After Housing: More Bubbles are Left

Consider this staggering statistic: In 2007 total credit market debt as a percentage of U.S. GDP was 343%–the highest in history. Yet day after day we hear “experts” pronouncing that the cure for our current economic troubles is to lower interest rates further—having the effect of creating even more debt.

We still do not have the collective understanding that a society grows rich by saving money and producing goods and services—not by extending artificially cheap credit. And since we lack that understanding, calls for bailouts of housing and other markets will continue.

Last week, Dallas Federal Reserve president Richard Fisher got it right when he said, “Our job is not to bail out imprudent decision makers or errant bankers, nor is it to directly support the stock market or to somehow make whole those money managers, financial engineers and real estate speculators who got it wrong. And it most definitely is not to err on the side of Wall Street at the expense of Main Street.” Unfortunately, Fisher is a lone voice in the Fed woods.

Although the term “bubble” is usually reserved for financial assets, if we understand a bubble to be fueled by unsustainable spending, we can understand there are other “bubbles” waiting to burst.

There is a health care bubble. Health care costs have risen to unsustainable levels. There are many reasons for this, but one that cannot be ignored is the fact that the current health care system does not encourage patient responsibility. An analogy would be if most automobile owners did not have even a basic knowledge of automobile maintenance and their foolishness was covered by insurance. Suppose most automobile owners never changed their oil; when their engines seized up, insurance simply paid for new ones. Suppose those who advocated common sense maintenance were routinely criticized for their unproven ideas. The outcome is clear—automobile expenditures would explode. All well and good, if you are a provider of engines and automobiles; not so good for the rest of the economy.

In Reclaiming Our Health, John Robbins writes:

I have come to realize that while doctors and medical technology have an important role to play in healthcare, they do not hold the ultimate secrets to health. Taken together, factors such as the food we eat, whether and how we exercise, the way we give voice to our feelings, the attitudes we hold, and the quality of the environment which we live are far more important to the quality of health we experience than even the most sophisticated medical technologies. It had been liberating to see that health comes from learning to live in vibrant harmony with ourselves, with the natural world, and with one another.

To understand how far we are collectively from understanding the basis of health that Robbins describes, consider Mike Huckabee’s weekend campaign quip in which he criticized Mitt Romney for peeling the skin off of his fried chicken: “I can tell you this, any Southerner knows if you don’t eat the skin don’t bother calling it fried chicken.” Without a health care “bubble,” in a country where heart-disease and obesity was common, presidential candidates would not be encouraging the consumption of toxic food.

There is an energy bubble. On a free-market there would never have been one gallon of ethanol sold in the United States. On a free-market there would never have been one nuclear power plant. Ethanol and nuclear energy are creations of complex subsidies. The capital that is being drained away by nonviable forms of energy helps to prevent entrepreneurs from discovering the next breakthroughs in energy. Just as no one had to direct entrepreneurs to discover oil as a replacement for whale blubber, government cannot direct the discovery of replacements for fossil fuels. The marketplace is in a continuous process of discovery; and no one knows whether solar energy, fusion energy, fuel cells, or a form of energy that we have never even heard of will be the replacement for fossil fuels.

Unfortunately, the energy bubble is still in its infancy. Just read this grab bag of energy promises that President Bush called for last night in his State of the Union address:

To keep our economy growing, we also need reliable supplies of affordable, environmentally responsible energy. Nearly four years ago, I submitted a comprehensive energy strategy that encourages conservation, alternative sources, a modernized electricity grid, and more production here at home — including safe, clean nuclear energy… And my budget provides strong funding for leading-edge technology — from hydrogen-fueled cars, to clean coal, to renewable sources such as ethanol.

There is an education bubble. These are glorious times to be an educator, if you are an associate superintendent or deputy superintendent or some other school administrator. Many of these jobs involve duties that, at best, are vague, and at worse, interfere with quality, classroom instruction. Yet all across the country, administrative budgets for public schools have exploded. If you have one of these jobs your livelihood depends upon convincing taxpayers that if they don’t increase funding for schools, they are hurting the children. Not allowing school choice guarantees administrative costs will continue to grow out of control. The movement to allow school choice has made little headway against the powerful public school lobby.

We may be many years from the time that these bubbles in health care, energy, and education will burst. Today, these bubbles are sustained by widespread illiteracy about health and economics. The transition years will not be pleasant; nonetheless, waiting on the other side of these bubbles is a vibrant, healthy, and sustainable economy.

Your Actions Speak So Loudly

There is a story about Mahatma Gandhi. A mother was concerned about how much sugar her son was eating; and so seeking advice, she took her son to see Gandhi. She asked Gandhi if he would tell her son to stop eating sugar. Gandhi replied come back next week. The following week the mother and son returned and Gandhi told the son to stop eating sugar. The mother asked Gandhi, “This was a very arduous journey for us to come to see you, why couldn’t you have told my son last week to stop eating sugar?” Gandhi replied, “Last week I was eating sugar, this week I gave it up.”

This story illustrates a central tenet of Gandhi’s leadership philosophy: “We must be the change we wish to see in the world.” One of the reasons that Gandhi was a great leader was because he was an authentic leader. An authentic leader inspires others because they are true to their core values and purpose.

How many authentic leaders, whose actions match their stated values, are running for president? Consider the case of Hillary Clinton.

Recently, the New York Times interviewed Hillary Clinton on economic policy. In the interview, Clinton “put her emphasis on issues like inequality and the role of institutions like government, rather than market forces.” Clinton talked of “economic excesses — including executive-pay packages she characterized as often ‘offensive’ and ‘wrong’ and a tax code that had become ‘so far out of whack’ in favoring the wealthy.” Touching a sensitive nerve, Clinton said that these excesses “were holding down middle-class living standards.”

Few could disagree that the middle-class are being squeezed. Salary increases for many Americans are failing to keep up with rising energy and food prices; and in spite of the bursting of the housing bubble, real estate prices remain high. In many organizations, CEO pay has reached troubling levels; and CEO pay doesn’t even seem to be tied to performance.

In the 1950s the average CEO earned 40 times the average pay of his employees; today that number is closer to 400 times. In an expanding economy, such disparities are little noticed; in a troubled economy, this is a recipe for middle-class discontent.

Yet, is Mrs. Clinton suited to address middle-class living standards? This past Friday, during the Nevada primary campaign, the Clinton campaign called the N9NE Steakhouse at the Palms in Las Vegas. According to a Las Vegas source:

The Clintons’ tab came to $1,530 and included entrees of nine steaks, three chicken, three salmon and three Maine scallops, two lobster pappardelle, salads, sashimi, rock shrimp, and various side dishes.

Defender of the middle-class? One cannot help but wonder how many small campaign checks the Clinton campaign had collected from middle class donors—donors who could never dream of such an expensive meal. Is Clinton being the change she says she wants to see in the world?

How can so many be so hoodwinked? Fear, caused by difficult economic times, brings forth polarizing politicians—politicians who stir-up discontent while offering increasingly demagogic solutions to problems. Until the time comes when the public is ready to listen to politicians who address root causes and engage in reasoned dialogue about these causes, we can be sure our economic difficulties are far from over.

Turning Our Seniors Into Serfs

Suppose you are a senior citizen living in Greenburgh, New York (about a half-hour north of New York City). Suppose you receive a $620 Social Security check each month and you need a walker to get around. Further suppose that for the past forty-three years you have lived in the same modest house in which you had raised your family. Further suppose that you are paying about $12,000 a year in property taxes; and because you do not want to leave your home, you have already taken out a reverse mortgage just to pay the exorbitant property taxes. Audrey Davison is in this situation.

What else could you or Audrey Davison do? Well, in a program that seems almost like a parody—but sadly isn’t—the town of Greenburgh, according to an AP story, “is pushing a program that would let seniors work part-time, for $7 an hour, to help pay off some of their property taxes.”

Town supervisor Paul Feiner “is suggesting creating about 25 slots for seniors and letting them work off $500 or so a year. His proposal faces some obstacles. If the wages earned are to be tax-free and directly credited to the property tax bill, the state Legislature would have to approve. In addition, unions would have to be convinced that the program is no threat to their members’ job security.”

I’ve read many news accounts on this story, and incredibly, only one felt it worthwhile to mention that Greenburgh was increasing property taxes by 19.4 percent in 2008. Instead of focusing on the problem of high taxes, the new articles quoted “experts” such as Scott Parkin of the National Council on Aging. Parkin praised the program: “It’s certainly in line with what we stand for, keeping seniors involved in work or volunteering as a part of healthy aging.”

Volunteering? The widow in question, Audrey Davison, will hardly be volunteering; she will hardly be engaging in work that she would have chosen on her own. She is being forced to work by ruinous taxes. Nowhere in the new reports is there even a suggestion that the problem may lie with out-of-control spending that leads to high taxes. Instead, the level of taxes is simply accepted as a given.

Greenburgh’s program—rather than being innovative—is a disgraceful return to serfdom. Under medieval feudalism, serfs were forced to work. The town of Greenburgh and Supervisor Feiner have no more right to Davison’s labor than the medieval lord had to the serfs’ labor.

Paul Feiner ran for reelection this year. The “Friends of Paul Feiner” wrote of him: “Paul Feiner is an accomplished public servant. We support Paul because of his passionate commitment to issues that will better the lives of all Greenburgh and village residents. Paul has always been a leader for progressive causes in our town.”

Progressive or tyrannical? I will leave that to you. Sadly, I have no doubt that many Americans would view Feiner as a progressive. We have reached the point that as a nation, we are collectively incapable of understanding the most basic principles of liberty and of economics.

In this world, spending our way to bankruptcy and putting senior citizens in forced labor projects just to stay in their cherished homes is taken as a sign of being progressive. Reasoned dialogue on fundamental issues has been silenced. Since Feiner is proclaimed to be progressive, those who disagree are simply defined as reactionary and not worth listening too.

Very early in one his seminal works, The Road to Serfdom, Nobel Laureate Friedrich Hayek makes a striking observation about our failure to consider root causes of our problems. Simply, we have incredible hubris:

We are ready to accept almost any explanation of the present crisis of our civilization except one: that the present state of the world may be the result of genuine error on our own part and that the pursuit of some of our most cherished ideals has apparently produced results utterly different from those which we expected.

Hayek explains why we fail to look at real causes—we are blinded by our belief in our good intentions:

Have we not all striven according to our best lights, and have not many of our finest minds incessantly worked to make this a better world? Have not all our efforts and hopes been directed toward greater freedom, justice, and prosperity?

Good intentions are not enough. An understanding of the basic principles of sound economics and of liberty and the humility to realize when you have gotten way off course are necessary too.

2008 and Beyond: “I Can’t Afford That”

In a poignant and understated opinion piece, called “The Courage to Choose” Minyan Peter helps us understand why 2008 and beyond are likely to be a very difficult years. Peter writes:

I believe that in time, historians will define the last twenty years in America as the “Age of Aspiration” where, thanks to unprecedented levels of credit, Americans could become anything they wanted.

Well, I, for one, believe that our Age of Aspiration is ending. And, with its conclusion, we must, for the first time in almost a generation, begin to reconcile our wants with our means. We must choose what to do without, rather than what more to do with.

Peter goes on to observe:

We are going to have to separate what is most important from least, and act accordingly. Where life was once limitless, it will now be constrained.

And, like it or not, all of us will need to return to our vocabulary a simple phrase that I believe has been lost over the past twenty years: “I can’t afford that.”

Unfortunately, social trends do not reverse easily. This “age of aspiration” that Minyan Peter describes could also be called an “age of entitlement.” The illusion of unconstrained choices is a mindset that will not be easily reversed. Collectively as a society, we do not currently have “the courage to choose.” Given that, it is easy to forecast certain social trends for 2008 and beyond.

1. More and more bailouts will be demanded by individuals, households, and organizations that have lived beyond their means. The demand for housing bailouts has only just begun and will begin to spread to credit card and other consumer debt.
2. Governments, at all levels, have lived well beyond their means. Because they have coercive power, they will be the last to say, “I cannot afford that.” Thus, it is almost a certainty that taxes will go up.
3. More and more dangerous populists, like Mike Huckabee, will seek office. Populists are especially dangerous because they are without any identifiable principles. This makes them especially prone to totalitarianism. As the economic situation worsens and fear goes up, in years to come, politicians like Mike Huckabee will seem like relatively benign candidates.
4. At the same time, because more of the population will be willing to look at root causes, more principled candidates, like Ron Paul, will seek office. Unfortunately, for the foreseeable future, support for unprincipled populists will exceed support for principled candidates. Polarization will increase.
5. Demand that income be redistributed from the “rich” will increase. The crowd that populists pander to will reason: “After all they must have attained their money unfairly and it’s only right that that money be redistributed to those who need it more.”
6. For the foreseeable future (next five years), we will move further away from our framework as a constitutional republic, which was founded with defined and limited powers granted to government.
7. As the social mood deteriorates, the threat of more ruinous foreign adventures will increase. Recently in New Hampshire, John McCain said that the United States military could remain in Iraq for “maybe a hundred years.”
8. Demands to limit cheap, foreign imports will increase. In the short-term, there is little chance that trade liberalization will be reversed; but in the coming years, the populist threat of ruinous tariffs and quotas will increase.
9. Demands that something be done about energy prices will increase. This will provide political cover for continued subsidization of ethanol and other forms of energy, such as nuclear, which are not viable on the free-market. This subsidization will further raise energy prices; drain capital away from viable, emerging, alternative energy sources; raise food prices; and create even more environmental disasters, like the current draining of aquifers in the mid-west.