No Sweat Economics

Fannie Mae and Freddie Mac lost mega-billions guaranteeing bad mortgages.  I’m guessing most people reading this are aware that US taxpayers spent a bundle bailing out the two agencies.  That would seem to put you ahead of congressmen Barney Frank and Anthony Weiner.

With no trace of irony, these two are calling on Fannie and Freddie to relax new, tougher lending standards.  Previously the agencies would guarantee mortgages on condos in new buildings where at least 51% of units were sold.  In March Fannie raised the minimum to 70%, and Freddie is set to follow suit in July.

In a letter to Fannie’s and Freddie’s CEOs, the two professional politicians argue that the tougher standards will keep buyers away from new developments.  The mortgage giants did not comment immediately, but safe to say they didn’t adopt this new rule arbitrarily.  They see a building with heavy vacancies as having unacceptable risk.  Considering it’s my money at risk, I applaud them.  I just wish they took more actions like this over the past 30 years.

Global stock markets have turned south this week following their spectacular recovery from the March lows.  Analysts blame the World Bank’s pessimistic read on economic activity for putting a damper on things.  Yesterday the body revised its estimate for this year’s global GDP contraction from 1.7% to 2.9%.  That’s quite a difference.  But was the earlier estimate reasonable?  And is the new one?

Most of the recent optimism about a global recovery centers on developing countries, particularly China.  Exports to the west and Japan are crucial to the world’s second largest economy.  Optimists hope China will make up for weakness in exports by expanding their domestic markets.

China has been the most exciting investment story of the last decade due to its spectacular growth and giant population.  So it’s easy to lose sight of the fact that China is still a relatively poor country. According to Xinhua News, the official news agency, per capita income of urban Chinese was the equivalent of less than $4300 per year in 2008.  Other sources put the figure closer to $2300.  Rural residents likely took in less than a third of that.  China became the world’s second largest economy not via wealth, but by the sheer size of its population.  Most Chinese still can’t afford many of the goodies the nation exports to the rest of the world.  So dramatically expanding domestic markets in the short term seems a tall order.

Many economies have fallen off a cliff:  year over year plunges in industrial production of 20% or more have been commonplace worldwide.  Countries have dramatically cut their imports due to lack of demand.  As the most prominent exporter, China must be absorbing a lot of the pain.  The government did produce a stimulus package to encourage consumer spending earlier this year.  But as we’ve already seen, it’s hard to imagine China’s domestic demand rising enough to compensate for the slowing exports.

Official numbers show China’s economy hasn’t emerged the global meltdown unscathed, as 1^st quarter GDP growth came in at a 6.1%.  Although most countries would kill for this growth, it’s a considerable slowdown for the People’s Republic.  But China exercises heavy control over the dissemination of information.  Why on earth should we take their economic reports at face value?  Anecdotal evidence shows those who do business in China certainly don’t.

According to the Zero Hedge blog, Societe Generale strategist Albert Edwards thinks China may prove to be a huge disappointment to economists and investors.  Others have noted China’s energy use is down more than 3% over the past year.  This and other data (including a 30% drop in corporate profits) paint the 6.1% growth figure as extremely dubious (I’d argue darn near impossible, as electricity and business activity are heavily correlated).  Note:  Edwards is the guy who invited much derision by exposing the 1997 Asian asset and currency bubble.

I agree with Soc Gen’s prognosis that stock markets are in for a rough ride later in the year when the Chinese growth story begins to unravel.  If politicians worldwide are expecting China to bail them out, they will be bitterly disappointed.  Get your own house in order, and don’t look for a helping hand from Beijing.  Alas, I doubt many will take this advice.

Today the Commerce Department reported the 1st quarter Current Account deficit (aka Trade Deficit) plunged by 34.5% from the previous quarter.  It’s the lowest level since 2001, which happens to be the last time the nation was in recession.

See the core article “When Bad News Is Good: Exploring the Trade Deficit Myth” for an explantion of why we shouldn’t worry about the trade “deficit.”  It’s not a deficit at all, and is nearly always larger when the economy is strong.  On the other hand, maybe the US can swing to “surplus” if the economy tanks further.  Given the choice, I’d prefer a huge trade “deficit” with a vibrant economy any time.

Here we go again.  Crude oil futures are rising after their 2008 price collapse.  In the search for a politically incorrect bogeyman, pundits are pointing at those evil speculators.

Few of these pundits know the first thing about trading a physical commodity like crude oil.  If they did, they’d understand that speculators can’t manipulate the price of oil for an extended period without leaving obvious fingerprints in the form of expanded inventories.  For an explanation, see this piece I wrote last year “Defending the Rogues: Why Speculators Aren’t to Blame for High Oil Prices.”

Or we can all just blame “speculators.”  After all, they’re evil rich guys looking to profit off the misfortunes of others.

I was just inspired by John Stossel’s piece “Competition Would Save Medicine, Too.” The debate over healthcare reform throws around terms like single payer and HMOs.  We can avoid socialized medicine with managed care.  But these solutions ignore a basic economic reality that dooms them to poor performance:  the people benefiting from the service are not paying for it directly.  Let’s touch on some motivations that drive all of us:

When I spend my money on myself, I care about price and quality.

When I spend my money on others, I care much more about price than quality.

When someone else spends his money on me, I care much more about quality than price.

When someone else spends her money on others, I don’t care too much about price or quality.

If I pay directly for my medical care, I want to ensure I get quality treatment at a reasonable price.  If my insurance company is picking up the tab, I still want quality treatment, but why should I care about the cost?  The company, on the other hand, is very concerned about the cost, but less interested in how well I’m treated.

I understand that certain medical treatments are beyond the cost of most people absent insurance.  But it’s the nature of medical insurance that needs fixing.  Insurance is supposed to protect us against large, unanticipated expenses.  Auto insurance helps you deal with the bill for an engine overhaul, but not the normal maintenance of oil changes.  Homeowners insurance will help you rebuild after a fire, but won’t repaint your kitchen if your kid takes a marker to the walls.  In the same way, health insurance should cover the expenses related to serious illness and injury.  It should not pay for every doctor visit and prescription related to your summer cold, or your child’s sore throat.

If our policies didn’t cover every little thing, their cost would plunge.  Then most of us could afford to insure against the really costly stuff.  What about the others?  Before the age of Medicare and managed care, many doctors volunteered to treat poor people, and were very flexible regarding payment for those of modest means.  (I hope to touch on the history of medicine pre-1965 in a future blog post).

So what’s the best answer right now?  In late 2003, the US government established the Health Savings Account (HSA) program.  To participate, you must buy a high-deductible insurance policy.  Accompanying the policy (which costs much less than most traditional policies), you fund your own savings account with tax deductible money each year.  It’s essentially a IRA that you can withdraw for medical expenses at any time without tax penalties.

Unlike earlier plans, the HSA is not “use it or lose it.”  You keep any money left over at the end of the year.  If you’re fairly healthy, your HSA can turn into a nice retirement fund.  Since you pay for most expenses with your own money, there’s an incentive to shop around for both doctors and pharmacies.  This competition should be beneficial down the road if more people utilize HSAs.

Whether we embrace socialized medicine or managed care, we ignore the basic human motivations that prevent us from getting what we need at an affordable price.  As Stossel says, competition provides us with the food and cars that we want and need.  There’s no reason it can’t give us medical care as well.

Most of the recent talk concerning the US auto industry centers around bankrupt General Motors and Chrysler, now owned by the US government and their proxy, the United Auto Workers union.

When GM and Chrysler chose to take taxpayer bailout funds last fall, they bought more time for business as usual.  They avoided making the tough restructuring decisions necessary for their survival.  No politician would want to see these companies fold months after wasting billions of dollars of taxpayer money.  Once the initial bailout was approved, the companies understood the government would eventually guide them through the restructuring process, whether inside or outside of bankruptcy.  But what’s going on at Ford, Detroit’s perennial number 2?

While the media focuses on the failures, there’s a phoenix gradually emerging from Detroit’s ashes.  Quietly, Ford Motor is outperforming domestic and foreign rivals, both in the showroom and the stock market.  The company became number one in US vehicle sales in May, easily besting Toyota.  And amid a severe global contraction and stock market slide, Ford shares have been flat over the past year.  Even their healthy Japanese rivals have slid in price.

Many analysts worry that Ford will face tremendous competitive disadvantages to GM and Chrysler.  After all, those two have shed most of their debt through bankruptcy.  But they are also beholden to their government and union masters.  Denials to the contrary, the government and the UAW will exert significant influence over GM and Chrysler’s strategic and operating decisions.  Which company do you believe is most likely to build cars people want?  Which company is most likely to attract investor capital?  A recent poll suggested many Americans would refuse to buy a car from a government-ruled company.

The only government-controlled entities that prove wise investments are monopolies.  GM and Chrysler must divest themselves of government influence quickly if they are to avoid becoming permanent wards of the state (think Amtrak).  Ford is certainly not out of the woods.  But turning down bailout bucks has earned them tremendous goodwill among potential customers.  And they can execute their business plans without pressure from Washington, DC.

Interesting analysis from former presidential economic advisor Keith Hennessey on his blog.  Little of the “stimulus” money will be spent this year.  The purpose of stimulus is to inject money into the economy quickly, not years down the road.  This law was more about growing government.

With a tip of the cap to Dr. Thomas Sowell, here goes:

• Social Security is an actuarially unsound investment fund that pays off early entrants using money raised from later investors. This is different from a Ponzi scheme because ____________. Please submit answers in 500 words or less. I will reward the most creative entrant with an honorary PhD in Financial Gymnastics.
• Gambling is illegal and immoral…unless the government plays bookie, or at least gets a cut of the take.
• It drives me crazy that the most parasitic people in our society-politicians-have the nerve to call themselves “public servants.” Grrrrr!!!
• If I was in financial trouble and began borrowing and spending like crazy, you’d say I was irresponsible. Why is it any different for the US government?
• The highest tax states, like California and New York, always seem to have the most serious financial problems. When will taxpayers understand the connection? What will it take for said taxpayers to demand fiscal sanity from elected officials?
• If Canada’s healthcare system is so great, why do we never hear about Americans going north for treatment? There are many stories about Canadians going south and paying for care that’s “free” at home.
• In the “Internet Era,” why are so many Americans clueless to the disaster that is socialized medicine? Horror stories from around the world are a few mouse clicks away. Canada’s provincial governments even put their obscene waiting list times on line!
• One definition of insanity is doing the same thing repeatedly, but expecting different results. Can we have all of Washington, DC committed and start over?
• What’s the main difference between the daily number and the mob’s old numbers racket? “Criminals” paid better odds to winners.
• The US government forced banks to “borrow” TARP money, and now refuses to take it back. Will someone let me know when this program expands to consumer auto loans?
• Contrary to popular belief, Robin Hood did not rob from the rich and give to the poor; he retrieved what the government had stolen.
• Why do more people seem annoyed by ATM fees than by taxes? You can usually avoid paying the buck or two anyway by sticking to your own bank’s machines.
• Our economy’s problems are not a result of “greed,” a word most people couldn’t define without stammering. Greed has always existed, and always will. If our society’s success depended on eliminating greed, we’d be doomed.
• There are three types of freedom: economic (capitalism), social (civil liberties), and political (the right to vote). If your government protects the first two, the third only gets in the way.
• The US government now owns 60% of General Motors. Is anyone outside of Washington, DC confident politicians and bureaucrats are capable of running a car company…or willing to keep their word and stay out of the way while professionals run it?
• “I’m from the government; I’m here to help you” used to be the punch line of a joke. It seems that today many people take the line seriously.
• It’s hard to end victimless crime with laws. If you want to change someone’s morality, convince them, don’t force them.
• Does it bother anyone that the US has been minting “czars” to tackle various problems the past 15 years or so? I guess it could be worse: we could call them “commissars.”

A Russian laments America’s “descent into Marxism.” Sadly, he makes some excellent points.