Housing, Future Growth, and the Free Market

The Administration has released details of its housing plan. Succinct commentaries on it may be found at Calculated Risk (CR having major expertise in housing) and Mish's Global Economic Analysis.

Both these bloggers criticize the bailing out of speculators who over-leveraged themselves to live in a house they could basically not afford, expecting to be able to flip the house or else refinance based on a higher future valuation.

There is general agreement here; but there is a deeper criticism: This country continues to make a horrible mistake, which is over-invest in housing. The U.S. became the economic engine of and banker to the world by being the low-cost producer of multiple exportable items. Scarce capital needs to go to strengthening areas that can benefit Americans at home and bring in revenue from exports.

What are these strengths? Biomedical and high-tech are two obvious choices. Go for it, America. Green, knowledge-based industries need much more support and will have marvelous social and financial paybacks. $8 Billion for high-speed rail, including building a high-speed train between L.A. and Las Vegas?

This is not emergency stimulus and is a parody: connecting two regions known for bubble-heads to each other when trains, planes and cars have no trouble doing so already. Scrap the $8 B and make Mr. Reid happy in Nevada by providing large research grants to UNLV.

In Roubini-land, RGEMonitor links to a Levy Institute Public Policy Brief, "After the Bust".

This paper argues for "the creation of a new, progressive Keynesian consensus, that will require placing economics at the center of the political stage."

DoctoRx here: Uh-oh. Isn't economics already a huge part of the political stage?

Even the in-house "conservative" of the op-ed page of the New York Times, David Brooks, wrote today that this "administration has taken its faith in government to such an extreme I'm turning into Ayn Rand."

Ouch! (Mr. Brooks is a mild-mannered moderate Canadian-American, for those unfamiliar to him. He does not get pushed easily towards Ayn Randianism.)

In contrast to the statist Roubini-favored approach to economic recovery, please consider Mish in his first post of the day, The Nationalization Train Has Left The Station, in which he criticizes Nouriel Roubini, Alan Greenspan and George W. Bush. (Quite a trio!) The key paragraph in his post is:

What Roubini, Greenspan or any other proponent of bail-outs, nationalization, etc. fails to explain, or even mention is this: Why can we not just let them fail? Let them go bankrupt! Why not?

He also has a marvelous picture courtesy of Michelle Malkin, inspired by the direct quote from Pres. Bush Dec. 16, 2008:




The statist tide is coming in. Crony socialism ("high-speed Reid") may be replacing crony capitalism. If matters proceed as they did in pre-Thatcher Britain, we may not be arguing about the unfairness of socializing the losses after having privatized the profits, because there may not be many profits. The markets keep pushing gold and silver up on that premise.

In the spirit of the times, I call for a Ronald Thatcher to lead us toward a more classical economics and toward a politics that is not dominated by economics but by the more important principle of freedom.

FuturEcon

The Levy Economics Institute of Bard College is an excellent independent source for no-fee information and analysis. Leon Levy, a/the founder of the Oppenheimer family of mutual and other funds, emphasized the importance of profits in economic analysis, and left among his legacies the Levy Institute, which has many activities and is worth visiting on-line periodically. Two recent analyses should be looked at:

Strategic Analysis from this month: "Flow of Funds Figures Show the Largest Drop in Household Borrowings in the Last 40 Years". The Levy Institute's Economic model projects that this sort of drop in borrowings will have long-lasting effects.

DoctoRx comments that we should accept that too much "growth" has been created by borrowing and lending. We need to "sacrifice" (in Mr. Obama's term) growth for a restoration of a more reasonable debt level.

Strategic Analysis from December 2008: "Prospects for the U.S. and the World: A Crisis that Conventional Remedies Cannot Resolve". The first sentence reads:

"The prospects for the U.S. economy have become uniquely dreadful, if not frightening."

The second sentence is not much more hopeful:

"In this paper we argue, as starkly as we can, that the United States and the rest of the world's economies will not be able to achieve balanced growth and full employment unless they are able to agree (upon) and implement an entirely new way of running the global economy."

DoctoRx here: I am not an economist, but the record of independent experts such as those working at the Levy Institute over the past two years gives them real credibility. In contrast, the Fed, the Congressional Budget Office, the White House, and Wall Street have, let us say charitably, missed the boat. So I'll give an unhappy thumbs up to the above.

In addition, there is a Working Paper at the Levy Institute from August 2008 titled, "Keynes's Approach to Full Employment: Targeted or Aggregate Demand?"

Here is the abstract:

"This paper argues that John Maynard Keynes had a targeted (as contrasted with aggregate) demand approach to full employment. Modern policies, which aim to “close the demand gap,” are inconsistent with the Keynesian approach on both theoretical and methodological grounds. Aggregate demand tends to increase inflation and erode income distribution near full employment, which is why true full employment is not possible via traditional pro-growth, pro-investment aggregate demand stimuli. This was well understood by Keynes, who preferred targeted job creation during expansions. But even in recessions, he did not campaign for wide-ranging aggregate demand stimuli; this is because different policies have different employment creation effects, which for Keynes was the primary measure of their effectiveness. There is considerable evidence to argue that Keynes had an “on the spot” approach to full employment, where the problem of unemployment is solved via direct job creation, irrespective of the phase of the business cycle."

This interpretation appears to argue against the Democratic effort to more or less throw a lot of money in a broad-brush fashion at construction jobs and other politically-chosen priorities. It supports the contention made repeatedly at this blog that the political process has failed us. Neither Congress nor the Bush Administration, nor the Fed, appears to have taken this credit crunch/financial crisis seriously enough to do real research and develop a coherent plan.

This perspective is supported by the first Strategic Analysis linked to above. If a relatively mild drop in consumer borrowing, to a historically very high level, can produce a long-lived drop in GDP, then society needs to move rapidly to develop plans for where to put its efforts, but can take the time to think this through. (Congress should have been doing this for many months by now.) Moving to a lower-debt economy will be good in the long-run, but will be associated with a slow economy for years to come. In that situation, what is needed is to do what doctors do all the time: triage. In the economy, the clear emergency is the imploding financial system (see yesterday's post, Hex and the Citi). Almost everything else is secondary.

I hope that Team Obama and Team Congress recognize this.

Copyright (C) Long Lake LLC