The buck stops somewhere else (try Treasury... or the Fed)

Tyler Cowen says that Congress has opted out of much of the economic crisis. That might not be a bad move on their part:

While Congressional leaders are consulted on the major policies, Congress is keeping its distance, perhaps to minimize voter outrage. This way, Congress can claim credit if a recovery comes, but deny responsibility if the price tag ends up higher than advertised or if banks seem to be receiving unfair benefits from the government.

Of course, while this may be a smart decision for Congress, it might have serious consequences for economic policy in the future:

A Congress that won’t accept much responsibility for the financial bailouts, for example, is unlikely to rise to the occasion when the time comes to make tough decisions on the budget...

On any single policy, the abdication of Congressional responsibility may not be a problem. Sometimes it is good to let the technocrats have their way. In the longer run, though, the United States requires a Congress courageous enough to accept responsibility for potentially unpopular policies. We are moving further away from that every day.

Most economic models typically assume that government will follow some optimal policy. But in reality government is subject to incentives, and in this case Congress doesn't have much reason to get too involved in this crisis. This is why the Federal Reserve (and much of the bureaucracy) is insulated from political pressure: there are tough decisions to be made and no one up for re-election wants to make them.

As Cowen points out, the danger comes about when the elected body doesn't have to make the tough decisions. When the time comes and they have to address the budget deficit--or whether to nationalize part of the banking sector--they won't have built up political capital by leveling with the public about what needs to be done and what can be done.

It may be time for Congress to bite the bullet and, well, actually do something.

If you don't know what a word means, you probably shouldn't use it

First he was a socialist. Now he's a fascist. And Obama has only been president for three months.

Fascism seemed to be the metaphor of choice at last week's Tea Party Protests. Consider this guy:

Or this guy:

As always, we can consult the Concise Encyclopedia of Economics to find out what a term like "fascism" actually means:

"Under fascism, the state, through official cartels, controlled all aspects of manufacturing, commerce, finance, and agriculture. Planning boards set product lines, production levels, prices, wages, working conditions, and the size of firms. Licensing was ubiquitous; no economic activity could be undertaken without government permission. Levels of consumption were dictated by the state, and 'excess' incomes had to be surrendered as taxes or 'loans.' The consequent burdening of manufacturers gave advantages to foreign firms wishing to export. But since government policy aimed at autarky, or national self-sufficiency, protectionism was necessary: imports were barred or strictly controlled, leaving foreign conquest as the only avenue for access to resources unavailable domestically. Fascism was thus incompatible with peace and the international division of labor—hallmarks of liberalism."

Of course, this is a terrible and inane metaphor for current policy. There are no plans to cartelize the economy, to set production goals or to dictate wages. The government is not going to take-over large segments of the economy. In fact, the Obama administration has consistently resisted bank nationalization, and has continued the "receivership" status of AIG--a particularly strange piece of legal gymnastics, which allows the government to own 80% of the company, but completely abdicate ownership rights.

The government is increasing expenditures to combat a recession, and is propping up the banks in order to combat a financial crisis. These may or may not be the right policies (I think the Obama administration has been a mixed-bag up to this point). But these policies in no way resemble fascism. Again, from the Concise Encyclopedia:

"Fascism is to be distinguished from interventionism, or the mixed economy. Interventionism seeks to guide the market process, not eliminate it, as fascism did. Minimum-wage and antitrust laws, though they regulate the free market, are a far cry from multiyear plans from the Ministry of Economics."

We are seeing an increase in government intervention in the economy. We are not seeing fascism and we are not seeing socialism. If you look at the definitions of the words, you can see that.

On a side note, it was sad to see the word "fascism" used not only by fringe protesters, but by anchors on Fox News. As a Jew, I think that comparisons to Nazi Germany should be treated with respect. Yes, you may not like the current administration's tax policies. But they are not comparable to the Holocaust. I think conservatives and libertarians would be wise to distance themselves from people who don't get that obvious distinction.

An ode to Paul Krugman

I just started a new job, so I haven't had a lot of time to post. But this definitely caught my attention:

For what it's worth, I think Tim Geithner is a very nice looking man.

What can you buy at a 99 cent store?

Stock, apparently:

"Citigroup shares dip below $1"

Change of heart

Add Alan Greenspan to the list of economists favoring some form of temporary bank nationalization. Greenspan was once a disciple of Ayn Rand, Goddess of individualism and libertarianism. Desperate times, I suppose.

(HT: Paul Krugman)

Semantics we can believe in

You know things are bad when a libertarian economist like Alex Tabarrok is warming to the idea of large-scale government intervention into the banking sector. Just one thing: don't call it "nationalization":

"Notice how the term nationalization confuses the issue. First, it suggests government ownership of the banks, which would indeed be a disaster. People in favor of free markets will rightly want to avoid any such outcome but ironically it's the current situation of "wait and see," and "protect the banker," which is likely to lead to an anemic recovery and eventual government ownership. Second, it confuses people on the left who think that nationalization is a way to insure that taxpayers get something on the upside. That idea is a joke - there is no upside. Taxpayers are going to have to pay through the nose but the critical point is that the taxpayers must pay the depositors whom they have guaranteed not the banks.

The debate so far has been framed between a "bailout" and "nationalization." But the public rightly sees the bailout as a way to protect bankers and thus we get pressure for government ownership, which has already happened in part through government control over banker wages. Bankruptcy in contrast is a normal free market procedure, it emphasizes that the firm has failed and current management should be removed. Framing the issue in this way, for example, makes it clear that only the depositors should be protected and under reorganization there should be no control over wages on future management (wages are going to have to be high to get anyone to take on the task). Finally the idea of bankruptcy makes it clear that the goal is to get banks solvent, under new management, and back under private control as quickly as possible."

Like Tabarrok, I generally oppose nationalization efforts in which government operates specific industries. If you think the government could run a car company, for example, try driving around in this:


But what Tabarrok is describing is very different. Since the government already has a stake in the banking sector (through the FDIC, it is the main bank insurer), government-facilitated bankruptcy is much more "free-market" than keeping insolvent, but politically connected banks on life-support. Tabarrok explains:

"What would a private insurance firm do in this situation? Would it pander to the current bank management and carry the zombie banks on its books, hoping and waiting for a miracle? Or would it step in, remove current management, pay off the depositors, reorganize and then sell the banks to recoup its losses? I believe a private insurer would follow the second path, the fact that the government is not yet ready to do this indicates how powerful bankers are in Washington. Thus, given deposit insurance the procedure most consistent with free market principles is bankruptcy, preferably a speed bankruptcy procedure under the auspices of the FDIC which has significant expertise in this field."

Despite the soon to be signed $800 billion stimulus package, the economy will not recover without a functioning banking sector. Bankruptcy won't be pretty, but it's better than being overrun by zombies.

Who's really overpayed?

While many commentators have blamed the Big Three's recent troubles on high salaries for manufacturing workers, Dean Baker points out that that's not the only important salary issue:

"The Post has virtually ignored the much larger gap between executive compensation at the Big Three and at the transplants. While top executives at Japanese manufacturers like Toyota only earn around $2 million a year, executives at the Big Three can earn 10 times this amount.This would seem to be a reasonable focus for those concerned about making the U.S. industry competitive."

When you break down the salary differentials between unionized GM workers and non-unionized Toyota and Honda workers in the US, you find that the former makes about 1.2 times the latter ($55 versus $45 per hour, including benefits). This is nowhere near the difference in executive pay.

As I've written before, the wage difference is probably a very small part of Detroit's problems. Similarly, even if GM pays it's executives $18 million more than their Japanese counterparts, this is still relatively small when compared to the billions of dollars in revenue and costs for these companies. Then again, you can't possibly argue that the Big Three's executives have been worth their salaries.

But does anyone want to buy their cars?

David Leonhardt has a great piece in today's New York Times, explaining why the Big 3 auto manufacturers are really in trouble (hint: it's not simply the labor costs)

"...here’s a little experiment. Imagine that a Congressional bailout effectively pays for $10 an hour of the retiree benefits. That’s roughly the gap between the Big Three’s retiree costs and those of the Japanese-owned plants in this country. Imagine, also, that the U.A.W. agrees to reduce pay and benefits for current workers to $45 an hour — the same as at Honda and Toyota.

Do you know how much that would reduce the cost of producing a Big Three vehicle? Only about $800.

That’s because labor costs, for all the attention they have been receiving, make up only about 10 percent of the cost of making a vehicle. An extra $800 per vehicle would certainly help Detroit, but the Big Three already often sell their cars for about $2,500 less than equivalent cars from Japanese companies, analysts at the International Motor Vehicle Program say. Even so, many Americans no longer want to own the cars being made by General Motors, Ford and Chrysler."

When you exclude the cost of pensions, GM, Chrysler and Ford offer compensation packages that are close to what foreign manufactures pay their American, non-unionized labor.

But the real point is that American's are being asked to bail out companies that don't make products people want to buy. That seems like a bad strategy to me. We can bail these companies out, we can subsidize their production and we can protect them from competition. But unless we require American's to buy their cars* (now there's a Patriot Act for you!) then these companies won't be profitable. I wish Congress would acknowledge that. The real problem is that the Big 3 make sub-par products in the US that are out of touch with consumers.

Until they fix that problem, we shouldn't be bailing them out. You can't help an addict until they admit they have a problem.

*Please note this is sarcasm. I don't think we should do this.

Did he just say what I think he said?

Dan Neil thinks we should nationalize General Motors:

"What to do about the domestic automakers? My modest proposal: Nationalize GM.

To be clear, I mean that the federal government should buy GM; forget rathole loans or nonvoting equity shares. The company's stockholder value has been essentially wiped out. The company's enterprise value -- the lock, stock and forklift price -- is about $32 billion; its total debt is $45 billion. Let's make GM an offer.

If you feel the gall of free-market ideology rising, consider that the measures being bruited about as preconditions for a bailout -- firing GM's top management; forcing a bankruptcy-like renegotiation of contracts with the UAW, suppliers and dealers (it has too many); and creating a czar of product development to force the building of green cars -- are nationalization in all but name. I say embrace it. GM-USA."

Neil argues that there are many benefits to nationalizing GM. In particular, he argues that the government has a longer-term view that is crucial for getting GM prepared for the future:

"The government can afford long-term planning. Many of GM's strategic missteps -- such as betting large on trucks and SUVs and not investing early in hybrid technology -- were the result of willful shortsightedness at the board level, responding to a financial market in which shareholders look for the quick return. Putting Uncle Sam in charge would fundamentally enlarge the return-on-investment horizon."

I heard Mr. Neil speaking on NPR last week. He said that while markets are really good at responding to consumer demands, they are really bad at anticipating them. So, if you want to get car companies to invest in environmentally sustainable technologies, the government needs to step in.

This is a terrible, terrible idea. If you think GM's management is bad now, just wait till Congress is in charge. Any company run by a group of people with no personal investment at stake and tons of external political pressure is doomed for failure.

I also completely disagree that government is any better at anticipating future needs. Markets have considerably more information with which to make those sorts of decisions and better incentives for investing in new ideas that will actually work. When Congress decided we needed alternative fuels, they put the brunt of their resources into corn-based ethonol, which we now know yields less energy than is required to create it. Government does not have a good track record with picking the winners.

Additionally, Neil claims Japanese and European manufacturers are "quasi-national" because of the government's role in healthcare and retirement costs. Fair enough. But isn't that an argument for universal healthcare and a stronger social safety net?

I'm a big proponent of people sticking to what they're good at. Congress is good at bloviation, not running corporations.

Money for nothing, bailouts for free...

Edward Glaeser has some good advice for dealing with GM, Chrysler and Ford:

"The hard-line enemies of a big Detroit bailout have standard economics on their side. The friends of Detroit, however, can rightly emphasize that a complete collapse of the car industry could make a bad economic downturn worse. The middle way is for car companies to go through Chapter 11 first, which will generate information and force the companies to rethink their future. Only then will it be possible to decide whether there is some role for limited government financial aid to avoid the costs of mass layoffs and defaults on pensions."

Detriot's woes have multiple causes--ranging from high labor and pension costs, poor corporate leadership, and misguided government protection--which means they can't be solved easily. The Big Three will burn through a $25 billion bailout in no time, and some have argued that if we bail them out this year, we better be ready to keep them on the public dole for years to come.

But, as Catherine Rampell notes, "a contraction of the Big Three would result in direct and indirect job losses of 2.5 million to 3 million in 2009", which perhaps argues for some government role in dampening the effect.

Hopefully Glaeser's third way gains some traction. Doing nothing may not be a good idea, but this bailout idea is fundamentally untenable.