Interest Rates and Housing

I started writing this column in November 2008 after witnessing a staggering distortion of the recent historical record regarding the cause of the financial crisis.

The left was blaming Wall Street, bankers, derivatives, and capitalism in general for the crisis when it was a gross exaggeration at best and an outright lie at worst. Instead, one needed to look at key economic factors that led to the crisis, with the housing bubble being the central problem - and the Federal Reserve's low interest rate policy and the government's promotion of housing, particularly subprime borrowers through "rolling the dice" (Barney Frank's words) with Fannie Mae and Freddie Mac.

Recent history is an interesting thing to discuss, since everyone lived through it - unlike debating historical events from decades or centuries ago. But clearly many people don't, or didn't, appreciate the government's role in creating the financial crisis, so it is useful to observe now a new housing bubble potentially being created - in Canada.

The Wall Street Journal reports on the explosive growth in housing prices in Canada recently despite a drop in personal income. Canada's housing prices grew more slowly than America's during the 2000-2006 boom, but it has continued to grow and its cumulative increase is now up 90% since 2000 as compared to less than 50% in America.

And what is fueling the boom? Naturally, the low interest rates that Canada's central bank implemented to address the economic slow down.

Housing prices are, and always have been, extremely sensitive to interest rates. It is true today in Canada as it was in America in the 2000s.

Let's hope Canada's boom doesn't get out of control and create large losses in its banking sector. And if it does happen, it will demonstrate that even well understood bubbles and looming credit losses are difficult for regulators to stop or prevent.

Nice Work if You Can Get It

The Wall Street Journal reports that Los Angeles is facing a severe budget deficit. The article describes municipal payroll and pension contribution information, which suggests the average city worker gets paid about $78,000 in salary. The city's pension contribution has averaged $16,500 per employee the past several years. Adding in health and other benefits pushes total compensation per worker to over $100,000 per year.

Unfortunately, high and growing compensation costs are one of the fundamental reasons for budget deficits at state and local governments.

If you want to fix state and municipal budgets, and keep taxes under control, compensation costs need to be reduced. It will take a great deal of political courage and perseverance on our leaders to make this happen, since any efforts to reduce government employees wages and benefits will be vociferously attacked by political powerful constituencies - the effected employees and the unions that often represent them.

Autism Explained?

There have been may explanations offered for why autism is diagnosed much more frequently today than in the past. No doubt that as awareness of the condition has increased, parents, educators, and doctors are more alert to identifying certain challenges as autistic.

But many other reasons are offered, including the view that vaccines laced with thimerosal are a cause. This theory has been debunked as junk science, as the recent scandal involving the Lancet medical journal illustrates.

But the Wall Street Journal reports on a study that offers real evidence as to why autism is increasing. The study shows that the likelihood of autism increases significantly with the age of the mother, and to a lesser extent the age of the father, at the child's birth. And since maternal and paternal age has been increasing the past couple decades, we now have a plausible reason why the incidence of autism has risen during this time period.

It would be interesting if researchers could study the change in the incidence of autism over the past couple decades holding constant maternal age. Then we could see if there remained an increase in autism due to reasons other than maternal age.

Your Dollars at Work

The Wall Street Journal reports that the Energy Department has spent only $2.1 billion of its $37 billion in "stimulus" funds.

If it is that hard to spend the money quickly, how about returning the rest to the Treasury and reducing the deficit by $35 billion? Moreover, with the economy showing signs of recovery, what is the rationale for spending this money, which apparently is so difficult to spend anyway?

This is just more evidence that the money is really about paying for various pet causes of the left, with "stimulus" as the excuse for getting it passed.

Productivity Growth

The Wall Street Journal reports that productivity has been soaring the past three quarters, averaging 7.3% growth. That is almost three times the 2.5% annual productivity growth the U.S. economy experienced from 2000-2008.

In short, employers are able to squeeze more production from fewer employees. This is a typical pattern during a recession as employers look to cut costs in the face of economic challenges.

To date, the increase in productivity has been greater than during a comparable period in the last recession in 2001 (see this data from the Bureau of Labor Statistics). This may be evidence that businesses are reacting to the risks they face due to Obama's policies on healthcare, global warming, taxes, and control and regulation of the financial and auto sectors.

If the future looks uncertain, it is easier and safer for a business to hunker down, cut costs, and conserve cash than invest for growth.

Such is the real nature of Obama's efforts to stimulate the economy.

Release the Doves

Do you feel safer now that the United States and Russia have reached an agreement in principle to reduce nuclear arms (see here)?

Because if you don't feel safer, then you get no benefit from this - since in reality such an agreement makes the world less safe.

The Obama crowd somehow believes if we limit our nuclear arsenal, it makes it less likely that Iran and other nations will develop their own nuclear weapons - as if America's overwhelming conventional military superiority was irrelevant to Iran's strategic considerations. This is, of course, ridiculous - our weak posture in the world as reflected in Obama's foreign policy, of which this nuclear treaty is just one example, emboldens Iran and America's enemies to think they can get away with their ambitions. Note French President Sarkozy's question last year about Obama: "Is he weak"?

America's nuclear deterrent is directed against many threats and to protecting its many allies. We need to deter Russia, China, North Korea, Pakistan, and possible new extrants to the nuclear club like Iran - and protect under our nuclear umbrella large chunks of Europe, Asia, and the Middle East. Russia doesn't protect anyone with its nuclear weapons other than itself and maybe Belarus. We need a nuclear arsenal of sufficient size, modernization, and flexibility to address this multitude of concerns, not one driven by a good photo op and diplomatic "win" for Obama.

The nuclear arsenals of the United States and Russia have been shrinking without a formal treaty requiring such reductions, reflecting the diminished tensions between the two nations. Russia's arsenal is on a path to continued declines, reflecting its relative poverty as compared to America - as Joe Biden so aptly stated it last year.

So we are proposing a treaty that either codifies that which will happen anyway and/or limit our flexibility to deal with a a greater number of nuclear powers. And we have been anxious to strike such a bargain with Russia, who has naturally seen our anxiety and taken advantage of it in the negotiations.

More of the "change" voters probably didn't bargain for in November 2008.

Taking Credit

Democrats have started "taking credit" for the government's initial estimate of 5.7% growth in economic output in the fourth quarter of 2009, saying that the "stimulus" bill was important to the return to growth. This simply isn't true.

It is important to note several things:

• There have been dozens of recession in American history, and we have always resumed economic growth - whether government policies were helpful or not to the recovery. Almost regardless of the policies pursued by the Bush and Obama administrations, we would have recovered from this recession. So the mere fact of coming out of a recession isn't relevant to taking credit for the policies pursued; instead, we have to see whether some or all of the specific policies contributed to recovery.

• There are many policies which are relevant to recovery, of which the "stimulus" bill is just one. For example, for those who believe increasing government spending is important to returning an economy to growth from a recession, there are long-established programs called "automatic stabilizers" which lead to increased government spending in a recession, such as unemployment insurance, food stamps, and welfare payments. They kick in immediately, rather than the long delay associated with the spending under the "stimulus" bill.

• Other government policies have clearly retarded growth. The Democrats efforts to restructure healthcare, legislate against global warming, and raise taxes has profoundly effected business confidence - which means that businesses are more wary of investing in new equipment or hiring additional employees with such risks looming over their business and the economy. The key to economic growth is to get businesses to want to expand again, and they need to understand how their investments can be profitable in the future. Without this, business will retrench. In the 1930s, this was called a "capital strike" as businesses feared the anti-business legislation and pronouncements of FDR. Obama's policies and rhetoric have created a similar situation today.

• The Bush administration also committed hundreds of billions to invest in the financial sector through TARP. While TARP has predictably turned into a political disaster, since it encouraged Democrats to pile on with its spending frenzy, it added a great deal of money to teetering banks. For those who believe government spending helps, the TARP money was spent quickly and in large amounts - as compared to the slow pace of spending under the "stimulus" bill. TARP stopped a modern run on the banks, which would have proved devastating to everyone. Given how TARP has turned into an excuse for government to spend outrageous amounts of money, it would appear to have been better for the government to guarantee banks liabilities - thereby stopping the run without giving Democrats the excuse to spend at unprecedented levels.

• In addition to TARP (or better yet a guarantee of banking liabilities), the most profound government policy to promote recovery was one not taken by elected officials, but instead decided and implemented by an independent government agency. The Federal Reserve undertook extraordinary measures to add liquidity to the financial system and cut interest rates. The Fed was trying to avoid a repeat of government policy 80 years before where the Federal Reserve's monetary policy turned the recession of 1929 into the Great Depression of the 1930s.

Christina Romer, Obama's head of Council of Economic Advisors, did extensive research work at Berkeley showing that fiscal stimulus is generally not relevant to aiding recovery from a recession whereas monetary policy is. While Romer has stated that this recession is different, she of course has to say that to justify Obama's "stimulus" bill.

Note monetary policy was one of the leading causes of the recent financial crisis, with the Fed's low interest rate policy serving to spur borrowing to an unprecedented degree and fueling the housing boom and its subsequent collapse.

We shouldn't be surprised monetary policy has such a profound impact on the economy, since it effects interest rates and the amount of money available to be spent and invested. Fiscal policy, particularly in the form of increased government spending, simply takes money from one person (a taxpayer or lender) and gives it to another person (a recipient of government spending). The impact of this transfer is modest at best, while the impact of monetary policy effects every decision in an economy.

Let's hope that the return to economic growth can be sustained. And let's hope that we can understand what did, and did not, cause it to occur.

Junk Science

The vaccine scaremongers have suffered another defeat. As reported by the Wall Street Journal, the the British medical journal Lancet finally issued a full retraction of research it published in 1998 that claimed to find a link between vaccinations and autism.

That claim has been debunked by many scientific studies since, and it is long overdue for Lancet to face up to the lies perpetrated by researchers including Andrew Wakefield.

But if there is a link to something of interest, note the one between the vaccine-autism scandal and the global warming charade, where emails and subsequent revelations have shown that researchers manipulated date and the scientific process to get to a desire political outcome.