Stimulating Debate

Steve left this comment on my recent post about the inclusion of additional funding for contraception in an early version of the stimulus package (this funding did not make it into the version passed by the House this week):

As to the "contraceptive stimulant", yes, I think it is ridiculous, but also exemplary; an example of the type of thing Rush Limbaugh (I gather, even though I don't descend to listen to) loves to latch onto in order to discredit an entire program of an other-wise positive and sincere effort to get us out of this mess...

First, let me say thanks for the thoughtful comment.

Next, let me say I also believe, like you, that most of the effort is thoroughly sincere. And, of course, you are absolutely right that this provision was exactly the sort of thing that Rush will seize upon and tirelessly flaunt in an effort to diminish the entire enterprise. It's not just Rush though. There is an entire industry that has grown around his model, one which no doubt pays handsomely. However, the fact that Rush, and those of his mold, rail against the stimulus bill (or anything else for that matter) doesn't automatically mean that it must be on the whole a positive. In this case, those on the Left use Rush et al. as little more than straw-men, presented for the purpose of knocking them down just to give credence to their argument.

The facts of the matter as I see them are thus:

Our government, in an effort to eliminate the current economic slump, is going to spend a massive amount of money. About 2/3 of it in the form of direct spending and about 1/3 of it in the form of tax cuts. No one knows if this will work or not. One can find respected professional economists, each with their own mountain of data to both prove this works and to prove that it doesn't. Therefore, it is not at all clear that the present undertaking is, in fact, the right thing to do.

In the seventy years or so that Keynes and his theory on government spending has been around he has been lauded for showing us the way out of the Great Depression and vilified for not being able to defeat the combined high inflation and high unemployment of the 1970's. No doubt that some will look upon the current experiment in spending as the final test for Keynes. A tie-breaking economic title fight for undisputed economic theory champion of the world. I suspect that a system as chaotic and complex as the world's economy can never be subject to the dictum of a single idea and all that we will know once this is over is whether or not this particular response, undertaken in its own peculiar way was successful or not. Of course, it won't be surprising if future economists are able to reasonably argue both sides, not unlike the current discussion of FDR's response to the Great Depression.

There is little doubt that some portions of the stimulus bill are not at all what could be considered emergency economic spending to jump start the economy. Many of the spending provisions were previous goals of the Democratic congress which they have inserted into the stimulus bill. The Democrats won. They are the majority. There is absolutely nothing wrong with them putting forth their proposals and even using the legislative rules process to favor their ideas over those of the Republicans, but this should be done under the normal legislative appropriations process, not as part of an emergency response to our dire situation.

If the Republicans had won there is no doubt that the stimulus bill put forth would have been the mirror image of the current one. In this case, tax cuts, not spending, would have made up the majority of the bill. In which case, a blogger or media personality from the Left would comb through the bill find some tax cut that directly benefits a tiny group of wealthy individuals and then tirelessly flaunt this as proof of the fact that Republicans do not care about average Americans. Even Rush has counterparts on the Left.

To those on the Right that would argue the apparent failure of the TARP program proves government spending will not alleviate our current woes I would offer the following cautionary note: The failure of the TARP does not prove that government spending cannot lift us out of this crisis. It does prove, however, that giving $350 billion to a handful of banks cannot lift us out this crisis.

What then, are we to do? It is clear that with one party in control of Congress and the White House it is their vision of response that will govern. All we can do is wait and see.

Objection Overruled!

Depending on what browser you are using to view this blog, you may see a warning at the top that this blog has been "flagged as objectionable." This is a problem on Blogger's end (Blogger is this blog's host). I affirm that while there are probably a great many things you might find disagreeable on this blog, there is absolutely nothing objectionable.

By the way, Blogger is run by Google, so keep this little SNAFU in mind on that inevitable day when someone suggests we turn everything over to Google since they have done such a bang-up job!

The Fed's Fortune Cookie: Your Influence Will Wane...But A New Love Is On The Horizon

The Federal Reserve's Open Market Committee began their regularly scheduled meeting today, but it appears that at least some commentators believe they needn't have bothered. Specifically, Sebastian Mallaby of the Washington Post.

In this column from Sunday, Mallaby takes up the case of China and its currency manipulation. No doubt many of you read "China" and "currency policy" and immediately begin to fade. Hang in there, he makes it worth your while. Only two sentences into his second paragraph he drops this little nugget:

What's more, this manipulation is arguably the most important cause of the financial crisis. Starting around the middle of this decade, China's cheap currency led it to run a massive trade surplus. The earnings from that surplus poured into the United States. The result was the mortgage bubble.

There you have it. The next time someone asks what caused the housing bubble and its aftermath the simple answer is cheap money from China. This in itself is really not that surprising since the cheap-Chinese-money-theory has been one of the handful of standard explanations that has been making the rounds ever since "pin the cause on the crisis" became America's number one parlor game (or at least it would be if anyone had parlors anymore). A few paragraphs on, Mr. Mallaby breezily dismisses two of the competing theories for the current mess as if they were almost beneath consideration.

This, then, brings us back to the Fed. Mr. Mallaby continues:

Could the Fed have raised interest rates to avert the bubble? The Fed's monetary policy was indeed too loose. But as Martin Wolf argues in his recent book, "Fixing Global Finance," it's not clear that higher interest rates could have prevented the trouble. Once China decides to export vast quantities of capital, that capital has to go somewhere. Higher interest rates in the United States might have encouraged the world's savers to park even more of their capital in this country.

According to this analysis if China decides to return cash to the United States in the form of investment, there is little the Fed can do to prevent an inflationary bubble. The best it can do is to try and limit the magnitude of the bubble by mounting a fighting retreat against any other influxes of capital.

The staggering implication of this is that in large part the US has surrendered control of its monetary policy to the Chinese government. If you think the Ron Paul crowd are perturbed by the Fed's inflationary policies, I have to believe a realization that we mortgaged our future to the Chinese for some cheap televisions and tennis shoes would be enough to drive them to apoplexy.

The unsettling thing about Mr. Mallaby's analysis is not his shocking description of the Fed's impotence, but the fact that he is really not that concerned by it. His article does not call for Americans to stop surrendering their economic self-determination or make an attempt to shame China for its hand in the crisis. As a committed globalist who probably looks on things like nation-states and international borders as quaint relics of the past, Mr. Mallaby is more concerned that China learn from this crisis what the oil shocks taught OPEC. The lesson for China is not to stop trying to manipulate the U.S. market, but to do so in a way that is their own economic interest. Basically, don't kill the goose that lays the golden eggs.

No doubt those that have lost jobs due to overseas competition know all to well the costs of trade. It is time that all Americans realize that there are many sorts of costs associated with trade and currency policies, both ours and those of our trading partners.

Stimulation and Contraception

Let it be clear from the outset, this post will contain no lewd puns. Besides, I had to look up how to spell innuendo and until recently I thought a double entendre was what you had when there were four people on the court at the French Open tennis tournament. And, for the record, the leader of the House Repbulican leader's name is spelled B-O-E-H-N-E-R, but it pronounced BANE-ER.

Yesterday morning I was enjoying my usual Sunday morning routine of coffee and political talk shows before church when I heard something that I thought must be a mistake. When asked for his reaction to the economic stimulus bill being considered in the House, Boehner said:

But spending 44--or $200 million to fix up the National Mall, $21 million for sod, over $200 million for contraceptives, how is this going to fix an ailing economy?

Now the $21 million for sod sounds so much like business as usual in the Congress that it passed without notice, but $200 million for contraception? That has to be a mistake I thought. Apparently not.

The reality of it is not quite as straightforward as Rep. Boehner presented it on Meet The Press, but here is the description of the provision as listed on Boehner's website:

Now comes the latest revelation about the congressional Democrats’ “stimulus” plan: it includes taxpayer funding for contraceptives and the abortion industry. Specifically, a provision in the legislation clears the way for expanded federal funding of contraceptives through Medicaid for those who aren’t even poor. Here’s how:

A Clinton-era program allows states to seek a waiver to offer Medicaid “family planning” services – even for those who are not poor enough to qualify for Medicaid. If they seek the waiver, the federal government matches the state funding with $9 for every $1.

Yesterday, during consideration of the congressional Democrats’ spending bill by the House Energy & Commerce Committee, the panel eliminated the waiver requirement. The result? All 50 states will now offer Medicaid “family planning” services (including contraception) with the federal government offering the same $9 to $1 match

This, of course, was one of the weekend talking points and was grist for the mill on Rush Limbaugh today as well as the obligatory left-wing blogosphere response. (I swear sometimes these entire exchanges are little more than set-pieces in some thoroughly predictable national pageant.)

Maybe Boehner's linkage to abortion is an overreach, maybe not. Maybe, since the Democrats control the presidency and the Congress, they have the ability to enact an agenda that includes funding for contraception. But to include increased access to contraception and family planning as economic stimulus strains credulity to the breaking point. I seem to recall then candidate Obama remarking something to the effect that a pig remains a pig, even if it is wearing lipstick.

Further evidence of just how shaky this proposition is comes from Speaker Pelosi's response when questioned by George Stephanopoulos of ABC. She said:

Well, the family planning services reduce cost. They reduce cost. The states are in terrible fiscal budget crises now and part of what we do for children's health, education and some of those elements are to help the states meet their financial needs. One of those - one of the initiatives you mentioned, the contraception, will reduce costs to the states and to the federal government.

Setting aside the generally incoherent tone of this response, just how does this provision reduce costs? Is she actually suggesting that as a response to the economic crisis people should stop having babies because they represent a cost to the states?

If this is true, it is only so because of the steady increase toward government interference in what have been traditionally family concerns, but that is a discussion for another day. While we do so at our own not insignificant peril, if we are going to reduce human beings to the sum total of their economic impact, the Speaker has a more pressing concern.

In case she hasn't looked at her desk in a while, she and her colleagues in the House are currently considering taking out a mortgage on the nation's future to the tune of about three quarters of a trillion dollars. Who does she think is going to pay this back?

If you don't have children now, there won't be any workers in the future. No workers means no productivity. No productivity, no taxes. I guess it won't matter that we can't pay our debts since there won't be any of us left.

While "I want my last check to bounce" may work as a personal finance strategy, it's no way to run a country.

And if spending on contraception and family planning is our best response to current conditions, our checks just might start bouncing long before we write the last one.

Home Economics: Perverse Incentives & Unintended Consequences

There are times when I am certain that managing my little platoon is not all that different than the way the Secretary of Treasury or Chairman of the Federal Reserve must feel managing the nation's economy. One of those times happened again this evening.

Yesterday was not good to bank stocks on the major indices. Business Week offers up a not un-compelling case that the TARP is the reason for the reduction in bank stock share price warning, "a growing number of investors and analysts warn that the TARP program may come at a large cost to bank shareholders. " This cost comes in several forms: reduced or eliminated dividends for regular shareholders, the high cost of repaying the government for its capital injections, the possibility that additional shares will be issued in the future (diluting current share value) and overall restrictions on operations of institutions that accept TARP funds.

So the TARP funds, intended to rescue ailing institutions, have the effect of driving down share price. While propping up share price is not a goal (at least not a stated one) of the TARP. Share price is certainly seen by the public at large in some way reflecting the success of the government's efforts at alleviating the economic turbulence. But now when the government rushes in with cash to keep a company afloat, shareholders abandon that same company. They don't leave out of fear, but out of a recognition that accepting government money, while unavoidable in the short term, may well mean a loss of value for them in the longer term. While this is not quite as Orwellian as former President G.W. Bush claiming he had to abandon free market principles in order to save them, it certainly gives one pause.

This state of affairs presents two valuable insights. The first is that actions (or failures to take action) have consequences. These consequences are notoriously difficult, if not downright impossible, to predict.

The second is that people, and by extension markets, respond to incentives. Incentive is a word that generally has positive connotations, but there certainly can also be incentives that lead to negative outcomes.

These two points were starkly illustrated in our home this evening.

As bedtime approached my wife surveyed the basement rec room and looked out over a medium sized debris field of children's toys, books, socks, and sundry items and realized that she wanted to get them cleaned up quickly. It occurred to her that people respond to incentives, so she immediately announced that if all hands participated in cleaning up the basement quickly and without complaining, they would be rewarded with what was described at the time only as a "treat".

Well, as you can imagine, her announcement went over like someone had shouted "Gold!" in the dusty main street of some 19th century boom town. And with her shout every pint-sized prospector rushed for the proverbial hills in order to secure his portion of the riches.

In no time the mess had disappeared and the proud helpers eagerly awaited the promised reward. Which in this case turned out to be a fruit and cream flavored life saver known as a Creme Saver. Once the available flavors were announced and a selection was made, each child wandered off to enjoy the high fructose fruits of their labor. Those that could unwrap the candy on their own did so, while those that had to be assisted delayed indulgence for just a moment longer.

Once every child began to suck on the candy the room grew silent except for the occasional slurping sound. Then, a few moments later, I overhead one child (aged 4) approach his brother (aged 6) and in a conspiratorial tone implore, "tomorrow we have to make another mess so that we can get another one of these."

So there you have it. We desired a tidy basement, but through an incentive have insured that it will be a mess again tomorrow.

I only hope that through our clean basement initiative we haven't also started down the road to major tooth decay.

******************
As an aside, one of the flavors of creme saver was pina colada, which was chosen by two of the children. As they went about telling their brothers just what flavor it was that they were enjoying, "pina colada" quickly morphed into "peanut brittle" which then mutated in "peanut butter riddle".

No New Year's Resolution for the TARP

In case you missed it, the Senate voted to release (or, rather, to not block the release of) the remaining $350 billion of funds from the TARP program. You remember the TARP, right? This was the money that was requested in order to buy mortgage backed securities from financial institutions, allowing them to avoid the disastrous consequences of their own irresponsible actions.

The consensus from both sides of the political aisle seems to be that the first portion of the money has been squandered. We have poured money into several financial institutions who seem to have done everything with it except lend. Acquisitions have been undertaken, dividends have been paid, and balance sheets shored up, but benefits have yet to flow to the larger economy. With so little to show for such a large expenditure, I am left scratching my head as to why we are doubling down on the TARP to the tune of another $350 billion.

It is worthwhile to think back to September and the initial response to the financial crisis. At that time, Treasury Secretary Henry Paulson circulated a now infamous 3-page proposal for legislation in response to the situation. Lawmakers promptly rejected the proposal as too broad, with too little oversight. They felt that granting the Secretary such a tremendous amount of power was dangerous, and probably not without reason.

Instead, Congress proposed and quickly passed their own response to the crisis. The Emergency Economic Stabilization Act of 2008 (EESA) dwarfed Paulson's three little pages, as if legislative quality and effectiveness is measured in reams of paper used. Among other things, EESA spawned the TARP and the Congressional Oversight Panel to monitor the TARP (more on this in the future). It also, however, included a provision to exempt from an excise tax, certain children's wooden toy practice arrows (I am not making this up). This is emblematic of how the Congress functions, or malfunctions if you will. Despite this legislative action, the economy continues to falter.

So a three page response was insufficient in theory, while the legislation that we ended up with has failed in practice.

How then, should we proceed? A change in course would seem to be in order. To that end, House Finance Chair Barney Frank (D-MA) introduced HR 384 which is described on house.gov as a resolution,

to reform the Troubled Assets Relief Program of the Secretary of the Treasury and ensure accountability under such Program

The Senate's vote, though, all but insures the needed reforms will not take place. Senate Banking Chair Chris Dodd (D-CT) has indicated that he will not introduce legislation similar to that of Franks. This refusal is all the more saddening since it comes from the Senate. The body, that with its longer terms and smaller size, should be most willing to assert itself in the face of what in Washington seemed to be a foregone conclusion.

Given the inability or unwillingness of our Congress to stand up to our President over the last eight years, a condition that Democrats especially have bemoaned, I am surprised that this is the best we can do. Regardless, we are on the hook for the remaining money and at this point one can only hope that the Congressional Democrats' faith in Obama to spend this money more wisely than Bush is not misplaced. Though on the face of it, I can't see why this would be the case.

Over at house.gov you can find a summary of activity on the House floor. The entry for Thursday, January 15th includes this item:

2:04 P.M. -

Committee of the Whole House on the state of the Union rises leaving H.R. 384 as unfinished business

The matter of fact tone of this simple note belies the continued trouble that it portends. The nation may never get back to business until members of Congress fulfill their obligation and tackle the unfinished business of governing.

Is the Mob Museum An Offer We Can't Refuse?

I've never seen a single episode of the Sopranos so I had to fall back on The Godfather, which once reigned supreme as the answer to pop culture's mafia obsession. Even though the classic film may have been pushed aside by the gang from HBO, it seems our desire for all things related to organized crime continues unabated.

In fact, the Mayor of Las Vegas has a plan to create a museum dedicated to organized crime, the so-called Mob Museum. How will he pay for it, you might ask? Certainly a museum dedicated to the mob could find some rather creative ways of financing construction, right? No need. You see, the Mayor's crew doesn't operate with baseball bats and hired muscle, they use the real source of power in the country, the government.

That's right, the Mayor wants to build the museum using funds from President-elect Obama's proposed stimulus plan. The Mayor described the project as, “absolutely falling within the four corners of what President-elect Obama is trying to achieve.” His criteria appear to be mainly that it is a construction project that is ready to begin work. I am not sure how it fits in with Obama's stated goals of making federal buildings more energy efficient, building the information technology infrastructure of the future, digitizing medical records, creating jobs in renewable energy.

The Obama camp will undoubtedly point out that this idea came from the Mayor, not from Mr. Obama or one of his aides. But the Obama campaign was one that relied on the dispersed efforts of groups throughout the country, they heralded this as one of their major strengths. Why should the pork barrel spending of the Obama administration be any different?

Grass-roots pork is not what I have in mind when I think of the government using spending to lift us out of the economic morass. Ultimately though, this type of frivolous spending is unavoidable with the Keynesian approach to recovery that were are currently undertaking. You know, the one where the federal government throws money at one problem after another. The theory being that if enough money is thrown at enough problems, eventually things will turn around. As ever, I am not convinced this will work (see here, and here).

Over the weekend, the LA Times included this piece, which has a brief history of the Keynesian approach, but makes clear that what we are about to do dwarfs all previous attempts by governments to spend our way out of economic collapse. The scariest part of the article though, is not that we are fulfilling some vision of financial salvation (Obama's or otherwise) but that we are embarking on this program for lack of a viable alternative, or, really, any alternative. It ends on this chilling note:

The fundamental argument for the huge stimulus has little to do with analysis of past plans or economic theories. What's driving it is the fact that the U.S. and most other countries are in a largely unforeseen and terrifying mess.

Other than waiting for the problem to burn itself out, the new administration sees few alternatives but to return to Keynes and stimulus.

It's not unreasonable to compare the current state of affairs to being lost in the woods. Our problem is that on the way in, we ate all of the bread crumbs we were supposed to leave behind to mark our trail. I am not sure it matters that we are now going to start dropping crumbs the size of loaves of Wonderbread. After all, there is only one ending to the story when you find yourself alone in the woods with the Mob, and it is not a happy one.

No Chair for Burris Lands Harry in the Hot Seat

If Senate Majority Leader Harry Reid of Nevada was Speaker of the House, this post would have been entitled 'Waffle House', but alas, I have to make do with Hot Seat Harry.

After an appearance on Meet The Press last Sunday in which Mr. Reid seemed quite adamant that the Blagojevich-appointed Roland Burris would not be accepted into the senate as Barack Obama's replacement, he now seems to be softening his stance considerably.

For those of you scoring at home this is the part where a solid Congressional majority begins to lose its way and get bogged down in everything except, you know, actually governing. It is no wonder that at least since Reagan, if not before, the Office of the President has turned into something just this side of a cult of personality. Please don't mistake this as a partisan criticism, as this sort of thing takes place in Republican Congresses as well. Impeachment anyone?

As noted, Mr. Reid had previously seemed quite firm in his pronouncement that Mr. Burris would not be allowed to join the Senate. When asked why Mr. Burris would not be welcome by Meet The Press moderator David Gregory, Mr. Reid's answer was that, "Blagojevich is obviously a corrupt individual." As Reid indicated, yesterday Mr. Burris was denied his place in the Senate.

Today, however, the Associated Press is reporting that Mr. Reid is looking for a way to accept Mr. Burris and that the main sticking point now is the fact that the Illinois Secretary of State has not yet signed the papers finalizing the appointment. I think the Civil War was still on the last time time Democrats were this deferential to states.

I don't want to suggest that Mr. Reid's grilling on Meet The Press had anything to do with his change of heart, but Mr. Gregory had him flummoxed, if not down right stymied. I mean this is what, Gregory's fourth or fifth show? He is a savvy media insider and down-home Harry is just a Senator from little ol' Nevada.

I can't help but wonder if Hillary Clinton isn't watching the news and regretting the decision to accept the appointment as Secretary of State.

Well, for Harry and the gang it is back to that stately but hollow dome that serves as a backdrop to the Washington DC soap opera that rivals anything found on Days of Our Lives. It is just too bad that they are Mr. Reid's days and our lives.

A Voice in the Financial Desert

If you are interested in a different idea about just how we got into the current financial mess and how we go about getting ourselves out of it, you should read this weekend's two part New York Times Op-Ed from Michael Lewis and David Einhorn.

The first part is entitled The End of the Financial World as We Know It. The real value of this piece is the fact that it does not fall back on the conventional wisdom to explain how we got into this mess: Namely, deregulation (the standard whipping-boy of the left) and irresponsible lending fostered by Freddie, Fannie, and the Community Reinvestment Act (public enemies number #1, #2, & #3, not necessarily in that order, according to those on the right).

Bypassing these usual scapegoats for the current state of affairs, the authors offer a far more plausible culprit, incentives. They argue that Madoff's ponzi scheme, clear failures by the credit rating agencies, and the apparent ineffectiveness of Treasury's response to the financial crisis are all unsurprising when you examine the incentives that existed (and that unfortunately continue to exist in many cases).

The second part, How to Repair a Broken Financial World, includes a short list of items that could be put into place to try and prevent this whole mess from recurring. The authors describe these changes to our financial system as, "perfectly obvious". Given the recent record of our leaders in Washington, this almost guarantees they will never be implemented (or, if they are, they will likely be unrecognizable).

If you are looking for a concise, informative, and refreshing discussion of our current financial state and some common sense approaches to finding our way out of this mess, be sure to check out these two pieces.

PS For those of you new to blogs, just click on the words, "The End of the Financial World as We Know It," and, "How to Repair a Broken Financial World." These are links that will take you right to the articles.

PPS For those of you looking for a good read, check out Liar's Poker by Michael Lewis. It is his account of working on Wall Street. Don't be put off by the subject matter. Liar's Poker is not a book for financial wizards who just happen to have a little interest in reading, it is a book for readers who just happen to have a little interest in what goes on in our financial sector. These days that should include everybody.