Financial firms are shifting focus toward Washington, D.C. because of the government’s growing role in the finance industry:

Before the financial crisis, BlackRock’s chairman Laurence Fink would speak with federal officials at most a few times a month, for instance when they called him in New York for information about mortgage markets or pensions funds or other areas in which his company was active. But now, as the chief executive of the nation’s largest asset manager, Fink says he talks to officials at least once a day. He plans to open an office in Washington by next year to influence policy and has hired the lobbying powerhouse of Quinn Gillespie & Associates.

This is what happens when government decides to take a more affirmative role in regulating and organizing the economy: companies try to influence government policy more.

The reason is obvious. Since the federal government is now the biggest player in the financial industry, and has the power to “save” a company with government funds, block their compensation policies, or even regulate away their line of business altogether, companies have no choice but to try to influence government policy in their favor. It’s only logical, but nonetheless tragic.

This is what a greater government role in the economy does. It creates corruption. Rather than survive and succeed based on their market success, companies will now compete based on who they know in Washington. This isn’t capitalism. This is what strong government entails.

(Via Jeffrey Miron.)

Megan McArdle on rationing, or to be more accurate, government planning:

Mechanisms to distribute tin without prices have been tried, and found wanting.  So have mechanisms to distribute practically every other good you can think of, from housing to hotdogs.  Rent control distorts the housing market and discourages landlords from building or improving their housing stock.  Price controls on bread result in shortages, and often distort the non-controlled sectors of the market. Fuel subsidies result in your precious tax dollars being diverted to Columbian roadside vendors who will siphon the gas out of your tank at great danger to themselves and pay something closer to market rates for it.  Etc.

I mean, fine, let’s not call it rationing.  Let’s call it “Fred”.  You’ll still end up with a crappy, overcrowded housing stock and shortages of basic goods.  What philosophical principal [sic] favors this?

This is why I wrote the “rationing” article. We’ve already had the debate on whether markets or government boards are better at deciding prices and supply, both in economics departments and in the real world. From 1920 to 1980, that was basically the defining question. Government planning lost the debate.

Whether health care should be rationed has become an important part of the health care reform debate. Critics of the Democrats’ general plan have said that government shouldn’t ration health care.

The response from some has been some variation of this:

In truth, rationing is an inescapable part of economic life. It is the process of allocating scarce resources. Even in the United States, the richest society in human history, we are constantly rationing. We ration spots in good public high schools. We ration lakefront homes. We ration the best cuts of steak and wild-caught salmon.

The argument is that because the market allocates resources across society already, that it “rations” resources, that there is nothing wrong with government rationing access to health care or what treatments can be had.

But the two are not equivalent at all. When the “market” allocates something, it does so through an uncountable number of individual choices based upon each individual’s own unique knowledge, each made voluntarily and with no right to force someone to make a decision.

Let’s use computers as an example. There are consumers who demand them, there are companies which design and build them, and there are others which supply the raw materials necessary to construct them.¹ There is an incredible amount of information necessary to know what kind of computer is desired (notebook or desktop, how much processing power, what kind of keyboard, what size screen, what software,…), how many and at what price. Just think of the amount of information which goes into that calculation; not only what consumers are demanding, but also the expertise to know if it is possible to do at an affordable price, and what resources are necessary to do so.

So in the allocation of computers, there are many actors involved with an insurmountably-large amount of data involved, too. But here’s the hard part: each actor only knows a part of the entire data whole. The consumer knows what they want and how much they’ll pay, but they don’t know if it’s reasonable to expect it for the price they’ll pay; the company designing them knows what is possible and what isn’t, but not what the resources to build them will cost and whether there are sustainable supplies of them; and the resource-suppliers only know how much they have and what the resources cost. But each piece of the data whole is vital to creating the right kind of computer, building just enough for the people who demand them, and getting them to those people. Add into this the factor of time — that each of these variables changes daily — and the complexity is quite clear.

These actors signal their piece of knowledge to each other through the market. Consumers only buy computers they want; the companies designing them buy the resources they need to build the computers demanded by consumers; and resource-suppliers increase prices on certain resources when they become scarce. This is how the market allocates resources: it coordinates monumentally-complex distributions of knowledge and the actors that have it into a cohesive network which works quite efficiently.²

This is is important because it shows how something which seems rather simple — buying a computer — is a complex interaction of individuals which create it, and can’t be efficiently decided by government. That is, a government body has no chance at all of accurately deciding what computers people want, who should design and build them, and for what price, because no one actor can know every piece of data.

But more importantly, it shows that this is all voluntary. The consumer decides what they want (within limits of what is possible), the company designing it decides how they will meet that demand, and the resource-suppliers decide first whether they will supply them at all, and second for what price. No one is required through force to do something. It is a voluntary arrangement.

But that is not how government works, and this comes to why the argument that market allocation and government rationing are the same thing is false. Government has the unique power of force: it can force people to do what it pleases, or ban them from doing what it doesn’t want them to do. So when government rations health care, it is does so through what is and isn’t legal. If it doesn’t think a certain breast cancer drug, which extends the life of people with breast cancer by a few more years, is worth its cost, then it bans it; no one can access it. It’s illegal.

The market would certainly “ration” the drug — if it’s incredibly expensive, then only the people who can afford it, or afford an insurance plan which supports it, will have it. But at least that drug is still available. When government rations, it’s illegal; when the market does, you can still get it. It’s just difficult, due to its cost.

So this is a long way to say: simply because the current health care system, one of the most regulated industries in our country, is not optimal does not mean we should give government the right to decide what health services are and aren’t allowed. The government cannot efficiently “ration” care, because it is much too complex and changes too quickly for a single actor to understand fully, and because government rations by force, not by voluntary choice.

It means we should work to reduce costs and make the current health care system, one of the most regulated industries in our country, more open and free to the individual to make choices.

1. And this is a simplistic look at the actors involved: many parts in a computer are designed and built by other companies, which must source either other pre-constructed goods, or the raw material necessary to manufacture them. [↩]
2. “Efficiently” meaning that each actor’s desires are met, or closely approximated. [↩]

The Acumen Fund provides capital to for-profit companies whose goal is to help solve poverty:

We believe that pioneering entrepreneurs will ultimately find the solutions to poverty. The entrepreneurs Acumen Fund supports are focused on offering critical services – water, health, housing, and energy – at affordable prices to people earning less than four dollars a day.

The key is patient capital. We use philanthropic capital to make disciplined investments – loans or equity, not grants – that yield both financial and social returns. Any financial returns we receive are recycled into new investments.

I find this absolutely fascinating. I wrote about exactly this kind of company when I first began writing TightWind.

It is a difficult proposition, both for Acumen and for the companies they provide funds to, because their target market does not have much funds. But unlike the developed world, their market has something incredible — a vast amount of untapped potential.

I am glad that they are not afraid to be a for-profit company, and to support for-profit companies. Non-profits certainly have their place, but for-profit firms are self-sustaining and, more important, build reserves of capital that can be invested in other areas to further develop their market.

Martin Feldstein on the cost of cap-and-trade:

The Congressional Budget Office recently estimated that the resulting increases in consumer prices needed to achieve a 15 percent CO2 reduction — slightly less than the Waxman-Markey target — would raise the cost of living of a typical household by $1,600 a year.

Henry Blodget:

Thanks to our stupidity bailouts, we now own major stakes in these firms–at mind-boggling expense. So it’s not clear why we want to destroy them. But that’s what we seem determined to do.

Believe it or not, hidden inside these companies are thousands of decent, competent people whose households bring in more than $250,000 a year. Many of these folks had NOTHING to do with the gambling addiction that bankrupted their firms. Many of them still have a choice where to work. And now that they’ve learned that their family’s pay will be capped at $250,000 indefinitely, many of them will quickly decide that now is a good time to pursue their careers elsewhere. (That is, unless their firm takes the easy and obvious step of just paying them a fatter salary, which just renders the whole thing a farce.)

…

The real lesson here, unfortunately, is that it’s a disaster for the government to run private companies.  We used to understand that.  But ever since we started telling ourselves that we had to save bankrupt institutions by taking them over and pretending not to ‘nationalize’ them, we have apparently forgotten.

David Moffett, the man hired to run Freddie Mac after it was placed in conservatorship in 2008, already quit because of the politicization of his job. But no one cared.

Let me be clear: this is not about “getting back” at the people who supposedly caused the financial crisis.¹ Nationalizing A.I.G. and providing aid to other firms is, at its best, a means of saving firms which were thought to be integral to the financial system. This is about saving these firms to save the system.

I did not support “saving” A.I.G. and other firms for precisely this reason: when government becomes involved in the economy, it inevitably politicizes it and fucks it up. I cannot get more blunt than that. This is what is happening now. President Obama and Congress (both Democrats and Republicans) were embarrassed by the bonuses paid by A.I.G., and so they are creating a magnificently-stupid tax to save themselves from people’s anger. They are not doing this for the country. They are doing it to save their political careers.

This is what happens when governments create messes: they try to shift blame to others. They create scapegoats. This isn’t a joke, this isn’t a game, and this isn’t justice. These are the first steps of the destruction of our economy.

(Via Marginal Revolution.)

1. And let me be even more clear: Although A.I.G. and other firms deserve blame for the crisis, if you want to blame someone, the federal government is your prime candidate. [↩]

Despite the financial crisis, caused in part by the Federal government’s requiring Fannie Mae and Freddie Mac to support subprime mortgages, the Federal government has learned nothing:

Most important, by taking over the companies, lawmakers have gained a lever over the housing market and national economy that many — particularly Democrats — are loath to discard, legislators say.
…
Moreover, the takeover has provided legislators with a long-sought ability to influence the mortgage marketplace directly and pursue social goals like low-income housing.

Absolutely insane, but these are the times we live in. This is the economic and political equivalent of touching a hot stove, and rather than learning not to touch hot things, embracing it like a long-lost lover.

Tyler Cowen explains why nationalization of Citigroup and other banks and bank-holding companies may not be such a good idea.

Robert Barro on the multiplier effect:

A much more plausible starting point is a multiplier of zero. In this case, the GDP is given, and a rise in government purchases requires an equal fall in the total of other parts of GDP — consumption, investment and net exports. In other words, the social cost of one unit of additional government purchases is one.

This approach is the one usually applied to cost-benefit analyses of public projects. In particular, the value of the project (counting, say, the whole flow of future benefits from a bridge or a road) has to justify the social cost. I think this perspective, not the supposed macroeconomic benefits from fiscal stimulus, is the right one to apply to the many new and expanded government programs that we are likely to see this year and next.

Not only is that a more reasonable and rational standard to apply to government projects than the assumption many are making — that the multiplier is more than one (up to 1.5 times), which justifies nearly any government spending as “stimulus” and thus as reasoning for passing any spending desired — but Barro estimates past multipliers to be much less than 1. At its height during World War 2, he estimates it to be .8x; during peace time, he estimates it to be “insignificantly” different than zero.

If we use a multiplier of zero standard, which we should because it insures the value created by spending overcomes its social costs, then many parts of the bill passed Friday would be unjustified.

From Time Magazine:

Traumatized by layoffs that have cost more than 1.2 million jobs during the slump, U.S. consumers have fallen into their deepest funk in years. ‘Never in my adult life have I heard more deep- seated feelings of concern,’ says Howard Allen, retired chairman of Southern California Edison. ‘Many, many business leaders share this lack of confidence and recognize that we are in real economic trouble.’ Says University of Michigan economist Paul McCracken: ‘This is more than just a recession in the conventional sense. What has happened has put the fear of God into people.’

In one of history’s most painful paradoxes, U.S. consumers seem suddenly disillusioned with the American Dream of rising prosperity even as capitalism and democracy have consigned the Soviet Union to history’s trash heap. ‘I’m worried if my kids can earn a decent living and buy a house,’ says Tony Lentini, vice president of public affairs for Mitchell Energy in Houston. ‘I wonder if this will be the first generation that didn’t do better than their parents. There’s a genuine feeling that the country has gotten way off track, and neither political party has any answers. Americans don’t see any solutions.’

The deeper tremors emanate from the kind of change that occurs only once every few decades. America is going through a historic transition from the heedless borrow-and-spend society of the 1980s to one that stresses savings and investment. In the short run, this helped trigger the cyclical recession, which is likely to run its course in the next few months. But when it’s over, America will not simply go back to business as usual.

From Time, in 1992, that is. Sound familiar?

Just saying.

(Via Marginal Revolution, which has been smartly comparing this recession to past ones.)