Tuesday, September 23, 2008

LA Times: Give The Professor The Data

1. LA TIMES (9/26/2007) -- Affirmative action enables hundreds of minority law students to attend more elite institutions than their credentials alone would allow. Data from across the country suggest that when law students attend schools where their credentials (including LSAT scores and college grades) are much lower than the median at the school, they actually learn less, are less likely to graduate and are nearly twice as likely to fail the bar exam than they would have been had they gone to less elite schools. This is known as the "mismatch effect."

Data from one selective California law school from 2005 show that students who received large preferences were 10 times as likely to fail the California bar as students who received no preference. After the passage of Proposition 209, which limited the use of racial preferences at California's public universities, in-state bar passage rates for blacks and Latinos went up relative to out-of-state bar passage rates. To the extent that students of color moved from UC schools to less elite ones, the post-209 experience is consistent with the mismatch theory.

In general, research shows that 50% of black law students end up in the bottom 10th of their class, and that they are more than twice as likely to drop out as white students. Only one in three black students who start law school graduate and pass the bar on their first attempt; most never become lawyers. How much of this might be attributable to the mismatch effect of affirmative action is still a matter of debate, but the problem cries out for attention.

~UCLA Law Professor Richard Sander, "Does affirmative action hurt minorities? Racial preferences may be setting up many black and Latino law students for failure."

2. LA TIMES (9/8/2008) -- Two years ago, Richard Sander published research suggesting that racial preferences at law firms might be responsible for black lawyers' high rate of attrition and difficulty making partner. He hypothesized that in the interest of promoting diversity, law firms sometimes hired black lawyers who were underqualified, and that when there was a "credentials gap" between black and white lawyers at a firm, black lawyers often were less likely to advance and more likely to leave the firm.

The research stirred debate throughout the legal community, and Sander said he was surprised at the vehemence with which people attacked his motives. A former Volunteers in Service to America participant, fair-housing activist and campaigner for Chicago's first black mayor, Sander, who is white, insisted he was simply trying to examine an important question.

Now the professor has waded into another controversy. Sander says his goal this time is to examine whether law schools set up many affirmative action beneficiaries for failure by admitting them into rigorous academic environments in which they are ill-prepared to compete. He proposes to study almost 30 years of data on State Bar of California exam-takers. In the end, he hopes to explain why, as reported in a Law School Admissions Council study in the 1990s, blacks are four times as likely as whites to fail the bar exam on the first try.

The state bar has refused to facilitate his probe. Citing privacy concerns, the bar has denied him access to detailed demographic data collected from exam-takers since 1972.

~From the article "Does affirmative action help or hurt African American law students?"

3. LA TIMES EDITORIAL (9/17/2008) -- A California professor studying affirmative action should have access to law school performance statistics.

UAW Doesn't Discriminate, Why Should McCain?

Watch the Obama ad above blasting McCain for owning three foreign vehicles: a Lexus, a VW and a Honda (identified in the Detroit Free Press as a "2001 Honda sedan"). If it's a 2001 Honda Civic, it was built in East Liberty, Ohio, with higher domestic content (75%) than the Ford Escort (60%), see photo below (source: Dallas Fed):

MP: The 2008 Honda Pilot and Honda Civic are built in the U.S. with a higher domestic content (70%) than the 2008 Dodge Ram (68%).

In a related story about McCain's "foreign cars,"
BusinessWeek reports that "The United Auto Workers, already supporting Obama, really doesn’t like Toyota or its Lexus unit."

MP: Oh, really? On the
UAW's website, it provides information for "consumers who want to purchase vehicles produced by workers who enjoy the benefits and protections of a union contract," and lists the vehicles made in the U.S. by members of the UAW, including the TOYOTA COROLLA and the TOYOTA TACOMA, along with the Mazda 6, Mitsubishi Eclipse, Mitsubishi Galant, Isuzu i-Series Truck, Mazda B-series Truck, and Mitsubishi Raider Truck.

The UAW doesn't discriminate against foreign car companies, why should McCain or you?

Affordable Housing: Nobody Knows What It Means, But Politicians Never Want To Be On Wrong Side

Anyone who has not lived in a liberal inner suburb such as Arlington, Virginia may have a difficult time understanding the emotional freight that the phrase "affordable housing" carries in local politics. It is an issue on which candidates campaign, on which activists make officeholders feel guilty and on which a remarkably forceful social service coalition, anchored by churches and nonprofit organizations, can amass lots of political power. Nobody is ever sure exactly what "affordable housing" means, but nobody running for office ever wants to be on the wrong side of it.

~Alan Ehrenhalt's article in The Governing Magazine titled "The Magic Word: Affordable"

HT: Tim Wise

What Do New Yorkers Think About Free Trade?

HT: Division of Labour

Flashback to 1999: Origins of the Credit Crisis

From the NY Times on September 30, 1999: "Fannie Mae Eases Credit To Aid Mortgage Lending":

In a move that could help increase home ownership rates among minorities and low-income consumers, the Fannie Mae Corporation is easing the credit requirements on loans that it will purchase from banks and other lenders.

The action, which will begin as a pilot program involving 24 banks in 15 markets will encourage those banks to extend home mortgages to individuals whose credit is generally not good enough to qualify for conventional loans. Fannie Mae officials say they hope to make it a nationwide program by next spring.

Fannie Mae, the nation's biggest underwriter of home mortgages, has been under increasing pressure from the Clinton Administration to expand mortgage loans among low and moderate income people and felt pressure from stock holders to maintain its phenomenal growth in profits.

In addition, banks, thrift institutions and mortgage companies have been pressing Fannie Mae to help them make more loans to so-called subprime borrowers. These borrowers whose incomes, credit ratings and savings are not good enough to qualify for conventional loans, can only get loans from finance companies that charge much higher interest rates -- anywhere from three to four percentage points higher than conventional loans.

''Fannie Mae has expanded home ownership for millions of families in the 1990s by reducing down payment requirements,'' said Franklin Raines, Fannie Mae's chairman and CEO. ''Yet there remain too many borrowers whose credit is just a notch below what our underwriting has required who have been relegated to paying significantly higher mortgage rates in the so-called subprime market.''

In moving, even tentatively, into this new area of lending, Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980s (MP: How prophetic!).

'From the perspective of many people, including me, this is another thrift industry growing up around us,'' said Peter Wallison a resident fellow at the American Enterprise Institute. ''If they fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.''

See Peter Wallison's article in today's WSJ

HT: Isaac Morehouse at Students for a Free Economy

Blame Fannie Mae and Congress For Credit Mess

How the political obsession with "affordable housing" and "home ownership" backfired:

The vast accumulation of toxic mortgage debt that poisoned the global financial system was driven by the aggressive buying of subprime and Alt-A mortgages, and mortgage-backed securities, by Fannie Mae and Freddie Mac. The poor choices of these two government-sponsored enterprises (GSEs) -- and their sponsors in Washington -- are largely to blame for our current mess.

In order to curry congressional support after their accounting scandals in 2003 and 2004, Fannie Mae and Freddie Mac committed to increased financing of "affordable housing." They became the largest buyers of subprime and Alt-A mortgages between 2004 and 2007, with total GSE exposure eventually exceeding $1 trillion. In doing so, they stimulated the growth of the subpar mortgage market and substantially magnified the costs of its collapse.

Beginning in 2004, their portfolios of subprime and Alt-A loans and securities began to grow. Subprime and Alt-A originations in the U.S. rose from less than 8% of all mortgages in 2003 to over 20% in 2006. During this period the quality of subprime loans also declined, going from fixed rate, long-term amortizing loans to loans with low down payments and low (but adjustable) initial rates. The hint to Fannie and Freddie was obvious: Concentrate on affordable housing and, despite your problems, your congressional support is secure.

Now the Democrats are blaming the financial crisis on "deregulation." This is a canard. There has indeed been deregulation in our economy -- in long-distance telephone rates, airline fares, securities brokerage and trucking, to name just a few -- and this has produced much innovation and lower consumer prices. But the primary "deregulation" in the financial world in the last 30 years permitted banks to diversify their risks geographically and across different products, which is one of the things that has kept banks relatively stable in this storm.

As a result, U.S. commercial banks have been able to attract more than $100 billion of new capital in the past year to replace most of their subprime-related write-downs. Deregulation of branching restrictions and limitations on bank product offerings also made possible bank acquisition of Bear Stearns and Merrill Lynch, saving billions in likely resolution costs for taxpayers.

~Charles Calomiris and Peter Wallison in today's WSJ

See related CD post below

Saints Are No More Common in D.C. Than Wall St.

Why then is there such a mess in the financial markets? Much of that mess is due to the very people we are now turning to for solutions-- members of Congress.

Past Congresses created the hybrid financial institutions known as Fannie Mae and Freddie Mac, private institutions with government backing and political influence. About half of the mortgages in this country are backed by these two institutions.

Such institutions-- exempt from laws that apply to other financial institutions and backed by the implicit promise of government support with the taxpayers' money-- are an open invitation to risky behavior. When these risks blew up in their faces, Fannie Mae and Freddie Mac were taken over by the government, costing the taxpayers billions of dollars.

Saints are no more common on Capitol Hill than they are on Wall Street. We can only hope that the political "solution" does not turn out to be worse than the problem.

~From Thomas Sowell's column A Political "Solution"

Monday, September 22, 2008

Great Depression:Not A Single Canadian Bank Failed

The McFadden Act of 1927 specifically prohibited interstate branch banking in the U.S., and only allowed banks to open branches within the single state in which it was chartered. Therefore, U.S. banks were forced to be small and local, with an undiversified loan portfolio tied to the local economy of a single state, or a specific region of a single state. The strict regulatory framework of the McFadden Act created a delicate and fragile banking system that could not easily withstand the shock of the Great Depression. Exhibit A: 9,000 banks failed in the U.S. in the early 1930s (see chart above).

Could it have been different? Could a different regulatory framework have enabled the U.S. banking system to withstand the Great Depression, thereby lessening its impact on the overall economy? Yes. Consider the following:

San Francisco Federal Reserve -- During the Great Depression years—1930 through 1933—5.6% (1,352 banks), 10.5% (2,294 banks), 7.8% (1,500), and 12.9% (4,000) of U.S. banks failed in each year; by the end of that four-year stretch, almost half of U.S. banks had either closed or merged. In all, 9,000 banks failed during the 19300s (see chart above).

Bernanke (American Economic Review, 1983) argues that this banking crisis worsened the magnitude of the downturn because credit supply fell as banks failed. Thus, many firms were unable to finance potential investments. Most of the failed banks were small and operated out of just a single office. In Canada, where not a single bank failed, branching was the rule; in fact, Canada had only ten large banks during the 1930s (see chart above). The Canadian economy fared much better than did the United States economy, in large part because of its better diversified and integrated banking system.

Bottom Line: Strict banking regulations are not always the answer to creating a sound and stable banking system. Exhibit A: The McFadden Act and The Great Depression, and the fact that 0 banks failed in Canada (due to a more sensible regulatory system) vs. 9,000 bank failures in the U.S. largely due to the repressive regulatory framework of the McFadden Act.

This Isn't Capitalism, It's Corporatist Socialism: There's Nothing Free Market About It

When congressional leaders and presidential candidates Obama and McCain call for more government oversight of our struggling financial institutions, go ahead and laugh. You know you want to. The idea that the private sector would be in better shape today if only we demanded more oversight from our politicians is preposterous. Our politicians wouldn't recognize "fiscal responsibility" if it spat in their ears.

Wall Street moguls may be "greedy," as both McCain and Obama have described them, but at least there are real consequences when their greed becomes excessive. They go out of business.

Except, that is, when the government bails them out. Thus far, in addition to being on the hook for the federal government's own massive debt, taxpayers are also putting up $85 billion to back insurance giant AIG, up to $100 billion each to back Freddie Mac and Fannie Mae, and we're funding the Bear Stearns backstop. Congress is also expected to approve at least $25 billion in corporate welfare for the big three automakers. You can probably expect more handouts down the road. All of this has some analysts now questioning the U.S. government's bond rating, and worse, wondering whether the government itself may soon collapse under the weight of its own debt.

When you, Joe Citizen, spend frivolously and default on your loans, the bank takes your house. When the government spends your tax dollars frivolously, it simply cooks the books to cover its excesses. When the books are left in ashes, the government just takes more of your money, or it prints more money, leaving the money it hasn't already taken from you devalued. Over the last few weeks, we've learned that you now face the prospect of an additional indignity: When your neighbor's bank spends frivolously and defaults on its loans, the government's going take your money then, too, to keep the bank in business.

Many commenters have blamed all of this on capitalism. This isn't capitalism. It's a peculiar kind of corporatist socialism, where good risks and the resulting profits remain private, but bad risks and the resulting losses are passed on to taxpayers. There's nothing free-market about it.

Governments have been screwing over taxpayers for about as long as there have been governments and taxpayers. Capitalism, on the other hand, is a fairly recent development, and has spurred an explosion of wealth and the greatest standard of living in human history. What's happening now isn't capitalism, but capitalism is certainly taking the brunt of the blame.

Radley Balko, senior editor for Reason magazine

22 Job Seekers For Every Job Opening in Michigan

The Michigan Department of Labor and Economic Growth's Michigan Talent Bank specializes in "bringing people and jobs together," but there's just one problem: There are almost 750,000 people in Michigan looking for jobs (or at least that's the number of resumes available), but only about 34,250 jobs available, a ratio of almost 22 job seekers per job available.

Lessons From Pakistan on Banning Short Selling

The chart above (click to enlarge) of Pakistan's Karachi SE-100 Index (data from Global Financial Data) shows what happened when short selling was banned on June 23: a huge but brief 1,300 point rally for three days, followed by a slow 3,250 point market collapse, a drop of more than 26% in less than three months.

HT: James Reynolds

See related article in today's WSJ "Short Sellers Keep the Market Honest" and see a similar chart on Dealbreaker

Banning short-selling is a way of buying time -- but if the mooted RTC II isn't up and running very quickly, the stocks which went up today are liable to go straight back down to where they were -- and, probably, further, given that each successive stock-market low is lower than the last.

It's surely no coincidence that the short-selling ban was unveiled at exactly the same time as politicians started talking in public about a huge government bailout fund. The problem with the fund is that it will require time-consuming legislation to set up, and time was the one thing which Morgan Stanley, in particular, didn't have.

And so the short-selling ban is a stopgap measure, designed to artificially boost stock prices until Congress can get its act together and throw a few hundred billion dollars at the market in a more substantive attempt to stop it from imploding.

Sunday, September 21, 2008

Lessons on Trade, Protectionism, and Mercantilism

The Nation That Lost Its Jobs, But Got Them Back.

HT: OBloodyHell

Detroit 3 Fail? We'd Just Buy Different Mix of Cars

Ford's assembly plant in Louisville, Ky., is participating in that corporation's struggles. The Toyota plant in Georgetown, Ky., is flourishing as part of the other American auto industry. It is located largely in the South, employs 92,000 Americans and is not in the toils of the cost structure Ford and GM negotiated with the United Auto Workers union. Lemon socialism -- the subsidization of the weak -- is supposedly needed lest a U.S. automaker file for bankruptcy, causing the sort of civil disorder and social chaos that accompanied the disappearance of Studebaker, Packard, American Motors and others.

Detroit is striking for subsidies while the iron is hot -- while the 37 electoral votes of two automaking states, Ohio and Michigan, hang in the balance. Where is the "partisan rancor," which John McCain deplores, now that we really need it? He and Barack Obama agree on the corporate welfare for the three Detroit mendicants. Obama perhaps believes that lemon socialism is better than no socialism at all. McCain, reacting viscerally, sees everything as a moral melodrama; his economic thinking, which really is nothing of the sort, owes more to Moses than to Adam Smith. In McCainism -- the politics of "honor" -- there are no mere mistakes; they must also be dishonorable, because corrupt.

Anyway, taxpayers have been conscripted into subsidizing $25 billion of government loans for Detroit, which says that sum is nice as an appetizer, but hardly a meal. It wants more.

Detroit says, correctly, that some of its problems stem from fuel economy and other mandates imposed by the 535 automotive engineers on Capitol Hill. But that is beside the point, which is: No one thinks that the failure of an auto manufacturer would pose systemic risk to the economy. Americans would just buy a different mix of cars.

~George Will

Hurricanes Do Not Cause Shortages

But panic buying does
(especially if prices are not allowed to rise due to "price gouging" laws).

And price controls do
(previous CD post).

HT: Ryan Fulkerson

Saturday, September 20, 2008

U.S. Household Net Worth Up By 43% Since 2002

According to the Federal Reserve, U.S. household net worth fell by $2 trillion over the last year, from $58 trillion in the second quarter of 2007 to about $56 trillion in the second quarter of 2008 (see chart above). But compared to 2002, U.S. household net worth has increased by almost $17 trillion (from $39.2 trillion to $56 trillion), or by almost 43% in the last six years.

As Ryan Ellis at American Shareholders Association reminds us, let's "keep it in perspective."

Canadians Pay 2X As Much For Generics As We Do

From Canada's Fraser Institute's study "Seniors and Drug Prices in Canada and the United States, 2008 edition":

Results (see chart above) show that on average in 2007, prices for the generic drugs that were most commonly prescribed to Canadian seniors were 101% higher in Canada than for identical drugs in the United States.

High prices for generics in Canada are caused by various misguided public policies that shield retail pharmacies and generic drug manufacturers from the competitive market forces that would put downward pressure on the price of generic drugs. Specifically, the reimbursement structure of public drug programs is the primary cause of unnecessarily high prices for generic drugs.

Public drug programs indirectly reimburse retail pharmacies for the cost of prescriptions dispensed to their insured beneficiaries, instead of directly reimbursing consumers or patients (i.e., the beneficiaries). This insulates consumers from the cost of the drugs, thereby removing incentives for comparative shopping, which would put downward pressure on prices.

Additionally, most public drug programs reimburse the cost of generic drugs at a fixed percentage of the brand name original drug. Under fixed percentage reimbursement, there is no incentive for retailers to compete by offering the lowest prices. This is because the buyer (the government) offers every seller the same price, and the price is known in advance. Large, established generic companies take advantage of the fixed price public reimbursement system by offering rebates to retailers that are “bundled” across many products, in exchange for exclusive distribution rights. This frequently results in a virtual monopoly within particular retail pharmacy chains for a particular generic label, and because pharmacies are reimbursed directly, discounts are not passed on to consumers. Thus, exclusive distribution allows pharmacies to charge the same inflated generic prices to public and private payers alike.

HT: Ben Cunningham

Quote of the Day: Natural Economists

I have found, over a long time, that some people are natural economists. They don't take a course, but they understand--the principles seem obvious to them. Other people may have Ph.D.s in economics, but they're not economists. They don't think like an economist. Strange, but true.

~Milton Friedman in the WSJ, at age 94 (4 months before he died)

HT: Jack McHugh

Cartoon of the Day

Shield Men From Folly: Fill The World With Fools

Many politicians and pundits claim that the credit crunch and high mortgage foreclosure rate is an example of market failure and want government to step in to bail out creditors and borrowers at the expense of taxpayers who prudently managed their affairs. These financial problems are not market failures but government failure.

The Community Reinvestment Act of 1977 is a federal law that intimidated lenders into offering credit throughout their entire market and discouraged them from restricting their credit services to low-risk markets, a practice sometimes called redlining. The Federal Reserve Bank, keeping interest rates artificially low, gave buyers and builders incentive to buy and build, thereby producing the housing bubble. Lenders were willing to make creative interest-only loans, often high-risk "no doc" and "liar loans," in order to allow people to buy more housing than they could afford. Of course, with the expectation that housing prices will continue to rise, it was no problem for lenders and borrowers but housing prices began to fall, leaving some people with negative home equity and banks in trouble.

The credit crunch and foreclosure problems are failures of government policy. In fact, what we see now is a market correction to foolhardy government policy. Congress' move to bailout lenders and borrowers who made poor decisions will simply create incentives for people to make unwise decisions in the future. English philosopher Herbert Spencer said, "The ultimate result of shielding men from the effects of folly is to fill the world with fools."

~Walter Williams

MP: Or if you make the world safe for idiots (and reckless borrowers, investors and executives), you’ll create a world full of idiots (reckless borrowers, investors and executives).

Friday, September 19, 2008

Convenient, Affordable Care: A Parking Lot Away

From John Goodman's Health Policy blog:

HealthFair operates a fleet of mobile screening "Health Coaches" (see photo above) that it parks at destinations around the country. The firm claims to have performed over 1 million preventive screening tests since its founding in 1999.

Their big sellers are preventive screens to assess the risk of heart attack, stroke and aneurism. The 7-test package includes an echocardiogram, electrocardiogram (ekg), an ASI test to detect hardening of the arteries, a stroke/carotid artery ultrasound, a test to detect abdominal aortic aneurysms, a ankle-brachial index and a bone density ultrasound.

HealthFair claims this bundle of tests would cost around $2,300 if performed in a hospital setting but its package deal (with interpretation) is only $195 - an 85% discount off the price of having the same tests performed piecemeal at your local hospital. Why so cheap? For one thing, HealthFair streamlines the scanning process, keeping overhead low and offering package deals. But the primary reason the price is so dramatically lower is that patients are expected to pay cash at the time of services. When patients pay with their own dollars, firms must offer value and convenience.

Now that 77 million baby boomers have reached middle-age and beyond, these type of health screening services promise to help assess cardiac health risk at a price all can afford. Just look for the big green motor coach at your local YMCA, Bally Total Fitness, Wal-Mart Neighborhood Market or Albertson's. (Appointments are required.)

HT: Ben Cunningham

MP: They'll be at four Rite-Aids in Michigan over the next few weeks. Search by zip code here.

Amazing Photos: The Short, But Eventful Life of Ike

In its brief lifespan of only 13 days, Hurricane Ike wreaked great deal of havoc. Affecting several countries including Cuba, Haiti, and the United States, Ike is blamed for approximately 114 deaths (74 in Haiti alone), and damages that are still being tallied, with estimates topping $10 billion. Many shoreline communities of Galveston, Texas were wiped from the map by the winds, storm surge and the walls of debris pushed along by Ike - though Galveston was spared the level of disaster it suffered in 1900.

Click above photo to enlarge,
see more photos here.

HT: Coyote Blog

Ban On Short Selling Is A Terrible Idea: Short Sellers Keep The Market Honest

The decision by SEC Chairman Chris Cox to ban short selling is a terrible idea. It is an encroachment on free-market principles. In extreme, the absence of short sellers would inflate stock market upturns, probably into bubbles. Short sellers keep the market honest. I know many in the short-selling community and most of them really do their homework. They are skeptical about puff pieces on companies and they are properly cynical about corporate press releases.

~Larry Kudlow

Thursday, September 18, 2008

Steven Landsburg: Like Creationism, Protectionism Requires Extraordinary Level of Willful Ignorance

Reason #1 that economist Steven Landsburg supports John McCain (with trepidation):

1. Free trade and immigration are my top issues, and McCain wins on both.

These are my top issues for several reasons. First, trade is the engine of prosperity not just for the United States but also for the poorest of the world's poor. Nothing matters more than that. Second, the instinct to care about the national origin of your trading partner (or employer, or employee, or landlord, or tenant) is an ugly one, and the instinct to care about the national origin of other people's trading partners—and on that basis to interfere forcibly with other people's voluntary transactions (through protectionism) —is even uglier.

Finally, protectionism, like creationism, requires an extraordinary level of willful ignorance. The consensus for free trade among economists is approximately as solid as the consensus for evolution among biologists, and it is a consensus supported by a solid body of both theory and observation. To ignore that consensus betrays a degree of anti-intellectualism that frightens me.

McCain is quite good on this issue, not just in terms of rhetoric (which I've known for a while) but in terms of voting record (which I've just recently researched). Obama, by contrast, promises to be our first explicitly protectionist president since Herbert Hoover. Some intervening presidents (Reagan, Bush I, and to a lesser extent Bush II) have been weak in their commitments to free trade, but none between Hoover and Obama has so explicitly rejected it.

Read the rest here in The Atlantic

Economists Are Primarily Writers of Econ Essays

Many economists falsely think of themselves as scientists who just “write up” research. We are not; we are primarily writers. Economics and finance papers are essays. Most good economists spend at least 50% of the time they put into any project on writing. For me, it’s more like 80%.

From the main conclusion in "
Writing Tips for Ph. D. Students," by economist and professor of finance John H. Cochrane, Graduate School of Business at the University of Chicago

Several other tips from Professor Cochrane:

Figure out the one central and novel contribution of your paper. Write this down in one paragraph. As with all your writing, this must be concrete.

Distilling your one central contribution will take some thought. It will cause some pain, because you will start to realize how much you’re going to have to throw out. Once you do it, though, you’re in a much better position to focus the paper on that one contribution, and help readers to get it quickly.

Your readers are busy and impatient. No reader will ever read the whole thing from start to finish. Readers skim. You have to make it easy for them to skim. Most readers want to know your basic result. Only a few care how it is different from others. Only a few care if it holds up with different variable definitions, different instrument sets, etc.

A good paper is not a travelogue of your search process. We don’t care how you came to figure out the right answer. We don’t care about the hundreds of things you tried that did not work. Save it for your memoirs.

Government Policy Got Us Into the Subprime Mess

Don Boudreaux points to this letter in the WSJ:

We are all talking about subprime loans and the havoc they've wreaked on the economy, but no one is talking about why banks give out these loans -- they are required to by law. Since the Community Reinvestment Act of 1977, Congress requires banks to offer loans to minorities in low-income areas, even if the clients can't make down payments, don't have good credit histories, or even employment histories.

Since these clients are high-credit risks, the only loans lenders can offer are high-interest loans that don't require a down payment or good credit history. These loans frequently default.

In order to cut down on the number of subprime loans an institution must make, it must cut down on all loans, because its subprime business is a proportion of its overall business.

Are we willing to crash our economy over some misplaced idealism? Congress must rescind the CRA or this problem will continue beyond today's bailouts.

M. Franks, Little Rock, Ark.

See previous CD posts here, here and here on the CRA, and its contribution to the housing and credit problems.

It's Not A Housing Problem, It's A Leverage Problem: Let's Bring Back 20% Down Payments

In this Bloomberg interview, economist and former St. Louis Fed president William Poole says that the fundamental problem is not housing, but leverage, both for individual, highly-leveraged households who had too little equity in their homes, and for the highly-leveraged financial firms that purchased the highly-leveraged mortgage securities.

Poole says there's too much debt, too much leverage, not enough equity in general, and suggests phasing out (or reducing by 50%) the tax deductibility of interest payments for corporations, which encourages excessive debt for tax reasons.

Arnold Kling at EconLog agrees with Poole, and suggests that "If we go back to 20% down payments, the market will be more stable. I'm sure that in a free market we would see 20% down payments. Barney Frank is the only person I can think of who still wants to lend with little or no money down. He's welcome to do it, but I dare him to use his own money instead of ours."

Quote of the Day: There Are No Solutions

There are no solutions; there are only trade-offs.

~Thomas Sowell

The Vision of The Anointed Central Planners

Kip’s Law: Every advocate of central planning always — always — envisions himself as the central planner.

Via Craig Newmark

Related quotes from Thomas Sowell's book "The Vision Of The Anointed: Self-Congratulation as a Basis for Social Policy":

In their haste to be wiser and nobler than others, the anointed have misconceived two basic issues. They seem to assume: (1) that they have more knowledge than the average member of the benighted, and (2) that this is the relevant comparison. The real comparison, however, is not between the knowledge possessed by the average member of the educated elite versus the average member of the general public, but rather the total direct knowledge brought to bear though social processes (the competition of the marketplace, social sorting, etc.), involving millions of people, versus the secondhand knowledge of generalities possessed by a smaller elite group.

The presumed irrationality of the public is a pattern running through many, if not most or all, of the great crusades of the anointed in the twentieth century--regardless of the subject matter of the crusade or the field in which it arises. Whether the issue has been 'overpopulation,' Keynesian economics, criminal justice, or natural resource exhaustion, a key assumption has been that the public is so irrational that the superior wisdom of the anointed must be imposed, in order to avert disaster. The anointed do not simply happen to have a disdain for the public. Such disdain is an integral part of their vision, for the central feature of that vision is preemption of the decisions of others.

The vision of the anointed is one in which ills as poverty, irresponsible sex, and crime derive primarily from 'society,' rather than from individual choices and behavior. To believe in personal responsibility would be to destroy the whole special role of the anointed, whose vision casts them in the role of rescuers of people treated unfairly by 'society'.

The charge is often made against the intelligentsia and other members of the anointed that their theories and the policies based on them lack common sense. But the very commonness of common sense makes it unlikely to have any appeal to the anointed. How can they be wiser and nobler than everyone else while agreeing with everyone else?

Gender-Based Discounts

Gender-based discounts (e.g. Ladies Night specials at bars) have been declared to be illegal forms of discrimination in California and New Jersey, and maybe some other states.

What about the discount above that I saw today at my dry cleaner in Michigan, would that be an illegal "gender-based discount?"

I-35W Bridge in Minneapolis: 11 Months To Build It

Only in America.

Amid Other Concerns, Don't Worry About Inflation

The Consumer Price Index (CPI) last month rose more than 5% over a year earlier, way above a rate that is consistent with price stability. At the same time, the federal-funds rate is at 2%, so the real interest rate on federal funds -- the interest rate adjusted for inflation -- has turned very negative.

Will this low real interest rate lead to inflation spiraling out of control? Shouldn't the Fed react more to the currently high inflation numbers by tightening policy, a view often advocated on this page, or at least not further lower the fed-funds rate if the economy looks like it might go into a tailspin? The answer is no.

While headline CPI inflation over the past year was above 5%, core CPI inflation was around 2.5% (about the same as the 2.4% average since 1994, see top chart above). With the sharp decline in oil prices from over $140 per barrel to below $100 now, and the decline in other commodity prices, headline inflation should fairly quickly move back towards core inflation.

If the monetary authorities react to headline inflation numbers, they run the risk of making serious policy mistakes. We have seen that headline inflation has risen well above its underlying trend as the price of energy has risen. But with energy prices having fallen, it will soon fall back to or below its underlying trend. A tightening of monetary policy in reaction to the rise in headline inflation would lead to a decline in employment and inflation. Because of the long lags between monetary policy actions and changes in economic activity, that decline would occur sometime down the road, when inflation would more likely be at or below its underlying trend.

One widely watched measure called the break-even inflation rate -- the difference between yields on longer maturity Treasury Inflation Protection Securities (TIPS) and Treasury bonds -- has fallen substantially in the last couple of months (see bottom chart above, the spread is now below 1.8%, the lowest in more than 5 years). Not all of this decline should be attributed to falling longer-run inflation expectation -- break-even inflation also is affected by inflation uncertainty and liquidity considerations. But it certainly suggests that inflation expectations are more likely to be falling rather than rising.

Columbia professor Frederic Mishkin
in today's WSJ

MP: I'm with Mishkin on this issue. There might be a lot of serious concerns about the economy and financial markets, but inflation isn't one of them. Worry about issues, but as Mishkin says, "don't worry about inflation."

Humour: Why Did the Chicken Cross the Road?

BARACK OBAMA: The chicken crossed the road because it was time for a CHANGE! The chicken wanted CHANGE!

JOHN McCAIN: My friends, that chicken crossed the road because he recognized the need to engage in cooperation and dialogue with all the chickens on the other side of the road.

DICK CHENEY: Where's my gun?

SARAH PALIN: Where's MY gun? That chicken's got no choice!

PAT BUCHANAN: To steal the job of a decent, hardworking American.

BILL CLINTON: I did not cross the road with THAT chicken. What is your definition of chicken?

AL GORE: I invented the chicken!

Read more here.

HT: Dennis Gartman

Wednesday, September 17, 2008

Crisis As Bad As Great Depression Or Worse?

Nobel-prize winner and former chief economist of the World Bank, Joseph Stiglitz has warned that the current financial crisis will continue for at least another eighteen months and in many ways represents a worse situation than the one faced by Americans during the Great Depression of the 1930s.

“This is clearly the most serious problem since the Great Depression and in some ways worse in terms of the financial institutions.” Stiglitz commented, referring to the fact that lenders are unwilling to take risks to finance each other because they no longer have complete access to their own undertakings let alone those of other institutions.

MP: The chart above shows average annual bank failures by decade back to the 1930s, illustrating a few points:

1. Put in context, the S&L crisis of the 1980s and early 1990s was relatively mild compared to the banking crisis of the 1930s, in terms of average bank failures per year.

2. The banking crisis of the 1930s was so severe that more banks failed (4,000) in a single year (1933) than the sum total of all bank failures in the period since 1934 (3,566).

3. Most of the bank failures in the 1930s were in 1930-1933 period, when bank failures averaged almost 2,300 annually. Once FDIC was put in place, the average number of bank failures dropped to about 50 per year.

4. Unless it gets a lot, lot worse, any comparison of today's financial crisis to the 1930s seems like quite an exaggeration.

Study Shows Speculators Helped LOWER Oil Prices

It was said to be the year of speculators gone wild. Seemingly everyone in Washington, including Barack Obama and John McCain, decided that oil prices were soaring because profiteers and middlemen were manipulating the futures markets. "Speculators" were spotted everywhere this side of the grassy knoll.

The only problem is that there's no evidence to support the conspiracy theories -- and sure enough, federal regulators dismantled this Beltway consensus late last week. In one of the broadest and most authoritative studies to date, the Commodity Futures Trading Commission has offered hard statistical data that financial trading hasn't been driving price moves. The CFTC conducted an unprecedented Wall Street data sweep and scrutinized millions of transactions worth billions of dollars between January and June of this year.

Lo and behold, the CFTC found that index traders and swap dealers actually reduced their stake in crude oil futures as prices spiked. The number of contracts held by these investors betting that prices would increase -- the net long position -- fell by 11%, and more were shorting oil than going long over the six-month period. In other words, index traders and swap dealers were driving the future price of oil down.

Commodity index funds also have a much smaller share of the oil market than everyone thought: just 13%. Even if the figure was 70% or more, as some assumed, it wouldn't have mattered. In a futures exchange, trades are matched, so one trader's gain is another's loss. The overall volume is irrelevant.

Wall Street Journal editorial

Thanks to Wesley Barnett for the pointer

Lessons From the 1979 Chrysler Bailout

A good way to see the current problems is to look back to the first big bailout of modern times. Before A.I.G., before Fannie and Freddie, before Bear Stearns, there was Chrysler.

In 1979, when it was still the 10th largest company in the country, Chrysler found itself on the verge of collapse, largely because high oil prices had made its gas guzzlers unappealing. Company executives and union leaders came to Washington, hat in hand, arguing that Chrysler’s demise would wreak unacceptable damage on the American economy. Congress and the Carter administration responded by arranging for $1.2 billion in subsidized loans. The Reagan administration helped further in 1981 by restricting Japanese imports.

On its face, the Chrysler rescue was a huge success. Under Lee Iacocca, the company came out with the K-car line of smaller vehicles, like the Dodge Aries, as well as the original minivan. By the mid-’80s, Chrysler had repaid the loans. Mr. Iacocca appeared on the cover of Time magazine as “Detroit’s comeback kid,” and his autobiography became a No. 1 best seller.

But if you take a moment to think through the full Chrysler story, you start to realize that it’s setting a really low bar. The Chrysler bailout may have saved the company, but it did nothing, after all, to stop Detroit’s long, sad decline.

Barry Ritholtz — who runs an equity research firm in New York and writes
The Big Picture, one of the best-read economics blogs — is going to publish a book soon making the case that the bailout actually helped cause the decline. The book is called, “Bailout Nation.” In it, Mr. Ritholtz sketches out an intriguing alternative history of Chrysler and Detroit.

If Chrysler had collapsed, he argues, vulture investors might have swooped in and reconstituted the company as a smaller automaker less tied to the failed strategies of Detroit’s Big Three and their unions. “If Chrysler goes belly up,” he says, “it also might have forced some deep introspection at Ford and G.M. and might have changed their attitude toward fuel efficiency and manufacturing quality.” Some of the bailout’s opponents — from free-market conservatives to Senator Gary Hart, then a rising Democrat — were making similar arguments three decades ago.

Instead, the bailout and import quotas fooled the automakers into thinking they could keep doing business as usual. In 1980, Detroit sold about 80% of all new vehicles in this country. Today, it sells just 45%.

There is a similar chance for us to be fooled about the extent of today’s problems. Some day, house prices will stop falling and the financial markets will calm down. But the underlying problems aren’t going away on their own.

At its core, the current crisis stems from two problems. Regulators, starting with Alan Greenspan, assumed that a real estate bubble couldn’t happen and that Wall Street could largely police itself. And households, struggling with incomes that haven’t kept up with inflation in recent years, said yes when those lightly regulated banks offered them wishful-thinking loans. No bailout can solve either problem.

David Leonhart in
yesterday's NY Times

Politicians' Hypocrisy: Do As I Say, Not As I Do

Reason Magazine asks: Why should other Alaskans be arrested for something Sarah Palin once did with impunity?

When it comes to questions about youthful marijuana use, Sarah Palin is no Slick Willie. "I can't claim a Bill Clinton and say that I never inhaled," the Republican vice presidential candidate
told the Anchorage Daily News in 2006 (Palin said she has smoked marijuana -- remember, it was legal under state law, she said, even if illegal under U.S. law -- but says she didn't like it and doesn't smoke it now), before she was elected governor of Alaska.

Although Palin's handling of the issue scores higher on the candor meter than Clinton's, she has the same difficulty reconciling her personal experience with her policy positions, a problem also shared by former pot smoker Barack Obama. None of them has a persuasive answer to the question of why other Americans should be arrested for something they did with impunity.

Chart above is from NORML.

CD Milestone Today: 1 Million Visits

Thanks for your visits to Carpe Diem!

Supermarket Dental Surgery Opens in UK To Help Solve Shortage of National Health Care Dentists

BBC: A dental surgery has opened in a supermarket in Greater Manchester. Sainsbury's Supermarket say that the private dentist clinic in its Sale branch is the first in a supermarket in the UK. The private surgery will go head to head with the NHS, charging £16 for a check up, which is slightly less than National Health Service fees.

David Gilder, of Sainsbury's, said: "There is a shortage of dental practices in the UK and the launch of this new service goes some way to providing local people with greater access to dental advice and a range of procedures."

also the article "Seven Million Patients Can't Find a Dentist on the NHS for Two Years," and the editorial "Bad Teeth - The New British disease."

HT: Ben Cunningham

Tuesday, September 16, 2008

We Won The War on Poverty Without Even Noticing It: Thanks To Cheap Imports From China

The abstract of the paper “Inequality and Prices: Does China Benefit the Poor in America?” by University of Chicago economists Christian Broda and John Romalis:

Over the past three decades there has been a spectacular rise in income inequality as measured by official statistics. In this paper we revisit the distributional consequences of increased imports from China by looking at the compositional differences in the basket of goods consumed by the poor and the rich in America. Using household data on non-durable consumption between 1994 and 2005 we document that much of the rise of income inequality has been offset by a relative decline in the price index of the poor. By relaxing the standard assumptions underlying the representative agent framework we find that inflation for households in the lowest tenth percentile of income has been 6 percentage points smaller than inflation for the upper tenth percentile over this period.

The lower inflation at low income levels can be explained by three factors: 1) The poor consume a higher share of non-durable goods —whose prices have fallen relative to services over this period; 2) the prices of the set of non-durable goods consumed by the poor has fallen relative to that of the rich; and 3) a higher proportion of the new goods are purchased by the poor. We examine the role played by Chinese exports in explaining the lower inflation of the poor. Since Chinese exports are concentrated in low-quality non-durable products that are heavily purchased by poorer Americans, we find that about one third of the relative price drops faced by the poor are associated with rising Chinese imports.

From the article "How China Helps America’s Poor" at The American:

In their newest study, Broda and Romalis contend that inequality has actually grown very little over the last decade. According to their research, the perceived rise in inequality—accepted as gospel by many economists and political figures—comes down to a simple measurement error, namely, focusing only on income, rather than on the prices of goods that particular groups consume.

“We are underestimating the gains from trade,” Broda says. “The current statistical interpretation ignores the fact that a poor household today can access goods that, in the 1960s, they could not—microwaves, DVDs—and, more importantly, that the prices of the staples that lower-income households consume have also gone down dramatically.”

Indeed, he claims that lower-income Americans, who tend to spend more on certain goods, have made impressive strides over the past decade, thanks largely to U.S. trade with China.

Broda and Romalis found that in the sectors where Chinese imports have increased the most (especially nondurable goods such as canned food and clothing), prices have fallen dramatically. They estimate that about one-third of the price decline for the poor is directly associated with rising imports from China. “In the sectors where there is no Chinese presence,” Broda says, “inflation has been more than 20 percent.”

“In the ’60s, all the talk was about trying to win the war against poverty,” he adds. “The bottom line with our study is that we may have won the war against poverty without even noticing it. Here we have Congress debating why the poor in America haven’t been able to grasp the great economic growth we’ve seen in the last 30 years. ‘It’s been only concentrated in the top 1%,’ they say. And, absolutely, that segment has grown a lot. But that doesn’t mean that the poor haven’t been able to access part of that progress.”

The Resilience of American Finance: The Future Growth Of Financial Services Industry Is Assured

The turmoil in the financial markets will reorganize the financial landscape. But this does not mean the financial industry will shrink dramatically. In fact the current crisis could well lead to an increase in the demand for financial services, as the world grapples with the need for new financial instruments, new risk management techniques, and the increasing complexity of the financial world.

Despite the recent turmoil, there is good evidence that the worst is over, especially for the commercial banks with access to Federal Reserve credit. Despite yesterday's severe sell-off, most are significantly higher than their July 15 low, and some such as Wells Fargo and UBS are up over 50% (see chart above).

Nevertheless, the current crisis will change the financial landscape. Certainly Bear, Merrill, Lehman and others will disappear as separate corporate entitles. But other institutions, specifically the commercial banks that absorb these firms, and who have direct access to Federal Reserve credit, will become larger.

The demand for financial services will in no way disappear as the automobile pushed out the horse and buggy a century ago. Although unemployment on Wall Street will undoubtedly rise, many workers will be reabsorbed elsewhere in the industry. The current financial crisis calls out for new products and services as well as more, not less, information about what is safe and profitable in the future environment.

It is easy to be pessimistic about the future of financial services in the current climate. But objective facts indicate that the future demand for these services will be high. Looking beyond past losses, the demand for financial services, especially internationally, has been strong. The growth of the developing countries, combined with the aging in the developed countries, will lead to huge international capital flows that will be facilitated by new and existing financial intermediaries.

It is shocking that firms that withstood the Great Depression are now failing in what economists might not even call a recession. But their failure was not caused by lack of demand for their services. It was caused by management's unwillingness to understand and face the risks of the investments they made. The names of the players will change, but the future growth of the financial services industry is assured.

~Jeremy Siegel in
today's WSJ

MP: Capitalism is a "profit AND loss" system.

Monday, September 15, 2008

Hurricanes Do NOT Cause Shortages

But price controls do.

Census Data Show Significant Income Mobility

One way to quantify income mobility is to examine how many people remain in the same tax bracket over time. We compared the returns of tax filers in the lowest tax rate bracket (zero) in 1987 with their returns in 1996. Only one third of the tax filers were still in the zero tax bracket and two thirds had moved up: 25% were now in the 10% bracket, 32% had moved up to the 15% bracket and 9% were in the 25%, 28%, 33% or 35% brackets. And that was following them for a decade, not a generation.

From 1996 to 2005, we have the income mobility data for income quintiles. Of those filers who were in the lowest 20% in 1996 and who also filed in 2005, 42.4% remained in the bottom 20% but 57.6% had moved up to a higher quintile: 28.6% were in the next highest quintile, 13.9% were in the middle quintile, 9.9% were in the second highest quintile, and 5.3% were in the highest quintile.

The data also show downward mobility among the highest income earners. The top 1% in 1996 saw an average decline in their real, after-tax incomes by 52% in the next 10 years.

~Art Laffer and Stephen Moore in today's WSJ

Economic Conditions: Not Even Close to The Great Depression, We're A Nation of Exaggerators

In the past two months, this newspaper alone (Washington Post) has written no fewer than nine times, in news stories, columns and op-eds, that key elements of the economy are the worst they've been "since the Great Depression."

It's a virus -- and it's spreading. Do a Google News search for "since the Great Depression," and you come up with more than 4,500 examples of the phrase's use in just the past month.

But that doesn't make any of it true. Things today just aren't that bad. Sure, there are trouble spots in the economy, as the government takeover of mortgage giants Fannie Mae and Freddie Mac, and jitters about Wall Street firm Lehman Brothers, amply demonstrate. And unemployment figures are up a bit, too. None of this, however, is cause for depression -- or exaggerated Depression comparisons.

This would suggest that anyone who says we're in a recession, or heading into one -- especially the worst one since the Great Depression -- is making up his own private definition of "recession." And probably for his own political purposes.

~Don Luskin in yesterday's
Washington Post

MP: See chart above of annual unemployment rates back to 1930 (August unemployment rate for 2008), showing that the average jobless rate in the 1930s was 17.1%, much, much higher (almost 3X higher) than the current rate of 6.1%. Any comparisons of today's economy to the economic conditions of the Great Depression are surely largely exaggerated.

Sunday, September 14, 2008

Change You Can Believe In, As Long As You're Using Someone Else's Money, And Not Your Own

The WSJ, Greg Mankiw and Tax Prof all reported on Joe Biden's tax returns (available here and summarized on Tax Prof). As Tax Prof (Paul Caron) points out: "Despite income ranging from $210,432 - $321,379 over the ten-year period from 1998 to 2007, the Bidens have given only $120 - $995 per year to charity, which amounts to 0.06% - 0.31% of their income (see chart below)."

Tax Prof points to IRS statistics showing that taxpayers with AGI over $200,000 make an average charitable contributions of $20,434, and taxpayers with AGI between $100,000 and $200,000 make average charitable contributions of $4,057. From 1998-2007, Biden's average AGI was $245,000 and his average annual charitable contribution was only $369 ($7 per week), see the comparison in the chart below.

ECON 101: You Can't Have It Both Ways

Do a Google news search for "gas stations" and "running out of gas" and you'll find more than 400 news reports like this one:

NASHVILLE, Tenn.- Hurricane Ike's presence near refineries in the Gulf of Mexico, drove many drivers in the midstate rushing out to get gas and leaving many gas stations tapped out.

Along Stewart's Ferry Pike gas seekers saw one of three things at gas stations: long lines, gas pumps covered, or no gas at the station at all. Some of those gas stations with no gas have been placed on a waiting list by distributors because of the high demand.

Do a Google news search for "price gouging" and you'll find more than 2,000 stories like this one, also from Tennessee:

state of Tennessee has seen a significant spike in the number of calls reporting price gouging over the past 24 hours. Tennessee state law prohibits businesses from unreasonably raising prices on essential goods, commodities, or services in direct response to a natural disaster, whether the natural disaster happened in Tennessee or not.

Observation #1: Demand for gasoline has gone up due to panic buying by consumers "rushing out to get gas" at the same time as gasoline supplies are falling, or expected to fall. It's simple economics that when demand for a product rises at the same time that the supply of that product falls, prices naturally rise to reflect the change in market conditions. Market prices always transmit accurate information about "relative scarcity," and act as a truthful "scarcity-meter." Since gasoline has become relatively more scarce in the last few days, the price naturally rises.

Observation #2: There's the joke about the son who says to his father, "Dad, I want to grow up, and be a musician." The father says "Well son, you're going to have to make a choice, you can't have it both ways."

In the case of gasoline, you can't have it both ways: If you don't want gasoline shortages, and you don't want gas stations running out of gas, you have to let the price rise to ration the scarce supply. If you don't allow prices to rise and prohibit "price gouging," you'll have guaranteed shortages and stations running out of gas. But you can NOT have low gas prices and high gas supplies (inventories at stations) at the same time, in the face of rising demand and falling supply.

Observation #3: Buyers complain about high gas prices and many report "gas gougers," but it is largely their fault that gas prices rise, due to panic buying and "rushing out to get gas." Without panic buying, the prices wouldn't have risen as much.

Observation #4: Remember also that gas stations make most of their profits not on gas, but on the other items they sell inside (milk, cigarettes, groceries, etc.). When a station sells out of gas and has to close until the next delivery, it loses out on sales of items with the highest profits, so it would be natural to raise prices so that it can ration their current supply of gas until the next delivery, which might be days away.