Thomas Sowell on Postponing Reality for the Car Industry

Thomas Sowell has an excellent article about the future of the car industry. He starts by drawing a paralel to the demise of the horse industry a hundred years ago, when the automobile became the main mean of transportation. Yes, plenty of jobs were lost, people supplying oats, saddles, horse shoes and buggies, but it was not the end of the world. It's what Schumpeter called "creative destruction", replacing non-efficient business with newer, modernized ones.

Of course, the end of thousands of years of horse business is not what's happening now, because there's no replacement for cars on the horizon. People are going to need cars in increased numbers, and if they don't buy them from GM or Chrysler, they'll buy from Toyota or Honda. That's why Toyota is building factories like crazy, because eventually someone will have to step in and supply the missing cars. As for the millions of jobs that are going to fall like dominoes: Dealerships will sell Hondas as well as they sold Chevys. And Toyotas still run on the exact same number of tires as a Buick. So again, it won't be the end of the world.

An Interesting Recession

There are a few things about the current recession that certainly haven't occured during the past ones.
Thanksgiving sales are up 3%, Thanksgiving weekend sales are up 19%, Cyber Monday is up, 15% housing affordability is at all time highs.
During the recession, the GDP grew at a healthy 2.8% in Q2!
And since NBER has a tendency to announce recession around the time they end, there's a big chance that the "official" recession will end within a couple of month.

Could fears of Obama-supported unions cause unemployment?

I was just wondering whether the threat of Obama empowering unions to force businesses to unionize could be a reason for the recent job losses and increase in unemployment numbers. If you werea business where there's a possibility of unionizing, wouldn't now be the time to fire those employees before it's too late?

Quote of the day: On war and peace

"In Italy, for 30 years under the Borgias, they had warfare, terror, murder, bloodshed - they produced Michelangelo, Leonardo da Vinci and the Renaissance. In Switzerland, they had brotherly love, 500 years of democracy and peace, and what did that produce? The cuckoo clock."

- Orson Welles as Harry Lime in Graham Greene's The Third Man

This is in relationship to the current left's obsession with peace, every anti-American on Earth wants peace, every liberal radical group has "peace" in its name, even the church of global warming is rewarded with a peace prize. Like Samuel Huntington said in The Clash of Civilisations, it's weird how, while Americans usually love competition between companies as the only way to progress, they seem so repulsed by the idea of competition between countries.

Jet-Flying Executives

Somehow I wasn't surprised at the "outrage" against the CEO's of the Big 3 flying private jets to Washington where they begged for a bailout.

But think of it... They said it cost $20,000 for this private flight. The delegations had about 15 members. Any idea how much first class tickets cost if you buy them 2-3 days in advance? A lot more than the $20,000 and anyway, why not use the jet, since the company already owns it. And now don't tell me they should fly economy class. After all, they got into this situation because of their heavy charity work. What else would you call paying $80/hour to a guy who just handles a screwdriver all day long?

And I didn't hear any similar outrage about B.H. Obama's recent trip to Washington, the one when he met President Bush. He and his wife flew on TWO SEPARATE private jets. They really couldn't find inside just one of them? And for comparison's sake... the Big 3 CEO's were executives of companies that need just 25 billions. Obama is the new chief executive of an entity owing 10 trillion...

Quote of the day: Reagan on Marx and communism

Communists are those who read Marx. Anti-communists are those who understand Marx.
- Ronald Reagan

Timeline of the Lending Crisis

Just found this full timeline of the events that led to the current financial crisis.

Quote of the day: Bailout and redistributions

To alleviate the obvious hardships to both homeowners and banks, the government commits to buy mortgages and inject capital into banks, which on the face of it seems like a very nice thing to do. But unfortunately in this world there is no tooth fairy. And the government doesn't create anything; it just redistributes. Whenever the government bails someone out of trouble, they always put someone into trouble, plus of course a toll for the troll. Every $100 billion in bailout requires at least $130 billion in taxes, where the $30 billion extra is the cost of getting government involved.

Art Laffer, Wall Street Journal

The Bailout Negotiations

Apparently, there was a hidden camera at the recent White House bi-partisan negotiations on the bailout bill. Here's the footage:

Fannie Mae, a major contributor to Obama's campaign

The corrupt Government-controlled Fannie Mae and Freddie Mac contributed to top Democrats campaign. More, 15 of the top 25 recipients were on the committees that were overseeing their activity. Here are just the first 4 beneficiaries:

1. Christopher Dodd (chairman of Senate banking committee): $133,900
2. John Kerry: $111,000
3. Barack Obama: $105,849
4. Hillary Clinton: $75,550

How did Fannie Mae and affirmative action bring the mortgage mess?

If you're still wondering who's guilty for the credit problems, it's not the free market, or greedy bankers, or Bush. It's, like I repeatedly said, the Government and its crazy "diversity" principles. Just read this article from September 30, 1999 in New York Times: Fannie Mae Eases Credit to Aid Mortgage Lending. Actually, I'll post it in its entirety, since it's way too prophetic. A good read is also Peter Wallison's article in today's Wall Street Journal, Blame Fannie Mae and Congress for the Credit Mess.

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets -- including the New York metropolitan region -- will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990's by reducing down payment requirements,'' said Franklin D. Raines, Fannie Mae's chairman and chief executive officer. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

Demographic information on these borrowers is sketchy. But at least one study indicates that 18 percent of the loans in the subprime market went to black borrowers, compared to 5 per cent of loans in the conventional loan market.

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980's.

''From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

Under Fannie Mae's pilot program, consumers who qualify can secure a mortgage with an interest rate one percentage point above that of a conventional, 30-year fixed rate mortgage of less than $240,000 -- a rate that currently averages about 7.76 per cent. If the borrower makes his or her monthly payments on time for two years, the one percentage point premium is dropped.

Fannie Mae, the nation's biggest underwriter of home mortgages, does not lend money directly to consumers. Instead, it purchases loans that banks make on what is called the secondary market. By expanding the type of loans that it will buy, Fannie Mae is hoping to spur banks to make more loans to people with less-than-stellar credit ratings.

Fannie Mae officials stress that the new mortgages will be extended to all potential borrowers who can qualify for a mortgage. But they add that the move is intended in part to increase the number of minority and low income home owners who tend to have worse credit ratings than non-Hispanic whites.

Home ownership has, in fact, exploded among minorities during the economic boom of the 1990's. The number of mortgages extended to Hispanic applicants jumped by 87.2 per cent from 1993 to 1998, according to Harvard University's Joint Center for Housing Studies. During that same period the number of African Americans who got mortgages to buy a home increased by 71.9 per cent and the number of Asian Americans by 46.3 per cent.

In contrast, the number of non-Hispanic whites who received loans for homes increased by 31.2 per cent.

Despite these gains, home ownership rates for minorities continue to lag behind non-Hispanic whites, in part because blacks and Hispanics in particular tend to have on average worse credit ratings.

In July, the Department of Housing and Urban Development proposed that by the year 2001, 50 percent of Fannie Mae's and Freddie Mac's portfolio be made up of loans to low and moderate-income borrowers. Last year, 44 percent of the loans Fannie Mae purchased were from these groups.

The change in policy also comes at the same time that HUD is investigating allegations of racial discrimination in the automated underwriting systems used by Fannie Mae and Freddie Mac to determine the credit-worthiness of credit applicants.

The mortgage situation is the market correcting a Government failure

People should be reminded as often as possible that it's Government regulation that created the mortgage mess.
As Walter Williams reiterates it in Stubborn Ignorance:

Many politicians and pundits claim that the credit crunch and high mortgage foreclosure rate is an example of market failure and want government to step in to bail out creditors and borrowers at the expense of taxpayers who prudently managed their affairs. These financial problems are not market failures but government failure. The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.

The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."

Why aren't people buying CFL bulbs?

There was an article in USA Today, The shape of lights to come? Not everyone's buying it, which discusses the reasons why despite all mandates and publicity people are still refusing to buy CFL bulbs. Here are a few reasons:

• They don't start out at full brightness. The bulbs can take up to a minute to reach full glow.
• They're temperature-sensitive. If it gets much below 30 degrees, they won't start up very quickly. CFL bulbs also burn out quicker if they're in a hot environment such as inside a light fixture. If you put it in an enclosed fixture, maybe it will last 3,000, not 10,000
• One size does not fit all. The more light a CFL puts out, the bigger it must be. The CFL equivalent of a 60-watt bulb is tiny. The 120-watt equivalent is bigger and won't fit in many lamps and fixtures
• Many CFL bulbs don't work well with dimmer switches and three-way light fixtures. When used with a dimmer switch, CFL bulbs typically will dim to about 20% of their full intensity and then cut out. When used in a three-way light fixture, many CFL bulbs will pop, hiss and buzz.

The article doesn't refer to the environmental hazards of having a mercury-laden hot bulb break in your house. Or to the hassle of disposing of CFL bulbs.
I see this as a basic matter of choice. Currently, it's estimated that 10% of households have CFL bulbs. Congress is now mandating everybody to use these bulbs. It's not enough that they want to tell you what school to go to, what food to eat and what car to drive, now they tell you how to light up your house.

Random Thoughts: Private vs Public Ownership

As my friends know, I tend to run quite a lot. A few days ago, after the snowstorm, I was running through my neighborhood. The roads were already cleaned, and the sidewalks were clean too. Well.... with a few small exceptions. All sidewalks in front of private homes were cleaned, but whenever I had to pass by a small park, green acres or city lot, it was snowy and slushy and had to jump on the road or step in deep snow.

This is a basic economic principle: private owners take better care of property than public owners (the city, the state or the feds). Private ownership is the key to higher living standards, not government control. Ever thought why ALL wildfires are starting on public lands? And I said it's an economic principle, not a political one, because this is not just about the government. It's simply about private ownership vs. the rest. Another example: while there is an endless supply of goldfish, the whales are often considered an endangered species. Why? Because goldfish are privately raised and sold, while whales are a common resource. It's private owners that are vested into preserving a resource.

Healthcare spending with other people's money

Prof Mark Perry found a very good explanation to the rising healthcare costs

According to Dr. David Gratzer of the Manhattan Institute, in 1960 about half of health-care expenditures were directly controlled by consumers. Today, it is about 15%. Over the same period in which consumers have relinquished control, per-capita health-care spending has quintupled and costs have skyrocketed.

He then suggests the following example:

Now imagine how your spending on food, travel, clothing, automobiles, cell phone plans, housing, etc. would change if you only paid 15% of the total cost out-of-pocket.
1. You'd eat a lot better, and so would your dog, e.g. you'd both eat a lot more steak.
2. You'd always travel first-class.
3. You'd get a Jaguar instead of a Ford Focus, or you'd get 2 Ford Focuses instead of one.
4. You'd get 2,000 minute per month plan, instead of a 500 minute plan.
What would happen to the prices of food, cars, etc.? Up, Up, Up.

And another interesting quote from PJ O'Rourke: If you think health care is expensive now, wait until you see how much it costs when it is free.

The Myth of Scandinavian Wealth

In a New York Times article titled We're Rich, You're Not. End of Story, Bruce Bawer (a Times contributor currently working in Norway) debunks the fairy tale of Nordic states abundance:

In Oslo, library collections are woefully outdated, and public swimming pools are in desperate need of maintenance. News reports describe serious shortages of police officers and school supplies. When my mother-in-law went to an emergency room recently, the hospital was out of cough medicine. Drug addicts crowd downtown Oslo streets..... After I moved here six years ago, I quickly noticed that Norwegians live more frugally than Americans do. They hang on to old appliances and furniture that we would throw out. And they drive around in wrecks. In 2003, when my partner and I took his teenage brother to New York - his first trip outside of Europe - he stared boggle-eyed at the cars in the Newark Airport parking lot, as mesmerized as Robin Williams in a New York grocery store in "Moscow on the Hudson."..... Even the humblest of meals - a large pizza delivered from Oslo's most popular pizza joint - will run from $34 to $48, including delivery fee and a 25 percent value added tax. Not that groceries are cheap, either. Every weekend, armies of Norwegians drive to Sweden to stock up at supermarkets that are a bargain only by Norwegian standards. And this isn't a great solution, either, since gasoline (in this oil-exporting nation) costs more than $6 a gallon.

Mr. Bawer mentions a study which ranked the 50 US states and 15 EU members based on GDP and purchasing power. Here are some of the results:

The only European country whose economic output per person was greater than the United States average was the tiny tax haven of Luxembourg, which ranked third, just behind Delaware and slightly ahead of Connecticut. The next European country on the list was Ireland, down at 41st place out of 66; Sweden was 14th from the bottom (after Alabama), followed by Oklahoma, and then Britain, France, Finland, Germany and Italy. Alternatively, the study found, if the E.U. was treated as a single American state, it would rank fifth from the bottom, topping only Arkansas, Montana, West Virginia and Mississippi.

There is an explanation for these rankings:

Economic growth in the last 25 years has been 3 percent per annum in the U.S., compared to 2.2 percent in the E.U. That means that the American economy has almost doubled, whereas the E.U. economy has grown by slightly more than half. The purchasing power in the U.S. is $36,100 per capita, and in the E.U. $26,000 - and the gap is constantly widening.

And there is another report from the international accounting company KPMG, which took into account actual disposable income (after taxes) and adjusted cost of living.

Scandinavians were the poorest people in Western Europe. Danes had the lowest adjusted income, Norwegians the second lowest, Swedes the third.

More on how the Government Encouraged the Mortgage Crisis

There are two articles in today's press about the roots of the mortgage crisis.

Thomas Sewell summarizes these causes in an interview:
The government has brought on the housing problem, partly by these very low interest rates, which encouraged many people to go way out on a limb. They’ve brought it on by highly restrictive building policies, which have caused housing prices to skyrocket artificially. And they’ve brought it on by the Community Reinvestment Act, which presumes that politicians are better able to tell investors where to put their money than the investors themselves are. When you put all that together, you get something like what you have.

In the NY Post, Stan Leibowitz goes further into investigating that last element - The Community Reinvestment Act, which mandates lenders to not discriminate borrowers based on the income level. It encourages loans to subprime lenders, alleging discrimination against them. He points out that there was one lender which was praised by community activists as a "paragon of nondiscriminatory lending". Its name? Countrywide.

Are taxes a threat to prosperity?

Arthur Laffer has a very intersting piece in today's Wall Street Journal, The Tax Threat to Prosperity.
Mr. Laffer uses hard data and statistical research to prove that:

• lower marginal tax rates (taxes for the highest-earners) result in bigger tax revenues
• lower rates for the smaller tax brackets have the opposite result - smaller tax revenues

Are Government regulations the cause of all troubles?

Walter Williams has an interesting editorial today on the subprime crisis, and the item that drew my attention is its mention of the Community Reinvestment Act of 1977. It appears as this is another example of Government interference with the free markets, and it mandates lenders to offer home ownership opportunities to underserved populations, and each bank must meet the credit needs of the entire community. In other words, this act that was opposed by virtually all economists forces banks to lend to subprime borrowers. It's like affirmative action and equal opportunity for the banking industry. Do you see any link between this and the subprime problems??

I don't think we need to argue anymore that government regulations are only causing more problems. The Freakonomics guys had an article yesterday in the New York Times in which they show, in their own style, how the Americans with Disabilities Act only helps increase unemplyment for americans with disabilities, while the Endangered Species Act does more to endanger the species on the list than to protect them.

When will politicians, especially liberals, udnerstand that the Government cannot fix externalities, and it should just leave the free markets take care of the problems??

Economics 102: Mortgages and economic stimulus

Today I read two very informative articles about some hot topics in the economy:

• Mortgage securitization: the underlying mechanisms of the mortgage market and what went wrong (from Econbrowser)
• Stimulus and superstitions: how the Government and the Fed affects the aggregate demand, and would it work? (from National Review)

New York Times advocating Free Trade??

OK, I lived to witness this... NY Times publishing an op-ed in support of Free Trade: "What to Expect When You’re Free Trading" (by Prof Steven Landsburg).
It's probably in response to the wacko idea of compensating people for job losses due to free trade and outsourcing. What's worse is that even candidates looking for the conservative vote advanced this crazy, populist theory.

From Prof Landsburg's article: Suppose, after years of buying shampoo at your local pharmacy, you discover you can order the same shampoo for less money on the Web. Do you have an obligation to compensate your pharmacist? If you move to a cheaper apartment, should you compensate your landlord? When you eat at McDonald’s, should you compensate the owners of the diner next door?

It's the employees who bear the burden of the Corporate Tax

A just released Treasury research paper shows who bears the burden of the corporate tax. Just when presidential candidates talk about increasing corporate taxes, just to squeeze those greedy, economy boosting, paycheck providing businessman, the Treasury research reaches the conclusion:

The incidence of the corporate income tax is an important issue for designing tax policy. Who bears the corporate income tax can affect overall conclusions about the progressivity of the tax system. Policy analysts have often made assumptions about how to allocate the corporate income tax in measuring the distribution of tax burdens.

A common assumption, based on theoretical models of tax incidence, is that capital (i.e. shareholders) bears the burden of the corporate income tax. Recent empirical work using cross-country data on corporate taxes and wages suggests reconsidering this assumption; labor may actually bear a substantial burden from the corporate income tax.

It shows how a 1% increase in the Corporate Tax will result, in the long run, in an almost 1% decrease in wages.