Free Markets, Free People

Daily Archives: April 26, 2010


Volcanic Dust Cloud All An Illusion?

This will go down in history as an epic FAIL:

Britain’s airspace was closed under false pretences, with satellite images revealing there was no doomsday volcanic ash cloud over the entire country.

Skies fell quiet for six days, leaving as many as 500,000 Britons stranded overseas and costing airlines hundreds of millions of pounds.

[...]

However, new evidence shows there was no all-encompassing cloud and, where dust was present, it was often so thin that it posed no risk.

The satellite images demonstrate that the skies were largely clear, which will not surprise the millions who enjoyed the fine, hot weather during the flight ban.

Jim McKenna, the Civil Aviation Authority’s head of airworthiness, strategy and policy, admitted: ‘It’s obvious that at the start of this crisis there was a lack of definitive data.

‘It’s also true that for some of the time, the density of ash above the UK was close to undetectable.’

Is there any surprise as to exactly who was responsible for this little mistake?

The National Air Traffic Control Service decision to ban flights was based on Met Office computer models which painted a picture of a cloud of ash being blown south from the Eyjafjallajokull volcano.

These models should have been tested by the Met Office’s main research plane, a BAE 146 jet, but it was in a hangar to be repainted and could not be sent up until last Tuesday – the last day of the ban.

Just think, but for a coat of paint, thousands of Britons could have been home with their families, commerce could have gone on largely as usual, and airlines (which operate on paper-thin margins as it is) would not be out tens of millions of dollars. Given the notorious precision of the models employed by the Met Office to predict weather, perhaps it would have been wise to send that plane up sans its shiny new paint job? Just a thought.

I guess we should just all be thankful that we’re not relying on the expertise of the Met Office to push broad new government powers. Based on this incident, one could imagine how the world economies might come to a grinding halt, and all based on nothing but an illusion coughed up by a computer model. Well, thank goodness, that could never happen.

[HT: HotAir HL]


Quote of the day – Crony Capitalism edition

I think this captures my feelings about the situation:

“[C]rony capitalism” has as much to do with real capitalism as praying mantises have to do with real prayer.” – Donald J. Boudreaux, Cafe Hayek

Boudreaux is responding to an article by Gerald O’Driscoll a few days ago in which O’Driscoll took on the notion that “crony capitalism” is simply an natural evolution of capitalism.  Boudreaux had a slight nit to pick with the author but his characterization of crony capitalism was dead on.

O’Driscoll covers many of the myths that those who want to characterize crony capitalism as a problem only to be found under a capitalist system.  In fact it has little to do with capitalism at all.  It’s simply cronyism and, once you understand what is being described, it can exist under any system that has a government.

You see, that’s the one ingredient that is necessary for it to exist.

Under a free enterprise system – capitalism – the government’s job is to play referee, that is, enforce legal contracts and prevent/punish fraud.   And, there’s a certain amount of regulation necessary to exercise those functions.

But when it gets beyond those parameters, it has a number of effects which have little to do with capitalism or a free market.  When government gives up its role as referee in favor of a reciprocal relationship with those it regulates that also benefits those who run government, you have cronyism.  Obviously, a capitalist system, then, isn’t the only place it can happen.

And how does this cronyism develop?

Public choice theory has identified the root causes of regulatory failure as the capture of regulators by the industry being regulated. Regulatory agencies begin to identify with the interests of the regulated rather than the public they are charged to protect. In a paper for the Federal Reserve’s Jackson Hole Conference in 2008, economist Willem Buiter described “cognitive capture,” by which regulators become incapable of thinking in terms other than that of the industry. On April 5 of this year, The Wall Street Journal chronicled the revolving door between industry and regulator in “Staffer One Day, Opponent the Next.”

Congressional committees overseeing industries succumb to the allure of campaign contributions, the solicitations of industry lobbyists, and the siren song of experts whose livelihood is beholden to the industry. The interests of industry and government become intertwined and it is regulation that binds those interests together. Business succeeds by getting along with politicians and regulators. And vice-versa through the revolving door.

We call that system not the free-market, but crony capitalism. It owes more to Benito Mussolini than to Adam Smith.

Government also tends to favor those who favor it.  And this is one of the many things which came to light in this recent financial bailout:

Crony capitalism ensures the special access of protected firms and industries to capital.

Businesses that stumble in the process of doing what is politically favored are bailed out. That leads to moral hazard and more bailouts in the future. And those losing money may be enabled to hide it by accounting chicanery.

Consider the revolving door at Goldman Sacs.  Consider the preponderance of union workers at GM and Chrysler.  Go ahead and try to argue there’s no money connection between those who control the government’s purse strings and regulations and those who have benefited.

Donald Beoudreaux gives a great summary that dispels the myth that “crony capitalism” is a version of capitalism or, in fact, has anything whatsoever to do with it:

To the modern American ear, “anarchy” no longer means simply “no ruler”; instead it now means “no law” – true, free-for-all chaos.  In vivid contrast, capitalism – real capitalism – is infused with law, most of which is self-enforcing.  The manufacturer who pays his suppliers late gets poorer credit terms in the future; the retailer who cheats her customers loses business; the customer who doesn’t pay his bills can no longer buy on credit.

The chief problem with crony capitalism is precisely that it injects significant amounts of lawlessness into the economy, transforming capitalism into something entirely different and dysfunctional.  Under crony capitalism, government excuses the politically influential from capitalism’s laws.  Thus unleashed from the impartial discipline of the invisible hand, the politically influential become criminals who lie, rape, pillage, and plunder.  And that’s true lawlessness and chaos.

So don’t let the enemies of capitalism get away with calling it crony capitalism.  It’s cronyism, pure and simple, and it can and does exist with any form of government.  And increased regulation isn’t going to change that dynamic or curtail the developed system of cronyism that we now suffer under.

~McQ


Poll trends, the Democrats dilemma and the GOP’s chance

Trying to analyze polling results is indeed a tricky business.  To be worth anything a poll must be carefully crafted to remove obvious and hidden biases from questions.   And, for the most part, a single poll really demonstrates only a “snap shot” of opinion for that moment.

Where polls have some value is in the trends they track.   And, with the number of polls out there, similar findings from other polls lend credibility to the trend being tracked.  History also make is clear whether or polling trends have any credibility. Poll watchers take all of that in when they consider a poll’s worth. A small number of polls have emerged as doing a good job of credibly tracking how various issues are trending. They’re certainly not fool-proof indicators, but taken with other polls one can begin to build an emerging picture.

Take this recent Gallup poll on party identification. Political junkies know that self-identification with a party indicates the strength of that party electorally. Self-identification ebbs and flows with the fortunes of the party and history proves that for us. In mid 2004, identification with a party was tied between Democrats and the GOP. But in 2006, for the mid-term elections, a 5 point gap opened favoring Democrats. And, Democrats benefited by picking up seats in Congress (and a majority in the House). In 2008, that gap had gone to double digits, and the Democrats swept the Republicans out of power.

Well, the double digit advantage for the Democrats has disappeared according to Gallup. Democrats hold a slight 1 point lead in those who identify with or lean toward one of the two parties.

Two points to be made – one, Democrats are hemorrhaging independents much more than the GOP is doing things right to bring these numbers together. There’s a lot of “buyer’s remorse” in the ranks of independents than any flocking to the Republicans because of what they stand for. As Gallup points out, only 28% of the country identifies themselves as “Republican”. That hasn’t changed a single percentage point since the beginning of 2009. What has shrunk is the number of self-identified Democrats. The percentage has dropped 3 points from 35% to 32%. So on party identification alone, Democrats still hold a 4 point lead on those who identify themselves as Republicans. What closes that gap to 1 point in favor of Democrats are the independents now leaning toward the GOP. From 13 point lead in 2008 to a 1 point lead in 2010 points to some pretty disillusioned indies.

Two – Republicans still have a lot of selling (and proving themselves) to do. What isn’t apparent with this trend is how solid the independent leaners are for the GOP. The fact that self-identified Republicans haven’t increased a single percentage point in over a year says a lot about how the voting public still perceives Republicans. The fact that a large number of independents have declared they “lean” toward Republicans now doesn’t really mean a hill of beans. Unfortunately in the system with which we’re stuck, you have to pick a side or stay home. I think the only reason that indies tend to lean more Republican than Democrat is they don’t like what they see going on with Democrats in power and figure they may have to hold their nose and vote GOP just to change the mix and stop, or at least slow down the runaway train of government.

Two other polls help firm up that conclusion – one in which the President’s approval rating keeps trending down (an indicator the public isn’t seeing its priorities acted upon) and the second which shows generic Congressional Republicans holding a 4 point lead over the generic Congressional Democrat, which history tells us spells trouble for Democrats.

Can all of this change? Sure – but it is unlikely. Why? Because Democrats are caught in a very difficult spot. All the political stars aligned for them last November except one – the economy. It went tango uniform. And, as it turns out, it didn’t just hit a bump in the road, it went over the proverbial cliff. They were able to get away with blaming the previous administration for a while, but that excuse has pretty much been used up. So here they sit, with the legislative and executive power they’ve sought for decades in order to pass an agenda they’ve wanted to pass for centuries, and the top priorities for the voters are the economy, jobs and the ballooning deficit. What’s an activist to do?

Well they’ve chosen – spending a year dithering, scheming and manipulating the process with health care reform while the economy tanked further, proposed trillion dollar budget deficits were forecast for years to come and unemployment briefly hit double digits. Now they’re trying to force a financial regulation regime through while arguing over introducing cap-and-trade or immigration as their next priorities in Congress.

It seems the Democrats have chosen – the window is closing on their agenda and, throwing the priorities of the voters under the bus, they’re going with the agenda.

It is that, I think, as much as anything, which has driven the independents to lean Republican. That sort of “party before people” attitude isn’t very popular nor is it usually rewarded. Right now the polls indicate that voters are ready to give the GOP another chance, but the support for doing so isn’t particularly solid nor will it grant them much slack should they too decide not address the public’s priorities.

There’s a lesson to be learned here -whether or not either party will heed it- and that is that those in Congress are there to do the people’s business, not their party’s business. Of course having said that, it is obvious that undoing what this bunch has done is no easy matter, and, in the end, may be less popular than the GOP thinks it might be right now. However, if Republicans run on a particular plan and that plan ends up being endorsed by voters putting them in power (House and Senate), if I were them I’d interpret that as the people’s priority and, as Larry the Cable Guy would say “get ‘er done” (sponsor and pass legislation and make the President veto it). Anything short of that will find the GOP back at a double digit disadvantage again when we hit the 2012.

~McQ



Forbes gets to the bottom of the GM loan “repayment” claim

And, it’s actually worse than first imagined. First the background:

Uncle Sam gave GM $49.5 billion last summer in aid to finance its bankruptcy. (If it hadn’t, the company, which couldn’t raise this kind of money from private lenders, would have been forced into liquidation, its assets sold for scrap.) So when Mr. Whitacre publishes a column with the headline, “The GM Bailout: Paid Back in Full,” most ordinary mortals unfamiliar with bailout minutia would assume that he is alluding to the entire $49.5 billion. That, however, is far from the case.

Because a loan of such a huge amount would have been politically controversial, the Obama administration handed GM only $6.7 billion as a pure loan. (It asked for only a 7% interest rate–a very sweet deal considering that GM bonds at that time were trading below junk level.) The vast bulk of the bailout money was transferred to GM through the purchase of 60.8% equity stake in the company–arguably an even worse deal for taxpayers than the loan, given that the equity position requires them to bear the risk of the investment without any guaranteed return. (The Canadian government likewise gave GM $1.4 billion as a pure loan, and another $8.1 billion for an 11.7% equity stake. The U.S. and Canadian government together own 72.5% of the company.)

So GM “paid back” only the $6.7 billion it got in the “pure loan”, not the full $49.5 billion it is on the hook for to taxpayers, or the $1.4 billion it got in a “pure loan” from Canada’s government.

When this story was first reported, it was claimed that TARP money was used to pay the loan. That’s true, but not exactly how you might have imagined it. Remember, GM reported a $3.4 billion fourth quarter, and a loss for the year. Where did it get $6.7 billion to pay off the loan? Here’s where:

As it turns out, the Obama administration put $13.4 billion of the aid money as “working capital” in an escrow account when the company was in bankruptcy. The company is using this escrow money–government money–to pay back the government loan.

Yes, that’s right, they used a taxpayer funded escrow account to pay off the loan. And, as Forbes points out, the GM claim that being able to do so shows progress, it’s hardly worth the hype it received – except that’s not the whole story. In fact, it’s not a show of progress at all. GM did it for a very specific reason:

Sean McAlinden, chief economist at the Ann Arbor-based Center for Automotive Research, points out that the company has applied to the Department of Energy for $10 billion in low (5%) interest loan to retool its plants to meet the government’s tougher new CAFÉ (Corporate Average Fuel Economy) standards. However, giving GM more taxpayer money on top of the existing bailout would have been a political disaster for the Obama administration and a PR debacle for the company. Paying back the small bailout loan makes the new–and bigger–DOE loan much more feasible.

Or, as Forbes sums it up:

In short, GM is using government money to pay back government money to get more government money. And at a 2% lower interest rate at that. This is a nifty scheme to refinance GM’s government debt–not pay it back!

~McQ

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