Monthly Archives: August 2007

Bush Bailout?

Was President Bush’s announcement that he is seeking to reform the FHA to assist strapped homeowners a bailout or an exercise in politics?

Our friend Barry Ritholtz says it seems like a political move before the holiday weekend.

Katrina

Peter Boettke discusses the recovery effort on the second anniversary of Hurricane Katrina:

On the second anniversary of Hurricane Katrina’s landfall in the Gulf Coast, received wisdom and today’s media coverage dictates that the Gulf Coast has barely begun to recover. This is not a fair assessment of the facts. Recovery is occurring on a neighborhood level; views of recovery based on political jurisdictions do not reflect accurately the quality or sustainability of the recovery. The ability to leverage social capital and make use of the leadership emanating from the voluntary sector is critical to promoting recovery.

Government-led recovery programs are in many ways causing more harm than help. By failing to clearly articulate the rules that govern the rebuilding process and the resources that governments will provide, governments at all levels have made it difficult for residents and business owners to make informed and intelligent decisions about whether and how to rebuild.

Community organizations, businesses, nonprofit groups and religious institutions help families make informed decisions about rebuilding. Reopened businesses, resumption of church services and similar phenomena send positive signals that communities are coming back. Residents making decisions about returning rely heavily on these signals in the face of conflicting or incorrect signals from authorities.

Economic History

Those who know me well, know that I have a soft spot for anything regarding economic history. Thus it was a pleasant surprise when Brad DeLong recently posted two excellent essays The World in 1900: The View from 1900 and The World in 1900: Poverty.

Read them both.

30 Days

Lew Rockwell lays out his 30-day plan for less government. My favorite line:

DAY FOUR: The minimum wage is reduced to zero, creating jobs for ex-federal bureaucrats at their market wage.

Kudlow’s Deflation

I have great respect for Larry Kudlow and his affinity for free markets, but I am not sure where he is coming from when discussing possible deflation:

There’s housing price deflation: The Case/Shiller home-price index is off 3.5 percent over the past year.

There’s commodity deflation: Gold prices are off nearly 15 percent from their 2006 highs. Stock prices for materials are off nearly 13 percent since July 19, while metal and mining shares are off 16 percent.

There’s the deflation of loan values, both CDOs and CLOs.

And there’s the deflation of the Treasury bill rate from 5 percent to 4 percent.

Larry is largely discussing specific falling prices, not deflation. In other words, he is speaking in anecdotes that do not reflect the overall price level. In fact, by any measure of the overall price level, prices are rising — and rising at a rate above the Federal Reserve’s comfort zone. Thus inflation is still a concern. Meanwhile, Larry has fallen for the old adage, if we ignore the prices that are rising, there is evidence that prices are actually falling.

I think that Larry is more concerned about housing and its effects on the economy than he would like to admit.

Addendum: I better not tell our friend Barry Ritholtz. This is his pet peeve.

Thoughts on Tipping

Tipping is somewhat of a bizarre practice because it suggests that you are rewarding a person for a job well done. However, often times it merely reflects societal norms. For example, when I go to a restaurant, I always tip the waiter/waitress. How much I leave largely depends on the service, but their performance has to be awfully bad for me to neglect to leave a tip altogether.

I am particularly interested in situations where it is not the norm to leave a tip. For example, I went through an automated car wash this morning. After the car passes through, two or three employees of the car wash then proceed to dry the car. I may be mistaken, but this is not a situation that requires a tip by some societal norm. Some employees are better than others and, in my view, they should be rewarded with a tip. However, I do not like to roll down my window after a car wash and thus I sometimes give the tip prior to the wash.

So here are my questions. Is this efficient? Should I tip before they have completed the job? Will this provide an incentive to do a good job? My rather unscientific observations suggest that they do a good job when tipped prior to the wash. However, since I do not know any of the workers I cannot be sure that this is as a result of the tip or the natural work ethic of the employees.

Any thoughts?

Radicals for Capitalism

Will Wilkinson and Brian Doherty discuss libertarianism over at Bloggingheads.

Robert Frank Discusses Economics

The Return of Gold?

Brian Doherty interviews Nathan Lewis, who is optimistic about a return to the “gold peg.”

Industrial Policy and Iraq

Joshua Holland are blaming the Bush administration for the failures of the Iraqi economy. First, Joshua Holland:

[T]he radical restructuring of Iraq’s political economy has received … little critical attention…. It was taken as a given that after knocking off Saddam, we’d rapidly privatize huge swaths of Iraq’s national companies, get rid of hundreds of thousands of civil servants, completely restructure the country’s tax and finance laws and throw Iraq’s economy wide open for foreign multinationals. …

Putting “free-markets” before what are recognized as “best practices” in post-conflict reconstruction had an immediate relationship with Iraq’s insurgency.

[...]

Common sense should have dictated that, after the destruction of its infrastructure and the dismantling of its (brutal but stable) government, Iraq … needed jobs and basics like electricity, water and sewage systems, and it needed them quickly.

Mark Thoma chimes in:

I wonder if adherence to that ideology rather than adopting a top-down planned approach that kept formerly state-run enterprises open and running (and opened more if needed) from the start would have changed the subsequent course of events. Forget efficiency, there was plenty of time ahead to worry about that, just put people to work doing something, anything. There was plenty that needed to be done.

The authors are correct to criticize the Bush administration, however the fundamental flaw in each analysis is that the introduction of and a dogmatic adherence to free market philosophy is what doomed the Iraqi economy and led many civil servants to join the insurgency. In reality, it is a top-down social planning approach taken on by the administration that caused the economy to sputter. Holland, himself highlights Paul Bremer’s 100 Orders, specifically numbers 1 and 39 (firing Ba’ath party members; failing to give Iraqi businesses preference during reconstruction). Furthermore, the adminstration launched efforts to encourage American retailers to buy Iraqi products. This is hardly what I would call a free market approach.

The authors also succumb to a common oversight. As Frederic Bastiat famously wrote,

“Between a good and a bad economist this constitutes the whole difference—the one takes account of the visible effect; the other takes account both of the effects which are seen and also of those which it is necessary to foresee.”*

Messengers Thoma and Holland fail to take account of what is not seen on more than one account.

Thoma and Holland, behind the veil of what is seen, conclude that had the adminstration should have kept the infrastructure in place. It is easy in hindsight to make this call, but it ignores what is unseen. Suppose the infrastructure had been maintained and that the United States “put people to work doing something, anything.” Would this have improved the economic circumstances in Iraq? Bastiat certainly wouldn’t believe so:

The great Napoleon, it is said, thought he was doing a very philanthropic work by causing ditches to be made and then filled up. He said, therefore, “What signifies the result? All we want is to see wealth spread among the laboring classes.”

[...]

As a permanent, general, systematic measure, it is nothing else than a ruinous mystification, an impossibility, which shows a little excited labor which is seen, and hides a great deal of prevented labor, which is not seen.**

Policies of putting Iraqis to work simply so that the would have “something, anything” to do would likely have been a good short-term emotional solution, but as time passes by the uselessness of these government created jobs provides nothing of value to the economy. While the Bush administration’s plan may not have produced a desirable result, I am not convinced that the alternative proposed by Thoma and Holland would have been successful because top-down planning of any kind is the road to serfdom.

More than anything, the failures to stabilize and grow the Iraqi economy highlight the utter impossibility of nation-building. Free markets that come about through force and are riddled with government (whether domestic or foreign) interventionism are unlikely to succeed under any circumstances.

Is it likely that we would have seen better results if the U.S. had maintained the Iraqi infrastructure? Perhaps. Perhaps not. Unfortunately, the arrogant belief persists that we can mold and plan societies by imposing so-called free market or industrial policies.



* Bastiat, Frederic. “That Which is Seen and That Which is Not Seen”. Bastiat Collection. Auburn, AL: Ludwig von Mises Institute, 2007, p. 1.

** Ibid, p. 17 – 18.