Beware the Invisible Hand

Does Government Intervention Work?

Burt Fulsom has a great post concerning the history of government meddling:

I know of no peacetime example that would encourage those who want to put our healthcare system–roughly one-sixth of the U. S. economy–under government direction. No supporter of healthcare has come forth with a single example of such a transfer improving the quality of American society.

........President George Washington experimented with government control when he advocated federally funding a new fur company to occupy the northwest territory and thereby help prevent the British from encroaching on U. S. land through their large Hudson Bay Company. Unfortunately, Indians and trappers alike despised the inefficient government fur company, and under President Monroe the U. S. disbanded the near bankrupt company, sold its assets, and allowed the more competent private U. S. companies to do all the nation’s fur trading.

During the Civil War, President Lincoln signed a bill to build the country’s first transcontinental railroad from Omaha, Nebraska to Sacramento, California. The federal government would do the financing. After granting roughly $60 million in land and another $60 million in federal loans, the bureaucrats were in dismay. The Union Pacific and Central Pacific had done a poor job of construction, and the road went bankrupt several times by the end of the 1800s.

Airplanes were another example. By 1900, some Americans worried that Europeans would invent the airplane and possibly use it to dominate others (including the U. S.) militarily. Government support, so the argument went, was therefore essential to stimulate Americans to inventive greatness. Samuel Langley, head of the Smithsonian Institution, received a federal subsidy to continue his research into manned flight. Langley conducted two public experiments with his federal dollars–launches right outside of Washington, D. C. Unfortunately, both flights crashed ignominiously into the Potomac River. Within two weeks after the second launch, the Wright Brothers–two bicycle mechanics from Dayton, Ohio–flew the first successful airplane in North Carolina, financing the venture with $2,000 of their own money.

For some reason, federal subsidy and control often diminish the chance of an enterprise being successful. In some cases, this occurs because federal officials do not have the same abilities as entrepreneurs–or the same incentives, to make an enterprise run efficiently and profitably. Another reason is federal control equals political control of some kind. What is best for politicians politically is not often what is best for businesses economically. Polticians want to win votes, and they can do so by giving targeted voters benefits while dispersing costs to others.

During the New Deal era of the 1930s, for example, some observers were amazed that in the midst of massive government programs to build bridges, erect school buildings, and conserve forest land, that unemployment fluctuated and remained at more than 20 percent in 1939–ten years after the Great Depression began. Why, in the midst of such visible job-creation, was unemployment so inflated?

First, President Roosevelt was targeting these jobs to districts he wanted to carry politically. The money was not necessarily going where it was most needed. Second, to get these federal dollars, they had to be taken from taxpayers and in doing that, the top marginal tax rate jumped from 25 to 63 percent in 1932; then to 79 percent in 1935; and finally–in the midst of World War II–to 94 percent in 1945. What incentives do businessmen have to invest when most of their profits are confiscated by government? Thus, politicians not only misuse much of the money to secure votes, but they stifle entrepreneurs from starting new businesses that would employ Americans and end high unemployment.

That oddity of massive government job-creation leading to higher unemployment brings us to the present and helps explain why President Bush’s “stimulus package” of $154 billion actually helped lead to increased unemployment and why President Obama’s $787 billion stimulus package last year led to even more unemployment. The created jobs were often political rewards; key parts of the economy remained unstimulated, and entrepreneurs–with the prospect of new taxes–had no incentive to invest and create the real jobs this country needs.

The Joy of Pain

I had the real pleasure of hearing Jason Cruise, founder of Outdoor Ministry Network and the producer of Me & Dad TV, speak last night at my church.

My biggest takeaway from Jason's speech was the message he relayed about the importance of discipline and the importance of pain being associated with bad decisions.

One of the biggest lessons Jason said he learned from his "daddy" (he's from East Tennessee where dad is better known as daddy, which is pronounced dedee) was that the brain and the hind parts speak the same language. If the butt says "OUCH" the brain says "OUCH".

Jason used Proverbs 13: 24 to make his point about the importance of discipline. The verse reads:

Whoever spares the rod hates his son,

but he who loves him is diligent to discipline him.

This is a hard message to swallow in today's environment. In many ways, we are instructed the only way to parent is with an unwavering love and affection for our child. I would agree with this instruction, but I don't agree with how many people define love and affection.

God tells us through the words of Solomon in Proverbs that if we want to parent with and unwavering love and affection, we will not spare the rod; we will not spare the discipline; we will not hide our children from failure; we will not fail to teach our children that pain follows bad decisions and that there are consequences to every action.

In fact, God tells us that if we do spare the rod and we do fail to properly discipline our children and we do fail to demonstrate the consequences of certain actions, not only do we not love our child, but we actually "hate" our child.

When you unpack this message, it makes perfect sense. If we fail to prepare our child for the harsh realities of life and the pain (both physical and mental) that comes with poor decisions, we are putting them in a path of destruction.

Please don't think I am advocating any kind of abusive behavior. I am simply advocating discipline.

Jason's message was clearly aimed at parenthood, but I think his line of thinking could just as easily be applied to the current financial mess our country is in and the growing dependence the we have on our government.

What our government is essentially trying to do today is to spare the rod. We don't want big companies who made horrible decisions to feel the pain of bankruptcy or total dissolution. We don't want the people who took out loans they couldn't afford to take responsibility for their actions and face foreclosure. We don't want our Nation to face the tough budgetary decisions that are staring us in the face.

Our government tells us they keep borrowing money, increasing taxes, increasing control and regulation, and bailing out failing institutions with billions of borrowed dollars (dollars we will pay back with interest) because they have compassion and care.

President Obama's message has always been that he is bringing us "hope". However, by sparing us the pain and sting of bad decisions and poor judgment, our government is showing that it hates each and every one of us.

Jason wrapped up his tough message with a very soft and powerful ending. He said the best thing his father ever did for him had nothing to do with the shelter he provided him with our the gifts he gave him or the number of his baseball games he attended. The best thing his father ever did for him was tell him he loved him and was proud of him each and every day of his life.

We are called not to spare the rod, but we are also called not to spare our enduring and everlasting love for our children.

Ray Stevens - "We the People"

You gotta love Nashville's own Ray Stevens, the "Comedy King of Music City."

Harrison Ford: No Limit for Better

The quote below is from a recent interview Parade magazine did with movie star Harrison Ford.

This will definitely make my wall at work:

“When I was a carpenter, I once worked with this Russian lady architect. I would tell her, ‘Look, I’m terribly sorry, but I want to change that a half inch,’ and she would say, ‘No limit for better.’ I think that is a worthy credo. You keep on going until you get it as close to being right as the time and patience of others will allow.”

Uh-oh!

Mark Perry at the fantastic blog Carpe Diem has a classic quote I thought was worth repeating here:

Now, let me get this straight.....We are going to pass a health care plan written by a committee whose chairman says he doesn't understand it, passed by a Congress that hasn't read it but exempts themselves from it, to be signed by a president that also hasn't read it and who smokes, with funding administered by a treasury chief who didn't pay his taxes…all to be overseen by a surgeon general who is obese, and financed by a country that's nearly broke. What could possibly go wrong?

~Anonymous

From today's "The Gartman Letter" (subscription required)

We're Your Stimulus Dollars and We're Here to Help?

Or maybe not.

From an AP article (not an exactly a bastion of conservative thought):

Ten months into President Obama's first economic stimulus plan, a surge in spending on roads and bridges has had no effect on local unemployment and only barely helped the beleaguered construction industry, an Associated Press analysis has found.

Spend a lot or spend nothing at all, it didn't matter, the AP analysis showed: Local unemployment rates rose and fell regardless of how much stimulus money Washington poured out for transportation, raising questions about Obama's argument that more road money would address an "urgent need to accelerate job growth."

.......Even within the construction industry, which stood to benefit most from transportation money, the AP's analysis found there was nearly no connection between stimulus money and the number of construction workers hired or fired since Congress passed the recovery program.

......"As a policy tool for creating jobs, this doesn't seem to have much bite," said Emory University economist Thomas Smith, who supported the stimulus and reviewed AP's analysis. "In terms of creating jobs, it doesn't seem like it's created very many. It may well be employing lots of people but those two things are very different."

When you read an article like this and realize that, despite the very simple and obvious fact that more government has not, is not, and never will be the answer, we are taxing, spending, and bureaucratizing (real word?) our way into complete and total ruin, it's hard not to despair.

Answers to Your Kids' Questions

A really fun article here on those pesky questions kids ask that we wish we knew the answers to:

WHY DO WE HAVE A LEAP YEAR?

Although you might think the Earth is still, it's actually moving in a track around the Sun rather like a circle. One complete trip round is what we call a year. As the Earth travels, it is also spinning, and each spin is what we call a day.

In a year, when the Earth comes right back around to where it started in relation to the Sun, it will have spun 365-and-a-quarter times.

This is a nuisance to our calendars - what can you do with a quarter of a day? So we just ignore it, which is why grown-ups sometimes say that there are 365 days in a year.

But if we continue to ignore that quarter day, the calendar would get out of step with where the Earth is. So every four years, we add up the quarters to one whole day and tag an extra day on to the calendar in February to bring us up to date.

Jonathan Betts, horologist (expert in time and time-keeping), Royal Observatory.

WHERE DOES THE WIND COME FROM?

Have you ever noticed that when it's cold outside and someone opens the front door of your cosy, warm house, the warm air from inside rushes out very quickly, which makes you feel chilly? Wind is made a bit like that.

When hot air from warm countries such as Spain bumps into cool air from places like England, the warm air rushes into the cold air and this movement of air is what we call wind.

If the air that meets is very warm and very cold, the cold air rushes very fast and produces a strong wind. But if the temperatures of the air are only a little different, the cold air moves slowly and we get just a light breeze.

Stuart Umbo, Science Museum

WHY IS THE SEA SALTY?

The sea is salty because the rivers that flow into it wash salts and other minerals out of the ground. These dissolve in the rivers and the rivers then flow into the sea.

Another source of salt is the sea bed. As the Sun evaporates the water from the sea to make clouds, it leaves the salts and minerals behind, so the sea is much saltier than rivers and lakes. Even though it rains on the sea as on land, this isn't enough to dilute the salt.

Roger Highfield, Editor, New Scientist

WHY DO YOU BLINK?

The very front of your eye is made of an extremely sensitive seethrough screen rather like the windscreen on your parents' car.

It's very important that it stays clean and moist so that you can see as well as possible. So every ten or 20 seconds, your eyelids close, spreading a thin layer of tears over your eye which washes off any bits of dust or anything else that may have got into it, like a car's windscreen wiper with squirty screen wash. If we didn't blink so much, we wouldn't be able to see properly, so it's lucky we do!

Dr Rob Hogan, president of the College of Optometrists

A Tale of Two Johnsons

I am a Vandy alum and former student athlete, and a huge fan of Georgia Tech's football coach Paul Johnson.

My brother and dad both attended Georgia Tech, so I have followed GT's football program very closely since Paul Johnson was hired two years ago.

What lies below is what I will call A Tale of Two Johnsons:

GT's Paul Johnson on the recent firing of Defensive Coordinator Dave Wommack:

“It was kind of a gradual process really throughout the last year-and-a-half,” Johnson said. “There are going to be times where — just like offensively, we played horrendous in the bowl game — there’s going to be some of that. But there’s not going to be a long pattern of it. And what happened was, I just felt like when we played the better offensive teams, we struggled.”

Johnson went on to add that he realized there were several issues that unexpectedly affected the defense’s performance this season, but that they should not be the only sources of evaluation.

“We’ve got some personnel issues, and we’ve got some other things to address, so it certainly wasn’t all Dave,” Johnson said. “But there comes a point where you have to make a decision, and you have to choose to make a decision or stay status quo, and I just felt like, to get where we want to go, I just need to change direction.”

Vandy's Bobby Johnson on refusing to make any changes to his staff after one of the worst offensive campaigns in the history of college football:

"We're going to look at what the cause is for our season," Johnson said. "But I'm not changing coaches because I hear a few fans talking. I'm not afraid to make changes. I've made them before."

Would another rough season in 2010 force Johnson to make some changes?

"That's kind of hard to say," Johnson answered. "What caused the rough year?"

Who cares about a few fans talking? How about the fact that since 2003 Vandy has an average ranking of 10 (out of 12 SEC teams) in points per game? How about the fact that Vandy has lost 66 games in 8 seasons and had four 2 win seasons? How about the fact that we are 0-3 vs. Service Academies and 0-2 vs. MTSU?

Maybe the facts described above, not that a "few fans" are talking, should be what prompts Vandy to change something.

Paul Johnson may not hire the best DC ever to replace Wommack, and the next DC may have some struggles as well. However, at least he acknowledges that if you have even a shred of competitive fire in you, you can't for one second settle for anything less than excellence or, at the bare minimum, the constant pursuit of it.

Boy did Vandy screw up when we picked up the wrong Johnson.

CRE Update

This is a very educational article by Atlantic writer Megan McArdle:

Commercial mortgage lenders basically have to worry about two kinds of default risk: cash-flow risk, and asset-price risk. Cash-flow risk is what happens to homeowners when the primary breadwinner becomes unemployed, and to landlords or hotel owners when rental prices plummet. Since commercial tenants typically sign relatively long leases, this problem tends to grow slowly except in hotels—and, apparently, in rent-controlled properties with litigious tenants.

.....In some ways, price declines are a bigger problem for landlords than for homeowners. Unless forced to move, homeowners with long-term mortgages who make enough to cover their payments can sit tight and hope the market recovers. Landlords, however, typically take out commercial loans for shorter terms of three to 10 years. In normal times, landlords coming to the end of a mortgage simply roll the debt over into a new loan. But collapsing asset values have wreaked havoc on this process.

Now, as loans come up for renewal, lenders have to reassess how much credit they’re willing to extend. Take a property that was worth $100million in 2007, when it was financed with a four-year, $70million mortgage. That’s a reasonably conservative 70percent loan-to-value (LTV) ratio. But if the building is worth only $70million when it’s time to roll the loan over, keeping the LTV at 70percent means that the owners can now borrow only $49million, and have to come up with tens of millions to pay off the original loan. Worse, as the markets tighten, lenders tend to want to see a lower LTV in the deals they finance.

............the repercussions from the commercial collapse will not be as great as those from the housing sector. The commercial market is considerably smaller than the residential market. The existing FDIC system can handle the decline, which will likely hit smaller banks harder than those in the “too big to fail” bracket. Moreover, fraud was probably much more prevalent in the residential than the commercial market, where even the newbie investors tend to be financial professionals or established businesspeople, not hustlers looking for a quick flip.

But given how experienced those investors were, why are our problems now as bad as they are? Fraud aside, Gyourko notes that at the height of its bubble, the commercial real-estate market displayed most of the pathologies that characterized the residential side. Only 50percent of the increase in prices between 2003 and 2008 resulted from rising rents, he says; the rest was just inflated optimism about the rents landlords would be able to charge sometime in the future. And just as in housing, banks joined the folly, increasing the LTVs and requiring less amortization over the life of the loan.

........The best explanation for the calamity that has overtaken us may simply be that cheap money makes us all stupid. The massive inflows of international capital, which Ben Bernanke has called the “global savings glut,” poured into our loan markets, driving interest rates lower—and, since most real estate is purchased with borrowed funds, pushing up the price of property in both the commercial and residential sectors. Rising prices, in turn, disguised any potential problems with the borrowers, because if they ran into cash-flow problems, they could always refinance, or sell. Everyone was getting bad signals from the market, and outlandish purchases looked almost rational.