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Posts Tagged ‘Government intervention’

After reading below about Argentina’s decline, several people have emailed to ask how Chile compares. Ask and ye shall receive. This post from last month shows shows Chile, Argentina, and Venezuela. Very powerful, which is why I gave the post such a grandiose title.

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There’s been a lot of coverage of the recent decision by Standard & Poor to warn that the United States has a “negative” outlook.

As Joe Biden would say, BFD. I’m stunned that anyone would care, particularly since the rating agencies have zero credibility. These clowns completely missed Enron. They missed the collapse of Europe. They blew it on the financial crisis, especially with regard to the corrupt government-created mess at Fannie Mae and Freddie Mac.

The fact that one of the rating agencies belatedly warns that America is heading in the wrong direction should elicit only one response, which is, “Where were you guys when Bush did no-bureaucrat-left-behind, the prescription drug entitlement and TARP? And where were you guys when Obama did the faux stimulus and government-run healthcare?”

One of the problems with the rating agencies in this regard is that they narrowly focus on the ostensible ability of an institution (such as a company or government) to repay debt. That’s an important consideration, especially if you are a bondholder, but (even if the rating agencies did a good job) it doesn’t tell us much about why a government is in good shape or bad shape.

This story – and the failure to recognize what’s truly important – is doubly irritating to me since I’m in Buenos Aires for the Mont Pelerin Society meetings. Many of the speakers have focused on the challenges in Latin America, with a lot of attention focused on what went wrong with Argentina.

If I was forced to compress all the analysis into one brief answer, the problem is crony capitalism. Argentina’s economy, for all intents and purposes, is one giant Fannie Mae/Freddie Mac/Obamacare/General Motors/Goldman Sachs Obamaesque dystopia. Government has enormous influence over every major economic decision. It’s like being in the middle of Atlas Shrugged, as political connections are the way to get rich.

This type of approach is far worse than the Scandinavian welfare state. Yes, the official size of government is bigger in places such as Sweden, but the negative role of government intervention is far more pervasive in Argentina.

What makes this so tragic is that Argentina used to be one of the world’s wealthiest countries. Last night, I had the privilege of listening to one of the nation’s leading free market advocates, Dr. Ricardo H. López Murphy, talk about Argentina’s history. In the 1800s and early 1900s, Argentina looked to the United States for inspiration (back in the days when government was a far smaller burden) and he noted that his country was remarkably successful.

Then, beginning around the 1940s, Argentina began to march in the wrong direction. As you can see from this chart, the consequences have been tragic. The nation’s relative ranking has declined precipitously. A country that used to be one of the world’s richest has now fallen way behind.

I also put Hong Kong on this chart to give further evidence that policy matters. Argentina has pursued an Obama policy of government intervention and has declined. Hong Kong has practiced laissez-faire economics and now is one of the world’s richest jurisdictions.

This is a warning to America. There is nothing magical about the United States. If we copy Argentina (actually, a very bad combination of Argentine-style crony capitalism and Swedish-style high-tax redistribution), we will suffer similar consequences.

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Having just done a blog post where I explained that government should stay neutral in fights between labor and management in the private sector, let’s look at a real-world example to understand why.

The millionaire owners and millionaire players from the National Football League are locked in a labor dispute. This is somewhat understandable since there are ten of millions of dollars of profit available and both sides obviously have an interest in getting the biggest slice of that income.

I don’t care who wins, but government has no role in this squabble (or in discussions about college football championships).

In a free society, people have the right to sign contracts. But freedom also means they have a right to not sign contracts. Indeed, these principle of self-ownership and control over property are key defining characteristic of liberty.

That’s why it is disappointing that the players are trying to get the government to tilt the playing field in their direction. Led by big-name stars (for PR value), the players are going to court in hopes of getting the government to use misguided and coercive antitrust laws to hamstring the negotiating position of owners.

The market should determine the outcome of this dispute, however, not the sordid world of government and politics. The players do not have a right to jobs with NFL teams, just as NFL teams do not have a right to force people into playing football.

Yes, it is a “restraint on trade” for NFL owners to not sign contracts, but it is also a “restraint of trade” for top athletes to choose not to play. But this simply illustrates why antitrust laws are so foolish and so inconsistent with the freedom of contract.

Here’s a blurb from the Associated Press report.

…quarterbacks Tom Brady, Peyton Manning and Drew Brees were among 10 players who sued the NFL in federal court Friday, accusing the league of conspiracy and anticompetitive practices that date back years. Their lawsuit asked the court to prevent a lockout. …They filed a request for an injunction that would keep the NFL and the teams from engaging in a lockout. Invoking the Sherman Act, a federal antitrust statute from 1890 that limits monopolies and restrictions on commerce, the players said they were entitled to triple the amount of any damages they’ve incurred. …The players accused the 32 NFL teams of conspiring to deny their ability to market their services “through a patently unlawful group boycott and price-fixing arrangement or, in the alternative, a unilaterally imposed set of anticompetitive restrictions on player movement, free agency and competitive market freedom.” The collective bargaining agreement with the league was expiring Friday.

One caveat. The title of this post says there is no role for government, but that’s not completely true. The courts have a role as neutral arbiters if there is a dispute about whether one side or the other has failed to live up to the terms of a voluntary contract. Though I suppose my caveat has a caveat since the two sides also could pick a private arbitration service to be the neutral judge of any dispute.

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Dana Milbank is a snarky leftist who writes for the Washington Post, but I have to give him credit for an amusing column today about the new big-brother diet guidelines from our incompetent federal government. Here are a few excerpts.

In the late 1970s, before the government began telling us what to eat, 15 percent of adults and 4 percent of children were obese. Now, after 30 years of Department of Agriculture (USDA) dietary guidelines, 34 percent of adults and 20 percent of children are obese. …Agriculture Secretary Tom Vilsack was a nutrition evangelist Monday morning as he rolled out the latest version of the dietary guidelines at George Washington University. …Vilsack said he can help fellow Americans to do the same – as long as they are willing to share with the government a few intimate details about themselves, such as how much they weigh, every morsel of food that passes their lips, and how they occupy themselves every minute of the day and night. …Undoubtedly, Americans would be healthier if they would follow the recommendations, but this sounds like TMI at the USDA. Using the drop-down “activity” menu on the website, you are asked to enter how many minutes a day you do such things as “dressing/undressing,” “sitting on toilet,” “sleeping,” “sitting quietly and watching television,” “slow dancing,” “singing in church,” “casino gambling,” “coal mining,” “washing dishes,” “wrestling” and “butchering animals.”

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The news is going from bad to worse for Ireland. The Irish Independent is reporting that the Swiss Central Bank no longer will accept Irish government bonds as collateral. The story also notes that one of the world’s largest bond firms, PIMCO, is no longer purchasing debt issued by the Irish government.

And this is happening even though (or perhaps because?) Ireland received a big bailout from the European Union and the International Monetary Fund (and the IMF’s involvement means American taxpayers are picking up part of the tab).

I’ve already commented on Ireland’s woes, and opined about similar problems afflicting the rest of Europe, but the continuing deterioration of the Emerald Isle deserves further analysis so that American policy makers hopefully grasp the right lessons. Here are five things we should learn from the mess in Ireland.

1. Bailouts Don’t Work – When Ireland’s government rescued depositors by bailing out the nation’s three big banks, they made a big mistake by also bailing out creditors such as bondholders. This dramatically increased the cost of the bank bailout and exacerbated moral hazard since investors are more willing to make inefficient and risky choices if they think governments will cover their losses. And because it required the government to incur a lot of additional debt, it also had the effect of destabilizing the nation’s finances, which then resulted in a second mistake – the bailout of Ireland by the European Union and IMF (a classic case of Mitchell’s Law, which occurs when one bad government policy leads to another bad government policy).

American policy makers already have implemented one of the two mistakes mentioned above. The TARP bailout went way beyond protecting depositors and instead gave unnecessary handouts to wealthy and sophisticated companies, executives, and investors. But something good may happen if we learn from the second mistake. Greedy politicians from states such as California and Illinois would welcome a bailout from Uncle Sam, but this would be just as misguided as the EU/IMF bailout of Ireland. The Obama Administration already provided an indirect short-run bailout as part of the so-called stimulus legislation, and this encouraged states to dig themselves deeper in a fiscal hole. Uncle Sam shouldn’t be subsidizing bad policy at the state level, and the mess in Europe is a powerful argument that this counterproductive approach should be stopped as soon as possible.

By the way, it’s worth noting that politicians and international bureaucracies behave as if government defaults would have catastrophic consequences, but Kevin Hassett of the American Enterprise Institute explains that there have been more than 200 sovereign defaults in the past 200 years and we somehow avoided Armageddon.

2. Excessive Government Spending Is a Path to Fiscal Ruin – The bailout of the banks obviously played a big role in causing Ireland’s fiscal collapse, but the government probably could have weathered that storm if politicians in Dublin hadn’t engaged in a 20-year spending spree.

The red line in the chart shows the explosive growth of government spending. Irish politicians got away with this behavior for a long time. Indeed, government spending as a share of GDP (the blue line) actually fell during the 1990s because the private sector was growing even faster than the public sector. This bit of good news (at least relatively speaking) stopped about 10 years ago. Politicians began to increase government spending at roughly the same rate as the private sector was expanding. While this was misguided, tax revenues were booming (in part because of genuine growth and in part because of the bubble) and it seemed like bigger government was a free lunch.

Eventually, however, the house of cards collapsed. Revenues dried up and the banks failed, but because the politicians had spent so much during the good times, there was no reserve during the bad times.

American politicians are repeating these mistakes. Spending has skyrocketed during the Bush-Obama year. We also had our version of a financial system bailout, though fortunately not as large as Ireland’s when measured as a share of economic output, so our crisis is likely to occur when the baby boom generation has retired and the time comes to make good on the empty promises to fund Social Security, Medicare, and Medicaid.

3. Low Corporate Tax Rates Are Good, but They Don’t Guarantee Economic Success if other Policies Are Bad – Ireland used to be a success story. They went from being the “Sick Man of Europe” in the early 1980s to being the “Celtic Tiger” earlier this century in large part because policy makers dramatically reformed fiscal policy. Government spending was capped in the late 1980 and tax rates were reduced during the 1990s. The reform of the corporate income tax was especially dramatic. Irish lawmakers reduced the tax rate from 50 percent all the way down to 12.5 percent.

This policy was enormously successful in attracting new investment, and Ireland’s government actually wound up collecting more corporate tax revenue at the lower rate. This was remarkable since it is only in very rare cases that the Laffer Curve means a tax cut generates more revenue for government (in the vast majority of cases, the Laffer Curve simply means that changes in taxable income will have revenue effects that offset only a portion of the revenue effects caused by the change in tax rates).

Unfortunately, good corporate tax policy does not guarantee good economic performance if the government is making a lot of mistakes in other areas. This is an apt description of what happened to Ireland. The silver lining to this sad story is that Irish politicians have resisted pressure from France and Germany and are keeping the corporate tax rate at 12.5 percent. The lesson for American policy makers, of course, is that low corporate tax rates are a very good idea, but don’t assume they protect the economy from other policy mistakes.

4. Artificially Low Interest Rates Encourage Bubbles – No discussion of Ireland’s economic problems would be complete without looking at the decision to join the common European currency. Adopting the euro had some advantages, such as not having to worry about changing money when traveling to many other European nations. But being part of Europe’s monetary union also meant that Ireland did not have flexible interest rates.

Normally, an economic boom drives up interest rates because the plethora of profitable opportunities leads investors demand more credit. But Ireland’s interest rates, for all intents and purposes, were governed by what was happening elsewhere in Europe, where growth was generally anemic. The resulting artificially low interest rates in Ireland helped cause a bubble, much as artificially low interest rates in America last decade led to a bubble.

But if America already had a bubble, what lesson can we learn from Ireland? The simple answer is that we should learn to avoid making the same mistake over and over again. Easy money is a recipe for inflation and/or bubbles. Simply stated, excess money has to go someplace and the long-run results are never pleasant. Yet Ben Bernanke and the Federal Reserve have launched QE2, a policy explicitly designed to lower interest rates in hopes of artificially juicing the economy.

5. Housing Subsidies Reduce Prosperity – Last but not least, Ireland’s bubble was worsened in part because politicians created an extensive system of preferences that tilted the playing field in the direction of real estate. The combination of these subsidies and the artificially low interest rates caused widespread malinvestment and Ireland is paying the price today.

Since we just endured a financial crisis caused in large part by a corrupt system of housing subsidies for Fannie Mae and Freddie Mac, American policy makers should have learned this lesson already. But as Thomas Sowell sagely observes, politicians are still fixated on somehow re-inflating the housing bubble. The lesson they should have learned is that markets should determine value, not politics.

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I’ve already commented here and here on the government forcing us to use inferior lightbulbs.

The bad news is becoming worse news. Here’s a story from England that was linked on Instapundit, showing how big business (which conspired with the politicians to get rid of high-quality incandescent bulbs) will now reap a windfall selling the new CFL bulbs at much higher prices. Here’s an excerpt from the Daily Mail.

The price of energy-saving light bulbs will treble as the final supplies of traditional bulbs dry up, industry experts have warned. The Government has ordered energy companies to scrap the subsidies that have kept the price of eco-bulbs artificially low for the last few years. At the same time, manufacturers are increasing wholesale prices to take advantage of the European ban on ‘energy guzzling’ old-style bulbs. Retailers also claim bulbs that currently cost only 33p are expected to sell for more than £1 within three months. Some will cost £3 or more. The move comes as Britain is gearing up to phase out the last incandescent light bulbs in an effort to meet climate change targets. The EU has already banned shops from buying stocks of 100watt bulbs and stopped them stocking up on any type of frosted incandescent bulbs.

The only silver lining to this dark cloud is that (at least I don’t think) CFLs are not subsidized in the United States. So while it is likely that prices will increase once there no longer is competition from incandescent bulbs, hopefully American consumers will not face the same big price hikes as their British cousins.

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Walter Williams explains why politicians and bureaucrats shouldn’t have the power to tell us what we’re allowed to buy.

At first blush, the mercantilists’ call for “free trade but fair trade” sounds reasonable. After all, who can be against fairness? Giving the idea just a bit of thought suggests that fairness as a guide for public policy lays the groundwork for tyranny. …Last summer, I purchased a 2010 LS 460 Lexus, through a U.S. intermediary, from a Japanese producer for $70,000. Here’s my question to you: Was that a fair or unfair trade? I was free to keep my $70,000 or purchase the car. The Japanese producer was free to keep his Lexus or sell me the car. …The exchange occurred because I saw myself as being better off and so did the Japanese producer. I think it was both free and fair trade, and I’d like an American mercantilist to explain to me how it wasn’t. Mercantilists have absolutely no argument when we recognize that trade is mostly between individuals. Mercantilists pretend that trade occurs between nations such as U.S. trading with England or Japan to appeal to our jingoism. …That’s nonsense. Trade occurs between individuals in one country, through intermediaries, with individuals in another country. Who might protest that my trade with the Lexus manufacturer was unfair? If you said an American car manufacturer and their union workers, go to the head of the class. …it’s never American consumers who complain about cheaper prices. It’s always American producers and their unions who do the complaining. That ought to tell us something.

The only thing I would add is that protectionists and free traders should unite in a campaign to get rid of misguided government policies that make it more difficult for American companies to create jobs and produce goods in America. America’s punitive corporate tax rate, for instance, should be dramatically lowered.

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The invaluable Tim Carney of the Washington Examiner is an expert at exposing the corruption of big government, and his article about for-profit colleges and government-subsidized tuition shows that everybody involved in this fight is sleazy. Unfortunately, no matter who wins, the taxpayers lose. It’s also worth pointing out that the main effect of government-financed tuition payments and loans is to drive up the cost of college – another example of the third-party payer phenomenon.

Here are key passages from Tim’s column.

For a case study in the tawdry and twisted world of Washington policymaking and lobbying, you can’t do much better than the current fight over the subsidies and regulations for for-profit colleges. Behind every argument is an ulterior motive, around every corner is a conflict of interest, and in every pocket there is cash procured through government policy supposed to serve the public good.
…don’t confuse “for-profit” with “capitalist.” Without federal subsidies in the form of Pell grants and federal loan guarantees, the for-profits might not exist. At the very least, they would be much smaller. About 87 percent of the revenue at the biggest for-profits comes from federal taxpayers, according to the Chronicle of Higher Education. They belong to a class of company that I call Subsidy Sucklers.
Sen. Tom Harkin, D-Iowa, earlier this year declared war on the for-profits, ordering the Government Accountability Office to investigate these schools’ marketing techniques. The GAO produced a scathing condemnation.
…But a closer look revealed a murkier picture. The GAO last month corrected the paper, modifying 16 of the report’s 28 findings. At Education Week, Rick Hess wrote, “all 16 of the errors run in the same direction — casting for-profits in the worst possible light.” The credibility of Harkin’s star witness in his August hearing, Steven Eisman, was also called into question.
Eisman is a short-seller who reportedly stands to make big money if the stocks of for-profit colleges collapse. He also is a vocal lobbyist for new regulations that would cripple these colleges. The term for Eisman is Regulatory Robber Baron.
… Bill Clinton’s former special counsel Lanny Davis first flagged Eisman’s role in a Politico op-ed, and liberal ethics “watchdog” Melanie Sloan followed up, criticizing Harkin for allowing Eisman to testify, sparking the liberal American Prospect to ask in a headline, “Why Are Progressives Fighting Student Loan Reform?” The answer: money.
On September 17 — about three months after Davis’s op-ed — Davis registered as a lobbyist for the Coalition for Educational Success, a trade group of for-profit colleges. Then in November, Sloan announced she was joining Davis’s lobbying firm. Also lobbying for the for-profit colleges are six former Democratic congressmen and three former Republican lawmakers.
This tale has no good guys, but it does have a moral: When you inject government into an industry, you get some pretty unsavory results.

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