Voice For Liberty

Tag: Interventionism

  • Causes of global finance crisis explained in Wichita

    Today, an audience of 600 business and civic leaders attended the 30th annual Economic Outlook Conference at Century II, produced by the Center for Economic Development and Business Research (CEDBR) at Wichita State University.

    The featured speaker was John A. Allison, chairman and former CEO of BB&T Corporation, the nation’s 10th largest financial-holding company. Its headquarters are in Winston-Salem, North Carolina.

    The primary cause of the recent financial crisis is our federal government’s policies and actions, Allison said.

    It’s not the fault of free markets, as some allege, because we don’t have a free market economy. We have a mixed economy, with some industries such as financial services being highly regulated by government.

    What was the cause of the real estate bubble? We built too many houses, many of larger size than we should have built, and we built them in the wrong places, he said.

    How did we make such a mistake? Allison said there are four causes or actors that contributed to the problem: the Federal Reserve Bank, the Federal Deposit Insurance Corporation (FDIC), housing policy as implemented by Freddie Mac and Fannie Mae, and the Securities and Exchange Commission (SEC).

    The action of these agencies turned a natural correction into a panic. Also, the policies government has taken since then may help us in the short term, but will almost certainly hurt us in the long run.

    The Federal Reserve’s errors include creating inducements to take risk based on false signals. The inverted yield curve that Fed Chairman Ben Bernanke created induced banks to take on more risk than they had been assuming. Also, “The huge level of federal debt we have today would not be practical if the government did not own the monetary system.”

    The Fed has sophisticated financial models to help it manage the economy, but these can’t integrate the economic activity of billions of humans. Illustrating this, Allison mentioned Frederich Hayek’s “fatal conceit,” where smart people believe they can do the impossible.

    The FDIC contributed to the problem by allowing start-up banks to offer high interest rates to depositors. With FDIC insurance, depositors don’t have any incentive to investigate the soundness of the banks in which they place their deposits. This has led to a lack of market discipline.

    Government housing policy has been a long-term problem. Spurred by the theory that home ownership for everyone is a good thing, in 1999, the Clinton administration announced that it would be the goal of Freddie Mac and Fannie Mae to have at least half their loans in so-called “affordable housing,” now called sub-prime mortgages.

    At the time, economists, including liberal economists, warned that this is risky, and that this course could take them down, and the U.S. economy with it within ten years. Nine years later it happened, Allison said, and the government was forced to bail out these two agencies.

    Politics played a role in this. Allison said he served on financial services roundtable committee for nine years. This committee warned Congress numerous times that it was certain that Freddie Mac and Fannie Mae would go broke. But Congress wouldn’t listen. Part of the reason was the political contributions to both Democrats (that party’s single largest contributor) and Republicans made by these two agencies.

    Fair value accounting regulations, particularly mark-to-market, led to inaccurate valuation of some assets when markets are thin (not many buyers). When banks were forced to mark down the values of assets more than what economic reality indicated, the loss of capital was multiplied, because banks are leveraged. This lead to larger losses in lending capacity that what was necessary.

    Banks with cash might be willing to assume the economic risk of purchasing some of these assets, but they couldn’t assume the accounting risk of future losses. This is an example of the distortions produced by our government-created accounting system, regulated by the SEC. Large and even small businesses don’t use this accounting system for their own management, because it’s not a good measure of value.

    The actions of Freddie Mac and Fannie Mae also led to the end of the “originate and hold” model for home mortgages, where banks and thrifts would make home loans, and then hold those loans as part of their portfolio of assets. Private institutions simply could not compete with these government-backed institutions.

    This led to the “broker model” or “originate and sell,” which had a terrible incentive. If you simply originate loans but don’t hold them and its risk, your incentive is to originate as many loans as possible, without regard to the riskiness of the loan.

    Summarizing the first part of Allison’s lecture: It is government policy that is largely responsible for the crisis. Free markets are commonly being blamed for the crisis, but this assessment is false. Our economy, as Allison has shown, is far removed from free and unregulated. Government intervenes everywhere.

    Allison presented a great deal of information in his talk, including some steps we should take to get out of this crisis and to prevent another. I’ll report on this soon.

  • Wichita downtown revitalization discussed on Kansas Week

    Bob Weeks discusses planning for downtown Wichita revitalization and what he learned on his trip to the Platinum Triangle in Anaheim, California. Host Tim Brown and guest Randy Brown also appear. From the KPTS Television show Kansas Week, August 14, 2009.

    The article referred to is Wichita’s getting ready to plan.

  • Wichita’s getting ready to plan

    As the City of Wichita develops a grand plan for downtown revitalization, can we have a process that is freedom-friendly and respects property rights? I went to Anaheim to find out.

    Leaders in Wichita — both private and public sector — believe that Wichita needs a plan for downtown. To support this, the city is seeking to develop a Downtown Revitalization Master Plan, a “a twenty-year vision for its thriving downtown.” Right away I want to ask: if downtown is thriving, why does it need revitalization?

    The document Wichita used to lure planning firms to apply for the planning job is full of ambitious and colorful language: “a community synergy that is contagious,” “casting a grand vision to realize our potential,” “the bold vision the community is seeking.”

    The danger we face is that Wichita’s plan will end up like almost all other urban plans — a top-down effort micromanaged by politicians and bureaucrats, people whose incentives are all wrong. We already have the structure in place, with our mayor promoting the plan for downtown as his signature achievement, and a tax-supported downtown development organization headed by a young and energetic planning professional.

    There is a different way to go about redevelopment, a way that respects freedom and property rights, while at the same time promising a better chance of success.

    Last month I visited Anaheim, California, to learn more about the Platinum Triangle. This is an area of low-rise warehouses and industry that the city thought would be a good place for redevelopment. (Anaheim’s old downtown was redeveloped starting in the 1970s, is fairly nondescript, and has not met expectations.)

    What Anaheim decided to do with the Platinum Triangle is to employ “freedom-friendly” principles in the district’s development. Or, as the subtitle to an article written by Anaheim Mayor Curt Pringle states, a “Foundation of Freedom Inspires Urban Growth.”

    Here are the important things that Anaheim has done that are out of the ordinary:

    No use of eminent domain to take property. The forceful taking of property by government for the purposes of giving it to someone else is one of the worst violations of property rights and liberty that we can imagine. But it’s a prime tool of redevelopment, one that the planning profession says is essential to their efforts to reshape cities.

    In Kansas, we have a relatively new eminent domain law that, on its face, should provide strong protection to property owners. It’s unknown whether this protection will be effective when a city such as Wichita asks the legislature to allow the use of eminent domain, which is what the law requires. If a city makes the case that the success of Wichita and thousands of jobs depend on the use of eminent domain, will legislators go along?

    Overlay zoning that respects existing land use. Instead of replacing existing zoning, the city added an “overlay zone.” This meant that while the land had new permissible uses and restrictions, existing rights were protected. It’s only if existing property owners wanted to pursue new development that they would have to conform to the new development standards contained in the overlay zoning.

    No public subsidies or incentives. In California, they’re called redevelopment districts. In Kansas, we call them tax increment financing or TIF districts. In either case, this mechanism allows property owners to, in effect, retain their own increased property taxes for the benefit of their developments, something that the average taxpayer — or real estate developer not working in a politically-favored area — can’t do.

    The City of Wichita views TIF districts as a powerful tool for development. The city has many existing TIF districts, and we can expect that others will be created to support downtown revitalization. While many people recognize and agree that the taking of land through eminent domain for economic development is bad, the taking of tax revenues through TIF is subtle. Most citizens don’t know this is happening.

    Anaheim did a few other things: it streamlined the permitting process, reduced parking regulation, developed a broad-based environment impact report, and relaxed requirements for balancing commercial and residential uses.

    It also used a “first-come, first served” housing permit allocation process. Instead of allocating housing permits to each parcel, permits were allocated to a much larger district. Developers could claim them through a competitive process and use them flexibly.

    What’s been the result in the Platinum Triangle? After the district was formed in 2004, development started at a fast pace. But the housing crisis in California has definitely put a damper on the pace of development. An illustration: In a loft project in the Platinum Triangle, condos originally priced at $400,000 are now offered at $250,000. It’s expected that as the housing crisis eases, developers will go ahead with their plans.

    The Platinum Triangle offers a distinctly different model for redevelopment than that practiced in most cities. A few other cities in California have noticed and are adopting Platinum Triangle-style, freedom-friendly, principles.

    The question we in Wichita now face is this: Will Wichita adopt a freedom-friendly approach to downtown revitalization?

  • The real right to medical care versus socialized medicine

    In 1994, George Reisman wrote a pamphlet explaining the problems with America’s health care system. He criticized the Clinton plan for reform, and offered an alternative based on freedom and markets rather than government interventionism. It is a brilliant work, and still relevant today: “I wrote this essay to help defeat the Clinton plan for socialized medicine. In all essentials it’s as valid today as it was then. It’s a demonstration that government intervention inspired by the philosophy of collectivism is the cause of America’s medical crisis and that a free market in medical care is the solution for the crisis. I urge everyone who wants to help defeat the essentially similar Obama scheme to read it.”

    You can read the pamphlet by clicking on The real right to medical care versus socialized medicine. It’s lengthy, at about 22,000 words. It takes a while to read. Part of what accounts for its length is Reisman’s explanation of every point he makes, which is very helpful.

    Reisman calls for more than simply defeating the Clinton plan, as we who oppose the Obama plan should be doing too. He calls for reform — radical reform — of America’s health care, and presents a plan.

    By way of introduction, Reisman writes

    … while the philosophy of Marx and Engels is dying, the philosophy of Locke and Jefferson, and Adam Smith, that is, the philosophy of individual freedom and capitalism underlying the American Revolution — the philosophy which, ironically enough, was the original meaning of the word liberalism — has been reborn. It has been reborn first and foremost at the hands of Ayn Rand in political philosophy and of Ludwig von Mises in economic theory, both of whom have enormously strengthened it. This philosophy of individual freedom, of the inviolability of individual rights, of the benevolent functioning of an economic system based on private ownership of the means of production and the profit motive — of capitalism — calls for a radically new political agenda. It calls for a political agenda that progressively rolls back the interference of the state and progressively enlarges the freedom of the individual. This is now what political philosophy and economic theory at their highest levels of development recognize to be the essential means of solving social and economic problems. Movement in this direction — in the direction of individual freedom from government interference — is henceforth to be regarded as the standard of what is to be considered progress in the realm of political action.

    It is on the basis of this newly resurgent, radically different political philosophy and economic theory — this philosophy and theory of individual rights and capitalism — that I explain the causes of the present crisis in medical care, criticize the Clinton plan, and present the appropriate solution and how to achieve it.

    The fundamental problem is this: “… the perverted notion of the need-based right to medical care — that is, an alleged right to medical care that entails a claim on other people’s wealth or labor, which must be met with or without their consent — is what underlies both the collectivization of medical costs and the concomitant loss of the individual’s personal financial responsibility. In this way, it is a perverted notion of the right to medical care that is fundamentally responsible for the rising cost of medical care.”

    Reisman goes on to explain, in detail, how the present system of purchasing health care leads to a variety of problems, such as “the potential for a limitless rise in the price of medical services” and “irrational medical malpractice awards and the practice of defensive medicine.” Most people seem to agree that these problems are present. He also explains how the present system is “perverting technological progress into a source of higher costs rather than lower costs,” how it is responsible for high drug prices, and how hospitals waste money buying costly equipment that is not needed.

    He also explains “bureaucratic interference with medicine and the rise in administrative costs,” characteristics of private health insurance companies that those who support government takeover rail against.

    Reisman then criticizes the details of the Clinton plan. These apply equally to the Obama plan.

    Then, Reisman proposes his solution. It’s not more government, which is what Obama offers. It’s less government and restoration of individual rights:

    The actual solution to the problem of runaway medical costs lies in the precise opposite of the direction chosen by the Clinton plan. It is not the final destruction of the individual’s rational right to medical care, which is what the Clinton plan would achieve, but the restoration and full implementation of that right — that is, the removal of all government interference that stands between buyers and sellers of medical care or in any way causes medical care to be more expensive than it otherwise would be.

    The best way to accomplish reform, Reisman writes, is: “The simplest, most obvious method of achieving a free market in medical care would be at one stroke to abolish all government intervention that violates a free market in medical care.”

    Recognizing that this is not likely to happen, Reisman proposes some steps to take.

    The first is a change in the tax laws that would have the effect of “[having] employees realize that they were responsible for the cost of their own medical care, even if the employer continued to pay insurance premiums on their behalf. This is because the individual employee would know that he could have his share of the money his employer paid on his behalf, in his own pocket if he wished.” In other words, dissolve many peoples’ notion that their health care is free (or very low cost) just because they get it as part of their job.

    Next, end the idea that Medicare is a free resource: “… unless they can demonstrate a lack of means, individuals covered by Medicare be required to pay a substantial deductible before their coverage under the program begins and then to make a continuing copayment of a significant percentage of all costs beyond some maximum limit. ”

    To increase the supply of health care, “it is certainly reasonable to ask that medical licensing laws be liberalized — nothing so extreme, mind you, as their outright abolition, but merely their significant liberalization.”

    To control hospital costs, a radical reduction in the regulation hospitals face is required.

  • Someone in California understands TIF

    In California, they’re called redevelopment districts. In Kansas, we call them tax increment financing or TIF districts. By either name, they provide a way to channel money to politically favored developers.

    The back-door way by which this is done benefits both parties: It hides what is really happening. A recent Los Angeles Times story held this:

    “If the state Legislature were asked to directly appropriate money for local shopping centers or any of the other endless private economic development that local officials like, they would never do it,” said former assemblyman and Sacramento mayor Phil Isenberg, who championed redevelopment reform when he was in the Legislature. “Because the current state subsidy is mostly hidden, it continues. … You have to ask if it is worth the expenditure of massive state funds to continue the process.”

  • Wichita’s economic development is expensive, risky

    Sunday’s Wichita Eagle carried an op-ed piece written by Doug Stanley, vice chairman of the Greater Wichita Economic Development Coalition. As we might expect, he calls for more government involvement and management of economic development.

    Stanley makes the point that economic development organizations like GWEDC have customers, going so far as to cite the saying “the customer is king.”

    The idea of a customer, however, implies willing and voluntary participants on both sides of the transaction. While the companies that receive benefits from the taxpayer are willing participants, the taxpayers are not.

    Reading Stanley’s op-ed, you might conclude that Wichita has no industrial sites available. Conversations will several local developers indicate that the opposite is true: there are many industrial sites — some complete with existing buildings — available for immediate occupancy. It may be true that we don’t have the 800 acre site that Sedgwick County wants in an industrial park, but we have many sites that even very large companies could use.

    And it’s a rare company that could use even a small fraction of 800 acres.

    Critics might say that these sites, owned by private interests, won’t be as responsive to the needs of companies making site selections. But who do you trust to be more proactive and responsive: entrepreneurs looking for survival and profit, or government bureaucrats like those working for GWEDC?

    The problem, of course, is that private entrepreneurs don’t have government largess funded by taxpayers to offer.

    That leads to something that Stanlely doesn’t mention: Chasing jobs through economic development is expensive. A 1996 PBS report stated “The strategy of offering cheap land, cheap labor, and sizeable tax breaks has worked well for the southern and southeastern states, but it is getting expensive. In 1980, landing a new Nissan plant cost Tennessee $11,000 per job created. In 1985, recruiting the Saturn Corporation cost the state $26,000 per job. In 1992, it cost South Carolina more than $68,000 per job to bring in a BMW plant, and the estimates range from $150,000 to $200,000 per job for the Mercedes Benz plant in Alabama.”

    This arms race among states needs to stop. Last year Cessna used the fact of an offer from other states to extract subsidy from Kansas, Sedgwick County, and the City of Wichita. But how else could political leaders in Kansas react? It would have been political suicide to let one of Kansas’ most famous companies escape.

    Not that Cessna was planning to leave Wichita altogether. Instead, the decision was where to build a plant to produce a new airplane model. Since last year, Cessna has scrapped plans for the new plane. To its credit, Cessna is returning or not using the subsidies. But this is an indication of the risk that government assumes when engaging in economic development.

    Government has a dismal record of picking winners and losers. Instead of making decisions based on economic factors, decisions are made for political reasons. Those reasons often have little to do with sound economic prospects and more to do with the next campaign for re-election.

    Action at the federal level is needed to stop this wasteful competition between states. Then, all states can disband their economic development organizations and let business be business.

  • Wichita Chamber of Commerce makes case for interventionism

    In a talk to the Wichita Pachyderm Club on Friday April 24, 2009, Bryan S. Derreberry, President and CEO of the Wichita Metro Chamber of Commerce, laid out the case for government management of our area’s economic and community development. The title of the talk was “The Basis for Economic Partner Selection and Collaborative Efforts.” The slide presentation is available at the end of this article.

    While the Chamber is, strictly speaking, not an arm of government, it receives a large amount of government funding. Additionally, many of the incentives that it offers to companies require governmental action and funding to implement.

    One of the things I learned — I had suspected this, but now it is confirmed — is that “economic and community development are now the same.” The Chamber views their mission as more than just economic development.

    Moreover, there’s a lot of competition in the economic development field. There are 361 MSA (metropolitan statistical areas) in the United States. There are 18,000 economic development organizations in the United States. All are looking to attract and retain business, just like the Wichita Chamber is.

    The prize being sought — the really large expansion or relocation — is relatively rare, as Derreberry said there are just 200 expansions or relocations that feature 500 or more employees each year.

    Some of the important tangible things companies are looking at, in order of decreasing importance, are highway access, low labor costs, low occupancy and construction costs, tax exemptions, availability of energy and its cost, availability of skilled labor, state and local incentives, fair corporate tax rates, low union profile, and available land and buildings.

    One of the slides Derreberrry presented dealt with the intangible factors that, if aren’t nailed down, “the competition will beat you every time.” These include:

    • Risk minimization for expanding or relocating employer
    • Cooperative, enthusiastic, positive, and sincere public and private leadership — sophisticated and wanting of the project
    • Consultative economic development experts
    • Solutions-oriented negotiations (“we’ll find a way”)
    • Tireless momentum that overcomes obstacles

    Other intangible qualities of a location include attributes such as vitality, earning, learning, social capital, cost of lifestyle, “after hours,” and “around town.” Many of these fall in to what our mayor and others refer to as amenities. It’s now the duty, it seems, of a city to plan for and provide entertainment for its citizens. Among the economic development planners, this is known as the “third place” beyond home and work: Are there other places I can go and feel good about the community I’m in?

    Two years ago Stephen Moore of the Wall Street Journal wrote an important article titled “Tax Chambers.” I’ve commented on it before in Tax Chambers of Commerce, Right Here in Kansas and The Decline of Local Chambers of Commerce. I used this article as the foundation for a question, which went something like this:

    “In February 2007, Stephen Moore wrote a column that appeared in the Wall Street Journal. In it he said ‘Thanks to an astonishing political transformation, many chambers of commerce on the state and local level have been abandoning these goals. They’re becoming, in effect, lobbyists for big government. … In as many as half the states, state taxpayer organizations, free market think tanks and small business leaders now complain bitterly that, on a wide range of issues, chambers of commerce deploy their financial resources and lobbying clout to expand the taxing, spending and regulatory authorities of government. This behavior, they note, erodes the very pro-growth climate necessary for businesses — at least those not connected at the hip with government — to prosper.’ Mr. Derreberry, the Wichita Chamber has supported tax increases, subsidies, centralized government planning, and what I call crony capitalism. Do you think this is valid criticism of this chamber?”

    He replied that the Chamber opposed a tax increase for education in 2002. The Chamber will support “responsible” taxes, he said. He recognized that a high tax and regulatory environment will inhibit the ability to grow communities. He didn’t address subsidy or centralized government planning, and he didn’t agree that this criticism applies to the Wichita Chamber. Something tells me he doesn’t get asked questions like this very often.

    Granting the incentives that the Wichita Chamber wants to offer is expensive. It requires government to pay subsidy directly to companies, or, as is often the case, grant companies relief from paying taxes. Sometimes a company is allowed to use its taxes for its own exclusive benefit, instead of funding the general operations of government.

    All these courses are costly.

    There’s also some question as to how important these subsidies are to companies. Last year, it was reported that North Carolina offered Cessna $200 million to build a new plant there. Between Kansas, Sedgwick County, and the City of Wichita, Cessna received an offer of $35 million, and decided to build the new plant here. To me, it looks like Cessna left $165 million on the table. Is building a new plant in Wichita worth that much? If they left $165 million on the table, would they have left, say, $185 million there too? The cynic in me says that Cessna never seriously considered building the plant outside Wichita, but they nonetheless wanted a reward for being a good corporate citizen.

    The planning that Mr. Derreberry talks about requires government expansion and interventionism on a grand scale. In a newspaper op-ed a few years ago, he mentioned the entrepreneurial spirit of Wichita. Government planning like the downtown revitalization effort underway in Wichita strangles entrepreneurship. So does the public-private partnership.

    Since there’s so much competition in economic development, and since Wichita doesn’t have picturesque mountains or seashore, why don’t we try something really different? We could make Wichita and Kansas a laboratory for economic freedom. That would be something quite unusual these days. There’s no telling to what level of prosperity we might advance.

    The problem is that this would require unilateral disarmament by Wichita in the escalating arms race between states and cities to see who can dish out the greatest incentives. It doesn’t seem likely to happen, especially given the short time frame of most politicians — the next election campaign.

    I spoke to one activist after the talk, and he was distressed at the call for government intervention that Mr. Derreberry called for. This reaction was in the minority, as many seemed appreciate of the Chamber’s efforts.

    Another person I talked to said the Chamber’s action reminded him of a quote from Adam Smith: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public.”

    Myself, I thought of a passage by Milton Friedman, which reads: “[The political system] tends to give undue political power to small groups that have highly concentrated interests; to give greater weight to obvious, direct and immediate effects of government action than to possibly more important but concealed, indirect and delayed effects; to set in motion a process that sacrifices the general interest to serve special interests rather than the other way around. There is, as it were, an invisible hand in politics that operates in precisely the opposite direction to Adam Smith’s invisible hand.”

    The basis for economic partner selection and collaborative efforts

  • Articles of Interest

    Kansas budget, wind power, alternative fuels gone wild, newspaper bailouts, journalism entrepreneurship

    House pushing big K-12 cuts (Topeka Capital-Journal) “The Republican-led House Appropriations Committee on Wednesday approved a budget-reduction plan that would trim $100 million in state aid to public schools in Kansas. The 3.3 percent reduction for the upcoming 2010 fiscal year would help balance the state budget.” With K-12 schools consuming about half of state general fund spending, it’s surprising that is all they’re asked to sacrifice.

    Wind farm to provide power to Greensburg homes, businesses (Wichita Eagle) A town destroyed by too much wind now seeks to benefit from wind. Actually, it’s milking the government subsidy that will benefit Greensburg: “And NativeEnergy Inc., a leader in climate solution services, will buy about two-thirds of the wind farm’s renewable energy credits over 20 years.” It’s unlikely this would be happening without taxpayer subsidy.

    Brownback backs Open Fuels Standards Act (Kansas Liberty, a subscription service) “Republican Sen. Sam Brownback today endorsed the introduction of legislation that would require 50 percent of new cars to have the capability to operate on gasoline, ethanol and methanol or diesel or biodiesel.” This is more of government trying to plan the future of the automobile industry, this time from someone who is considered a conservative.

    Kerry aims to rescue newspapers (Washington Times) “Troubled by the possible shuttering of his hometown paper, Sen. John Kerry reached out to the Boston Globe on Tuesday, then called for Senate hearings to address the woes of the nation’s print media.” Bailout fever continues to spread. If you think it’s bad for the federal government to run banks and automobile companies, just think how bad things will be when the press is beholden to people like Kerry for its survival.

    True/Slant Tests Another Model Of Web Journalism (Wall Street Journal) “This week, a new Web news site is entering the fray, with a novel approach to journalistic entrepreneurship, new forms of advertising, and an effort to blend journalism and social networking.” This site’s address is trueslant.com. If journalism is to survive — and let us hope it thrives — it will serve America best if it is through private initiative like this, rather than through Sen. John Kerry’s government bailouts.

    Alternative Fuel Folly (Kimberly A. Strassel in the Wall Street Journal) Describes how a paper company may reap a $1 billion annual windfall by simply continuing to do what it already does. It’s an example of how government policies often produce unintended effects.

  • Walter Williams on the housing crisis

    Economist Walter E. Williams explains the causes of the housing crisis. Then, why would we let these same people who caused the housing crisis take charge of health care? Short and worthwhile viewing.