States that permit recreational marijuana sales tend to have lower rates of vaping-related hospitalizations, according to data published by the Centers for Disease Control and Prevention (CDC). The CDC has linked vitamin E acetate, an adulterant typically reserved to the black market, to 48 of the 51 hospitalized patients it has examined. Governments have often responded to these contaminations by enacting bans on e-cigarettes and other vaping products, but the CDC data suggest they should take the opposite approach.
As with prohibitions throughout history, these bans are misguided. They would push consumers to black markets, where vaping products are more dangerous. In fact, despite the disproportionate popularity of nicotine vaporizers, of the 1,782 hospitalized patients who were asked what type of product they were using, 80 percent reported use of vaporizers containing THC, the main psychoactive ingredient in marijuana. And due to marijuana's illegality, this figure is likely an underestimate, as patients are likely underreporting THC use to avoid potential prosecution.
The CDC has also found THC in the majority of lung fluid samples it has tested in conjunction with contaminates like vitamin E acetate, coconut oil, and limonene, while acknowledging that THC wouldn't necessarily remain in the lungs. But this strong relationship is not because THC is more dangerous to vaporize than nicotine, but because THC vapor fluids are typically purchased on the black market.
Vaping first emerged in U.S. markets in 2007 as a safer alternative to cigarettes—it provides nicotine without the harmful tar in burned tobacco. Critics cite the possible adverse effects of nicotine, especially for teens, while harm reduction groups point to potential health benefits of vaping over smoking traditional cigarettes and their carcinogenic tar.
Until recently, the consensus supported smokers switching to e-cigarettes. Last March, however, reports of lung illnesses and deaths from vaping began to emerge, with 2,506 hospitalizations and 54 deaths reported to the CDC so far this year. In September, the CDC initially advised consumers of all vaping products to stop use immediately. But at the end of October, CDC Director Robert Redfield warned that THC products, particularly those purchased from "informal sources," seemed to be playing a major role in the lung injury outbreak. Redfield added that users of nicotine e-cigarettes should not return to smoking conventional cigarettes.
The federal government still outlaws recreational marijuana use in every state, as does state law in 39 of the 50 states. This means that THC vaping products are usually purchased in black markets and subject to their dangers.
Strikingly, states that permit recreational marijuana sales are experiencing far fewer lung injuries. Alaska, which voted to legalize recreational marijuana in 2014, did not report a single vaping-related hospitalization until one case surfaced in December. Overall, states with legalized marijuana have reported approximately 6.7 fewer lung injuries per million people than states that have not yet permitted recreational cannabis sales, according to our analysis of CDC data.
There are some outliers among the states permitting recreational marijuana. Despite voting to fully legalize marijuana in 2016, Massachusetts currently has the highest vaping hospitalization rate among legalizing states at about 10 cases per million people. But Massachusetts also only has 33 operating marijuana dispensaries, which implies insufficient access to the legal market. In contrast, the City of Denver has 171 recreational dispensaries alone. Regulations restricting access to legal suppliers correlate with higher rates of vaping hospitalizations, but every state that permits recreational marijuana is still below the average of all states.
There are fewer injuries from vaping in legalized marijuana states because consumers have less need to access the black market for THC vaping products. Potentially dangerous additives like vitamin E acetate have been found almost exclusively in underground vaping products, a danger that fades in states with legal marijuana.
Vapers—like those who use alcohol, recreational drugs, and most products in general—are better off buying products in legal markets, where numerous mechanisms moderate the dangers of risky products. Competition between suppliers leads to safer products, with above-ground firms developing reputations for higher quality products. Legal producers and independent groups like Consumer Reports test products for safety and report this information. And if these mechanisms fail, tort liability can hold legal suppliers accountable.
In underground markets, these mechanisms are absent or less effective. Consumers face greater difficulty finding a competing product if they doubt the quality from any given supplier. They also cannot easily sue for damages without also criminalizing themselves. Sending illegal products to a lab for testing is prohibitively expensive and legally risky for both buyers and sellers. And because they don't compete in an open market with legal protections, sellers of illegal drugs often push products that are adulterated to mask their low purity and increase profit margins. That's why expensive, poppy-derived heroin is so often cut with cheap, synthetic fentanyl, and why THC vape pens on the black market are cut with cheap vitamin E acetate.
Numerous episodes illustrate that driving markets underground via prohibition or overregulation means riskier products. Prohibition in the 1920s caused thousands of alcohol poisonings from tainted or mislabeled alcohol. Heroin prohibition, combined with its restrictions on clean syringes, exacerbated the HIV/AIDS outbreak because of needle sharing. And regulation of prescription painkillers has spurred heroin and fentanyl overdoses as consumers switched to underground opioids.
The recent vaping-related hospitalizations and deaths fit this pattern.
Rather than restricting vaping products, a better policy would legalize marijuana broadly and avoid strong restrictions on nicotine or THC vaping products. Prohibition and overregulation drive these products underground and make them more dangerous. It may be counterintuitive to many lawmakers, but legalization, not prohibition, is the answer to making vaping safer.
The post To Reduce Vaping Illness, Legalize Marijuana appeared first on Reason.com.
]]>Like Obama, Rep. Nancy Pelosi (D-Calif.) blames partisan bickering in Washington for the nation's economic woes and recently accused Republicans of having "passed bills that would destroy up to 2 million jobs—nearly 10,000 jobs per day" in the 200 days since she was booted from her role as House speaker. Pelosi, of course, is an old hand at job pivotry. She prefers her jobs bought and paid for by federal money, and in a pleasing shade of green.
Republicans have their own jobs agenda, but mostly prefer to talk trash about the Democrats. "Spurring jobs and the economy is always next on the Obama Administration's to-do list," sniped Current House Speaker John Boehner (R-Ohio) in an August 3 blog post, "right after more spending, more taxing, and more regulating."
Meanwhile, the American people are raising a collective skeptical eyebrow at both parties on the employment front. A July Pew Research poll showed an even 39-39 split on which party Americans trust more on jobs. But a CNN/ORC poll released Friday finds that only 29 percent of respondents think there will be more jobs in their communities a year from now—and 26 percent think there will be fewer jobs.
In an effort to produce real free-market ideas for boosting employment, Reason asked some of our favorite economists, writers, professors, and entrepreneurs for one concrete policy change they would recommend that would increase job growth. —Lucy Steigerwald
Robert Higgs
Repeal of ObamaCare would probably do wonders to spur hiring, especially for permanent positions. Compensation for such jobs usually includes a benefits package with health care insurance, as well as a money wage or salary. Health care insurance often constitutes a major part of the employer's cost of keeping a permanent worker on the payroll, and anything that makes this cost difficult to forecast makes employers leery to take on new workers.
ObamaCare—the Patient Protection and Affordable Care Act—is a gigantic statute, and it would be a big bite for employers to digest in any event. But as it stands, it serves mainly as an announcement that a large number of legal black boxes must be filled with new regulations that various administrative agencies will eventually promulgate. As Gary Lawson has written recently, "Implementation of the Act will require many years and literally thousands of administrative regulations that will determine its substantive content and coverage."
This situation creates tremendous uncertainty that affects virtually all firms. After all, no matter how firms may differ in other regards, they all hire employees, and in most cases employee compensation amounts to a major part of their total cost of operation. Repeal of ObamaCare would have many benefits, but surely a great benefit would be the removal of an ominous cloud of uncertainty about a critical matter that now hangs over the entire labor market. In the face of this uncertainty, few firms have been, or will be, willing to assume the risk associated with increasing their permanent, full-time workforce.
Robert Higgs is a senior fellow in political economy at the Independent Institute. He is the author of Crisis and Leviathan: Criticial Episodes in the Growth of American Government, and several other books.
Deirdre McCloskey
"Jobs" are deals between workers and employers, and so "creating" them out of unwilling parties is impossible. The state, though, can outlaw deals, and has. So: eliminate the minimum wage for people younger than 25. The resulting boom in jobs for young people will amaze. Maybe it will inspire voters to get the state out of the job-outlawing business. Probably not, so sure are we that the state "protects" by stopping deals between willing parties.
Deirdre McCloskey is a professor of economics, history, English, and communication at the University of Illinois at Chicago, and author of The Bourgeois Virtues: Ethics for an Age of Commerce.
Amity Shlaes
The single thing the U.S. could do to ensure long-term growth, including that of jobs, is to reform our Federal Reserve so that monetary policy is rules-based, not personality-based. Even a return to the gold standard would do, though it is also possible to fashion a monetary regime under which the currency is pegged to a basket of commodities.
Amity Shlaes is a senior fellow in economic history at the Council on Foreign Relations. She is the author of The Forgotten Man: A New History of the Great Depression. Her biography of Calvin Coolidge will be released next spring.
John Stossel
Close the Departments of Labor, Commerce, Agriculture, Energy, and HUD, then eliminate three fourths of all regulations.
John Stossel's show Stossel airs Thursdays at 10 p.m. on Fox Business Network. He contributes a regular column to Reason.com.
Donald Boudreaux
My answer (within the realm of "remotely politically possible") is: Replace all income taxes, including that on capital gains, with a consumption tax. But do this only if the Constitution is amended to prevent government from taxing incomes and capital gains.
A second, less radical, proposal is to eliminate capital gains taxes and amend the Constitution to prevent Uncle Sam from taxing personal and corporate incomes at marginal rates higher than 20 percent.
Donald Boudreaux is a professor of economics at George Mason University, and blogs at Cafe Hayek.
Bryan Caplan
Easy: Cut employers' share of the payroll tax.
Bryan Caplan is a professor of economics at George Mason University. He is the author of The Myth of the Rational Voter: Why Democracies Choose Bad Policies, and most recently, Selfish Reasons to Have More Kids: Why Being a Great Parent is Less Work and More Fun Than You Think.
Bruce Bartlett
I don't believe there is any way to increase employment significantly without raising the rate of economic growth. Therefore, the real question is how to raise economic growth. I continue to believe that the economy's fundamental problem is a lack of aggregate demand.
I think a dose of inflation is just what the economy needs and libertarians should stop being so obsessive about it. Moreover, I think at some point they need to admit that the Fed cannot raise aggregate demand by itself when the economy is in a liquidity trap, which it obviously is based on the level of interest rates being close to zero.
Under these circumstances, I believe that some form of aggressive fiscal policy is necessary to get money circulating, raise the velocity of money, and get the economy out of a liquidity trap. I do not believe, under current circumstances, there is any type of tax cut that would achieve this goal; only direct spending by the government on purchases of goods and services will help. Therefore, the Fed will, somehow or other, have to figure out how to raise aggregate demand by itself.
The only other thing I can think of to raise growth would be a deliberate devaluation of the dollar, which would raise exports. Theoretically, the Fed could buy as much foreign currency as necessary to bring the dollar down. But this is impractical because foreign countries can retaliate by buying dollars with their own currency or impose restrictions on U.S. imports. Any policy of devaluation would be strenuously opposed domestically by those who are obsessed with the idea that the dollar should be strong regardless of the economic conditions.
I realize that everything I have just said is totally contrary to the libertarian worldview. However, I believe that implementation of libertarian policies, such as cutting spending and tightening monetary policy, under current economic conditions will only make it worse. I support any regulatory measure anyone can think of to reduce unemployment, but am disinclined to think there are any that will have more than a trivial effect under current macroeconomic conditions.
Bruce Bartlett was a domestic policy adviser to Ronald Reagan and a treasury official under George H.W. Bush. His most recent book is The New American Economy: The Failure of Reaganomics and a New Way Forward.
Jeffrey Miron
Policymakers should stop worrying about job growth. Instead, they should focus on eliminating economic policies that impede economic efficiency—runaway entitlements, a horrendous tax code, excessive regulation, impediments to free trade, and more—and then let the job situation fix itself.
Jeffrey Miron is the director of undergraduate studies and a professor of economics at Harvard University.
John Berlau
Repeal portions of the Bush-era Sarbanes-Oxley Act to make it easier for smaller companies to raise capital by going public, and thus expand and create thousands more jobs.
Repeal portions of last year's Dodd-Frank Wall Street Reform and Consumer Protection Act, which has created hundreds of pending rules causing uncertainty and a halt in hiring for everyone from banks and credit unions to retailers and manufacturers that extend credit or hedge financial risks with derivatives.
Pass the bipartisan Small Business Lending Enhancement Act—S. 509 by Sen. Mark Udall (D-Colo.), and in HR 1418, by Rep. Ed Royce (R-Calif.)—to lift the aribitrary cap on business lending by credit unions. The Credit Union National Association estimates that easing this barrier would create over 140,000 jobs in the first year and thousands more in the years after that.
John Berlau is director of the Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.
Allan Meltzer
We have made the mistake of using short-term policy changes to try to cope with a long-term problem. There are several long-term changes called for. There is great uncertainty and lack of confidence in the future. That reduces investment and employment. One change that would reduce uncertainty is a five-year moratorium on new regulation except for national security. Another would be a budget agreement that made the debt sustainable. Not likely. Third; corporate tax rate reduction paid for by closing loopholes. Finally, we need assurance that we won't have inflation. A credible, enforced inflation target would work.
Allan Meltzer is a professor of economics and the political economy at the Carnegie Mellon University Kepper School of Business.
Ira Stoll
Congress should stop extending unemployment benefits, and better yet, restructure the unemployment insurance program or block-grant it to the states to allow them to experiment with ways of doing so. The idea is to change the program so it creates an incentive for recipients to get a job, rather than an incentive for them to remain unemployed.
This could involve altering the unemployment benefit formula so that the amount of the payment gradually decreases over time, reducing the propensity of beneficiaries to stay on unemployment until they frantically search for a job and find it just as the benefits run out.
Or it could involve allowing states "the flexibility to convert their unemployment insurance payments from checks sent to the jobless into vouchers that can be used by companies to hire workers," as Bloomberg News columnist Jonathan Alter suggests, relaying an idea from a Democratic candidate for U.S. Senate from Massachusetts, Alan Khazei.
Or it could involve changing the program so recipients get a hefty share of their benefits up front, as a lump sum. They can then use the money as capital to start small businesses. Or if they find a job quickly, they can save or invest or spend the money. (No repeat passes, though; the idea is to increase incentives for finding or creating a job, not rewards for people who get themselves fired.) Another approach might be to fold unemployment together with health, college, homeownership and retirement as expenses that people can save for in a tax-favored account.
Ira Stoll is the editor and founder of FutureOfCapitalism.com and the author of Samuel Adams: A Life. His weekly column appears at Reason.com.
Walter Olson
If I could press a button and instantly vaporize one sector of employment law, I think I'd pick age discrimination.
Its beneficiaries are among those needing least assistance. The main cash-and-carry effect of age-bias law is to confer legal leverage on older male holders of desirable jobs, such as managers, pilots, and college professors, who by threatening to raise the issue can extract ampler severance packets than might otherwise be offered them. Much legal talent is wasted in the resulting exit negotiations, which seldom seem to rouse the ire of critics of gaudy executive pay, golden parachutes and so forth.
It blatantly backfires on those it tries to help. Once cut loose from the old job, those same buyout recipients find it harder to land the next high-level job because of the perception that older hires are more likely to need buyouts not far down the road.
It generates pointless avoidance mechanisms. Ask your HR director about the costly stage in layoff strategy known as "age-balancing the RIF" or about the many small-talk questions you're not supposed to ask at job interviews for fear of seeming interested in the subject ("I notice you're a veteran. Which war?") or about the brain-cracking legal headaches that arise from the premise that (at least in some situations) the design of pension plans is supposed to take no notice of age.
Its intellectual basis is lighter than helium. Race, sex, sexual orientation and disability each form the basis of a major identity politics movement. But really: "ageism?" It's one thing to abridge liberty to expiate the national guilt of antebellum slavery, but can anyone keep a straight face in proclaiming persons of late middle age a historically oppressed class?
Please, I want to see this law repealed before I'm too old to enjoy it.
Walter Olson is a contributing editor to Reason, senior fellow at the Cato Institute, and proprietor of Overlawyered.com.
Peter Schiff
To make the greatest impact on persistent unemployment, the government should pursue policies that allow the free market to set wages, benefits, and all issues related to employment. Just as employees are allowed to leave jobs for whatever reason, employers should be allowed to hire and fire based on any criteria without fear of litigation. In other words, liability cost for hiring employees should be minimized. Employees become easier to hire once employers know that their downside risks are minimized. In addition, all labor laws protecting employees from employers, including minimum wage laws, should be repealed.
Employment is a voluntary relationship between two parties. Our laws should reflect and support that concept to the highest extent possible. Employees do not qualify for special privileges (inappropriately labeled worker's rights) simply because they accept a job, and employers do not lose their rights and become subjected to special obligations just because they hire. The playing field should be level.
Peter Schiff is the CEO of Euro Pacific Capital and the author of How an Economy Grows and Why it Crashes.
Alex Tabarrok
QE3: Fed should buy lots of long term T-bonds.
Alex Tabarrok is the Bartley J. Madden Professor of Economics at the Mercatus Center at George Mason University.
Fred L. Smith
Approve the Keystone XL Pipeline: 20,000 jobs created. The 1,700 mile Keystone XL Pipeline would link expanding Canadian crude production from tar sands with America's first-class refining hub in the Midwest and along the Gulf. The $7 billion project would roughly double U.S. imports of tar sands oil from western Canada.
Because the Keystone XL pipeline crosses an international border, the primary permitting agency is the State Department. However, oil production from tar sands is more carbon-intensive than traditional production, so environmentalist groups are staunchly opposed to it. As a result, the project has been in a permitting limbo for three years. By approving the project in short order, President Barack Obama would directly create more than 20,000 high-wage manufacturing jobs and construction jobs in 2011-2013, according to an independent analysis by the Perryman Group.
Fred L. Smith Jr. is the president of the Competitive Enterprise Institute.
The post What Would You Do to Improve Job Growth? appeared first on Reason.com.
]]>This view is a pipe dream. Most new regulation will do nothing to limit crises because markets will innovate around it. Worse, some regulation being considered by Congress will guarantee bigger and more frequent crises.
Government-Induced Moral Hazard Caused the Crisis
The Financial Crisis of 2008 did not occur because of insufficient or ill-designed regulation. Rather, it resulted from two misguided government policies.
The first was the attempt to promote homeownership. Numerous policies have pursued this goal for decades, and over time they have focused mainly on homeownership for low-income households. These policies encouraged mortgage lending to borrowers with shaky credit characteristics, such as limited income or assets, and on terms that defied common sense, such as zero down payment.
The pressure to expand risky credit was especially problematic because of the second misguided policy, the long-standing practice of bailing out failures from private risk-taking. This practice meant that financial markets expected the government to cushion any losses from a crash in mortgage debt. Thus, the historical tendency to bail out creditors created an enormous moral hazard.
One crucial component of this moral hazard was the now infamous "Greenspan put," the Fed's practice under Chairman Alan Greenspan of lowering interest rates in response to financial disruptions that might otherwise cause a crash in asset prices. In the early to mid-2000s, in particular, the Fed made a conscious decision not to burst the housing bubble and instead to "fix things" if a crash occurred.
It was inevitable, however, that a crash would ensue; the expansion of mortgage credit made sense only so long as housing prices kept increasing, and at some point this had to stop. Once it did, the market had no option but to unwind the positions built on untenable assumptions about housing prices. Thus government pressure to take risk, combined with implicit insurance for this risk, were the crucial causes of the bubble and the crash. Inadequate financial regulation played no significant role.
New Regulation Must Avoid Moral Hazard
If government-induced moral hazard caused the crisis, then new regulation should avoid creating or exacerbating this perverse incentive. Yet two components of proposed regulation will increase, rather than decrease, the chances for moral hazard.
One proposed change in regulation would give the Federal Reserve increased power to supervise financial institutions, especially bank holding companies such as Citigroup or Bank of America. This approach is a triumph of hope over experience. Why should an expanded Fed role be beneficial when the Fed erred so badly in the previous instance?
Defenders of an expanded Fed role will claim that, in the lead up to the crisis, the Fed did not have explicit powers to supervise and monitor non-bank financial institutions, and that such powers could have avoided the crisis.
Yet during the years before the crisis, the Fed had more than ample power to recognize the unprecedented level of risk that was building in the economy and to issue stern warnings, whether or not it had explicit regulatory authority. In fact, far from cautioning the market to behave, the Fed promoted the notion that it could solve any problems that might result from a bursting of the housing bubble.
Regulators are fallible. Alan Greenspan, once thought to be the Maestro, got it fabulously wrong. Ben Bernanke, regardless of the merit's of his stewardship, will not be Fed chairman forever. Centralized and expanded power to make things better is also centralized and expanded power to make things worse. In particular, any mistakes made by a powerful, centralized authority have a magnified impact because they distort the behavior of the entire market.
Just as problematic as granting the Fed additional powers is the proposal to allow the FDIC to resolve bank holding companies using taxpayer funds. Under the proposed arrangement, the FDIC rather than bankruptcy courts would be responsible for bank holding companies, and the FDIC would be authorized to make loans to failed institutions, to purchase their debts and other assets, to assume or guarantee their obligations, and to acquire equity interests. The funds would be borrowed from Treasury.
This means that FDIC resolution of bank holding companies would put taxpayer skin in the game, a radical departure from standard bankruptcy and an approach that mimics the actions of the U.S. Treasury under TARP. Thus, the new approach would institutionalize TARP.
The result will be that under the proposed system, bank holding companies would forever more regard themselves as explicitly, not just implicitly, backstopped by the full faith and credit of the U.S. Treasury. That is moral hazard in the extreme, and it will create an unprecedented incentive for excessive risk-taking by these institutions.
The Bankruptcy Approach
The only way to limit financial panics is to eliminate government-induced moral hazard, and that means letting failed institutions fail. Whether resolution is carried out by the FDIC or a bankruptcy court is not the crucial question; rather, it is whether that resolution process forces all the losses on the institution's stakeholders rather than bailing them out with taxpayer funds.
The standard objection to allowing failures is that some financial institutions are allegedly so large or interconnected that their failure causes a breakdown of the credit mechanism, thereby harming the whole economy rather than just transmitting losses that have already occurred. According to this view, letting Lehman Brothers fail was a crucial mistake that initiated the meltdown, and bailing out other financial institutions was a necessary evil to prevent even further chaos. Nothing could be further from the truth.
Rather than being a cause, Lehman's failure was merely the signal that time had come for the U.S. economy to pay the price for all the distortions caused by the misguided policies toward housing and risk. Given those distortions, a massive unwinding and restructuring was necessary to make the economy healthy again.
This restructuring required lower residential investment, declines in stock and housing prices, and shrinkage of the financial sector. All of this implied a recession, even without any impact of financial institution failures on the credit mechanism, and the recession meant that lending would contract, even without a credit crunch.
The bailout itself, moreover, caused much of the financial market turmoil. The announcement that the Treasury was considering a bailout scared markets and froze credit because bankers did not want to realize their losses if government was going to bail them out. The bailout introduced uncertainty because no one knew what the bailout meant. The bailout did little to make balance sheets transparent, yet the market's inability to determine who was solvent was a key reason for the credit freeze.
Thus letting Lehman fail was the right decision; bailing out Bear Stearns, Fannie, and Freddie in advance of Lehman, and the rest of Wall Street afterwards, were the mistakes. For all its warts, bankruptcy rather than bailout is the right way to resolve non-bank financial institutions. Any regulation that formalizes bailouts creates an enormous moral hazard and a black hole for taxpayer funds.
The Future
To limit future financial crises, policy must first avoid the distortions inherent in the attempt to expand homeownership. This means eliminating the Federal Housing Administration, the Federal Home Loan Banks, Fannie Mae, Freddie Mac, the Community Reinvestment Act, the deductibility of mortgage interest, the homestead exclusion in the personal bankruptcy code, the tax-favored treatment of capital gains on housing, the HOPE for Homeowners Act, the Emergency Economic Stabilization Act (the bailout bill), and the Homeowners Affordability and Stability Plan. None of this is sensible policy.
In addition, policy must end its proclivity to bail out private risk-taking. This second task is difficult, since it requires policymakers to "tie their own hands." Specific changes in policies and institutions can nevertheless support this goal. The first is avoiding new regulation that makes bailouts more likely. A second is repealing all existing financial regulation, since this would signal markets that they, and only they, can truly protect themselves from risk.
The third and perhaps most important way to reduce moral hazard is to eliminate the Federal Reserve. As long as the Fed exists, it will regard itself as, and be regarded as, the economic insurer of last resort. In a world with perfect information, appropriately humble central bankers, and an absence of political influence on monetary policy, such a protector might enhance the economy's performance on average.
In the world we live in, none of these conditions will hold consistently, so the potential for policy-induced disasters is large. The U.S. economy prospered for its first 125 years without a central bank. It's time to try that approach again.
Jeffrey A. Miron is Senior Lecturer and Director of Undergraduate Studies in the Department of Economics at Harvard University and a Senior Fellow at The Cato Institute. He blogs at http://jeffreymiron.blogspot.com.
The post Financial Market Reform appeared first on Reason.com.
]]>This provision of risky debt to low-income homeowners was exacerbated by a second misguided federal policy: the longstanding practice of bailing out private risk taking. Although this has gone on for decades in the U.S. and other countries, the Federal Reserve played a special role during the tenure of former chief Alan Greenspan. The Fed's implicit and almost explicit policy before the housing crash was to say to the financial markets: "Don't worry about the fact that there's a bubble. We'll lower interest rates and keep them low enough to prevent a collapse in asset prices." This logic, broadly applied, was commonly called the Greenspan Put. The Federal Reserve was basically selling the market an option for getting out comparatively unscathed when things turned bad. The result has been a widely held assumption that market actors would not have to bear the full losses from their own risky behavior.
When people try to pin the blame for the financial crisis on the introduction of derivatives, or the increase in securitization, or the failure of ratings agencies, it's important to remember that the magnitude of both boom and bust was increased exponentially because of the notion in the back of everyone's mind that if things went badly, the government would bail us out. And in fact, that is what the federal government has done. But before critiquing this series of interventions, perhaps we should ask what the alternative was. Lots of people talk as if there was no option other than bailing out financial institutions. But you always have a choice. You may not like the other choices, but you always have a choice. We could have, for example, done nothing.
Unfair in the Short Term, Inappropriate in the Long Term
By doing nothing, I mean we could have done nothing new. Existing policies were available, which means bankruptcy or, in the case of banks, Federal Deposit Insurance Corporation receivership. Some sort of orderly, temporary control of a failing institution for the purpose of either selling off the assets and liquidating them, or, preferably, zeroing out the equity holders, giving the creditors a haircut and making them the new equity holders. Similarly, a bankruptcy or receivership proceeding might sell the institution to some player in the private sector willing to own it for some price.
With that method, taxpayer funds are generally unneeded, or at least needed to a much smaller extent than with the bailout approach. In weighing bankruptcy vs. bailouts, it's useful to look at the problem from three perspectives: in terms of income distribution, long-run efficiency, and short-term efficiency.
From the distributional perspective, the choice is a no-brainer. Bailouts took money from the taxpayers and gave it to banks that willingly, knowingly, and repeatedly took huge amounts of risk, hoping they'd get bailed out by everyone else. It clearly was an unfair transfer of funds. Under bankruptcy, on the other hand, the people who take most or even all of the loss are the equity holders and creditors of these institutions. This is appropriate, because these are the stakeholders who win on the upside when there's money to be made. Distributionally, we clearly did the wrong thing.
From the perspective of long-run efficiency, the question is also relatively straightforward. By the end of 2005, it should have been apparent that the U.S. economy was fundamentally misaligned. We had significantly overinvested in housing and significantly underinvested in factories, plants, and equipment. In effect, we needed a recession: a period to readjust the balance between the different types of capital.
More broadly, failure is an essential aspect of free markets. Failure shows capitalism is working, because it means resources are moving from bad uses to good uses.
There are other long-term problems with the bailout approach. Bailouts create moral hazards going forward, meaning market players will be more inclined to take excessive risks. Bailouts encourage inappropriate goals, such as propping up insolvent banks. Bailouts give the government ownership stakes in these institutions, which means that politics, not economics, is going to decide where these firms invest in the future. And bailouts set the wrong precedent for other industries.
The Only Plausible Argument
There is therefore only one reasonable argument for choosing bailouts over bankruptcy. Bailouts might make sense if bankruptcy imposed an externality—an unwelcome spillover effect. The argument for that goes as follows: When a given bank fails, it loses intermediation capital, or the ability to make loans. Any given bank knows a particular sector of the economy, a particular region of the country, or a particular kind of loan market. So if that bank fails, that specialized knowledge gets destroyed; therefore, at least in the short term, no one can easily make that kind of loan.
If that happened to one bank, you'd say it was no big deal; there are plenty of banks that have lots of knowledge. But if one large bank fails and defaults on obligations to lots of other banks, forcing some of them to fail, you might worry that contagion could lead to a lot of intermediation capital disappearing in a short period of time.
That story sounds somewhat plausible. But it has two key weaknesses, one theoretical and one empirical.
The theoretical weakness is that if a bank fails but its assets and its employees are bought by another bank, there is no reason for the intermediation capital to disappear. It just gets transferred to someone else. If you think that the good ideas for making productive loans are in the brains of the people of the failed bank, those people are probably going to go work at some other financial institution—a hedge fund, an insurance company, another bank. So you're not necessarily going to lose all the intermediation capital as a result of the failure. Indeed, the failed bank's employees may be put to work in more productive ways.
The empirical problem with the claim that bank failures destroy intermediation capital is that there isn't strong evidence to support it. Some evidence does show a correlation between bank failures and declines in output. But since declines in output should lead to bank failures, we don't know which is causing which. Thus, there isn't much quantitative data showing that bank failures lead to a large excess loss, over and above what you would expect when a negative shock hits the economy.
Because housing prices have declined, some people and institutions are worse off. Maybe it's the first bank in the chain that takes most of the hit. Or maybe the first bank passes some of the hit along because of its counter-party claims to some other bank. But that hit has to be taken. And in the U.S., it was a big hit indeed—plausibly several trillion dollars in housing wealth. The size of that loss doesn't demonstrate a spillover effect; it just shows that somebody has to experience the loss that the economy has already taken.
Twisted Incentives
The problem isn't only that the bailout wasn't necessary in the first place. The bailout may have made the credit situation worse. When banks hear that the Treasury Department is dangling hundreds of billions of dollars out there to purchase their toxic assets, what are they going to do? Sell their assets for 20 cents on the dollar, or hold onto them in the hope that the government will eventually buy them for 80 cents on the dollar?
The moment Treasury Secretary Henry Paulson got in front of the cameras last fall and announced that we were on the brink of catastrophe, Wall Street was bound to freeze, because bankers wanted to figure out how much money was available and how they could get some. Let's not realize any losses we don't have to realize, they figured, because Treasury's going to bail us out.
Of course, the bankruptcy approach is itself messy, and there are some legal issues concerning whether existing procedures apply to bank holding companies or just banks. But what the administration should do now is stop giving banks money and start being open to the bankruptcy approach when existing law allows it. Further, the administration could push Congress harder to expand and clarify the FDIC's receivership authority. As long as regulators keep giving banks money, nothing is going to clean the mess in the financial sector.
The latest government program, the Public-Private Investment Program, is just another handout to the banks. It sets up a system where a small amount of private money is combined with a small amount of government money and a big loan guaranteed by the government to buy the toxic assets from the bank.
So what are the incentives to private-sector actors? Well, they're putting hardly any money in. If it turns out that the toxic assets they bought aren't worth anything, they haven't lost much. If the assets are worth a lot, they make some money. Either way, the Treasury Department is guaranteeing everything. Reasonable estimates indicate that these toxic assets are not worth very much, so this is just another way of transferring resources to the banks by buying their toxic assets at inflated prices.
That's not the only area where the Obama administration has twisted incentives. President Obama's mortgage plan uses $275 billion in tax funds to help homeowners refinance and lower rates, to subsidize payments from borrowers to lenders, to get lenders to modify loans, and so on. It gives another $200 billion to the government-created home mortgage companies Fannie Mae and Freddie Mac. This is exactly the wrong approach.
The aim is to reduce foreclosures, so the delinquent or nearly delinquent borrowers can stay in their homes. That sounds like a laudable goal, but it ignores a fundamental reality: This money is coming from somebody else. So what the plan is doing is penalizing relatively responsible homeowners or renters—everybody who pays taxes—and rewarding those people who should have known, or at least should have had some inkling, that the loans they were being offered were too good to be true. This program creates exactly the wrong incentives for people deciding whether to borrow and whether to be homeowners.
More generally, it continues the policy of promoting homeownership. We got in this situation because the government wanted to promote homeownership. Until we create a situation where people make decisions based on their own resources and have to think about bearing the consequences of the decisions they make, the root cause of the financial crisis will only get worse.
Shrinking the Pie
Add in Obama's $787 billion stimulus and his $3.6 trillion budget, and a picture emerges of an administration totally unapologetic about its designs to expand the size and scope of government. There is no question that the people advocating this spending want much more government intervention with respect to unions, energy, health care, infrastructure, and other areas. The crisis has given them the opportunity to ram through a bunch of things they've been pursuing for a long time.
As a matter of accounting, they are almost certainly understating the budgetary implications of their programs. Their assumptions about economic growth are optimistic relative to those of private forecasters. Furthermore, many of the items in the stimulus package that were supposed to be temporary are not going to be temporary. Thus, my guess is that deficits will be much bigger than the administration predicts.
The stunning thing about Obama's spending proposals is that there's almost nothing you could defend from the perspective of efficiency. It's all about redistribution–not redistribution to the poor but redistribution to Democratic interest groups: to unions, to the green lobby, to the health care industry, and so on. At some point these everescalating government interventions will affect the size of the economic pie. If we start looking more like France, with more than 20 percent of GDP controlled by the federal government, output growth and economic freedom will all suffer.
The fundamental problem underlying the financial crisis was government policy. Instead of undertaking enormous new policies, we should try to fix or eliminate bad policies and focus on efficiency rather than redistribution. Doing nothing new and simply working with pre-existing procedures would have been much better than anything we've done so far.
Jeffrey Miron (miron@fas.harvard.edu) is senior lecturer and director of undergraduate studies at the Harvard University Department of Economics and a senior fellow at the Cato Institute.
The post The Case for Doing Nothing appeared first on Reason.com.
]]>One policy change, however, can stimulate both the economy in the short-run and enhance efficiency in the long-run: repeal of the corporate income tax, which collects up to 35% of the difference between revenues and costs of incorporated businesses.
From the efficiency perspective, the corporate income tax has never been sensible policy. Economic theory holds that an efficient tax system should not tax capital income, since this distorts the incentives to save and invest. Even if the tax base includes capital income, corporate income taxation is overkill. All income earned by corporations accrues to households as dividends or capital gains, and this income is then taxed by the personal income tax system.
Proponents argue that the corporate income tax makes sense because high-income taxpayers own corporations at a disproportionate rate. This desire to redistribute income can still be achieved using the personal tax system. That approach is better targeted than taxing corporate income, since many low and moderate income households own corporations via their pensions and 401(k)s. The true burden of corporation taxation falls not just on stockholders, but on employees through lower wages and on consumers through higher prices. Thus corporate taxation hits taxpayers across the income spectrum.
Corporate income taxation has other negatives. It requires a complicated set of rules and regulations, over and above the personal income tax system, generating compliance costs. Special interests ensure that corporate tax systems favor specific industries or activities, further distorting private investment decisions. Along those lines, corporation taxation reduces financial transparency, making it harder for investors to monitor corporate behavior.
So repeal of the corporate income tax is good policy independent of the state of the economy and would provide short-run stimulus.
Repeal means higher stock prices and improved cash flow. Corporations would respond to this change by investing in plant and equipment, and by hiring additional workers. These investments would be more productive than the ones funded by stimulus projects, since corporations respond to market forces, not to political influence. Since corporations could more easily invest out of retained earnings, repeal would also circumvent many banks' reluctance to lend.
The budgetary impact of a corporate income tax repeal—roughly $300-350 billion per year—might seem daunting, but this amount falls well short of the Obama fiscal package. The long-run impact will be less than what is implied by current revenues, since repeal will expand economic activity and therefore increase other kinds of tax revenue.
The stimulus impact of a corporate income tax repeal is likely to be substantial. Recent estimates by Christina Romer, the head of Obama's Council of Economic Advisers, suggest that tax cuts have a multiplier of three, meaning that repeal would increase GDP by roughly $1 trillion. By comparison, the administration's assumption that the government spending multiplier is about 1.5 suggests that the $500 billion in the Obama stimulus package would increase GDP by about $750 billion.
Elimination of the corporate income tax is a no-brainer. It benefits the economy in both the short-run and the long-run, with modest implications on the government budget.
The broader lesson here is that policymakers should attempt to improve the economy by eliminating currently existing bad policies, not just by adding new layers of government. By focusing equally on efficiency and stimulus, policymakers can set the stage for a sustained and healthy recovery.
Jeffrey A. Miron is a senior lecturer in economics at Harvard University.
The post Economic Change We Can Believe In appeared first on Reason.com.
]]>Responding to commentators who believe that misguided government policies caused or contributed to the current financial mess, Weisberg asserts that the real culprit is the libertarian financial policy (which banned "any infringement of the right to buy and sell") that the U.S. has allegedly pursued in recent years. We're in the midst of "a global economic meltdown made possible by libertarian ideas," writes Weisberg, who adds that intellectually vapid libertarians simply cannot "accept that markets can be irrational, misunderstand risk, and misallocate resources or that financial systems without vigorous government oversight and the capacity for pragmatic intervention constitute a recipe for disaster." Libertarian policies have failed so miserably, he concludes, that it is time to toss libertarianism, like Soviet communism, on the trash bin of history.
Excuse me? Are you serious, Jacob?
Whatever one's views of libertarian policies, the incontrovertible fact is that the U.S. has not pursued such policies. Not in the past 10 years. Not in the past century. Indeed, except for a brief moment before Alexander Hamilton engineered the first U.S. bailout of financial markets, not ever. If the U.S. had truly been the "Libertarian Land" that Weisberg alleges, a huge range of policies that have helped fuel the current situation would have been radically different.
In Libertarian Land, banks would not be chartered, defined, and regulated by government, as they have been in the U.S. for over 150 years. In particular, banks would have the right to "suspend convertibility," meaning they could tell depositors, "Sorry, you can't have all your money back right now," during banks runs that threatened bank solvency. This is precisely what banks did in key financial panics during the pre-Fed period, when suspension was illegal but tolerated or encouraged by regulators. By so doing, banks reduced the spread of panics and solvent but illiquid banks did not fail in large numbers.
In Libertarian Land, the Federal Reserve would never have been created. This means the Fed could not have turned a normal recession into the Great Depression by failing to stem a huge decline in the money supply. This decline and the related bank failures occurred because the Fed's existence was taken as indication that banks could not, or should not, suspend convertibility, as they had done successfully in the past. Thus in Libertarian Land, the Great Depression would probably not have occurred.
If the Fed had never been created, Alan Greenspan would never have been its chairman. Thus he would not have given investors inappropriate assurances about the riskiness of derivatives or the long-term viability of the stock market boom of the mid-1990s. Absent the Fed, no Alan Greenspan would have kept interest rates low for an extended period and thereby fueled the housing bubble that has played a key role in turmoil of the past two years. Market participants would have made judgments on their own, and these would plausibly have been more cautious as a result.
In Libertarian Land, the Securities and Exchange Commission, along with financial market regulation such as capital requirements, would not exist. This means investors would have no assurance that government can keep "excessively" risky or fraudulent securities out of the marketplace. Many small investors would stay on the sidelines, leaving the risky investing to those who could afford to lose.
In Libertarian Land, government would not promote increased home ownership, so it would not have created Fannie Mae and Freddie Mac, or encouraged these institutions to extend subprime loans, or implicitly promised to bail them out if or when these loans failed. Thus a key ingredient in the recent financial turbulence would not have arisen.
In Libertarian Land, government would not protect private agents from the downsides of their risky decisions. This means no rescues or bailouts for banks, airlines, or car companies. No deposit insurance, no pension benefit guarantees, and so on.
In Libertarian Land, individuals and businesses would take risks, but they would think long and hard about these risks. Some individuals and businesses would profit handsomely from smart risk-taking, but many would earn modest returns on average because their seemingly "excessive" returns in good times would be balanced by big losses in bad times.
Reasonable people can debate whether consistent pursuit of libertarian policies would have improved U.S. economic performance over the past two centuries. They cannot claim, however, that recent events demonstrate the failure of libertarian policies, since those policies have not been employed.
Nor can they say, as Weisberg contends, that "libertarian apologetics fall wildly short of providing any convincing explanation for what went wrong." In fact, by theorizing, anticipating, and underscoring the inevitable failure of mixing free-market dynamics and politically driven interventions into the economy, libertarians explain both what's going on and how to avoid its periodic repetition.
At a minimum, the jury is still out on whether a truly libertarian policy regime is desirable. With luck, some government will one day have the courage to give it a try.
Jeffrey A. Miron is a senior lecturer in economics at Harvard University.
The post The End of Libertarianism and Other Adventures in Financial Policy Fantasy appeared first on Reason.com.
]]>