A Plan for Economic Recovery

The cries for relief from the economic recession reached a state of pure, irrational cacophony with the recent request by the pornography industry for a government bailout. While many will likely reject the very idea of such a request out of hand, it fits in with the popular focus of how to pull us out of this significant downturn. “Saving jobs” is all anyone seems to care about. While it is annoying and painful to lose a job (I lost my own job in November partially as a result of the crisis), the job loss is the symptom, not the disease. Even the “credit crunch”, which caused so many closures in fringe firms and industries, is still an intermediary between the disease and the symptoms. While I will not get into the precise cause of what I have termed the “disease” here, which has a multitude of possible causes being widely discussed by professional and academic economists, I will go into how the new administration should deal with improving the economy in the medium to long-run over short-run “solutions” that will come back to bite us later.

1. Raise Interest Rates. It is well-documented empirically that it takes somewhere between eighteen and twenty-four months for a change in the money supply to fully work its way through the economy. Interest rats where they stand now are at an unstable level, whereby the Fed is effectively giving money away to banks. That form of subsidization distorts the economic realities banks face. To lower interest rates to the level they are at right now, the Fed continually needs to expand the money supply at ever expanding rates, which results in some of the highest annualized inflation rates in almost two decades (upwards of 6%) that we’ve seen in recent months.

Bernanke must return to the “inflation-targeting” philosophy he has promulgated in the past. While I don’t agree with Bernanke’s economics on any level, the spirit of such a philosophy applies to exactly these types of situations. While he may not be afraid of using the keys to the printing press, inflation above a “normal” level isn’t going to help anything in the medium run.

When he takes office, Obama must not look to the Fed as a revenue source. He cannot expect the excessive liquidity provided by the fed to continue and should support its elimination. Funding of greater government spending must come from taxation, not from the printing presses.

2. Eliminate Public Debt. There have been frequent complaints that the remaining solvent banks have not been willing to loan money as quickly as they have been in the past. The fallacy of such complaints is twofold: One, that the ease to which banks lent in years past was very likely one of the factors that got us here in the first place and what banks are doing right now makes sense, and Two, that the government can easily make a dent in the credit crunch simply by eliminating its debt. The “true” cost to the government borrowing lies in that, through the sale of treasury bills, it takes money (crowds out) from private bonds. The treasury bills, since they are riskless, effectively set the floor below which no private bond will ever be sold. If debt is eliminated and this floor drops, the option of raising money by floating a bond, which beforehand was unprofitable for a firm, may now make sense. Eliminating this debt is very simple and requires no further bureaucracy to get set up; just swap a few items in the treasury’s ledger. While the debt is Bush’s fault and his mess, Obama must be the one to clean it up.

3. Get out of Iraq. We need to reduce military spending drastically. Once that state is stable enough, or it is determined that we can no longer do any good, we need to pull out completely. Each dollar spent there could go towards a tax cut, elimination of our debt, or building infrastructure, all of which improve the economics of taxpayers far more directly than marginal improvements to the security of the new Iraq state. To Keynesians who believe that our spending there helps in the same sense that paying someone to dig a hole and fill it helps unemployment, I disagree since I see little evidence that our economy is in such an extreme situation. A tax cut will go straight towards the areas of consumption taxpayers have had to give up in recent months (such as retail), spurring job growth, or to paying down debt, keeping the banking system solvent and increasing its profitability. Paying down the debt would help growth even more directly through the means I mentioned above. While the current recession may appear more closely to the Great Depression during which Keynesian methods were supposed to have worked versus the cost-push stagflation during which Keynesian methods failed, those methods appear to me to be cosmetic. We are far from needing to resort to spending for the sake of spending, whether it be in the military or in social programs, in the current economic situation.

4. This is an ok time to build infrastructure, but don’t be stupid about it. With all that being said, now does seem to be the time to use government spending to spur internal improvements, but I only say so with significant caveats.

1. Don’t determine a certain amount of money to spend and keep spending until you hit it. Congress must force good opportunities to come to it instead of seeking them out. We want the public spending first to help citizens in real, genuine ways that private firms have problems providing. We should not be spending arbitrarily just so someone can have a job.
2. Don’t use this as an opportunity to support green infrastructure. These forms of technology are only asked for right now in areas of relative affluence, and as such, support of them is a subsidy to the rich. Green infrastructure must remain in the hands of local governments in the interests of their constituents rather than a holistic macroeconomic plan.
3. Don’t do anything the states can’t do themselves. If something only benefits one or some states directly, the state can make the judgment on its own whether it is worth to tax and spend on the infrastructure. Anything else quickly degenerates into pork belly-seeking situations.

5. Let the industries and firms fall. If the market says too many cars are getting produced, the government should not be in the business of promoting such a level of production. Not all industries are failing right now; such failure says something about whoever does. An unprofitable business model has no place in society unless someone is willing to support it charitably. Let the market determine where those people are best utilized elsewhere. We have had no problems letting that happen in 2001 with tech firms. Perhaps that was because it was so easy, in hindsight, to see why dot coms were so stupid. If the business models of the auto makers, retailers, financial firms, and pornography studios have been unable to withstand the crisis, the market is rejecting their usefulness. We need to stop looking at the jobs being lost and instead remember that all jobs must ultimately serve a purpose. The purpose of many of the firms within those industries has ended.

The economic downturn is ultimately a systemic problem. However, we don’t have clear evidence has to what exactly caused the system to fail, but we can fix the intermediary factors that contributed to such a failure and avoid screwing it up more. The question should not be about eliminating job loss, but about ensuring that the system is set up in such a way that the remaining private firms can find new, better roles for them as soon as possible without causing further problems later.

Is Freedom of Association Fascism?

The New York Yankees in recent years have upset very many people with their policy of enforcing “patriotism” during the Seventh Inning Stretch. Security forces every patron in the ballpark to remain still while “God Bless America” is sung. The blogosphere has generally condemned such draconian measures, as this requirement apparently struck a nerve. For example,

Yankee Stadium security deserves no benefit of the doubt here, nor in this instance does the Steinbrenner family if they’re the ones who have ordered the policy be implemented. Forcing paying customers to stand at rapt attention during a song isn’t some cute little attempt at patriotism to bolster the legacy of Mr. Born on the Fourth of July Steinbrenner, it’s FASCISM. Roughing them up over their failure to stand still during a canned recording of a song that’s been drained of all meaning by its endless repetition is in diametric opposition to what the song and the country it so proudly celebrates stand for; this is about as un-American as you can get.

The author (Jaffe) complains in very strong words about the rights of those that dissent from the requirement to pay respect. Essentially, he argues that the requirements curtail his Freedom of Speech. Freedom of Speech, Jaffe implies, is not simply about government censorship, but an entitlement to express one’s personal opinions, whatever the circumstances.

This broad interpretation of Freedom of Speech erases the power of its close cousin, Freedom of Association. Yankee Stadium is not the public square; it is private property. If the owner of that private property requires that you perform some legal action (e.g. paying respect during a patriotic song) in order to stay therer, you must do it, if we are to say that the owner is really “free”. As the oft-quoted 19th century judge said, “The right to swing my fist ends where the other man’s nose begins.” During a decade where ostentatious displays of patriotism are in the vogue, Freedom of Association may annoy liberals in circumstances such as these, but there is little grounding for referring to it as Fascism. Whether Jaffe likes it or not, Steinbrenner has just as much right to throw people out of the stadium for appearing unpatriotic as Jaffe does to throw someone out of his house for voicing, for example, Neo-Nazi propaganda. Freedom of Association is Fascism only in a world where all humans have an indelible right to take a shit in their neighbor’s yards. There really isn’t another way to spin it.

There are complicating factors to the specific issue; the circumstance that set off Jaffe above involved an anecdote where security allegedly manhandled a fan out of the stadium without a refund. To my understanding, the ticket gave the fan a license to be in the stadium and a refund would have been necessary to legally kick him off the property. Obviously, the actions taken by the security officer were also over-the-top, as Freedom of Association is not Freedom to Assault. Yet, these issues were not the crux of any argument I’ve seen on the blogosphere; instead Jaffe and his ilk have used them almost solely as an embellishment to the outrage they feel for needing to pay respect during the song. Nonetheless, the anecdote is just that, an anecdote, and one that was voiced by a fan who was likely drunk at the time and who had every reason to punch up his story a little bit. It’s not fair to form generalities on that type of thing.

The more theoretical criticism I can see of this policy is whether Yankee Stadium should be considered purely “private property”. Major League Baseball teams have long been run almost as public trusts rather than a classic, profit-seeking enterprise. New York City has substantially subsidized a new stadium for the franchise, which is set to open next year. If one considers the new stadium public property, the question changes drastically, although it is still not cut-and-dry. Public property still does not immediately imbue one with the right to voice any opinion whatsoever, and I do not mean that in the banal, “yelling fire in a crowded room” sense. There is no reason why a town hall cannot throw someone out for yelling obnoxiously, and of course, liberals themselves harshly denounce religious statements on public property. This is not to say that this circumstance neatly falls into any of those categories, but the door is open for discussion. My standpoint, although it is not a very firm one, is that the Yankees can continue this practice until the city uses the funds as a gateway to instruct them otherwise.

Freedom of Speech, and more generally, Freedom of Expression, are negative rights, not a positive ones. Censorship occurs when the government explicitly stops you from doing something you could do with your own means. Referring to two private parties (you stand during the song and pay me $80 in exchange for being here) as censorship is both dishonest and a complete non-sequitur. Analogously spurious and deceitful are claims that stem-cell research is banned in the United States (it’s legal, but “failing to fund” is construed as “banning”) or that failing to increase funding for public broadcasting is censorship. All of these arguments make the preposterous assumption that Freedom of Expression is somehow an entitlement rather than a protection from government coercion. To put it another way, these views reprehensibly argue that freedom to choose gives those who invoke it the inalienable right to express their values or beliefs through the property of others, whether literal or through taxation. From that perspective, equating a failure to provide a positive Freedom of Expression to Fascism is nonsensical. No society can function that way without becoming duplicitous or lawless.

Bankruptcy: A Hidden Bubble-Enabler

Economic bubbles are an accepted fact both popularly and academically, but their causes are subject to debate. Monetarists posit that reactionary, Keynesian monetary policy causes the normal ebbs and flows of the economy to fluctuate more drastically, since central bank’s “stabilizing” actions take time to work their way through the economy. Austrians argue that contemporary banking systems allow lending institutions to push the savings rate of an economy above its true level, resulting in overstocked inventory and production capacity that the consumers cannot afford. Those with a financial bent see investors who focus on capital gains in the stock market, bidding up the price above and beyond its fundamentals simply because other people will probably bid the price up more until the bubble finally bursts. Still others focus on psychological factors that cause common investors to overvalue categorically the future prospects for the economy as a whole. Depending on one’s assumptions and background, any of these explanations may be appealing. They largely possess internally correct logic and are not necessarily mutually exclusive.

While these models require certain assumptions regarding the intrinsic framework of the economy, these explanations do not need to be the whole story. Stepping on a gas pedal causes a car to move faster, but its rate of acceleration also depends on the texture of the road, the power of the engine, and the weight of the car, among myriad others. One, two, or three of the above positions may be the analog of stepping on the gas pedal and the power of the engine, but there is no reason to believe that there does not exist an equivalent to the less important texture of the road.

I conjecture that one of these factors is the very existence of bankruptcy law in the United States. This is a very strong statement; I’m firmly aware of this. At the same time, if you dissect what bankruptcy law really is and really does, its existence and nature is peculiar and bizarre.

Declaring bankruptcy is a painful, terrible thing. No one wishes it for herself. Due to factors entirely outside of his control, bills may add up and the bank may even seize an individual’s house. Bankruptcy, while very damaging to one’s reputation and prospects, allows a way out and a fresh start. Creditors couldn’t have ever really expected to get paid, but bankruptcy allows swift resolution and the opportunity for them to get something, anything. On a case-by-case basis, the process allows a resolution and the likely best outcome for all parties.

When lawmakers write public policy, however, their job is not one specific case study or example. It is (or should be) what is best for the economy looking forward. The existence of bankruptcy as an alternative to forever digging out of a hole of bills eliminates a cost associated with taking on financial risks. No one wants bankruptcy, but its difficulties set a mathematical lower bound for the downside risk of a particular venture. For instance, say, opening a pizza parlor has a 3/5 chance of succeeding, 1/5 chance of failure, and 1/5 of utter failure, with the latter two options both resulting in bankruptcy. However, if “failure” means “$500,000 in debt” and “utter failure” means “$10,000,000 in debt”, the entrepreneur does not see the full cost to opening the pizza parlor. Presumably, since he declared bankruptcy at $500,000 in debt, being bankrupt was better (and hence less costly) than a $500,000 debt and much less costly than a $10,000,000 debt. This asymmetry encourages citizens to put themselves in situations that result in massive failure by only making them pay for a fraction of the cost of that failure.

Call bankruptcy what it really is, a statute automatically written into any contract that allows an individual or corporation out it if she really, really has problems paying it.

While eliminating bankruptcy as an option may decrease demand for credit since the borrower now faces the true cost of borrowing, it also, arguably more importantly, eliminates many of the moral hazard issues that banks have to put up with right now. The lender must ask for collateral and do all sorts of background checks because it really can’t trust the borrower to present himself honestly. However, with the elimination of bankruptcy, this cost would be reduced since the borrower can be trusted much more fully to police himself. While certain moral hazard issues still exist (if the borrower is successful, the bank is only going to get paid back what it lent while the borrower can possibly receive an unlimited high return), this fixes one side of the equation. Thus, while two effects are at play, there combined effect of these is an empirical question that requires study before asserting that it would either increase or decrease the quantity of investment across the economy.

However, I’m not too concern with the small-time entrepreneur, but the stockholders of financial firms.

Incorporation laws, virtually worldwide, allow the owners of a business to hide their personal assets from bankruptcy courts when profiting from a business. Therefore, the lower bound effect of bankruptcy alluded to earlier is pushed higher. The only thing the owner has to lose is the equity in the firm. In contrast to real bankruptcy, she gets to keep her house.

The same thing holds true with shareholders of public company. If the firm they collectively own makes a risky investment, and the most they could lose is the value of their stock, they will not value the investment efficiently. The shareholders must feel the effects of the choices of the board of directors if the market is to hold them accountable for choosing managers who are too risk averse. If this philosophy were to be adopted, suddenly, stocks stop becoming an interesting hobby, one where there are real repercussions for risk. Stocks become far less fun to speculate upon when the stockholder could lose his house by holding them.

The direct economic effect bankruptcy laws have on society is a misallocation of resources in favor of stocks over investment vehicles. This is primarily of academic concern, although it ultimately has negative consequences down the line. The real problem for the economy is its upwards bias for prices across all stocks. Any such bias facilitates the complete collapse of the market, setting the stage for the already mentioned orthodox causes of bubbles to consummate. While practically and morally, giving an individual or corporation a second chance through bankruptcy may seem ostensibly to be a bad outcome to worse alternatives, policy makers must weigh the negative effects of misallocation of resources and bubble-enabling against such benefits. If bankruptcy laws should ultimately remain in place despite their costs, so be it, but the costs must enter the discussion.

I have not found any literature in libertarian (Monetarist or Austrian) economics that may provide another solution for this problem, and whether there are arguments for bankruptcy as being an innate aspect of private property. If this question has been discussed elsewhere, please direct me to it.

Realigning the Union

The Articles of Confederation and the Constitution of the United States maintain a common theme: a stringent dissolution of power. While the Articles failed due to the lack of any power afforded to the national government, the first seventy years of the Union continued the presupposition that individual states must hold complete sovereignty whenever possible. As economist-historian Thomas DiLorenzo (among others) poignantly observed, before Lincoln, the phrase “United States” was always considered a plural; the etymological implication being that the country was a collection of sovereign entities rather than a indivisible body whose states served as inconsequential appendages.

Setting aside questions of whether a return to strong federalism is desirable or feasible, at this point it wouldn’t be nearly as effective as it was in the early parts of the nineteenth century. Populations were smaller and the ethnic flavors of different segments of America were far more pronounced. In a word, the states were more homogeneous. North Carolinians were very similar in tastes and values to other North Carolinians, in the same way that the beliefs and attitudes of those living in Connecticut correlated. While there still exists a certain degree of interstate heterogeneity between, for example, blue and red states, this does not remain true nearly to the extent it was two hundred years ago.

I cite a nameless State Representative campaigning to get elected to represent a part of Long Island. She decries the parsimonious state support of Long Island schools in contrast to other the support of other geographic areas as the prime example of the state legislature being out of touch with the needs of Nassau County. While those from Long Island may feel like they’re getting the shaft, the state legislature is almost certainly acting rationally. Long Island schools have an excellent reputation while those in upstate New York can be charitably described as mediocre. Nassau County is one of the most affluent areas of the country (and by extension, the world), whereas the rural parts of the state resemble West Virginia. If we take the moderate position that A) taxes should fall more on the rich than the poor and B) the state should help prop up the worst of its schools, the inequity of state funding is an inevitable no-brainer. Nonetheless, upper-middle class suburbanites understandably feel gypped when seeing such a small return on their state tax dollars.

The answer that could solve all this is to make Long Island its own state. This is a scary idea for anyone with a firm feel of tradition, and if your goals for political organization is celebrating the lines we drew in the ground hundreds of years ago, I probably can’t change your mind. If your goal is to align political lines in such a way that people can get the most they want from their state government (whatever that may be, socialism, lack of government intrusion, whatever), state lines should approximate delineate those with similar goals and values.

To wax hypothetical, here is my approximation of how the American Northeast “should” look-

State 1: Southern Maine, Southern New Hampshire, Eastern Massachusetts, Rhode Island, Eastern Connecticut

State 2: Northern Maine, Northern New Hampshire, Vermont, Western Massachusetts, Northwest Connecticut

State 3: Eastern Queens and Brooklyn, Staten Island, Long Island

State 4: the rest of New York City, Southwest Connecticut, Southeast New York, Northern New Jersey, Northeast Pennsylvania

State 5: Upstate New York, Western Pennsylvania

Now, I’m drawing lines mostly along rural/urban population bases, but you can see what I’m getting at. More granularity or precision can be achieved by employing sociologists or others who study this type of thing. Long Islanders don’t care about the failing schools in New York because Long Islanders are in every sense different and separate from those living on the other side of the state. Those with whom they can identify are roughly those whose lives center upon Manhattan, but who don’t actually live in an urban environment, or in other words, the rest of Long Island, the residential parts of Queens and Brooklyn, and Staten Island. The vast majority of people who live in these areas are very liberal, but put their families first. They want similar things from a state, if not in an absolute way than to a much greater degree than a family living on a farm out near Rochester.

Theoretically, those attending heavily subsidized schools in the middle of rural New York may subsequently feel getting screwed out of swaths of copious Long Island money, but that really isn’t the point here. The rural Pennsylvania/New York hegemony can focus its efforts on fixing those problem schools without compromising to the legislative acolytes of suburbia. If the state cannot gather enough funding to fix the problem, to the point where it is an inexcusable social justice issue, it should be the onus of the entire country to fix the problem (if anyone’s), not the rich people who happen to live in the same arbitrary geographic zone.

The key in such realignment is that those who are paying for whatever the problem is should be those it affects, or at the very least, come into contact with it. Rural areas with poor education can concentrate their efforts on fixing schools. Those in New York City and its densely populated sprawl can focus on keeping crime low and ameliorating a school system that is screwed up for completely different reasons. Suburbanites can pool their mass quantities of excess income to create grander civic events and programs they couldn’t ever consider getting through the state legislature before. Everyone wins, with an added bonus of people possibly seeing their state government do what they want it to do.

This will never, ever happen, for one reason alone. Inertia. Obviously, there would be some transaction costs involved in radically realigning the government structure, but that’s not the real reason. The conversation would never get to the point where political scientists and their ilk would need to start arguing over cost/benefit analyses, simply because this is where we are now and we have put too much sentiment into it. Too many political careers would disappear. This is an unfortunate, since realigning the Union would probably be a free lunch.