Fannie and Freddie

Paul Gigot has an outstanding piece on Fannie Mae and Freddie Mac today in the WSJ. “The abiding lesson here is what happens when you combine private profit with government power.” Exactly.

Here’s what I said about the twin-headed hydra in my 2005 Downsizing the Federal Government:

Federal taxpayers also face financial exposure from the mortgage giants Fannie Mae and Freddie Mac. These ‘government-sponsored enterprises’ are private firms, but taxpayers might become responsible for their debts because of their close ties to the government. The value of these ties created an implicit federal subsidy of $23 billion in 2003. The large size of GSEs threatens to create a major financial crisis should they run into trouble. Balance sheet liabilities of the housing GSEs grew from $374 billion in 1992 to $2.5 trillion by 2003.

A benefit of fully privatizing the GSEs would be to end the corrupting ties that these entities have with the federal establishment. Fannie Mae’s expansive executive suites are filled with political cronies receiving excessive salaries. They spend their time handing out campaign contributions to protect the agency’s subsidies.

Federal Reserve Chairman Alan Greenspan and others have argued that Fannie and Freddie need to be subject to more regulatory control because they pose a threat to financial market stability. But a better solution is to make these and other GSEs play by the same rules as other businesses, and to end the distortions caused by federal subsidies. The federal government should completely sever the ties with Fannie, Freddie, and the other GSEs.

My analysis sadly proved to be correct, and my policy solution is more needed than ever.

Senator Obama’s Tax Plan to Make America More Like France

The presumptive Democratic nominee is getting some negative attention for his plan to kill the 2003 tax rate reductions, which would boost the top tax rate by 4.6 percentage points. But a far more radical proposal is his scheme to extend Social Security payroll taxes so they apply to income above $250,000, a change that would increase the top marginal tax rate by about 12 percentage points. In a new video being distributed by the Center for Freedom and Prosperity, I explain why raising America’s top tax rate to French and German levels will undermine economic performance and reduce U.S. competitiveness.

As always, I look forward to feedback from Cato-at-Liberty readers. I already know that I mistakenly promoted Larry Lindsey by stating that he served as Vice Chairman of the Federal Reserve rather than “just” a member of the Board of Governors, and I’m also a bit disappointed with the sound quality, but I’m mostly looking for substantive comments. This topic was a bit of a challenge. I wanted to focus on the big increase in the top marginal tax rate, and the negative implications of European-style fiscal policy, but obviously needed to give some background on the workings of Social Security. So let me know whether I was too detailed or not detailed enough.

Censorship vs. Editorial Discretion

Via Ezra Klein, Tim Fernholz seems to be confused about the nature of censorship:

Conservatives argue (often with comparisons to communist states) that the doctrine, which hasn’t been in effect since 1987, forced the state to mandate speech. It really just provides for reasonable discussion of views, but the Right demagogues the issue to raise money and keep Rush Limbaugh on the air unopposed.

But now that McCain can’t get his stuff in the Times, it’s a terrible moment for American media! The FCC’s regulation wouldn’t affect a print newspaper, obviously, but it’s rank hypocrisy for McCain to complain that he’s not getting a fair shot, especially when he is co-sponsoring legislation to permanently ban the Fairness Doctrine. Apparently, equal time is only a bad idea when liberal views are being silenced.

This really isn’t complicated: The difference between advocates for bringing back the fairness doctrine and conservative critics of the New York Times is that the conservatives are not (as far as I know) advocating that the government force the New York Times to carry John McCain’s op-ed, or even to carry a certain quota of conservative columnists in order to ensure a “reasonable discussion of views.”

Fernholz dances around this issue, asserting that it’s not really censorship because the goal is simply to promote a “reasonable discussion of views.” And it’s true, I guess, that the Fairness Doctrine doesn’t involve giving the White House veto power over which stories get aired on NPR. But imagine if every five years the New York Times had to get its printing license renewed, and the Federal Press Commission reviewed the previous five year’s op-ed pages to ensure that they had represented a “reasonable discussion of views.” Fernholz can’t seriously claim that this would have no effect on the Times’s coverage—that it might not decide to scratch a few op-eds critical of the current administration or maybe hire an extra conservative (or liberal, depending on who was in power) columnist to make sure there weren’t any “reasonableness” problems during the license renewal process.

No, conservatives and liberals agree that the publishers of newspapers have a right to print whoever they please on their op-ed pages, “reasonable” or otherwise. The same principle applies to broadcast media, and for the same reasons.

Pickens’ Hot Air

The NYT editorial board is all aquiver over T. Boone Pickens’ plan to increase wind-generated electricity in the United States. A Times editorial gushes:

[Pickens would] develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40 percent and the country would save $300 billion a year.

Just one problem: Increased wind power may not free up that much natural gas.

Nat gas–fired generation has some important characteristics: Turbine generator nat gas plants are relatively cheap and quick to build, but they can be expensive to operate because the fuel is pricey. The plants can be put into service (“dispatched”) and taken out quickly with little start-up cost. Moreover, nat gas turbine plants can be very small (some are the size of a tractor-trailer) and emit little pollution relative to coal-fired plants, so they can be sited close to (and in) areas of heavy electricity demand.

Given its profile, nat gas generation is often used for “peak” production — that is, used for periods when demand is great and must be satisfied immediately (e.g., hot summer days when air conditioners are running full-blast, “work hours” when factories and offices are consuming a lot of juice) as well as to address localized power problems (e.g., areas that are at risk of brown-outs). This contrasts with coal-, nuclear-, and hydro-powered plants that are expensive to build but relatively cheap to run, that are difficult to idle and to site, and that are used, accordingly, to provide “baseline” power to large areas. (I should note, in charity to Pickens, that nat gas “co-gen” plants are also used as part of the baseline supply.)

Wind-powered generation is an intermittent source of electricity that may not be available during periods of peak demand. Its product, as envisioned by Pickens, would have to be transported over great distances on the nation’s overly-congested power grid — from the “wind-swept plains” to population and manufacturing centers — in order for it to satisfy much of the nation’s energy demand. Thus, it’s unclear how wind-powered electricity can effectively displace much of the 20 percent of U.S. electricity that is currently produced by natural gas. (In contrast, all renewables, combined, produce about 2.4 percent of U.S. electricity.)

If anything, wind-powered generation seems better suited to replace some coal-fired generation (especially in Texas where Pickens is building a $10 billion wind farm and where coal is often the marginal source of power). But since coal isn’t a transportation fuel, this displacement wouldn’t reduce the nation’s dependence on oil — unless there’s a breakthrough in battery technology that would make electric cars more practical. Moreover, if the nation does increase its dependence on wind power, then we would likely have to increase our dependence on nat gas peakers to cover those days when wind isn’t available (which often are those hot days when air conditioners are cranked up).

This is not to say that wind-powered generation should be ignored. The United States will likely overcome its current energy woes through a mixture of technology advances and conservation efforts, and wind may be part of that mix. But Pickens’ claim that wind power could be used to displace 40 percent of U.S. transportation fuel seems like little more than hot air.