Free Markets, Free People

Daily Archives: August 31, 2010


German recovery, part II

I discussed this earlier with a post about Paul Krugman and Gary Becker, explaining why the German approach – essentially getting government out of the way while providing incentives to businesses for expansion and hiring – was superior to the tried and consistently failed tactic of huge amounts of government deficit spending as a "stimulus". Krugman and others waved away the German recovery as simply an upsurge in exports, nothing more.

E21 has an excellent article out today in which it takes exception to the Krugman claims (note too that E21 refuses to call Krugman and economist but instead refers to him as a “commentator”):

U.S. commentators, like Jonathan Chait and Paul Krugman, have taken issue with holding out Germany’s economic recovery as a success story – one that contains lessons for U.S. policymakers. Contrary to their claims, Germany’s recovery does not appear to just be about trade flows and global demand for their manufactured goods. 50% of their second quarter GDP came from private sector consumption and investment growth.

Private sector growth – what a concept, no?

Here is an extended excerpt which is probably one of the best explanations I’ve seen. The last line is so irony laden that it almost makes you wince.  Also, as you read this carefully you will again note the obvious – “this ain’t rocket science”:

The contractionary effects of deficit-financed stimulus were highlighted by European Central Bank (ECB) President Jean-Claude Trichet at the Jackson Hole conclave. While many commentators in the U.S. still depict the debate over stimulus as pitting sagacious “pure” economists that favor more deficit spending against the politically astute economic illiterates, Mr. Trichet explains that the Franco-German technocrats in Frankfurt view the economic literature as counseling steep budget cuts in the current environment. Many U.S. economists speak of the need to increase deficit-financed public expenditure to avoid a Japanese-style “lost decade”, yet it is precisely the exploding public debt ratios that Mr. Trichet identifies as the real cause of Japan’s malaise and the greatest risk to Western economies today. To those who believe sharp reductions in public expenditure are too risky, given overall economic weakness, Mr. Trichet responds that deficit-financed stimulus is unlikely to provide any measureable boost to demand in the current environment because the government purchases are offset by reduced private expenditure. And on this point, Mr. Trichet even goes even further:

“There is the additional argument positing that credible fiscal deficit reductions through expenditure cuts lead the private sector to expect a lower future tax burden, especially when the nature of the cuts make future tax reductions more likely. This can generate higher consumption expenditures and more investment.”

Lest anyone believe Mr. Trichet was talking about modest cuts to public expenditure to assuage irrational markets, he went on to suggest that cuts to government spending should be sufficient to reduce debt-to-GDP ratios by 30 percentage points over the medium term. Mr. Trichet cites numerous examples where cuts of this magnitude have resulted in improved short-run economic performance. That it takes a French lifetime bureaucrat to travel to the American West for these words to be spoken at a U.S. policy symposium says something fairly profound about the current state of policymaking in the U.S.

Again, as I mentioned in the first post I’ve cited, the proof is in the pudding.  Germany is back to pre-recession unemployment rates and excellent GDP growth.   And where, again, is the US during “recovery summer”?

Perhaps now you can understand the reason Mort Zuckerman has referred to the economic policies of this administration as our “economic Katrina”.  At this point we’d better hope the worst we suffer is a lost decade like Japan’s.

~McQ


Here’s a surprise – Federal Flood Insurance Program incentivizes bad – and costly – behavior

Did you know there’s a home in Mississippi that has flooded 34 times in 32 years? And each time it has flooded, the federal government, through FEMA’s Federal Flood Insurance Program, has paid the owner’s claim. The house, worth $69,900, has cost the government $663,000 in flood damage claims. That’s almost ten times the home’s worth and averages over $20,000 a year.

If insanity is doing the same thing over and over again and expecting different results, that aptly describes this federal program. It essentially incentivizes home owners to remain in flood prone areas by bailing them out each time they are flooded. And, as you might imagine, that’s finally caught up with the program, as USA Today reports:

FEMA’s National Flood Insurance Program is the nation’s main flood insurer, created by law in 1968 as private companies stopped covering flood damage. The program insures 5.6 million properties nationwide and aims to be self-sustaining by paying claims from premiums it collects.

Instead it’s running deeply in the red. A major reason, a USA TODAY review finds, is that the program has paid people to rebuild over and over in the nation’s worst flood zones while also discounting insurance rates by up to $1 billion a year for flood-prone properties.

Along with the huge losses from Hurricane Katrina, the generous benefits have forced the program to seek an unprecedented $19 billion taxpayer bailout.

As one critic succinctly points out, “if this were a private insurer, it would be bankrupt”. In fact, it with those business practices, it would have been bankrupt years, if not decades ago. And now, hat in hand, it goes to the taxpayer for a bailout. $19 billion dollars worth of bailout.

As a government program, federal flood insurance covers anyone. It’s similar to state-run programs that insure homeowners and drivers who cannot get private coverage. Policies cannot be canceled, and individual premiums cannot be raised based on claims payments.

"It is not run as a business," [FEMA Administrator Craig ]Fugate said.

Congress’ Government Accountability Office said in April that the program is "by design, not actuarially sound" because it has no cash reserves to pay for catastrophes such as Katrina and sets rates that "do not reflect actual flood risk."

Raising insurance rates or limiting coverage is hard. "The board of directors of this program is Congress," Fugate said. "They are very responsive to individuals who are being adversely affected."

Or said another way, Congress has been “captured” by influential constituents who see no problem using their influence to burden taxpayers to subsidize the way of life they prefer – no risk building in areas prone to natural disasters. It isn’t “regulatory capture” per se, but it could certainly be called “constituent capture”. It is certainly rent seeking. Whatever the name preferred, it is an abuse of the taxpayer’s money.

It appears the plan is to continue doing business as usual – providing cheap insurance to builders and homeowners who continue to build or rebuild in flood prone areas. No fault risk taking subsidized by the federal government via taxes. So when you see stories like this, you know who to blame:

In Fairhope, Ala., the owner of a $153,000 house has received $2.3 million in claims. A $116,000 Houston home has received $1.6 million. The payments are for damage to homes and what’s inside.

After all, the view’s beautiful, coverage cheap and can’t be canceled and the risk minimal in terms of dollar loss, so what incentive is there to relocate to an area less prone to flooding as long as the taxpayer is on the hook to subsidize that lifestyle and they keep paying?

~McQ


IPCC: stay out of politics and concentrate on science

Essentially, that’s the unvarnished version of what an independent commission recommended the UN’s IPCC do from now on – stay out of politics and concentrate on getting the science right.

UN climate change experts have been accused of making ‘imprecise and vague’ statements and over-egging the evidence.

A scathing report into the Intergovernmental Panel on Climate Change called for it to avoid politics and stick instead to predictions based on solid science.

The probe, by representatives of the Royal Society and foreign scientific academies, took a thinly-veiled swipe at Rajendra Pachauri, the panel’s chairman for the past eight years.

As anyone who has been keeping up with the scandal among the IPCC and warmist “science” crowd in general, the report last issued by the UN’s climate commission has been under heavy and increasing fire from many directions.  This is the latest in the saga.  The investigative panel also make it clear that they’re of the opinion that Pachauri is not the guy they believe should be in charge of the IPCC.

Harold Shapiro, a Princeton University professor and chair of the committee that conducted the review, said that a report by an IPCC working group "contains many statements that were assigned high confidence but for which there is little evidence."

Professor Shapiro said the IPCC’s response to errors when they were subsequently revealed was "slow and inadequate."

Asked about the Himalayan glaciers error, Professor Shapiro said, "At least in our judgment, it came from just not paying close enough attention to what [peer] reviewers said about that example."

He added that there was concern about the U.N. climate panel’s lack of a conflict of interest policy, as is standard in most Government departments and international bodies.

The report called for development of a "rigorous conflict of interest policy" and made detailed suggestions on what should be disclosed.

Among those disclosures recommended are any financial and other ties to groups with an interest in the outcome of such a report (Pachauri has previously acted as an adviser to green energy companies).

The main finding, as noted above, was that despite all the claims to the contrary, many of the findings published with a “high confidence” were not peer reviewed or, if they were, the process was badly flawed.  Consequently, many of the findings were found to be erroneous.

That’s not to say that the panel found the overall IPCC report to be fraudulent – on the contrary – it claims to support the basic findings. And I’d be interested to know the panel’s leanings before their investigation.  Nevertheless it does find the present report’s errors to have badly “dented the credibility of the process”.

The panel also made a recommendation that the head of the IPCC be professionally qualified to do the necessary job:

‘Because the IPCC chair is both the leader and the face of the organisation, he or she must have strong credentials (including high professional standing in an area covered by IPCC assessments), international stature, a broad vision, strong leadership skills, considerable management experience at a senior level, and experience relevant to the assessment task.’

Pachauri’s background is mechanical engineering and he served with the Indian railway system before entering academia.  Few objective observers would his credentials as adequate for the job.  However Pachauri has no plans to step down.  This is another example of what putting an unqualified individual in high office will get  you.

We’ll see how this plays out, but remember that the IPCC report is something by which countries set their environmental policies.  If Pachauri stays on, with his credibility tarnished, a very good case exists for questioning the validity of the report (given this episode).  My guess is pressure is going to mount to oust him and replace him with a scientist at least associated with the field under investigation.

Frankly  I hope he stays on.  In my estimation, he perfectly represents why the warmist movement – and that’s what it is – continues to lose its audience and fewer and fewer people believe what they’re trying to sell.  And, afterall, he’s at least as qualified as Al Gore.

~McQ