Russ Roberts has a nice, succinct overview of what F.A. Hayek argued. Hayek was a brilliant man.

(The article is gated, so you’ll have to click through from Google. The above link is to Google News–just click on the first link.)

Sven Wilson:

Fuller’s point is basically that life is hard and unfair for many hard-working people, and government can help.  Fair enough.  But what she doesn’t seem to get is that the more government steps in to fulfill the traditions of churches, families, neighbors, colleagues, clubs and associations, the less people feel a moral obligation to others, the less they have the ability to help others because of high taxes, and the less they feel a personal responsibility to provide for themselves.

Ezra Klein said this about our deficit yesterday:

The rate on our treasuries will rise at some point. It might even change “on a dime,” as people like to say. It’ll be that change that forces us to do long-term deficit reduction. In the absence of that external pressure, we’re not going to do any serious deficit reduction (at least, not outside what we passed in health-care reform). Let’s be honest about that with ourselves.

Klein says that we won’t reduce the deficit until the financial markets force us to by demanding substantially higher interest payments for our debt, so until then, we should just borrow and spend as much as we can (to ostensibly stimulate the economy) until the party’s over.

I’m not quite sure where to begin here. (I’ll ignore his side comment that the healthcare reform bill reduced the deficit, which is absolutely false.)

First, this is an oddly fatalistic view for a guy who, earlier the same day, said this about liberals pressuring Obama:

…problems don’t abate simply because they’re difficult to solve, or difficult to get the votes to solve. Douthat writes that “technically, [liberals] could be right” that deficit spending would accelerate job growth, but it doesn’t matter because the votes don’t exist for it. I’m not exactly sure what this is supposed to prove, but I don’t think it logically follows that the people who might have the right idea about how to solve the problem should stop pressuring politicians to support that idea.

(Emphasis mine.)

Let’s address his initial argument, though.

So, Klein is arguing that because the politics of reducing the deficit are difficult, and the only thing that can fix that is investors demanding a higher rate of interest on our debt, we should borrow and spend as much as we can in the interim. The parents are out of town, so let’s eat as much candy and draw on as many walls as we can until they get back. We can’t help ourselves—we’re only kids, after all.

Klein’s argument (and he isn’t alone in this—read Krugman for a more bombastic version of the same argument) is that, because it is relatively cheap for the U.S. to borrow money at the moment, and we have a weak economy, we should be borrowing as much of it as possible and spending all of it.

This argument is ridiculous, and dangerous. While interest rates on our debt are low for both short and long-term debt, the debt’s principal does, at some point, come due.¹ When it comes due, the U.S. can either pay it, or roll it over—turn it into new debt. If investors want to roll it over, they can demand a higher rate of interest on it.

If the U.S. follows Klein’s recommendations, our deficit will increase significantly, and our financial condition will worsen even further. Investors could, at that point, demand such a high rate of interest that we cannot afford to pay. At that point, the game’s over.

Krugman et al. would say this really doesn’t matter, because the U.S. can’t default. We control our own currency, and thus we can inflate it and pay any rate of interest we want. At that point, investors might choose not to lend to us. But worse, though, we could destroy our own currency. If you want to see inflation run wild, then you should throw in with Klein.

1. People who loan others money receive two payments: periodic interest on the loan, and at the end of the loan, the amount they loaned them. For example, if the loan is for $1000 for 5 years at 10%, the yearly interest payments are $100, and the loan’s principal is the $1000. ↩

They might want to add this to the dictionary entry for “hypocrisy”:

White House spokesman Bill Burton took him to task again on Monday, suggesting that Hayward take part in the cleanup operations in the Gulf of Mexico with the 300,000 euro yacht he co-owns.

“You know, look, if Tony Hayward wants to put a skimmer on that yacht and bring it down to the Gulf, we’d be happy to have his help,” Burton said to laughter in the White House briefing room.

So Burton mocks Hayward for attending a yacht race, but then said this:

But when asked about Obama’s day Saturday, in particular his four hour golf game at a course near Washington, Burton said the president had the right to decompress a bit after a hard week.

“I don’t think that there’s a person in this country that doesn’t think that their president ought to have a little time to clear his mind,” Burton said.

“I think that a little time to himself on Father’s Day weekend probably does us all good as American citizens,” he said.

But not, apparently, British citizens.

The Economist, commenting on Obama’s response to BP:

If he sees any impropriety in politicians ordering executives about, upstaging the courts and threatening confiscation, he has not said so. The collapse in BP’s share price suggests that he has convinced the markets that he is an American version of Vladimir Putin, willing to harry firms into doing his bidding.

First, it should be noted that The Economist endorsed Obama in the 2008 election. And comparing him to Vladimir Putin is *sort of* serious.

Second, however, this nicely summarizes why the administration’s response to BP is so troubling. BP bears responsibility for the oil spill and all damages associated with it—damage to the environment, to affected businesses, and to affected states for lost tourism revenue. Our system is designed to handle this through the court system, so damages are fairly awarded. This is a defined, orderly and understood process.

The Obama administration, however, has decided that this isn’t for the courts to decide, but for the president. By forcing BP to place $20 billion in a separate fund, and to pay $100 million for salaries of workers who lost their jobs due to Obama’s own moratorium on deepwater drilling, Obama has made himself both executive and judge. That’s deeply troubling.

He has done so not because the court system has failed (which still would not justify transferring a judicial responsibility to the executive branch), but for political expediency. Because Obama claimed during his campaign that the federal government’s maligned response to Hurricane Katrina was due to incompetence in the Bush administration, and he would lead an effective response to disasters as president, he has been criticized for not doing much in response to the oil leak. He is making what should be a question for the courts—how much damages to award, decided coolly, without outside influence—into a political question.

That should worry everyone, and schadenfreude for BP shouldn’t cloud just how wrong the administration’s response is.

Gregory Mankiw considers the administration’s response to the failure of their stimulus models:

The trouble is, we have no way of knowing for sure if the model was in fact correct. To react to a model’s failure to predict events accurately by insisting that the model was nonetheless right — as Obama’s economic advisors have done — is hardly the most obvious course. Careful economists should instead respond with humility. When their predictions fail — as they often do — they should not dig in their heels, but should instead be willing to go back to their starting assumptions and question their validity.

The administration predicted that without stimulus the economy would suffer 9 percent unemployment, and with stimulus it would not rise above 8 percent. The unemployment rate for May was 9.7 percent. Their conclusion is that the stimulus wasn’t large enough, rather than questioning their initial assumptions.

Mankiw’s piece is excellent, and looks at one of the assumptions they should have re-considered—that government spending’s multiplier is 1.5, while for tax cuts it is 0.99¹, and that this is the sole criterion for deciding what kind of stimulus should be used.

1. The multiplier is how much effect one dollar will have on GDP. So, for a dollar of government spending (with the 1.5x multiplier), GDP would increase by $1.50. ↩

Keith Hennessey nicely summarizes the administration’s response to the Gulf oil spill:

The President risks overreaching by trying to use a crisis in one subset of domestic oil drilling to enact a policy agenda that applies to all types of oil drilling and imports, and to coal, and to natural gas. Were he to focus just on solving the deepwater drilling problem, he’d have a slam dunk. Instead he’s trying not to let this crisis go to waste, and to use it as an opportunity to enact indirectly related policies that are much more hotly disputed.

Hennessey provides some of the best analysis and commentary on Washington minutia.

After two individuals (who identify themselves as students) ask Congressman Etheridge (D, NC) if he “fully supports the Obama agenda,” he pushes their camera away and grabs one of them first by the hand, and then his neck and waist.

Etheridge, while refusing to let go, demands to know who they are.

David Weigel of the Washington Post wrote about it, but rather than focus on what the Congressman did, chose to focus on who the individuals are (He titled his article “Who TMZ’d Rep. Bob Etheridge?”), and characterizes Etheridge’s actions as a “hug.”

Two things: one, Etheridge was completely out of line. Who these individuals are is wholly irrelevant. Second, Weigel’s article is an attempt to shift the story from something absolutely unacceptable–Etheridge’s actions–to something merely of interest, who the individuals are.

Let’s see how the media portrays this (if at all). It should be instructive.

The Obama administration will try to force BP to pay for the salaries of workers who lose their jobs as a result of the administration’s deepwater exploratory drilling ban:

Earlier on Wednesday, U.S. Interior Secretary Ken Salazar told a Senate hearing he would ask BP to repay the salaries of any workers laid off because of the six-month moratorium on deepwater exploratory drilling imposed by the U.S. government after the spill.

BP is responsible for the environmental and economic damage caused by their negligence (and, from what I can tell, absolute stupidity), and should pay for it. But the deepwater exploration ban is this administration’s choice, and has nothing to do with BP.

The Obama administration is attempting to use (justified) public anger against BP to force them to cover the effects of their own policy. This is so monumentally immoral I’m not sure what to say. How they manage to continually top themselves is beyond me. It’s a talent, really.

Paul Krugman says Fannie Mae and Freddie Mac had nothing to do with inflating the housing bubble.

His argument is that because the housing bubble reached its maximum point of inflation in 2005, and the GSEs’ share of residential mortgages began decreasing in 2003 while the private market’s share began increasing in 2003 and overtook the GSEs’ in 2004, this means the GSEs were not responsible for inflating the bubble.

His evidence is not sufficient to support his conclusion. While housing prices reached their upper limit in 2005, they grew significantly from 1997 to 2003–the same time period where the GSEs’ share of residential mortgages, and of mortgages to borrowers with incomes below the median, grew significantly. Their purchase of loans to borrowers with incomes below the median doubled between 1997 and 2003, and their purchase of low down payment loans (loans with a down payment of 5 percent or less) grew even more drastically in the same period.¹

Russell Roberts explains how this affected subprime securities prices (and thus how attractive they were for investors):

They played a significant part in the expansion of mortgage credit to low-income borrowers, an expansion that presumably pushed up housing prices in low-income neighborhoods, making subprime securitization more attractive.

The GSEs, though, did not only contribute to the housing bubble through non-prime mortgages. By purchasing prime mortgages from loan originators (banks, for example) and turning them into securities, the GSEs took those loans off of the originator’s balance sheet (which eliminates the risk for them), freeing the originators to make even more loans. Between 1997 and 2003, the GSEs total loans purchased rose by more than 65 percent.² This contributed to the housing bubble by allowing loan originators to make loans almost without risk (because they could offload them from their balance sheet to the GSEs), which invariably led to an increase in mortgages. More loans means more people buying more homes, which means rising home prices. Moreover, this also made it easier for loan originators to make riskier non-prime loans, because they no longer had to carry their prime mortgages on their balance sheets. They could just make those loans and immediately receive a payment for them from the GSEs.

The GSEs played an important role in inflating the housing bubble between 1997 and 2003, in effect getting the ball rolling. (And, actually, much more than that: according to Krugman’s chart, this time period was responsible for about half of the total housing price inflation.)

Krugman discusses none of this. Rather, he tries to simplify the GSEs’ role in the housing market into a single chart that isn’t sufficient to justify his conclusion. This is either remarkably lazy on Krugman’s part, or he is being intentionally dishonest. And I doubt the former.

1. See Professor Robert’s excellent paper on the financial crisis, Gambling With Other People’s Money. ↩
2. Ibid. ↩

The Democrats’ DISCLOSE Act requires:

Among other things, an organization’s donors are presumed to support its political ads unless they specify otherwise, so their names must be reported to the government, raising the possibility of bullying or retaliation by politicians.

Why does the government need to know who donated to an organization? Why should organizations be required to give their donors names?

And:

Even when corporations are allowed to speak, any communication that mentions a candidate during the covered period, including online material, could expose them to investigation by the Federal Election Commission (FEC) for unauthorized “coordination” with a political campaign.

Change we can believe in.

Massachusetts is taking $100 million from “wealthy” hospitals to reduce insurance premiums for small businesses:

Wealthier hospitals would be required to make a one-time $100 million contribution to ease insurance premiums for smaller businesses under a bill approved Tuesday by the state Senate.

Calling this a “contribution” is disturbingly Orwellian. It is forcibly taking from one group and giving to another. There is nothing voluntary about that.

This also shows just how idiotic Massachusetts’s healthcare reform, and by extension, the Democrats’ healthcare reform, is. It was supposed to reduce healthcare costs, but instead it has done the opposite. Now, because their “reforms” failed, the state government is seeking to “reduce” costs by controlling insurance premiums:

Under the bill, health insurers would have to file rate increases with the Division of Insurance three months before they are set to take effect. The division would be required to review the rates to see if proposed increases are reasonable.

That would be a grand idea if the problem was price gouging by insurance companies (it isn’t). The problem is real, hard healthcare costs for providers. Authoritarians, who support measures like this, either can’t grasp that simple concept (and would rather believe it must be the result of nefarious businesses screwing people), or do recognize it but find it convenient for the advancement of their political agenda of government control to stay publicly oblivious to it. After all, when you have a scapegoat, it’s much easier to gain more government control. They’ve learned their history well in that regard.

James Surowiecki comments on market volatility created by increasing (and erratic) government intervention in the economy:

As a result, investors have a vast range of new things to worry about, like voter sentiment in Westphalia. They have to try to figure out whether policymakers will do things they shouldn’t, like slash spending during a downturn, and not do what they should, which is to intervene promptly when systemic crises appear.

He’s right that government intervention is creating uncertainty in the market, but his solution–that governments intervene “promptly” during crises–is exactly wrong.

Bubbles certainly are inherent to markets, but systemic crashes are not. The financial crisis we experienced in 2008 was a result of a housing bubble that the federal government (1) funded through low interest rates and the GSEs (Fannie Mae and Freddie Mac) and (2) encouraged through prior bailouts of ailing banks. This created an environment where risks were not properly considered precisely because of what Surowiecki recommends: Government would intervene if the bubble burst. And that’s precisely what they did.

We shouldn’t be creating standardized and routine government intervention in the economy to protect failing institutions. We should do the opposite: make clear government will not save failing firms nor their creditors. Government protecting firms and creditors makes Washington, D.C.’s whim, and not a company’s own fundamentals, ultimately responsible for a company’s success.

That isn’t capitalism. It’s authoritarianism, with markets merely serving the government’s desires.

Arnold Kling comments on the European Union’s bailout of debt-ridden members:

My take is that this is like TARP in that it treats the European debt crisis as a liquidity problem, when at least in part it is a solvency problem. Lately, I have seen several writers argue that a Greek default is inevitable, and no one seems to argue otherwise.

Suppose that banks had to write down the value of their Greek debt by 30 percent or more. At the very least, this would eat significantly into their capital, and they would have to curtail lending. This in turn would make funds scarce for other sovereign debtors. In some sense, this is what should happen–interest rates should rise, and financial intermediation should contract.

As he points out, the problem is this isn’t simply a liquidity issue (e.g. banks have stopped lending, but the country’s finances are actually strong). This is a solvency issue. These countries are in terrible shape financially.

Like TARP and the nationalizing of Fannie Mae and Freddie Mac here, this only extends the inevitable. These countries still need to fix their fundamental problem, and this is just prolonging the pain.

George Packer on the Obama administration’s foreign policy.

Then the President paused, apparently expecting this sensible recognition to prompt a round of applause, but there was silence, and he seemed to stumble. His timing was off; the people in his mostly Egyptian audience had already done their clapping when he uttered the word “democracy.”