Author: Warren Gibson

Another Housing Bubble?

Warren Gibson Current Events, Economics, Liberty , , , , ,

Last year I wandered down the street to an open house for sale. Even though I announced myself as a looky-loo, the agent welcomed me. We sat around talking and eating cookies for an hour; no prospects showed up.

It was a nice day today and I decided to walk to another open house thinking I’d again look around and chat with the agent. Hardly – the place was mobbed! It looks great in this picture but the reality is it’s stuck way up on a hill with a steep driveway and no garage. It’s 80 years old and although it’s been fixed up cosmetically it’s nothing to write home about; not in my book anyway. Nevertheless, I’m betting they’ll have multiple offers before this first day on the market is over.

This is the San Francisco Peninsula which is by no means representative of the whole country but I hear that Las Vegas has turned around too, as have tony places in New York. Why? Although I can’t prove it, I believe a good part the gusher of money that the Fed has been printing is now making its way into housing. The stock market has stalled, the bond market is in retreat, gold has plummeted, and that pretty much leaves housing.

So although the basic premise of monetary stimulus is plausible, it just doesn’t work. The new money seems to go careening around the economy in search of the Next Big Thing. Bubbles form and collapse, malinvestments are revealed and the cycle starts anew. What’s different this time is that it’s been such a short time since the collapse of the previous housing bubble to what looks like the start of another.

If these wasteful cycles of boom and bust are to end, the Fed must cease its stimulus programs. But it can’t. When the Fed dropped just a hint last week that it might start “tapering” off its bond-buying (money-printing) program, the bond market panicked. Why should we care about the bond market? For one thing, the average maturity of the federal debt is just a couple of years. Maturing debt must be rolled over into new debt, and if the new debt carries higher interest rate, the total annual interest payment could quickly swell from a “mere” $345 billion for the current fiscal year toward a trillion dollars per year, swamping any efforts to contain spending, like the $80 billion sequester that just took effect. We could end up needing a bailout from China.

The Fed will very likely continue or even accelerate its bond buying, depending on who occupies Bernanke’s seat come January. We should expect continuing cycles of bubbles and busts and the real possibility of some very nasty fiscal consequences.

The Real IRS Problem

Warren Gibson Current Events, Liberty , , , ,

It’s heartening to see distrust and resentment of the IRS building up in the wake of the targeting of tea party groups and such. But let’s not overlook the daily predations of the IRS, small and large, which add up to a mountain of costs borne by citizens – not just monetary costs but also mental anguish and occasionally violent confrontations.

Case in point: your humble servant. This morning I received a notice demanding $8,900 in back taxes. Needless to say that ruined my day even though it took me only five minutes to realize that they made a mistake and I owe them nothing. I have high hopes that this will be resolved quickly but you never know. I mentioned my plight to a friend this morning and he chuckled. He once had a $1,400 claim which he fought for ten years until finally he got to the right person at the IRS who found their mistake in five minutes. Did he get an apology? Restitution or compensation of any kind? Of course not.

The complexity of the tax code is often cited as a significant drag on the economy, in terms of time spent gathering information and preparing returns, money paid to tax preparers and tax attorneys, etc.  But there are lots of other bad effects.  No one understands the tax code in its entirety and most IRS agents understand little of it — or worse, what they often think they understand is wrong.  Nor do taxpayers understand it.  This opens the door for errors, misunderstanding, cheating and consequent confrontations, anguish, time and money wasted, and sometimes violence.

If we have to have an income tax (which I’m unwilling to concede), let’s have a simple flat tax and do away with, if not the inherent coercion of any tax, at least the enormous expense and anguish that are part and parcel of the current insane system.

The Obama Administration: RIP

Warren Gibson Current Events, Liberty, Politics

OK, that pronouncement is a bit premature. But if the Republicans hold the House next year as seems likely, it’s a done deal. Just keeping track of all the attacks on the administration has become quite a chore. And quite a few of those attacks are coming from Obama’s base of support.

  • The press is howling about the Justice Department’s heavy-handed subpoena of journalists’ phone records. “A fishing expedition for sources and an effort to fend off whistleblowers” is how the New York Times editorial board describes it. This issue isn’t going away any time soon.
  • Then there’s Guantanamo, the closing of which was to be Obama’s first priority upon taking office in 2009. Thus New York Times commentator Joe Nocera:  “The president could have jumped through the hoops Congress now requires and continued moving prisoners out of Guantánamo. But he didn’t. Instead, he froze all transfers, including 56 men from Yemen who had been ‘cleared’ for transfer by a national security commission that Obama himself established. The government, the commission essentially said, has no national security interest in holding these men. Yet Obama continued to let them rot in that Cuban hell. And you wonder why they are on a hunger strike?”
  • Some unions are mad at Obama as Brandon Christensen pointed out on this blog, where he quotes one union’s demand: “repeal or complete reform” of Obamacare.
  • The IRS scandal may have a shorter half-life. The Times correctly points out that Presidential use of the IRS to bludgeon political enemies goes back at least to Franklin Roosevelt and Richard Nixon. Still, it’s heartening to see the Tea Party rejuvenated, with street protests and blogs pointing out that thuggish behavior is a long-standing and probably irremediable attribute of the IRS.
  • Waiting in the wings is Dodd-Frank. This financial “reform” act is mostly not yet in effect because the agencies are trying to figure out how to write the rules that will actually put into practice the clear-as-mud intent of the law. It’s a near-certainty that this law has fixed nothing and that another financial crisis will hit, possibly before Obama leaves office.  Already we see signs of bubbles in the housing and stock markets.

“This country has come to feel the same when Congress is in session as when the baby gets hold of a hammer,” said Will Rogers. Three years of gridlock, if we’re fortunate enough to get it, should hide away the hammer, at least for a time, from both Congress and the President.

University Graduation Rates are Too High

Warren Gibson Current Events , , , , , ,

A proposal has surfaced to “punish” California state universities, including San Jose State where I teach, if they either (1) continue to raise tuition rates or (2) fail to raise their graduation rates. The punishment would take the form of reduced state support.

First of all, we taxpayers (including me; I’m a net tax payer) should rejoice at such “punishment” as it would lessen the burden on us. Taxpayers aside, how might the state universities respond to such punishment? On the fiscal side, they could recruit more out-of-state and foreign students who pay full freight. The UC campuses are already cutting admissions of in-state students in favor of out-of-state full payers – will UC eventually become UNC – University of Non-Californians? Furloughs are unlikely; they were tried once and didn’t work. They can’t cut salaries; there’s a faculty union. They’ll never cut out administrators. No, all bureaucracies, when forced to cut expenses, make cuts that are most painful to the public. Therefore, in addition to recruiting more full payers, they will cut classes.

What about graduation rates? They can’t raise admission standards because that would be “unfair” to racial minorities who are disproportionately ill-prepared for college work. They already have programs to try to coax students to study, with marginal results, and the obligatory special privileges for students with “learning disabilities.” It’s not clear what more could be done along those lines. No, I contend that the most humane policy for state universities would be to cut graduation rates. Here’s why.

It is indeed unfortunate that so many students, more than half at SJSU and other state universities, fail to graduate within six years. Those students have paid a big price in terms of money spent, debt incurred in many cases, and foregone income, with almost nothing to show for it. A bachelor’s degree from a state university, unless it’s in engineering, is worth little enough; two or three years of class work is worth nothing. Those who do make it all the way to the sheepskin gain a marginal advantage; their degree signals a certain amount of persistence. Their value to an employer remains uncertain; many, I fear, couldn’t be trusted with such simple tasks as reading with understanding, writing, doing simple calculations or, perish the thought, critical thinking.

All too many students who enter SJSU are ill-prepared and/or poorly motivated. Large numbers must take remedial math or English because they learned nothing in their public high schools. Many have little or no idea why they are there – some seem to view college as a way to delay their entry into responsible adulthood.

A good number surely have aptitudes for jobs that may require some specialized training, but not a college degree. I’m thinking of welders, hospitality workers (wait – you can get a B.A. in hospitality!), tile setters, carpenters, electricians, roofers, beauticians, nannies; the list goes on and on. What a tragedy that such students fall into the sinkhole (for them) that is a university campus.

Since admissions standards aren’t likely to be raised, the only humane thing to do is to get these students out the door as fast as possible. I expect to give a lot more D’s and F’s in my class this semester than I normally do, not because I’m pursuing any agenda but because they won’t have learned the material. Those students will be hurt, short term, but it’s the right thing for them, long term, especially if it hastens their exit from a university where they don’t belong.

Looking Backward: A Review

Warren Gibson Books, Liberty , ,

My Amazon review of Beth Cody’s “Looking Backward: 2162-2012, A View From a Future Libertarian Republic”

The author’s stated goal was to write a libertarian equivalent of Edward Bellamy’s socialist utopian novel “Looking Backward.” She achieves that goal with room to spare.

If I were to judge this novel by its plot, characterization, or dialogue, I would have to knock off a couple of stars. I won’t because those elements, which are crucial to most novels, don’t matter here. The flimsy plot is quite adequate to the author’s purpose which is to portray a near-ideal libertarian society. I wouldn’t call her vision a “utopia” because at several points, Prof. Seeton, the expositor and defender of the new society, admits that it has flaws. He even says it will collapse eventually and only hopes that event will be peaceful.

I almost wished that I too could crawl into a time capsule, as her protagonist does, and go back to a time before I became a libertarian. That’s because this would be such a dandy introduction for someone new to the philosophy. A novice with an open mind would find a trove of solid arguments on nearly every aspect of human life.

Get copies of this book for the young people in your world.

Borderless Economics: Chinese Sea Turtles, Indian Fridges and the New Fruits of Global Capitalism

Warren Gibson Books, Economics , , , , , , ,

Robert Guest, the business editor for The Economist, has organized insights gleaned from 20 years of reporting on and analyzing events around the world into a breezy yet profound account of the flow of people and ideas across borders.

Raw immigration statistics miss the “networks of innovation,” as Guest calls them. Immigrants may find it difficult to adapt to a new land with strange customs and a new language. But in just about any American city they find a community of people like themselves who can ease the transition and help them get established. This process is good for everyone involved.

For example, Indian immigrants to America—most notably Silicon Valley engineers—are tightly networked among themselves and have contacts in India and around the world. Having made their fortunes, some then return to India to pursue business or philanthropic activities. To illustrate, Guest describes the Universal Identity program. Hundreds of millions in India have no public identity beyond their immediate communities. A team of Indian expatriates returned to India and launched a program to create a computer-based system that would allow Indians to submit to fingerprinting and retina scans and to receive a national ID number that would serve as their entrée into the modern Indian economy. Libertarians look askance at government identification numbers, but in rich countries we take for granted our ability to prove our identities. Continue reading →

FDR, Uncle Fred, and the NRPB

Warren Gibson Economics, History, Law, Politics , , , , , , , , , , , , , , ,

In Ayn Rand’s epic novel Atlas Shrugged, government officials regulate the economy through something called the Bureau of Economic Planning and Natural Resources. She clearly chose that name to reflect their belief that productive people were bound to produce just because of their “conditioning” and could therefore be treated pretty much like coal in the ground—as resources ripe for exploitation.

One wonders whether she had ever heard of the National Resources Planning Board (NRPB). The NRPB was a real agency, part of the kaleidoscope of bureaus that formed the New Deal. Its history is in some ways as dry as dust, but a closer look reveals some interesting and timeless insights into the planning mentality and the role of personalities in shaping history.

The philosophy underlying Roosevelt’s New Deal, if one can call it that, was to try something and if it didn’t work, try something else. In that same spirit the NRPB mission changed frequently; even its name changed four times before it was killed in 1943. It had been authorized as part of the National Industrial Recovery Act, but that program was ruled unconstitutional in 1935, leaving the National Planning Board, as it was called then, in danger of extinction. It was quickly rescued by FDR, however, and established as an independent agency. Casting about for a new name, one planner suggested “natural resources,” whereupon another commented that human beings were America’s most important resource. “National Resources” was suggested. The President chewed the phrase over a few times, then, pleased with its sound, grinned and announced, “That’s it. Get that down, boys, because that’s settled.” Continue reading →

Unemployment: What’s To Be Done?

Warren Gibson Economics, Politics , , , , , , , , , , ,

In Part 1 I outlined natural unemployment, government-caused unemployment, and the attempts to measure these. We saw how ambiguous and subjective some of the concepts of unemployment are and how the government, specifically the Federal Reserve, is charged with managing it. Now we turn to current conditions and what can be done about them.

There have been huge advances in technology and substantial declines in trade barriers in recent years. While these developments have raised living standards they have been hard on people whose skills were rendered obsolete or uncompetitive. When changes evolve gradually, as when so many people left farming in the last century, the disruption is not so great. Changes are now coming faster and are extending to some high-paid professional jobs. Automated systems can now handle at least the routine aspects of some legal research and medical diagnosis.

Time and time again new doors have opened to workers as old doors closed. Machines replace workers, but they raise productivity and produce new employment opportunities. We can expect this pattern to continue for a long time to come. Still, it is within the realm of possibility that robots and computers could take over so much work that the demand for human workers would shrink drastically. But those very machines would mean higher productivity and thus higher living standards.

A great deal of work can be now be done remotely, providing an advantage to areas with low living costs. Substantial outsourcing of such jobs to foreign countries has occurred (though that trend may be reversing as low-cost areas of the United States become competitive and as customer dissatisfaction and problems with managing offshore workers come up). The benefits of outsourcing and other productivity enhancements are spread across all consumers, but the job losses are concentrated among small and sometimes vocal minorities. Continue reading →

Unemployment: What Is It?

Warren Gibson Current Events, Economics, Liberty, Politics , , ,

Unemployment has regained center stage now that the debt crisis has receded from that position, at least for a time. Unless things change dramatically over the next year unemployment will be the number one issue in the forthcoming presidential election. Hardly any proposal will escape being labeled “job-killing” or “job-creating” or both.

To begin with some basics, what is work and what is a job? For economists, work is any activity that we would not perform without tangible compensation, usually money. In our work lives almost all of us are also motivated by nonmonetary considerations, and to the extent we diverge from the most remunerative activity available to us, we are blending work and leisure. A retired person who takes up college lecturing may do the work primarily for the satisfaction it brings. If his salary were withdrawn and he continued to teach, he would be enjoying leisure.

The goal of all economic activity is consumption, which to economists means not just mundane goods like faster cars but also “noble” ends like cathedrals. Jobs are therefore not ends in themselves, as much as public discussion would suggest otherwise. They are means to acquire income to be used for consumption and saving, in addition to personal satisfaction, learning opportunities, or socializing.

A person who lacks a job is unemployed if he or she wants work, has suitable skills, and has realistic expectations about compensation. These are vague terms; they make unemployment a murky concept. That goes double for underemployment, though both remain very real phenomena. Continue reading →

Rand Paul for President!

Warren Gibson Current Events, Politics , , , , ,

By now everyone knows about Rand Paul’s thirteen-hour filibuster on the Senate floor. He succeeded in his short-term goal, as Attorney General Holder finally produced a memo affirming that the President has no right to murder American citizens who are not engaged in hostilities against the U.S. Senator Paul drew more support from colleagues than I would have expected, including Senator Minority Leader McConnell and Democratic Senator Wyden of Oregon.

But it’s not just his short-term success that has me excited. This might just be the start of a couple of very favorable longer-term outcomes.

First is the prospect that RP may run for President in 2016. He has dropped hints to that effect. He is an attractive candidate for libertarians because of his generally solid stands for economic liberty, civil liberties and non-interventionism. OK, maybe he’s a bit more conservative than some of us would like, and he endorsed Romney last year. And by traditional standards, he’s young and inexperienced.

Yet he just might be electable. He should be able to draw on the army of Ron Paul supporters who are mostly young and energetic. By 2016 the Obama administration will be in shambles and the Democratic candidate will have to distance himself from Obama. A minority party could emerge and siphon off Democratic votes. People will be looking for a fresh face, and Rand Paul does have a boyish, fresh face which doesn’t hurt. And he’s a bit less caustic and perhaps a bit more articulate than his dad.

Best of all, he could be the catalyst for a realignment of politics in this country. One side would be centered on the libertarian principles just mentioned: economic freedom, civil liberties, international peace. The first principle would attract some fellow travelers from the right and the other two would attract some from the left. On the other side would be statists of various stripes including “progressives,” who should be classified as fascists, as well as bloodthirsty warmongers like Senator McCain.

The political realignment just outlined will be familiar to anyone acquainted with the World’s Smallest Political Quiz, formerly called the Nolan chart. Millions of people have taken the quiz, and it has gained considerable respect (“The Quiz has gained respect as a valid measure of a person’s political leanings,” says the Washington Post.)

A lot can happen between now and then. RP’s rising start could fade. He could get co-opted by the Republican establishment. We’ve been disappointed before and it could happen again. But the idea does give one hope. Rand Paul for President, Gary Johnson for Vice President?

(Footnote for anyone shocked by the f-word: There are two aspects to fascism. The economic aspect leaves ownership of the means of production under nominal private ownership but with the government calling all the shots. That describes the program of the “progressives” to a tee. The other aspect is racism or nationalism, echoes of which are seen these days in the forms of affirmative action, multiculturalism, and “diversity” programs.)

The Volcker Rule

Warren Gibson Economics, Law, Politics , , , , , , , ,

Paul Volcker is a man of considerable stature, and not just because he’s six feet, seven inches tall. He gained a reputation for courage and plain talk as chairman of the Federal Reserve System under Presidents Carter and Reagan because he broke the back of the 1970s inflation. He did so by (mostly) sticking to a tight monetary policy even though that meant sky-high interest rates and sharp back-to-back recessions before the economy could enter its vigorous recovery. Now 84, he has enjoyed a comeback in recent years as an adviser to President Obama. His Volcker Rule, prohibiting proprietary trading by banks, was heralded as one way of preventing a repeat of the recent financial crisis, and it became part of the Dodd-Frank Act signed into law in July 2010.

Dodd-Frank’s full title, incidentally, is the Wall Street Reform and Consumer Protection Act. Like most current legislation its name reflects hoped-for outcomes, not its actual provisions. Reading the act (the PDF is available here) is not for the faint of heart. There are 16 titles consisting of 1,601 sections for a total of 848 dense pages. Only a lawyer could love sentences like this:

Any nonbank financial company supervised by the Board that engages in proprietary trading or takes or retains any equity, partnership, or other ownership interest in or sponsors a hedge fund or a private equity fund shall be subject, by rule, as provided in subsection (b)(2), to additional capital requirements for and additional quantitative limits with regards to such proprietary trading and taking or retaining any equity, partnership, or other ownership interest in or sponsorship of a hedge fund or a private equity fund, except that permitted activities as described in subsection (d) shall not be subject to the additional capital and additional quantitative limits except as provided in subsection (d)(3), as if the nonbank financial company supervised by the Board were a banking entity.

Volcker initially outlined his proposal in a three-page memorandum. It came to life as Section 619 of Dodd-Frank, expanded to 11 dense pages. This section is supposed to prevent banks from buying and selling securities for their own accounts, in contrast to brokering customer trades. It also prohibits banks from holding interests in hedge funds or private equity funds or from sponsoring such funds. These prohibitions are supposed to lessen the need for future bailouts like those that were provided to financial institutions in 2008 and 2009. Continue reading →

Making Whistle-Blowing Pay

Warren Gibson Current Events, Economics, Law, Politics , , , , , , , , ,

The federal bureaucracies are hard at work churning out rules to implement the Dodd-Frank financial “reform” act. In May the Securities and Exchange Commission announced rules for its new whistleblower program, which rewards individuals who provide the agency with “high-quality tips that lead to successful enforcement acts.”

The minimum amount of recovered funds that can earn a reward is $1 million, but the sky’s the limit on the upside. The whistleblower gets to keep 10 to 30 percent of the amount collected, including fines, interest, and disgorgement of ill-gotten gains. We’re talking about big game here, with awards conceivably topping $100 million.

Eric Havian, an attorney with a law firm that represents whistleblowers, noted in an interview with the San Francisco Chronicle’s Kathleen Pender that the securities laws cover a “huge category of bad conduct,” such as illegal insider trading, cooking the books, market manipulation, stock option back-dating, false or misleading disclosures, and the deceptive sales of securities. Almost anything potentially can be illegal, and these vaguely defined offenses leave much room for government mischief. As for insider trading, this is a practice that does little harm and may actually provide benefits to small investors. (See my January/February 2011 Freeman article, “Inside Insider Trading.”)

If corporations felt they needed limits on insider trading or other conduct to attract shareholders, they could write prohibitions into their bylaws so that violations, if not settled internally, could be remedied under civil law. Continue reading →

Sardines at Midnight

Warren Gibson Economics , , , , , , , , , ,

Sardines at midnight? If the mood should strike me, I can zip down to the local Safeway store here in Belmont, California, which is open 24/7, and be back with a can in 20 minutes. My biggest problem would be choosing from among Thai, Canadian, Polish, or Norwegian sardines packed in water, olive oil, tomato-basil, or soybean oil.

So what? It’s darn near a miracle, that’s what, and would seem so to most inhabitants of today’s world and everyone in yesterday’s world. Leonard Read’s phrase “The Miracle of the Market” was only a slight exaggeration. I won’t attempt to describe how markets miraculously motivate and coordinate the actions of the thousands of people who cooperate in providing me with sardines. Nobody can do that better than Leonard Read did in his classic “I, Pencil.” If for some reason you haven’t read it, stop now and do so.

The increased quantity and quality of the conveniences available to us are really amazing. We should stop to think about them from time to time, paying special attention to the incentives that brought them about.

I have vague memories of the Fisher Brothers grocery store where my mother took me around 1950. The place was tiny and the selection limited. Looking back, I wonder about its cleanliness: The owners kept sawdust on the floor to soak up spills. Later they built a supermarket that was much larger but still only a pale precursor of today’s Safeway. A mix of union coercion, government regulation, and perhaps just plain custom kept all supermarkets closed after six p.m. Monday through Saturday and all day Sunday. A working woman had to scramble to get her shopping done before closing time or join the mob on Saturday. Continue reading →

Shoot the Shorts

Warren Gibson Economics, Law , , , , ,

European bank stocks have dropped sharply in recent days, presumably because they hold large amounts of shaky debt issued by the governments of Greece, Portugal, Spain, Ireland and Italy.  Several European governments have found someone to blame for their financial problems, and their target is that perennial favorite, speculators. And not just any old speculators, but the darkest of that shady lot, short sellers. Short sales of major European bank stocks are banned for a period of time so that traders can’t spread false rumors and trigger a downward spiral in these stocks.

(To sell short means to sell borrowed stock in the hope that the price will decline.  If the stock does fall, sellers buy the shares cheaply, return them to their original owner, and pocket the cash difference.  If the shares rise instead, short sellers have to pay a high price and suffer a loss.  When a number of short sellers cover their positions out of  fear of rising prices, it’s called a short-covering rally.)

What a dreary and stupid move the Europeans have made. They might have learned from the ban instituted in 2008 by U.S. authorities, which accomplished nothing.

Real Fears

There is good reason to fear for the European banks – the problems with European sovereign debt are evident.  Rumors are hardly necessary when the banks’ exposure is well known.  And if false negative rumors justify intervention, what about false positive rumors? Why not ban purchases of stocks when the all-knowing regulators determine they were boosted by bullish rumors? Continue reading →

Methodological Individualism

Warren Gibson Books, Liberty , ,

I am just now rereading Ludwig von Mises’s magnum opus, Human Action.  What a joy it is to get reacquainted with Mises’s masterful work and to use it as a benchmark to gauge my own intellectual odyssey since first reading it more than 40 years ago.

Early on the reader encounters the term “methodological individualism.”  This mouthful may seem at first to be some abstruse epistemological concept that can be forgotten once the foundations for Mises’s economics have been established.  On the contrary, revisiting Mises has made me realize just how thoroughly I have internalized the concept and what a big difference it has made in my thinking about political and economic controversies.

Let’s start with what methodological individualism is not.  It has nothing to do with “rugged individualism.”  It is not ideology at all.  It is a term that describes the essential nature of human thought and action.  It is a bedrock principle on which Mises grounds his entire exposition of economics.

“The Hangman, not the state, executes a criminal.”  This is Mises’s pithy summary of methodological individualism.  Mises does not deny that the hangman acts under the influence of his relationships to others in society.  He is an employee or a servant of some penal system and is obliged to carry out executions when so ordered. He may fear consequences if he fails to act as ordered.  He may have a family that he provides for.  He may wish to secure his place in Heaven. None of these conditions alters the basic sequence of events: The hangman ponders the action he is set to perform, thinking carefully or hardly at all.  He believes his best choice is to pull the rope that opens the chute.  He causes his arm to move and the deed is done. Continue reading →