Wednesday, September 30, 2009

The Stimulus Helped the Economy? Not So Fast!

President Barack Obama, Ben Bernanke, and Paul Krugman claim the “stimulus” and other interventions have “pulled the economy from the brink.” And even that’s not enough, as Krugman notes in a recent New York Times blog post:
In a rational political and policy environment, the implication of all this [the fading economy] would be clear: we need more stimulus. Yes, it would add to federal debt — but isn’t that worth doing to help reduce an output gap that’s wasting our potential at the rate of more than a trillion dollars a year?

The “solution,” Krugman says, is for government to create more debt and print more money. Since he already publicly claims the printing of money creates a “free lunch,” he would approve of nearly any way the money appropriated by Congress would be spent, just as long as there is spending.

Lest anyone think the “stimulus” is spent wisely, think again. One building block of economic analysis is “utility theory” in which people rank their preferences from highest to lowest. For example, while I might want to take a vacation, it is more important that I spend my income first on my house payment, then food and other expenses that will support my family.

If there is money left over, perhaps then I can take my trip. Likewise, when we want governments to spend money on various projects, we assume that the most important items will be first in line. (One can make a case that just about all government spending is foolish and reckless, but for purposes of this article, I will assume that at least some government spending has social value.)

According to the promoters of the “stimulus,” the money has gone to hard-pressed states and localities to fill in the gaps caused by declining tax revenues. In some places this has meant that lower-valued projects have been abandoned or put on the back-burner, which fully reflects the human valuation process.

If the “stimulus” were about helping states and localities through hard times, the government would want them to spend it on the most-important projects, or perhaps even hold that money in reserve to ensure solvency through the recession. Instead, Congress has directed that money be spent on things that local and state governments would never consider to be priorities.

I have to do nothing more than drive to work to see this foolishness in action, as two “stimulus”-funded projects are in my backyard. I live in Garrett County, Maryland, and have to drive over Big Savage Mountain, a 3,000-foot-high ridge, to go to Frostburg State University, which is five miles east of my home. If I take U.S. 40 over the mountain, I often have to stop and wait for several minutes while work crews expand the drainage ditches along the steep road on the mountain’s east side.

If ever there were a make-work project, this is it. In the more than eight years I have lived in this area, I never have witnessed any problems caused by the old drainage ditches and there really did not seem to be any problems there caused by cascading storm water.

However, the other project on I-68 on the east side of Big Savage Mountain makes the drainage undertaking look to be fiscally sound. The interstate highway has a narrow median with a guardrail down the middle. This past week, drivers going east and west were shuttled into one lane to accommodate workers putting down rolls of new sod in the narrow median strip. If ever there were a worthless project, this was it – and even my children commented on its uselessness.

If these “stimulus”-funded undertakings are typical of what the Congress directed for states and localities, then the “leaders” of the U.S. government are even more delusional than I had imagined. Not only are they handing out money in a manner that imperils our future, but they also are demanding that it be spent on phantom things that intelligent people never would need in the first place.

This is not “change we can believe in.” This is government as usual.

Tuesday, September 29, 2009

Free Plaxico Burress!

Although Wilt Alston has written a piece good enough to be the Last Word on the unjust imprisonment of Plaxico Burress, nonetheless, I figure I will do mop-up duty, as well as second his excellent commentary. Indeed, I believe that Burress is a political prisoner who is being disguised by the press as a felon. Given that the mainstream media today is little more than a mouthpiece for the political classes, I think it is safe to say that the press does not "get it," nor ever will.

I was struck by the quote by NYC Mayor Michael Bloomberg that Wilt used at the beginning of the article, and I will present it again:

"If we don't prosecute [him] to the fullest extent of the law, I don't know who on Earth we would. It makes a sham, a mockery of the law. And it's pretty hard to argue the guy didn't have a gun and it wasn't loaded."

Usually, anything that takes Bloomberg’s mind off wanting to establish the anti-smoking policies of Adolph Hitler (as well as Bloomberg wanting to tell the rest of us what we can and cannot eat) is a good thing, but not in this case, as I would rather hear him lecture against Twinkies than hear his flawed reasoning for locking someone in a government cage. Hizzoner’s quote does not tell me that, somehow, the judicial apparatus in the Large Malus Domestica is geared up to give "justice for all." Instead, it seems to me that the government of the city has engaged in selective prosecution – all in the name of "blind justice."

Once upon a time, the authorities would have seen Burress’s wound as being substantial punishment for not having his equivalent of a firearms hall pass, and he would have received a legal slap on the wrist – which would have been less unjust than throwing him into the can for two years. I seem to remember that 40 years ago, Ted Kennedy managed to kill someone, a small detail that the authorities on the Kennedy payroll in Massachusetts seemed to forget when they charged him with a misdemeanor for "leaving the scene of an accident."

That Kennedy received a recent near-million-dollar burial of which the extravagance exceeded that of someone from an actual royal family tells us that the political classes are being held to much different standards than someone who actually is a valuable member of society. (Catching the winning touchdown pass in the Super Bowl is a much greater and more socially-useful feat than ramrodding God-awful bills like "No Child Left Behind" and worse into law and tom-catting with Christopher Dodd through the District, and having sex with a bimbo on a sailboat in full view of the rest of the world.)

No, Plaxico Burress managed to violate a "law" that really should not be a law, period. This is a statute that declares that people in NYC are not permitted to engage in self-defense without permission, while city employees wearing blue uniforms and badges are entitled to empty the clips of their handguns into unarmed people and not go to jail.

New Yorkers were not always so squeamish about firearms. John Lott writes that a few decades ago high school students who were on rifle teams would carry their rifles on the subway and into their schools, where the guns were put into safe keeping until the students went to practice at a shooting range. Unfortunately, New York has political leadership that no longer realizes that just because a person is carrying a private firearm does not mean the person is going to shoot other people.

Bloomberg is fond of saying, "I don’t know why people carry guns. Guns kill people." No doubt, Hizzoner demands that the police that tend to his entourage be disarmed. Oh, I forgot; only privately-owned guns "kill people." Cops never shoot anyone, and they certainly never kill people and certainly not unarmed people.

The imprisonment of Plaxico Burress reveals a real smugness with the New York political classes, as though a Great Deed of Justice has been carried out. In the name of "justice for all," the authorities in New York have carried out selective prosecution, making sure that a high-profile person who has offended the mayor’s worldview goes to prison.

The political classes – and especially the New York City political classes – protect their own. When the city collapsed financially in 1975, it turned out that city officials were selling municipal bonds to pay off previously-issued municipal bonds, an act that clearly broke a host of fraud statutes. However, no one went to jail despite the fact that the city officials clearly were engaged in a financial swindle that would dwarf even what Bernie Madoff did 30 years later.

Far more people were harmed by New York’s financial fraud than were hurt by Plaxico Burress carrying a loaded handgun. New York cops each year kill innocent people, yet they pay no price. Burress is in jail, while city employees who are guilty of far greater crimes go free. That is the lesson of the imprisonment of Plaxico Burress and none other.

Thursday, September 24, 2009

Did Cash for Clunkers “Revitalize” the Auto Industry?

During a recent conversation with a friend, he told me that the Cash for Clunkers program had “done wonders” for the auto industry. Indeed, he hardly is alone.

Automotive News recently editorialized that the program “worked,” and now it is time to “build on its success.” The editorial declared:

The August U.S. light-vehicle sales tally reported last week proves that the government’s cash-for-clunkers program was a huge success. Now it’s up to automakers and their dealers to be clever marketers and salespeople to maintain and build on the clunkers momentum.

From the beginning, there were doubters who, for political or other reasons, said the clunkers program was little more than a federal handout to the Detroit 3. But the rising tide of enthusiasm among U.S. consumers for purchasing new cars lifted many automakers, not just those with a fleet full of fuel-sippers.

The writer adds:

Better yet, dealers say cash for clunkers sparked a positive shift in consumer attitudes that will lift new-car sales in the months ahead, especially if economists are right about positive indicators.

This editorial was written two weeks ago, The industry has come back to earth with a thud since then. The Boston Globe reports that things are rather quiet in the aftermath:

...once the federal money dried up, so did the sales rally. Now, customers at dealerships like Silko Honda in Raynham are few and far between, and inventory is once again accumulating.

Manager Adam Silverleib said business was “pretty intense” as a result of the federal stimulus program, with the dealership hustling to accommodate customers and handle the piles of paperwork required for them to receive reimbursement on vouchers. “Now we’re kind of back to where we were in the spring,’’ he said.

And what was it like in the spring? It was called a recession, with recession-like sales figures to boot. In other words, one can liken the Cash for Clunkers program to throwing lighter fluid on damp wood. Flames will rise up for a few minutes, but unless the wood catches fire, the lighter fluid was next-to-worthless.

Contrary to what Automotive News breathlessly declared, the Cash program pretty much was what anyone with common sense and decent economic training could have predicted. It spurred sales for a while, but after the money dried up, so did the new car sales.

I contend, however, that where Automotive News saw “momentum” for the auto industry, in reality this program has brought long-term economic damage. To understand why the program was, on net, economically harmful, one first must understand Frederic Bastiat’s “broken window fallacy.”

Since most, if not all, readers are familiar with this fallacy, I don’t need to repeat it. However, the most important part is that while the townspeople believed the broken window brought prosperity, it actually reduced their wealth because they were forced to use resources to recreate a window which already had existed, thus depriving the community of the use of those resources elsewhere.

With Cash for Clunkers people turned in vehicles on which they were making small if any payments.. In normal situations, if they had wanted another vehicle, many would have traded in what they had for another used car or truck. Instead, even though they were given a fairly large down payment, many purchased cars that substantially raised their personal debt.

To make matters worse, the government ordered the dealers to destroy the engines of the so-called clunkers, many of which were not clunkers at all. Thus the government managed to destroy a huge amount of wealth, all in the name of creating wealth. Furthermore, if any automakers or dealers used the Clunker program as a reason to engage in new capital expansion, they quickly will find that those “investments” really are malinvestments, which means they will be worse off in the long run because they diverted resources to lines that won’t be profitable.

Like so many government programs, Cash for Clunkers, while creating some short-run benefits for a few people, will have negative effects in the long run. I suspect that even the editors of Automotive News will realize sooner or later that it was a lemon.

Thursday, September 17, 2009

My Recent Letter to a Federal Judge

I recently wrote this letter to a judge who will be sentencing a man who recently was convicted of "honest services fraud," which is based upon a "law" that I believe is unjust and immoral. (I have written about this "law" here.) The names of the judge and the man being sentenced have been omitted.

Your Honor:

I am writing in connection with the recent conviction of "Mr. X" on the charges of "honest services fraud" and "money laundering." While I am an economist (I am an associate professor of economics at Frostburg State University in Maryland), I also have spent many years writing specifically on federal criminal law and especially so-called white-collar crime. My work has been published in academic journals and magazines such as Reason.

First, I need to say that any conviction for "honest services fraud" troubles me. If there is a vague criminal statute on the books, this is it. If there is a criminal statute on the books that is, de facto, an ex post facto law, this is it. About a week ago, "Mr. X," after reading some of my work on "honest services fraud," emailed me and asked if I would write this letter. I’m not receiving a penny of compensation for this, but am doing it, instead, because I am fully convinced that any conviction under "honest services fraud" is unjust and is an affront to our Constitution and the rule of law.

I say this because there is no real hard and fast definition of "honest services fraud." For example, I am writing this letter in my university office on a university computer. I am using my university stationery and letterhead, and one can argue this falls into the scope of what I do, given I have published academic articles on the subject of federal law. A prosecutor who wished to indict me for "honest services fraud" could jump on this and say that I am providing "dishonest services" to my employer.

Have you ever made a personal call while at work? Have you "surfed" the Internet while at your desk to find sports scores or to purchase something for your private use? If so, an enterprising federal prosecutor could try to indict you, although I doubt that would be the case.

For that matter, I highly doubt that your representative in Congress has fully read any of the bills on which he or she has voted, yet I have seen people indicted and convicted for "honest services fraud" because those people had not read every word in every legal document they had signed. Why is no one from Congress indicted? Let’s call it, "professional courtesy."

Second, the U.S. Supreme Court has decided to hear an "honest services fraud" case (involving Conrad Black), and at least some of the justices have publicly said they are troubled by the implications of this very, very vague law (if we can call it "law," as it goes against every principle for which people like William Blackstone stood).

In other words, "Mr. X" very well might have been convicted of a law that really is not a law and might be struck down by the court, which should trouble everyone involved. (Of course, the "money laundering" statutes automatically kick in when there is a "fraud" case involving money. The idea that the feds pile one law upon another for a single act also troubles me and I believe such actions also are affronts to the Constitution and everything for which the rule of law once stood.)

All too often, federal criminal law is little more than a conviction awaiting someone to be charged. As the economy tanks, we now see federal prosecutors effectively criminalizing business failure when, in reality, much of what we see in many cases such as that of "Mr. X" is a situation in which the financial risks that might have made sense when taken in a financial boom turn into huge liabilities in a downturn. An economist already has testified to you that as much as anything, "Mr. X’s" business failure was more due to the general economy than any "fraud" on his part – if there was any fraud at all.

When recessions happen, unfortunately, enterprising federal prosecutors are all-too-eager to claim that a normal business failure really was the result of fraud, and because they have "laws" that permit them to criminalize just about anything, they usually win what I believe are unjust convictions in court. Thus, a case in which people were up front about their finances suddenly turns into "fraud," not because real-live fraud was committed, but rather because the failure was more spectacular.

Now, let me give you another example. This past year, my pension, which is run by administrators in charge of our pension system, lost 25 percent of its value. Now, this is a major loss to many of us in the Maryland university system, yet I don’t see any federal prosecutors hauling our pension administrators off in handcuffs and chains. Substantively, there really is no difference between our pension losses and the losses suffered by "Mr. X" and others in this particular set of business deals. Both sets of losses were due to the steep economic downturn.

So why do prosecutors go after one person and not another? It is that modern phenomenon we know as "selective prosecution." As one trained in the law for many years, you know that historically, "selective prosecution" has been looked down upon by those people who truly cared about rule of law. As a layperson, all I can say is that a regime of "selective prosecution" is an immoral regime. It is not right; it goes against everything we have been taught in our lives about rightness and fairness and the law itself.

Yes, I know that when "Mr. X" was doing well, he spent a lot of money, drove nice cars, and went to Las Vegas. Yet, college professors also go to conferences in Las Vegas and spend university money. (I have gone to a couple conferences there, myself.) Does traveling to Las Vegas make someone a criminal or somehow demonstrates that a person who did so should be sentenced to a long prison term? As far as I am concerned, what "Mr. X" did with the money he made in previous deals is a non sequitur when it comes to dealing with the issues at hand, even if the press makes a big deal out of it.

As I have stated before, I do not know "Mr. X," nor is he paying me to write this letter. I am doing it because I do not want to see one human being going to prison after being convicted of breaking a law that is so vague and so expansive that every one of us could be put in the dock for violating it.

The great civil libertarian and attorney Harvey Silverglate recently published a new book, Three Felonies a Day, and if you have not read it, I would highly recommend it to you. Mr. Silverglate is a friend and has been a mentor to me for many years, and he takes a very jaundiced view of "honest services fraud" and all that it entails, which means that I have some very wise company in expressing my views against this unjust law.

Thank you for taking time to read this letter. I do hope that it will influence you as you face the very difficult task of sending "Mr. X" to prison.

William L. Anderson

Saturday, September 12, 2009

Obama attacks the poor -- again

President Obama, who supposedly is a man who cares about the poor, has decided that he needs to prop up some of the wealthiest industrial workers in the world, the American labor unions. By levying a 35 percent tariff against tires from China, Obama not only is forcing people to pay more for tires, but this ruling also will result in more traffic deaths and injuries.

Of course, the New York Times has portrayed this move as a "victory" for this country, as though we "win" by being forced to pay more for goods, and especially goods as important as tires. Unfortunately, the Times, which always claims to be on the side of consumers, says nothing in its article about how this will have a negative effect on our economy, making people poorer in the bargain, but enriching people who already are at the top of the wage ladder.

What does this mean for people of lower incomes? It means that many of them either will pay more for tires or they will put off buying new ones, which almost certainly will result in more auto accidents, and more deaths and injuries on the highway. Of course, most of the people who will be killed and injured are not union members, so what does Obama care?

Thursday, September 10, 2009

Like other economists, Krugman also gets it wrong

In 1998 Paul Krugman wrote an attack on the Austrian theory of the business cycle (ATBC), saying that it was about as credible as the “phlogiston theory of fire.” Not surprisingly, he managed not only to mislabel the ATBC (calling it a “Hangover Theory”) but also proved incapable even of describing the theory that had been so well laid out by Ludwig von Mises, F.A. Hayek, and Murray N. Rothbard.

I mention this ten-year-old sarcastic foray into economics because Krugman has struck again, this time in a New York Times Magazine article, “How Did Economists Get It So Wrong?” It turns out, according to the 2008 Nobel Prize winner, that economists falsely claim that capitalism is “perfect”:

Unfortunately, this romanticized and sanitized vision of the economy led most economists to ignore all the things that can go wrong. They turned a blind eye to the limitations of human rationality that often lead to bubbles and busts; to the problems of institutions that run amok; to the imperfections of markets — especially financial markets — that can cause the economy’s operating system to undergo sudden, unpredictable crashes; and to the dangers created when regulators don’t believe in regulation.

That was not the only problem with economists, as Krugman sees it. Not only did they have a wrong-headed faith about free markets, but they also had forgotten the Great Lessons of Keynesianism:

Keynes did not, despite what you may have heard, want the government to run the economy. He described his analysis in his 1936 masterwork, “The General Theory of Employment, Interest and Money,” as “moderately conservative in its implications.” He wanted to fix capitalism, not replace it. But he did challenge the notion that free-market economies can function without a minder, expressing particular contempt for financial markets, which he viewed as being dominated by short-term speculation with little regard for fundamentals. And he called for active government intervention — printing more money and, if necessary, spending heavily on public works — to fight unemployment during slumps. [Emphasis added.]

He adds:

It’s important to understand that Keynes did much more than make bold assertions. “The General Theory” is a work of profound, deep analysis — analysis that persuaded the best young economists of the day. Yet the story of economics over the past half century is, to a large degree, the story of a retreat from Keynesianism and a return to neoclassicism.

One should read Henry Hazlitt’s classic The Failure of the “New Economics” to see something other than the fawning prose that Krugman writes about Keynes. There is so much nonsense in these two paragraphs that it would take a large volume to refute it all. I will concentrate on just a few things.

First, it is amusing to see Krugman write that Keynes was concerned about economic “fundamentals,” given that Keynesian theory treats all capital and, indeed, all assets as being homogeneous. There are no economic fundamentals in the Keynesian system; indeed, Keynes (and Krugman) call for inflation, which is general in scope, as a way to end unemployment in specific economic sectors.

Second, like Keynes, Krugman has declared that printing money will solve nearly any economic problem (although he has not used the specific Keynes quote on inflation, that it “turns stones into bread”). As Hazlitt noted in his classic, Economics in One Lesson, inflation always leads to economic disaster.

Third, as the ATBC so aptly points out, it is inflation that creates the boom-and-bust cycles. If inflation is the cause of the problem, then even more inflation cannot be the solution.

Krugman is correct when he says Keynes made “bold assertions,” but one searches The General Theory in vain for something profound. As Hazlitt noted, there is nothing in the book that is both true and original: What is true is not original, and what is original is not true.

Krugman is right that economists “got it wrong.” However, it was not a religious belief in free markets that caused the trouble, but rather government intervention, something Krugman never seems to mention in any of his columns.