable financial crisis in history.” Treasury Secretary Larry Summers was one of those Cassandras back in 1999. So was Lawrence J. White in a 2004 Cato Policy Analysis calling for privatization, or failing that, a clear removal of the federal guarantee for the two companies. Instead, Congress and successive administrations continued to push Fannie and Freddie to get bigger and to buy mortgages that were in clear jeopardy of default. And now, having created this crisis, the federal government proposes not to wind down the overextended companies but to take them over so they can get all the benefits of crack federal financial management. Kling proposes a better exit strategy.

What Do TV Ratings for Speeches Mean?

Last week it was reported that Barack Obama’s acceptance speech was the most-watched convention speech ever, with 38.4 million viewers. Then, six days later, the Republican vice presidential nominee came within an inch of his record total. And then Nielsen reported that John McCain’s speech edged out Obama’s, making him the most-watched presidential nominee ever.

But there’s a footnote to this victory. Nielsen rates the audiences on commercial networks. But PBS says that 3.5 million people watched its broadcast of Obama’s speech, while only 2.7 million watched McCain on PBS. Why? Need you ask? PBS is a government-funded network for liberals. More people watched McCain on the conservative Fox News Channel, more people watched Obama on the liberal PBS. So if you add in the PBS figures, Obama probably has a very slight edge in total viewers. (Nielsen also doesn’t rate C-SPAN, which doesn’t release viewing figures.)

But does any of this matter? Dudley Clendinen reported in the New York Times [$] on August 26, 1984, that more people watched Walter Mondale’s acceptance speech than President Reagan’s. Reagan went on to win the election by 59 to 41 percent. And Jesse Jackson’s convention speech drew more viewers than either Reagan or Mondale.

And that wasn’t the only time, Clendinen reported: “Mr. Humphrey outdrew Mr. Nixon on television [in 1968], but not in the polls. The same thing happened with Gerald R. Ford and Jimmy Carter [in 1976]. And it happened again four years ago, when President Carter lost to Ronald Reagan.”

So enjoy your Nielsen victory, Republicans. But don’t assume that a victory at the boob tube presages a victory a the ballot box.

(Footnote: I wondered if today’s candidates were really drawing more viewers than earlier nominees, in the days of three networks and no cable competition. As far as I can tell, yes they are. Reagan and Mondale in 1984 drew 19 million viewers each. Cable was already taking big bites out of the networks by then. Nielsen says that 35 million watched Jimmy Carter’s speech in 1976. He got a much larger percentage of a smaller population.)

A Pox on Both Your Houses

Full disclosure: I used to work for John Goodman.  I respect his intellect.  I agree with him on many, many things.  Nevertheless, he recently posted a comment on his blog that I think was pretty … hmm, what do you get when you combine ill-considered and substantively incorrect? 

Since people without health insurance routinely get medical care financed through some other mechanism, Goodman impishly suggested that the president could solve the problem of the uninsured by ordering the Census Bureau to stop counting people as “uninsured” and instead label them according to who pays for the care they do receive.  “Voila!” Goodman blogged.  “Problem solved.”

Predictably, every Church of Universal Coverage congregant and his mother pounced on Goodman for appearing callous.  (He’s a witch!  Burn him!)  Even the McCain presidential campaign distanced themselves from Goodman.  I can’t say that I’m overly concerned with appearances; I did launch the Anti-Universal Coverage Club, after all.  But this is not just an issue of appearances.

Goodman’s comment was substantively problematic because there is a very real difference between having health insurance and not having it.  When you don’t have health insurance, it’s generally more difficult to get medical care, especially high-end care.  If you choose not to purchase health insurance, fine.  It’s your life.  But many Americans who would like to purchase health insurance cannot, for no other reason than their government has made it prohibitively expensive.  Those people are uninsured by government, not by choice.  That’s a very important category of people.  (Are you listening, Census Bureau?)  Government also makes being uninsured, and providing charitable care to those in need, much costlier than necessary.  Those factors constitute “the problem of the uninsured.”  Best not to whitewash it.

Goodman is correct that his “solution would put the United States on a par, say, with Britain and Canada,” whose governments “insist that all of their citizens are ‘insured,’ whether or not they get needed medical care.”  Yes, the Church of Universal Coverage is goofy for thinking that having coverage is the same thing as having access to care.  Yes, they should drop their obsession with universal coverage and instead obsess over, say, continuously making medical care better, cheaper, and safer. 

But let me put this question to all those (Reggie?) who gave Goodman a laurel and hearty handshake in the comments section of that post:

If free-market advocates pretend that lacking health insurance has zero effect on access to medical care, or describe ex-post subsidies as insurance, how can we accuse the Church of Universal Coverage of being muddle-headed? 

That said, the Church of Universal Coverage really should have stuck to what was substantively wrong with Goodman’s comment. 

Ezra Klein sees in this episode proof that everyone who disagrees with him (Klein) is basically a Death Eater.  I can’t complain too much, though; Klein did plug the Anti-Universal Coverage Club.  (Thanks, pal.) 

Jonathan Cohn agrees with Klein, and doesn’t see any connection between the large number of uninsured Americans and the fact that even more Americans are over-insured.  (Jonathan Cohn, meet Alan Garber and Jonathan Skinner.) 

Worse, Cohn is guilty of the exact same thing as Goodman – only Cohn whitewashes access problems stemming from waiting lists in other countries, rather than a lack of insurance here at home.  In his book, Cohn writes that in France, “Waiting lists and lines, the supposed drawbacks of universal health care, appear to be nonexistent,” and then implies that concerns about rationing in government-run systems are often “imagined” (p. 227-8).  In a post on TNR’s The Plank, he explains why waiting lists appear to be nonexistent in France and Germany (TNR took down Cohn’s post, but Arnold Kling blogs the relevant Cohn quote):

some countries with universal coverage don’t seem to have waiting lists at all, even for elective procedures. It’s hard to be 100 percent certain about this: France and Germany, for example, don’t actually keep official statistics on waiting times. But that’s because nobody in those countries seems to consider queuing a problem.

The French and Germans don’t consider queuing a problem, eh?  At the time, I responded to Cohn with polling data from those countries:

the French and Germans who were dissatisfied with their health care system’s waiting times outnumbered those who were satisfied (50 percent and 55 percent dissatisfied, respectively). So there may be a problem [with waiting lists] in those countries, even if the authorities do not measure it. (Perhaps we could approach the uninsured the way that France and Germany approach waiting times, and just stop counting them.)

Of course, I was just kidding about not counting the uninsured.  Who knew that Goodman would take me seriously?  But Goodman can always claim that he was just following Cohn’s lead.

Where’s the outrage from the Church of Universal Coverage over Cohn’s whitewash?  Oh, that’s right: a lack of access doesn’t bother them as much as a lack of coverage.

I’m on Rangel’s Side…Sort Of

Poor Charlie Rangel. The chairman of the House Ways & Means Committee got some bad press in July when the sweetheart deal giving him four rent-controlled apartments became public knowledge. Now he’s getting another dose of bad publicity because he somehow forgot to report $75,000 on rental income for his luxury villa at the Punta Cana resort in the Dominican Republic. The New York Times reports:

A lawyer for Mr. Rangel, Lanny Davis, …said the congressman did not realize he had to declare the money as income, and was unaware of the semiannual payments from the resort because his wife, Alma, handled the family finances and conferred with their accountant, John Viardi, on tax matters. …New York State law classifies filing a false city or state tax return a felony punishable by up to four years in prison, but Kathleen M. Pakenham, a tax lawyer at the law firm of White & Case, said criminal prosecutions are rare and in most cases, the taxpayer is simply fined 20 percent of the back taxes owed.

I’m sure plenty of commentators will be dragging out a petards (whatever that is) and hoisting Rangel on it, but I want to express some sympathy. In a good tax system, governments only tax income earned inside national borders – the common-sense practice of “territorial” taxation. As such, the only government that should be concerned about Rangel’s Domincan Republic income is the Dominican Republic. The Ways & Means chairman is only in trouble with American tax authorities because the United States has a very imperialistic system of “worldwide” taxation.

But before you feel sorry for Mr. Rangel and start organizing a petition drive on his behalf, it’s worth noting that the chairman has not tried to fix this policy. Indeed, he wants the make the IRS bigger and the tax code more onerous. Let’s hope, though, that this experience will push him in the right direction.

Bipartisan Nonsense on “Energy Independence” and Trade

Sen. John McCain reinforced his bipartisan credentials Thursday evening by sounding as confused as the Democrats on the nation’s assumed need for “energy independence.”

In his acceptance speech at the GOP convention in St. Paul, McCain pledged federal support for alternative energy so the United States can reduce the amount of energy it imports from abroad. “When I’m president,” McCain told cheering delegates, “we’re going to embark on the most ambitious national project in decades. We are going to stop sending $700 billion a year to countries that don’t like us very much. We will attack the problem on every front.”

He then pledged his support for more offshore drilling, nuclear power plants, wind, tide, solar and natural gas.

Whoa! Before we embark on a project that could cost tens or hundreds of billions of dollars, let’s get the facts straight. Specifically, where did that $700 billion number come from?

That is far more than what we pay for imported energy. In 2007, Americans spent less than half that amount—$319 billion—for imported energy of all kinds, including oil and natural gas. Even with higher energy prices in 2008, our total bill for imported energy this year will be nowhere near $700 billion.

Contrary to popular perception, most of our oil imports come such friendly countries as Canada, Mexico, Colombia, Brazil, and the United Kingdom, or from more neutral suppliers such as Iraq, Kuwait, Nigeria, Angola, Chad and Congo (Brazzaville).  Only a third of our imported oil comes from the major problem countries of Saudi Arabia, Venezuela, Algeria, Ecuador and Russia. We don’t import any oil directly from Iran. [You can check out the latest Commerce Department figures here.]

The $700 billion that Sen. McCain probably had in mind is America’s total trade balance, known as the current account. Last year, Americans rolled up a $731 billion current account deficit with the rest of the world. That account includes not just energy but also manufactured goods, farm products, services, and income from foreign investments.

The current account deficit is not driven by energy imports but by the underlying level of savings and investment in the U.S. economy. We run a current account deficit because, year after year, more is invested in the American economy than Americans save to finance that investment. Foreign capital fills the gap, and the resulting net inflow of foreign investment more or less directly offsets the gap between what we import and what we export.

If the federal government dramatically increases spending on alternative energy, as Sen. McCain and his Democratic opponent both seem to want, the result will be a bigger federal budget deficit, a smaller pool of domestic savings, more foreign capital flowing into the United States, and an even larger current account deficit.

Calvo Raid Justified?

The police have now reviewed and justified the violent break-in of Berwyn Heights, Md., mayor Cheye Calvo’s home a few weeks back. The police kicked in his front door without announcing themselves, and shot his two pet dogs dead. The police later cleared Calvo of any wrongdoing but insisted that their raid tactics were appropriate. A separate FBI investigation is under way.

We’re hosting a forum on no-knock raids here next week.  Mayor Calvo will be here to tell his story and we’ll also hear from Radley Balko, author of the Cato study Overkill, and Peter Christ, co-founder of Law Enforcement Against Prohibition.  Details here.