The Bear Stearns Debacle
By Russ Roberts
This commentary aired on National Public Radio's All Things Considered on March 25, 2008. Audio is here.
Wall Street is all about profit. All about the bottom line. And profit does play a major role in making our world go round. Without profit, there's no point in taking risks. Without risk-taking, there's no investment. Without investment, there's no growth. Profits are the cornerstone of our economy and our way of life.
But as Milton Friedman liked to point out, our economic system isn't just based on profit. It's a profit and loss system. It's the combination that sustains and enhances our standard of living.
Yes, the potential for profit encourages people to take risks. But without the potential for loss, you have reckless risk-taking. You have risk-taking without prudence. Without the potential for loss, irresponsibility goes unpunished.
The Federal Reserve and the Treasury Department have orchestrated the rescue of Bear Stearns. The defenders of that maneuver argue that if Bear Stearns had failed it would have created a lot of collateral damage, so much collateral damage, that you and I, normal folk who don't know anything about high-falutin' financial instruments like "collateralized debt obligations" would have been engulfed as well. If Bear Stearns had gone bankrupt, Lehman Brothers might have been next. Some say that if Bear Stearns had failed, the entire banking system was at risk.
Maybe.
It seems awfully hard to know for sure.
But what I do know for sure is that by subsidizing the marriage of Bear Stearns and JP Morgan, the government has removed some of the loss from the profit and loss system. Oh, they tried to make Bear Stearns suffer by demanding a price of $2 a share. But now the deal has been renegotiated—ta-da!—to $10 a share, a mere five-fold readjustment. What's going on here?
What's going on here is that we're in uncharted territory, a world where the Fed and the Treasury are making up the rules as they go along, where accountability is being ignored and a world where the government bails out Bear Stearns and its creditors rather than letting those who have been reckless learn a lesson for the next time.
Yes, letting Bear Stearns go under would have been dangerous. But helping JP Morgan devour Bear Stearns is dangerous, too. Where does the government stop in protecting people from irresponsibility? Home owners and lenders are next. The political pressure is inexorable for some sort of bail out. And then comes more regulation of investment banks.
In a world where people who make bad decisions are spared the full consequences, only one thing is certain. We've encouraged more people to make more bad decisions in the future. The real price to be paid isn't the dollar costs of any bail out, but the encouragement of recklessness and irresponsibility. That will make all of us poorer down the road.
Selling Anchovy Ice Cream
By Russ Roberts
This commentary aired on National Public Radio's All Things Considered on February 20, 2008. Audio is here.
A friend of mine told me the other day he’s planning to vote for John McCain. Why? Because McCain promises to keep the Bush tax cuts and my friend thinks that a good idea.
Why would my friend think that John McCain will keep the cuts—after all, he voted against them as a Senator.
My friend said, well, McCain said he’d keep the cuts.
I know. It seems pretty absurd doesn’t it? Ridiculous, really. Who actually believes what politicians say? But my friend who likes McCain is no fool. He’s probably read more history books than a lot of history professors. I’d never call him naïve. But he wants to like one of the candidates and McCain is his best shot. So he’s managed to convince himself that McCain is going to keep the tax cuts.
I have to conclude that my friend is living in something of a fantasy world. But he’s not alone. Any one who’s passionate about a candidate is doing the same thing. Hillary is promising universal health care. And why should we believe she’ll keep that promise? Because she says so. Where’s the evidence she’ll succeed the second time around?
Outside of politics, we’re usually a little more down to earth when it comes to rhetoric and promises. Suppose you see an ad for anchovy ice cream. The ad promises "It’s delicious!” Convinced? Probably not. You take that word “delicious” with a grain of salt. Actually more than a grain. More like a pound. You realize that the seller of the ice cream is self-interested and just trying to make a sale.
I treat the rhetoric of politicians like ads for anchovy ice cream. Call me a cynic, but I assume they’re trying to make a sale.
So when Obama says on his web site that he’s tired of “divisive ideological politics,” I wonder: what other kind of politics is there? Promising politics without “divisive ideology” is like selling a sure fire way to be a millionaire , working from home using the Internet. Most of us know it’s too good to be true. But Obama is selling like hotcakes even though his promise is just as unrealistic.
We have such a yearning for a candidate with principles and ideals. We like to think our candidate is the good one, it’s the other guy’s favorite who’s the evil opportunist. But they always break our hearts, don’t they? Too many of us, I fear, are living in a fantasy world.
Once in office, they all want to be popular. They like power more than principle. They respond to the political winds, rather than the rhetoric that got them elected. And when they break their promises because it’s politically expedient, they always have a justification.
The good news? That evil candidate from the other party that you hate, isn’t nearly as dangerous as you think. Once in office, he or she will listen to the public rather than to principles. It happens every time.
The Science of Stimulus
By Russ Roberts
This commentary aired on National Public Radio's All Things Considered on January 16, 2008 in response to much talk about the the need to create a stimulus package to avert a recession. Audio is here.
Love that word—stimulus. It sounds so scientific. With the right stimulus, you can even make the leg of a dead frog twitch. A heart attack victim gets the stimulus from those chest paddles and bam. Back to life. My online dictionary defines stimulus as something that "rouses or incites to activity." Sounds like the perfect prescription for an ailing economy.
But if politicians know how to stimulate the economy, why wait for a recession? If you can make the economy grow, why wait for bad times?
One answer is that a healthy patient doesn't need medicine. But the other possibility is that it's all hot air. Maybe we don't know how to make a $14 trillion economy move very quickly. And if we did, it would take a lot more than an injection of even 125 billion dollars.
There's that scientific language again—an injection. The politicians are always going to inject some amount of money into the hands of consumers and into the economy, like a doctor giving a lifesaving blood transfusion. But where does the economic injection come from? It has to come from inside the system. It's not an outside stimulus like the chest paddles or the transfusion. It means taking money from someone or somewhere inside the system and giving it to someone else.
The standard stimulus package doesn't change incentives. It's a check from the government. The hope is that the receiver will spend it. But when you just send out checks from the government, whoever gets stimulated is likely to be offset by someone who gets unstimulated.
The money has to come from somewhere. If you raise taxes to fund the plan, the people who are taxed are poorer and they'll spend less. If you borrow money to fund the plan, the people who buy the government bonds have less money to spend and that offsets the stimulus. It's like taking a bucket of water from the deep end of a pool and dumping it into the shallow end. Funny thing—the water in the shallow end doesn't get any deeper.
And even the people who get the money often save more of it than they spend.
That's why stimulus schemes based on giving people money have a poor track record of energizing the economy. Usually, the only thing that gets stimulated is a politician's approval rating.
I'm not saying that economy policy is irrelevant. Economic policy matters because it affects the long-run growth of the economy. I'm all for policies that make us more productive or innovative by changing incentives. But those policies take time. There's little any economic doctor can do to move our $14 trillion organism of an economy in the next few months.
Politicians who work in the Oval Office—or those who seek to work there—would be wise to remember that patience is a virtue. Focus on the policies that lead to growth over time. Expecting results overnight is bound to lead to disappointment.
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Sunny Side Up
By Russ Roberts
This commentary aired on National Public Radio's All Things Considered on December 26, 2007. You can listen to it here.
I know the economic news doesn’t seem very cheerful these days. But a lot of it is blown out of proportion, stories and subplots designed to scare us, told by politicians and people with their own agenda. Let’s not let them push us around whether they’re on the right or the left, Republican or Democrat.
They always tell us the sky is falling. That’s the minimum standard for getting our attention in a busy news cycle. But remember that the sky usually doesn’t fall. We just move on to the next scare.
So my New Year’s wish for America is that we be skeptical of falling sky stories and that as a result we all sleep better.
Immigrants aren’t going to ruin America. Our culture is stronger than you think. It’s a culture born of immigrants. They’ve always been part of the great American stew of language, food, music and hard work. And the kids do better than their parents.
The subprime mortgage crisis isn’t going to ruin the economy. After years of appreciation, falling housing prices aren’t a disaster. Home ownership will remain near or at an all-time high.
China isn’t going to steal our prosperity or our jobs. They can’t. If they keep selling us toys with lead paint, we’ll stop buying them. Meanwhile, they play Santa Clause and the American economy keeps creating more jobs.
The middle class isn’t dying out. Real median family income has been growing steadily for the last 30 years. Unemployment is still below 5% and has been that way for a while.
The falling dollar means very little. It certainly doesn’t threaten the economic vitality of the United States.
None of this is meant to defend the economic status quo.
Or a Republican President. Or a Democratic Congress. I slept just as well in the ‘90s when we had a Democratic President and a Republican Congress. We just had different scare stories back then that didn’t turn out to be true.
And there are a lot of things that could be better. Our schools. A tax system even the IRS doesn’t understand. How the federal government spends the money.
I know. You’re still mad. Surely I’ve mentioned something that does keep you up late at night. But maybe, just maybe, working yourself up over China is just as silly as worrying about immigration. Maybe they’re both grossly overblown as threats to our prosperity and way of life.
Chill out.
Read more arguments on the other side. The optimists usually have some decent arguments. Maybe they’re right. Learn some economics. It’s working for me.
Unless you’re one of those people who likes to get steamed over the state of the world just for the sake of steaming. Then I can’t help you. But the rest of really should sleep better. It’s going to be OK. Really. Sweet dreams.
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Why We Trade
By Russ Roberts
from Foreign Policy, November 2007
To hear most politicians talk, you’d think that exports are the key to a country’s prosperity and that imports are a threat to its way of life. Trade deficits—importing more than we export—are portrayed as the road to ruin. U.S. presidential hopefuls Hillary Clinton and Barack Obama want to get tough with China because of “unfair” trading practices that help China sell products cheaply. Republican candidate Mitt Romney argues that trade is good because exports benefit the average American. Politicians are always talking about the necessity of other countries’ opening their markets to American products. They never mention the virtues of opening U.S. markets to foreign products.
This perspective on imports and exports is called mercantilism. It goes back to the 14th century and has about as much intellectual rigor as alchemy, another landmark of the pre-Enlightenment era.
The logic of “exports, good—imports, bad” seems straightforward at first—after all, when a factory closes because of foreign competition, there seem to be fewer jobs than there otherwise would be. Don’t imports cause factories to close? Don’t exports build factories?
But is the logic really so clear? As a thought experiment, take what would seem to be the ideal situation for a mercantilist. Suppose we only export and import nothing. The ultimate trade surplus. So we work and use raw materials and effort and creativity to produce stuff for others without getting anything in return. There’s another name for that. It’s called slavery. How can a country get rich working for others?
Then there’s the mercantilist nightmare: We import from abroad, but foreigners buy nothing from us. What would the world be like if every morning you woke up and found a Japanese car in your driveway, Chinese clothing in your closet, and French wine in your cellar? All at no cost. Does that sound like heaven or hell? The only analogy I can think of is Santa Claus. How can a country get poor from free stuff? Or cheap stuff? How do imports hurt us?
We don’t export to create jobs. We export so we can have money to buy the stuff that’s hard for us to make—or at least hard for us to make as cheaply. We export because that’s the only way to get imports. If people would just give us stuff, then we wouldn’t have to export. But the world doesn’t work that way.
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It’s the same in our daily lives. It’s great when people give us presents—a loaf of banana bread or a few tomatoes from the garden. But a new car would be better. Or even just a cheaper car. But the people who bring us cars and clothes and watches and shoes expect something in return. That’s OK. That’s the way the world works. But let’s not fool ourselves into thinking the goal of life is to turn away bargains from outside our house or outside our country because we’d rather make everything ourselves. Self-sufficiency is the road to poverty.
And imports don’t destroy jobs. They destroy jobs in certain industries. But because trade allows us to buy goods more cheaply than we otherwise could, resources are freed up to expand existing opportunities and to create new ones. That’s why we trade—to leverage the skills of others who can produce things more effectively than we can, freeing us to make things we otherwise wouldn’t be able to afford.
The United States has run a merchandise trade deficit every year since 1976. It has also added more than 50 million jobs during that time. Per capita income, corrected for inflation, is up more than 50 percent since 1976. The scaremongers who worry about trade deficits talk about stagnant wages, but they ignore fringe benefits (an increasingly important part of worker compensation) and fail to measure inflation properly.
In a recent Republican presidential debate, one of the moderators said that since 1989, the United States has lost 5 million jobs to foreign trade. He wanted to know what the candidates were going to do about it.
I have no idea how you measure that number, but the implication was that 5 million lost jobs over 18 years is a big number. Five million is a large number if we’re talking about the number of pennies I have to carry in my pockets. It’s a big number if we’re talking about the number of people coming to my kid’s birthday party. But it’s a very small number when you’re talking about job destruction and the job creation that follows in a dynamic economy.
On the first Friday of every month, the U.S. Bureau of Labor Statistics produces an estimate of how many new jobs are added to the U.S. economy. That’s the net change, the gains minus the losses. The bureau also estimates quarterly gross job changes, the absolute number of jobs created and destroyed. In the fourth quarter of 2006, there were 7.7 million jobs created and 7.2 million jobs lost. That happens every quarter when there isn’t a recession—that’s how you add 50 million jobs over three decades.
Five million jobs lost over 18 years? Every three months, the U.S. job market more than makes up for those losses.
Trade is just one economic force that creates and destroys jobs. Tastes change. Innovation makes workers more productive. Some industries shrink. Others expand. Some disappear. New industries get created. Joseph Schumpeter called it creative destruction. He understood that it is the underlying mechanism that transforms our standard of living for the better.
Let’s stop trying to scare people with the Chinese threat to our economy. The world would be a better and more peaceful place if we stopped measuring the trade deficit. But if we’re going to measure it, the least we can do is talk about it sensibly.
Russell Roberts is professor of economics at George Mason University and a research fellow at Stanford University’s Hoover Institution. He is the host of the weekly podcast EconTalk at EconTalk.org and the author of The Choice: A Fable of Free Trade and Protectionism (Upper Saddle River, NJ: Prentice Hall, 2006), a primer on trade issues written in the form of a novel.
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Defending Baseball's UnNatural
By Russ Roberts
This commentary aired on NPR's All Things Considered on September 13, 2007. You can listen to it here.
At the age of 20, Rick Ankiel was a starting pitcher on a playoff-bound St. Louis Cardinals team. Then it fell apart. I was there. I saw him throw five wild pitches and walk four against the Braves in a single inning. He never got over that. He tried the minors to find the lost magic in his arm. Then surgery. Nothing helped. The dream died.
But Ankiel wouldn’t let it die. It took him almost seven years, but he made it back to the major leagues as an outfielder. That was heartening enough. But he did more than make the team. He played with flair. With grace. With excellence. Suddenly, he was leading the Cardinals toward first place.
Then came the news that Ankiel had ordered human growth hormone, or HGH, in 2004. Suddenly, the golden boy was tarnished. Sports writers called it a tragedy. My nine year old son’s face fell when I told him. Why are you sad, I asked. All those things he did, he said. It wasn’t him.
I think that’s what most people thought. It wasn’t him. We thought it was Rick Ankiel who was playing The Natural in real life. But it wasn’t him. It was the Unnatural. The enhanced Ankiel. Ankiel with an asterisk.
But I don’t see the tragedy. He hit the homers. HGH doesn’t let other people hit the home runs for you. It doesn’t move the fences closer for your at bat then move them back. It makes you stronger. So does weight-lifting. Should we call all the weight lifters cheaters? How about the ones who lift longer than the average?
Human growth hormone wasn’t banned in baseball until 2005. But suppose Ankiel found a way to order HGH after 2004. Ooooohhh. Maybe he’s taking it now. But we now he wasn’t alone in 2004. We know lots of major leaguers took steroids and HGH and who knows what else to try and improve their performance.
I think what we really dislike about the Ankiel story is that it shatters the illusion of what sports is about. Sports is about people in intense competition with a lot of money at stake. That money is at stake only because we care so much about who wins and loses. We call it a game and blame the owners for treating it like a business. But we’re surprised and disappointed when the players act that way, too. They’re supposed to do what they do for the same reason we throw a baseball around with our kids—for the love of the game.
We don’t want to be reminded of what people will do for money and fame and adulation. They’ll do a lot. Actors and actresses enhance their performance with surgery. We understand it’s not about vanity. It’s the competition. We don’t judge the Academy Award winner who had surgery to stay in the game. There’s no tragedy that people are always looking for an edge. Why should we be surprised or disappointed when athletes do the same thing?
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The Lady in the Harbor
By Russ Roberts
This commentary aired on National Public Radio's All Things Considered on June 7, 2007. You can listen to it here.
According to the White House, the new immigration bill will "Help Keep The U.S. Competitive In The Global Economy By Establishing A New Merit-Based System For Immigration That Is Similar To Those Used By Other Countries."
And how is it going to do that?
There's going to be a point system to determine who gets one of the precious 380,000 visas that are up for grabs. Highly educated people get points. People with skills that are in high demand, whatever that means, get points. Young but not too young? Points. Speak English well? More points for you. Speak it badly, fewer points. Don't speak it at all? No points.
People with the highest point totals get the visas.
Some people complain that the Bush Administration is too free market. But the idea that Washington bureaucrats can figure out which skills are in high demand is an idea straight out of the old Soviet Union. It would be great if we could get some old communists from the politburo to administer it, but we won't be able to. They won't score high enough on the point system to get a visa.
The whole thing's pretty inspiring isn't it?
We once believed in a lady in the harbor with a lamp beside the golden door.
She said "send me your tired huddled masses yearning to breathe free." She welcomed the wretched and the homeless. Now it's "send me your tired huddled masses as long as they're software developers, 25-39 years old and can already speak English." So modern. So utilitarian. So ugly.
Here's an idea. If we care so much about keeping the US competitive in the global economy, we can do more than just keep the wrong people out. Let's make existing residents prove they're worthy of staying here.
Surely some of us aren't pulling our economic weight. Surely some of us are a burden on the school system and the health care system and the law enforcement community. Surely some of us are not contributing to that elusive, uplifting goal of a competitive work force competing in the global economy.
We need a point system. Get one of the top 380,000 scores and we're sending you back to where you or your ancestors came from-where you can drag down our so-called economic competitors.
Speak English with an accent? Five points. Make less than the median income? Twenty points. About to go on social security? Twenty five points. Watch more than ten hours of television a week? Ten points. English major in college? Five points. Obese? Ten points.
And if you're a Senator or President who thinks we should micromanage immigration to sustain our global competitiveness, whatever that means? One hundred points. A perfect score. Go get a real job where you contribute to the richness of American life instead of trying to tear it down.
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