Two articles in yesterday's Wall Street Journal relate to concerns I have raised in this blog before. The first article talks about the federal government through the Department of Energy becoming the largest "venture capitalist" in the country. A small automotive firm, Fisker Automotice, Inc., ran into financing difficulties with plans to build a plant in Finland. With the help of the U.S. government, and Vice-President Biden, the company received funds and set up the plant in Delaware. (Evidently, VP Biden still is a senator from Delaware.) According to the article, the DOE will lend or give out more than $40 billion to businesses that work in "clean" technology.
The second article describes how Edward Montgomery, the auto-communities recovery czar, is able to cut through red tape to help auto firms redevelop abandoned auto sites. In particular, he has been able to get the EPA to expedite and alter its brownfied site-assessment program. Perhaps it is a coincidence, but the auto industry, in which the federal govenrment now has ownership stakes in two of the leading auto makers, is the main beneficiary of the czar's activities.
We are moving from an economic system that relied on private firms and initiatives to one that is becoming more dependent on government. Of course, we did not have a "free-enterprise economy" before January 2009--there has always been a lot of government involvement in the economy. But there still seems to be a difference now. I suspect government officials argue much of it is due to the recession. The same thing happened during the Great Depression, and much of the government involvement persists to today. Are we in for another ratcheting up of government guidance (control?) of the economy?
Tuesday, December 15, 2009
Sunday, December 13, 2009
Tax Cuts versus Government Spending
Greg Mankiw's column in today's business section of the New York Times compares economic research on the stimulative impact of tax cuts relative to government spending. He cites research papers that find a larger impact for tax cuts, including work done by the President's advisor, Christina Romer. I know space is limited in a column, but I wish Mankiw had emphasized more the difference between temporary changes and permanent changes. As anyone who has had any microeconomics knows (or at least learned at one time) all elasticities are greater the longer the time period.
The stimulus offered while George W. Bush was still president was a tax cut, but a temporary tax cut. The effect was that most people used the tax cut to pay down debt or increase savings. I think these are good things, but they do not stimulate the economy. Similarly, increased spending that is know to be temporary in nature will not have as much effect as an increase in spending that should last a long time. If a firm wants to take advantage of a temporary increase in spending, it will not make long-term investments as part of the process. If the firm believed the spending might be available for many years, it would respond in a different manner. One of the reasons tax cuts provide more stimulus when the cuts are expected to be permanent, or as permanent as anything can be that involves the government, then there is both a spending effect and an incentive effect. The latter is not in place for temporary tax cuts or rebates. Probably the worst think Keynes ever said was, "In the long run, we are all dead." But time passes and constant focus on the short run leads to ad hoc measures that lead to more measures later on.
The stimulus offered while George W. Bush was still president was a tax cut, but a temporary tax cut. The effect was that most people used the tax cut to pay down debt or increase savings. I think these are good things, but they do not stimulate the economy. Similarly, increased spending that is know to be temporary in nature will not have as much effect as an increase in spending that should last a long time. If a firm wants to take advantage of a temporary increase in spending, it will not make long-term investments as part of the process. If the firm believed the spending might be available for many years, it would respond in a different manner. One of the reasons tax cuts provide more stimulus when the cuts are expected to be permanent, or as permanent as anything can be that involves the government, then there is both a spending effect and an incentive effect. The latter is not in place for temporary tax cuts or rebates. Probably the worst think Keynes ever said was, "In the long run, we are all dead." But time passes and constant focus on the short run leads to ad hoc measures that lead to more measures later on.
On Interest Rate Risk
The Sunday New York Times has an article about banks not refinancing mortgages much right now. In his speech on Saturday, the President blamed large financial institutions for the recession. Others in the article suggested that banks should be more willing to refinance mortgages, and many would want to because interest rates are low.
Financial institutions were at fault but so was the government. Government policy encourages homeownership in many ways, including pushing regulated banks to find creative ways to help poorer risk families obtain mortgage financing. Ultimately, banks and other financial institutions got on the bandwagon, ultimately paying very little attention to "due diligence."
Interest rates are low right now, but the article also points out that the low rates are due to government programs that probably will phase out soon. In other words, rates will be going up. A bank that refinances potentially locks in for 15 or 30 years at a low interest rate. If interest rates begin rising in a few years, the bank cannot force the borrower to accept a higher rate. That is, the banks bear the interest rate risk. Securitization has been one of the methods used to get rid of the interest rate risk. But securitization is part of the "risky loans and complex financial products," that the President complained about in his speech.
I had hoped that the current recession would lead to changes in behavior. There are signs that households are wising up and increasing their savings while reducing their debt. It is not clear that financial institutions have made changes other than ones necessary to comply with government concerns. And, it is not clear the government is making any lasting changes. There is still a push to encourage wider howeownership, the building of new homes despite the large inventory of unsold homes, and the ever-constant desire for low interest rates. We may have missed a depression in the economy, but I find the situation today depressing.
Financial institutions were at fault but so was the government. Government policy encourages homeownership in many ways, including pushing regulated banks to find creative ways to help poorer risk families obtain mortgage financing. Ultimately, banks and other financial institutions got on the bandwagon, ultimately paying very little attention to "due diligence."
Interest rates are low right now, but the article also points out that the low rates are due to government programs that probably will phase out soon. In other words, rates will be going up. A bank that refinances potentially locks in for 15 or 30 years at a low interest rate. If interest rates begin rising in a few years, the bank cannot force the borrower to accept a higher rate. That is, the banks bear the interest rate risk. Securitization has been one of the methods used to get rid of the interest rate risk. But securitization is part of the "risky loans and complex financial products," that the President complained about in his speech.
I had hoped that the current recession would lead to changes in behavior. There are signs that households are wising up and increasing their savings while reducing their debt. It is not clear that financial institutions have made changes other than ones necessary to comply with government concerns. And, it is not clear the government is making any lasting changes. There is still a push to encourage wider howeownership, the building of new homes despite the large inventory of unsold homes, and the ever-constant desire for low interest rates. We may have missed a depression in the economy, but I find the situation today depressing.
Tuesday, December 8, 2009
A Day of Infamy
The EPA announced that greenhouse gasses are a threat to public health, preparing the way for EPA regulation of the sources of greenhouse gasses. It is ironic that this announcement fell on December 7--the anniversary of the Japanese attack on Pearl Harbor and the day President Roosevelt called it a day which will live in infamy. EPA Administrato Lisa P. Jackson is quoted in the release, "These long-overdue findings cement 2009's place in hitory as the year when the Unted States Government began addressing the challenge of greenhouse-gas pollution and seizing the opportunity of clean-energy reform." As an editorial in the Wall Street Journal today notes, seizing is the correct verb. The EPA is seizing the political process and taking on the role of the legislative branch.
I am sure the EPA would dispute this claim, and would argue that their decision is legitimatized by past acts such as the Clean Air Act. But a policy as controversial as climate change policy has been should surely be handled through the legislative process. Instead, democratic principles are ignored in favor of administrative fiat. Perhaps Ms Jackson is so convinced in her rightness that grabbing power is justified in her mind. It may be the same attitude as displayed by the scientists whose e-mails have been released and indicated that they were trying to keep any dissenters to the climate change "consensus" from publication. They may be right, but in lands where the rule of law is supposed to apply and in which democratic procedures and institutions exist, the route taken is simply wrong.
I am sure the EPA would dispute this claim, and would argue that their decision is legitimatized by past acts such as the Clean Air Act. But a policy as controversial as climate change policy has been should surely be handled through the legislative process. Instead, democratic principles are ignored in favor of administrative fiat. Perhaps Ms Jackson is so convinced in her rightness that grabbing power is justified in her mind. It may be the same attitude as displayed by the scientists whose e-mails have been released and indicated that they were trying to keep any dissenters to the climate change "consensus" from publication. They may be right, but in lands where the rule of law is supposed to apply and in which democratic procedures and institutions exist, the route taken is simply wrong.
Monday, November 30, 2009
Justice and Economic Growth
Michael Sandel is a professor of government at Harvard who teaches a popular course on justice. He now has published a book based on the course and it was reviewed in Sunday's New York Times. The reviewer, Jonathan Rauch, notes that many public policy disagreements are really differences about justice. I suspect he is correct, although Tom Sowell's book, A Conflict of Visions, remains a better discussion of his point. But Rauch begins his review by recalling a conversation with a prominent conservative commentator who railed against the Obama administration's handling of General Motors and Chrysler. Rauch states that he found the fury of the commentator puzzling. He asks, "Was it such a crime for the government to treat differently situated stakeholders differently, even if doing so was unorthodox?" Clearly, Rauch thinks the answer is no, but I must respectfully disagree.
When economists give advice about how a poor country can encourage economic growth a common part of the answer is the importance of the rule of law. When decisions about who owns productive resources are left to the whims of the reigning government, few people make long-term investments in the resources. A predictable constancy is necessary if investments are to be made. Or, as Mancur Olsen put it--the wealth of a society depends on its ability to make long-term investment commitments. Such investments will not be made when the fruit of the investments may be confiscated at a later date. To alter bankrutpcy proceedings for the sake of political expediency is to move away from the rule of law. Rauch is aware that the rule of law is involved, but dismisses it when he writes, "Is justice absolute and process-driven, so that we should stick to rules come what may? Or is it situational and outcome-aware, so that we should sometimes imporise to take account of special circumstances?" Rauch seems to favor the latter. I favor the former, along with Hayek, Sowell, and Milton Friedman (to name a few).
We may be moving into a period of slower growth rates for the country. The focus on the short term that exists in Washington, the alteration of rules due to the emergency of a recession, and probably health care reform will reduce somewhat incentives to invest. For the latter, David Brooks offered an interesting discussion of health care reform as a trade-off between vitality and security. The social safety net will be enhanced but marginal tax rates will increase. The latter will reduce growth rates in the future.
Living in a liberal democracy means that decisions about trade-offs like those just mentinoed are decided through political processes. If society prefers less growth but bigger safety nets, then who am I to say society is wrong? Most Europeans I have met prefer their society to ours. But I am not certain most Americans prefer European economic and social systems to ours. Time will tell.
When economists give advice about how a poor country can encourage economic growth a common part of the answer is the importance of the rule of law. When decisions about who owns productive resources are left to the whims of the reigning government, few people make long-term investments in the resources. A predictable constancy is necessary if investments are to be made. Or, as Mancur Olsen put it--the wealth of a society depends on its ability to make long-term investment commitments. Such investments will not be made when the fruit of the investments may be confiscated at a later date. To alter bankrutpcy proceedings for the sake of political expediency is to move away from the rule of law. Rauch is aware that the rule of law is involved, but dismisses it when he writes, "Is justice absolute and process-driven, so that we should stick to rules come what may? Or is it situational and outcome-aware, so that we should sometimes imporise to take account of special circumstances?" Rauch seems to favor the latter. I favor the former, along with Hayek, Sowell, and Milton Friedman (to name a few).
We may be moving into a period of slower growth rates for the country. The focus on the short term that exists in Washington, the alteration of rules due to the emergency of a recession, and probably health care reform will reduce somewhat incentives to invest. For the latter, David Brooks offered an interesting discussion of health care reform as a trade-off between vitality and security. The social safety net will be enhanced but marginal tax rates will increase. The latter will reduce growth rates in the future.
Living in a liberal democracy means that decisions about trade-offs like those just mentinoed are decided through political processes. If society prefers less growth but bigger safety nets, then who am I to say society is wrong? Most Europeans I have met prefer their society to ours. But I am not certain most Americans prefer European economic and social systems to ours. Time will tell.
Sunday, November 29, 2009
China and the U.S.
Tyler Cowen's article in today's New York Times is worth reading. Cowen refers to the symbiotic relationship between the U.S. and the U.S., as noted also in Niall Ferguson's term, "Chimerica." At the heart of the problem is the exchange rate policy of China--pegging the dollar-yuan rate so that Chinese exports remain cheap in the U.S. China maintains the exchange rate by borrowing heavily in the U.S., which helps keep interest rates low in the U.S.
Since the financial crisis and the full-fledged recession began, I fear that the U.S.-Chinese relationship has not been getting enough attention. Part of the reason may be simple--what can the U.S. do about the relationship unilateraly? The U.S. cannot China to revalue its currency. But the bail-outs of Wall Street, the continued propping up of housing markets by the U.S. government, and the call for a "jobs bill" by many Democrats, along with the push for health-care reform, drops the China-U.S. relationship down on the Administration's to-do list. I hope Cowen's article can help raise concern over the China-U.S. relationship higher on the to-do list.
Since the financial crisis and the full-fledged recession began, I fear that the U.S.-Chinese relationship has not been getting enough attention. Part of the reason may be simple--what can the U.S. do about the relationship unilateraly? The U.S. cannot China to revalue its currency. But the bail-outs of Wall Street, the continued propping up of housing markets by the U.S. government, and the call for a "jobs bill" by many Democrats, along with the push for health-care reform, drops the China-U.S. relationship down on the Administration's to-do list. I hope Cowen's article can help raise concern over the China-U.S. relationship higher on the to-do list.
Friday, November 13, 2009
HUD Saved Us from a Depression
An article in today's New York Times concerns the Federal Housing Administration. FHA provides insurance for homebuyers who don't meet traditional criteria for conventional loans. In othe words, the FHA is part of the government support and encouragement of homeownership. During the subprime craze, many buyers bypassed the FHA, but in the last year or so the FHA has backed a lot of mortgages. Their reserves are low--0.53 percent of the total porfolio, and some think that the FHA will need a bailout before too long. Yet, they also had faced pressure from Congress to open their doors to a broader group of applicants, i.e., applicants with lower down payments and poorer credit ratings. Brian Montgomery, a former head of the FHA, said that even if a bailout is needed, people should still feel gratitude. The article ends with a quote form Mr. Montgomery, "They should be going over to the H.U.D. building and frankly thanking the career staff for saving them from a depression."
So, government subsidization and pressure on lenders to encourage broader homeownership led to the run up in housing prices. When the housing bubble burst, we entered a severe recession. The FHA has continued to prop up housing markets, evidently saving us from a depression. But the collapse in prices that followed the run-up in prices is due, to a considerable extent, to government policy. Does that make sense?
So, government subsidization and pressure on lenders to encourage broader homeownership led to the run up in housing prices. When the housing bubble burst, we entered a severe recession. The FHA has continued to prop up housing markets, evidently saving us from a depression. But the collapse in prices that followed the run-up in prices is due, to a considerable extent, to government policy. Does that make sense?
Subscribe to:
Posts (Atom)
