Archives: 08/2010

This Week in Government Failure

Over at Downsizing Government, we focused on the following issues this week:

  • The angst over phantom food stamps cuts indicates that those of us who believe the needy aren’t best served by Uncle Sam have our work cut out.
  • A response to Office of Personnel Management Director John Berry on federal versus private pay.
  • Alaska’s love/hate relationship with the federal government underscores why weaning the states off their addiction to federal dollars would be difficult.
  • The debt-burdened Greek government is planning to sell a large share of the state-owned Hellenic Post.  The debt-burdened U.S. government is doing nothing with its struggling U.S. Postal Service.
  • Symbolic of this unprecedented federal intervention into the housing market is news that the FHA is insuring mortgages on luxury condos in Manhattan.

Mortgage Finance around the World

As the debate on the future of Fannie Mae and Freddie Mac heats up, a useful exercise is to ask how does the U.S. system of mortgage finance compare to other countries, with the obvious caveat that there are a lot of differences to account for. 

A good place to start is a recent working paper by Michael Lea at San Diego State University.  The first observation from Dr. Lea’s paper is that several countries, with far less government involvement in the mortgage market, have comparable, if not higher, homeownership rates than the United States.  These countries include Australia, Ireland, Spain, the United Kingdom and Canada.  He also found that countries with less government support of their rental markets also have higher ownership — not surprising since higher rental subsidies would discourage ownership.

Other differences:  the United States and Denmark are the only developed countries where the predominate type of mortgage is a long-term, fixed rate.  Most countries have variable rate or fixed rate for shorter periods. For instance in Germany, many mortgages offer a fixed term for 10 years, then either adjust or roll-over. 

The United States is also almost alone in having no prepayment penalties and no recourse.  Where a mortgage is recourse, the lender is not limited to collecting just on the house but can go after a borrowers’ income or other assets.  So apparently, in the rest of the World, a borrower is expected to pay his mortgage regardless of the value of his house.

In most other countries, even those with comparable homeownership rates, most funding for mortgages is via bank deposits.  That is surprising given how often I’ve heard it claimed that you can’t rely on just deposits to fund the mortgage system. Somehow the rest of the world manages to do so.

That’s just a few of the interesting comparisons in Lea’s paper.  It is an easy read and has some great charts and tables.

Does High Unemployment Make Inflation Impossible?

Benn Steil and Paul Swartz wrote a technically brilliant yet readable Wall Street Journal tutorial explaining why “the Fed’s exit strategy is not credible, and that means a serious risk of high inflation down the road.” 

They are sure to be ignored by those of the Keynesian faith who have repeatedly assured us that inflation cannot possibly be a problem for many, many years.  Why not?  Because there is so much “slack” in the economy—a euphemism for high unemployment.
 
If this “slack theory” of inflation makes you too sanguine about future inflation, recall that it is the same theory that predicted stagflation would be impossible in 1973–75 and 1979–81.

Figures from The Economist, August 21, raise some doubts.  The latest unemployment rate in Argentina is 8.3%, but CPI inflation over the past year was 12.2%. Unemployment in Venezuela is 8.2%, but inflation is 13.3%. Unemployment in Egypt is 9.1%, but inflation is 10.7%.  Unemployment in India is 10.7%, but inflation is 13.7%.  Unemployment in Turkey is 11%, but inflation is 7.6%.   Wasn’t high unemployment supposed to make high inflation impossible

Perhaps Slack Theorists might take comfort from the fact that inflation is “only” 4.2% in South Africa, where unemployment is 25.3%.  But that is not exactly solid proof.

Whenever Keynesian dogma proves so completely at odds with the facts, there is a powerful inclination among true believers and their herd of media apostles to cling to the theory and diregard the facts. 

Some volatile economists who previously worried about near-term U.S. inflation have switched to assuming (as they did in 2003) that high unemployment will produce deflation.  Yet that is obviously not happening in the countries listed above.  The only country with falling prices is Japan, with an unemployment rate of 5.3% (and foolishly high tax rates and decades of wasteful ”fiscal stimulus”).

File the Steil-Swartz article away for future reference. 

And remember Reynolds’ Second Law: “Inflation is always lower before it moves higher.”

The Strategic Dimension of the Mosque Debate

There are many facets to the debate about the Muslim community center and mosque proposed for the site of a former Burlington Coat Factory near Ground Zero in southern Manhattan. My colleague David Boaz’s observation on the United States pluralist founding tradition was a delight. Important as they are, I’m put off by the domestic political ramifications (1, 2, 3, 4), if only because of the crassness and opportunism that inhabit all politics.

There is a strategic dimension to the story. This episode is signaling to audiences around the world the current relationship between the United States and Islam. These audiences might support or oppose the United States and act accordingly to undermine or support terrorist groups. For these people, knowledge of a Muslim community, active in New York and proximate to Ground Zero, would help put the lie to the “clash of civilizations” narrative sought by al-Qaeda and its franchises, undercutting their support.

The debate itself sends signals: If the United States were predominantly anti-Muslim, this debate wouldn’t be happening. If our political leaders had the power to decide matters of religious observance, this debate wouldn’t be happening. The debate is helping to show Muslim populations around the world—who might not know otherwise—that we think and debate about these things, that we are a functioning democratic republic, and that our country is undecided about the position of Muslims in the United States or, at worst, weakly anti-Muslim. 

In the video clip after the jump, conservative icon Ted Olson expresses well, I think, how standing by our constitutional values is good counterterrorist signaling.

These strategic considerations may not be dispositive, but my preference is for this project to go forward and communicate to worldwide audiences that we are still the pluralistic, welcoming, confident society we have been in the past.

Islam did not attack the United States on 9/11. It is simple collectivism—the denial of individual agency that libertarians reject—to believe that the tiny band of thugs who perpetrated the 9/11 attacks speak for an entire religion, culture, or creed. Our sympathy to families of 9/11 victims and our vestigial fears should not allow us to indulge gross and wrong generalizations about individuals of any faith.

A recent Cato Capitol Hill briefing is relevant to all this. You can review “Strategic Counterterrorism: The Signals We Send” on the Cato web site. Cato’s recent publication, “Terrorizing Ourselves: Why U.S. Counterterrorism Policy Is Failing and How to Fix It,” addresses many dimensions of the terrorism and homeland security problems, including the strategic logic of terrorism, to which we respond (whether we mean to or not) during debates about Muslims in America.

Has ObamaCare’s Unpopularity Caused ‘Abject Panic at the White House’?

Politico has obtained and published a confidential messaging-strategy presentation that essentially admits ObamaCare supporters are losing the battle for public opinion.  The presentation was delivered to professional leftists by the left-wing Herndon Alliance, based on public opinion research by Democratic pollsters John Anzalone, Celinda Lake, and Stan Greenberg, in a forum organized by the left-wing group Families USA,  “one of the central groups in the push for the initial legislation.”  It is a stark admission that the public has not warmed to the new health care law, despite predictions that they would do so. 

Here’s how Politico describes the presentation and its implications:

Key White House allies are dramatically shifting their attempts to defend health care legislation, abandoning claims that it will reduce costs and deficit, and instead stressing a promise to “improve it.”

…The confidential presentation … suggests that Democrats are acknowledging the failure of their predictions that the health care legislation would grow more popular after its passage, as its benefits became clear and rhetoric cooled. Instead, the presentation is designed to win over a skeptical public, and to defend the legislation — and in particular the individual mandate — from a push for repeal…

The presentation concedes that groups typically supportive of Democratic causes — people under 40, non-college educated women, and Hispanic voters — have not been won over by the plan. Indeed, it stresses repeatedly, many are unaware that the legislation has passed, an astonishing shortcoming in the White House’s all-out communications effort.

“Straightforward ‘policy’ defenses fail to [move] voters’ opinions about the law,” says one slide. “Women in particular are concerned that health care law will mean less provider availability – scarcity an issue.”

The presentation also concedes that the fiscal and economic arguments that were the White House’s first and most aggressive sales pitch have essentially failed.

“Many don’t believe health care reform will help the economy,” says one slide.

The presentation’s final page of “Don’ts” counsels against claiming “the law will reduce costs and deficit.”

Reason magazine’s Peter Suderman notes that ObamaCare supporters are “backing down from core arguments about cost and deficit reductions in the new health care law… It’s a frank admission that the economic argument in favor of the law has basically failed amongst voters.”

These revelations come at the same time a CNN/Opinion Research poll shows ObamaCare’s individual mandate is increasingly unpopular.  Politico reports:

Just 44 percent favor the health care mandate… Fifty-six percent oppose the mandate, up 3 percentage points from when the bill passed.

Americans still support ObamaCare’s price controls — which force insurance companies to over-charge the healthy and under-charge the sick — by 58-42 percent.  But as President Obama has himself acknowledged, those price controls don’t work without the individual mandate.  Unless a majority also supports the mandate, you don’t have majority support for either.

The Washington Examiner’s David Freddoso speculates there is “abject panic at the White House” over the unpopularity of ObamaCare.

Don’t Be Afraid of the Chinese Economic Tiger

The news that China has surpassed Japan as the world’s second-largest economy has generated a lot of attention. It shouldn’t. There are roughly 10 times as many people in China as there are in Japan, so the fact that total gross domestic product in China is now bigger than total gross domestic product in Japan is hardly a sign of Chinese economic supremacy.

Yes, China has been growing in recent decades, but it’s almost impossible not to grow when you start at the bottom — which is where China was in the late 1970s thanks to decades of communist oppression and mismanagement. And the growth they have experienced certainly has not been enough to overtake other nations based on measures that compare living standards. According to the World Bank, per-capita GDP (adjusted for purchasing power parity) was $6,710 for China in 2009, compared to $33,280 for Japan (and $46,730 for the U.S.). If I got to choose where to be a middle-class person, China certainly wouldn’t be my first pick.

This is not to sneer at the positive changes in China. Hundreds of millions of people have experienced big increases in living standards. Better to have $6,710 of per-capita GDP than $3,710. But China still has a long way to go if the goal is a vibrant and rich free-market economy. The country’s nominal communist leadership has allowed economic liberalization, but China is still an economically repressed nation. Scores have improved, but the Economic Freedom of the World report ranks China 82 out of 141 nations, just one spot above Russia, and the Index of Economic Freedom has an even lower score, 140 out of 179 nations.

Hopefully, China will continue to move in the right direction. That would be good for the Chinese people. And since rich neighbors are better than poor neighbors, it also would be good for America.

And Don’t Trust Politicians With Government Either

Senator Al Franken (D-Minn.) sent out an email today suggesting that WiFi is threatened by the Google-Verizon “deal” on ‘net neturality regulation.

The Google-Verizon framework was written so as not to apply to wireless Internet services,” says Franken. “If you use wi-fi or access the Internet on your phone, this is a serious problem.

This doesn’t exhibit a basic understanding of the technologies. WiFi is a wireless technology, but it’s not what they’re talking about when they say “wireless.” They’re talking about the communications services provided by wireless carriers. iPhones switch back and forth between AT&T’s service and WiFi pretty seamlessly, so the error is forgiveable—unless, say, you’re someone who claims authority to regulate these technologies.

But perhaps Senator Franken does not hold himself out as having that authority. What struck me about the missive is Senator Franken’s somewhat inverted take on power arrangements in the federal government:

This evening, I’ll be speaking at an FCC hearing in Minneapolis. I’ll urge the commissioners to reject the Google-Verizon framework, stop the Comcast/NBC merger, and take action to keep the Internet free and open.

Folks, Article I, section 1 of the United States Constitution creates the United States Senate, with section 3 describing the Senate’s makeup and some procedures.

The Federal Communications Commission is not a constitutional body. The best view is that Congress has no authority to establish an FCC like we have today. The better view is that Congress should not maintain the sprawling FCC we have today. And the only correct view is that FCC is a creation of Congress, beneath it in every relevant respect.

Senator Franken is supposed to oversee the FCC, not act as a supplicant, “urging” it to do x, y, and z.

Does it matter a lot? No. Senator Franken is mostly making a symbolic appeal to gin up constituent support. But he’s also symbolizing the abasement of the legislative branch to an independent agency that has no constitutional pedigree.

Cato’s Constitution Day conference is September 16th. Obvious issues like “Senator or Independent Agency: Who is the Boss of Whom?” won’t be on the docket….