Condemned to repeat it

The idea that what passes for a government in Somalia could ask for international funding to solve the problem of Somali piracy is comic. That Rep. Donald M. Payne (D-N.J.) actually intends to seek funding for the ridiculous proposal in Congress is tragic. That Payne’s party claims the legacy of Thomas Jefferson is absurd.

Typically when faced with a foreign policy problem we’re lucky if we have one good historical precedent to guide our actions or, more often, a few close parallels. In this case we’re guided by two solid and completely on point historical lessons that cry out “Don’t do it!”

One of these is so recent and should be so firmly entrenched in the public mind that having to even mention it is absurd. One would think that a popular movie only 8 years out of the theaters would be enough for even the dullest of dullards to remember that 18 American soldiers died and 73 were wounded in our last attempt to help the Somalis. The reason those deaths eventually grew out of what started as a purely humanitarian mission was that in the anarchy of Somalia at the time, which persists to this day, money, food or other aid never reached those it was intended to help without US military escorts to help it on its way. Unless we’re prepared to provide an overwhelming show of force, the rule “no land war in Asia” is doubly true in Africa.

The second object lesson is the payment of an estimated 20% of federal revenues to the Barbary pirates from 1786 to 1801. That huge expense didn’t win a war or disband the pirates, it only delayed by 15 years the Marine landing on the shores of Tripoli. The delay was perhaps necessary as the new nation recovered from the cost of the Revolutionary War and built up its naval forces. Today, we do not have that problem. The surest, the quickest, and the most honorable way to deal with these pirates is to do simply that – deal with the pirates and those sheltering them. That buying them off may be cheaper in the short run is irrelevant. To paraphrase Thomas Jefferson, “Trillions for defense; not one cent for tribute.”

Somalia says: Let us handle the pirates

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Are video games an inferior good? and other questions

In the big flurry of economic news lately I have a lot of questions and, because I’m just that arrogant, a few answers.

Video game sales were up 10% in February. Now this is a big question. Are video games an inferior good? Obviously when times are shaky, people are going to delay big ticket purchases, even for necessities like houses and refrigerators. But it seems like people who feel really insecure about the near term future would not spend hundreds of dollars on a luxury like a Wii or Xbox. To believe the economy is not starting to recover, we have to believe that people will spend more money on video games when they have less money to spend.

Another question on this same front. Depending which headline you trust, sales either rose 10% or “sales growth slow[ed] in February.” Have some people in the media not gotten the memo? Your guy won. You don’t have to keep looking for a negative spin on any good economic news. I guess an eight year habit of sabotage is hard to turn off overnight.

Another reason to ask “Why would we even consider giving more money to the Big Three?” [by way of Newmark’s Door]:

Fifteen Cars Americans Are Buying
…the Saturn Astra, which saw sales increase 30.3% over last year…General Motors recently announced plans to halt production on all Saturn models and phase the brand out of existence by 2011.

Doesn’t that kind of management decision making cry out for a Chapter 7, not Chapter 11, bankruptcy and financial oblivion for the people in charge? Recall that Chrysler is doing the same thing, though only with one of its best selling models and not with a whole division.

Retail sales excluding autos rose two months in a row. A week after the report, the Fed announced a $1.25 trillion plan to buy securities in the open market – to print $1.25 trillion dollar. Why now? After the second rise in retail sales, I was ready to argue that this Fed meeting was time for them to adopt a “neutral” stance and mid-summer was probably the ideal time to consider a small but symbolic rate increase. Such a move would have signaled a commitment to the integrity of the dollar, calmed the fears of the Chinese and other foreign bondholders, made US banks and industry more attractive to private foreign capital and eased commodity prices, a big boon to nonfinancial companies and consumers. Instead, the dollar tanked and oil prices are back above $50/barrel – despite a continuing inventory glut and a decision by OPEC to delay production cuts in the name of helping the world economy. Bernanke and Company undid the kindness of OPEC in one unnecessary move. Today, Bernanke is out trying to undo the damage by promising to “taper off” the printing of money. Perhaps instead of all this jawboning, Bernanke ought to branch out from economics and study the politics of Ronald Reagan, “If it’s not broken don’t fix it,” then you won’t have to fix your fix. Until he does learn that lesson, keep a sharp eye out for the next Fed inflation fueled bubble and maybe you can make a worthless buck.

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How to spot a pseudocon

If you want to identify a pseudo-conservative and don’t have access to a D.C. phone directory, here are a few points to look for:

1. A penchant for using a sometime association with the Republican Party and an occasional attempt to intellectually support some conservative principle in a pale imitation of William F. Buckley to sell their wares to National Review’s readership.

2. Going gaga over the “historic nature” of the Obama Presidency with never a mention of the over 100 years of Republican championing of civil rights that laid the groundwork for it and never questioning whether they ought to be judging the President by the content of his character rather than the color of his skin.

3. On the talking head shows, at a true conservative’s suggestion that it’s time to join John Galt’s strike, they will leave everyone in a state of hopeless confusion by either praising or castigating, depending on their current state of Obamania, the work of 1960s children’s author Ann Rand.

4. After eight years of supporting everything from expansion of Medicare to steel tariffs they try to reclaim their conservative bona fides by criticizing Michael Steele for not belonging to the Every Sperm is Sacred Constitutional Amendment branch of the pro-life movement.

5. When faced with the largest expansion of federal government involvement in the economy in decades, they devote their energy to criticizing the bigger evil – Rush Limbaugh opposing the socialist tide.

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Rantlets: Chrysler, Credit and Afghanistan

  • Chrysler is asking for an additional $5 billion from the federal government and its action plan calls for, among other things, discontinuing the popular PT Cruiser model. This car was reported in February to be Chrysler’s 4th biggest seller and “with a sales drop of 55%, the PT would sell just 42,384 copies per year at this rate – but it was originally set to sell just 35,000 a year, so it’s still ahead of projections.” The viability plan includes launching 24 new vehicles in 48 months. So, apparently cutting your 4th best seller, a product that is selling more than initially projected even in a downturn, is good policy at Chrysler. In other words, Chrysler took a look around its operations and decided to fix what wasn’t broken. In my book, that ranks right up there with flying on a corporate jet to beg for taxpayer funds.
  • Chrysler is predictably blaming its ongoing problems on nonexistent consumer credit issues. According to the Washington Post:

    Because consumers are having difficulty getting credit, Chrysler estimates seasonally adjusted annual sales will average 10.8 million vehicles this year until 2012. In recent years, that rate hovered around 16 million.

    This is hogwash. The Treasury Department reported today that lending increased in December at the top 20 banks. Getting an auto loan today is more convenient than ever before. Banks are, in fact, lending, but when it comes to Big Three products, consumers aren’t interested. Hyundai, Kia and Subaru all managed to post year-over-year sales gains in January by offering better products and good warranties that aren’t threatened by the specter of bankruptcy. As long as Chrysler is focused on credit markets and federally financed pipedreams instead of its customers, the company isn’t going to turn around and the answer to its begging should be “No.”

  • President Obama is sending an additional 17,000 troops to Afghanistan to deal with continuing trouble there. While the increase is needed according to commanders in Afghanistan, we should learn a lesson from the Soviet experience there and the US experience in Iraq – stabilizing Afghanistan will have much less to do with troop levels than with proving to Afghans that their destiny is in their own hands. The increased troops of the Iraq Surge were only effective because they contributed to that end.

GM, Chrysler Ask for Billions More in Federal Aid

PT Cruiser News

U.S. Treasury Says Bank Lending Rebounded in December

Obama to Send 17,000 More Troops to Afghanistan

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Lifestyles of rich Republicans

A few times a year I’ll get a hateful comment or a bit of hate email accusing me of being out of touch with the common man. The usual comment is along the lines of “rich Republicans like you have no idea what it’s like to…” fill in the blank. I am, you see, a Dot Com Thousandaire and some people find that kind of quadruple digit wealth infuriating.

I thought it would be fun to share a few items from the lifestyle of rich Republicans like myself here on the interwebs. Maybe I’ll even get a few details out there on The Google.

For the first installment, I thought I’d share what rich Republicans like myself drive. Keep reading to see my new car:

… Read More

More on Moral Hazard

Last week I addressed a flaw I saw in the “moral hazard” argument for avoiding any action, no matter how justifiable, on the grounds that it might encourage future risk taking. My point, briefly, was that risk taking is actually something worth encouraging.

This week in The New Yorker James Surowiecki exposes the other half of the flaw in the moral hazard argument. In short, it doesn’t happen. :

Why might the effects of moral hazard be smaller than expected? To begin with, most bailouts aren’t like deposit insurance, which is certain and quick. Financial bailouts are uncertain and messy, and they typically occur only after institutions have already suffered extensive damage. Bear Stearns, for instance, was “saved” only after its shares had fallen almost ninety-five per cent from the previous year, and it seems unlikely that either its laid-off workers or its battered shareholders came out of the experience anxious to engage in more foolhardy behavior.

Again, there are plenty of reasons to be leery of a spending package calculated to be just small enough to avoid the word “trillion,” but moral hazard is an argument that would win few converts even if it weren’t fatally flawed.

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The War is Won

American style democracy has come to Iraq:

Officials said on Sunday 7.5 million or 51 percent of the more than 14 million registered voters [voted].

From Saddam Hussein to enthusiastic self-government to American style apathy in 6 short years. It took us almost 200.

Looks like it is time for the troops to come home.

Iraqi election turnout not as high as hoped

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Moral hazard and market failure

Much of the talk last year about how to address the developing financial crisis focused on the concept of “moral hazard”. The concern about moral hazard led folks with no particular aversion to government spending to delay taking action at the earliest stages until the situation had snowballed beyond Lehman Brothers. Now people are starting to use the phrase again. As long as we’re waxing philosophical – and let’s face it, moral hazard is a philosophical, not an efficiency argument – we ought to take a look at another philosophical concept in this context: market failure.

The entire moral hazard argument is based on a simple, but fundamentally flawed, premise:

Markets always value risk taking efficiently.

Now, I’m a big fan of markets. Given the option, I’d always take the market failures in favor of bureaucratic control and the more common bureaucratic failures. Still, an intelligent discussion of moral hazard and risk taking requires acknowledging that the only way that moral hazard can even come into play is if markets failed to properly value risk taking at some point. Either risk taking was overvalued two years ago or it’s undervalued today, perhaps both. I think that it’s actually more of the latter.

Risk taking behavior doesn’t just mean making subprime loans, loans which are not actually losing that much money and would still be making money if not for job losses and media doom and gloom encouraging “jingle mail”. It even includes more than packaging those loans into securities, some of which are losing money by the boatload.

Risk taking includes a whole range of behaviors like:

  • Investing in a startup company like McDonald’s (1965), Wal-Mart (October 1970), Microsoft (1986), Ford (1903) or Google (2004).
  • Sailing three little ships west to get to the East Indies.
  • Signing an agreement to trade stocks under a buttonwood tree in an untested nation on a new continent.
  • Putting a man on the moon.
  • Committing the entire industrial might, technological expertise and human capital of a nation to defeat totalitarianism on two fronts.

One of the reasons market capitalism is so productive is that it encourages risk taking behavior, while socialism and all its variants discourage it. If risk taking is undervalued today, and I think it’s pretty clear that it is, then the efficient response would be to ignore moral hazard arguments and take actions that incentivize risk taking. Those actions could be the simplest things like tax credits for investments by business and durable goods purchases for consumers or they could involve government more actively subsidizing risk as with Treasury buying up mortgage backed securities or the Fed discounting commercial paper. In any case, while the philosophical argument that the market should prevail has some appeal it’s worth remembering that the same government took an active role in forcing risk to be undervalued in the first place. The best place to deal with economic moral hazard is the same place we deal with every other moral hazard – the courtroom. Those who broke laws should be punished and those who played fast and loose with other people’s money and then came feeding at the public trough should be banned from the banking, securities or insurance industries. But public policy towards protecting shareholders, creditors and taxpayers and ultimately ensuring that markets do function efficiently shouldn’t be held hostage to false concerns that undervalue entrepreneurship.

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