New School Politics

If you're a first time visitor, you may want to subscribe to our RSS feed, which will keep you up to date with all the latest New School Politics posts. Thanks for visiting!

Now that Obama has decided to shed a fraction of his flowery rhetoric in favor of more specific ideas, especially on economic issues, he is beginning to paint a better self-portrait of himself as a policy man. But when listening to him talk substance, I cannot help but raise an eyebrow relatively often. Here was a absurd comment from his Chesapeake victory speech:

It’s a game where trade deals like NAFTA ship jobs overseas and force parents to compete with their teenagers to work for minimum wage at Wal-Mart.

This contention is just completely wrong and makes almost no economic sense. It is illogical and there is no data to support it. Not only is it sensationalism and Wal-Mart bashing, but seems that there is no reason to say it unless it were aimed at scaring people into supporting Obama and his economic plan. There is really no other explanation to why he said it other than it is pandering and, ironically, fear-mongering from the man who pontificates about hope all the time.

If he was economically literate he would take note of the fact that over half of those working minimum wage are under the age of 25 (and more than a quarter in their teens), while almost nine of every ten minimum wage workers do not have any dependents (BLS). Moreover, he would also recognize that freer trade allows for more capital mobility and for businesses and people to remain more productive, thus delivering more, cheaper, and better products to consumers. Bill Clinton was honest enough to embrace free trade even when it went against his party’s grain. Now even his wife isn’t brave enough to stand up against her party. Worse yet, Republicans like Huckabee, and to an extent Romney when he was still in the race, underhandedly went after free trade, using the unoriginal line, “I believe in free trade, but it has to be ‘fair’ trade.” Talk about a lepor’s bell. Among candidates on trade, however, McCain has demonstrated that he is most consistently in favor, even telling Iowans that he is in favor of eliminating all farm an ethanol subsidies.

One of America’s most prominent economists, Greg Mankiw, writes:

An open question in my mind is whether Barack Obama is going to align himself with the economic centrists in the Democratic party or with the populists on the far left of the party. A key litmus test is trade, and so far it does not look good.

And, for that matter, it doesn’t look so good for the other Democrat in the race as well.

From the Washington Post, here are the candidates records on earmarking which should serve as an indicator to how much fiscal restraint and responsibility they will practice on the whole:

Sen. Hillary Rodham Clinton helped secure more than $340 million worth of home-state projects in last year’s spending bills, placing her among the top 10 Senate recipients of what are commonly known as earmarks, according to a new study by a nonpartisan budget watchdog group.

Working with her New York colleagues in nearly every case, Clinton supported almost four times as much spending on earmarked projects as her rival for the Democratic presidential nomination, Sen. Barack Obama (Ill.), whose $91 million total placed him in the bottom quarter of senators who seek earmarks, the study showed.

Sen. John McCain (Ariz.), the likely GOP presidential nominee, was one of five senators to reject earmarks entirely, part of his long-standing view that such measures prompt needless spending.

On the issue of disparity in pay between men and women, the candidates positions serve as an indicator of their overall attitude towards free exchange and market forces, as well as their willingness to use government to stifle those forces. From the WSJ:

There are actually two versions of comparable worth legislation, the Fair Pay Act and the Paycheck Fairness Act. The former is co-sponsored by Sen. Barack Obama; the principal sponsor of the latter is Sen. Hillary Clinton (Mr. Obama is a co-sponsor). Both would push companies to set wages based not on supply and demand — that is the free market — but on some notion of social utility. The goal is to ensure that jobs performed mostly by men (say, truck drivers) are not paid more than those performed mostly by women (paralegals, perhaps).

President Ronald Reagan correctly called comparable worth “a cockamamie idea.” A great lesson of economic theory, not to mention historical experience, is that government-set wages and prices not only curtail freedom, but lead to shortages, surpluses and market disruptions.

The writer is right on the money with his conclusion, but I will add that the arrogance of the candidates who think that the millions upon millions of individual economic actors determining supply and demand, while working in their own self-interest, should be manipulated on a whim by government edicts is becoming increasingly ominous. While I have traditionally said that Obama would be slightly more rational on the economy than Clinton, it is clear that their platforms are very, very similar (Clinton even accused Obama of copying her ideas) on these issues and that neither are very desirable Presidents at least in terms of how they would handle the economy. And even though McCain has his fair share of economic setbacks, not to mention the fact that he claims to not know much about the economy, he appears to be a more consistent backer of limited government and the free market than either Democrat would wish to be accused of in their wildest nightmares.

Popularity: 45% [?]

This past summer I wrote about the great hope I had in Nicolas Sarkozy to restore capitalism to France and by doing so, save its lagging economy. I had read transcripts of his translated speeches, saw him on television multiple times and read enough articles about him to feel that he was somebody who could truly enact change in that once great nation which is slowly being marginalized in the global arena. I stand here today disappointed that this man who had such great rhetoric on the campaign trail failed to live up to his promises.

Sarkozy has proven to be a protectionist in his trade policies and just as socialist, in most other policies, as the machinery he claimed he would tear down. His popularity in France has dropped 13% and, instead of sticking to his convictions, he has simply given in. This past Monday he spoke to steelworkers and declared he would save their plant from being shutdown, on Wednesday he promised bonuses to low-income pensioners and, in response to a slow down by taxi drivers, the same day ended plans to deregulate that service. All of these are far cries from his campaign days where he gained widespread support for wanting to significantly reduce government regulation and handouts, and create a more privatized economy. Obviously this is not the man the French people thought they would be getting when they overwhelmingly voted for him and gave his party a considerable majority in the National Assembly.

The biggest disappointment, however, has been his handling of the Societe General (SocGen) situation. SocGen is a major French bank that has recently experienced tremendous losses. Sarkozy has been adamant that only another French company may bid for the bank. This ignorant protectionist view will do more harm than good for SocGen and the French economy as a whole. SocGen will not get the best price if foreign companies are not allowed to bid on it, so the shareholders will be injured. The French economy will take a blow as investors who may have believed in Sarkozy’s rhetoric about opening France to globalism will realize that he is no different than previous French protectionist politicians, and invest their money elsewhere.

Popularity: 38% [?]

George Soros is convinced that the world is about to enter a serious recession.  Unfortunately, it seems as if most of the financial world is similarly convinced. The latest trend in stock markets seems to be, “Sell!  Sell!” as traders don’t know what’s going to happen in trading today in the United States, which just opened at 10AM.  The Federal Reserve, in an attempt to head off the recession, cut interest rates last night in a rare between-meetings announcement.   News from the Asian markets isn’t good, with Forbes saying that the environment is rather negative.  One Japanese trader seems to have summed up the mood.

“It’s like a funeral in here,” said Ken Masuda, senior equities dealer at Shinko Securities in Tokyo.  ”No one knows what’s going to happen tonight in New York.  It’s like we’ve gone blind, you don’t know what’s coming.

“Until we see New York, all we can do is sell.” 

We can hope that the United States can stave off recession with an economic stimulus package and without pushing the stock market lower.  Unfortunately, the stimulus package seems far off, as Democrats and Republicans cannot agree on how to reinvigorate the economy.  Sen. Charles Schumer [D-NY] predicts that the stimulus package will be passed some time in March.  If the market drops today as it has been predicted, this may be too late.  Europe, meanwhile, is convinced they won’t be affected by the US’ possible recession.  We’ll be covering the financial situation all day, and we hope that our next post comes with good news instead of bad.  In the meantime, as Eftychis suggested, stick to Forbes, The Financial Times, The Wall Street Journal, Bloomberg News, and financial aggregators like Google Finance & Yahoo Financefor up to the minute reports on the stock market’s position.  As of this writing, the NASDAQ was down approximately 117.68 points, or 5.03%, while the DJIA has seen a drop of 59.91 points [or .49%].

Popularity: 94% [?]

From his Economic View column in the NYT, Tyler Cowen writes:

There has been plenty of talk about “predatory lending,” but “predatory borrowing” may have been the bigger problem. As much as 70 percent of recent early payment defaults had fraudulent misrepresentations on their original loan applications, according to one recent study. The research was done by BasePoint Analytics, which helps banks and lenders identify fraudulent transactions; the study looked at more than three million loans from 1997 to 2006, with a majority from 2005 to 2006. Applications with misrepresentations were also five times as likely to go into default.

This fact, however, falls upon the deaf ears of the Democrats, all of who touched upon the issue in Tuesday’s Nevada debate:

Edwards said, “We need a national law cracking down on predatory and payday lenders that are taking advantage of our most vulnerable families.”

Clinton argued that, “…because of the way the interest rates are going up, and many of the fraudulent and predatory practices that got people into them in the first place…” we need to extend credit and loosen bankrupcy laws for those in trouble.

Obama agreed, “Hillary’s exactly right, but we’ve got to modify some of the fraudulent practices, predatory lending practices.”

It sounds wonderful to the economically illiterate, but this season’s buzzword–“predatory” lending–does not so much as pass the smell test. The fact is that the phenominan–if you can call it that–is easily explained by the price system. If the price of credit goes down, and lenders have access to a greater supply of funds then demand from consumers goes up as they are able to borrow more then they previously could. With more credit, consumers are able to buy higher end goods, which they otherwise wouldn’t have access to–such as homes–and the price for those goods grows.

In reality, neither the lenders nor borrowers were “predatory.” Each demanded more credit as credit became cheaper. Unfortunately for both, the credit bubble burst and they are suffering the consequences of unsustainable financing. But the fact remains, it makes no sense to call either party “predatory” considering they both got screwed. And I believe that is the point that Professor Cowen would ultimately make.

In the same column, Cown spoke on lethal cold fronts:

Spells of extreme cold kill over 27,000 Americans each year, or about 700 people each very cold day. Heat waves may receive more publicity, but it turns out that cold periods — days with an average temperature below 30 degrees —have more significant and longer-lasting effects on human mortality. More people die in cold periods than in homicides.

Extreme cold brings cardiovascular stress as human bodies struggle to adjust to the temperature; many of the deaths in these periods come through heart attacks. Heat waves tend to kill people who were already weakened and would have died soon anyway; cold periods bring additional people to the verge of death.

When retired people move to a warmer state, their life expectancy rises dramatically. In fact, 8 to 15 percent of the increase in American life expectancy over the last 30 years comes from people moving to warmer climates, according to research done by two economics professors, Olivier Deschenes at the University of California, Santa Barbara, and Enrico Moretti, at the University of California, Berkeley.

Much is made of how a warming trend could hurt us, but, not only do I assume that those are under the most severe of scenarios, not much is made of if and how warming can help. Not only do many more humans die from the cold than from the heat, but productivity also flurishes when it is warmer. For instance estimates generally hover around the consensus that warming and greater CO2 has contributed to a 15% growth in crop yields since 1950.

This wisdom regarding warming is certainly unconventional, but it is worth discussing openly. I believe the reason we never hear about it is that global warming skepticism is strongly condemned by the mainstream.

Popularity: 42% [?]

Sarkozy seems to be having a rough week. It was discovered that his son is secretly involved in the French rap world - the very world that Sarkozy inflamed both as Interior Minister and President. The rapper that Pierre Sarkozy (Nicolas Sarkozy’s son) works with previously wrote a song calling for people to vote against Sarkozy in the election. On top of this newest drama, there is the older news of Sarkozy’s highly publicized relationship with Carla Bruni, a model turned singer. The opposition to what the French see as frivolous media-pandering in a time when the French economy is looking grim has been reflected in the recent drop in Sarkozy’s approval rating. Apparently many French feel that Sarkozy is spending too much time enjoying himself, and not enough time doing his job. (Ironic?) His approval rating currently stands at 48%, a sharp drop from the 65% approval rating he had in July, and his stock looks to continue dropping, courtesy of an economic announcement that he made today.

It seems that Sarkozy has gotten it into his head to tax the internet and mobile phones in France. This is clearly a bold move, considering that policy experts note that Internet access drives a country’s growth-clearly the fact that France’s economic growth is projected to lag behind that of the other Euro countries for the 3rd year in a row doesn’t faze Mr. Sarkozy. Sarkozy is proposing what he calls and “infinitesimal” tax on internet and mobile “telephony” in order to cover his other proposal: the removal of commercials from public television broadcasting. This measure is an attempt to save the television and other mass media industries that are quickly being outpaced by the internet.

France currently has cheaper internet access and a higher percentage of homes with high speed connections than the average for the OECD (Organisation for Economic Co-Operation and Development). Sarkozy was widely welcomed in the US when he was elected last year because he was seen as having the financial skills to reverse what have been lackluster years for the French economy. However, he’s proven to do anything but this. His Internet Tax proposal would place undue burdens on the growth of an already struggling country. If the television industry is no longer able to provide and compete, consumers should not be forced to carry its carcass on their shoulders. But, as Sarkozy’s affair with Bruni has shown, he’s really just looking out for himself, not his country - a great idea for an investor, but not the leader of a country.

On one last note, Sarkozy announced also today that the 35-hour work-week must be abolished. He actually acknowledged that the severely restricted hours might be hurting France in the global market! Good job Sarkozy- and good luck!

Popularity: 30% [?]

Along the same lines of voter irrationality, especially on economics, here is a link to a compilation of polls on issues of international trade. Despite the fact that economic theory such as the logic of comparative advantage demonstrates how global trade is omni-beneficial–that the relative majority of economists agree that freer international trade is healthy–and that all the evidence points to more international trade corresponding with higher living standards, most people in America still believe it is a detriment. The most recent of the polls give you an indication of public opinion: 

NBC News/Wall Street Journal (12/14-17/2007)  

Do you think the fact that the American economy has become increasingly global is good because it has opened up new markets for American products and resulted in more jobs, or bad because it has subjected American companies and employees to unfair competition and cheep labor? 

Good: 28%

Bad: 58%

Equal 11%

Unsure: 3%   

Popularity: 33% [?]

Normally, I’m against government in all of its forms. It taxes and spends, and uses up citizens’ money for pork spending and unnecessary “aid.” However, I believe government should expand to one area: drugs. Not drug regulation, but cultivation and sales.

Think about it this way: are people going to stop buying drugs just because they’re illegal? Of course not. All we do is foster cartels, a black market, and waste billions on anti-drug campaigns. Why don’t we just target the source?

Here’s my plan. The government creates something called the Federal Department of Hallucinogens or whatnot. They can start by getting tobacco farmers to grow drugs, which they must sell exclusively to the federal government. Failure to do so will result in confiscation of land. However, the government will pay fair prices for each kind of drug.

Then, the government will manufacture them into a usable form. Because the government is heavily regulating it, marijuana will be in a pure form, not that cocaine-spiked stuff that they give to kids these days. Likewise, meth, for one, will also be free of the useless garbage-it will be sterile and safer. Dosage can also be regulated by the government. The government can then sell drugs to druggies at a decent price, allowing them to make a profit (including all the beauracacy, farmers, regulation). They can use this money to, say, fund education.

This plan has several effects: firstly, it will cripple the drug cartels. No money = no mercenaries, guns, and therefore crime. They will be starved. Secondly, the drugs will be safer and more regulated against OD’s. This will reduce such deaths. Third, the government makes money, not spends it. We’ll save whatever we spend on drug-regulation, and make money from the selling of drugs, allowing us to cut taxes and fund other things like education. Fourthly, we get more people employed, and we can keep them happy. Finally, the government will have a large stockpile of these drugs to use for military/scientific/medical purposes. What’s wrong with this plan? Almost nothing.

Perhaps the best part is that it will give us back, on average, $30 of our taxes. This may not seem like a lot, but when you account for the 300,000,000 people in this country, and the 150,000,000 who actually pay tax (middle class always gets screwed, poor people want higher taxes cuz they don’t have to pay them and get benefits, upper classes have the means to evade taxes via switzerland, etc.) that’s a lot of money.

Popularity: 51% [?]

In a editorial in the Financial Times, Barack Obama makes the case for more government regulation in response to the subprime mortgage bust currently being experienced. A couple of his main points, I believe, were very off the mark. One,

Over the past several years, while predatory lenders were driving low-income families into financial ruin …

First of all, “predatory” is clearly just a smear word and has no true meaning as it pertains to the economics of the situation. Second, there is no logical reason why lenders would desire to drive subprime borrowers into “financial ruin.” That would essentially require lenders to conspire against their own investments. It is pretty simple, if the borrower fails then the lender fails because the lender will no longer be paid out on their investment and moreover it discourages third party investment in that lender’s business itself. This is plainly evidenced by the exact troubles we face now: lenders made bad loans, borrowers defaulted, and both lost lots of money. As Senator Obama clearly does not recognize, in the free market the interests of creditor and debtor are mutual.

Two,

We need to help struggling borrowers to weather this storm. One way to protect innocent homeowners - at least until this crisis passes - is to establish a fund to help people refinance or sell to avoid foreclosure. We can partially pay for this fund by imposing penalties on lenders that acted irresponsibly or committed fraud.

This is exactly the thing not to do. It completely manipulates the incentives for optimal standards in home ownership. For one it relieves home owners of accountability by absorbing the costs of any foolish financial decision they make. It gives borrowers greater incentive to be careless and accept loans that they at their present level of time preferences simply cannot handle.

On the other hand Obama also proposes to punish businesses in a manner that discourages them from investing in home ownership such that it burdens lenders with overflow costs from failed investments that they have already once paid for. If Obama wants to reduce the rate of homeownership in America, especially for those who struggle the most to afford it, he has certainly got the right idea. By forcing creditors to absorb an inordinate amount of the consequences of defaulted loans they will respond by reducing their willingness to issue mortgages proportionally.

Popularity: 37% [?]