Featuring the author Angus Deaton, Dwight D. Eisenhower Professor of Economic and International Affairs, Woodrow Wilson School of Public and International Affairs & Economics Department, Princeton University; with comments by Charles Kenny, Senior Fellow, Center for Global Development; moderated by Ian Vasquez, Director, Center for Global Liberty and Prosperity, Cato Institute.
The 2008-2009 financial crisis and Great Recession have vastly increased the power and scope of the Federal Reserve, and radically changed the financial landscape. This new ebook examines those changes and considers how the links between money, markets, and government may evolve in the future.
That is the provocative title of the lead paper in the prestigious economics publication, the Journal of Macroeconomics. It is authored by George Selgin, William D. Lastrapes, and Lawrence H. White. (Selgin and White are professors, Cato scholars, and many-time participants in the annual Cato monetary conference).
The journal’s editor considered the paper so important that he devoted a section of the September issue to it, with discussion by a number of prestigious economists, including professors Allan Meltzer and Jeffrey Miron (a Cato senior fellow).
The Selgin et al. paper is largely a review of the historical literature on both the Fed and the pre-1913 U.S. monetary system. In recent years, the literature has reassessed the Fed’s performance in a less favorable light. And the literature has come to view the National Banking system more favorably. The historical assessment of the Fed’s performance, especially with respect to inflation, is quite damning. For even the period most favorable to the Fed, the post-World War II period, the record compared to the pre-Fed era is not favorable.
I predict this debate has only begun.
To purchase an electronic copy of their final paper from the publisher, click here; to read the Cato Working Paper draft of their paper, click here.
But people sometimes say “I want free trade so long as it’s fair trade.” In most cases, they’re simply protectionists who are too clever to admit their true agenda.
In the Belly of the Beast at the European Commission
There’s a similar bit of wordplay that happens in the world of international taxation, and a good example of this phenomenon took place on my recent swing through Brussels.
While in town, I met with Algirdas Šemeta, the European Union’s Tax Commissioner, as part of a meeting arranged by some of his countrymen from the Lithuanian Free Market Institute.
Mr. Šemeta was a gracious host and very knowledgeable about all the issues we discussed, but when I was pontificating about the benefits of tax competition (are you surprised?), he assured me that he felt the same way, only he wanted to make sure it was “fair tax competition.”
But his idea of “fair tax competition” is that people should not be allowed to benefit from better policy in low-tax jurisdictions.
Allow me to explain. Let’s say that a Frenchman, having earned some income in France and having paid a first layer of tax to the French government, decides he wants to save and invest some of his post-tax income in Luxembourg.
In an ideal world, there would be no double taxation and no government would try to tax any interest, dividends, or capital gains that our hypothetical Frenchman might earn. But if a government wants to impose a second layer of tax on earnings in Luxembourg, it should be the government of Luxembourg. It’s a simple matter of sovereignty that nations get to determine the laws that apply inside their borders.
But if the French government wants to track - and tax - that flight capital, it has to coerce the Luxembourg government into acting as a deputy tax collector, and this generally is why high-tax governments (and their puppets at the OECD) are so anxious to bully so-called tax havens into emasculating their human rights laws on financial privacy.
Now let’s see the practical impact of “fair tax competition.” In the ideal world of Mr. Šemeta and his friends, a Frenchman will have the right to invest after-tax income in Luxembourg, but the French government will tax any Luxembourg-source earnings at French tax rates. In other words, there is no escape from France’s oppressive tax laws. The French government might allow a credit for any taxes paid to Luxembourg, but even in the best-case scenario, the total tax burden on our hypothetical Frenchman will still be equal to the French tax rate.
Imagine if gas stations operated by the same rules. If you decided you no longer wanted to patronize your local gas station because of high prices, you would be allowed to buy gas at another station. But your old gas station would have the right - at the very least - to charge you the difference between its price and the price at your new station.
Simply stated, you would not be allowed to benefit from lower prices at other gas stations.
So take a wild guess how much real competition there would be in such a system? Assuming your IQ is above room temperature, you’ve figured out that such a system subjects the consumer to monopoly abuse.
Which is exactly why the “fair tax competition” agenda of Europe’s welfare states (with active support from the Obama Administration) is nothing more than an indirect form of tax harmonization. Nations would be allowed to have different tax rates, but people wouldn’t be allowed to benefit.
For more information, here’s my video on tax competition.
P.S. The Financial Transaction Tax also was discussed at the meeting, and it appears that the European actually intend on shooting themselves in the foot with this foolish scheme. Interestingly, when presented by other participants with some studies showing how the tax was damaging, Mr. Šemeta asked why we he should take those studies seriously since they were produced by people opposed to the tax. Since I’ve recently stated that healthy skepticism is warranted when dealing with anybody in the political/policy world (even me!), I wasn’t offended by the insinuation. But my response was to ask why we should act like the European Commission studies are credible since they were financed by governments that want a new source of revenue.
Yesterday the financial regulators released data on the 2011 mortgage market, as collected under the Home Mortgage Disclosure Act (HMDA). Setting aside my belief that HMDA should be repealed and the data collection ended, the release, summarized here by the Federal Reserve, does offer a number of insights into both the mortgage markets and mortgage regulation.
The headline take-away is mortgage loans have fallen to 16 year lows, particularly among home purchase mortgages. One of the reasons, not so much discussed, is that lenders are a whole lot less willing to hold mortgages on their own books. In 2006, lenders actually held about 39% of purchase mortgages on their balance sheets. By 2011, that percentage had fallen almost in half to 21%. Now there have been a few exceptions. Wells Fargo, for instance, is actually holding more purchase mortgages on their books in 2011 than in 2006. Most lenders, however, have greatly reduced their balance sheet exposure. Take at one extreme, Citibank, which went from holding over half (52%) in 2006, to just 8% in 2011. While lenders are clearly, and understandably, trying to minimize their interest rate risk, I believe another fact is trying to control both their credit and legal (not to mention political) risk of holding mortgages.
If you aren’t holding mortgages, then the other option is to sell them, either to other banks or to Fannie/Freddie. Here we see the impact of the GSEs increasing their credit standards (appropriately in my opinion). Go back to 2001 and lenders were selling almost half their “unconventional” mortgage originations to the GSEs, by 2011 this had fallen to just over a third. One does not see a similar trend in GSEs purchases of conventional mortgages, which remains just above a third in both 2001 and 2011.
Despite the increased concentration in banking, in general, share purchased by the Top 10 bank originators changed little between 2006 and 2011, increasing slightly from 35.2% to 36.9%. The other trend to catch my eye was that most of the decline in mortgage activity from 2010 to 2011 was among low or moderate income households. Purchase lending for high income was almost flat.
These are just some initial thoughts. Still digesting what is a pretty large data dump.
Last Thursday, the Fed announced its intention to proceed with another round of quantitative easing, or QE3. To summarize my reactions:
By introducing another program to buy MBSs, to the tune of $40 billion per month, the FOMC is supporting the long-standing federal policy of special aid to housing, real estate and mortgage interests. These federal policies were the largest single contributor to the financial crisis. Why would the Federal Reserve want to encourage continuation of these federal policies? Almost every economist, except those allied with housing interests, agrees that the mortgage-interest and real-estate tax deductions in the federal tax code should be eliminated or scaled back. I’ll wager that almost every Federal Reserve economist shares this view. The Federal Reserve says that it is apolitical but this decision is directly supportive of continuation of the current status of Fannie Mae and Freddie Mac. This action is not monetary policy but fiscal policy, extending credit to a favored industry. This policy is crony capitalism, whether practiced by the federal government or by the Federal Reserve.
The FOMC’s decisions create yet another exit problem for the Fed. If job growth picks up, or inflation rises, before every future FOMC meeting the market will wonder if the Fed will stop buying MBSs. The Fed has refused to offer any genuine guidance as to when the policy will end. Conversely, if job growth remains weak, market participants will wonder before every FOMC meeting whether the Fed will do more, or introduce some new and untried policy.
In his press conference, Chairman Bernanke appropriately emphasizes the need for fiscal policies to stabilize federal finances. Yet, he is promising that the Fed can make a material contribution to bringing down unemployment. That promise reduces the pressure on Congress to act. Why should Congress deal with the tough political issues if the Fed can do the job, even if more slowly than if Congress acted?
It’s no secret that I’m not a big fan of the Dodd-Frank-created Consumer Financial Protection Bureau (CFPB), mostly because I believe it will not be good for consumers. So let me acknowledge an instance in which the agency is attempting to do something good.
One thing I dislike more than the CFPB is the practice of many state and local governments to use their “abandoned” property laws to steal the remaining value of a consumer’s gift card. Here’s how it often works: Say your favorite aunt gives you an Amazon gift card for your birthday. Now you don’t know what you want to use it for, so you put it in a drawer in your house. If you leave it there for more than two years—even considering that it is in your house (that is, in your actual possession)—but you don’t use it, states like Maine consider it “abandoned” and force the merchant (in this case Amazon) who issued it to transfer its outstanding value to the government. If that’s not theft, I don’t know what is.
The CFPB has issued a notice for comment on whether these laws should be preempted by federal statute. Now if the CFPB was really doing its job, it would simply cite Article I, Section 10 of the Constitution, which prohibits states from ”impairing the obligation of contracts.” But I suspect that the CFPB doesn’t fundamentally have a problem with states rewriting contracts, at least not when the states claim the rewriting somehow benefits consumers. Oddly enough in the abandoned gift card instances, however, the states in question are benefiting the merchant. These laws relieve the merchant of his obligation to honor the cards’ promise to the consumer, because the state puts itself in the place of the consumer.
I am withholding final judgment on this CFPB initiative because, after all, this is a notice for comment, not a final rule or preemption. As the CFPB was intentionally structured to be a captive of specific special interests, I worry that once the affected governors and mayors mobilize to protect their ability to steal consumers’ gift cards, the CFPB will fold like a cheap suit. Here’s hoping the agency gets this one right.
Vice presidential candidate Paul Ryan has been accused of lying when he claimed that Obama broke a promise by letting a Wisconsin auto factory close, when in fact the factory closed before Obama took office. Although that isn’t precisely what Ryan said, there is some validity to the accusation that his statement was deceptive.
But numerous Obama supporters are playing just as loose with the facts when they say that, if Obama hadn’t rescued GM and Chrysler, far more factories would have closed permanently. That is simply untrue. While news agencies have fact-checked some of the things being said at the Democratic convention, I haven’t seen any challenges of this claim.
Both GM and Chrysler were headed for bankruptcy. If they had gone bankrupt under chapter 11, most of their factories would have stayed open and they would have continued making and selling cars. Bankruptcy would have allowed the companies to avoid interest and dividend payments for a time, and to renegotiate union contracts. Under bankruptcy laws, stockholders would have lost the value of their stocks, but bond owners–who have first claim to company assets and profits–would have been paid off, if not in whole than at least in part.
Instead of letting the companies declare bankruptcy, Obama decided to “bail them out” by taking them over. Once the administration had control of the companies, it had them file for bankruptcy, just as they would have done without the government takeover. Stockholders still lost everything, but so did Chrysler’s bond holders. Instead of renegotiating union contracts, the administration gave the unions greater say over the companies. In other words, the administration didn’t bail out the companies; it bailed out the unions at the expense of (in Chrysler’s case) the bondholders.
In doing so, the administration created uncertainty in the bond market. Bonds were supposed to be safer investments than stocks. But who would want to invest in long-term bonds if the government could step in at any time and void the legal rights of the bond owners? The result is that bond sellers must be willing to pay more interest to attract buyers.
In short, the Obama auto bailout probably didn’t save many jobs (though it probably did keep worker pay uncompetitively high). Instead, it is more likely that the Obama administration’s action prolonged the recession by discouraging private investment in American industry.
This month’s Cato Unbound looks at the Austrian school of economics. Specifically, how do Austrian insights apply to the “real” world—not just theory, but economic history and policy?
In his lead essay, Professor Steven Horwitz argues that Austrian economists are making important and under-appreciated empirical contributions. The Austrian school even stands to teach mainstream economics a good deal about how to conduct empirical work and interpret it properly.
To discuss with Horwitz, we have invited three other distinguished economists, each of whom has been influenced by the Austrian school—while ultimately settling elsewhere methodologically: Bryan Caplan, George A. Selgin, and Antony Davies.
As always, Cato Unbound readers are encouraged to take up our themes, and enter into the conversation on their own websites and blogs, or on other venues. We also welcome your letters. Send them to jkuznicki at cato dot org. Selections may be published at the editors’ option.