Detailed Abstractions

Bank of America announced today it’s plans to repay the $45 billion dollars in tarp money to get out from under the restrictions of the government (AFP):

…The bank based in North Carolina said it would repurchase the preferred shares issued to the US Treasury as part of TARP, but would not immediately buy back the warrants, or options to buy additional shares.

“This is good news that the bank can get out of the TARP and can stop having to answer to public and government criticism,” said Jon Ogg at 24/7 Wall Street….

The policies BoA is trying to escape from includes restrictions on the top 25 individuals in the company including the CEO.  I and many others wrote about what a disastrous policy from the new administration this truly was (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment…

Just two days earlier, I also wrote about BoA’s issues with getting a new CEO hired under all the government restrictions (here).  Indeed, at least four potential candidates have simply stated they don’t want the job.

Now, if these policies were actually designed to do this, incentivize those companies with TARP money to pay it back as quickly as possible, bravo!

Taking the language from the administration I doubt it, but it’s always good news when a major business under intense governmental scrutiny shows the quickest to its financial health is to remove the additional scrutiny.

This also  parallels with a recent NBER Paper on the global economic recession (abstract here, full paper purchase price $5).  In the full paper they try to prove the thesis that the main problem with the global economy is that investment money from developed countries should be flowing into developing countries, but instead developing countries such as India and China have investment income flowing into developed countries like the US & Britain.

& This seems pretty intuitive.  In general, investment money will flow to inefficient markets, industries, and companies in an immature market.  The reason is easy – it’s more and faster bang for the buck.  However, in a mature economy like the US and as we move forward in time, there are less and less efficiencies to be gained through anything other than new technologies.

In an immature market it’s the opposite case.  Industries and companies are new.  Small amounts of investment money can return great efficiency gains and therefore monetary gains.

Some people try to blame us citizens, consumerism, and capitalism in general for this failure, but that’s actually the opposite of the truth as well.  The reason Chinese citizens save so much more of their disposable income than do US citizens isn’t because they are more frugal, but have less real options to invest domestically even though major efficiency gains are theoretically possible.

As the abstract states:

…The inability of emerging economies to absorb savings through domestic investment and consumption due to inadequate national financial markets and difficulties in enforcing financial contracts; the currency controls motivated by immediate national objectives; and the inability of the US economy to adjust to the perverse incentives caused by huge money inflows leading to a breakdown of checks and balances at various financial institutions. The financial crisis in the US was but the first acute symptom that had to be treated. A sustainable recovery will only occur when the natural flow of capital from developed to developing nations is restored….

This doesn’t mean the US doesn’t have fault – so long as we continue to allow the government to write blank checks of any amount without respect to the deficit and ignoring huge unfunded liabilities such as MediCare – we seem to be on a sure path to a back slide.  I’m not really into prediction making as it’s obviously fraught with so many problems, but I’ll never understand how the solution to cheap money and an over investment of housing, is to keep money cheap and incentivize home buying (here).

Either way, it’s good news for BoA, with investors showing their interest with heavy after hours trading (here).

As should’ve been expected and according to all recent news, having a Treasury Department position of paymaster isn’t working out so well for the free market.

Earlier this year, against all basic free market principles the Obama Administration through the Treasury Department started setting up compensation boards (CNN):

WASHINGTON (CNN) — An amendment in the $787 billion economic stimulus package passed by Congress Friday would severely restrict bonuses and other forms of compensation for top executives at companies receiving federal bailout money….

Due to all the negative publicity surrounding the government’s handing over billions of dollars in tax payer dollars to corporations which deserved to fell, Senator Dodd explains:

…”The decisions of certain Wall Street executives to enrich themselves at the expense of taxpayers have seriously undermined public confidence in efforts to stabilize the economy. American taxpayers deserve better,” Dodd said….

Now it might just be me, but I’m not sure Wall Street executives are allowed to vote on appropriations bills and then force the treasury to distribute the funds as they see fit.  It seems Mr. Dodd is blaming Wall Street for the government’s failure to handle the crisis correctly.

With all logic aside though, they went forward.  Not only did they seek to limit overall compensation of the highest paid, but asked for refunds from bonuses already given – one provision in the bill:

…The secretary of the Treasury must review past compensation paid to the top 25 employees of TARP recipients and seek reimbursements “if those payments were contrary to the public interest or inconsistent with the purposes of the [stimulus package] or the TARP,” according to Dodd’s statement….

& People everywhere rejoiced…. I mean complained.  In what was an obviously anti-capitalist move sure to do more damage than any political good it might bring about, people everywhere spoke up (examples here, here, & here), including NBER (abstract here – paper costs $5):

…Important facts about compensation are that: the compensation distribution is highly skewed; each year, a sizeable fraction of chief executives lose money; the use of equity grants has increased; the income accruing to CEOs from the sale of stock has increased; regardless of the measure we adopt, compensation responds strongly to innovations in shareholder wealth; measured as dollar changes in compensation, incentives have strengthened over time, measured as percentage changes in wealth, they have not changed in any appreciable way….

Even little ole me could see this as a negative and wrote about this here just a month or so ago (here):

…Even without bothering with the fact that the government is not in any position to understand what kind of compensation any single employee should have, this is still a radical and arbitrary move that if continued can work to destabilize the economy.

…this decision is an anathema to a free society breaking not only the contract rights of ordinary citizens, but also violating all individuals by pushing a blatant ex  post facto punishment….

& now we have exactly what was shown through economic analysis and basic logic to be true (@Bloomberg):

Nov. 23 (Bloomberg) — Bank of America Corp.’s board may extend its search for a permanent new chief executive officer into 2010 if directors can’t settle on a candidate in the next three days, according to people familiar with the matter….

…At least four external candidates, including Citigroup Inc. director Michael O’Neill, rebuffed approaches….

…That’s narrowing the field and giving the board “an incredibly tough job,” said Michael Holland, who oversees more than $4 billion as chairman of Holland & Co. in New York. “For people who have choices, it’s hard to figure out why someone would take this job.”…

Is it now time to stop calling obvious results  (Un)?intended Consequences…

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.

Over at the Huffington Post, Keli Goff wrote an interesting, yet disturbingly short sighted piece about particular health care costs which exist in large part due to personal private choices.

She begins the piece titled Mad at Greedy Insurers for This Health Care Mess? Then Why Aren’t You Mad at Your Greedy Neighbors discussing the government’s bail out of private businesses:

Raise your hand if you are still filled with anger when you hear the name AIG and picture the more than $100 million of your tax dollars that were delegated–without your consent–for employee bonuses there.

Now raise your hand if you were angry when you learned that Citigroup (which has received so much bailout money that American taxpayers have been dubbed “its major stockholder”) was planning to spend $50 million of your money on a luxury jet….

Even though the numbers she sights are a far cry from the actual tax dollars given to private business, she uses the anger over the bail outs to compare with the lack of anger of health care costs related to personal choice:

…There is something inherently distasteful about being expected to foot the tax bill for someone else’s personal choices–particularly bad ones–and not being given any choice of your own in the matter. Which is why I am so surprised that there has been so little anger expressed by leaders on either side of the health care debate when it comes to the issue of personal choice and responsibility in health care…

…According to the Centers for Disease Control, “obesity costs our nation as much as $147 billion per year in direct health care costs and lost productivity.” And according to the nation’s oldest anti-smoking organization smoking costs taxpayers a whopping $300 billion dollars annually, or 1,000 times the amount of the AIG bonuses….

Utilizing this ratio of anger levels contrasted with actual dollars, she follows through by discussing the trait both costs have in common, personal responsibility:

…Some health care reform advocates will argue these costs would be lower if there were government subsidized health care, but my question is why should the government, specifically taxpayers, subsidize health care costs for conditions that are not only preventable but essentially chosen by the patient? With all of the anger surrounding the health care debate, at town halls, in the House and Senate, where is the anger about personal responsibility?…

Like many before her, she perfectly frames the clear distinction between individual actions which don’t harm others and societal responsibility.  She uses our innate disgust of having to foot the bill for the negative consequences of others and sees the fundamental issue of both problems.

If only she had stopped there.  If only she understood clearly that when I hurt myself, I should be the only one liable for the resolution, we’d be in total agreement.  Instead, she illogically assumes that individual responsibility is shared among all citizens:

…To be clear, personal responsibility is not only up to consumers.  Mayor Bloomberg’s success in curbing smoking in New York is due to a multi-pronged strategy of aggressively fining bars and restaurants that allow patrons to flout the anti-smoking ban and raising the cost of cigarettes, in essence targeting the dealer as much as the addict….

Not only is responsibility shared in her view, but government force is also the solution.  Therefore since targeting these “bad smoking” behaviors has coincided with a decrease in the number of smokers , why not continue these policies to control other “bad” behaviors?

…A similar strategy should be undertaken federally against fatty foods and drinks (including many of the ones I love).  But as long as groups like the AFL-CIO oppose efforts to hold Americans financially accountable for their personal health choices, so that the system can afford to treat those who do not choose to be sick…

Thinking more critically though, this turns out to be very short sighted thinking devoid of any historical context and antithetical to fundamental human behavior.  Indeed, I think most people agree with her that when people make bad decisions that affect only themselves, they should be solely responsible for the consequences.

Where she fails is in properly analyzing government as the solution.  If one fully analyzes her solution, the lack of follow through in her thinking becomes easily spotted.

First, we know that human behaviors are heavily influenced by incentives.  It’s natural and obvious; we do things that benefit us.  For those willing to see reality for what it is, examples are all around us.  We can see it in the use of commission programs for corporate sales force.  We see it in TV commercials and marketing campaigns.  We even see it in the tax code.   Through denial or lack of contemplation though, some fail to see that this same fundamental human behavior also affects our decisions as they relate to health care.

In fact, one of the reasons for rising health care costs and bad personal choices is individual consumers have been moved further and further away from the actual cost.   In the US, part of rise in health care costs can be attributed to  government incentives which pushed health care plans away from individuals and towards employers.  For the same reason, others countries with socialized medicine also see rapidly rising costs of health care.

Second, we also know that historically, when governments are given the power continue to assume more and more control over individual lives, it ends in tyranny.  As we allow government to assume more responsibility for individual actions, we necessitate their ability to control those actions.

Assuming we still believe in a free society, one of the prices we pay is having the responsibility for the negative consequences brought about by our choices.

For instance, if you smoke – society doesn’t owe you CHEMO.  If I you eat 30K calories a day – society doesn’t owe you gastric bypass surgery.  If you drink a bottle of whiskey a day – society doesn’t owe you a liver.

However, by not of following the logic of her solutions and ignoring historical contexts, she can safely and happily assume government control is the answer:

…So the next time you are reminded of how angry you are at AIG or any other institution that was “bailed out” with your money, just remember that AIG may have mugged you once, but McDonald’s and your neighbor keeping them in business (and whoever invented the doughnut, bacon cheeseburger), will be sucking your wallet dry for decades to come….

Which only leaves us in the end with nothing more than a false dichotomy as if we only have two choices:  either we pay for it or we control it.

Really, due to faulty logic, she has unwittingly made a very cogent argument against government provided health care.  IE – we don’t need to control that behavior if we are not paying for it.

But I don’t know if she understands that by continuing to promote societal responsibility for individual choices, she is also logically promoting less freedom and more government intrusion.  I don’t know if she even believes in the value and morality of freedom.  I also don’t know that she doesn’t fully understands all of this, but due to value differences only, still believes government control to be the answer to health care problems.  And I really don’t know which is worse – being wrong based upon ignorance or understanding the full ramifications of increased government control, but not caring.

The truly concerning part should be that it doesn’t matter which is worse as the results are always the same.   For as long as we have enough people with these types of beliefs, we will continue to lose more and more individual freedoms.

As Hayek stated:

“We must show that liberty is not merely one particular value but that it is the source and condition of most moral values. What a free society offers to the individual is much more than what he would be able to do if only he were free.”

Unless you were lucky enough to be traveling or otherwise unavailable on Sunday, you were likely deluged with Mr. Obama’s media storm to sell not only health care, but apparently many other items as well.

First, it should be noted that this WH is above all, extremely insecure.  The President could be seen on 5 Sunday news shows: NBC, ABC, CBS, CNN and Univision.   But he didn’t have time for Fox, the number one rated Sunday news show…

Regardless of the WH being extremely petty and worrying more about perceived injustices than an honest discussion with those who might disagree, what he actually said is far more serious.

When asked if a health care mandate was a tax increase on ABC’s this week, the President responded:

…”I absolutely reject that notion,” the president said….

“What it’s saying is, is that we’re not going to have other people carrying your burdens for you anymore,” said Obama. “Right now everybody in America, just about, has to get auto insurance . Nobody considers that a tax increase.”…

Using flawed logic is nothing new for Presidents, but this one isn’t even close.  Hhe’s analogizing the privilege of driving with the “privilege” of being a citizen.

The difference of course as that by my very birth, I have a “right” to be a citizen, whereas driving has always remained a privilege with constraints.  You see, I can forgo auto insurance, so long as I don’t drive.  There are many ways around without a car in this day and age, but if I “choose” to drive, then constraints can be placed on me.

Health care on the other hand would be required simply because I existed and no other reason.  & If the government says, “You have to buy this” – it is a tax increase as not paying it can land you in very serious legal troubles.

On CBS’s Face the Nation, with an omnipotent sense of when health care, our fearless leader goes further:

…Obama put his support behind the idea of taxing employers that offer high-cost insurance plans.

“I do think that giving a disincentive to insurance companies to offer Cadillac plans that don’t make people healthier is part of the way that we’re going to bring down health care costs for everybody over the long term,” Obama said on NBC’s “Meet the Press.”…

Even ignoring the fact that this goes against his basic premise that more people need more health care, one wonders if there is anything our President doesn’t know.  So far, he’s taken over banks, car companies, told car companies with whom to merge, who to hire, who to fire, what to build… and now we find out he knows how much health care is too much.

But let’s not stop there.  Not only is our community organizer one of the smartest men in America when it comes to economics and health care, he’s also a brilliant strategist with respects to Afghanistan:

…”What I’m not also gonna do, though, is put the resource question before the strategy question,” Obama told NBC’s David Gregory on “Meet the Press.” “Until I’m satisfied that we’ve got the right strategy I’m not gonna be sending some young man or woman over there- beyond what we already have.”…

I’m not sure exactly what happens to man to think he has the answers to every single last question. Maybe it’s just arrogance and ignorance, as Hayek stated:

If most people are not willing to see the difficulty, this is mainly because, consciously or unconsciously, they assume that it will be they who will settle these questions for the others, and because they are convinced of their own capacity to do this.

Whatever the reason he believes so strongly in his ability to decide what’s best for our own good, history shows us without question where this inevitably leads.  Hayek again:

To act on the belief that we possess the knowledge and the power which enable us to shape the processes of society entirely to our liking, knowledge which in fact we do not possess, is likely to make us do much harm.

Let’s hope we begin to understand the value of humility before we do too much damage.

As we all know, Congress, the Senate, and the President of the United States is pushing hard for health care reform, which they promise us will lead to lower costs and will be completely revenue neutral.

To take their claims into context, these are the exact same individuals who brought us a really good program, Cash for Clunkers, only to bankrupt it in 1/11th the promised time.

The program, which was intended to remove older, less fuel efficient cars off the road, started on July 24th, 2009, with a total of $1 Billion dollars in assets (here):

…Approved last month, the program known officially as the Car Allowance Rebate System offers rebates of $3,500 to owners who relinquish cars rated at less than 18 miles per gallon to purchase ones getting at least 22 m.p.g. If the new vehicle gets at least 10 m.p.g. more than the trade-in, the rebate is $4,500. For SUVs, minivans and pickups, a 2 m.p.g. improvement is required, while a 5 m.p.g. gain nets the full rebate…

…The program is expected to run four months, or until the $1 billion is depleted. The National Highway Traffic Safety Administration has until July 24 to issue the final regulations, putting most transactions on hold until Friday…

It was supposed to last 4 months, but is now almost out of money (here):

WASHINGTON — Transportation Secretary Ray LaHood said Sunday that unless the Senate approves $2 billion in additional funding, the Obama administration could be forced to halt as early as Tuesday the “cash for clunkers” program that has become one of the most visible and fast-acting of the government’s economic-stimulus programs.

& the analysis itself wasn’t a simple mistake or a black swan.  We didn’t run into any unknown situations or start out with bad numbers.  The reason the initial analysis was wrong was negligence:

…U.S. auto sales have been running at an annual pace below 10 million a year since January, a steep drop from the 16 million annual sales levels normal earlier in the decade. That sales collapse has led to tens of thousands of layoffs at auto companies and the manufacturing and service firms that support them…

Using just those numbers alone, we expect 3.2 million cars to be bought in the next 4 months, but Congress allocated money for just  8% of expected sales, without apparently contemplating the obvious increase in demand.

Of course this is a minor example when comparing the relatively small number of $1 billion dollars (or $11 billion) against a $3 trillion dollar budget, but it’s clearly instructive.

Time and time again, the government had lead us down a path with promises of this and that kind snake oil, this and that kind of freedom.  Yet almost every single time, they have proven their inability to fully understand the consequences of legislation.

The amount of willful ignorance it mush take to be consistently wrong, but still think you’re helping now or will be helpful in the future is simply astounding.

But shooting fish in a barrel will only get us so far.  In our system of government, the end result is that the voters are truly responsible.  Politicians run on incentives like us all & as long as voters don’t hold them accountable for their mistakes, they have no obvious reason to change course.

If we as voters show, by our very actions, that we are ok with a system that rewards incumbency without contemplating actual results, rewards style over substance, rewards politically correct talk as opposed to direct debates, we are contributing to a system which will allow these actions to continue.

But since there doesn’t seem to be any grassroots effort aimed at actually changing the system itself instead of ensuring “our team” wins, we might as well ask the question:

How much did they say health care would cost?

For another obvious example of government malfeasance, the LA Times has an article discussing several projects that were given TARP money designated as “stimulus” that are doing everything except stimulating the economy:

…Millions of dollars are going toward bicycle lockers, bike paths, walking trails and a skate park, Coburn said. One town in North Carolina is using stimulus funds to hire an administrator whose job will be to procure more stimulus funds, according to the report….

One project mentioned is the $3.4-million construction of a 13-foot tunnel near Tallahassee, Fla., that will allow turtles and other wildlife to safely cross U.S. Highway 27….

I guess since they’ve proven themselves so trustworthy, we might as well hand over the entire financial and health care systems to the US government.

Read whole thing here.