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Saturday  January 2, 2010


Today's Zinger:

I Hate When Facts Get In The Way Of My Feelings


The Morning Briefing:


Providing payments to the unemployed to help them through a economic downturn.  Providing mortgage assistance to people that may lose their homes because they can no longer afford to pay their mortgage payments.  Who would possibly say that we should not do this, especially since the United States is going through one of the worst economic downturns in the past 70 years?

Politicians use legislation, such as unemployment and mortgage support, as weapons of political fighting.  Some see it as a war for the middle class.  These programs sound like a good idea, yet some in politics vote against these bills.  Is it that they don’t care about American’s? Is it they only care about corporations and profits? Or is it that there is another view that may sound heartless but is actually better for the overall health of the economy?

Today’s New York Times published an article that deals with one of these issues, the $75 billion dollar mortgage program that went into effect earlier this year.  Long touted as a support for Main Street, now economists are looking at it as a problem for the economy.

Zinger looks at “political legislation”.  These are bills that, on the surface, sound good to help the average person, but in reality, end up doing more damage than good.  Politicians have long used middle class rhetoric to win votes, but many of these bills are middle class traps.

The Discussion:

Rent Control:  When landlords raise rents to a point that the lower income tenants can no longer afford to pay, many advocate controlling how quickly rent can increase.  Sounds like a good idea, however it leads to lower quality and fewer houses for the lower income.

Price Controls:  When costs begin to escalate many advocate place controls to how quickly prices can increase.  Logically, if everyone agrees to stop raising prices, no one should have to raise prices because of inflation.  In reality this results in runaway inflation once price controls are eased or deregulated, as Richard Nixon found out when he tried to do it.

Salary caps:  When wall street pays so much for certain people, why many other people are payed so little or unemployed, many politicians try to cap salaries.  What this leads to is a flight of talent.  The well paid, and highly valuable employees, leave these companies and end up placing all jobs in these companies, as well as shareholders, at greater risk of loss.

Mortgage programs:  As the New York Times showed in today’s paper, what might sound like a good idea, in reality causes more economic damage by delaying the inevitable.  It drives down the value of more homes and does not really save homeowners from having to find less expensive housing.  Here is a link to the article:    NY Times article on Mortgage Program.

Health Insurance reform:  Providing health insurance to all Americans without first restructuring the delivery system for health care of attacking the costs of health care will result in much higher costs and longer lead times to access health care and ultimately will not cover all Americans as planned.  But who can say no to politicians that have staked their careers on health care legislation and say that they are providing health care to the less fortunate?

Providing Unemployment Insurance:  Congress recently authorized the third round of unemployment insurance.  No one can argue that there are times that people need help when unemployed, however economists know if you want to know how long unemployment will last, look at when the unemployment insurance runs out.  Many people use unemployment payments as a hold over to find the “right job”.  But in most down economies the right job may no longer be available or they must find a job that pays less.  Unemployment insurance payments delays the inevitable.

Providing jobs through government programs:  FDR brought jobs to America, or should I say created jobs, through his “New Deal” program.  The program is often hailed as a positive force that shed America of the Great Depression.  Economists are now looking at the policies of the New Deal and many say it was responsible for prolonging the Great Depression and keeping unemployment around 20% for a full decade.  Others argue that it would have taken far greater stimulus to get America out of the Depression.  Either way, the New Deal was not the stimulus that ended the Great Depression, World War II was.

These are just a few of the political programs that sound like a good idea.  They certainly sound like programs that would help Main Street.  They have often been used as a way to stir voters against Wall Street.  Many politicians see these programs as a sign that they are “looking out for you."
But these programs go against what we know about economics and markets.  When politicians try to legislate an economic reality it leads to greater problems.  Much has been written about public policy and economic realities.  Zinger recommends two books that dispel some commonly held beliefs about economics and political programs.

The First, Economic Facts and Fallacies by Thomas Sowell.  Dr. Sowell takes on economic situations such as price support, transportation projects, housing, etc. 

The other book is New Deal or Raw Deal  by Burton Folsom Jr. which looks at the policies of the Roosevelt Administration and how they damaged America.

The Conclusion:

Many of our politicians lack a good understanding of economic principles.  Some use the power of emotion over the realities of economics to gain votes and political advantage.  The vast majority of America will respond to the line “I care about Main Street and not Wall Street”.  But if these people care so much about the average American, they should make the tough decisions to heal the economy quickly and not prolong the situation to win votes. These government programs sustain a bad situation rather than allow the markets to react to changing situations.

America, we have entered a new era of a global economy.  We cannot hide within our borders.  We cannot legislate control of the market and wages.  We have to come to grips with the realities of changing resources, worldwide competition and labor sources around the world.  Trying to hold on to what we have will only make the situation worse.  It is time to innovate, reeducate and find new ways to compete and be effective.

That’s my view, I would like to hear from you.



Who Said It?


“Never Underestimate the Difficulty Of Changing False Beliefs by Facts"

Henry Rosovsky
Professor of Economics
Harvard University

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