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Obama’s Job Creation In the Abstract

January 5, 2009 8 comments


The latest iteration of President-Elect Obama’s stimulus plan calls for 3 million jobs to be created or saved, of which approximately 20% will go towards government positions. For an example of how this has worked out at the state level, see Bill McGurn’s recent editorial on my home state of New Jersey. As usual, no economist or even rational, thinking human being could give sanction to a plan like this in good faith. If giving out jobs to people in government is a good solution to the unemployment problem in bad times, then shouldn’t the government “create” these jobs in good times too? But there is an even more fundamental question than this. Why should government create jobs for the sake of employment in the first place?

It is this question that underpins almost all of the government intervention in our lives over the last hundred years or so. The government is acting as if it is a divine central planner, with the ability to provide ample housing, healthcare (soon universal), credit, flatten market cycles and provide every type of moral-hazard-inducing insurance possible. It is in many respects one big Ponzi scheme where money is taken from the productive and paid out to a wide variety of special interests. The people in response have acted as complacently as the SEC in the case of Mr. Madoff.

If the government can carry out all of these functions in addition to fixing unemployment by simply creating government jobs, then why even have private industry? After all, the government has already monopolized its control of the money supply, and partially nationalized commercial and investment banks and automobile manufacturers. Why let the evil private businesses with their risk-taking, competition and potential failure ever enter into the equation? No, let’s sacrifice the free market to save the economy. Let’s have the government determine how labor should be optimally allocated, determine how much food, clothing and shelter each person should receive and which industries should grow and contract. After all, historically this has worked out quite well in the Soviet Union, Nazi Germany, fascist Italy and even relatively more liberal post-war Japan.

Sarcasm aside, this is something on which F.A. Hayek proved quite prophetic. Granted, I am no expert on Hayek, but having read The Road to Serfdom, it is clear that the problem of economic calculation is the reason the government cannot provide full or optimal employment, or any of its other ridiculous services without leading to utter economic ruin and ultimately revolution. No bureaucrat can figure out how to optimally produce and allocate goods and services, not only because he lacks the specialized knowledge, but because he is not subject to the price-setting mechanism of the market, nor is he held responsible by profit or loss. The government does not need to produce the best good or service at the lowest price to survive. In our particular mixed economy, the government’s economic calculus in attempting to socialize losses, pick winners and losers and “stimulate” the economy sows the seeds of its own destruction because it counters the very forces that led us to prosperity.

Legally, all one has to do is look at the Constitution to see that there is 0 justification for the government to be in the majority of the businesses it is now in. We are supposed to have a government with limited powers, created to protect individual liberty. It is for this reason that the government’s primary positive power granted by the Constitution is the power to defend (though incidentally we do have private defense companies that help with this function). The document is mainly however one of explicitly negative powers (to constrain government), in which without the clauses regarding “promoting the general welfare,” of the citizens, “the power to regulate commerce” amongst the states and the complicit loose-interpretationist judges, there is no way that the politicians could ever twist the language to fit their whims.

One of the little-spoken-of negative provisions in Article I, Section 10 of the Constitution should be given more attention by our elected officials. It reads “No State shall…make any Thing but gold and silver Coin a Tender in Payment of Debts. How much more attractive would those muni bonds be if we were actually paid in gold or silver, as the founders, who understood the problems associated with fiat money intended? Ultimately, the politicians in our current malaise could do right by their constituents by spending more time reading the Constitution, and less time listening to Keynesians. For it is paper money and government we have, and sound currency and liberty we lack.

Foreclosure Relief

December 20, 2008 Leave a comment

Barney Frank and friends are finishing the touches on “foreclosure relief” in the form of $350 billion in TARP funds. The favored logic of the Washington crowd is that since housing is at the heart of the crisis, it is most important to “stabilize” the housing market, and that foreclosure relief is the best means to do so. The funds will be released to the Treasury with conditions that President Obama and Secretary Paulson will agree to programs that cut interest rates and “forgive” a portion of principal on mortgages. There are two elements to this that are inherently flawed. One is the economic aspect and the other is the moral aspect.

From an economic perspective, in terms of creating stability in the housing market this plan does anything but that. I would define stability as a situation in which supply and demand meet, so that there is a fair market value established for real estate. Given that this price is set by a constant stream of transactions between buyers and sellers, as with all markets the housing market is unstable until it clears.  Just as in trying to flatten out market cycles however, the truth that stabilization is generated by chaos is lost on Washington.  

By artificially reducing interest rates and thus prolonging the time before foreclosure for those who cannot afford their houses, the market value of these houses will remain artificially high. This is because the government will reduce the supply of houses that otherwise would have been foreclosed and liquidated, thus keeping imprudent people (at least temporarily) in their homes and people with the cash to purchase the homes out.  Since house prices will remain artificially high, it will take even longer for mortgage-backed assets to reach their true market value as well.  In addition, the banks providing the mortgages will receive less money than they otherwise would have were the market for houses free, both in terms of lower interest rate payments and the government-imposed “forgiveness” on a certain percentage of mortgage principal.  To recap, the government steps in and alters a private contract so as to relieve the debtor at the expense of the creditor.  This seems like a great incentive for banks to continue to lend in the future.  

The other aspect of this is the moral one. First, what kind of precedent does the government set if when a homeowner can’t afford a home, the government can arbitrarily abrogate a contract made by two private consenting individuals in favor of one side — and the side of the debtor no less? This creates a major moral hazard, because now people will see that if they go into serious debt to buy a home, the government will bail them out by offering more favorable terms if they fail to fulfill their obligations.  Of course I suppose this precedent has already been set in people’s minds given the government’s increasing socialization of risk in the private sector.  

There is a second major moral problem with this as well. The law of the land here is favoring debtors over creditors. The conception that one should “forgive” a portion of principal on a mortgage is absolutely ludicrous. The person who saves their money does the debtor a favor by lending them money, and so the fact that just because market conditions change, the creditor than has to sacrifice his or her rights to the person who borrowed in the first place is egregious. To be sure, a saver takes a risk by lending, but they also have a contractual right to certain claims if the debtor cannot fulfill his or her obligations, so for the government to be able to intervene and “relieve” the debtor to me seems unjust.  If contracts can be violated by government fiat then the glue of society must come undone.