“Why Americans Hate Economics”

The WSJ runs an article criticizing the recent inane economic views espoused by the White House regarding unemployment insurance.

The author was incited by Laura Meckler’s question to White House Press Secretary Jay Carney regarding unemployment insurance. The story has made the rounds. Meckler, reporting for the WSJ last week at the White House,

“dared to ask White House Press Secretary Jay Carney how increasing unemployment insurance “creates jobs.” She received this slap down: “I would expect a reporter from The Wall Street Journal would know this as part of the entrance exam just to get on the paper.”

In response, Moore writes that the administration’s failed policies, including the extension of these benefits and the $830B stimulus, prove the failure of Keynesian economics.

I don’t think that Moore goes far enough in his analysis of the unemployment benefit fallacy. If injection of cash in the form of unemployment payments creates jobs, why don’t we give every citizen, unemployed or not, such benefits?

Finally, the article begins with the confused statement that “too often economic theories defy common sense,” and ends with the confusion Americans have over Keynesian policies that simply don’t work as touted. While I agree with the condemnation of government-induced demand, I don’t understand why the economic theories behind this condemnation defy common sense. Perhaps what Moore means to say is that politicians touting bad economic policies defy common sense, but that really isn’t as interesting.

 

Posted in Economics, Government Failure | 2 Comments

Fannie Mae’s Q2 Results: $5.17 billion loss, or $14.40 per American citizen

Fannie’s Q2 8k is available here, with a loss of $5.175 billion for the second quarter.

Because the US Treasury holds senior preferred stock in FNMA, they are eligible to receive dividend payments. In the second quarter, these payments amounted to $2.3 billion. In all, Fannie is requesting that the Treasury transfer $5.1 billion of funds under the terms of the senior preferred stock purchase agreement in order to eliminate the company’s net worth deficit. $2.893 billion of this loss is attributable to Fannie itself, while the remainder of the $5.1 billion total consists of the preferred stock dividend already paid to taxpayers.

They were certainly busy over the last three months! However, as the graph included in the financials shows, the Treasury, and thus taxpayers, has contributed $105 Billion in total to Fannie since it entered conservatorship:

Fannie’s portfolio posted a $3.9 billion credit loss in the second quarter of 2011, compared with $5.7 billion in Q1. However, the notes to the financial statements indicate that this improvement was not necessarily indicative of an improvement in asset quality. Instead, the report notes that the “decline in credit losses was primarily due to an increase in amounts received related to outstanding repurchase requests.”

These repurchase requests are the bane of the mortgage industry; they occur when Fannie contacts an institutional investor with a demand that the institution write a check for defaulted loans sold to Fannie in previous years. These cases go back to 2004-2005 vintages, or more, and might involve a claim that the underlying value of homes in the pool was misstated, for example. However, Fannie typically settles cases for cents on the dollar.

 

Posted in Federal Debt, Freddie / Fannie | Leave a comment

Bankrupt Central Falls, RI, a “City with a Bright Future”

Bloomburg summarizes the bankruptcy filing of Central Falls, Rhode Island following the the failure of local law enforcement, firefighters, and city retirees to accept retirement benefit concessions. It marks the fifth such municipal bankruptcy this year.

The city’s website still maintains that Central Falls is a “City with a Bright Future,” available here if you can believe it. Just after the heading is a welcome to the city’s bankruptcy receiver. Demographically, the city is home to some of the poorest residents of Rhode Island and has a median income of $22,628 according to the receiver’s report.

The city is termed “distressed” by the state because of has one of the highest property tax burdens relative to the wealth of its taxpayers. This tax burden is eye popping: after a 2009 residential property reevaluation, property values were found to have declined by 44% from their previous valuation date, 2006. Because the reevaluation is required to be revenue neutral, the residential tax rate in the city increased from $10.78 per $1,000 of assessed value to $19.22 of assessed value, a 78% increase.

The receiver’s report, which is available in PDF format here, notes that a “culture of government [. . .] has allowed this fiscal crisis to occur without adjusting revenues or expenses or engaging the community in a dialogue about the financial and other challenges the City faces.” The city’s unfunded liability for its pension and retiree health benefits plan amounts to $80 million. The receiver notes that the city could fund this liability if it does not fund any other service of program, including debt service, for five years.

In all, the report is a sobering reminder of the crisis faced by our municipalities. In his conclusion, the receiver notes that the system of government in Central Falls “insulates its elected officials from public accountability and diminishes citizen involvement.” The drastic cuts to the city’s pension plans will now be made more severe by legal wrangling in the courts and the appointment of a necessary, but expensive, receivership.

More from Walter Olson at Cato: http://www.cato-at-liberty.org/as-central-falls-falls/

Posted in Government Failure, Municipal Debt, Unfunded liabiltiies | Leave a comment

News Breaks: Apples are in fact not Oranges

The BBC runs an article noting that the US Treasury, as of July 27, 2011, possesses less cash than Apple. The Treasury’s financial statement ended that date is available on their website, with an ending cash total of $73,768M.

The federal government and Apple computer do not make for a very interesting comparison. Apple is a publicly traded corporation whose management seeks to maximize profit, while the United States is a democratic republic.

Apple engages in profitable business lines, eliminating them if they prove not to be. Our national highway system is not itself profitable. It requires a massive, ongoing capital investment, yet served as an important factor in post-World War II growth in the United States. The (forced) taxable contributions that fueled and continue to support this network are important may be abhorrent to some, but their collection by a state overcomes the significant barriers to entry a national highway system entails for the private sector. A private highway system would incur addition transaction costs, such as a potentially inconvenient array of  toll collections for one, than a federally-funded system. Indeed, all roads may lead to Wal-Mart under a private system; a state-run and taxpayer financed system balances coercive revenue collection with correcting an (arguable) area of market failure.

In short, the federal government’s purpose is not profit maximization. Though there are many systemic problems with our system which make for fodder for this website, the Treasury’s comparison to a corporation is not very interesting.

Posted in Accounting Standards, Federal Debt, Government Failure | 1 Comment

USPS Retail Closings Usher in New Opportunity for Private Sector

The USPS’ unsustainable performance has created a new opportunity for the private sector. Following the announced shuttering of over 3600 retail postal office locations throughout the United States, businesses are looking into filling the need for smaller-scale access to postal services as reported in the Wall Street Journal today.

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