Here’s a letter that I sent yesterday to the Wall Street Journal:

Thomas Frank worries that, if Uncle Sam creates “One Big Regulator” for financial markets, this czar will be an industry insider who does more harm than good (”The Real Danger of ‘One Big Regulator’,” Nov. 11).  Frank is right to worry.  But his solution (as far as he even bothers to suggest one) – basically, hoping that appointees to the post will unfailingly be noble and wise public servants – is childish.

Even if we can imagine a super-regulator operating in ways that increase the efficiency and stability of financial markets, the prospect that he or she will be either inept or dishonest is far too great to risk concentrating such enormous power in a single person or agency.  In practice we must reckon on realities and not on fantasies.

So in fact we must reckon on the allure of power to those who greedily crave authority over others; we must reckon on power’s corrupting influence; and we must reckon on the imperfections that mar even the finest individual’s knowledge and judgment.  These unavoidable realities of the human condition will result in this “One Big Regulator” – whose hands, at best only loosely tied, will be on all of the nation’s financial levers – injecting into financial markets systematic risks far greater than those that already exist.

Sincerely,
Donald J. Boudreaux

Here’s a thoughtful piece on the merits and demerits of criminalizing insider trading.

Among the most common arguments made today in favor of the criminalization of insider trading (as opposed to letting corporations, in competition for capital, decide which information is and isn’t appropriate for insiders to trade on) is expressed in these paragraphs of the article linked to above:

“I think there are some libertarians who think we should allow it,” says Wharton finance professor Jeremy J. Siegel. “But I think insider trading is not a good thing. It makes it more risky to buy securities. When someone is offering to buy or sell, it might be that he or she has some inside information and you are going to get duped. So you cannot trust that you are going to get a fair price.” Put simply, insider trading means other investors pay more than they should when they buy and get less than they should when they sell.

….

[I]t’s important to prosecute insider trading cases because the practice can hurt individual investors and undermine the public confidence that allows firms to raise money in the capital markets, says Eric W. Orts, professor of legal studies and business ethics at Wharton. “The danger is you lose a broad public faith in the markets, and people take their money out.”

I’ve never understood why so many people find this “confidence in markets” argument to be compelling.

If insider trading (on non-proprietary information) causes asset prices to reflect more accurately the true, long-run values of those assets, then insider trading should increase confidence in markets.

Put differently, ordinary investors would be less confident in markets that take an average of t units of time to incorporate into asset prices a piece of relevant information than these investors would be in markets that take an average of t+1 units of time to achieve the same adjustments to asset prices.

To the extent that insider trading causes prices to reflect asset values more quickly and more accurately, general investors should be more confident in asset markets and, hence, more likely to invest their earnings in such markets.

When Jeremy Siegel says that, with insider trading, “you cannot trust that you [a non-inside investor] are going to get a fair price” — I immediately ask: why not?  Precisely because insider trading brings asset prices into closer alignment with their ‘true’ values more quickly than would be the case without insider trading, on average the prices at which investors buy and sell assets will be more ‘fair’ — i.e., more truthful — with insider trading than without insider trading.

Suppose, for example, that shares of Acme Inc. are now selling for $50 per.  Suppose also that an insider knows that Acme’s CEO and CFO have been cooking Acme’s books to make Acme appear to the public to be more profitable than it really is.  If that insider can trade on that non-public information — obviously, by shorting Acme stock — the price of Acme stock will start to fall immediately upon the commencement of such insider trading.

Any trader who buys Acme stock after this insider trading commences gets a ‘fairer’ price — a more truthful price — than that trader would have gotten if Acme’s shares were still trading at $50 due to the fact that information about Acme’s true financial state remained private and unincorporated into Acme’s share price.

Thanks to Carpe Diem’s Mark Perry for reminding us of Milton Friedman’s insights about the (il)logic of employer-provided medical insurance.

Writing recently in the Christain Science Monitor, University of Missouri – St. Louis economist David Rose explains why creating the much-touted “health-care cooperatives” — part of the bill passed a few days ago by the House of Representative — won’t work as promised.

Here’s a letter that I sent yesterday to the Washington Post:

Robert Samuelson writes that “Depression prevention means supporting consumption and asset markets” (”The next economic bubble?” Nov. 10).  This claim contains a modicum of truth resting atop a mountain of misunderstanding.

What’s true is that the supply of money should be prevented from collapsing relative to people’s demand for money.  But beyond this, policies to “support consumption and asset markets” cause trouble.

At any given point in time consumption markets and asset markets compete against each other for resources.  If income-earners today save more, they must today spend less, and vice-versa.  Sound money allows interest rates to accurately reflect income-earners’ preferences for deferring consumption – that is, for investing resources in asset markets.  The huge problem with active monetary policies – and not least with those that aim to restore prices to boom levels – is that these policies distort interest rates, causing markets to misallocate resources between consumption markets and asset markets.  The upshot is the recurrent need for markets to slough off investment projects that are not sustainable over the long haul.

Sincerely,
Donald J. Boudreaux

A very illuminating story on “jobs saved.” I think the estimates and methodology reported here are not the same as the “one million jobs saved or created” discussed here. But the real importance of this story isn’t the inconsistency or the ludicrousness of claiming that exactly 12,374 jobs have been saved or created in Massachusetts. I quote this at length because it really shows the difference between stimulus in the textbooks and stimulus in the sausage factory. The former is a theoretical nicety that may or may not be true. The latter is about helping your friends under the cover of saving the economy.

The Boston Globe reports (HT: Drudge):

While Massachusetts recipients of federal stimulus money collectively report 12,374 jobs saved or created, a Globe review shows that number is wildly exaggerated. Organizations that received stimulus money miscounted jobs, filed erroneous figures, or claimed jobs for work that has not yet started.

The Globe’s finding is based on the federal government’s just-released accounts of stimulus spending at the end of October. It lists the nearly $4 billion in stimulus awards made to an array of Massachusetts government agencies, universities, hospitals, private businesses, and nonprofit organizations, and notes how many jobs each created or saved.

But in interviews with recipients, the Globe found that several openly acknowledged creating far fewer jobs than they have been credited for.

One of the largest reported jobs figures comes from Bridgewater State College, which is listed as using $77,181 in stimulus money for 160 full-time work-study jobs for students. But Bridgewater State spokesman Bryan Baldwin said the college made a mistake and the actual number of new jobs was “almost nothing.’’ Bridgewater has submitted a correction, but it is not yet reflected in the report.

In other cases, federal money that recipients already receive annually – subsidies for affordable housing, for example – was reclassified this year as stimulus spending, and the existing jobs already supported by those programs were credited to stimulus spending. Some of these recipients said they did not even know the money they were getting was classified as stimulus funds until September, when federal officials told them they had to file reports.

“There were no jobs created. It was just shuffling around of the funds,’’ said Susan Kelly, director of property management for Boston Land Co., which reported retaining 26 jobs with $2.7 million in rental subsidies for its affordable housing developments in Waltham. “It’s hard to figure out if you did the paperwork right. We never asked for this.’’

The federal stimulus report for Massachusetts has so many errors, missing data, or estimates instead of actual job counts that it may be impossible to accurately tally how many people have been employed by the massive infusion of federal money. Massachusetts is expected to receive an estimated $1 billion more in stimulus contracts, grants, and loans.

My favorite perspective on the political economy of counterfactuals came from a reporter (Tom Foreman of CNN) who gave me his analysis of politicians and the economy. It went something like this:

Politicians taking credit from what they’ve done for the economy are like little kids working the controls of video games without putting any money in. There’s all kinds of stuff happening on the screen of the video game and they think that it’s all due to the frantic work of their fingers.

Krugman and DeLong have been attacking Mankiw and Meltzer for mocking the “jobs saved” metric of the Obama Administration. Here is Krugman:

Thomas Sowell has said that economics helps you understand that there are no solutions, only tradeoffs. In that spirit, I want to recommend Arnold Kling’s study of the financial crisis, Not What They Had in Mind. My favorite quote from the essay is a variant on Sowell’s:

The lesson is that financial regulation is not like a math problem, where once you solve it the problem stays solved. Instead, a regulatory regime elicits responses from firms in the private sector. As financial institutions adapt to regulations, they seek to maximize returns within the regulatory constraints. This takes the institutions in the direction of constantly seeking to reduce the regulatory “tax” by pushing to amend rules and by coming up with practices that are within the letter of the rules but contrary to their spirit. This natural process of seeking to maximize profits places any regulatory regime under continual assault, so that over time the regime’s ability to prevent crises degrades.

NOAA announced (HT: Drudge) that October was the third coldest October in the United States on record. If it weren’t for global warming it would have been the coldest by far.

The Gallup poll has discovered (HT: Catherine Rampell) that Saturday is the day of the week that consumers spend the most money. In a brilliant policy innovation, President Obama has decreed that from now on, every day of the week will be called Saturday. The ap reports:

“This will not cost the American people a dime,” the President said at a press conference announcing the change. “There are no budgetary costs. The stimulus effects will he huge. Not only will Americans spend more than they did before, but there will be a new demand for calendars. The surge in calendar production will increase employment in the publishing and printing industry. This is a win-win for the American people.”

He also outlined some important psychological benefits:

“No more Monday morning quarterbacking. Every day is a weekend. And no more Sunday night blues for people dreading Monday morning.”

The President also announced that Thanksgiving would be celebrated on the 25th Saturday in November.

From an article on Goldman Sachs, from a conversation with the CEO, Lloyd Blankfein:

He starts with a little humility. He understands that “people are pissed off, mad, and bent out of shape” at bankers’ actions. Goldman played its part in the meltdown that almost destroyed the global financial system. It, like most other banks, lent too much money, made its first quarterly loss for more than a decade last year and ended up taking bail-out cash from Washington. “I know I could slit my wrists and people would cheer,” he says. But then, he slowly begins to argue the case for modern banking. “We’re very important,” he says, abandoning self-flagellation. “We help companies to grow by helping them to raise capital. Companies that grow create wealth. This, in turn, allows people to have jobs that create more growth and more wealth. It’s a virtuous cycle.” To drive home his point, he makes a remarkably bold claim. “We have a social purpose.”

I used to feel this way. I used to think that Wall Street innovation was part of our prosperity because the innovation made markets more efficient. But that only works when firms face profits and losses. When losses are truncated by bailouts, you get anti-social risk-taking. You get a cycle not of virtue but of vice. You get $1.5 trillion poured down the black hole of subprime lending. The bottom line of the current system is that Blankfein won and the we, the people, lost. Shame on the people who allowed him to play with our money instead of his own. Shame on him for pretending he earned our money and the profits he made playing with it.

Here’s a letter that I sent yesterday to the New York Times:

Arguing that “economic incentives in health care” are perverse, David Leonhardt asserts that “As long as doctors and hospitals are paid for each extra test and treatment, they will err on the side of more care and not always better care.  No doctor or no single hospital can change that.  It requires action by the government” (”Making Health Care Better,” Nov. 4).

Hogwash.  To see why, change just a few words in the above quotation: “As long as sales people and clothing stores are paid for each extra necktie and nightie that they sell, they will err on the side of more selling and not always better customer service.  No salesperson or single clothing store can change that.  It requires action by the government.”

Make sense?  Of course not.

The problem isn’t fee for service; it’s subsidized payments by third-parties.  The result for medical treatments is no different than it would be for clothes if clothing retailers were paid not by each customer but instead by heavily subsidized third-parties.

Sincerely,
Donald J. Boudreaux

Here’s a letter that I sent this morning to the Gray Lady:

Slavoj Zizek rightly complains – if with understatement bordering on the vulgar – of being “deceived” by communism (”20 Years of Collapse,” Nov. 9).  But like many other pundits who feign wisdom by steering clear of what they mistakenly interpret to be an extreme position, he complains also of being “disillusioned” by capitalism.

Capitalism is indeed poles apart from communism, but not in a way that renders society best served by some compromise between the two.  Unlike communism and milder forms of collectivism, capitalism is not imposed; it is simply what arises when adults are free to engage in consensual commercial acts in cultures that respect private property rights and largely reject both status and superstition as guides to decision-making.  Also unlike communism, capitalism conscripts no one to serve other persons’ ends; individuals can opt out of capitalist societies.

Perhaps most importantly, unlike communism, capitalism promises neither to produce heaven on earth nor to engineer any New and Better Man – and so capitalism gives rise to none of the murderous zealotry endemic to communism.

Sincerely,
Donald J. Boudreaux

Here are two excellent videos for your November 9th celebration of communism’s collapse.

The first is from the always-excellent reason.tv.

The second is of Hayek discussing socialism.

My colleague Pete Boettke reflects on that marvelous day, exactly 20 years ago.

This week’s EconTalk is Scott Sumner on monetary policy. Sumner argues that monetary policy was too restrictive in late 2008 and turned a mild recession into a doozy. I don’t agree yet but that argument and his whole perspective is very interesting.

George Will is a national treasure.

Here’s a letter that I sent this morning to the Wall Street Journal:

Kudos to Mark Spitznagel for drawing attention to the important but neglected work of the late Ludwig von Mises (”The Man Who Predicted the Depression,” Nov. 7).

But while Mr. Spitznagel is correct that Keynesians ignored Mises’s 1912 book, Theorie des Geldes und der Umlaufsmittel (and its 1934 English-language translation, The Theory of Money and Credit), Keynes himself did not ignore it – and therein lays a revealing tale.

When Mises’s German-language book first appeared in 1912, Keynes reviewed it in the prestigious Economic Journal, dismissing it as being unoriginal.  Seems pretty damning, until we learn that Keynes himself, in his 1930 book Treatise on Money, confessed that “in German, I can only clearly understand what I already know – so that new ideas are apt to be veiled from me by the difficulties of the language.”

Keynes’s influential dismissal of Mises’s work was based not on anything as lofty as informed disagreement; it was based instead on incomprehension.

Sincerely,
Donald J. Boudreaux

Here’s a letter that I sent yesterday to the Washington Post:

Brian Czech repeats one of today’s most frequently heard mantras – namely, that continued economic and population growth spell disaster for the planet and humanity (Letters, Nov. 5).

Virtually all available evidence contradicts this doomsday claim.  For example, the earth’s population today is seven times larger than it was in 1800, and yet most people today live lives that are far more sanitary, healthy, long, and rich in experiences than were those of all but the most privileged potentates and pooh-bahs before the industrial age.  Each hectare of land now feeds more mouths and clothes more bodies than ever before.  Water and air in capitalist countries are cleaner than they were a century ago, or even just 50 years ago – and still getting cleaner.  Available supplies of oil and most other raw materials show no signs of being depleted, despite the fact that today we use absolutely larger quantities of these materials.

Mr. Czech commits the common mistake of assuming that humans are net consumers of resources.  But when markets are reasonably free and property rights extensive and secure, most people are net producers.  History amply supports this claim.  I challenge Mr. Czech or anyone else to offer evidence to the contrary.

Sincerely,
Donald J. Boudreaux