Coyote Blog

The scare story, from November 2008:

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Industry supporters are offering such grim predictions as Congress weighs whether to bail out the nation's largest automakers, which are struggling to survive the steepest economic slide in decades.

Even if just GM collapsed, the failure could bring down the other two companies - and even the U.S. operations of foreign automakers - as parts suppliers run out of money and shut down"¦.

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

I called BS on this at the time.  Turns out it was yet another made-up scare story to justify government coercion and more unthinking expenditure of taxpayer dollars:

One of the biggest fears of a GM bankruptcy filing -- a collapse of revenue -- appears to not be as prominent an issue as originally thought.

Car buyers appear undaunted by GM's bankruptcy, assuaging one of the auto maker's biggest fears heading into Chapter 11. Early signs point to stable demand for GM cars and trucks since the company filed for Chapter 11.

Mr. Henderson said June retail sales are tracking higher than May. "June sales are moving along just fine," Mr. Henderson told reporters at a summit in Detroit. Sales to rental and other fleets are down from last month, he said. "We're very gratified for the support of dealers and customers that we've received through this."

Meddle in the economy too much, and investment dries up as entrepeneurs sit on the sidelines to see what's next:

"America isn't hiring precisely because of government policy. Small business owners, who are usually the first into and the first out of the job pool, are standing by the fence and watching. They are paralyzed by regulatory uncertainty. If they hire someone who ends up doing poorly, will they be able to fire that person? Will they have to pay their health care bills after they've been terminated? If so, for how long? Who will pay for all these stimulus checks? If it will turn out to be small business, why would they hire instead of keeping costs low to prepare for the big tax bill? Where will the market move? Are you in the right business or are your clients in a politically disfavored industry? . . . Jobs aren't languishing despite the government's best efforts. They're languishing because of them."

Via Glenn Reynolds

Via the AZ Republic:

House Democrats narrowly won a key test vote Friday on sweeping legislation designed to combat global warming and usher in a new era of cleaner energy. Republicans said the bill included the largest tax increase in American history.

The vote was 217-205 to advance the White House-backed legislation to the floor, and 30 Democrats defected, a reflection of the controversy the bill sparked.

Interestingly, Democrats are selling the bill by saying it won't work.  Since a cap-and-trade scheme can only succeed if it changes consumer consumption patters, it must impose costs on consumers to work.  But...

"The bill contains provisions to protect consumers, keep costs low, help sensitive industries transition to a clean energy economy and promote domestic emission reduction efforts," the White House in a statement of support for the legislation.

Next stop, Senate, where the bill has even more of an uphill climb.

Update: Final tally on the main vote was 219-212.  Of course absolutely no one who voted "yea" has any idea what they voted for, since no one can even produce a copy of the bill, much less attest that he or she read it.

I am very glad to hear this from someone other than, uh, me:

China bashing during the past decade is reminiscent of the Japan bashing that occurred during the 1980s. It turned out that Japan's substantial export surplus with the US, its extensive accumulation of US Treasury bonds, and its purchases of assets in the US did not hurt the United States, but were for the most part foolish actions on the part of the Japanese government and businesses. I believe that similar conclusions will be reached about the parallel Chinese practices.

I have been saying this for years, that the Chinese trade and exchange rate policies everyone wanted to bash were doing nothing but helping us and hurting the Chinese people.  I wrote a hypothetical post from the Chinese persepective nearly 3 years ago:

Our Chinese government continues to pursue a policy of export promotion, patting itself on the back for its trade surplus in manufactured goods with the United States.  The Chinese government does so through a number of avenues, including:

• Limiting yuan convertibility, and keeping the yuan's value artificially low
• Imposing strict capital controls that limit dollar reinvestment to low-yield securities like US government T-bills
• Selling exports below cost and well below domestic prices (what the Americans call "dumping") and subsidizing products for export

It is important to note that each and every one of these government interventions subsidizes US citizens and consumers at the expense of Chinese citizens and consumers.  A low yuan makes Chinese products cheap for Americans but makes imports relatively dear for Chinese.  So-called "dumping" represents an even clearer direct subsidy of American consumers over their Chinese counterparts.  And limiting foreign exchange re-investments to low-yield government bonds has acted as a direct subsidy of American taxpayers and the American government, saddling China with extraordinarily low yields on our nearly $1 trillion in foreign exchange.   Every single step China takes to promote exports is in effect a subsidy of American consumers by Chinese citizens.

This policy of raping the domestic market in pursuit of exports and trade surpluses was one that Japan followed in the seventies and eighties.  It sacrificed its own consumers, protecting local producers in the domestic market while subsidizing exports.  Japanese consumers had to live with some of the highest prices in the world, so that Americans could get some of the lowest prices on those same goods.  Japanese customers endured limited product choices and a horrendously outdated retail sector that were all protected by government regulation, all in the name of creating trade surpluses.  And surpluses they did create.  Japan achieved massive trade surpluses with the US, and built the largest accumulation of foreign exchange (mostly dollars) in the world.  And what did this get them?  Fifteen years of recession, from which the country is only now emerging, while the US economy happily continued to grow and create wealth in astonishing proportions, seemingly unaware that is was supposed to have been "defeated" by Japan.

We at Panda Blog believe it is insane for our Chinese government to continue to chase the chimera of ever-growing foreign exchange and trade surpluses.  These achieved nothing lasting for Japan and they will achieve nothing for China.  In fact, the only thing that amazes us more than China's subsidize-Americans strategy is that the Americans seem to complain about it so much.  They complain about their trade deficits, which are nothing more than a reflection of their incredible wealth.  They complain about the yuan exchange rate, which is set today to give discounts to Americans and price premiums to Chinese.  They complain about China buying their government bonds, which does nothing more than reduce the costs of their Congress's insane deficit spending.  They even complain about dumping, which is nothing more than a direct subsidy by China of lower prices for American consumers.

And, incredibly, the Americans complain that it is they that run a security risk with their current trade deficit with China!  This claim is so crazy, we at Panda Blog have come to the conclusion that it must be the result of a misdirection campaign by CIA-controlled American media.  After all, the fact that China exports more to the US than the US does to China means that by definition, more of China's economic production is dependent on the well-being of the American economy than vice-versa.  And, with nearly a trillion dollars in foreign exchange invested heavily in US government bonds, it is China that has the most riding on the continued stability of the American government, rather than the reverse.  American commentators invent scenarios where the Chinese could hurt the American economy, which we could, but only at the cost of hurting ourselves worse.  Mutual Assured Destruction is alive and well, but today it is not just a feature of nuclear strategy but a fact of the global economy.

I concluded in another post

Napoleon said to never interrupt an enemy when he was making a mistake.   I don't consider China an enemy, but it just flabbergasts me that the Chinese taxpayers and consumers see fit to subsidize lower prices for our consumers, and we feel the need to stop them.

More here

From an article about the Edsel:

total new car sales in the United States declined 31% from the 1957 to 1958 model years

Gosh, and we managed to get out of that without spending a trillion dollars.  Wow.

Postscript: Sometimes it is hard for fiction to top reality.  In vacation, the movie-makers tried to create the ugliest station wagon they could imagine.

They didn't even come close to topping reality

It is good that everyone has made clear to me that Obama represents change because otherwise, I would have thought that the current stimulus bill was politics as usual, only on steroids.  The other day I hypothesized that panic-stricken statements of disasters from both the outgoing Bush administrations and the new Obama administration, generally crafted to help push "emergency" legislation, are having a substantial negative effect on the economy.  It turns out, this is not a new accusation.  From Newsweek, 1991:

Be afraid, be very afraid. That has been the message of President George W. Bush and his economic team ever since December, when they realized that for the first time in 112 years they couldn't use the normal argument of new presidents to push their program. Invoking "the will of the people" wasn't going to cut it this time.

So they did something risky and unusual--they poor-mouthed the economy to build support for their tax cut (which, as currently designed, would have almost zero impact on the economy this year) and to sprinkle a little blame for any recession on Bill Clinton. Even if Bush turns out to be right in his predictions of gloom, that doesn't mean he was right to make them. Not "prudent," as his father might say. Not helpful.

Yes, the power of any president over the economy is often exaggerated. This latest slowdown began last fall and was probably inevitable. The tech-stock bubble inflated and burst without much influence from Washington. But if the origins of economic trouble cannot be blamed on a president, the way it spreads psychologically is very much within his job description, if for no other reason than that the American people believe it to be. Consumer confidence is central to any soft landing (or, in the case of real recession, any recovery), and that confidence can be bolstered or eroded by the man in the White House.

Update: the Washington Times article I quoted in a previous post points me to another such statement from the NY Times in 1991:

Normally, presidents are cheerleaders for the nation's economy....

Now comes George W. Bush, who is presenting what an analysis in The Financial Times last week called ''the novel spectacle'' of a president ''urging citizens to ignore good economic news and focus on the bad.''

All week, the president talked about the economy ''sputtering,'' and he wrapped up the week on Saturday by beginning his weekly radio address to the nation this way: ''Good morning. For several months, economic indicators have pointed toward a slowdown, and now many Americans are starting to feel its impact. The stock market is causing worries, high energy prices are straining family budgets and some workers and small-business people have been directly affected by layoffs and slowing retail sales.''

Barack Obama, in the Washington Post:

By now, it's clear to everyone that we have inherited an economic crisis as deep and dire as any since the days of the Great Depression

Sorry, maybe I am just cynical from having politicians call 8 of the last 3 recessions the worst economy since the Great Depression**, but I don't think this is the worst crisis since the 1930's.  It's not even the worst since I was born.  The late 70's were worse, the early 80's were worse, and from a financial/banking crisis point of view, the late 80's were worse.

What Americans expect from Washington is action that matches the urgency they feel in their daily lives -- action that's swift, bold and wise enough for us to climb out of this crisis.

Actually what I have come to expect is arrogance, a desire to turn any crisis into increased power for Washington, and general incompetence.  So far, I have not been disapointed.

Our economy will lose 5 million more jobs. Unemployment will approach double digits.

OK, I will take that bet.  5 million more jobs with the base being the January employment numbers.

I won't get back into all the Keynsian arrogance in the rest of the piece -- suffice it to say that the overwhelming assumption is that the government can spend money more productively than can individuals.  But check out this economic jumble:

In recent days, there have been misguided criticisms of this plan that echo the failed theories that helped lead us into this crisis -- the notion that tax cuts alone will solve all our problems; that we can meet our enormous tests with half-steps and piecemeal measures; that we can ignore fundamental challenges such as energy independence and the high cost of health care and still expect our economy and our country to thrive.

I reject these theories, and so did the American people when they went to the polls in November and voted resoundingly for change. They know that we have tried it those ways for too long. And because we have, our health-care costs still rise faster than inflation. Our dependence on foreign oil still threatens our economy and our security. Our children still study in schools that put them at a disadvantage. We've seen the tragic consequences when our bridges crumble and our levees fail.

Is he really implying that our economic problems were cause by use of fossil fuels, health care costs, aging bridges, and classrooms with out enough computers?  Why yes, he seems to be saying just that.  The rest of the piece is dedicated to just those things as a solution to the problem. Seriously, what does any of this have to do with a recession spurred by 1) banking liquidity crisis 2) loss of consumer new worth through falling home prices and 3) panicky statements by senior government officials.  The answer, of course, is nothing.   Basically Obama is pursuing the old "this crisis will be solved by all the piecemeal programs I was pushing before the crisis" argument.

I am sure there are folks who believe these things, if done well, might increase GDP 10 years from now, but is there anyone who really thinks this will create 3 million jobs in the next 18 months?  I am reminded of the old joke, how do you make a million dollars in real estate?  Start with 10 million.  In the same vein, how does the government create 3 million new jobs?  By destroying 5 million others.

By the way, speaking of bait and switch, these solutions Obama focuses on - health information, energy projects, school rebuilding, and highways - account for at most 6.5% of the total tax cuts and spending programmed by the stimulus bill for the first 2 years (34.1 of 525.5 billion, which is a bit outdated because it is based on a CBO report of last week, and has not kept up with the new pork added by Congress since then).

I just can't believe this guy actually represents change for people.  To me, he sounds like a total flashback of every politician from the 1970s, who used to flail around with just this type of rhetoric.  What's next, Whip Unemployment Now?

**Footnote I think I am going to try to trademark "Worst Economy Since the Great Depression" like Pat Riley trademarked "threepeat."  Or maybe just trademark "WESGD."  Here are a couple of past examples:

Clinton / Gore 1992: "Mr. Gore lambasted Mr. Bush for what he called 'the worst economic performance since the Great Depression'".  The US unemployment rate peaked around 7.8% in 1992 and was headed down towards the 6's by the time Clinton was inaugurated.   The 1991-1992 recession turned out to be one of the shortest on record.

John Kerry, 2004: "In his Sept. 2 speech in South Carolina, Kerry claimed the U.S. is suffering 'the greatest job loss since the Great Depression.'"  The 2004 unemployment rate peaked at 5.8% and was headed down into the fours during Bush's second term.  The 2003-4 recession was almost as short as the '92 recession.

For perspective, via Carpe Diem, initial jobless claims as a percentage of the labor force:

Via TJIC:

The steel industry, a bellwether for the state of the nation's economy, is looking to the government for a huge investment program: up to $1 trillion over two years.

Government can't create capital -- it can only force it to be reallocated and, to a small extent, move it forward from the future.   Given that there is some sort of fixed amount of investment capital in the economy, then, it strikes me that we are rapidly approaching the point where we are giving to Congress the job of allocating the vast majority of the country's available investment capital.  And if that prospect does not scare you, and it should, consider this:  Congress has made it fairly clear the three criteria it will use to select the recipients of capital:

• They must have a business model that has been proven a failure (by poor performance, eroding market share, and/or near bankrupcy)
• They must have strong, powerful unions with the historically proven ability to dictate terms to management
• The company and its key stakeholders must be strong supporters of the party in power

They say the government does things that private parties can't or won't, and that is certainly true here since I cannot imagine any private investor allocating capital on these criteria.

This was sent to me by a reader:  Much as looking at percentage moves in the Dow is much more meaningful than looking at nominal points moves (500 points means a lot less when the average is at 10,000 than when it is at 1,000), it is useful to look at the recent jobs report in the same way.  While 553,000 lost jobs is certainly a lot, it is only the 41st worst loss since WWII when looked at as a percentage of the workforce  (and it would be much further down the list if we had similar metrics back into the 1930's and 1920's).  Via Bespoke Investment Group:

This tends to confirm the statement I made last week, that this recession is likely worse than anything a 20-something Obama supporter can remember, but is not yet even close to some of the problem years of the 1970's, much less the 1930's.

By the way, it is interesting to see all those 1950's dates in there but no dates in the last 25 years, given there are many who have been writing about the current economy being so much riskier for workers than the 1950's.

MaxedOutMamma (an economist somewhere but she seems to only drop tantalizing clues as to where she plies her trade) is concerned:

I was troubled by how many people seemed to feel the economy wasn't in deep trouble.   Profound skepticism and the belief that this is all media/political highjinks seem almost to be the consensus.

I guess you may have to put me in the majority.  I certainly don't doubt that we are headed for a recession.  And it would not surprise me if this is the worst recession that most 20-something Obama voters have experienced, though that is not saying much.  But I am not sure we are even facing the Seventies in this one and we certainly are not facing the 1930s.

Here is the problem that we more casual consumers of economic news must struggle with -- the media has fairly accurately predicted 20 of the last 3 economic downturns.  Everywhere you turn, you see analogies to the Great Depression, a period of time where unemployment topped 25%.  Given the media's track record and the nearly breathless panic about the looming economic disaster, any sane person has to put a divide-by-X filter on economic news.  It is certainly possible that I and other are using too large of an X as a correction factor, but is that my fault, or the fault of the purveyors of information who can't tell any story straight.

By the way, for us Polyannas, here are several interesting posts from Mark Perry

• Housing affodability highest since 2002
• Loan delinquency rates at historical lows (except mortgages, but mortgage delinquency rates still below 1991)
• Real estate bubble limited to less than 10 states (and really only four)

... then it would be much easier to reduce CO2 production, because we could just shut down stupid-inefficient boneheaded and outdated Soviet-era industry, like Poland has:

Polish Prime Minister reminded that the economy of Poland, who has cut carbon emissions by about 30 percent since 1988, relies on coal for up to 90 percent of its energy needs. This, he argued, entitles Poland to encourage other countries, for whom climate protection is a hard nut to crack.

Amount of Polish CO2 reduction that would not have happened anyway in the course of modernizing their economy and is instead due to focus on CO2:  Zero.

More on how the vast majority of European progress towards Kyoto goals is due to the shutdown of Soviet industry, and how this is the primary reason the 1990 benchmark date was chosen, here.

Technocrats love to pick winners.  Leftish technocrats, in particular, love to believe that the complex operations of the entire economy choose technologies that are inferior to those the technocrat would have imposed on the economy had she been in charge.  But here is what happens when they try, in a cautionary tail that is particularly relevant given the number of specific technologies Barack Obama has said he would promote (e.g. a million plug-in hybrids by 2015) (via Tom Nelson)

The federal government has invested billions of dollars over the past 16 years, building a fleet of 112,000 alternative-fuel vehicles to serve as a model for a national movement away from fossil fuels.
But the costly effort to put more workers into vehicles powered by ethanol and other fuel alternatives has been fraught with problems, many of them caused by buying vehicles before fuel stations were in
place to support them, a Washington Post analysis of federal records shows.

"I call it the 'Field of Dreams' plan. If you buy them, they will come," said Wayne Corey, vehicle operations manager with the U.S. Postal Service. "It hasn't happened."

Under a mandate from Congress, federal agencies have gradually increased their fleets of alternative-fuel vehicles, a majority of them "flex-fuel," capable of running on either gasoline or ethanol-based E85 fuel. But many of the vehicles were sent to locations hundreds of miles from any alternative fueling sites, the analysis shows.

As a result, more than 92 percent of the fuel used in the government's alternative-fuel fleet continues to be standard gasoline. A 2005 law -- meant to align the vehicles with alternative-fuel stations -- now requires agencies to seek waivers when a vehicle is more than five miles or 15 minutes from an ethanol pump.

The latest generations of alternative vehicles have compounded the problem. Often, the vehicles come only with larger engines than the ones they replaced in the fleet. Consequently, the federal program --
known as EPAct -- has sometimes increased gasoline consumption and emission rates, the opposite of what was intended....

The Postal Service illustrates the problem. It estimates that its 37,000 newer alternative-fuel delivery vans, which can run on high-grade ethanol, consumed 1.5 million additional gallons of gasoline last fiscal year because of the larger engines.

The article does not even mention that E85 ethanol made mostly from corn does absolutely nothing to reduce total CO2 production (it just shifts it around, due to the amount of energy required to grow corn and convert it to ethanol) while raising food prices.

California did something like this years ago, putting the force of subsidies and state law behind zero-emission vehicles.  This wasted a lot of money on electric and hydrogen vehicles that were not yet technologically mature enough to prosper, while missing out on low (but now zero) emissions approaches that could have had much more impact because they were technologically ready (e.g. CNG for fleet vehicles).

Y'all know where I stand on the dangers of CO2.  But if we really have to do "something", then the only efficient way to do it is with a carbon tax.  But politicians hate this idea, because they don't want to be associated with a tax.  But the fact is, that every other action they are proposing is a tax of some sort too, but just hidden and likely less efficient.  There is no magic free lunch that Barack Obama and his folks can think of and impose, no matter how smart they are.  In fact, to some extent, smarts are a hindrance, because it tempts people into the hubris of thinking that they are smart enough to pick winners.

Postscript: If you are reading this and thinking "well, if I were in charge, I would not be that stupid and I could make it work" then you don't get it.  1)  No one can make it work, for the same reasons the Soviets could not plan their economy from the top -- its just too complex.  At best, policy-makers are choosing between a handful of alternatives to back.  In contrast, every individual has a slate of opportunities to reduce his/her CO2 production at the least cost, and when you add up all these individual portfolios, that means there are hundreds of millions of individual opportunities that must get prioritized.  That is what pricing signals do, but government bureaucrats cannot.  2) The morons and knaves ALWAYS take over.  Even if you are brilliant and well-motivated, your successor likely will not be. For years, folks have generally been comfortable with the outsized role of the Federal Reserve because they thought Greenspan  (and Volker before him) ran it brilliantly.  Well, there are arguments to be made about this, but even if we accept this judgment, what happens when the next guy is in charge and is not brilliant?

Postscript #2: If you want a specific example, let's take plug-in hybrids.  How can anyone be against these?  I personally like the concept of cars being driven by electric traction motors (I like the performance profile of them) and would love a good plug-in hybrid.  But what happens when we find out that many of these cars were bought in coal-burning areas where electricity is particularly cheap, and discover coal-fired electricity pollutes more than an internal combustion engine?  Or when we use a cap and trade system to cut back on coal fired plants, and find that the huge number of plug-in hybrids are exacerbating brown-outs and electricity shortages?  Or we find that the billions of dollars of capital diverted by the government to expanding plug-in hybrids could have easily yielded far more CO2 reduciton had it been applied in another area?  That is why a carbon tax is the only way to go (if we are going to do anything) because it allows individuals to make capital expenditure decisions to reduce CO2 based on their vastly higher knowlege of the opportunities and the pricing signal of the tax.

I have no problem if women want to spend four years at college studying (at their own expense) the role of indigenous women in the postmodernist Marxist movement of 1960's Paraguay, or whatever.  However, I do have a problem when these same folks later complain that their income is below average or they are under-represented in the board room.  Just peruse the top and bottom of this list at Carpe Diem. 

College degrees most dominated by women include library science, consumer science, social science, education, language, psychology, and gender studies.  Top college degrees most dominated by men include construction trades, engineering tech, transportation, military technologies, engineering and computer science. 

Sorry, but I cannot imagine any possible restructuring of society and the economy where the first list is more valuable and has higher income potential than the second list.

The technocratic compulsion is very seductive to a lot of people (including, I think, our President-elect).  I can't tell you how often I hear "if we just had one smart person to clean up the mess..."  But it never works.  Just think about this auto czar idea being trial-ballooned this week.  Even if you could find someone brilliant enough to perfectly discern and synthesize the diverse buying interests of a hundred million consumers, he can never have the right incentives sitting in that government job.  Pretty soon he has group A insisting that he needs to mandate more fuel economy and group B that he needs to protect union jobs and group C that he needs to save jobs in Michigan in preference to Ohio and group D advocating for Ohio over Michigan and... you get the point.  All rolled up with the incentive problem that if he actually solves the problem at hand, he will be out of a job, so you can bet the problem is never fully solved.

My wife read the Michael Lewis article and comes back to me and says "I can't imagine how you can read that and still oppose government intervention and increased regulation."  I said, "why?"  Sure, people screwed up and did stupid stuff, but no defender of capitalism promises that won't happen.  Besides, what regulation would you propose?  "I don't know, but someone smart should have been watching them."

And that is what the argument usually boils down to - someone smart should have been watching them.  But lots of smart people were watching all the time.  You can see one such person featured in Lewis's article.  Guys run all over Wall Street looking every day for some single digit basis point spread they can make money off of.  But untold wealth was just sitting there for someone who was willing to call bullshit on the whole CDO/CDS pyramid game.  These guys playing this game were searching for people to bet against them. 

And despite this, despite untold wealth as an incentive, and companies looking for folks to take the other side of their transactions, only a handful saw the opportunity.  Thousands of people steeped in the industry with near-perfect incentives to identify these issues ... did not.  What, then, were our hopes of having some incremental government bureaucrats do so?  Usually, after this kind of crisis, there are lines of pundits and writers ready to suggest, with perfect hindsight, new regulations to avert the prior crisis.  But, tellingly, I have heard very few suggestions. 

Back in the 1980's, everyone was freaked out about junk bond-financed hostile takeovers, greenmail, leveraged buyouts and the like.   Since, while this activity has not disappeared, the wackiest of this behavior has really died down.  Do you remember that act of Congress and subsequent regulation that really curtailed this behavior?  Yeah, neither do I.  The fact is that, if they are allowed -- and if they are not shielded by taxpayer-funded bailouts from the consequences of their actions -- individuals learn from their excesses.  Or they go bankrupt.

Step 1:  Really, really screw up your industry beyond all hope of repair, while paying yourself a nice salary to do so

Step 2:  Claim to the world that your industry is unique and different, and failure of your company and/or industry will cause a chain reaction that will bring down the whole economy and cost the country many multiples of the bailout price tag

Advocates for the nation's automakers are warning that the collapse of the Big Three - or even just General Motors - could set off a catastrophic chain reaction in the economy, eliminating up to 3 million jobs and depriving governments of more than $150 billion in tax revenue.

Step 2 is obviously pulled off easier if either a) representatives from your industry run the Treasury department or b) the new President owes your unions big time for his recent victory in a critical state.  For those of you just trying to keep you small business afloat, don't try this at home.  No bailout will ever be forthcoming if you don't have the power to move electoral votes, but you should expect to pay for other people's bailouts.

Postscript: This is funny:

Automakers say bankruptcy protection is not an option because people would be reluctant to make long-term car and truck purchases from companies that might not last the life of their vehicles.

I think if people still buy tickets on airlines that are operating out of chapter 11 (an item that has zero value if the company folds) then people will still buy cars.  This is so totally lame it is tremendously irritating.

I predicted it here.  Now see it here:

House Speaker Nancy Pelosi said Wednesday that Congress is considering bailing out Detroit's Big Three automakers."We may need to make a statement of confidence in our auto industry," Pelosi told NPR this afternoon. "We're not saving those companies, we're saving an industry. We're saving an industrial technological and manufacturing base... It's about jobs in America."

I wrote why its better to let GM fail.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

Pelosi held a meeting Monday with Democratic leaders to consider a request from Detroit's Big Three automakers for another $25 billion in "bridge financing" to help them survive a huge downturn in auto industry.

I am happy to see that Barack Obama is not entirely in reality-avoidance mode with his climate policy:

You know, when I was asked earlier about the issue of coal, uh, you know "” Under my plan of a cap and trade system, electricity rates would necessarily skyrocket. Even regardless of what I say about whether coal is good or bad. Because I'm capping greenhouse gases, coal power plants, you know, natural gas, you name it "” whatever the plants were, whatever the industry was, uh, they would have to retrofit their operations. That will cost money. They will pass that money on to consumers.

To folks with any kind of background in economics, this has to be the case.  Reducing the total output of current power plants, and thereby obsoleting all that investment and squeezing supply, at least in the medium term until new capacity of other types can be built, can only lead to a) rationing through blackouts or b) higher prices to ration the shorter supply.  The cost of option a is so high that price is going to have to be the rationing mechanism.  Skyrocket is actually pretty close to what would happen to rates if Obama sticks by his plan of limiting greenhouse gasses to 1990 or earlier levels.  (His explanation is actually pretty poor for the mechanism - pass-through of retrofit costs would likely be minor to the supply / demand balancing effect of shaving 20/30% off supply in a short period of time.

I think a frank discussion of the dangers of a "pollutant" vs. the cost of abatement is a fair one.  I personally think the threat of CO2 is wildly exaggerated, and the cost of doubling or tripling electricity costs will hurt Americans far worse than a few tenths of a degree of warming.

But don't get too excited.  Obama is still living in economic never-never land on other related issues:

yes, there is going to be some increase in electricity rates on the front end, but that over the long term, because of combinations of more efficient energy usage, changing lightbulbs and more efficient appliance, but also technology improving how we can produce clean energy, the economy would benefit.

Sorry, but this is way wrong.  Obsoleting perfectly good infrastructure and wholesale replacing it with trillions of dollars of new infrastructure does not help the economy any more than if a massive earthquake had destroyed the plants.  This is the broken windows fallacy on steroids.  The only benefit from all this cost will be whatever climate benefit we accrue from the CO2 reduction.  For there to be such a benefit, one must assume a) substantial future warming and b) that the current temperature happens to be the best possible temperature we could ever be at.  But that, as they say, is a whole other blog.

A lot of folks, particularly on the left, look with some fondness at the political economy of continental Europe.  They are attracted by high job security, short work weeks, long vacations, and a strong welfare system.  They make the mistake of seeing in these traits a more promising society "for the little guy," when in fact just the opposite is true.

The European Corporate State

The political economy of companies like Germany and France are actually incredibly elitist, dominated by perhaps a hundred guys (and I do mean guys) who run the country in a model only a few steps removed from Mussolini-style fascism or the Roosevelt's National Industrial Recovery Act.   In these countries, perhaps 20 corporations, ten or fifteen large unions, and a group of powerful politicians and regulators run the economy.

US workers sometimes make the mistake of seeing the political power of European unions and equating this power with being a more egalitarian environment for workers.  But the European political economy is rule by the in-crowd over the out-crowd that exceeds any of the patronage relationships we complain about in this country.  What we don't often see from our American perspective is the way the system is structured not to protect poor from the rich or the weak from the strong, but to protect incumbents (whether they be corporations or skilled workers) from competition.

In the European labor markets, mobility is almost impossible.  The union system is built to protect current high-skilled workers from competition from new workers, whether in the same country of from abroad.  Large corporations that form part of the cozy governance of the country are protected from new competition, and are bailed out by the government when they hit the rocks.

As a result, unemployment is structurally high in countries like France and Germany, hovering for decades between 8 and 12% -- levels we would freak out at here.  Young and/or unskilled workers have a nearly impossible time breaking into the labor market, with entry to better jobs gated through apprenticeships and certifications that are kept intentionally scarce.  Joe the plumber is an impossibility in Europe.  Some Americans seem to secretly love the prospect of not easily being fired from their job, but they always ignore the flip side -- it is equally hard to ever be promoted, because that incompetent guy above you can't be fired either.

Entrepreneurship in Europe is almost impossible -- the barriers just to  organizing your own corporation legally are enormous.  And, once organized, you will quickly find that you need a myriad of certifications and permissions to operate in your chosen field -- permissions like as not that are gated and controlled by the very people you wish to compete with.  The entire political economy is arrayed in a patronage system to protect current businesses with their current workers.

Here is a test, that works most places in the US except possibly in Manhattan.  Ask yourself who are the wealthiest and/or most succesful people that you know.  Then think about where they went to school.  Sure, some of the more famous Fortune 25 CEOs went to name schools, but what about the majority of succesful people you meet in your life?  If you are like me, most of them did not go to Ivy League or what one might call elite schools.  They had normal state college educations.  You will typically find a very different picture in Europe.  While of course there are exceptions, it is much more likely that the wealthy people one meets were channeled through a defined set of elite schools.

Corporations in Europe, particularly the cozy few who wield influence with the government, seldom fail and/or really gain or lose much market share.  I always thought this a telling statistic:  (Fortune 100 by year here)

[Olaf Gersemann] points out that of the top 20 largest publicly traded companies in the US in 1967, only 11 are even in the top 60 today, much less the top 20.  In contrast, he points out that of the 20 largest German companies in 1967, today, thirty-five years and nearly two generations later, 19 are still in the top 60 and 15 are still in the top 20.

Its also an inherently anti-consumer society.  The restrictions on foreign trade, entrepreneurship, and new competition all reduce consumer choice and substantially increase prices.  EU anti-trust enforcement, for example, barely pretends any more to look out for consumer interests.  Most of the regulators decisions are better explained by protection of entrenched and politically influential European competitors than it is by consumer power or choice.

"Progressives" in this country often laud the lower income inequality numbers in Europe vs. the United States.  The implication is that the poor in Europe are somehow better off.  But in fact this is not true.  Careful studies have shown that the poor are at least as well off in the US as in Europe, particularly when one corrects for the number of new immigrants in the US.  (That's another difference, by the way -- Europe is virtually closed to immigration, at least as far seeking new integrated citizens is concerned).  What drives income inequality is that our middle class is richer than Europe's middle class, and our wealthy have more income than Europe's wealthy.

To this last point, I have always felt that comparisons of the wealthy in the US to those in Europe, and comparison of income inequality numbers, are a bit apples and oranges.  The US is a country where access to most of the best perks is via money - they have a price.  In Europe, access to most of the best perks can't be bought by money, they can only be accessed by those with the elite establishment club card.   To some extent, the income numbers understate the difference between rich and poor in Europe for this reason.

Next Stop:  America

We see many of the elements of the European economic system slipping into the US today.  An increasing number of professions require certification by the government, with this certification often either controlled by the incumbents in the profession or with criteria that essentially require new entrants to compete in the same way incumbents do.  We see the top companies with political influence, from Wall Street firms to banks to automobile manufacturers getting government assistance to stay in business or maintain their status.  This, from the proposed GM bailout, is the European system personified:

General Motors and Cerberus Capital Management have asked the U.S. government for roughly $10 billion in an unprecedented rescue package to support a merger between GM and Chrysler, two sources with direct knowledge of the talks said on Monday....

one of the conditions of the merger would be that GM-Chrysler would spare as many jobs as possible in order to win broad political support for the government funding needed to complete the deal, people familiar with the merger discussions said.

This is the same political deal cut in Europe.  Large powerful company is protected from failure by government.  In turn, powerful company protects interest of powerful union.  The only thing missing here, which I think is clearly on the agenda for the Obama administration, is a large protective tariff to shield this inefficient mess from competition.  Left out of the equation are consumers, who get more expensive cars and suffer because GM is again given a hall pass from producing cars that people actually want to buy.  Also left out are potential competitors, who don't get the government deal and who miss out on the chance to buy up GM assets and hire ex-GM employees out of bankruptcy and do a better job with them.  This European system puts a premium on keeping productive assets in their current hands, rather than in the most productive hands:

Corporate DNA acts as a value multiplier.  The best corporate DNA has a multiplier greater than one, meaning that it increases the value of the people and physical assets in the corporation.  When I was at a company called Emerson Electric (an industrial conglomerate, not the consumer electronics guys) they were famous in the business world for having a corporate DNA that added value to certain types of industrial companies through cost reduction and intelligent investment.  Emerson's management, though, was always aware of the limits of their DNA, and paid careful attention to where their DNA would have a multiplier effect and where it would not.  Every company that has ever grown rapidly has had a DNA that provided a multiplier greater than one... for a while.

But things change.  Sometimes that change is slow, like a creeping climate change, or sometimes it is rapid, like the dinosaur-killing comet.  DNA that was robust no longer matches what the market needs, or some other entity with better DNA comes along and out-competes you.  When this happens, when a corporation becomes senescent, when its DNA is out of date, then its multiplier slips below one.  The corporation is killing the value of its assets.  Smart people are made stupid by a bad organization and systems and culture.  In the case of GM, hordes of brilliant engineers teamed with highly-skilled production workers and modern robotic manufacturing plants are turning out cars no one wants, at prices no one wants to pay.

Changing your DNA is tough.  It is sometimes possible, with the right managers and a crisis mentality, to evolve DNA over a period of 20-30 years.  One could argue that GE did this, avoiding becoming an old-industry dinosaur.  GM has had a 30 year window (dating from the mid-seventies oil price rise and influx of imported cars) to make a change, and it has not been enough.  GM's DNA was programmed to make big, ugly (IMO) cars, and that is what it has continued to do.  If its leaders were not able or willing to change its DNA over the last 30 years, no one, no matter how brilliant, is going to do it in the next 2-3.

So what if GM dies?  Letting the GM's of the world die is one of the best possible things we can do for our economy and the wealth of our nation.  Assuming GM's DNA has a less than one multiplier, then releasing GM's assets from GM's control actually increases value.  Talented engineers, after some admittedly painful personal dislocation, find jobs designing things people want and value.  Their output has more value, which in the long run helps everyone, including themselves.

The alternative to not letting GM die is, well, Europe (and Japan).  A LOT of Europe's productive assets are locked up in a few very large corporations with close ties to the state which are not allowed to fail, which are subsidized, protected from competition, etc.  In conjunction with European laws that limit labor mobility, protecting corporate dinosaurs has locked all of Europe's most productive human and physical assets into organizations with DNA multipliers less than one.

Beyond the actual legislation, the other sign that the European model may be coming to the US is in attitudes.  I think Michelle Obama is a great example of this.  She and her husband checked all the elite boxes - Princeton undergrad, Harvard Law - but she is shocked that having punched her ticket into elite society, society didn't automatically deliver, as it might in, say, France.  She's actually stunned that, had it not been for Barack's succesful books, they might have had to give up their jobs as community organizers and at non-profits to actually earn enough to pay back their 6-figure school loans.

Despite their Ivy League pedigrees and good salaries, Michelle Obama often says the fact that she and her husband are out of debt is due to sheer luck, because they could not have predicted that his two books would become bestsellers. "It was like, 'Let's put all our money on red!' " she told a crowd at Ohio State University on Friday. "It wasn't a financial plan! We were lucky! And it shouldn't have been based on luck, because we worked hard."**

The Progressive Irony

In all this, I think there is an amazing irony.  In a nutshell its this:  The "Change" that Barack Obama is selling to the electorate is in fact the creation of a government infrastructure to fight change.  I have written before that progressives are actually inherently conservative.

Ironically, though progressives want to posture as being "dynamic", the fact is that capitalism is in fact too dynamic for them.  Industries rise and fall, jobs are won and lost, recessions give way to booms.  Progressives want comfort and certainty.  They want to lock things down the way they are. They want to know that such and such job will be there tomorrow and next decade, and will always pay at least X amount.  That is why, in the end, progressives are all statists, because, to paraphrase Hayek, only a government with totalitarian powers can bring the order and certainty and control of individual decision-making that they crave....

One morning, a rice farmer in southeast Asia might faces a choice.  He can continue a life of brutal, back-breaking labor from dawn to dusk for what is essentially subsistence earnings.  He can continue to see alarge number of his children die young from malnutrition and disease.  He can continue a lifestyle so static, so devoid of opportunity for advancement, that it is nearly identical to the life led by his ancestors in the same spot a thousand years ago.

Or, he can go to the local Nike factory, work long hours (but certainly no longer than he worked in the field) for low pay (but certainly more than he was making subsistence farming) and take a shot at changing his life.  And you know what, many men (and women) in his position choose the Nike factory.  And progressives hate this.  They distrust this choice.  They distrust the change.  And, at its heart, that is what the opposition to globalization is all about - a deep seated conservatism that distrusts the decision-making of individuals and fears change, change that ironically might finally pull people out of untold generations of utter poverty.

Don't believe me?  Below is from an email I received.  The writer was outraged that I would have the temerity to say that the middle class in the US had it better than even the very rich in the 19th century.

Sure, the average rural resident of a developing country earns more in dollars today than before. But you're missing the big picture. Wealth is about so much more than just money, and status symbols. It is about health, and well being, and contentedness, and happiness. The average peasant family in India in 1900 may have lived a spartan lifestyle by today's standards, but it probably could rely on more land per family, crops uncontaminated by modern pesticides and fertilizers, a stronger social network and village-based safety net. These peasants were self-sufficient. That is no longer the case

Progressives want to eliminate risk and lock in the current world.  New technologies, new competitors, new business models all need to be carefully screened and gated by a government-labor-corporate elite.  Entrepreneurship, risk, mobility, achievement all should be sacrificed to a defined and steady paycheck. In the name of dynamism, progressives, as well as many modern politicians, want to limit the dynamism of the American economy.  In the name of egalitarianism, they wish to create a small political elite with immense power to manage everyone's life.  In the name of progress, they wish to lock current patterns and incumbents in place.

** Postscript: By the way, here is how I responded to Michelle Obama's education debt rant

I don't know why I can't just move along from Michelle Obama's rant about the terrible cost of her Princeton / Harvard Law degree.  Maybe its because I attended the same schools (different degrees) and my reaction is just so different -- I had a fabulous experience and live in awe that I had such a unique chance to attend these schools, while Michelle Obama seems to experience nothing but misery and resentment.  Granted that I did not have to take on a ton of debt to get these degrees, but I have plenty of friends (and a wife) that did.

This analogy comes to mind:  Let's say Fred needs to buy a piece of earth-moving equipment.  He has the choice of the $20,000 front-end loader that is more than sufficient to most every day tasks, or the $200,000 behemoth, which might be useful if one were opening a strip mine or building a new Panama Canal but is an overkill for many applications.  Fred may lust after the huge monster earth mover, but if he is going to buy it, he better damn well have a big, profitable application for it or he is going to go bankrupt trying to buy it.

So Michelle Obama has a choice of the $20,000 state school undergrad and law degree, which is perfectly serviceable for most applications, or the Princeton/Harvard $200,000 combo, which I can attest will, in the right applications, move a hell of a lot of dirt.  She chooses the $200,000 tool, and then later asks for sympathy because all she ever did with it was some backyard gardening and she wonders why she has trouble paying all her debt.  Duh.  I think the problem here is perfectly obvious to most of us, but instead Obama seeks to blame her problem on some structural flaw in the economy, rather than a poor choice on her part in matching the tool to the job.  In fact, today, she spends a lot of her time going to others who have bought similar $200,000 educations and urging them not to use those tools productively, just like she did not.

Us non-financial types are always learning something new.  After a lifetime of thinking that our economy rests on free markets, entrepreneurship, an educated and flexible labor force, risk-taking, etc., we suddenly find that everything depends on the TED Spread, a metric most of which most of us were blissfully ignorant 2 months ago.

The TED spread is basically the difference or spread between short term inter-bank loan rates and short term treasuries or T-bills.  It is in some sense a measure of perceived risk of lending to banks vs. (what are considered) low or near-zero risk US treasury obligations.  One way to think about it in the current market is how much extra would you need in interest to lend to your slacker brother-in-law Earl vs. say to Bill Gates.

Not surprisingly, the TED spread has shot up over the last few weeks, and it tends to be the #1 metric cited in declaring impending doom for the US economy.  But Alex Tabarrok looked at a longer view of the TED spread, and found this:

Now, the period from 1970-1983 were not by any means an economic glory period, but on the other hand its clear that TED spreads of the order of magnitude we have seen in the past weeks are not unprecedented by any means.

The problem I have with the TED spread is that higher recent spreads are being used as an indicator that credit has "dried up" and lending is at a standstill.  Why do I resist this conclusion?  Because of this chart:

So, gasoline prices rocketed from $1.50 a gallon to over $4.00 a gallon.  Does this mean that gasoline purchases have stopped?  Has the gasoline market closed up shop?  Of course not.  It just means the price went up.  It is absurd to show me a price chart, which is what the TED spread graph is, and infer from it changes in the underlying transaction volume.

In fact, when one looks at actual volume, of inter-bank loans or new commercial lending, there is not (at least yet) any of the drop-off everyone seems to assume exists.  For example:

The media is really bending over backwards to find ways to twist earnings data for average Americans to try to make the point that real income for many folks has stagnated or dropped.  They are doing this to support a two-pronged legislative strategy in the next Obama administration:

1. Use the power of the government to further tilt the balance towards unions and against employers in wage negotiations  (this strategy having worked out so well to create prosperity in the automobile and airline industries)
2. Further modify the income and Social Security tax structures to make them even more regressive than they are today.

They are firing on all cylinders behind this strategy.  They are even mobilizing the neo-Keynesians to make the pitch that the Great Depression and the current financial crisis were caused by a shift in wealth from laborers to the capital classes, and that the only way to prevent future crises and depressions is to, wait for it, increase the power of unions and institute more wealth redistribution  (Example here, via Kevin Drum).

I was going to do a post fisking the James Livingston article linked above on Kevin Drum's site, but Livingston's hypothesis was such a mess that it was just going to take too much of my day.  But in doing some research, I found this chart from a couple of years ago in the NY Times that really caught my attention:

Talk about chutzpuh -- look at the lede on the chart and then look at the chart itself.  Yes, the lede is correct, but only if you choose the totally meaningless number of "cash wages" rather than total compensation.  If one looks at total compensation (or what they call "overall" compensation), the entire argument falls apart.   Workers have maintained about their same "share" of the economy.

Sure, a large percentage of that is now in health care benefits, but that's a choice workers have made (and the government has encouraged through tax policy).  In fact, this compensation mix has been driven in large part by the Left's beloved unions, so on what basis can folks say that these other benefits somehow "don't count?"  Certainly, they cost their employers equally, whether it is cash or health care.  Corporate profits are up a bit, but in line with their normal historical levels in the 1950s and 1960s, the golden age of the US economy, according to the Left.  (By the way, the pattern of falling wage shares and rising profit shares after recessions is a well-documented one.  Wage-earners do best at the end of an economic cycle, employers more towards the beginning.  The chart cut off after 1997 would look about the same as the last several years).

I will tell you right now that every time you hear someone bemoaning the stagnation of wages, they will never, ever, ever be talking about total compensation per individual.  Having, through government policy and union activity pushed the compensation mix to non-cash elements, they then play a heads-I-win-tails-you-lose game of not giving any credit for those compensation elements.

Other games that are played to try to make the case that real earnings have stagnated include:

• Time frame selection. Everyone making this argument will choose 2000 as a starting point.  They justify it by saying it is the beginning of the Bush years, but 2000 is really selected because it is a pre-recession peak, and they have to measure peak-to-trough of the economic cycle to try to make their point.  Just as an example, if you look at the household income numbers below, you can see there is very typically a 5-year drop after a recession followed by net gains.  If we chose, say, the first Clinton term we could play the same game, showing a peak-to-trough drop in real incomes.
• Household income game. The household income numbers are fraught with peril, because companies don't pay households, they pay individuals.  And household makeups are changing simultaneous to income changes.  For example, imagine the economy was just my household.  If my wife were to get fed up with my shtick and divorce me tomorrow, average household income would drop by 50% in one day (as our total income stays the same but we go from one to two households).  If my wife were to go back to her high-paying pre-kids job tomorrow (if only it were so!) our household income would go way up, in part because the labor department does not capture the value of the labor she provides at home.Mark Perry has a lot more on the household income numbers here, but he shows that the household size number has been changing a lot, causing the metric to understate income changes per individual:

• Individuals matter. Median income looks at the middle person on the ranked list of US incomes.  So, for example, if there are 100 million income earners, the median income is the income of number 50 million on this list.  But whoever the person is at spot 50 million is almost certainly not the same person who was at spot 50 million last year.  They might have fallen on the list, but the odds are they moved up.  As folks age and gain experience and/or seniority, they tend to increase income faster than inflation.  Most minimum wage earners, for example, tend to be under 25.  The number of families supporting three kids on minimum wage (at least of the primary bread-winner) at the age of 45 is really, really low, despite the anecdotes we are bombarded with in the media.

• Immigration has a huge effect. The total number of foreign born people in the labor force is estimated around 21 million, of which perhaps 6.3 million are illegal immigrants.  Positing that at least 10 million of these arrived in the last two decades, and that many of these folks began at relatively low, below-median incomes, means that median incomes are hugely affected by immigration.  Leaving immigrants out so the comparison is close to apples and apples, to find the true median income gain over the last 20 years one would have to count up 10 million or so spots on the list.  Again, as in the previous point, most individuals can be better off even if the median stagnates  (presumably immigrants coming in at the bottom are also better off, even at the bottom, than where they were before, or they would not have come.  We often forget that much of our bottom quartile of income in this country would be upper middle class in many other nations).  This is a classic mix problem that most people, and the media, almost always get wrong.  In a situation with a changing mix of multiple groups, each of the groups can be improving on some metric, but the overall metric can go down.  You can see the income stats by race here.  Every race group has increasing median income, but since the Hispanic group has grown 8x faster than the anglo population in the US, the total results are mixed downwards.Here is a quick example.  Group A has values of 5,6,6,7.  Group B has values of 1,2,3.  Ten years later Group A is the same size and has values of 6,7,7,8.  Group B has doubled in size, and now has values of 2,3,4,2,3,4.  In these examples, every single individual has a higher value.  Also, Group A's median has increased from 6 to 7, and Group B's has increased from 2 to 3.  But the median for the whole combined group A+B has dropped from 5 to 4.  Both medians (and averages) can do funny things when mix is shifting.
• Even the NY Times. The NY Times actually makes two of these points for me in another article, arguing that historic median income drops were concentrated in areas of high immigration, and reported drops were due to the choice of the economic peak as a starting point.  WOW?  Is this the same NY Times I began this post criticizing.  Yes it is, the only difference is that this article ran in 2001, when they were reporting on the economy during a Democratic administration.
  
• Income taxes are already wildly progressive.  While I would love to be in that top 1% group, I don't really begrudge them their success.  Besides, who can look at the chart below, again from Mark Perry, and come to the conclusion that the top 1% are being treated unfairly generously.

• Every country that has implemented this plan (government-backed unions and wildly progressive tax policy), including most of Western Europe, is demonstrable worse off than the US on absolute measures.  This is both the median, but also in every quintile, including the poorest.  While it is true the poorest quintile has a bigger gap from the riches in the US vs. France for example, on an absolute basis our poorest are at least as well off  (particularly when differences in immigration policy are taken into account).

The best way to mobilize people is to make them panic.  That is why so many institutions have incentives to may you panic over the environment, or global warming, or the threat of terrorism, or the economy.  In most cases (Naomi Klein's hypothesis not-withstanding) these folks want you to get so worried you will give up something, either money or freedom or both.

Some kind of recession at this point is unavoidable, I guess.  But in fact, we really haven't seen what I would call a real recession since the early 1980's.  We've had a really long run, and now its time to cut back on that spending and board up the financial windows for a little while.  The economy has to de-leverage itself some, and that is going to slow things down for a while.  People keep talking about the Great Depression, and I don't see it.  I don't even think its going to be the 1970's.

The most visible symbol of financial problems seems to be the falling stock market.  But all those companies in those indexes are the same ones that were there a month ago, and are still healthy and making money.  The fall in the markets does not represent and change in the current health of industrial America.  The lower prices reflect a changing expectation about those company's future prospects, but the folks driving the market are just guessing, and really, their guesses aren't really any better than yours or mine.  Similar expectations drove oil up to $145 and now back down under $80.  Wall Streeters work really hard to portray themselves as smarter than you or I, but they are not.  I went to school with them.  I know these guys.  They aren't smarter, and they aren't any less susceptible to panic.  In fact, because they are often highly leveraged and are worried about making payments on that new Jaguar they just bought for their mistress, they tend to be more easily stampeded.

In October of 1987, the stock market fell 22.6% in one day.  If you date the current financial issues to about September 22, when the market closed around 11,000, then the market has fallen over these tumultuous weeks by 22.0% at last night's close -- dramatic, but still not as bad as the one day drop in '87. 

One argument about regulation that seems to be gaining traction through the recent financial crisis is "See, private action and enterprise is not infallible.  They can make mistakes that have costs for everyone.  Therefore they need to be regulated." 

I don't have time for the full refutation of this, but a few thoughts:

• No one ever said that private actors in the economy are infallible or even universally honest.  However, no one has ever been able to make the case that government employees are any more infallible or honest. 
• There are a couple of reasons government regulators are going to be demonstrably worse than the marketplace in making decisions.  The first is information -- a few actors in Washington can never have the same access to information as thousands of actors across the country or around the world.  The second is incentives -- while regulatory hawks cite private greed as a bad incentive in the marketplace, bureaucratic incentives can be at least as problematic.
• Governments are subject to all sorts of rent-seeking initiatives, not to mention regulatory capture, that undermine regulatory effectiveness.  Just look at the bailout bill. Wooden arrows?

For some reason, the argument "private actors screwed up" seems sufficient justification for regulation.  The burden of proof should instead be "the government could have done better."

Here is a nice example of how regulation really works, from an interview with Warren Buffett:

QUICK: If you imagine where things will go with Fannie and Freddie, and
you think about the regulators, where were the regulators for what was
happening, and can something like this be prevented from happening
again?

Mr. BUFFETT: Well, it's really an incredible case study in regulationbecause
something called OFHEO was set up in 1992 by Congress, and the sole job
of OFHEO was to watch over Fannie and Freddie, someone to watch over
them. And they were there to evaluate the soundness and the accounting
and all of that. Two companies were all they had to regulate. OFHEO has
over 200 employees now. They have a budget now that's $65 million a
year, and all they have to do is look at two companies. I mean, you
know, I look at more than two companies.

QUICK: Mm-hmm.

Mr.
BUFFETT: And they sat there, made reports to the Congress, you can get
them on the Internet, every year. And, in fact, they reported to
Sarbanes and Oxley every year. And they went--wrote 100 page reports,
and they said, 'We've looked at these people and their standards are
fine and their directors are fine and everything was fine.' And then
all of a sudden you had two of the greatest accounting misstatements in
history. You had all kinds of management malfeasance, and it all came
out. And, of course, the classic thing was that after it all came out,
OFHEO wrote a 350--340 page report examining what went wrong, and they
blamed the management, they blamed the directors, they blamed the audit
committee. They didn't have a word in there about themselves, and
they're the ones that 200 people were going to work every day with just
two companies to think about. It just shows the problems of regulation.

The problem, of course, is that Fannie and Freddie were doing exactly what Congress wanted them to do -- systematically lowering mortgage underwriting standards.  They won't put it that way now, but that is  what spreading home ownership to lower income families really amounted to.

Several people I know have argued with my "do nothing" approach to the current mortgage and liquidity mess.  Their argument is that the current crisis has frozen the short term money market, with banks refusing to lend to each other, and only doing so via central banks.  The problem, they claim, is that this could lead to an extended drying up of business to business credit.  For example, two people both used the fuel retailing example, arguing that inventory purchases are made on credit, and paid off as the inventory is sold.  The logic, I assume, is that businesses have all reduced their working capital, and so a drying up of short term business credit will cause the economy to lock up, with producers and retailers unable to buy components and inventory.  One such argument here.

I guess the questions are 1) for how long and 2) how best to fix it.  To the first question, this is by no means the first time in my lifetime that short-term credit has dried up.  Liquidity eventually returns, mainly because lenders need to lend as much as borrowers need to borrow.  As to the second question, central banks are currently handling this by increasing the amount of money they will lend short term.  Rather than lend to each other directly, bank A deposits with the Fed and then the Fed lends to bank B.  The cycle ends NOT when every bank is healthy but when banks and other institutions are confident they know which banks are healthy.  All the bailout is doing is delaying this reckoning.  I don't think it matters that banks and certain financial institutions survive, I think it matters that the ones who are not going to survive are identified quickly so the rest can start lending again to each other.

Given these concerns, I reiterate my position that if the government is going to inject liquidity and create new financial asset insurance programs, it makes more sense to me to do it at the point of concern, i.e. in the credit market to main street businesses, rather than dumping the money into the toxic sludge of credit default swaps. 

I missed this excellent interview with my local Congressman, John Shadegg, whom I don't always agree with but is still way better than 99% of Congress:

 

David Freddeso: Is a bailout necessary to save the economy at
this point from complete collapse "” from a major failure of multiple
institutions at the same time?

Shadegg: I think that's the most difficult question that
could be posed under these circumstances, and it's the question that I
have struggled all week to find the answer to. I have talked to a lot
of smart people who know Wall Street, know banking, know the economy
quite well, and you hear different opinions. Some will tell you that it
is absolutely essential. Quite frankly, I'm skeptical about that.

But I think that in some ways the question doesn't matter any more.
Because Secretary Paulson chose to raise the matter in the way he did "”
that is, to go public in a very high-profile way, not just with his
concern, but with a kind of Chicken-Little, the-sky-is-falling kind of
demand "” it became a self-fulfilling prophecy.

That is to say, once the secretary of the Treasury announces to the
world that there is a pending financial collapse, perhaps as great as
the Great Depression, and Congress must act "” he has sent a signal that
essentially tells world markets that Congress must act. I will tell you
that has been one of the most frustrating things about this since the
very beginning...

I can't tell you how many members of Congress were stunned at that
news, and were stunned that none of their local bankers were calling
them. And then they called their local bankers, as I called my local
bankers, and my local bankers said, "I think things are just fine." I
talked to one banker who said, "Gosh, we've got money, and we're
liquid, and we're making a profit. And we're in the market selling
loans, and we've got competitors trying to sell loans against us."

So, at that point, there's a disconnect. Secretary Paulson is
claiming that this is a catastrophe of generational proportions that
could go worldwide. And none of what we were hearing back home matches
that. And I'm not speaking just for myself, but also for many of my
colleagues who were making similar calls. They weren't being called by
their bankers, or by any of the businesses back home saying, "I can't
borrow any money".... If, in fact, Paulson had struck a chord with the
American banking community, wouldn't you think that after he announced
on Friday that there was a crisis of liquidity that threatens the
entire nation's financial solvency and Americans' jobs from coast to
coast, that my community bankers in Arizona wouldn't have been picking
up the phone by Monday morning, if not over the weekend, to say that "I
share the Secretary's concerns"?

 

Sometimes I snap at someone for their criticism of a particular politician.  Typically, they assume I am doing so because I support that politician.  But in reality, I am using just sick of the implication that somehow other politicians would have been much better.  I absolutely agree with Don Boudreaux's comment:

Fareed Zakaria (author of a truly fine book and columnist for the
Washington Post) rightly argues that Sarah Palin is unqualified to be
president of the United States (and, hence, by extension, unqualified
to be V-P). Mr. Zakaria is correct that Gov. Palin's recent answer to a
question about the economy "is nonsense - a vapid emptying out of every
catchphrase about economics that came into her head." He's correct also
that she's unfit to be entrusted with the power of the modern
presidency.

But Mr. Zakaria is incorrect to suppose that these traits separate
Gov. Palin from other candidates for high political office. Calls by
Senators McCain and Obama for cracking down on "speculators" are full
of classic and wrongheaded catchphrases, as is Sen. Obama's vocal
skepticism about free trade. Gov. Palin is merely less skilled in
passing off inanities and claptrap as profundities.