August 9, 2013 3:34PM

Imaginary Squabbles Part 5: Comparing Krugman’s 2005 Housing Bubble Forecasts to Mine

New York Times columnist Paul Krugman has recycled another phony argument about something I wrote many years ago. 

He begins by citing Matt O’Brien who found that Fed governor Janet Yellen in October 2005 was predicting there would be no great impact on the economy “were the house-price bubble to deflate.” O’Brien concludes that, “Back in 2005, she didn't appreciate how much shadow banks relied on AAA-rated mortgage-backed-securities (MBS) as collateral to fund their day-to-day operations—or how much even this supposedly high-quality collateral could go bust if housing did.” But that is “What Janet Yellen and Everyone Else Got Wrong,” as Krugman’s column is rightly titiled. Nobody in 2005 grasped what a precarious house-of-cards was being built, worldwide, on U.S. mortgage-backed securities. 

O’Brien found another quote suggesting Yellen did get it right by December 2007. Yet the recession had already started by then, and blogger Bill McBride and others were worrying that rising unemployment would cause mass foreclosures (not the other way around).

“We had a monstrous housing bubble,” writes Krugman, “and Janet Yellen recognized it in real time [December 2007].... It’s important to notice that just being willing to see the obvious here puts Janet Yellen way ahead of a lot of people who still presume to give us advice on the economy.”   

He links to a 2008 list of 28 people who were supposedly way behind Yellen in “being willing to see” that house prices had fallen 21.6 percent by December 2007, even though nearly all of those 28 references were from 2003–2005. My name is at the top of that list, of course. But why am I on it while Krugman and Yellen are not?

The “Unofficial List of Pundits/Experts Who Were Wrong on the Housing Bubble,” was compiled by a finance lawyer who blogs as “Economics of Contempt.” He worked as a legislative aide to a House Democrat and dealt with derivatives at Lehman Brothers. The list of 28 could find no investment bankers who got it wrong, even at Lehman or Bear Stearns, but it did find a lot of conservatives and libertartians.   

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August 9, 2013 3:22PM

Federal Job Training Programs and Crony Capitalism

The Reason Foundation’s Adam Millsap and Anthony Randazzo have an op‐​ed up at Real​Clear​Pol​i​cy​.com that cites examples of how federal job training programs are used to favor particular commercial interests. A snippet: 

Crony capitalism is when private interests collude with government to acquire subsidies or economic benefits that give them an advantage in the marketplace. Many job‐​training programs, such as the “On the Job Training Program” (OJT), serve just this purpose.

In many cases, the OJT program provides subsidized job training for specific jobs in specific areas — because the funds are limited, only certain employers will get the money. For example, in 2009, the OJT program provided a 50 percent salary subsidy to train chemical composite technicians for Renegade Materials in Dayton, Ohio. The company and workers both benefited from the program, but the subsidy provided Renegade with an advantage over its competitors, who did not benefit from free taxpayer money.

Similarly, Canadian company Energuy built its U.S. headquarters in Sacramento, Calif., to be near an OJT program called JobLink. Energuy, which hires workers to evaluate the energy efficiency of home appliances, has been expanding in other parts of California as well, specifically targeting areas that have subsidized training. The company has become so dependent on the availability of training subsidies that, according to its president, Energuy has “actually had meetings where we’ve said we’ll only move forward if we can get a subsidized employee; otherwise we’ll have to wait until we’re financially ready.”

Sometimes job‐​training subsidies help a range of firms in a particular industry, as was the case with the $22 million used to help lobstermen in the Northeast improve their businesses with government‐​funded business‐​plan training in 2010. These subsidies favor people currently in business over those who might want to enter the industry.

Millsap and Randazzo also point out that job training programs are ineffective and that funding is allocated to the states haphazardly. They correctly note that alternatives exist in the private sector, which is where responsibility for training workers belongs. Over at Downsizing Government, a Cato essay on federal employment and training programs goes into deeper detail on many of the themes discussed by Millsap and Randazzo. 

Unfortunately, both Republicans and Democrats support the federal government continuing to stick its nose where it doesn’t belong. As is the case with pretty much every policy issue Washington (mis)handles, the two parties largely only differ on the details.

August 9, 2013 3:07PM

Should South Korea Command Its Own Military?

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The Korean War ended six decades ago. No peace treaty was signed, so the parties technically are still at war. But no one wants to restart the conflict because everyone would lose.

Pyongyang’s system of monarchical communism, is a great mystery. But the more important question in Washington is, why is the U.S. still involved on the peninsula, threatening and threatened by the North?

America’s role started as an afterthought , with the United States and the Soviet Union dividing control of what was then a Japanese colony after Tokyo’s surrender in World War II. The Democratic People’s Republic of Korea (the North) invaded the Republic of Korea (the South) in 1950. The U.S. intervened, followed by China. 

Three years later an armistice ended the fighting and the U.S. signed a defense treaty with the ROK, backed by a tripwire military presence along the Demilitarized Zone. Washington even ran the Combined Forces Command, possessing operational command of the South Korean military in both peace and war. 

Today the balance on the peninsula has shifted dramatically. Seoul is prosperous and populous, as well as an important global player. The DPRK is politically isolated and an economic wreck. South Korea enjoys a 2:1 advantage in population, 40:1 advantage in economic strength, and overwhelming advantage in international support.

So why is America still defending the ROK? As I wrote in my latest article on American Spectator Online:

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August 9, 2013 2:53PM

Keystone XL Pipeline: “No Material Impact” on U.S. Carbon Dioxide Emissions

President Obama has a ticklish situation on his hands with the Keystone XL pipeline—one long on symbolism but short on practical impacts.

He took a few minutes out of his June 25th speech unveiling his Climate Action Plan to specifically address the pipeline issue:

Now, I know there’s been, for example, a lot of controversy surrounding the proposal to build a pipeline, the Keystone pipeline, that would carry oil from Canadian tar sands down to refineries in the Gulf. And the State Department is going through the final stages of evaluating the proposal. That’s how it’s always been done. But I do want to be clear:  Allowing the Keystone pipeline to be built requires a finding that doing so would be in our nation’s interest. And our national interest will be served only if this project does not significantly exacerbate the problem of carbon pollution. The net effects of the pipeline’s impact on our climate will be absolutely critical to determining whether this project is allowed to go forward. It’s relevant.

The president is balancing “our national interest” in the pipeline—which surely includes factors (or, at least, the perception of factors) like growing the economy, adding jobs, and increasing our energy security—with the pipeline’s (perceived) impacts on the climate via the carbon dioxide emissions (which he oddly terms “carbon pollution”) associated with the oil it will carry.

When it comes to growing the economy, adding jobs, and/or increasing our energy security, the estimates of the impact of the Keystone XL pipeline are all over the place—but all positive. The more level-headed analyses generally indicate the gains will probably be rather small in the overall sense.

When it comes to affecting the climate, again, the estimates are all over the place, and largely depend on assumptions as to how much leverage the Keystone XL pipeline will have on opening up the Canadian tar sands to further development. Folks who claim that the pipeline’s approval would mean “game over” for the climate assume that the pipeline is the key to opening up the 1.7+ trillion barrels of oil that are estimated to be contained in the Canadian tar sands formation. More sober analyses argue that market demands are such that the oil will be brought to market with or without the Keystone XL pipeline and, as such, the pipeline itself will have virtually no impact on carbon dioxide emissions and, by extension, climate change.

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August 9, 2013 12:20PM

In Education, the Goal Posts Move

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Other than in Shaquille O’Neal’s stunning vision of the future of basketball, the goals in sports don’t move. If they did, it would make the games a whole lot more random, and the outcomes unreliable indicators of who is really the better team. But in education — as we’re seeing with the hue and cry over new test results in New York — the goals do move. A lot. That’s pretty ironic considering that the top‐​down measures are specifically intended to establish set standards.

Earlier this week, New York released the results of its first statewide tests to gauge student mastery of the Common Core national curriculum standards. Not surprisingly, “proficiency” rates crashed, plummeting between 24 and 34 percentage points depending on the subject. But as Core supporters rightly warned, plummeting scores don’t necessarily indicate plummeting performance; they indicate that the goal posts have moved. Of course, supporters say the posts have moved higher — like basketball hoops in Shaq’s 2044 — and that may be the case. But what’s more important is just that the goals are in different places — maybe they moved to the side, not up — and students haven’t been shooting in that direction.

This is far from the first time the goals have jumped, ducked, or shifted in the “standards” era. Throughout the No Child Left Behind years we saw states changing tests, standards, etc., so results often weren’t comparable from one year to the next. And New York itself revealed a few years ago that its tests had gotten easier over the years, rather than its education system getting much better.

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August 9, 2013 9:00AM

Cato Makes Dick Durbin’s Enemies List

As reported on the Wall Street Journal's editorial page and picked up by the Chicago Tribune among many others, Senator Dick Durbin (D-IL) has been sending out letters to anyone he has determined to have funded the American Legislative Exchange Council since 2005. He wants to know these supporters' position on "stand your ground" laws, which ALEC (a group of state legislators pushing center-right reform ideas) advocated around the country.

After Trayvon Martin was killed in Florida—which had passed a stand-your-ground law before ALEC started pitching its model legislation—liberal activists pressured ALEC's corporate donors to cut their ties with the group (never mind that "stand your ground" didn't play a role in George Zimmerman's trial for Martin's death), which is partly why ALEC closed its task forces on non-economic issues.

Durbin smelled blood in the water and, continuing his rampage against corporate political speech—pretty rich for someone who inserted a consumer-unfriendly provision into Dodd-Frank at the behest of Walgreens and other large retailers in his home state of Illinois—is now seeking to shame anyone ever associated with ALEC.

That includes Cato. Earlier this week, we received a letter from Durbin asking two questions (you'll have to pardon the awkward grammar; this went out to hundreds of groups, so Durbin's staff apparently had no time for proofing):

  1. Has Cato Institute served as a member of ALEC or provided any funding to ALEC in 2013?
  2. Does Cato Institute support the “stand your ground” legislation that was adopted as a national model and promoted by ALEC?

And, by the way, Durbin wants recipients of his polite inquiry to know, "I plan to convene a hearing of the Senate Judiciary Committee Subcommittee on the Constitution, Civil Rights and Human Rights to examine 'stand your ground' laws, and I intend to include the responses to my letters in the hearing record. Therefore, please know that your response will be publicly available."

Well, I'm proud to say that Cato isn't going along with this charade.  Our president John Allison has responded to Durbin with a letter that I'll quote in its entirety:

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August 8, 2013 4:23PM

Some Trade Links, and Today’s “Shamelessly Pandering Congressman” Exhibit

A few items that crossed my desk today. All the emphases in the blockquotes are my own.

Imported Food Regulations

Following up from Doug's post yesterday advocating for a "deregulatory stimulus," here's a story from Inside U.S. Trade [$] that shows how even obscure areas of federal law can serve as examples of, as the article puts it, a "paradigm shift" in the way regulations are written and applied:

The [Food and Drug Administration] proposal represents something of a paradigm shift in the way that imported food is currently regulated. FDA generally allows food to come into the country unless it has information that an exporter has lax safety practices or that a specific shipment is tainted – although it tests only a tiny percentage of imported food.

In essence, the [Foreign Supplier Verification Program, or FSVP] rule is shifting some of the burden to show that food is safe to the private sector. It also creates a basis for FDA to reject food imports besides finding a shipment to be adulterated. Under the proposed rule, food can be turned away if FDA finds that an importer does not have an adequate FSVP in place.

This is all part of a broader change in the way FDA operates that is being brought about under the Food Safety Modernization Act. That law, which was signed by President Obama in January 2011, also requires a frequency of overseas facility inspections by FDA that some observers say are unrealistic given its current funding levels....

In other words, the new Food Safety Modernization Act no longer just requires that imported food be safe. Now imported food can be rejected simply because of the absence of certain documentation. Proving food to be safe is a lot more burdensome than preventing unsafe food from entering the country. It does indeed represent a paradigm shift, and an unwelcome one.

How is the private sector coping with all of this?

Reaction from the private sector to the proposed rule has been fairly positive, according to industry sources. Many were pleased by the fact that FDA narrowed the scope of who is subject to the requirements to the party that actually caused the food to be imported, rather than including the agents who often act as middlemen in trade transactions.

England [a consultant to food importers] also generally praised FDA for limiting the importers' responsibilities to interacting with the last party involved in exporting the food, and not imposing requirements for importers to go through their suppliers' entire supply chain, which he said would have been unworkable.

I think that's code for "not as bad as it could have been." Kind of sad, don't you think?

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