The Economic Way of Thinking

Fannie and Freddie as the Biggest Losers

The two are expected to pay dividends on their taxpayer-financed preferred stock, and how?  Through further taxation:

The firms have made clear that they may only be able to pay the preferred dividends they owe taxpayers by borrowing still more money . . . from taxpayers. Said Fannie Mae in its most recent quarterly report: "We expect that, for the foreseeable future, the earnings of the company, if any, will not be sufficient to pay the dividends on the senior preferred stock. As a result, future dividend payments will be effectively funded from equity drawn from the Treasury."

The loss cap is being lifted because the government has directed both companies to pursue money-losing strategies by modifying mortgages to prevent foreclosures. Most of their losses are still coming from subprime and Alt-A mortgage bets made during the boom, but Fannie reported last quarter that loan modifications resulted in $7.7 billion in losses, up from $2.2 billion the previous quarter.

The government wants taxpayers to think that these are profit-seeking companies being nursed back to health, like AIG. But at least AIG is trying to make money. Fan and Fred are now designed to lose money, transferring wealth from renters and homeowners to overextended borrowers.

More here.

The Carbon Tax vs Cap-and-Trade

Ted Gayer's December 2nd testimony to the U.S. Senate.

Empty Nests

Over at the DOL blog, my friend, Bob Lawson, calculates the yield on an empty nest in Detroit, The Pontiac Silverdome. 

Here's a story on how Beijing's "Bird's Nest" has also become an empty nest. 

Leave It To Leviathan To...

...investigate the practice of charging user fees for airline travel (story here).  The introduction of user fees for baggage, meals, seating, etc. is one of the few things going right for the airline industry, but Congress appears unlikely to leave this new approach to pricing alone:

The reason for the Congressional interest is money. Fees, for the most part, are not taxed, so the government is concerned it is missing out on extra revenue that could help airports.

Penny-pinching travelers may gripe about the fees, but this new inquiry could raise the ultimate cost of tickets, if airlines decide to pass along to their customers the cost of the additional taxes.

A Simple Public Finance Rule

Here's the rule: When the revenue on a tax is negative, repeal the tax!  (Or, at minimum, reduce the outlays!). 

Radical reactions seem especially appropriate when your state is in the red zone or near the red zone; according to this new Pew Report of states, Georgia is close to that point.   

Due to a number of year-end refunds, the state of Georgia's corporate income tax was negative for the month of October.  Lawmakers expect this to turn-around and, unfortunately, don't appear to be considering a repeal or cut in refunds any time soon. 

To quote my friend, Art Laffer, "Yikes!" 

Assorted Links

(1) I often ask students in Public Choice what would happen to policy if the franchise were extended to those under age 18.  Here's an Economist magazine article discussing why the franchise should be extended to prisoners.

(2) Are you a lurker?  I've been posting more Facebook updates to avoid being considered that kind of Facebooker! (HT: Anemone)

(3) My dog is the Nomar Garciaparra of labs.  That is, she has ticks like you wouldn't believe.  We're seriously considering giving this new collar, which was discussed in the Wall Street Journal's "Personal Journal" section today, a try. 

(4) One way of measuring the return on publicly funded stadiums. 

(5) Frank Jacobs discusses the excellent site, "Strange Maps" over at the Freakonomics blog. 

A Reminder: There Are A Million Millions In A Trillion

Don't forget that when you look at GDP figures, which show the flow of income produced in our country during the course of a year.  Also, remember that when you look at the stimulus and stabilization policies.  And, finally, remember that when you look at the national debt. 

ADDENDUM:  Consider this: in a stationary economy, reducing the debt by a mere $1 trillion could be accomplished by levying a 100% tax (confiscation) on a million millionaires who earn one million dollars a year.  And who says taxation and the deficit won't affect incentives and long term economic growth?

Onward And Upward

In one of the few notes I ever received from one of "my" professors, Jim Buchanan, he ended it by writing, "Onward and upward!" 

I know the following graph, which tracks average marginal tax rates over time, was NOT what Professor Buchanan had in mind when writing the above words to me:

HT: Greg Mankiw

Feeding the Beast

Last weekend I attended a great Liberty Fund conference in Santa Fe, NM.  The conference was on the theme of "Deficits, War, and Liberty," and my pals, Chris Coyne (co-director of conference with Gerald O'Driscoll) and Pete Boettke were there.

The first reading assigned for the conference was the final chapter of Smith's Wealth of Nations on public debt.  In the chapter Smith tells us politicians won't raise taxes in the present to finance spending on wars and crises, so they instead push burdens off into the future.  Time and again, however, these burdens turn into large debts, which get debased; Smith tells us he'd prefer debt repudiation, but the State resorts to financial "juggling tricks" instead.  The end result is the "deficits, debts, debasement" problem Pete Boettke frequently brings up in posts about the current financial crisis on The Austrian Economists blog. 

During this session I raised the question of whether expanding R (tax revenue) is really as difficult as Smith and politicians suggest.  Couldn't simple tax reforms, such as the flat or "fair" tax, promise higher revenue for the state?  Couldn't auctioning off of state resources, such as interstate highways and the military, raise tremendous wealth in the here and now?

While Dave is correct that drug legalization probably isn't especially stimulative, legalizing drugs and other victimless crimes could be a small source of tax revenue as well.  And, finally,why not go ahead and raise revenue by allowing seats in government and rights to citizenship to be auctioned off?  In sum, there are creative ways to increase R without inflicting much harm on people in the present.   

To be clear in concluding: I view starving the beast and letting the State die as the first-best solution.  But, if we're in the world of second-best, I'd rather have a State raising revenue by pursuing reforms like the above versus taxing us a lot more later and/or monetizing in the future.  

Deciphering Bono: Actions Sometimes Speak Louder Than Words

Anemone and I had a blast last night rocking out to U2 in the Georgia Dome.  Their play list offered a nice combination of new tunes and classics like "Beautiful Day" and "With or Without You," and their light show was spectacular.  The 71,000+ seat stadium was packed, which is a feat only a few bands could pull off. 

Seeing U2 perform is something we've wanted to do for years because we both love listening to Bono when he has a microphone in hand and Edge behind him.  However, I tend to push the "Mute" button on my remote whenever U2's front-man is on Oprah or without Edge.  While I'm sure Bono's heart is in the right place, good intentions, ill-informed economic reasoning, and tremendous international appeal make for a dangerous combination when it comes to some of his activist efforts.  In other words, unless he's singing, I try to tune out his words as much as possible.

His actions, on the other hand, are sometimes worth paying attention to because they demonstrate that even the great humanitarian, Bono, responds to economic incentives (additional stories here and here).  The Rolling Stones also appear unable to get no satisfaction, and, as a result, they have followed Bono's move to The Netherlands. 

A Sentence to Ponder

"The large expansion in debt in World War II looks like a small blip compared to what's coming if we do not change policy."  That's what John Taylor said recently on his new blog, Economics One. 

Here's the relevant graph accompanying the comment:

 

Gimme Gitmo?

Many of our readers have probably seen the Jeff Daniels commercials promoting business investment in Michigan.  For a while cable news networks and business channels were saturated with the Michigan ads.  Many of the Michiganders I roll with scoffed at the ads and asked the practical question (in Yooper dialect), "At what cost are dem der ads being run?"  My peeps hated the way Michigan was being presented and couldn't believe this was the best idea Michigan's governor, Jennifer Granholm, could come up with for attracting business to Michigan.

The financial crisis of 2008 and the collapse of the US auto market has forced Michigan officials and Granholm to consider making deeper budgets cuts.  It's also forced Granholm to become more entrepreneurial about the state budget and think big about alternative uses of public resources.  In Standish, MI, for example, a prison is set to close on October 1st.  Rather than leave it vacant, officials are working with the federal government to bring jobs to MI by bringing Guantanamo detainees to town.  Many locals in Standish are strongly opposed to the idea out of principle; others worry that a federal prison, which has different job requirements, won't employ the Standish prison guards displaced by the closure.

The Sweet Taste of Victory

Some readers may remember this post of mine from several months back regarding local property taxes and the absurd valuation county assessors reached on our property here in Macon, GA. 

As I promised in the post, I protested.  I expected nothing in return for my efforts, but I was at least going to go down with a fight.  Well, lo and behold, when opening my mail recently I discovered that county appraisers actually considered my appeal and knocked 10% off of my property revaluation.  The new revaluation brings the value in line with the price we paid for our house and a recent appraisal value.

I'm sure our property taxes are still going way up in October, but small moral victories like this one sure taste sweet.

WHAT WOULD YOU SACRIFICE FOR THE HEALTHCARE PLAN?

Forget for a moment whether or not the proposed plan would work.  Let's just consider financing the plan.  Would those in favor be willing to give up the budgets for the Department of Education, the Department of Agriculture, the Department of Labor, and so on -- shut them down -- and redirect those dollars to healthcare?

You see, it's not only a question of healthcare at what cost, but healthcare at whose cost? If bureaus such as these would have to be sacrificed, then at least some of "the" costs would become clear to the plan's supporters and their constituents.  Healthcare over education?  Healthcare over food and the farming tradition?  Healthcare over our great American labor force?  

Instead, the incentives within the political process encourage the costs to be dispersed in the form of higher taxes.  And that takes on the appearance of only shifting expenditures from the private to the public sector.  The "same money" will still be spent, we will be told, but on other (and more visible) projects.  The unseen will remain just that -- unacknowledged and ignored.  Countless entrepreneurial projects, and with them jobs, will be delayed, stifled, or abandoned, but how can we accurately measure that?  How can we convince non-economists, let alone politicians, that "the cost" of the emerging healthcare plan is much more systemic and complex than most of us could only imagine?  And even if we could do so in some vague sense, would that persuade them to reconsider the tradeoff?

 

Snarky Sunday Thought

The same people who get upset about $500 hammers and "Bridges to Nowhere" look up at the sky every Fourth of July and cheer, honk their horns, and call the launching of their city dollars into the sky "tradition" and "freedom."

(I have looked around for price tags for the big fireworks displays--Boston, D.C., etc--to no avail, but I suspect it's a lot of money.  Middletown, CT, for example, spent $60,000 on last night's show.  Elkhart, IN cut their city fireworks budget from $10,000 to $8,000 this year.  Independence, OH taxpayers appear to have doled out $25,000 for their show.  Of course, some cities fund the shows through sponsors and private donations.)