Topic: Regulatory Studies

Missile Defense and the Banks

Many argue that the demand for public goods justifies government spending and taxing.  Defense spending is a classic public good. The New Times offers an interesting case study of how the federal government actually spends money on defense.

The story recounts the activities of Michael Cantrell, a Defense Department employee who turned into a lobbyist for various projects connected to the missile defense program. According to the story, Cantrell “extracted nearly $350 million for projects the Pentagon did not want, wasting taxpayer money on what would become dead-end ventures.”

Cantrell is awaiting sentencing on corruption charges related to taking kickbacks for defense contractors. But his violations of the law did not start until 2000. Much of the $350 million wasted on defense projects happened before he started taking a cut of the action.

Read the whole story. Here is my summary: Pentagon officials did not want the projects Cantrell pushed, but powerful members of Congress did support such outlays. DOD had missile ranges around the world, but Ted Stevens thought another one was needed in Alaska. Acoustics research might have been conducted many places, but Trent Lott preferred the work done by the University of Mississippi in Oxford and a Huntsville defense contractor that had a branch office in Oxford. And so on.

In other words, members were directing the DOD budget to benefit their constituents in exchange for votes on election day. “Vote for me and I will give you $1,000” is not limited to presidential elections.

Gordon Tullock once wrote of campaign finance:

It should of course be kept in mind that [campaign contributions] are not actually for the purpose of buying votes. The votes are bought by the bills passed by Congress, or the Legislature, which benefit voters. But the campaign money is used to inform the voters about what their congressman has done. Since the voters pay little attention, concentrating the message on a narrow scope and repeating it again and again is necessary even though it annoys intellectuals. On the whole it is the actual things done for the voters by the votes of their and other congressmen, which attract voters to elect those congressmen.

The Cantrell story confirms Tullock’s insight. The reporter mentions campaign finance contributions by defense contractors, but by and large, the story is one of constituent service (that is, the creation and maintenance of vote purchase schemes).

There are several interesting questions here. Can Congress actually provide public goods efficiently? Isn’t Cantrell’s story one of earmarking without the earmarks? If so, won’t the practice of earmarking continue even if Congress gets rid of earmarks? The story shows Congress in a poor light, but don’t we want the legislature to control its agents (like the Pentagon) instead of simply delegating authority to spend to them?

One final lesson. The Cantrell story shows what happens when Congress has money to spend on national defense. In coming days, the federal government may come into ownership of many banks. How do you think Congress will spend the capital of those banks?

If Anyone Blames the Market, I Swear I’ll…

Right now, it’s very popular with politicians to blame the free market for our mortgage-driven economic woes. It’s also, as with most things popular among politicians, utter nonsense: Fannie and Freddie are Dr. Washington’s monsters, and DC has practically forced lenders to float loans to high-risk borrowers.

Of course, it’s not just in mortgages that the feds have been superheating the market, only to proclaim that they’re saving it every time they do something that will just make matters worse. They’ve been doing that in higher education for decades, delivering or guaranteeing loans targeted at high-risk borrowers, and the current credit “crisis” has done nothing to curb their enthusiasm. Heck, it’s emboldened them to do more.

You might recall something I wrote back in April about the Ensuring Continued Access to Student Loans Act, a fast-moving piece of legislation intended to shield any college student from the possibility that he or she might not be able to get a loan. Among other things, the act increased limits on several federal loans so that students could borrow even more, and loosened the eligibility guidelines for PLUS loans so that parents in significant mortgage arrears could still borrow college cash. It easily passed Congress, pushing significantly more money at ever-greater risks – and Congress has just extended it to 2010.

And people wonder why lenders make loans to obvious credit risks, and college costs keep on skyrocketing?

Unfortunately, some people in Washington never learn, or worse, know full well that pumping ever more money to big risks is a huge, dangerous distortion, and just don’t care. Case in point, this quote from Michael Dannenberg, senior fellow with the New America Foundation, lauding Senator Obama in a new AP article for proposing a new tax credit program—which includes a make-work “community service” payback piece—on top of all the other federal aid programs:

Michael Dannenberg, senior fellow with the New America Foundation and a former adviser to Sen. Edward Kennedy, D-Mass., says Obama’s proposals take the problem of college affordability more seriously than McCain’s. And he calls the tax credit a significant innovation.
“McCain’s message when it comes to increased tuition is, ‘You’re on your own,’” said Dannenberg, who has not worked for Obama’s campaign. “Obama’s message to families is, ‘We’ll give you more financial aid to help you with college costs, but your kids are going to have to help others.’”

Notice what taking a problem “seriously” means? Offering even more bankrupting government largesse! And who cares about the ultimate bill…until, that is, the reality of “no free lunch” ultimately forces it to come due.

In light of this, nobody, and I mean NOBODY, in Washington had better blame “market forces” for huge cost problems, inefficiencies, or just plain wasted money in higher education. Federal politicians, with their constant bribery of voters and special interests, have made our colossal financial messes, and they haven’t got a leg to stand on acting like they are the solution and freedom is the problem.

I’m from the Government and I’m Here to Stop Hurting You

The Washington Post discusses the great new options for street food in downtown Washington–not just hot dogs but “po’ boys, pulled pork, gumbo, shawarma” and more. Sure sounds like the much-criticized D.C. government is really helping this time: The jump headline says, “With City’s Help, Vendors Break the Mold.” Author Tim Carman writes, “Both [new food] vendors still needed public assistance.” And “the city [has] been working with vendors to give hungry Washingtonians a taste of what they want.” All praise the D.C. government, font of good food.

But of course the city hasn’t produced the food. It hasn’t subsidized the vendors. It hasn’t put vendors together with investors. All it has done is to lift, in one part of the city, “regulations that have choked the life out of D.C.’s street food for decades.” There are licensing rules (and a moratorium on issuing any new licenses), prohibitions on hiring employees, cart size rules, regulations on where you can park a cart at night, and so on. So the “public assistance” the vendors received was to be exempted from some of the regulations, inside a 32-block demonstration zone.

It reminds me of the wisdom of Henry David Thoreau: “This government never furthered any enterprise but by the alacrity with which it got out of the way.”

The Risk-Free Society Comes into View

Peter Bernstein draws a conclusion from the current problems in the financial markets:

The subprime mortgage mess, the huge leverage throughout the system, the insidious impact of new kinds of derivatives and other financial paper, and, at the roots, the vast underestimation of risk could not have happened in a planned economy.

Oh really? Another story from today’s New York Times reports:

The banking giant JPMorgan Chase, for instance, has 70 regulators from the Federal Reserve and the comptroller’s agency in its offices every day. Those regulators have open access to its books, trading floors and back-office operations. (That’s not to say stronger regulators would prevent losses. Citigroup, which on paper is highly regulated, suffered huge write-downs on risky mortgage securities bets.)

Goldman-Sachs, which was largely unregulated, mostly avoided losses related to the mortgage market through prudent hedging. Citigroup, which was highly regulated, suffered such losses. Expect state control without the promised payoff in a planned economy.

There’s a larger point here that Bernstein neglects completely. A prosperous society requires risk taking. Bernstein is correct: historically a planned economy has prevented such risk taking. Not surprisingly, such societies have not been prosperous, to put it mildly.

More important, they have not been free societies. Preventing the downside of risk requires control over people’s choices. Seventy bureaucrats reviewing your trades. More generally, the best and the brightest continually uttering imperative sentences. Stay away from that cake! Avoid that derivative! Think correct thoughts! The risk-free society will be a society filled with hectored serfs.

Right now, at this moment of hysteria, the political class suffers from availability bias. Like Bernstein, they see only the downside of risk and conclude the necessity of the planned economy. A more complex and nuanced view would see both sides of risk and the enduring value of liberty.

Fannie and Freddie

The IBD has an excellent front page summary of the 1990s roots to the Fannie Mae and Freddie Mac disaster.

One issue IBD touches on is the ineffectiveness of the regulating agency OFHEO. Here is OFHEO giving Fannie and Freddie a clean bill of health just last December.

One reason that having regulatory agencies is worse than having no suchagencies is the false sense of security provided to markets by such apparently off-base seals of approval.