The case against government-guaranteed loans and mortgages to private businesses and persons is almost as strong as, though less obvious than, the case against direct government loans and mortgages. The advocates of government-guaranteed mortgages also forget what is being lent is ultimately real capital, which is limited in supply, and that they are helping identified B at the expense of some unidentified A. Government-guaranteed home mortgages, especially when a negligible down payment or no down payment whatever is required, inevitably means more bad loans than otherwise. They force the general taxpayer to subsidize bad risks and to defray the losses. They encourage people to "buy" houses that they really cannot afford. They tend eventually to bring about an oversupply of houses as compared with other things. They temporarily overstimulate building, raising the cost of building for everybody (including the buyers of homes with the guaranteed mortgages), and may mislead the building industry into an eventually costly overexpansion. In brief, in the long run they do not increase the overall national production and encourage malinvestment.
-Henry Hazlitt. Economics in One Lesson (46-47).
Showing posts with label Economics. Show all posts
Showing posts with label Economics. Show all posts
Saturday, November 12, 2011
Thursday, November 10, 2011
Economics
The art of economics consists in looking not merely at the immediate but the longer effect of any act or policy; it consists in tracing the consequence of that policy not merely for one group but for all groups.
Henry Hazlitt. Economics in One Lesson. (17)
Henry Hazlitt. Economics in One Lesson. (17)
Friday, September 16, 2011
Economics and How Green Was My Valley
Last week there was a mine accident in Wales. What caught my eye was the following quotation:
1,500 people. That makes the automobile or cattle-ranching businesses look healthy. But the end of coal mining in Wales is more catastrophic to the identity of her people than Detroit jobs going overseas. Mining has been the lifeblood in those valleys for centuries. And its gone. Time moves on but can the people keep up with her?
My father grew up in a town with two industries: the railroad and a Celanese plant. As my father entered high school, the Celanese closed down. By the time he got out of college, the railroads were dying. There was no future for him in the town of his birth. Like others in his high school class, he left only to return when he was dying.
Wales is an example of that writ large: When the major job source left, there was a brain drain. What was left behind lives on the charity of the government.
As of June 2011, 1,500 people in Wales worked in the mining industry, according to government sources.
1,500 people. That makes the automobile or cattle-ranching businesses look healthy. But the end of coal mining in Wales is more catastrophic to the identity of her people than Detroit jobs going overseas. Mining has been the lifeblood in those valleys for centuries. And its gone. Time moves on but can the people keep up with her?
My father grew up in a town with two industries: the railroad and a Celanese plant. As my father entered high school, the Celanese closed down. By the time he got out of college, the railroads were dying. There was no future for him in the town of his birth. Like others in his high school class, he left only to return when he was dying.
Wales is an example of that writ large: When the major job source left, there was a brain drain. What was left behind lives on the charity of the government.
Friday, August 5, 2011
Economics, History and the Economy
The Great Depression started with the Stock Market Crash of 1929. It worsened until 1933 when many banks failed. Franklin Roosevelt was inaugurated in 1933 and promised the American people a New Deal. By putting a lot of money into the economy there were signs of recovery but total recovery did not come until the United States became involved in World War II.
This is the conventional wisdom. In fact this would be a decent test answer. Unfortunately there are a number of gaps in it as I will point out when appropriate. But that is not the reason for this excursion. There are two questions that have been on my mind of late and I am seeking the answers. First, are we in a similar situation to the U.S. economy of 1937-1938? Second, and more profoundly: Did we ever totally recover from the Great Depression or are the props still in place?
First, a more detailed and accurate account of the events of the Great Depression. A financial bubble came to the surface in 1929. This bubble was caused primarily by the monetary policy of the Federal Reserve. Interest rates were too low which led to too much money in circulation, money that went into items of speculation such as the stock market and increased production. Now, here is an instance where I have gone against the received wisdom. I see increased production as a form of speculation. Somebody (or some committee) makes a conscious decision as to production. They estimate what will be needed in the coming months or years. That is speculation. Anyway, with this speculation the Stock Market reached unheard of heights: I call it Fantasyland. When the market broke (or began a correction if you will) money disappeared from circulation. What did the Federal Reserve do? Instead of compensating for the dwindling supply by dropping rates, they aggravated the problem by raising interest rates. Lack of money means lack of purchasing power. People (consumers) are focusing on the basics. Goods go unsold. What do we do when we have too much of something? We sell it overseas. But Congress decides to get involved by passing one of the most restrictive tariffs in history. Our trading partners respond accordingly and the problem at home only gets worse. By 1932 the situation is so bad that banks are dropping like flies. A program is created to give money to banks that are in trouble but in the interest of openness the names of the banks asking for this help will be made public which makes the program worthless. Roosevelt is elected and pushes through reforms of the banking system and programs meant to stimulate the economy. By 1936 this becomes nothing more than targeted vote-getting. When Roosevelt is re-elected comfortably, he begins to show concern for the deficit and cuts back on spending to try to balance the budget. Neither is Congress interested i n throwing more money at the problem. The result is the Great Recession of 1937-1938, from which the nation only emerges with the onset of World War II and increased government spending. This is the standard interpretation. Some say that the Depression did not end until 1947-1948 with the end of the war adjustment.
Here is where I disagree. If one posits the idea that artificial government stimuli boosted the economy but did not technically end the Depression until 1947, how can you say that it ended even then. What was happening in 1947? The Cold War with increased defense spending. The Marshall Plan and massive foreign aid for rebuilding. The GI Bill with college tuition and loan payments. In the 1950s you have the beginnings of the Interstate Highway System, a massive infrastructure project, and then in the 1960s there is an enormous increase in entitlement benefits such as Medicare/Medicaid and Social Security. If one looks at the number of people who work directly or indirectly for the government, it is a high percentage of the employment figure. The percentage of GDP related to government spending is also still high. Is that recovery?
This is the conventional wisdom. In fact this would be a decent test answer. Unfortunately there are a number of gaps in it as I will point out when appropriate. But that is not the reason for this excursion. There are two questions that have been on my mind of late and I am seeking the answers. First, are we in a similar situation to the U.S. economy of 1937-1938? Second, and more profoundly: Did we ever totally recover from the Great Depression or are the props still in place?
First, a more detailed and accurate account of the events of the Great Depression. A financial bubble came to the surface in 1929. This bubble was caused primarily by the monetary policy of the Federal Reserve. Interest rates were too low which led to too much money in circulation, money that went into items of speculation such as the stock market and increased production. Now, here is an instance where I have gone against the received wisdom. I see increased production as a form of speculation. Somebody (or some committee) makes a conscious decision as to production. They estimate what will be needed in the coming months or years. That is speculation. Anyway, with this speculation the Stock Market reached unheard of heights: I call it Fantasyland. When the market broke (or began a correction if you will) money disappeared from circulation. What did the Federal Reserve do? Instead of compensating for the dwindling supply by dropping rates, they aggravated the problem by raising interest rates. Lack of money means lack of purchasing power. People (consumers) are focusing on the basics. Goods go unsold. What do we do when we have too much of something? We sell it overseas. But Congress decides to get involved by passing one of the most restrictive tariffs in history. Our trading partners respond accordingly and the problem at home only gets worse. By 1932 the situation is so bad that banks are dropping like flies. A program is created to give money to banks that are in trouble but in the interest of openness the names of the banks asking for this help will be made public which makes the program worthless. Roosevelt is elected and pushes through reforms of the banking system and programs meant to stimulate the economy. By 1936 this becomes nothing more than targeted vote-getting. When Roosevelt is re-elected comfortably, he begins to show concern for the deficit and cuts back on spending to try to balance the budget. Neither is Congress interested i n throwing more money at the problem. The result is the Great Recession of 1937-1938, from which the nation only emerges with the onset of World War II and increased government spending. This is the standard interpretation. Some say that the Depression did not end until 1947-1948 with the end of the war adjustment.
Here is where I disagree. If one posits the idea that artificial government stimuli boosted the economy but did not technically end the Depression until 1947, how can you say that it ended even then. What was happening in 1947? The Cold War with increased defense spending. The Marshall Plan and massive foreign aid for rebuilding. The GI Bill with college tuition and loan payments. In the 1950s you have the beginnings of the Interstate Highway System, a massive infrastructure project, and then in the 1960s there is an enormous increase in entitlement benefits such as Medicare/Medicaid and Social Security. If one looks at the number of people who work directly or indirectly for the government, it is a high percentage of the employment figure. The percentage of GDP related to government spending is also still high. Is that recovery?
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