Archives: November, 2010

Currency Wars Also Have Unintended Consequences and Collateral Damage

The Fed’s planned purchases of $600 billion of long-term Treasury bonds were targeted for domestic problems, but are having international consequences. The expansion of the Fed’s balance sheet drives down the foreign-exchange value of the U.S. dollar, and (same thing) forces other currencies to appreciate in value.

Emerging markets with high short-term interest rates will attract “hot money” flows. These flows are not stable sources of funding, and disrupt the small capital markets in these countries. Long-term, the appreciation of their currencies harms their competitiveness in global goods’ markets.

Brazil has already imposed capital controls and other emerging markets may follow. The Chinese in particular have reacted sharply.  According to a Reuters dispatch, Xia Bin, adviser to China’s central bank, said another financial crisis is “inevitable.” He added that China will act in its own interests.

In short, the Fed’s actions have undone whatever good came out of the G20 meetings. Any hope for cooperation on currency values and financial stability is out the window. There are potential spillovers in other areas of global cooperation.

Currency wars, like other wars, have unintended consequences and collateral damage.  Some countries will predictably react by imposing capital controls.  Moves to curb imports can follow. Monetary protectionism leads to trade protectionism.

However it might like matters to be, the Fed cannot simply act domestically.  It has reached the useful limits of further easing.

Wishful Thinking about ObamaCare Investigations

NPR found two Republicans who caution House Republicans that their efforts to investigate ObamaCare could “backfire.”

But all those hearings could also have the opposite effect — giving the administration a chance to make its case in favor of the law, a case that often got drowned out during the election campaign.

“The next round of this, while there will continue to be the broad sloganeering on both sides, will presumably get a little bit more into the detail,” says Martin Corry, a health care lobbyist and former official at the Department of Health and Human Services during the Bush administration. “So if you’re a family with a 22-year-old still in college, you may not want to see that provision [that lets grown children stay on their parents’ health plans] repealed.”

… Former Republican Sen. Dave Durenberger of Minnesota says he thinks the Democratic-led Senate could try to dampen the House repeal efforts by holding a series of hearings of its own.

Let me see if I understand.  If House Republicans hold hearings, it will be a boon to ObamaCare.   Even though House and Senate Democrats stoutly refused to hold such hearings.  If House Republicans hold hearings, sloganeering will give way to detail.  And if House Republicans hold hearings, ObamaCare supporters will finally be able to get their message out — something they were unable to do while they controlled both chambers of Congress and the executive branch.

Bernanke’s Twist on Price Stability

While it’s been obvious for years, Bernanke showed his rationale for more easing in today’s Washington Post.  He believes we are in danger of too little inflation.  While common sense might imply that price stability means neither inflation nor deflation, in Bernanke’s book, anything below the Fed’s target of 2 percent is bad.

First of all, there really needs to be a public debate over the Fed’s 2% target.  After all, a 2% rate of inflation over, say, 30 years erodes almost half of one’s wealth.  How that can seriously be viewed as “price stability” is beyond me.  While a 2% rate of inflation is not going to bring the economy to a halt, it is still a massive theft of wealth over the long haul.

Bernanke has also expressed the fear that “low and falling” inflation could lead to deflation, which would raise the real value of debt, which could lead to additional defaults.  But what Bernanke doesn’t seem to get is that inflation isn’t falling. Let’s go to the data.

The graph below is simply the consumer price index (CPI) over the last year.  Does it appear to be falling?  Of course not.  In fact, the trend is one that is rising.

Now CPI includes lots of things, some of which are temporary trends.  The Fed has a nasty habit of excluding those items it doesn’t like.  But let’s take a look at something that matter to the typical family:  food.

In the next chart, we can see that the trend in food costs over the last year has been upward, not down.  Contrary to Mr. Bernanke’s worries, most families worry about putting food on the table, which has been getting more expensive, not less.

Another trend worth examining is the cost to producers, best measured via the producer price index (PPI).  As one can see from the next chart, that has been heading up as well.

The point to all of this is that we aren’t seeing this deflation that Bernanke constantly worries about and we aren’t headed in that direction either.  And the worse part is that we’ve been here before.  In the earlier part of the decade, then–Fed Governor Bernanke urged Greenspan to fight any chance of deflation by cutting rates to what were then all-time lows.  The result was a housing bubble.  Thanks again Ben. 

Now this might all be worth the cost if it reduced unemployment.  But it won’t.  The traditional way Fed policy brings down unemployment is by increasing bank lending, but banks are already sitting on a trillion in reserves.  Inflation, in and of itself, does not create jobs.

Tea Party Electees Might Get Early Chance to Prove Themselves on Education

Over the last couple days I’ve been arguing that the time might be ripe to start pushing the case in Congress to get Washington out of education. Educationally, fiscally, and constitutionally it is the right thing to do, and the negatives of being smeared as “anti-education” or “anti-child” could be countered by very powerful voter sentiments against big, wasteful government.

Well, it seems new Tea Party-type Congress members might get a chance to use education to prove their bona fides very early. In his post-pummeling presser yesterday, President Obama mentioned education as one area in which he could see bipartisan accomplishments being made, and several articles today — including on Politico and in The Washington Post — suggest that education might indeed be a Kumbaya issue.

That could be right, because presumptive House Speaker John Boehner (R-OH) was a lead force behind the No Child Left Behind Act, and the Obama administration has made a lot of noise (if just the opposite in terms of concrete action) about taking on teachers unions and fighting for charter schools. In other words, there seems to be some bipartisan convergence on education, with Republicans now favorable toward federal control and Dems willing to at least talk critically about mega-potent unions. That NCLB is far passed due for reauthorization only bolsters education’s chance of being used as a fence-mender.

That said, there are a lot of obstacles in the way of this happening, with the ideological fissures among congressional Republicans likely to be one of the biggest, as well as divisions among Democrats. But if the leadership in both parties see education as a place where they can all hold hands, the time to make the unapologetic, uncompromising case for getting Washington out of our schools will definitely be upon us.

Why Some People Think NPR Exhibits Bias

Listening to NPR on the way into work, I twice heard a reporter refer to Meredith McGehee, a champion of (ahem) campaign finance reform, as a “good-government lobbyist.”

Got that?  If you disagree with McGehee’s lobbying agenda — if, say, you think campaign finance reform is an unconstitutional attempt by the Left to restrict political speech that they don’t like — then you are against making government better.

But did you catch the more subtle form of bias?  I maintain there is no such thing as good government. (Call it Cannon’s First Law of Politics.)  And I’m not alone.  ”Government, even in its best state,” wrote Thomas Paine in Common Sense, “is but a necessary evil.”  Not good.  Less evil than the alternative, to be sure.  But still, evil.  Others disagree.  The reporter, like many others and probably without even realizing it, took sides in that long-standing debate too.

Post-Election Outlook: Agriculture Edition

My colleagues have done a thorough job of analyzing the policy implications of Tuesday’s federal election outcome as it affects trade policy, health care, immigration, education, and the scope and size of government generally (more here on federal spending). Most of them are cautiously optimistic that a Republican-controlled House is good news for liberty-minded folk. Let’s hope so.

Unfortunately, there are fewer obvious reasons for optimism that Tuesday’s result will mean big changes in agricultural policy, a depressingly bipartisan area of federal intervention. Even Rand Paul, the poster child for the Tea Party, expressed “moderate” views on farm subsidies during his campaign.

On the positive side of the ledger, our friends at the Environmental Working Group make the excellent point that being a friend of Big Farming was not enough to shield many Democrats from defeat. Earl Pomeroy (D, ND) represents the congressional district that ranks Number One in farm subsidy receipts (now there’s a source of pride!) and even he got the boot. As did Senator Blanche Lincoln, chairperson of the Senate Agriculture Committee and shameless architect of a bailout package for farmers that was funded we-don’t-exactly-know-how. At least 15 (possibly 16 if Rep. Jim Costa (D., CA) loses his too-close-to-call race) Dem members of the House Agriculture Committee — friends of the farmer all — are now looking for work. In other words, support for Big Ag is not a sufficient shield.

On the other hand, it’s not clear that their replacements are an improvement as far as agriculture policy is concerned. With a new farm bill due to be written in 2012 (although soon-to-be-former House Agriculture Committee chairman Collin Peterson (D., MN) was trying to get that ball rolling earlier), it is not certain that the fiscal conservatism exhibited during most Republicans’ campaigns extends to farm policy. Indeed, probable new House Agriculture Committee chairman Frank Lucas (R., OK) has said he disagrees with getting rid of the fiscally offensive (but less trade-distorting) direct payments that flow to farmers regardless of what, or even whether, they farm.  That was an area of reform that Collin Peterson was at least willing to look at. (More on the implications for direct payments here).

Chuck Abbott, agriculture reporter for Reuters, has more analysis on the outlook for farm policy. His is a more optimistic take, and I hope he’s correct. For my part, my skepticism is based on statements such as those by the CEO of the Renewable Fuels Association, speaking on a conference call yesterday:

[F]or the most part those that may have been defeated were replaced with equally strong advocates for value added agriculture and ethanol. Does anyone believe that Kristy Noem (R-SD) will not be a strong voice for ethanol?

Exactly. The fight’s not over yet, folks.

All of Your Money Belongs to the State

Yesterday, the Supreme Court of the United States heard arguments in an appeal of a 9th Circuit decision, Winn v Garriott, a challenge to one of Arizona’s education tax credit programs. It’s been getting more press than I’d expected, in the New York Times, the Washington Post, and USA Today. That’s great news, because the case is far more important than just saving a program that improves education and expands educational freedom.

The 9th Circuit’s reasoning arrogates to the state all property, dissolving the distinction between public and private funds as well as public and private choices. It is a disturbing, dangerous decision.

They assert that tax cuts are the equivalent of government funds, a conclusion possible only if one assumes that all personal income belongs by default to the state rather than to the individual who earned the money. It asserts as well that when taxpayers and parents privately choose to support religious educational organizations, they are in violation of the First Amendment. This reasoning blatantly ignores the logic and plain meaning of the 2002 Zelman decision upholding school vouchers, among others.

Here is a prediction; the court will have their absurd ruling on an Arizona education tax credit program posted on the wall of judicial shame like so many others issued from their Circuit.

But I want more from the Court. This ruling is so awful that I can only pray SCOTUS rules beyond the questionable standing of the plaintiffs and comprehensively dismembers this most egregious 9th Circuit decision.