The Mortgage Bubble - Just the Facts

The Independent Institute has a new report (pdf) about the history of the mortgage bubble, and its subsequent collapse. It makes the same arguments, and uses of the same data (and much more) I used here. But the history of the political interference in the mortgage market that revved up in the early 1990s is far superior. Essential reading for anyone who wants to understand the mortgage mess as a failure of government, pure and simple.

European Unrest

Esther at Islam in Europe, who always does a great job presenting the phenomenon of Muslims in Europe in all its complexity, has a roundup of simultaneous low-level disturbances (riots, if you like) in Malmö (Sweden), France and Greece. The disturbances concern, respectively, the arrest of radicals in a mosque, reaction to education reform, and whatever it is that Greek anarchists riot about.

It's not 1848, but it is a little disconcerting. If I were a betting man I would look to Spain next.

Cross-posted at European Wilding.

Do Macroeconomists Know Anything?

When I was in graduate school getting a Ph.D. in economics, I had the hardest time passing my macroeconomics comprehensive exam. I found much of the material counterintuitive, and the mathematics more difficult than in microeconomics or the field exams that I took.

Well, now I have my revenge. Macroeconomists, and those in policy circles they have trained, aren’t coming off looking too good right now. Here is Marketwatch on the Fed running out of interest-rate ammunition in its attempt to get the U.S. economy moving again:

Rates are already very low and are not playing much part in the credit crunch that is strangling the economy.

Investors should know that the Fed still has plenty of ways to stimulate the economy, even with rates near or at zero, economists said.

The bottom line on Fed policy is supply of money. The Fed typically targets the price of money, but, with the price so low, it will focus on increasing the quantity of money through its balance sheet.

Vince Reinhart, a former senior Fed staffer who is now at the American Enterprise Institute, said the Fed will make a promise in its policy statement "to use the balance sheet to help foster economic recovery and better-functioning markets."

Macroeconomics is premised on the idea that there is this single entity called “the economy,” and “the economy” can be treated the way a diseased organ is. But “the economy” is really the coordination of the conflicting desires of 300 million people (or, nowadays, six billion people). At any moment, changes will leave some people worse off, some better off. Even now, recent economic changes are operating in favor of some people. Lower oil prices are making truck drivers better off, lower home prices are making homes more affordable, etc.

If the collective sum of everyone’s changed circumstances is on balance negative at any moment, we can defensibly talk about the abstraction called a “recession” or “depression.” It is no fallacy of composition to say the economy right now is on balance terrible. But it is such a fallacy to suppose that the remedy lies in treating the entire “economy.” Undergraduate textbooks still speak of how “spending” and “the economy” respond to particular actions by the government, in the same way a doctor can say how a bacterial infection will respond to an antibiotic. But the economy is not an organ; it is not even a body, in which all the parts generally work together to advance the prospects of reproductive success. Instead, it is a network of people both competing and cooperating as they try to advance their interests, based on the rules of the game. The macroeconomic measures of trouble we are observing are really the sum of millions of microeconomic mistakes (in conjunction with a smaller number of successes). Those mistakes have to be liquidated, no matter how painful it is.

There is a reason that interest rates have failed to do the trick, and that is that what we face is not a liquidity problem but an information problem. People are not yet certain how many financial bombs remain unexploded, and the only way out is to let them blow up so we can learn what we need to learn as fast as possible. There is no magic tool in the Fed’s workshop – not interest rates, not the “balance sheet,” not anything else – that will do what rate cuts have failed to do. Nor can any crude stimulus package coming out of Washington, which operates on the mistaken premise that some mistakenly conjured aggregate abstraction called “spending” is too low. (Large cuts in taxes would be somewhat more effective, not, as even a now-and-then smart economist like Paul Krugman argues, because spending will go up, but because politicized decisions about resource use will be replaced – in fact, more than replaced, because of greater incentives to take risks – by market ones.) Washington can however easily make things worse by constantly rewriting the rules of the game – voiding debts if the borrowers have enough political strength, bailing out this guy but not that, announcing a big spending program and leaving it to the future to figure out how to pay for it – etc. Political uncertainty multiplies market uncertainty. The unpredictable effects of both Congressional and Fed responses to current circumstances are making things worse.

All macroeconomic problems are fundamentally microeconomic problems, and the continued defiance of this fact by our ruling classes is costing us a fortune.

Joe the Advance-Money Thief

A New York Times contributor has a fairly typical collectivist op-ed about the forthcoming book by 2008 presidential campaign gadfly Joe the Plumber:

The unlicensed pipe fitter known as Joe the Plumber is out with a book this month, just as the last seconds on his 15 minutes are slipping away. I have a question for Joe: Do you want me to fix your leaky toilet?


I didn’t think so. And I don’t want you writing books. Not when too many good novelists remain unpublished. Not when too many extraordinary histories remain unread. Not when too many riveting memoirs are kicked back at authors after 10 years of toil. Not when voices in Iran, North Korea or China struggle to get past a censor’s gate.

Joe, a k a Samuel J. Wurzelbacher, was no good as a citizen, having failed to pay his full share of taxes, no good as a plumber, not being fully credentialed, and not even any good as a faux American icon. Who could forget poor John McCain at his most befuddled, calling out for his working-class surrogate on a day when Joe stiffed him.

Note first that the fact that Mr. Egan can't trust someone to fix his toilet unless he has been properly licensed is sort of pathetic. That he needs government rather than his own good sense to pick a plumber is something I wouldn't expect to observe in a country fit for grownups to live in.

Equally important is this idea that it is the job of big publishing companies to write the books that pass Mr. Egan's no doubt properly credentialed notion of "good." As a starter, it raises the notion of what is "good": plenty of highly educated and well-read people have starkly different standards from Mr. Egan on this question. And of course one might argue that the opinion of what someone who buys Joe the Plumber's books ought to ethically count as much as Mr. Egan's, and that markets are there to sort out these conflicting views. This is the fundamental justice of the market - no gatekeeping critic can block that which is desired; all aesthetic judgments are treated equally.

But never mind. Publishers know what is really "good," but they ignore the good in favor of the profitable:

"For the others — you friends of celebrities penning cookbooks, you train wrecks just out of rehab, you politicians with an agent but no talent — stop soaking up precious advance money.

I know: publishers say they print garbage so that real literature, which seldom makes any money, can find its way into print. True, to a point. But some of them print garbage so they can buy more garbage."

This is classic leftist thinking - there is a zero-sum amount of "advance money," and more for Joe the Plumber means less for unjustly neglected real writers. And so publishers have some kind of mysterious responsibility to devote their own resources and expose their shareholders, workers, and authors they have already signed to deals to risks in order to advance Mr. Egan's interests, rather than those interests that these groups have worked out together to their mutual satisfaction in the marketplace. The idea that we live in a positive-sum world, and that Mr. Egan was free starting the moment this column occurred to him to round up enough money in gilded New York to start a firm to publish the writers he likes - he could probably find it amid the loose change in the office couch down the hall of (justifiably) bestselling Times columnist Thomas Friedman - simply never crosses his mind. He could then find out if there really is enough advance money to go around - if the value to readers of the writing Mr. Egan adores is higher than the opportunity cost of producing it.

But that would require Mr. Egan to expose himself to risk, and it's better that other people be strongarmed into doing that. The resources that the shareholders of Random House have accumulated - the human capital, the human networks, the printing presses, the editors and their judgment - are really there to serve Mr. Egan's arbitrary (just as anyone's is) notion of good writing. The popularity of this kind of thinking - from auto bailouts to paying for health care to growing crops to, now, writing books - is why this is every day a progressively less free society. The day someone figured out how to privatize reward and collectivize risk was the day that freedom began to die, and Mr. Egan, in his own inconsequential way, long ago signed onto that agenda, probably without a moment's reflection.

As an aside, if you want the cultural assumptions of Mr. Egan's argument properly skewered, do it the Iowahawk way.

The Medicare Miracle That Isn't

Many advocates of single-payer health-care make the argument that the U.S. government should simply extend Medicate to all citizens. The elderly are overwhelmingly satisfied with Medicare, the argument goes, and so it is a simple matter to preserve all that is best with the U.S. health-care system - a free choice of a doctor with whom a patient can have a long-term relationship - while fixing what is worst - its unaffordability. I confess I do not know where the evidence that the elderly are satisfied with Medicare comes from. I suspect it is mostly argument by anecdote. When my mother turned 65 she was delighted with it, although whether she got the same quality of care she could've had had she (and we) been responsible for all her health care, as we were for her food, housing, and other essentials, is impossible to say.

But I have always had my doubts about how satisfactory Medicare really is, and know an offhand remark in The Portland (Ore.) Tribune has brought those doubts some support. Below are the money quotes:

Those waits already are long for many Portland patients, especially those with Medicare or Medicaid health insurance. Those providers don’t reimburse physicians at as high a rate as most private insurers.

About 45 percent of all Oregon physicians won’t even take new Medicare patients, according to McMullan. With a glut of patients and a lack of internists, McMullan says, they have begun rejecting the patients whose insurance won’t reimburse them as well.

As I suspected. With Medicaid this has long been known, but time-based (as opposed to money price-based) rationing may be endemic to Medicare as well. The article notes that it is happening too with some fully insured primary-care physicians (PCPs), although I suspect not nearly as much.

It is not correct to say there is a "shortage" of PCPs, as the article suggests there is, because that shortage has to be connected to some notion of willingness to pay, willingness to offer, prices and alternatives, and never is in such claims. But time-based rationing is almost certainly far more common among Medicare and Medicaid patients than among those paying cash or fully picking up the tab for their own health insurance (where it is probably zero), and than among patients with conventional employer-based health insurance.

In principle there is no objection to having more and more doctors be specialists, and fewer and fewer willing to be PCPs. Increasing specialization has been a hallmark of medicine, as with every other line of work, for centuries. There is probably nothing magical about PCPs per se, except that employers and insurers, in an effort to keep moral-hazard costs down, insist on interposing them as gatekeepers. That of course is a function of the fact that in the U.S. we treat health insurance as an opportunity to get others to pay for our routine health care, rather than as conventional (e.g., auto-liability or homeowners') insurance against low-probability, high-consequence acts. I think the more serious issue is time-based rationing of health-care treatment generally. And that, I fear, may be coming soon to a country near you.