January 2012

CBO’s newest estimates of stimulus package’s effects

by Fran Smith on March 3, 2009 · 1 comment

in Economy, Stimulus to Nowhere

Yesterday the Congressional Budget Office posted its year-by-year estimate of the effects of the recently enacted economic stimulus package, the American Recovery and Reinvestment Act of 2009.  CBO’s graph shows three different projections of potential GDP.  Here’s their explanation:

To illustrate the short- and long-run effects of the legislation on output, with CBO’s
January baseline projection of potential GDP set as a reference point, Figure 1 shows
three different projections of the economy’s actual output: CBO’s January baseline
projection of GDP (which does not include the effects of ARRA), GDP using CBO’s
high estimate of the effects of the legislation; and GDP using CBO’s low estimate of the
effects of the legislation.

What I think is particularly interesting in their discussion is the contrast drawn between short-term and longer-term effects. The CBO notes that over the longer term, the increase in government debt with wealth held in government bonds will “crowd out” private investment and reduce “the stock of productive private capital.”  CBO assures us, however, that’s not going to occur over the near term.  Why?  Because decreased demand has already meant that firms are lowering their private investment.  Did I get that right?  Here’s what CBO says:

In contrast to its positive near-term macroeconomic effects, the legislation will reduce
output slightly in the long run, CBO estimates. The principal channel for that effect,
which would also arise from other proposals to provide short-term economic stimulus
by increasing government spending or reducing revenues, is that the law will result in
an increase in government debt. To the extent that people hold their wealth as
government bonds rather than in a form that can be used to finance private investment,
the increased debt will tend to reduce the stock of productive private capital. In
economic parlance, the debt will “crowd out” private investment. (Crowding out is
unlikely to occur in the short run under current conditions, because most firms are
lowering investment in response to reduced demand, which stimulus can offset in part.)
CBO’s basic assumption is that, in the long run, each dollar of additional debt crowds
out about a third of a dollar’s worth of private domestic capital (with the remainder of
the rise in debt offset by increases in private saving and inflows of foreign capital).

Parallel Lies

by Iain Murray on March 3, 2009 · 1 comment

in Deregulate to Stimulate, Economy, Features, Regulation, Zeitgeist

British Prime Minister Gordon Brown has been talking with President Obama this morning, and high on the agenda was the PM’s call for international banking regulation. The interesting thing is that both Obama and Brown have blamed lack of regulation for the banking crisis, when there is clear evidence on both sides of the Atlantic that it was bad and inept regulation that drove the crisis. For an example from the US, here’s John Carney on how bad regulations helped destroy AIG. Over in the UK, the Taxpayers’ Alliance has an excellent study that outlines numerous ways in which regulations and regulators contributed to the UK’s own crisis. Here are its conclusions:

A poor response from regulators

* Unclear and restrictive EU Directives limited the Bank of England’s response to the crisis at Northern Rock. In particular, the Takeover Code and the Market Abuses Directive were felt to preclude an inter-bank rescue operation and covert lender of last resort assistance respectively. Mervyn King, Governor of the Bank of England, argued that these prevented effective support being given to Northern Rock.
* Deposit protection was not sufficient to give bank customers confidence. In particular, the time it takes for the Financial Services Compensation Scheme to pay out and failures to make other government payments promptly may have led depositors to believe their money would effectively be frozen for months in the event of a collapse.
* The tripartite system meant that the Bank of England lacked the information needed to properly assess whether lender of last resort actions were appropriate or not. Despite the ineffectiveness of regulatory oversight, compliance costs rose substantially for banks after the Financial Services Authority took over supervision.
There had been concerns for some time before the crisis about problems at the Financial Services Authority. Prominent voices criticised a lack of quality staff and insufficient focus on systemic risk, but sufficient changes were not made.

How regulations exacerbated the crisis

* Capital adequacy rules in Basel II are based upon borrower default risk – the chance that companies and mortgages will go bust. This means that capital requirements will tend to increase as an economy falls into recession and fall as an economy is expanding. Studies for the US Federal Reserve System confirmed that the rules are procyclical as far back as 2004. It is clear that the rules worsen financial crises.
* Common capital adequacy rules encourage firms to hold similar assets and respond in similar ways in a crisis. This amplifies herd behaviour. At the same time, common international rules mean that booms and busts in individual countries are likely to take place at the same time, increasing the amplitude of global credit cycles.
* Mark to market regulations rely upon the market to provide a price for an asset and cannot function when that market temporarily ceases to exist, as the market for many assets did at the beginning of the financial crisis. Had mark to market regulations been in place in the 1980s every one of the United States’ ten largest banks would have become insolvent.
* Regulations, particularly restrictions on short-selling, did serious damage to hedge funds. This not only damaged the funds themselves but exposed troubled banks to further risks and closed off some means of funding, in particular by preventing banks being able to raise capital through issuing convertible bonds.

In one sense both the PM and President are right. The global system of financial regulation is broken, but what the two leaders are thinking of doing is merely putting red tape over the cracks.

In the Obama Era, Big Brother to Replace Private Charity (maybe?)

by Gary Howard on March 3, 2009 · 1 comment

in Personal Liberty, Politics as Usual

Just what is up with the section of the Obama administration’s budget which plans to ‘phase-out’ tax deductions for charitable giving?  Frankly this is a little unnerving to someone who works for a nonprofit organization like I do, I have heard similar sentiments among those from all parts of the political spectrum.  To this news, there are those who would say: it only affects those  “rich” folks making over $200K/year.  To which I say: So what?  Furthermore, the ‘rich’ are responsible for a good deal of charity (more research here)–why reduce their capacity even further than increased income taxes and a slow economy will already?  Others will argue that Obama’s continuation and expansion of Bush administration policy giving taxpayer money to faith-based programs justifies and cushions any reductions groups may experience under the proposed phase out.  To which I say: They should not be getting taxpayer money in the first place.

I am generally against speculating on people’s motives when it comes to policy, I would rataher point out how said policy is not good.  However, one cannot help but figure that with this in place it will be much more difficult for non-profit organizations who do not take government money to operate effectively.  What if that is the whole point? What if the reduction or outright elimination of privately-funded and privately run charitable groups is exactly the intent here?  I will not go that far, yet.  But I wouldn’t be surprised.

Hansen belittles models, carbon trading, Kyoto; calls for coal-destroying carbon tax

by Marlo Lewis on March 3, 2009 · 1 comment

in Energy, Global Warming

Last week’s House Ways & Means Committee hearing on “scientific objectives for climate change legislation” contained much grist for skeptical mills.

Dr. James Hansen did not challenge any of Dr. John Christy’s specific arguments that UN climate models overestimate climate sensitivity. Instead, he advised Congress to ask the National Academy of Sciences for an “authoritative” assessment, because the science is “crystal clear.”

Hansen was quite harsh in criticizing Kyoto (an “abject failure”) and carbon trading (a politically unsustainable hidden tax for the benefit of special interests). He outlined a proposal for what he calls carbon “Tax & Dividend,” whereby 100% of the revenues would be refunded to the American people via monthly deposits to their bank accounts.

As I discuss here, Hansen’s beguiling proposal could decimate coal-based power in a decade or two, pushing electricity prices up faster than dividend payments increase, and saddling the economy with a growth-chilling energy crisis.

Why Is the Chicago Tribune in Bed with T Boone Pickens?

by William Yeatman on March 3, 2009

in Global Warming

Why is the Chicago Tribune again allowing its editorial page to shill for T Boone Pickens? For the second time in 5 months, the Tribune has published a self-serving opinion piece by Mr. Pickens (Our Energy Future, 16 November 2008; Solving Our Nation’s Energy Predicament, 24 February 2009).

Remove the rhetoric, and T Boone’s plan is quite simple. He wants the government to (1) force taxpayers to subsidize his wind power; (2) force taxpayers to pay for the transmission lines to deliver his wind power; (3) force consumers to buy his wind power; (4) force consumers to buy T Boone’s natural gas “saved” by using  his wind power to power their cars.

America gets expensive energy and T Boone Pickens gets rich. As CEI’s Marlo Lewis artfully put it: “This T Boone-doggle Pickens your pocket.”

Your Loss Is My Gain, Sucker!

by Hans Bader on March 3, 2009 · 4 comments

in Bailout Watch, Economy, Politics as Usual, Regulation, Stimulus to Nowhere

I am being enriched by a vast expansion of government that will impoverish you and your family, and shrink the size of the economy in the long run.

Across the country, and probably where you live, home values have declined by 20 percent or more. But my house, located where many federal employees live, has lost much less value. Indeed, the tax assessor claims (with some exaggeration) that my home’s value is down only a few percent over 2007 and 2008, and is still well above its 2004 purchase price.

A Washington Post story today suggests why. It notes that thanks to Obama’s huge spending proposals, fueled by deficit spending on an unprecedented scale, up “to a quarter-million” bureaucrats could be added to the federal payroll. The Post reports that “President Obama’s budget is so ambitious, with vast new spending . . . that experts say he will probably need to hire tens of thousands of new federal government workers to realize his goals.”

Many of these new federal employees will end up living in Arlington, Virginia, the suburb right next to Washington, D.C. where my home is located, increasing demand for housing there. (Federal employees are better paid than the average private sector employee, although their pension and health benefits are not as generous as for many state and local employees, whose compensation far outstrips private sector employees). So essentially, you and your family, through higher taxes and higher national debt that will have to be paid off in the future, are subsidizing the value of my home.

The relatively resilient housing market in Arlington reflects large, deficit-financed government spending that has poured money into the Washington, D.C. area while sucking money out of the rest of the country. The compensation of federal employees has substantially outstripped inflation, and that trend seems likely to continue and increase under a Democratic Congress and Administration. (Spending rose, rather than fell, as a result of the Democrats retaking control of Congress in 2006).

This spending can’t be justified as a long-term cure for the economy. The Congressional Budget Office has recently issued a letter reaffirming its prior conclusion that the stimulus package passed by Congress and signed into law by Obama will actually reduce the size of the nation’s economy “in the long-run.” That’s because of the “crowding-out” effect — money that the government borrows to “stimulate” the economy results in a higher national debt, which results in higher spending on interest to service the national debt, which in turn results in money being taxed or borrowed to pay that interest, rather than being left in the private sector where it can be invested to create jobs. “In economic parlance, the debt will ‘crowd out’ private investment.”

Investors have already reached the same conclusion. Stock markets rise even in recessions (like the 1981-82 recession) when investors expect the recession to eventually end and lead to strong economic growth. That’s why they are called leading economic indicators.

But this year, the stock market has fallen like a stone, because investors — unlike the general public — realize that Obama’s economic policies are destructive and will retard, rather than speed, a recovery. The Washington Post today reports that stocks have lost 52% of their value since their peak, and have fallen to their lowest level since 1997.

The fact that the stock market has continued to fall this year is a sign of incompetence in Washington, and an illustration that the welfare-filled, deficit-exploding, trial-lawyer-enriching, $800 billion stimulus package pushed by Congressional leaders and Obama was a terrible mistake that will do nothing to address the root causes of the current financial crisis.

Ironic Snowfall for Resource-Rich Greenies

by Silvia Santacruz on March 2, 2009 · 1 comment

in Energy, Environment, Global Warming, Natural Resources

Environmentalists characterize themselves as petite Davids battling gargantuan corporate Goliaths in order to grab media attention.  But hundreds of green activists demonstrated today to raise awareness of global warming and against coal production in front of the Capital Power Plant in southeast Washington D.C.  The group had plenty of resources ranging from a raised stage with microphones, to trucks loaded with food and coffee, to green plastic helmets, all the way down to fluorescent caps and fancy colored anti-industry signs.

We, the counter protesters, were comprised about 25 to 30 Davids.  Participants hailed from the Competitive Enterprise Institute (CEI)—the event organizers—as well as the producers of the film Not Evil Just Wrong, the National Mining Association (NMA), American for Prosperity (AFP), the National Center for Public Policy Research, Conservative Caucus and others.  All of us proudly held our no-frills signs celebrating coal, highlighting its importance to electricity generation and the nation’s economy.

Despite the disparity between the number of anti-coal demonstrators and the “Celebrate Coal” participants, the weather proved to be a major ally: the nation’s capital was anything but warm today, making the global warming argument sound absurd.  In fact, Americans needed a lot of affordable coal-generated electricity today to heat their homes.

One of my favorites images of today’s dual protest (see picture above) was a Greenpeace activist seen cleaning snow from the top of his solar-powered truck with a metal sign that read, “Stop Global Warming Now”.  One of my colleagues couldn’t resist and asked, “How is that global warming sign working with cleaning out the snow?”

The greenie was too ashamed to continue, and left.

CEI stages “Celebrate Coal” counter-rally on Capitol Hill today

by Christine Hall on March 2, 2009 · 1 comment

in Energy, Environment, Global Warming

Despite the fact that the DC area was just clobbered with snow last night and this morning, hundreds of left-wing environmentalists descended on Capitol Hill today for a global warming protest. The proximate object of ire was the nearby coal-generated power plant. Mostly hippie-influenced college students, from the look of the crowd, they grouped around Longworth House Office Building with their professionally printed, matching, corporate-looking signs. Chanting various slogans, such as like “power to the people” and “green jobs now,” they marched down several blocks to the power plant at New Jersey and E Street, SE.

Not to cede the day to the patchouli-and-dreadlock crowd, CEI, with representatives from Americans for Prosperity and FreedomWorks, was on-hand to meet the anti-energy message with one championing affordable energy. AFP energy policy expert/activist Phil Kerpen was hilariously improvising his own chanted slogans ridiculing the no-economy, no-jobs policies championed by the other team. Stay tuned for photos and videos from the event. And read Iain Murray’s write up of the greens’ “magnificent display of self-delusion.” Meanwhile, the Greenpeace truck fitted with massive, snow-covered solar panels was a special visual treat. They painted it green and blue, with a windmill, so you KNOW it has to be all benevolent and green. How does the thing generate power when covered in snow? I’ve no idea! One of the other team’s protesters waxed romantic about the vehicle as he walked by, saying it brought back good memories of a past protest. (Warm and fuzzy feelings associated with a Greenpeace truck? Really?)

Another visual treat: a woman with a motley collection of stuffed animals festooned to her back and luggage. No idea what that was all about. Anyone?

Will the “food police” be nationalized?

by Fran Smith on March 2, 2009 · 4 comments

in Nanny State, Personal Liberty, Precaution & Risk, Sanctimony

In this bizarre Washington world, it can’t possibly be true, but it is: a top staffer at the lobbying organization often pejoratively referred to as the “Food Police” is one of two candidates in line to be the nation’s top food safety guru.

According to news reports, Caroline Smith DeWaal, a top food alarmist at the Center for Science in the Public Interest (CSPI), may be named head of the USDA’s Food Safety and Inspection Service (FSIS).

CSPI is the group that railed against food irradiation even when just about every major international and domestic food group and public health official extolled its virtues in helping to prevent food-borne disease outbreaks. This is the group that campaigns against fat yet waged a scientifically inaccurate campaign against the fat substitute Olestra. This is also the group that opposes carnivore eating habits, yet hyperventilated about Quorn, a meat substitute. Again, CSPI is the group that tried to terrify people about acrylamide — a naturally occurring substance formed in starches cooked at high temperatures.

Their lack of scientific evidence for much of their fear-mongering, however, doesn’t stop them from attacking sugar, caffeine, saccharin alcohol, whole milk – and any other substance that doesn’t suit their lifestyle choices.

Next to CSPI’s founder, Michael Jacobson, Smith DeWaal is the leading food alarmist at the group, and, according to the Washington Times, has lobbied–

. . . the White House, Congress, the USDA, the Food and Drug Administration, the Environmental Protection Agency, and the departments of Interior, Treasury, Health and Human Services, and Justice on matters concerning food safety.

The center spent $610,000 in the past two years, according to Senate records, to lobby the House and Senate.

Smith DeWaal previously worked for Public Voice for Food and Health Policy and a subgroup of the Ralph Nader-founded group, Public Citizen.

Check out what Reason columnist Jacob Sullum has written about CSPI. Also check out this and the many articles critiquing the group by the American Council on Science and Health.

“Sanity is not statistical”

by Ivan Osorio on March 2, 2009 · 1 comment

in Culture, Economy, Politics as Usual, Stimulus to Nowhere

There are few things more fascinating to watch than liberals hyperventilate to the point that they lose the basic ability to construct even a rudimentary argument. It’s not pretty, but like a car wreck, it’s hard to turn oneself away. Consider this letter in the current issue of The Economist:

SIR – Sadly, the Republicans have rediscovered the joys of opposition. Nothing as slight as a national crisis is going to make them shift from ground that seems so politically advantageous. Yet despite its considerable flaws, the stimulus bill does have substantial broad support—among voters. Perhaps, in time, the Republican rump will come around, but I would not count on it any time soon, especially when newspapers such as yours are prepared to treat their claims of high-mindedness with such undeserved respect. [Emphasis added]

The writer is essentially arguing that Congress should pass the stimulus, even though, admittedly, it has “considerable flaws”– because it’s popular. (Notice the lack of any discussion of its effects.)

And that’s not all. In the same letter, the writer accuses Republicans of engaging in “politically advantageous” pandering by opposing that same allegedly popular program.

With President Obama’s approval ratings still at healthy levels, we may yet see more similar defenses of policies he supports to be based on popularity — couched in more diginfied terms, such as “mandate,” of course.

It’s always good to keep in mind Winston Smith‘s greatest discovery: “Sanity is not statistical.”

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