H/T Greg Mankiw.
H/T Interpretation by Design. The box leading in to the Texans is spot on.
A couple of items from over the weekend are well worth reading for those who are interested in financial health of the U.S.
First, the Wall Street Journal’s Holman Jenkins, Jr. notes that Bank of America’s declining value reflects that the federal government’s bailout of Wall Street during the financial crisis of 2008 has been of dubious merit:
Let’s revisit the theory of the bailout. The government holds a safety net under the financial system, preventing a worse panic, with consumers and business cutting back spending more radically, with more people losing jobs, with more houses going into foreclosure.
It made sense on paper and underlies claims today that the government has been a net profiter from its bailout activities.
But it becomes apparent that the 2008 crisis isn’t over. And our bailout strategy?
In one presumed lesson of the Great Depression, a splurge of deficit-financed spending is supposed to support the economy while consumers and businesses get over their shellshock. But as George Soros noted to Der Spiegel, the U.S. government in the 1930s wasn’t saddled with huge debt. Unless today’s deficit spending is visibly directed at projects with a positive return, he says, it just frightens the public that the government itself is going bankrupt.
Meanwhile, this Bradley Keoun and Phil Kuntz/Bloomberg article reports that the Federal Reserve loaned an astonishing $1.2 trillion to Wall Street during the 2008 crisis. Interestingly, that amount is roughly equal to the amount that U.S. homeowners currently own on 6.5 million delinquent and foreclosed mortgages.
The foregoing does not surprise regular readers of this blog. Efficient operation of markets depend in large part on the allocation of losses based on who took the risk of loss. Remove the consequences of that risk and the result is that the politically well-connected profit, not necessarily those who carefully assessed and hedged risk.
Remember, it’s not rocket science.
Warren Buffett’s NY Times op-ed of last week generated a substantial dose of self-righteous indignation.
I mean, really. If someone as wealthy as Warren Buffett thinks that the mega-rich people should pay more taxes, then why shouldn’t they?
Although the issue seems so simple, as with many things in life, it’s not.
Apart from the fact that Buffett is not averse to taking positions that protect himself at the expense of others, the taxes that the mega-rich pay are already highly disproportionate.
And as Jeff Miron notes, assessing even an additional 10% surcharge on taxpayers earning over $1 million would not generate enough to make a meaningful difference in reducing the budget deficit. Miron zeroes in on Buffett’s error in reasoning in the following passage:
Buffett errs, most fundamentally, by focusing on outcomes rather than policies. The right question is which policies promote differences in incomes that reflect hard work, energy, innovation and creativity, rather than reward the unethical, the politically connected and the tax-savvy.
In economics, as in sports, we should adopt good rules and insist that everyone play by them. Then we should stand back and applaud the winners.
Indeed, check out what David Logan discovered when he crunched the numbers:
So taking half of the yearly income from every person making between one and ten million dollars would only decrease the nation’s debt by 1%. Even taking every last penny from every individual making more than $10 million per year would only reduce the nation’s deficit by 12 percent and the debt by 2 percent. There’s simply not enough wealth in the community of the rich to erase this country’s problems by waving some magic tax wand.
Finally, to put everything in perspective, think about what would need to be done to erase the federal deficit this year: After everyone making more than $200,000/year has paid taxes, the IRS would need to take every single penny of disposable income they have left. Such an act would raise approximately $1.53 trillion. It may be economically ruinous, but at least this proposal would actually solve the problem.
And as Charles Koch and Harvey Golub note, it’s not as if government has distinguished itself in the way in which it has used tax revenues.
Meanwhile, Peter Gordon insightfully points out why indulging in class warfare against the wealthy is dangerous.
Timothy Snyder’s Bloodlands (Basic, 2010) reminds us of the horrors of what occurs when the dynamics of racial and class warfare collide.
Are those who fan such flames confident that similar outrages could not happen here and now?
Or do they even care?
Yes, our Congress is back at it:
Since the Supreme Court limited the definition of ‚Äúhonest services‚Äù fraud in last year’s landmark Skilling v. U.S., the Obama Administration has been looking for a way to restore essentially unlimited prosecutorial discretion to bring white-collar cases.
Last fall Assistant Attorney General Lanny Breuer told a Senate committee that Congress should act to ‚Äúremedy‚Äù the Court’s decision. Three bills moving through the House and Senate would try to do so, expanding the reach of prosecutors to go after unpopular politicians or businesses whom they can’t pin with a real crime.
In Skilling, the Supreme Court ruled that the honest services statute was “unconstitutionally vague” and restricted its application to clear cases of bribery or kickbacks. The new legal template of Senate bills sponsored by Judiciary Chairman Patrick Leahy, the liberal Democrat, and Illinois Republican Mark Kirk would end run that change, transforming many state or local ethics violations into federal felonies any time there is an allegation of undisclosed “self-dealing.” . . .
Where to begin?
For starters, as Bill Anderson points out, why on earth do our political leaders think we need even more people in prison?
Moreover, as Larry Ribstein has been saying for years, granting the government this type of unfettered power to criminalize merely questionable business transactions has proven to lead to even worse prosecutorial abuse that is rarely sanctioned.
How is justice served by turning such prosecutions into a lottery? Is public confidence in the federal criminal justice system really promoted by unfavorable comparisons to Russia’s?
And let’s not forget the incalculable human toll of such prosecutions.
The truth is that this type of amorphous criminalization of business judgment is fundamentally bad regulatory policy. Such prosecutions obscure the true nature of business risk and fuel the myth that investment loss results primarily from criminal misconduct. Besides, allowing wide discretion to prosecute business judgment deters businesspeople from taking the business risks that lead to valuable innovation, wealth creation and – most importantly these days – desperately needed jobs for communities.
So, in the face of such compelling reasons to forego such criminalization, why do our political leaders and prosecutors insist on more?
Ayn Rand’s observation about socialists who use state power to further their supposedly altruistic goals seems particularly apt:
“[T]he truth about their souls is worse than the obscene excuse you have allowed them, the excuse that the end justifies the means and that the horrors they practice are means to nobler ends.”
“The truth is that those horrors are their ends.”