2009 State Business Tax Climate Index

The Tax Foundation recently put out their annual state business tax climate index. I reproduced a graphic found in the pdf that sums up the findings.

HT: Club for Growth

Did Low Interest Rates Cause the Housing Boom? No.

Michael Spence, a 2001 Nobel Laureate for economics wrote a column for Forbes today. In it, he makes this spurious claim, as have a few others:

“One should ask why a housing bubble caused by low interest rates…”

His article “Will the Bailout Work?” goes on to defend the current narrative on the glorious bailout. The problem is that his above statement fails to match reality as I suspect he simply hasn’t done his homework.

This thinking is wrong. It fails to explain differences in geography and historical evidence that contradicts the logic in previous periods of falling interest rate.

Using national average mortgage rates, we find that prime mortgage rates were at a peak of 8.64% before the boom on May 19,2000 (which really began in earnest in 2001), and then hit an all time low of 5.21% on June 20, 2003. That seems dramatic, so let’s do the math. Assuming that all mortgages were at 8.64%, but were all refinanced at 5.21%. This would imply a 41% increase in purchasing power. That seems to correlate to the increasing prices, but let’s dig a little deeper.

The problem with this thinking is that it would imply no increase in the housing supply. People did not merely bid up the existing housing stock; they built new and bigger houses, remodeling older ones. Furthermore, increased purchasing power does not immediately drive up the cost of construction. In a city with ample supply of land and few development entanglements, there is no reason why an increase in debt purchasing power would be wiped out by a commensurate inflation in the price of building materials. Home construction is a very competitive market, and the price of homes should approximate the cost of construction plus a muted profit margin.

There is also the notion of cross-price elasticity. That is, when people gained debt purchasing power, many chose to refinance and pocket or spend the savings on other things. While this interest rate assumption may correlate well to housing price behavior in California, it doesn’t explain why home prices increases in Atlanta ran at a fairly smooth rate of 4% a year between 1991 and 2007 (S&P Case Shiller). Of course, in California, it also doesn’t fully explain why prices surged by 147%. In short, the cross-price elasticity effect would water down the effects of lower interest rates.

Another problem with this line of thinking is that significant drops in interest rates should have caused housing bubbles in the past. If mortgage rates dropped by 3.5% during the this decade, why wasn’t there a huge bubble after mortgage rates fell from 18% in 1981 to 10% in 1987? Or when they fell from 10% to 7% between 1990 and 1993? In fact, home prices in Los Angeles declined significantly between 1990 and 1993. There is little historical correlation between interest rates and housing price swings.

Explanations for the housing boom and bust:

Interest rate changes – Bogus

Greed – Nice and vague and conveniently impossible to measure

Deregulation – So far, I have seen few specific deregulations mentioned, so I will relegate this to ideological rhetoric until I see evidence

Government mandated sub-prime lending through the Community Reinvestment Act along with Fannie Mae and Freddie Mac – Bingo!

Local and state residential development restrictions that constrained the market and drove up prices – Bingo!

After the Bailout - Dow DOWN 470 pts

I added the area shaded in gray around the time the bailout passed at 1:22 pm.

I thought that the bailout was supposed to help the markets prevent a sell off. Oops! I guess the media got it wrong again.

Credit Crunch is a Farce - No to the Bailout!

I began to believe within the last few days that the "Credit Crunch" was an illusion, and the more I have dug the more I have come to the conclusion that the Crisis Does Not Exist. It is a false narrative told by those with vested interests and insular Wall Street viewpoints.

According to the FDIC, only 13 banks have failed so far this year. This compares to 11 in 2002, and thousands after the Savings and Loan debacle. We have yet to reach a level of bankruptcies to warrant dramatic action.

Looking at total bank lending according to the Federal Reserve, again I do not see contraction of loan activity as is claimed. Link here. Lending is flat over the last few months, but similar events happened in 2003, 2002, 2001, and 1999. Furthermore, Commercial and Industrial loan activity has not contracted at all. Link here. The press keeps claiming that businesses can't get loans. Between 2001 and 2004, Commercial and Industrial loan activity contracted by around 18%, but we have yet to see any fall in recent history.

Mind you, the links I provide only show data up until the beginning of August. However, Alan Reynolds has written a piece for Forbes that includes data up through September 17th. (Includes a nice table) He is coming to the same conclusion that I am.

If all the recent hysterical chatter about lending being "frozen" or "shut down" refers to anything real, it is not about banks loans (through Sept. 17) but about such arcane financial markets as asset-backed commercial paper or loans between banks. But this too is mainly about financial firms, not Main Street.

Adding to the case is anecdotal evidence from my hometown paper, the Houston Chronicle.

"It has not had any change to the way we offer and extend credit to our customers," Mike Poppe, chief financial officer for Beaumont-based electronics and home furnishings retailer Conn's

"Everything is the same," said Mike Even, Finger Furniture's general manager. "I don't see any changes anytime soon."

To top it all off is economist Alex Tabarrok of Marginal Revolution blog:

There is also a consensus among economists that the bailout bill is not the right policy. None of the above economists, for example, is enthusiastic about the bailout. My bet is that all of us think that the bailout has a substantial likelihood of failing. The support that exists is born out of hope and fear not judgment and experience. Nevertheless, the political consensus is that a bailout is what we will get whether it is likely to work or not. (bold is mine)

The above economist are: Paul Krugman, John Cochrane, Luigi Zingales, Douglas Diamond, Raghuram Rajan

The bailout will not work. The "Credit Crunch" is a farce. This is a Wall Street problem, NOT a Main Street problem. Encourage your Congressman to Vote NO to the bailout.

Update: - Unfortunately, it passed. Not good for the economy. What do we do in 3 months when the bailout clearly did not work.

How Texas Reps Voted on the Bailout

In Total

Against - 23
For - 9

Against
Barton
Burgess
Carter
Conaway
Cuellar
Culberson
Doggett
Gohmert
Green, Al
Green, Gene
Hall
Hensarling
Jackson-Lee
Johnson, Sam
Lampson
Marchant
McCaul
Neugebauer
Ortiz
Paul
Poe
Rodriguez
Thornberry

For
Brady
Edwards
Gonzalez
Granger
Hinojosa
Johnson, E. B.
Reyes
Sessions
Smith

Republicans in Italics, Democrats otherwise

Great Speech Against the Bailout

Click here

Here here, Mr. Flake.

Another Depression? Not Yet

The belief that we are headed for another depression is being tossed around, so I wanted to help clear up some questions about the current state and direction of the economy. Let me put a few fears aside, but then bring up a few that you may not be aware.

How do Depressions Happen?

First, Depressions don’t just happen. They are not a random and inevitable byproduct of a free market. In fact, the opposite is true. As I have written before, the free market is simply a system where individuals, not government, make personal financial decisions that are often extremely complex, based on what makes the best sense to them. When the government interferes, they are telling individuals that they are wrong and that a few people are smart enough to make decisions for society as a whole. Because each human life is so complex, a small group of government planners will make so many errors that the more they try to fix the economy the more havoc they will cause.

A Quick History Lesson

In 1929, the stock market plunged in widespread panic. This was not unique, as it has happened many times before and afterwards throughout the years. In 1987, the stock market dropped even more precipitously than in 1929 and the economy kept on humming for several more years. In fact, the market recovered so dramatically that the Dow Jones Industrial Average actually recorded a gain for the year.

What actually happened was a collision of new socialist ideas and the hubris of Presidents Herbert Hoover and Franklin Roosevelt. In 2001, we saw the stock market drop and the economy slow after the attacks on September 11th. Within days, the Federal Reserve lowered interest rates to help the economy get back on its feet. After the crash in 1929, the Federal Reserve decided to stop following the rules of the Gold Standard and increased interest rates. The Fed poured cold water on an already cooling economy.

Herbert Hoover knew what always followed a financial panic in America: companies would slash their worker’s wages so that they could stay in business. Hoover, in his infinite wisdom, decided that this was bad and convinced thousands of companies not to lower wages exchanging union promises to not strike. Lo and behold, hundreds of companies started to go out of business because they couldn’t afford the promises. The mistakes by President Hoover continued as he and his cabinet tried to “fix” the economy.

As the economic malaise dragged on the American people soured on Capitalism. Roosevelt easily won election in 1932. Unfortunately, instead of seeing Hoover as fool hardy, he saw Hoover’s error as not going nearly far enough. Roosevelt’s government attempted one fruitless attempt after another. Not until Pearl Harbor did President Roosevelt’s experiments end and the country’s focus moved to the war. Afterwards, President Truman was not nearly as interested in market interference as Roosevelt, and America’s economy quickly rebounded.

Are Our Leaders Repeating History?

Ben Bernanke, the current President of the Federal Reserve had this to say to the famously free market Milton Friedman on his 90th birthday on the role of the Federal Reserve in starting the Great Depression:

“You're right, we did it. We're very sorry. But thanks to you, we won't do it again.”

Is he right that they will not do it again? I believe so. I am not a fan of the Federal Reserve or much of what they do, but I do think that they will likely avoid the horrible mistakes that occurred during the Great Depression. Mr. Bernanke is renowned as an expert on the Great Depression and his admissions on the numerous mistakes that the government made encourages me to believe that we will not make the same mistakes.

As a number of other economic writers have recently noted in various articles, there is also no brewing intellectual movement endorsing the socialist ideas rampant amongst the intelligentsia during the late 1920’s. This too gives me comfort that history will not repeat itself.

However, what happened in a few short years after the onset of the Depression that gives me concern today was that millions of Americans, who had more faith in the free market than understanding, lose the faith in tough economic times. Unfortunately, in our own time, we have seen a significant bump in support for solutions that ignore free choices and responsibility by individuals.

Many of our leaders exhibited the same vices of Hoover and Roosevelt when it came to the recent $700 billion bailout, but not all. While President Bush admitted that the bailout went against his free market instincts, few in the Democratic Party, nor their candidate Senator Obama, took pause at such a gargantuan interference. Their concern was not whether the government should interfere in the market, only the distribution of the benefits.

It is not repeating old mistakes that concern me so much, as it is committing new ones. There are many people in power with a friendly disposition towards market interference. Unemployment is heading upwards and inflation continues to be a problem. Will recent decisions make these situations worse? Will Americans lose just enough faith in the free market to vote people into power whose first instinct is to interfere in the market and expose us to the risk of a much deeper recession? Will our leaders, guided by fear, succumb to ill-conceived economic ideas? I hope not.

Another Depression? Not yet.

Houston Needs Price Gouging

In the wee hours of Saturday, September 13th, Hurricane Ike came ashore in Galveston County, Texas, where I live. With my family safely housed with relatives on the far northwest side of Houston, I traveled Saturday afternoon to view the damage to my home situated several miles from the coast. I faced little traffic on the highways, few downed power lines, and had little problem getting to where I was going. Now, six days later delivery trucks don’t seem to be able to make it here. Houston’s mayor is still pleading companies to make deliveries of gas, food, and ice, as we sit in long lines for necessities and common comforts. How do we fix this problem? Legalize price gouging.

What was noticeable for a number of days after the storm was gasoline hoarding. Queues for gasoline extended multiple blocks and required several hours of patience. The overwhelming majority of customers not only completely filled the tanks within their vehicles, but they also filled one or more gasoline canisters. No one wanted to wait through another line, so the incentive from price controls was to purchase as much as possible to avoid the need to come back. Because of this incentive, the few gas stations that were open inevitably ran out of fuel, feeding a vicious cycle of panic and hoarding.

If gasoline prices had been allowed to float up to, say, $8, some people, including tightwads like me, would have chosen not to buy as much gasoline in hopes that the price would come down over the next few days. If the average customer was buying only 10 gallons of gasoline instead of 25, the stations would have been able to service more people because the incentives would be to self-ration and not as much to hoard.

The unseen benefits that $8 gasoline would have brought are alternative purchasing options. With enormous profit margins to be made, tanker trucks from the four corners of America would have set off to sell gasoline on the roadside, in parking lots, or door to door, quickly ending the shortage. Instead of getting on the phone and begging for supplies, the mayor could have concentrated on traditional city functions like restoring water, clearing roads and removing debris.

Now, the greatest shortage is electricity. While few incentives could encourage the power companies to work faster, nor for safety reasons should they, there are alternatives that price gouging could provide. The tens of thousands of people who own generators, but have now had their electricity restored, have likely tucked them back into the corner of the garage. If the price was allowed to double or triple, they would be placed in a much more helpful position of being able to pocket some cash now and buy another generator when the prices return to normal in the coming months. As it is, few individuals have an economic incentive to part with their generators and give them over to the hundreds of thousands facing weeks without electricity. Because price gouging is illegal, thousands of people are burning up precious gasoline hoping to hit the Home Depot lottery by being there when the next shipment of five generators arrives tomorrow.

The emotional pull for an egalitarian distribution of food seems to be even stronger than that for gasoline, but the same problems persisted in local supermarkets after the storm. As I picked up a few items at a recently opened store near my home, I witnessed food hoarding going on as well. A woman added nearly a dozen packages of hot dogs to her cart already half-full with bags of frozen chicken breasts, and other packaged meats. She then turned to advise the other two women she was with to grab some. Each added half a dozen packages to their carts. I don’t know their situation back home, but since the shelves were mostly bare already, it probably meant that other people arriving later would have to go without. If the store had hiked the prices of certain items even a few dollars, food types in short supply could have been enjoyed by more people not just the lucky few who discovered that the store had recently restocked.

It is hard to label a system that bans price gouging egalitarian when the winners are those who get lucky or simply have a high tolerance for waiting in line. We need to legalize price gouging. As I wait for my roof to be fixed and tree limbs to be hauled off, I am eating no hot dogs. Can someone tell FEMA to send more hot dogs?

Ike - Only Some Damage

I am finally back home in air-conditioned comfort. We are still under a water boil advisory, so ice for our drinks. I have a big bath tub size area of shingles that blew off the roof, but only a couple water spots inside the house. A tree in the front yard lost several large limbs and looks a little sparse. Two sections of the fence blew down. Other than that, not too bad.

Hurricane Ike

For those of you who have read my bio you may be aware that I live in League City, TX, where Ike is supposed to cross over in the wee hours tonight. Thankfully, my house is at 25 ft. above sea level, so I'm not terribly concerned about catostrophic damage from the storm surge. Although, I suspect that we will have no power or water for a few days.

Cross your fingers.

Signs of Victory

I've been a little excited over the last few weeks as McCain seems to have surged past Obama and has momentum heading towards the debates. I've tried to keep that excitement subdued because many things can happen between now and then, but some anecdotal events have given me reason to start thinking victory.

I saw this article headline today and took it as a sign that Obama is in far more trouble than I had previously hoped:

"What's the difference between Palin and Muslim fundamentalists? Lipstick" - Juan Cole - Salon Magazine

A selected quote:

"Palin's stance is even stricter than that of the Parliament of the Islamic Republic of Iran"

I'm pretty sure that implying that a Vice Presidential candidate is more radical than the leaders of an authoritarian dictatorship, is only a hairs breadth away from the classic internet rhetorical crutch - "She's worse than Hitler". It's one thing for some wild-eyed crazy to stoop to this level of discourse in the comment section, but for a magazine that takes itself seriously, to print this sort of hyperbole is laughable.

Mr. Cole, you are a joke.

Time to Eliminate the Federal Gas Tax

The Federal Gas Tax must go. It is part of the rent-seeking bog that has mired our Congress in excessive spending, and provides the murkiest pool of funds for pork barrel projects. It serves virtually no national interest and it wastes the time of lawmakers and federal officials.

I am not proposing a tax cut. I would fully expect most every state to increase their gas taxes to make up for the lost funds from federal transportation outlays. The point is for individual states to make decisions on transportation spending, and remove the bulk of funds that Congress hands out with a wink and a nod to friends, donors, and the well connected.

Many have attacked earmarks with good cause, but there are still those that defend them. The defenses go something like this:

“I was sent to Congress to fight for my state/district and make sure we get our fair share of federal funds”

or

“The citizens in my state/district would rather have their elected officials work for them instead of relying on some bureaucrat”

Should individual states get their fair share of gas tax revenue? Yes, by never sending the money to Washington in the first place.

Who should decide how gas tax revenue in Delaware be spent? The people of Delaware. If Oklahoma wants to build freeways, then let them use their own money. If Oregon wants no freeways and only light rail, then let them use their own money. Funding should not be based on the seniority of a state’s congressional delegation. It should be decided with the reasonable judgment of those who are most familiar with state transportation needs: The State governments.

The bumbling bureaucrats and the arcane funding formulas give incentives for every state and city to maximize their funding by kowtowing to the rules and not strictly looking out for the interests of their local citizens. If these defenders of pork are right, state governments would be vastly superior at appropriating gas tax funds than the federal government. When a state government is using their own money there will be far fewer “Bridges to Nowhere”. It is only when they are trying to game the system that idiotic projects of that ilk are enacted.

Federal Gas Tax dollars are a cesspool of corruption. They waste time and misappropriate transportation dollars around the country. The Federal Gas Tax must go!