Hayek and Development

Friedrich Hayek’s 110th birthday today offers a good opportunity to reflect on his growing influence in the field of economic development. Here’s a short video from a Cato policy forum featuring William Easterly, one of the world’s leading development economists, explaining Hayekian insights that have shaped Easterly’s own influential thinking.

Hayek’s appeal to students of development economics is due not only to the sorry record of foreign aid and the top-down development approach of so many poor country governments; more recent, constructivist efforts to promote economic freedom or democracy, as through IMF conditionality or war and occupation (e.g., Iraq) have proved equally discouraging. As Hayek noted, “To plan or organize progress is a contradiction in terms.”

In the field of international economics, Money, Markets and Sovereignty is the latest, important book that I regard as Hayekian. Authors Benn Steil of the Council on Foreign Relations and Manuel Hinds, former finance minister of El Salvador, make the timely case that the extreme form of monetary nationalism that exists today is incompatible with globalization, prone to crises, and poses the greatest threat to globalization. For those of you not interested in monetary policy, chapter two on “A Brief History of Law and Globalism” is well worth the price of the book.

Or you can come hear the authors at Cato on May 19 present their book at a forum. (For a case study of how El Salvador is becoming an economic success story, see here.)

Real Cost of Obama’s Foreclosure Plan Is Showing up on Fannie’s Balance Sheet

One of the pillars of President Obama’s plan to turn around the housing market is to allow current homeowners, who are neither late on their mortgage or having trouble paying their mortgage, to refinance into a lower rate if their loan is held by Fannie Mae or Freddie Mac.

All sounds good and well, and was touted by the administration as a plan that would help millions of homeowners at no cost to the taxpayer. However, with Fannie Mae’s recent SEC filings, the true cost of Obama’s plans is starting to show up, and in a way that could potentially cost the taxpayers billions more.

Highlighted in a recent Bloomberg story, Fannie Mae is requesting an additional $19 billion in aid from the Treasury in order to restore its solvency. One of the reasons why Fannie needs additional cash is the cost of “Future activities that our regulators, other U.S. government agencies or Congress may request or require us to take to support the mortgage market and help borrowers may contribute to further deterioration in our results of operations and financial condition,” as stated by Fannie Mae in its SEC filing.

Freddie Mac has also reported that the impact of the president’s foreclosure plan may amount to some $30 billion in losses from the reduction in value of mortgage-backed securities held by Freddie. Given Fannie’s substantial portfolio holdings of similar assets, it is likely that Fannie’s loss from the Obama plan will also top $30 billion.

It would be bad enough if these losses were simply borne by Fannie and Freddie. But given the continued injection of taxpayer dollars into the two GSEs, it is clear that most of those losses will be passed along to the taxpayer. So next time you’re refinancing your Fannie- or Freddie-held mortgage, remember to put aside some of that savings to cover the inevitable tax bill that will be coming to cover it.

Happy Hayek’s Birthday

Today is the 110th anniversary of the birth of F. A. Hayek, who honored the Cato Institute by serving as a Distinguished Senior Fellow, and in whose honor the F. A. Hayek Auditorium is named. “It is hardly an exaggeration to refer to the twentieth century as the Hayek century,” John Cassidy wrote in the New Yorker. If we’re lucky, the 21st century will also be a Hayek century.

Hayek spoke at Cato several times.  Before his 1982 Distinguished Lecture, he sat down for an interview with Cato Policy Report.  Here’s another interview by our late board member Jim Blanchard that appeared in Cato Policy Report. Senior fellows Tom Palmer and Gerald O’Driscoll have offered appreciations of his work. O’Driscoll more recently applied Hayek’s business cycle theory to the current financial crisis.

Cato adjunct scholar Ilya Somin ponders Hayek’s continuing relevance in this essay from just before the crisis announced itself last fall. Somin notes that Hayek’s critique of socialism gets most attention from scholars, but his critique of conservatism is also worth pondering.

As the world suffers from the aftereffects of another Federal Reserve-created bubble, it’s a good time to reread Hayek on the boom-and-bust cycle. But it’s also a good day to reflect that Hayek lived just long enough to see the demise of the totalitarian socialist system that he spent his life analyzing and criticizing. The world is freer today, partly because of Hayek’s great work.

Wow. Just…. Wow!

The Alliance for School Choice shot some video during the rally to save the D.C. voucher program that you simply must see. Two young men, voucher high school students, speaking out in favor of school choice for all D.C. kids.

I’ve said it before and I will keep saying it: if Democrats do not wake up from their current contented complacency and realize that school choice is the future of their party, history will bury them.

Defense Spending and “Global Public Goods”

Matt Yglesias picks up on a discussion between Will Wilkinson and Joseph Heath about American conservatives’ curious enthusiasm for providing “global public goods” (GPGs) in the form of enormous military spending to attempt to secure sea lines of communication (SLOCs) and do other things that are dubbed GPGs.

I think Matt is onto something bigger when he writes that

a considerable portion of American defense spending is genuinely wasteful. If we didn’t do it, it just wouldn’t be done. After all, it’s important to understand that excess capacity in military equipment is about as close as you can get to a real-world example of entirely wasteful public sector activity.

The economists tell us that one of the main properties of public goods is that they ought to be under-provided.  As Matt writes, it seems like we’re over-providing what are being called “public goods” here.  To my mind, this strongly implies that they aren’t public goods.

(Then again, if we’re going to accept that the entire globe is the jurisdiction to which the U.S. government is supposed to be providing public goods, you’re back to public goods – that is, we’re under-supplying the GPG of global security.)

While I’m not sure what my views are on traditional GPGs like a stable monetary or trading order, I’m very skeptical that anything related to security can be dubbed a GPG.  The two key properties of public goods are nonrivalrousness and nonexcludability.  Nonrivalrousness means that my consumption of the good doesn’t conflict with yours.  Nonexcludability refers to the idea that if you’re living within the jurisdiction of the provider of the public good, it’s impossible to opt out of consuming it.

Economists teach defense as the example of the quintessential public good.  For two people living in a country, one’s consumption of defense doesn’t conflict with the other’s and neither can be excluded from its benefits.

But I’m pretty sure you can’t move from the idea of a bounded jurisdiction like that of a state to the entire globe and still have public goods in a meaningful sense.  For example, the Japanese will recall from their experience in the 1930s that the control of SLOCs is very much excludable.  Our inability to supply truly global security means that we have to pick and choose to whom we allocate resources.  Our provision to one country of a formal alliance, for example, is very much rivalrous with neighboring countries’ security.

More generally, in the context of the defense budget at home, I’m more inclined to think that a big chunk of U.S. defense spending constitutes a public bad: transfer payments from taxpayers to defense companies.  Think about it for yourself; what is the marginal benefit to you of an extra F-22?  An extra nuclear warhead?  To whom is the social surplus (or more accurately, rents) allocated?

As is probably clear, my views aren’t terribly well formed here, but the problem is an interesting one.  Chris Preble discusses GPGs in The Power Problem, and a case against the defense budget as a pure public good is Jeffrey Rogers Hummel and Don Lavoie’s “National Defense and the Public-Goods Problem,” in Robert Higgs, ed., Arms, Politics, and the Economy (New York: Holmes & Meier, 1990), pp. 37-60.

Economist, Mark Your Words

The current (May 7th) edition of The Economist observes that Arne Duncan’s results as secretary of education will determine “whether it is worth continuing with moderate education reforms — for if these reforms cannot succeed with $100 billion and a golden boy at the helm, they never will.”

It would be nice if they remember those words four or eight years from now. It would be even nicer if they realized that it is unnecessary to reserve judgment for that long. In Cato’s 2009 Handbook on Policy, I point out that the federal government has spent $1.85 trillion on education since the mid 1960s, with precious little to show for it. Duncan’s $100 billion is pocket change by comparison.

The Economist is also mistaken, as I was in March, in thinking that Duncan or Obama might save the D.C. voucher program. They have done no such thing. They merely seek to kill it by attrition rather than abolishing it outright. The program’s best bet now is for the District of Columbia to take it over.

Civil Liberties Surge

There’s encouraging news in recent polls about two civil liberties issues — marriage equality and marijuana legalization — and it’s got some observers talking about “tipping points” and “a bandwagon effect.”

Take marijuana: A poll released yesterday by Zogby and the O’Leary Report found that 52 percent of respondents would favor legalizing marijuana, with 37 percent opposed. That’s the first poll I’ve seen that found a majority in favor. (The poll was released in a full-page ad in The Hill newspaper on May 6 and does not appear to be online. It had a sample of 3,937 voters from the 2008 election, weighted to reflect the election outcome. Presumably it was an online poll, but if it had any bias it appears to be in a conservative direction: other results included 57 percent support for the “tea parties,” 71 percent opposition to new gun control laws, 57 percent opposition to cap-and-trade, and 53 percent opposition to legislation that would pressure radio stations to provide “diversity.” Of course, it’s kind of scary that only 53 percent of respondents opposed ideological censorship of radio.)

Whatever you think of that poll, it’s not the only one. In February, Nate Silver posted a chart of polls on legalization, showing a slow but steady rise, up to about 40 percent. A Field poll in April showed that 56 percent of Californians support legalizing and taxing marijuana, the first time Field had ever found a majority in favor. The poll was largely on budget issues, and voters may have been desperately searching for new revenue sources other than general tax hikes. Also in April an ABC News/Washington Post poll found 46 percent of respondents in favor of legalizing the use of small amounts of marijuana, an all-time high in that poll.

The New York Times points to other signs of change on the marijuana front: Pot has become essentially legal for anyone in California who can tell a medical marijuana clinic that it would make him feel better. Attorney General Eric Holder has said that the federal government would back off its attempt to enforce the federal laws against medical marijuana in the 13 states that have legalized medical use. The threats to prosecute Michael Phelps for a bong hit were widely ridiculed. These developments have led Andrew Sullivan and CBS News to speculate about a “tipping point” for change — at last — in marijuana prohibition. Just this week, California governor Arnold Schwarzenegger said there should be a major study of the possibility of legalization.

Meanwhile, TPM and AOL’s PoliticsDaily also see a tipping point for marriage equality. A majority of New Yorkers now join Gov. David Paterson in supporting same-sex marriage. That same ABC News/Washington Post poll finds that “in 2004, just 32 percent of Americans favored gay marriage, with 62 percent opposed. Now 49 percent support it versus 46 percent opposed — the first time in ABC/Post polls that supporters have outnumbered opponents.”

Over the past decade many states have passed bans on gay marriage, a fairly redundant exercise since none of those states had or were about to have marriage equality. But suddenly, since the narrow victory for California’s Proposition 8 in the 2008 election, and really within the past month, same-sex marriage is picking up steam. The Iowa Supreme Court ruled unanimously that excluding same-sex couples from marriage violates the Iowa Constitution’s equal protection guarantee.  The Vermont legislature passed marriage over the governor’s veto. The Connecticut legislature and Republican governor Jodi Rell affirmed the state court’s ruling for marriage equality. Maine governor John Baldacci signed into law a freedom-to-marry bill overwhelmingly approved by the Senate and House. The D.C. Council voted 12-1, with only well-known marriage defender Marion Barry in opposition,  to recognize same-sex marriages from states that approve them. Both houses of the legislature in crusty libertarian New Hampshire have passed a gay marriage bill, which now awaits a decision by Democratic governor John Lynch. Marriage advocates are optimistic in New Jersey.

Some of these laws may be overturned by Congress or by popular vote. And some 30 states have constitutional bans on gay marriage, limiting the opportunity for progress in most of the country. But one of the striking things about the rapid succession of votes is the lack of public opposition. Conservatives have been remarkably silent, perhaps because some of them genuinely do feel less outrage about legislative action than about ”judicial tyranny,” and perhaps because opposition to gay marriage is getting to be embarrassing among educated people. My former colleague Ryan Sager, best known for his book The Elephant in the Room: Evangelicals, Libertarians and the Battle to Control the Republican Party, argues in his new Neuroworld column “that we may be starting to see a ‘bandwagon effect’ that will significantly increase support for gay marriage in the next few years.” He cites Nate Silver’s chart on rising poll support for marriage equality and notes that support for gay marriage is rising much faster than support for interracial marriage did in an earlier era. Zogby asks the same question: Has the tide turned for same-sex marriage?

One striking point in all these polls, of course, is the age difference. That ABC News/Washington Post poll “showed just how much of the movement is occuring among younger voters. Support for gay marriage has grown somewhat among voters over age 65, from 15 percent to 28 percent, but six in 10 remain strongly opposed. Among those under 35, though, two-thirds support it, up from 53 percent in 2006, and nearly half support it strongly.” And “[s]upport for legalizing small amounts of marijuana for personal use is nearly twice as high among young adults (57 percent of those under 30) as seniors (30 percent), with middle-aged Americans split about evenly.” Obama carried young voters by 2 to 1. If the Republicans get out front on opposing marriage equality and marijuana reform, they can make that a permanent Democratic majority.

By the way, that much-discussed ABC/Post poll also showed declining support for gun control. Trapped in the liberal-conservative paradigm, ABC discusses that point this way: “Other views tilt more to the right. Just 51 percent in this poll support the general principle of “stricter gun control laws,” about the same as last September (50 percent) and down sharply from its peak, 67 percent in mid-2000. The 48 percent now opposed to gun control is the most in polls dating to 1989, and the number “strongly” opposed, at 36 percent, its highest in that time. ” Those of us who have escaped the liberal-conservative paradigm recognize that the right to bear arms is also a civil liberty, and it’s entirely consistent to support marriage equality, marijuana legalization, and the Second Amendment.

The “shift to the left” that we seem to observe on economic policy is depressing to libertarians. But that’s mostly crisis-driven. When the results of more spending, more taxes, more regulation, and more money creation begin to be visible, we may see the kind of reaction that led to Proposition 13 and the election of Ronald Reagan at the end of the 1970s. Meanwhile, this cultural “shift to the left” is far more encouraging. And don’t forget, at 90 days into the Obama administration, Americans preferred smaller government to “more active government” by 66 to 25 percent.