Monthly Archive for April, 2008

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Robert Frank Inadvertently Makes the Case for School Choice

Published on 4/27/2008 in Education and School Choice . Closed

Cato-at-liberty:

Matt Yglesias points to an article in Sunday’s Washington Post by economist Robert Frank that makes a strong case for school choice. Well, OK, he doesn’t explicitly talk about school choice, but he certainly does a good job explaining the problems caused by the absence of choice:

In the 1950s, as now, families tried to buy houses in the best school districts they could afford. But strict credit limits held the bidding in check. Lenders typically required down payments of 20 percent or more and would not issue loans for more than three times a borrower’s annual income.

In a well-intentioned but ultimately misguided move to help more families enter the housing market, borrowing restrictions were relaxed during the intervening decades. Down payment requirements fell steadily, and in recent years, many houses were bought with no money down. Adjustable-rate mortgages and balloon payments further boosted families’ ability to bid for housing.

…

The most important thing to note, though, is that the scarcity of good schools Frank identifies is not an inherent fact about the universe, but a consequence of the public school monopoly. In a competitive education market, a shortage of good schools in a given area would spur people to either start new schools or expand the best of the existing ones. But the public school system has few mechanisms for doing either of those things (charter schools are a very limited mechanism for starting innovative public schools). Which means that the supply of good public schools is artificially limited, leading parents to bid up their price. The way to alleviate the shortage of good schools is not to re-regulate the mortgage market, but to reform the education system so that it’s easier to start and expand high-quality schools. Few things would do that as effectively as a robust program of school choice.

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Deficits: Learning To Love Debt

Published on 4/27/2008 in Economics . Closed

Another Financial Planning article by Kenneth L. Fisher, from May 1, 2007. Ken thinks deficits are good, up to the point where borrowing cost (the interest rate) almost equals the return on assets [profit maximization theory].

Pundits bemoan the fact that America’s official personal saving rate turned negative nearly two years ago, and has headed south ever since. Americans aren’t saving. Worse still, we’re allegedly drowning in debt on a personal level; and, on the national level, the government has profligate spending plans to drive the federal saving rate deeper into negative territory than ever before.

Most people are horrified about this. Americans have a near-religious aversion to debt. We agree that debt is bad, and lots of debt is downright immoral. Almost no one would say debt is good–unless he or she wants to be seen as a mentally infirm charlatan with malicious intent. Call me what you will. Debt is good.

Last fall (Financial Planning, November 2006), I showed you how to use the questions from my book, The Only Three Questions that Count, to debunk the fear that big federal budget deficits are bad for the economy and for stocks. In fact, by using the first of my three questions–What do you believe that’s actually false?–I showed that big budget deficits are actually great for the stock market. Historically, big deficits are followed by stock-market returns that are dramatically superior to those following surpluses–for as long as 36 months out.

Still, it may be hard to fathom why budget deficits are good, since they add to our overall debt. But if you use the second question–What can you fathom that others find unfathomable?–you’ll see that deficits are good because debt is good. Debt is so good, we could use much more of it. Just reading that sentence may enrage you. But anger is usually twisted fear, which can be addressed by my third question: What is your brain doing to blindside you now? The key is to untwist the fear to see reality better so we can make better stock-market bets.

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OUR OPTIMAL DEBT

Is the U.S. over- or under-indebted? Since we have total assets of about $120 trillion (according to the Federal Reserve Flow of Funds Account) and a GDP of $13 trillion, our return on assets is 11% after taxes–that’s very high. A current fair estimate of borrowing cost is about 6%, or 4% after taxes–much less than our return on assets. We’re not over-indebted. Instead, we’re falling far short of profit maximization–immorally so!

Enjoy — lots of good points. I’m just not yet convinced Ken is correct.

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Deficits: Deficient Thinking

Published on 4/27/2008 in Economics . Closed

Then we checked subsequent 12-, 24-, and 36-month stock returns. You’d expect surpluses would have led to great returns, but the opposite is true. Budget deficit extremes had the better results—by a wide margin. Following deficit extremes, markets averaged 21.6% over 12 months, compared with -1.8% for the surpluses. After 36 months, deficits averaged 35.1% returns but surpluses just 10.3%.

I’ve started accumulating the time series to verify Fisher’s claims quoted above [from Market Minder 2/4/2008].

Seeing just that, a rational person would conclude buying big deficits is a superior strategy to buying big surpluses. Even more amazing: It’s the same thing globally—Germany, UK, and Japan all experienced superior stock returns following deficit extremes.

And it makes good financial sense. You can reference any Corporate Finance textbook for lessons in leverage and optimal capital structures to discover there’s an appropriate debt level for every firm—and extrapolate those same lessons to a federal level. You can also check America’s history for times we’ve had as much, more, or less debt as a percent of GDP to know our current debt load likely isn’t troubling. (Having no debt, as we did when President Jackson paid it all off, had disastrous results. We suffered a bank panic and one of the worst depressions in our nation’s history.)

But here’s another way to see this: Newly lent money in this country changes hands about six times in the first year. Six times! You borrow to buy a car. The dealer takes that money, pays the manufacturer and his employees. The manufacturer pays its employees, buys raw steel, and pays lobbyists. All the employees buy groceries, clothes, and home entertainment systems. The grocery store . . . you get it. Every time money changes hands, it moves our economy along.

It’s the same thing with government debt. Yes, our government does really stupid things and we prefer if you or GE or Apple or Lindsay Lohan or even someone less responsible made that first spend. But still, money gets borrowed and spent on dumb government things. Useless bridges. Paved bike trails in communities you’ll never visit. Reflective paint on signs in National Forests. The money gets spent, and respent, and respent—and our economy benefits. It’s better money gets borrowed and spent six times than if it doesn’t get borrowed at all—even when the government does the borrowing.

This is not to say we’re happy about bigger government. We’d prefer a smaller government because you’re an infinitely wiser spender of your money than any politician. If you could take your own money and make that first spend, our economy would be better off still. But it’s wrong to assume a government’s debt is bad for the economy. We’d just rather see them borrow money than take more of it by force (i.e., taxes).

And the stock market’s our proof! If budget deficits were bad and surpluses good, we’d see it in history—but we don’t. So when you read about our massive budget deficit, you can roll your eyes and know the three remaining deer in Union, New Jersey are getting a world-class bypass over Route 78, but it doesn’t spell trouble for the market. Quite the reverse!

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Americans hoard food…

Published on 4/27/2008 in Economics . Closed

Costco and other grocery stores in California reported a run on rice, which has forced them to set limits on how many sacks of rice each customer can buy. Filipinos in Canada are scooping up all the rice they can find and shipping it to relatives in the Philippines, which is suffering a severe shortage that is leaving many people hungry.

Some recent stats:

FARM TRADE

Rice 122%

Wheat* 95

Soybeans 83

Crude oil 82

Corn 66

Gasoline 41

Gold 37

Sugar 30

Coffee 24

Milk 5

Live cattle -7

Lumber -14

* On the Chicago Board of Trade

Source: Commodity Futures Trading Commission

Energy policy: bad policy can wreck the global economy

Published on 4/27/2008 in Climate Change , Economics , Energy Policy and Global Warming . Closed

Global warming is an issue for the elites, he said, not for the average voter.

Evan Thomas talks to some politicians

In the summer of 2006 I went to see Congressman Rahm Emanuel, who was running the Democrats’ successful effort to regain control of the House of Representatives… So I asked Emanuel, how are the environment and global warming playing out there in the heartland? Is it stirring voters? No, he replied. In the 2006 congressional elections global warming was virtually a nonissue, he said, a low-priority item way behind the war and the economy and old staples like education and health care. Global warming is an issue for the elites, he said, not for the average voter.

…National polls show that the environment ranks fairly low as an issue that moves voters… But most voters worry more about jobs and keeping fuel cheap.

I don’t follow the polling, but will assume that Mr. Thomas accurately reports voter sentiment. Then the shocker that dropped my jaw — Thomas wants a command and control solution!

… the politicians will have to get involved and put the thumb of government on the scale-and then lean hard. That means calling for sacrifice-serious wartime sacrifice.

or in other words “let’s wreck the global economy”. Sigh — good policy can probably stabilize emissions at a 2050 GDP cost of less than 2%. See my last post Energy policy: good policy can stabilize emissions and create wealth.

Energy policy: good policy can stabilize emissions and create wealth

Published on 4/27/2008 in Climate Change , Economics , Energy Policy , Favorites and Global Warming . Closed

200804270946Good energy policy can probably stabilize emissions at a 2050 GDP cost of less than 2% Studies project more like 1 to 1.5% but forecasting how it is all going to work out in 50 years is impossible. So 2% is just my speculation, based on my optimism about markets and innovation, and a recognition that humans can adapt and adjust policy as innovations and effects emerge.

What do I mean by good policy? Simple summary: a revenue-neutral carbon tax. Establish a predictable rising price on carbon from a low level of around $15/ton CO2, increasing to around $60/ton by 2050. If innovation is running ahead of plan, then that offers the possibility of reducing planned future increases. Inversely, if emissions are running ahead, increase the future carbon price. Something like Al Gore’s proposal could result in a GDP gain by 2050, not a loss [e.g., because energy not consumed is cost not spent]. Gore proposes rebates of the first dollars of payroll taxes — dollar for dollar with revenues from the carbon taxes.

For the details of how carbon tax revenues can be fully rebated and distributionally neutral, see e.g., “A Proposal for a U.S. Carbon Tax Swap – An Equitable Tax Reform to Address Global Climate Change” [Brookings Institution Hamilton Project Oct 2007] by Gilbert E. Metcalf, Professor of Economics, Tufts University.

Christopher Hitchens

Published on 4/26/2008 in Democracy , Economics and Politics . Closed

His own loss of faith came in slow degrees. “If someone had asked me my political alignment, well into the 1990s, I would have said that I was a socialist and a Marxist.” Then he found himself writing to students of his and this process developed into the 2001 book Letters to a Young Contrarian. As he surveyed the 30 years since the catalysing effect of 1968, he says he was forced to admit that there was no longer a socialist international movement, nor even a socialist critique that might help to revive one.



“So what are you doing calling yourself a socialist?” he asks. “All you’re doing is making sure that people don’t confuse you with a liberal—which I’d always considered a position of lily-livered weakness. But that makes it an affectation. So I felt it fall away. I didn’t repudiate it, I didn’t get poisoned by it, I didn’t hate it and I didn’t have a Damascene moment about it. But I did notice that those who do think they’ve got a critique of capitalism turn out to be reactionaries. They prefer feudalism or agrarianism; they’re pre-capitalists. Marxism at least has a theory of development and innovation. And global capitalism now seems to be the only thing that is revolutionary. That’s my Marxist way of looking at it.”

Many of Hitchens’s critics conclude that this is his way of saying he’s a neoconservative. His reply is that he doesn’t consider himself to be “any kind of conservative.” He would rather just be called a human rights hawk. “There should be a word for people who believe US power can and should be used to oppose totalitarianism,” he says. With no faith left in the French and Russian revolutions, or the proletariat, all that now remains is his idea of America as “the last revolution in town”—its spirit of liberty revived by the struggle to transform the middle east.

Alexander Linklater has researched and written an excellent mini-biography of Christoper Hitchens — the cover article for the latest Prospect — the result of three days of interviews in Washington DC.

His main business, he claims, has been to ally himself with what was originally an underground movement of Sunnis, Shias and Kurds—all working towards the overthrow of a latter-day Stalinist monster. “I have felt like I used to in the 1960s,” he says, “working with revolutionaries. That reminds me of my better days.”

When Qubad Talabani arrives at the apartment, the discussion is close and intimate. They discuss his father’s weight, before moving on to the problem of Turkish incursions into northern Iraq. A Washington lobbyist for the Kurdish regional government, the young Talabani is formidably smart. They discuss L Paul Bremer’s big mistake—not the disbanding of the army, Qubad argues, which was in fact his main achievement, but the failure to provide payoffs and pensions. Hitchens talks about the evidence, some of it apparently furnished by Qubad’s brother, that Saddam’s ties to al Qaeda preceded the invasion. Qubad discusses the need to create a federal Iraq. It’s not hard to see in the young Talabani the kind of secular and cosmopolitan vision of Iraq that Hitchens has tried to cling on to as the threat of Sunni-Shia civil war has darkened. Hitchens claims allies among several Iraqi factions, but his first real contact came in the early 1990s, when “trudging around northern Iraq” researching an article for National Geographic on Saddam’s use of chemical weapons against the Kurds. And it was their struggle with which he originally identified.

Highly recommended

Venezuelan student leader wins the Milton Friedman Prize for Advancing Liberty

Published on 4/26/2008 in Democracy . Closed Tags: .

The Milton Friedman Prize Goes to a Hero:

The 2008 Milton Friedman Prize for Advancing Liberty has been awarded to Yon Goicoechea. Goicoechea was a key leader of the Venezuelan student movement that ralled the country to vote down Hugo Chavez’s referendum on a constitutional change that would have turned Venezuela into a socialist dictatorship. More on Yon here, as well as information on the gala May 15 dinner in New York at which the Prize will be presented.

It’s interesting to reflect on the diversity of the first four recipients of the Prize. The first Prize in 2002 went to Peter Bauer, presumably in recognition of his lifelong scholarship on development economics and the sources of wealth. (I say “presumably” because the Selection Committee doesn’t formally explain its decisions. But the announcement of the award referred to “his pioneering work in the field of development economics, where he stood virtually alone for many years as a critic of state-led development policy with its emphasis on central planning and external foreign aid.”)

The second Prize went to Hernando de Soto, an author of two books on economics but more importantly a tireless crusader and activist on behalf of poor people and their need for property rights.

The third Prize, in 2006, went to Mart Laar, the youngest prime minister in the history of Estonia, who led his country out of the Soviet Union and into the European mainstream. He slashed taxes and transfer payments, privatized state agencies, liberalized international trade, and created one of the fastest-growing economies in the world, dubbed the “Baltic Tiger.”

And this year the Prize goes to a young man who is not–not yet, at least–a scholar, an author, or an elected official. He’s just a law student who stood up when others wouldn’t and helped to create a movement that prevented a strongman from becoming a dictator.

I think the diversity of the recipients reflects the many ways in which liberty must be defended and advanced. People can play a role in the struggle for freedom as scholars, writers, activists, organizers, elected officials, and many other ways. Some may be surprised that a Prize named for a great scholar, a winner of the Nobel Prize in Economics, might go to a political official or a student activist. But Milton Friedman was not just a world-class scholar. He was also a world-class communicator and someone who worked for liberty in issues ranging from monetary policy to conscription to drug prohibition to school choice. When he discussed the creation of the Prize with Cato president Ed Crane, he said that he didn’t want it to go just to great scholars. The Prize is awarded every other year “to an individual who has made a significant contribution to advance human freedom.” Friedman specifically cited the man who stood in front of the tank in Tiananmen Square as someone who would qualify for the Prize by striking a blow for liberty. Yon Goicoechea not only stood in front of the tank, he stopped it. Milton Friedman would be proud.

I notice that the Prize has gone each time to someone almost a generation younger than the previous recipient. I’d guess that trend won’t continue, unless President Obama’s daughter convinces him to privatize Social Security.

Near-Unanimity for Tax at TV Roundtable on Carbon Pricing

Published on 4/25/2008 in Energy Policy . Closed

James Handley reports on a carbon tax vs. cap-and-trade debate. Al Gore appears to be consistent in his backing for a revenue-neutral carbon tax. Obama’s advisor continues to come down on the wrong side.

My co-panelists were heavy hitters: economists Robert Shapiro (Commerce Undersecretary under Pres. Clinton) and Eric Toder (formerly of IRS and Treasury), and Barack Obama’s energy and environment advisor, Bob Sussman (former Deputy EPA Administrator).

Moderator Susan McGinnis set the stage with a clip from Al Gore’s latest slide show:

Here’s the solution. We need a CO2 tax, revenue-neutral, to replace taxation on employment, which was invented by Bismarck — and some things have changed since the 19th Century.



I explained that a gradually-increasing carbon fee imposed upstream on fossil fuel energy sources would create price expectations to encourage energy conservation and renewables. A carbon fee would also disproportionately tax those who fly more, drive bigger vehicles longer distances and choose oversized, sprawled-out houses, thus embodying the “polluter pays” principal.

Moreover, a carbon tax wouldn’t divert funds for government spending so long as it was revenue-neutral. The Carbon Tax Center suggests recycling carbon fee revenue through the economy via equal distributions or “dividends” to every household. Each household’s “carbon dividend” would increase annually as the carbon tax rises. Gore suggests using carbon tax revenue to replace regressive payroll taxes. Either revenue-neutral approach would reward low-carbon-users without penalizing the poor or increasing the total tax burden.

Shapiro was trenchant:

The only reason anyone is talking about cap-and-trade now is because the U.S. (at Gore’s urging) insisted on cap-and-trade in Kyoto. Gore has since abandoned cap-and-trade and is now calling for a carbon tax to replace other taxes. Caps just aren’t working.



CO2 reductions under the EU’s cap have been “negligible and very costly,” Shapiro said. Exemptions (e.g., for coal power plants in Germany) “overwhelm the cap.”

Shapiro also noted out that China and India have rejected cap-and-trade. In contrast, he argued, a U.S. carbon tax would encourage our trading partners to tax carbon to avoid forfeiting revenues on their exports to us.

Shapiro further noted that controlling quantity, as a cap does, adds volatility to energy prices, leading to disruptive price spikes, harming the economy and undermining support for the system.

McGinnis noted that Southern California’s cap-and-trade system for smog emissions was crashed by price spikes during their electricity crisis.

I researched Clean Skies TV a bit — looks like their site is very much “under development” — may be useful by mid 2008.

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US energy consumption by energy source

Published on 4/25/2008 in Energy Policy . Closed

The tables for 2001-2005 have been released by the EIA. Don’t know why it takes three years to figure out total consumption…

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