A Proposed Solution to the Housing Crisis

Part of what I seek to do here is to raise things that aren't being heard enough. As Krugman notes, the current bailout plan looks to be throwing money at some US banks without compensating US taxpayers for the risk they're taking.

What's worse is that this fix might not even fix the problem, because it is not only the subprime loans which are the problem -- it is all sorts of loans. Jason Lindt makes this case, and although I can't vouch for his numbers, he makes it convincingly. He says we should go straight to the problem: banks' insolvent balance sheets. While the current bailout plan looks like a sneaky way to throw money at banks, a good plan should specifically offer capital to these banks by purchasing their preferred stock. This gives them some Tier 1 capital as a cushion, and it also makes them pay us dividends in the future.

I still have questions about this. Sometimes the dividends on preferred stock don't get paid, but then they stack up cumulatively. The Tier 1 capital page says these types of preferred stock don't usually apply to Tier 1 capital. We might need a strange kind of which is more geared towards the long-term, and also gives us voting power in these companies. We need to put these banks on long-term payment plans, because it is going to be a while before they'll be able to pay us back for the mess they've caused.

Incidentally, as to the cause of this, Anton Wahlman notes something I haven't heard before: the effect of the Taxpayer Relief Act of 1997, which exempted profits on personal residents from taxation. That law likely contributed more than the Community Reinvestment Act bullshit, which has been refuted.

The paths

If you live in a world of your own,
A world of isms and a dusty tome, hook a left.
Search till you die;
the wisdom you seek is a lie.

If you live in the world of matter,
A world of irrational symbols, reactions, and recursion,
try the path to the right,
but know you may be in for a fight.

You live in a world of people,
Some are strong, and some feeble.
Beware the bull; his word can pull.
And consider neither path, young soul.

My goal?

Granted curiosity infernal,
I seek life eternal.

Review of Kicking Away the Ladder by Ha-Joon Chang

I was pleasantly surprised by this book, which was first assigned to me in a class. I must not have read it then, and now I'm finally working through the books I've piled up over the years. It destroyed the misconceptions which I'd finally come to accept after years of brainwashing (with no evidence).

The first claim is that mainstream economists have ignored history. The "eminent" Nobel (the fake economics one) laureate economic historian, Douglass North, wrote "the standard history of the United States" economy which mentioned tariffs once "in order to dismiss them as an insignificant factor in explaining US industrial development" (2002:24-25). This can only be regarded as intellectually dishonest. Alexander Hamilton first proposed the infant industry argument for US industry, in opposition to Adam Smith's advice that the US focus on agriculture. The US maintained average weighted tariffs of around 40-50% on manufactured goods until 1950. The illustrative table, from Paul Bairoch's book Economics and World History, is available online.[1]

The second chapter focuses on policies which countries used to get an edge in industry. Espionage, tariffs, subsidies for imported raw materials, government-subsidized plants and researchers, and other methods were used to bolster industry.

The next chapter focuses on institutions. It's much looser and weaker, but makes the tentative case that we might be pushing important institutions such as democracy, central banking, various regulations, limited liability corporations, bankruptcy law, property (including intellectual) rights, the judiciary, child labor, social welfare provisions, and information disclosure too fast on developing nations. I'm not sure I'm convinced, but it is interesting. Some of these are important, others are less so, certainly. The most important, in my mind, are stable law, transparency, information disclosure, and property rights for the masses rather than the few. The succinct and scholarly discussion of economic institutions in historical and developmental context alone makes the book worth it.

After reading the book, I'm inclined to agree that activist policies are often necessary. Friedrich List, the major theorist of the infant industry argument, argued that free trade was really only beneficial among equally industrialized countries, and I'm inclined to agree. A country needs to build up its basic industrial institutions. However, tariffs are probably not the way to go today. Export-oriented policies used by the Asian Tigers are preferable. The issue is complex, however, as all the countries are chasing after a limited supply. Economists seem skeptical of the race to the bottom in international trade (in things like environmental standards), but I don't really understand why.

Should we be trying to support advertising?

There's a bit of a problem with "new media". People aren't willing to pay for it. We may have micropayments on the way, but for now the support is largely advertising. But advertising may not be as lucrative as people think. As web-consumers become smarter and internet search (as well as other internet navigation) becomes more effective, click-through rates plummet to nothing.

The bigger problem will come when companies realize that much of advertising is a waste of money. A recent study found by comparing US and Canadian drug use (where drug advertising illegal) that drug advertising was short-lived and "modest".[1] Media producers, particularly independent ones, will find it more difficult to spend time doing what they're doing.

When I find a good blog, I purposefully click on Google ads to show a little support.

Capitalism and Freedom Review

After reading Capitalism and Freedom carefully, my opinion of Milton Friedman has been revised upward. I was assigned this book for class, but I never gave it a thoughtful, careful read till now. The book that I had read carefully from Milton, Free To Choose, left me thinking he was not a great thinker. My recollections were that Free To Choose was surprisingly lacking in nuance. That is probably because it was targeted for a mass audience, but its simplicity still seems like a negative mark for Milton Friedman.

Capitalism and Freedom has very few numbers, and no models, but it is well-argued nonetheless. It is full of rhetoric, but it is the kind of rhetoric that makes sense -- the kind which characterizes government controlling the individual as a violation of human rights. Friedman argues against the central control which was prominent at the time, but is no longer taken seriously. He does not so much engage the other type of socialism -- welfare capitalism, except to perhaps endorse it in his last sections on the distribution of income and social welfare measures.

In Friedman's second chapter, he notes the appropriate functions of government (p. 34) -- functions which I completely agree with, but which neocons, and liberals, tend to forget about. These include setting and enforcing the rules of the "economic game", promoting competition, countering monopolies, overcoming neighborhood effects (also called externalities), and even supplementing charity and the family in protecting the irresponsible. He identifies a number of policies as unequivocally wrong. Generally I don't agree that these are always wrong, but it is hard to see why agriculture price supports would be necessary. Others, such as tariffs, parks, and detailed regulation of banking would seem to have a place dependent upon the situation.

Chapter 3, on money, is probably one of the most important chapters. Friedman opposes the current Federal Reserve system, believing it is too liable to human error, and instead proposes (citing his A Program for Monetary Stability) a consistent rate of growth in the money supply of 3 to 5 percent.

Chapter 4, International Financial and Trade Arrangements, is also enormously important, and unfortunately awfully complex -- more so than money. Friedman endorses the floating exchange rate which Soros finds so troubling -- and the floating rate might be the best of bad options. Unfortunately, it leads to a fair amount of uncertainty, speculation, and sudden catastrophes as currencies change. If only there was a perfect system.

In chapter 5, Friedman critiques the Keynesian use of fiscal policy to alleviate unemployment. He argues that it relies upon untenable assumptions, because the money which the government spends must be borrowed from the public, which will drive up interest rates, and thus reduce the amount of spending and investment. He admits that it is ultimately an empirical question, but says that his recent work (The Relative Stability of the Investment Multiplier and Monetary Velocity in the United States, 1896-1958) suggests that there is no rise in expenditures, as his "quantity theory" suggests.

In Chapter 6, Friedman lays out the case for vouchers in education. I won't spend much time here -- I agree that vouchers are a good thing if strict standards are maintained, but Friedman endorses questionable standards, such as allowing segregated schools. Chapter 7 is on discrimination, a complicated political subject I'd rather not get into.

Chapter 8 is on monopoly. Friedman admits that all the ways of dealing with monopoly are bad, but tentatively concludes that leaving monopolies private may be best, mainly because innovation happens so quickly, and the government is so reluctant to let loose of its hold. I'm not sure I agree, but it is a decent point. He also makes the case here that a corporation should not be socially responsible, and that government needs to be the one holding people responsible. This sort of reminds me of how I used to play MUDs -- exploit the code, and argue that I shouldn't have to maintain reasonable behavior if it is not programmed into the game. It was probably a bad attitude, and a corporation should similarly not follow the letter of the law -- if it does, it will hopefully find itself in trouble, as I did. This argument from Friedman might be taken as an implicit argument that the government must be especially vigilant and free to take action.

He notes an interesting unintended consequence of our current system. Dividends are taxed double, which leads corporations to hold dividends and then invest them in their business, whether it is prudent or not. I fully agree with him here, and wish corporations disbursed more dividends. He wants to abolish the corporate income tax and instead force shareholders to record their profits from the company on their taxes -- meaning that they'd have to pay taxes on them, I'm guessing?

In Chapter 9, Friedman makes the case that the American Medical Association is a lobbying group bent on keeping competitors out. It's amusing. He defends "faith healers" by noting that one of thousands of quacks may produce a valuable breakthrough through their unorthodox experimentation. Those of you who know my Wikipedia efforts will know that I am sympathetic to alternative medicine, and I like this defense -- although I truly dislike things like therapeutic touch and homeopathy. Friedman argues that restricting medicine only to the highly-skilled reduces the total "physician-hours", and reduces total amount of care, thereby reducing the quality. Friedman tentatively notes that government certification may be necessary because certification information is nonexcludable -- one person can pass it on to others.

In Chapter 10, on the distribution of income, Friedman gets again into the tough ethical issues. He admits that the issue is difficult. Somehow he tries to run inequality from personal endowments together with inequality from inherited wealth, because the latter leads to personal endowments. To an extent, this is true, but he emphasizes it too much. He also makes a somewhat bizarre argument that if there were 4 Robinson Crusoes marooned on four islands, and one landed on a fruitful island, that Crusoe would not be required to share his wealth, and the 3 others, who were barely scratching by, would not be morally justified in taking it. He says this is analagous to someone finding $20 on the street, and then 3 people deciding to mug you for not sharing it. Does his analogy make sense? I dunno. I don't get ethical issues, generally, but I think 1) we should encourage a meritocracy, 2) we cannot allow people to starve or live with debilitating illness. Which brings up to the next chapter.

In Chapter 11, Friedman discusses Social Security and other social welfare provisions. He criticizes the idea behind social security -- that people cannot save for themselves -- however, I tend to think that people cannot. He notes this possibility as well, but thinks there are better ways of ensuring that people secure their retirements, so that the government is not left supporting them in their old age. He argues that most people would save for their unemployment, and that social security arose only because many people were unprepared for the Great Depression.

In Chapter 12, Friedman endorses a negative income tax, noting that such a system would target poverty much more specifically than minimum wage laws.

In 13, he sums up his arguments. Nothing too interesting here, and I'm losing steam.