Financial Regulation Bill

The financial regulation bill has a finalized form from the reconciliation conference. (See WSJ article here.) It will take some time to read through the bill and evaluate it. At this point, I just want to note that the task force President Obama put together to determine the causes of the financial and economic crisis has not finished its work or put together a report. Yet, we get a bill to prevent anything like this from happening again (according to Sen. Dodd). Just what is the point of the task force then?

Does President Obama Understand Animal Spirits?

The recent Economist has an editorial about President Obama's handling of BP and the oil spill in the Gulf. The page entitled "Lexington" also discusses Obama's relationship with business. The claim that some on the right make that Obama is socialist is refuted. Of course, whether the refutation is correct or not depends on one's definition of socialism. Traditionally, socialism refers to government ownership of the means of production. By this definition, Obama is not a socialist. According to some political scientists, modern socialism refers to an enlarged welfare state and expanded social safety nets. By this definition, I would classify Obama as socialist, but I would also classify most in the Democratic Party as socialist then. My colleague in Hope's Political Science Department, Jeff Poulet, argues that the older definition should be adhered to, and I will do so.

The Lexington page made an interesting point though, and one with which I would concur. It said that Obama doesn't understand business. The same could probably be said of many politicians of both major parties. Academics who support business often have no actual experience in business, and may not understand business. A case could be made that Ayn Rand, who wrote so glowingly about the businessperson who stood firm to his or her beliefs and who was successful in spite of government didn't seem to realize how often business people seek government help in one way or another.

When I visit a business, especially a manufacturing concern, I am struck by the amount of capital equipment used to make the product. The equipment is costly and generates increased labor productivity and higher wages. To purchase the equipment, the firm must have raised funds from stockholders, or from savings of the entrepreneur, or through borrowing, or from profits. Yet, for many politicians, profit is almost a dirty word.

The optimistic faith of an entrepreneur who steps out and begins a business is courageous. Most new businesses fail. This is where the "animal spirits" mentioned by Keynes in his General Theory comes into play. Would anyone start a new business on the basis of mathematical expectation alone? Keynes argued no because the future is unknown. Instead, people often have a spontaneous urge to action rather than inaction.

I question whether Obama or many other politicians and even many academics appreciate the risk and courage it takes to start a business. And even for businesses that have been around awhile and have grown, there is still a huge risk in expanding and building new facilities. Hiring workers involves a great responsibility. I have also spoken with business owners who speak of lost sleep worrying about how they can keep employees employed. I admire people who are willing to step out, risk their savings, in order to create new products or services and employment for others.

Power Hungry

I just finished an excellent book on energy--POWER HUNGRY by Robert Bryce. The subtitle of the book is "The Myths of 'Green' Energy and the Real Fuels of the Future. His basic argument is that the popular "green" energies--wind and solar--can never replace hydrocarbons as the major source of power in the world. He notes that it is not energy that we want, but power. As he notes, "Energy is the ability to do work; power is the rate at which work gets done." (p. 13). It's power we want and we want it 24/7. He continues, "Renewable energy has little value unless it becomes renewable power, meaning power that can be dispatched at specific times of our choosing." (p. 39).

Bryce focuses on what he calls the Four Imperatives. These are: power density, energy density, cost, and scale. The renewables fail on these imperatives.

He also has some good one-liners:

"If you are anti-carbon dioxide and anti-nuclear, your are pro-blackout."

"All-electric cars are The Next Big Thing. And they always will be."

As Bruce says repeatedly, it is a matter of math and physics. He sees the solution to more use of natural gas and nuclear power.

The book can help clear the air of hype and sensationalism, which are often invoked by environemental activists.

Rethinking Home Ownership

David Wessel in Thursday's WSJ had a good piece on homeownership. In previous posts, I have argued that much of our problem leading up to the financial crisis was an over-emphasis on increasing homeownership rates in the country. Wessel offers a solid analysis of the issue.

Government Failure as seen by Prof. O'Driscoll

Good op-ed piece by Gerald O'Driscoll in today's Wall Street Journal. A combination of regulatory capture and information problems makes it unlikely that big government can effectively regulate complex environments, whether ecological or financial.

Companies are Still Risk Averse

The Wall Street Journal has an article today about a report cash holdings of nonfinancial firms. Cash holding are up 26% from a year earlier, and the increase is the greatest ever in records that go back to 1952. Evidently, firms are very cautious and risk averse still. I wonder if we have a kind of employers' strike, as some have described the latter part of the Great Depression. There was so much concern by business leaders then over the activism of the government and uncertainty about future policy that they were fearful to increase investment spending and hiring. The current situation is reminiscent of that, but we still have too small a time period to reach such a strong conclusion.

Is Obama Anti-Business or Anti-Markets, Part II

Now that I am back from Germany and done with the spring semester, I plan to post more regularly. In an earlier post, I discussed whether Obama is actually anti-business or anti-markets. The question is relevant because the two are not the same thing. Obama has said he is not anti-business, and offers support things like the bailout of General Motors. But, that act makes him anti-market. An op-ed piece in today's Wall Street Journal written by the governor of Indiana offers another explanation as to why that is the case. He reminds readers that the bailout of GM and Chrysler resulted in unique bankruptcy proceedings--proceedings that caused secured debtors to lose much more than would have been the case under normal bankruptcy procedures. This violation of the "rule of law" is anti market even if it helped two large firms. Once again, when government picks favorites in business they are not being pro-markets. They are also not being pro-business since some businesses are helped and others harmed by the favoritism.