Detailed Abstractions

This is one of those cases where it’s almost as if the planets aligned perfectly to show anyone willing to see the complete idiocy of our current economic policies.  In the midst of a recovery that is anything other than certain, a time when the US government, its citizens, and indeed larges swaths of the world are simply broke, yet we keep on spending.

The Federal Reserve Chairman has stated directly (here via Reason.com):

Today may be terrible, but tomorrow is going to be much worse, at least as measured by such metrics as deficits, debt, and entitlement spending. In an April speech, Federal Reserve Chairman Ben Bernanke laid out the misery that awaits us. “The arithmetic is, unfortunately, quite clear,” he said. “To avoid large and unsustainable budget deficits, the nation will ultimately have to choose among higher taxes, modifications to entitlement programs such as Social Security and Medicare, less spending on everything else from education to defense, or some combination of the above.”…

Yet just yesterday, the committee to reduce budget deficits is joining a long line of other government employees in asking for more.  Over @ Cato (here):

It’s rather symbolic of what’s wrong with Washington that a commission ostensibly created to promote deficit reduction is seeking a bigger budget….

Yep, that’s correct.  As private businesses have continued to contract to meet decreased demands, the federal government continues to grow.  This happens when the federal government is allowed to print money, but that’s a side note.

Simple fact is, we have no money, yet we are still spending like drunken sailors and it seems we don’t understand.  When the governor of New Jersey is forced to tell people directly:  unlike the US government, the state of New Jersey can’t print money, we’ve run into a major problem.

& like most problems, the federal government will not help.  They are the enemy of spending policy as we can easily see, but for those that think maybe they can help here… please watch their latest commercials for the census count and ask yourself what is they underlying theme?  On the government’s own website propoganda, what is the underlying theme?

What is the main thing they want you to take away from this?  That government is the answer.  Our leaders are telling us, in no uncertain terms the same unsustainable and morally questionable hypothesis:  Make sure you get counted…. so you too can get paid.

Maybe it’s time to start asking:  exactly where are they leading us?

DA has several posts on the reasons behind the economic collapse as well as financial reform itself.  &, as is usual, the government is using the “crisis” as a power grab.

@ MarketWatch (here):

…The comprehensive bill is an attempt fix holes in the regulatory system that helped lead to the Great Recession….

At this point, Republicans are blocking a Senate vote:

…Among the sticking points are provisions that would give regulators the authority to guarantee debts of large financial institutions, provisions that would give the Federal Reserve authority to lend money to banks in an emergency, and a proposal to deal with failing systemically important companies by setting up a “burial insurance” fund….

Now I’m no fan of the Republicans and understand full well some of their opposition is about politics and not the actual bill, but I’m pleased with this block. First, guaranteeing debts of larger financial institutions does the exact opposite of the administration’s consistently stated goal – end too big too fail. @ MarketWatch (here):

NEW YORK (MarketWatch) — The U.S. must pass legislation to reform the financial system , in particular to make sure that no bank operates on the assumption that it will be bailed out by taxpayers, Lawrence Summers, the director of the National Economic Council and President Barack Obama’s top economic adviser, said Sunday.

“We must end too big to fail,” he said on Face the Nation. “There is no one associated with the White House who believes “too big to fail” is acceptable, or that it’s acceptable for financial institutions to rely on a bailout.”…

@ Daily Finance (here):

Too big to fail? This isn’t a designation that the Obama administration wants to exist any more….

& the President himself via YouTube (here). Insuring potential debts for very large institutions which might fail, is insuring too big to fail continues.  In this particular case, the logic is obvious and inescapable.  If an institution becomes very large, then the government designates them as whatever, which in turn tells the investing public that that institution is backed by the federal government. This will not only give larger banks an advantage (would you rather invest in a business you know won’t be allowed to fail or one that you know will be allowed to fail?), making it more difficult for smaller banks to compete, but actually incents banks to become big enough to get the designation itself. But why stop there? @ MarketWatch (here):

…The legislation would set up a new agency to protect consumers from lending abuses. It would also give the government the authority to wind down big financial institutions, and expand oversight of the derivatives market….

Soooooo… the government, which continued to support Fannie and Freddie after being told by numerous groups the risk they posed, the government which regulated ratings agencies who gave triple-A bond ratings to MBSs, the government who’s economic predictions have failed again and again needs yet another agency from which to fail?  Maybe it’s just me, but I thought the justice system was supposed to protect consumers… But that’s simply not enough power either.  They also need more control over the derivatives market.  You know, the market which had nothing to do with the economic crisis.  They also plan to more heavily regulate pay-day loan companies.  Not sure what they had to do with the crisis either… I think Alan Reynolds @ Cato stated it very well (here):

The Obama administration thinks it has discovered the perfect formula to cram legislation through in a hurry:  Demonize some prominent firm within an industry you plan to redesign, and then pass a law that has nothing to do with the accusation against the demonized firm.  They did this with health insurance and now they’re trying it with finance.

However it’s said and whatever is said, this legislation will do the opposite of its theoretical intent.  It will not protect anyone, but  hurt all consumers.  By adding more and more layers of of regulations, the barriers to entry are increased for everyone, hurting competition, and raising prices for the end consumer.

Obamacare - was the final push an act of noble means or just hubris? (via Reason.com here)

…At a time when America’s economy is still in bad shape and when we face numerous problems abroad, Obama has put the country through a shattering political battle—and, with legal challenges and promises of repeal, the fight may be just beginning.

This seems, at the moment, less a monument to idealism than to hubris.

Rep. Mike Honda, D-CA seems to think Fannie Mae knows their stuff (via Politico here).  In asking for more money to prevent legal foreclosures, he gives us this:

…In addition, Fannie Mae estimates that as many as 50 percent of the minority homeowners who received a subprime loan should have qualified for a prime loan. This clearly indicates the need for housing counseling services….

With all due respect to Mr. Honda, I think all this clearly indicates is poor critical thinking skills.  When a GSE which apparently knew nothing about the impending crisis and was proactively laying down on the job when it came to auditing loan standards gives you estimates on who might or might not have qualified for what kind of loan – laughter is the appropriate response.  Not regurgitation.

Cato on telephony deregulation, cell phone innovation, & ingratitude (here).  Discussing his memories as a child where phone line were costly and long distance was only slightly less expensive than actual driving as compared to today’s age:

Then came the breakup of the AT&T monopoly in 1984. Phone technology and competitive service provision exploded. In 1982, Motorola produced the first portable mobile phone. It weighed about 2 pounds and cost $3995.

Within a very few years they were much smaller, much cheaper, and selling like hotcakes.  Today there are some 4.6 billion mobile phones in the world, and counting, or about 67 per every 100 people in the world.

Then he moves forward to the ingratitude:

And to celebrate this incredible achievement, Slate and the New America Foundation are holding a forum titled “Can You Hear Me Now? Why Your Cell Phone is So Terrible.”

From the CEI (Competitive Enterprise Institute), we learn the EPA is about to expand its powers (here):

Washington, D.C., March 30, 2010 – The Environmental Protection Agency and the National Highway Traffic Safety Administration (NHTSA) are expected this week to finalize their joint greenhouse gas (GHG)/fuel economy standards rule. This will make carbon dioxide an “air pollutant subject to regulation” under the Clean Air Act for the first time. The rulemaking, and the endangerment finding that is its prerequisite, will allow EPA to immediately exercise and continue to amass powers never delegated to the agency by Congress….

I suppose those supporting the decision know nothing about the EPA’s massive failure in just the Energy Star program.

Lastly, as a reminder, most places and people in the US did NOT buy homes they couldn’t afford (via WSJ here):

The U.S. still is feeling the effects of widespread housing bust, but a new report serves as a reminder that large swaths of the nation didn’t experience a boom in home prices and hasn’t suffered from the bust….

In fact, most of the insane double digit growth in real estate prices were in 5 main areas – NY corridor, Florida, Arizona, California, Nevada.  Make of it what you will that almost all flyover states never experienced the irrational boom, to be inevitably followed by the burst.

Under the title, Unnecessary Court Decisions, FIRE has won a victory for free speech rights on college campuses (here):

FORT WORTH, Texas, March 16, 2010—Late yesterday, in a striking victory for the First Amendment on campus, a federal district court in Texas ruled that a number of restrictions on students’ speech at Tarrant County College (TCC) are unconstitutional. In his decision, U.S. District Judge Terry R. Means found that TCC’s reliance on a policy prohibiting “disruptive activities” to restrict students Clayton Smith and John Schwertz from holding an “empty holster” protest violated the First Amendment….

Congrats to FIRE once again for trying to teach society what free speech actually means, just wish a court wasn’t required to force “educators” to understand freedom.

More “When I say what others should be allowed to do, that doesn’t apply to me” politicians.  This time via Reason Foundation discussing Arne Duncan, the current US Secretary on Education has prevented poor people in one district from having vouchers while maintaining a system for the well connected in other parts of the country (here):

US Education Secretary Arne Duncan has been unwilling to support the DC Opportunity Scholarship program that allows disadvantaged students to attend higher-quality DC private schools and even rescinded the scholarships of 216 children that had already been accepted into the program this year. This becomes even more ironic in light of the fact that Duncan maintained an exclusive list of well-connected folks that he helped exercise school choice in Chicago’s highest quality public schools….

What they call ironic, I consider extreme arrogance, but to-may-to, to-mah-to…

CATO shows us an interesting chart about the level of government spending in health care.  Hopefully with straight forward facts we can start to disabuse others of the notion that the current state of health care is due to private industry (whole thing here):

via Mercury News, CA, with major budget issues (via KNX 1070 News), but should that stop them from further propping up home sales during a correction in the market cycle?  Well, if you’d think yes, then you give too much credit (here):

…The deal reached Monday provides $200 million in new tax credits for homebuyers…

Which is stupid enough, but politicians can’t be held back by things such as economics.  So while more sellers exist than buyers, they also want to spur construction:

…to be split evenly among those buying a home for the first time and anyone buying a newly constructed home. Anyone qualified who makes a purchase between this May and August 2011 will receive a credit for 5 percent of the home’s purchase price, up to $10,000 over three years….

DA has several posts on the governments’ continuing actions which are understood to have been part of the problem in the first economic crisis (here, here, & here), but attempting to add new inventory to a market under correction is grossly irresponsible.

• I think there is still a health care debate even though the bully pulpit isn’t wanting to increase attention to this, but writer Michael F. Cannon from the Cato Institute diligently continues to shed light on the issue.  As one of the best writers on the subject I recommend everything he has written or papers he has published on the subject.  For now, he has a three part series worth the time for anyone interested in learning more: Questions for Thoughtful Obama Care Supporters (Part I, Part II, Part III)

• It might not matter, the health care bill hated by all might be pushed through with various legal and procedural maneuvering.  here via Cato

• Interesting medical research showing correlation: As girth grows, risk of sudden cardiac death shrinks.  I question their use of BMI to identify normal/underweight as as 6’4” person can weight as little as 160 and still be normal (chart), but hopefully it will help them understand that stats are useful tools, but for things such as medicine…. due to the unique nature of us all, the future is individually built therapies, not government programs to change the BMI of an entire nation.

• John Stossel writing Reform Does Not Mean More Rules in response to Senator Chris Dodd’s proposed overhaul of financial regulation:

The New York Times headline says Dodd’s Bill “Adds Layers of Oversight”.

Just what we need: 1,336 pages of additional “layers.”  Senator Dodd is as ignorant as he is arrogant.

• Lending credence to Mr. Stossel’s position, How the Fed slept through Lehman via Rueters

• Cornell MBA student says bet against Warren Buffett (here via WSJ).  Not saying I agree, but I do agree with WSJ – always nice to see someone attempting to break conventional wisdom.

• Here come’s the CFPA…. known as the Consumer Fraud Protection Act, which is shaping up to confirm my theory on the titling of bills.  Meaning it will not protect anyone, including consumers, from anything, including fraud; which I thought was already against the law….  More @ Reason by Tim Cavanaugh here.

• More psychology study showing evidence that concealment or perceived anonymity can lead to more unethical behavior.  via Time here

• Via Calculated Risk, Home Builders $2.3 Billion “Gift” from Taxpayers, demonstrating our government’s utter indifference to the economic realities associated with propping up businesses which should naturally contract during a correction.

• Cato on the government’s continued refusal of basic facts showing government employees earning more on average than their civilian counterparts (here)

• Obama administration to reverse decision on trying terrorist mastermind in NY & instead opt for a military tribunal – via WSJ here

• For light reading, America’s Craziest Cities @ The Daily Beast where they rank cities based upon stress, drinking, eccentricity, and number of psychiatrists.

In January’s edition of Wired Magazine, they detail an article about rail systems and advocate high speed rail as a solution for congestion.  The problem is identified correctly (here):

…Getting California’s train up and running will be expensive. But doing nothing would cost two to three times more. Why? Currently, gridlocked lanes waste $20 billion in fuel and productivity annually. And it’s only going to get worse. The Golden State is growing — quickly. By 2030, another 12 million people could be calling it home. Without an infrastructure overhaul, drivers can expect a 10 percent congestion increase every year. To accommodate the billion trips between cities that residents and visitors will make annually, the state would need to build 3,000 more miles of freeway lanes, five more commercial airport runways, and 90 more airline departure gates. The price: at least $100 billion. Oh, and all that construction wouldn’t alleviate traffic; it would simply keep pace with it….

The article goes on to detail rail as a solution, showing a brief history of rail in the US, including the really cool technological advancements in rail systems.  The main problem with the idea however, isn’t that new rail systems aren’t cool or that rail couldn’t become much faster and more efficient, the main problem, which they slightly acknowledge, is getting people to use it:

…To be cost-efficient, any high-speed rail system needs an ample supply of riders. San Francisco hopes to deliver them through a new million-square-foot terminal. Dubbed the Transbay Transit Center, it will connect the new rail line with nine regional transportation systems…

And

…No city epitomizes the insane appeal of driving like Los Angeles, whose citizens cling to their steering wheels even as they face the worst congestion in the nation. Will high-speed rail persuade them to give up their autos? Maybe. Ridership on the local rail system has increased to 306,000 on weekdays, up from 265,000 in 2007. A faster, cheaper trip — the high-speed ride between Ontario and LA will save the average commuter at least 85 hours and as much as $6,400 a year in gas, parking, and lost productivity — might pry even the most dedicated motorist out of the driver’s seat….

Looking historically though, they’ve made this argument over and over again and it’s always failed.  Due to constant regulation of the transportation industry, we’ve wasted billions and continue to poor billions more into this mess (from 2007):

Rail transit is a huge waste of money that harms transit riders and mainly benefits a few politically powerful interest groups, such as rail contractors, at the expense of ordinary taxpayers….

Thanks in part to the high cost of rails, transit systems in Atlanta, Baltimore, Buffalo, Chicago, Cleveland, Philadelphia, Pittsburgh, St. Louis, and the San Francisco Bay Area carried fewer riders in 2005 than two decades before….

…Due to financial stresses caused by the high cost of rail transit, San Jose cut its transit service by 20 percent and lost a third of its transit riders.

The mass transit system in Portland, Ore., carries only 7.6 percent of the region’s commuters, down from 9.8 percent before rail construction began.

The subway in Washington, D.C., is wonderful for tourists, but not commuters: Though the region gained more than 100,000 jobs between 1990 and 2000, the transit system lost more than 20,000 daily commuters….

& it fails for the very same reason most centralized planning fails – there is no one-size fits all solution which can magically come from government that will ever be better than what the market can provide.  Over thinking the obvious, that if rail lines could honestly save the average individual 6400 dollar a year, they should be willing to pay 4000 dollars a year to help fund it.

The simple truth is that government inefficiency will only increase the costs of rail overtime, increasing the subsidies and making a large portion of the population fund what a small portion of the population will use.  As Cato notes (here):

….Second [problem with highs peed rail], highway users paid for interstate highways, whereas high-speed rail will be almost entirely subsidized by general taxpayers who will rarely use it….

Why do “smart” people seem to espouse imposed solutions by default?  Well, as with a lot of scientific minded individuals and magazines, the search for solutions to problems becomes an end by itself.   This certainly helps when it comes to innovation – always looking for that next step or next increase in efficiency is extremely valuable ideal which helps many be successful.

Conversely, we also try to decrease known defects, a valuable skill in a fairly closed system, but I think a detriment to larger scale thinking.

Engineers, computer programmers, process engineers, CFOs, IE those in the industries where daily critical thinking tasks ask not only what we can do better, but also attempting to steam line, standardize, and reduce defects through control mechanisms, seem to be more prone than others to view imposed solutions as a solution default.

Indeed, in their lines of work, lots of systems are routinely imposed on clients, employees, and others with typically, minimal involvement from the end user. & often for good reason.  Allowing untrained users to have open access to say a client database would be too risky.  Allowing any employee to spend the company’s money on what they thought was a good idea, would be a huge preventable risk as well.

The difference however between these critical thinking endeavors is that they have somewhat of a closed system.  Sure, market dynamics affects the controls companies can exert on their clients, but the cost benefit analysis for decisions in these closed system will be much more accurate than a similar analysis for the market as a whole.

The idea of imposing these new systems through tax payer funds has a further assumption as well: if the market is currently in state A and many experts believe it should be in state B, that’s because the market has failed.  Inside of that assumption holds that we have the requisite knowledge to take literally billions of individual transactions which led to the creation of the current transportation system and with a few nifty math tricks and a good sales pitch from the experts -  impart a better solution than all those transactions managed to build.

& lastly, but not an inconsequential difference, is a company’s ability to control the results.   One of the keys to any systems update success, will always be in checking the results.

For instance, if I changed process X, hopefully to make the time spent on X lower on average or hoping to reduce defects in products for which process X can affect – I should be able to look back in time after making the changes and ask the question – did my solution work for the problem we attempted to solve?

This doesn’t seem all that radical and certainly seems like something our government could be doing now, but the historic reality is always the same.  Governments seek to grow by expanding power.  Governments by nature move slowly.  Good government is stable and therefore moves more slowly.

This means when the government proposes changes in X process to solve problem Y, they have a known tendency to exaggerate the benefits and obfuscate any attempts to prove that changes in X didn’t affect Y, by constantly shifting goal posts (example of just one, tiny government program employing this strategy  here – 2002):

…This is essentially the strategy that DARE, the country’s leading drug education program, has successfully used to stay in business for nearly two decades. One study after another has found that students who complete DARE (a.k.a. Drug Abuse Resistance Education) are just as likely to use drugs as students who don’t. Yet DARE claims it is constantly revising its curriculum, so any research indicating that it doesn’t work is immediately outdated….

In a classic example of not being able to see the forest for the trees, this default condition of believing in solutions which will be imposed for benefit of others might be well meaning, but still one of the largest logical & philosophical impediments to true freedom.

With the recession ending (@MSNBC):

WASHINGTON – More than 90 percent of economists predict the recession will end this year, although the recovery is likely to be bumpy….

Or maybe a double-dip (@Politico.com):

…All that’s enough to convince some observers that the economic recovery is faltering and could be heading for a “double dip” recession. And that would mean the recent green shoots of recovery turn out to be just a pause in a much longer economic slide….

& a stimulus which has saved jobs (@USA Today):

WASHINGTON — States have reported using stimulus money to create or save more than 388,000 jobs so far this year, buttressing the Obama administration’s claim that the $787 billion plan has had a significant impact on the economy….

Or maybe not (@WashingtonExaminer):

…Even if we take at face value the White House claim that it created or saved all these jobs with approximately $150 billion of the economic stimulus money, a little simple math shows the taxpayers aren’t getting any bargains here: $150 billion divided by 650,000 jobs equals $230,000 per job saved or created. Instead of taking all that time required to write the 1,588-page stimulus bill, Congress could have passed a one-pager saying the first 650,000 jobless persons to report for work at the White House will receive a voucher worth $230,000 redeemable at the university, community college or trade school of their choice. That would have been enough for a degree plus a hefty down payment on a mortgage….

Maybe some perspective is needed.  To truly put it in context, let’s look at the Great Depression (@Cato):

…According to most accounts, the stock market crash of October 1929 was the spark that sent the economy spiraling downward.

How could this be? After all, by November 1929, the stock market had started to recover, and by mid-April 1930, it had reached its pre-crash level. Contrary to the received wisdom, massive government failure — not the stock market crash — pushed the United States into the Great Depression….

As written here before (here, here & here), economic predictions are inherently tricky and the government does a very poor job because politics always gets in the way of objective truths.  NBER who is usually the group society follows for when a recession starts and ends told us in December of 2008 that December 2007 was the beginning of the dive demonstrating that most “objective” economic truths are only found in hindsight.

In fact, some brilliant legal minds have made just this point to contemplate delaying financial regulations intended to mitigate similar future scenarios in which we might find ourselves (here).  Richard Posner’s analysis:

The Report is premature in two respects. The first is that it advocates a specific course of treatment for a disease the cause or causes of which have not been determined. Now it is not always necessary to understand the cause of something you don’t like in order to be able to eliminate the effect. If you have typical allergy symptoms you may get complete relief by taking an antihistamine; it is not necessary to find out what you’re allergic to. But generally, and in the case of the current economic crisis, unless the causes of a problem are understood, it will be impossible to come up with a good solution. The causes of the crisis have not been studied systematically, and are not obvious though they are treated as such in the Report. (Remember, the Great Depression of the 1930s ended 68 years ago and economists are still debating its causes.)…

Note – this doesn’t mean that we don’t understand basic incentives and most likely results.  Like chaotic systems in which minor changes in the beginning state of a system can show drastic changes in the end results, our economic system is so complex as to defy attempts to model very specific changes.  Though with hindsight and true analysis, we can get to a point where we know with probabilities what has happened and what will likely happen given specific policies.

For instance, if we make houses cost less by giving tax breaks or whatever, sales will increase for the time that incentive exists.  If the incentive is timed, then some sales will just be premature sales and show corresponding decreases in future quarters.

Meaning, we can use a basic understanding of incentives in order to gauge most likely results, but today only with hindsight can we show real numbers on very specific things such as the stimulus bill’s impact on house sales or jobs.

& even then, given the inherent difficulty in defining a “saved” job and politicians willingness to ignore any data contrary to any rosy picture they wish to present, any economic predictions or numbers coming from politicians should be suspect by default.