Left and Wrong author: Harold Meyerson
Left and Wrong article: Greece or California: Who’d you rather be?

In the linked article, Harold Meyerson (a left-wing writer for the Washington Post and Los Angeles Times) argues that we as a nation need to bail out California, which is beset by budgetary woes, because Europe has decided to give aid to Greece.

What draws progressives to be bailout suckers? Battered-wife syndrome?

How many bailouts must we all suffer before the bailout suckers learn one very simple lesson: if money is obtainable for certain behavior, that behavior will certainly obtain. That is not to say that California wants to default. A bailout does not provide an incentive to default. It removes a disincentive to default.

There are certain economic consequences to a bankrupt California, and California should suffer all of them. Contrary to what Meyerson says, there are very few consequences to those outside of California; no budget cuts, no layoffs, no crowded classrooms. The only serious consequence to the rest of the country is the bailout he proposes.

The rest of the country has no input in the California budgetary or legislative process, nor should it. To invite this by giving them a feather bed invites federal control over California priorities and programs. If we go down that road, Californians (and Texans and Alaskans and Hawaiians) will soon enough have input and control over the budget priorities (and taxes) in my state. After all, Meyerson says we should not give Californians special treatment.

Congress should do the exact opposite of what Meyerson proposes. They should vote on and pass a bipartisan declaration that states that no federal funds will be appropriated to California in the event or anticipation of credit downgrade or default. That will prevent California legislators from kicking the can down the road (to Washington, DC) and force them to make the hard choices they must make … for themselves.

Link: http://www.realclearmarkets.com/articles/2010/02/15/why_washington_cant_reform_healthcare_97634.html

Another really good article on health care economics …

Link: http://www.realclearpolitics.com/articles/2010/02/03/the_perils_of_prosperity_the_story_behind_the_economic_crisis_100149.html

This summary of the causes of the recession by respected economist Robert Samuelson is generally close to the mark. It leaves out some key points (CRA, homeownership promotion, mark-to-market), but is right on the principle macroeconomic factors.

The second to last paragraph has some merit:

But it’s neither possible – nor desirable – to regulate away all risk. Every “bubble” is not a potential Depression. Popped bubbles and losses must occur to deter speculation and compel investors and borrowers to evaluate risk. The overregulation of finance may discourage useful innovation and clog the channels for capital on which an expanding economy depends. Finally, a single-minded focus on the blunders of Wall Street may also distract us from other possible sources of future crises, including excessive government debt and borrowing.

Two big inefficiency problems are occurring with the way the government is handling the crisis right now. First, the return to excessively low interest rates (which Samuelson points out were part of the reason we got here) and an unprecedented amount of deficit spending will result in productive inefficiency–an excessive amount of investment over saving. The difference is made up in an increase in the money supply fed by government debt (and, for the first time, by existing mortgage securities). This will end up in higher inflation (when money velocity returns), unused capital investment, and broken balance sheets (both for households and for government).

Second, since much of the spending is by government, it also results in allocative inefficiency–investment and consumption of goods and services at prices divorced from actual value. Whenever you hear some Keynesian (like Brad DeLong) saying “spend money on anything", you will understand what I am talking about. Intuitively it makes no sense to pay people to bury cash in the ground and dig it up again. Yet almost the entire stimulus bill was money looking for a grift. The boom caused a lot of government-induced malinvestment, principally in financial services and homebuilding industries. The bust is a natural reaction to correct these, to move the capital and labor invested in these industries elsewhere. If this is interrupted by government pushing the resources into yet other unproductive work (e.g., green jobs), the bust will have made us all poorer for nothing and will continue until we let the natural adjustments occur.

To progressives I say: … LET’S MAKE A DEAL!

I’ll keep my morals out of your bedroom if you keep your morals out of my wallet.

Let the progress begin.

While it is a little late, I may as well go on record writing that I oppose(d) the reappointment of Ben Bernanke as Chairman of the Federal Reserve. He’s a very capable individual, but:

1. He is implementing the same policy that created the severe economic crisis that gave us a badly structured economy and a resulting recession, i.e. easy money and artificially low interest rates. In fact, he has pursued the lowest interest rates in the Fed’s history.
2. He has sought to acquire much more power and discretion for the Federal Reserve. Not only has he returned to a dual policy of price stability and macroeconomic stability (full employment), the latter being wisely and effectively discarded in the last thirty years by Volcker and Greenspan, but he has made these goals justification for buying consumer mortgages and equities without Congressional approval.

In fact, his very competence is part of the problem. He has found brilliant and inventive ways to pursue these goals, all of which (intentionally or not) expand the power of the Fed at the expense of elected officials, the financial industry, and common liberty.

Anyhow, Bernanke was confirmed to a second four-year term by the U.S. Senate yesterday by a vote of70-30. 18 Republicans, 11 Democrats, and 1 independent voted no.

I was not actually surprised that many Republicans supported his re-confirmation. But I was curious how this vote compared with the TARP vote of October 2008. It would seem that similar reasoning for legislators to oppose TARP would be used to oppose Bernanke: letting the market adjust to economic reality, belief that government interference makes the problem worse, assuaging symptoms accommodates the problem, so forth.

So, comparing Republicans on the two votes (the TARP vote breakdown is here) for those who served in both Congresses, we have:

1. For TARP, for Bernanke (18): Alexander (TN), Bennett (UT), Bond (MO), Burr (NC), Chambliss (GA), Coburn (OK), Collins (ME), Corker (TN), Graham (SC), Gregg (NH), Hatch (UT), Isakson (GA), Kyl (AZ), Lugar (IN), McConnell (KY), Murkowski (AK), Snowe (ME), Voinovich (OH)
2. For TARP, against Bernanke (7): Cornyn (TX), Ensign (NV), Grassley (IA), Hutchison (TX), McCain (AZ), Specter (PA), Thune (SD)
3. Against TARP, for Bernanke (3): Barrasso (WY), Cochran (MS), Enzi (WY)
4. Against both (10): Brownback (KS), Bunning (KY), Crapo (ID), DeMint (SC), Inhofe (OK), Roberts (KS), Sessions (AL), Shelby (AL), Vitter (LA), Wicker (MS)

Note that three Republicans voted who did not serve in the last Congress and thus did not vote on TARP: Johanns (NE), LeMieux (FL), and Risch (ID); Johanns voted for Bernanke, the other two against. That makes 41 Republicans because I included Specter (PA), turncoat.

Group (1)–the timid. This includes a lot of typical establishment, free-market-is-better-I-guess kind of Republicans who think the bailout was necessary “to avoid a Depression” (whatever) and the Fed should be doing all it can to “get the economy moving again". It is disappointing to see some stalwart economic conservatives here, like Burr, Kyl, and especially Coburn. These people lean free-market, but they lack the conviction.

Group (2)–the jaded. These might be senators who have changed their mind on macro-management issues, now that they have seen it play out in cahoots with a Democratic government.

Group (3)–the confused. This group thinks the bailout was wrong but that things the Fed was doing which is hand-in-hand was okay. Why are Baraaso and Enzi voting for Bernanke? Is there some connection to Wyoming?

Group (4)–the wise. These senators read my blog.

Taking these votes together seems to show a dichotomy in economic policy. It is not (strictly) free-market vs. government, and is not so much populism vs. establishment. It is more a belief (or doubt) that the macroeconomy can run (or correct) itself. It is something along the lines of Keynesian vs. Austrian in macroeconomics. One doesn’t need to be distrustful of individuals or businesses to believe that they may freely act together to perhaps inadvertently bring down the system (i.e., one can be free-market and Keynesian). But it is a mistaken belief.

I have long thought that there are two main fault lines in economic policy: regulation vs. laissez-faire and redistribution vs. desert. These two votes show a macroeconomic fault line which kind of fits into the regulation vs. laissez-faire, but not quite: some of the senators in group (1) have impeccable anti-regulatory credentials. Indeed, many of them probably believe that it is (in some way) pro-free-market to vote for TARP and to vote for Bernanke. But I think it reflects a mistaken belief that natural forces in the economy, being voluntary choices of individuals, are something to be resisted. If you subscribe to the “Too Big to Fail” mentality and do not recognize the moral hazards involved in resisting it, you would have also voted for the biggest bailout in economic history and for a man whose response is to return to the course that got us there.