Tuesday, November 11, 2008

Supply and Demand

Take a look on craigslist at the Northern Virginia and DC area housing section. You'll notice that many people have put up their house or apartment for a few nights around the inauguration. No central planner told them to rent out their home for a day or two. Regular people saw an opportunity for profit from the increased demand that hotels could not satisfy. The markets work like this everyday for almost anything you buy. If we outlawed "price gouging" this new supply of rooms would not be available, and a visiting family might decide to buy two rooms instead of one. Supply and demand at work. Laws against "price gouging" would not change how visitors to the inauguration value a room near DC. However, such a law would block the signal, and the price of a room would bear little relation to how people value it. With no restrictions on pricing, the supply increases, more people get what they want, and those that place a high value on a room can get one. Prices serve as signals every single day, and if policy blocks those signals there are clear repercussions. So, when you want the government to set prices for something, think about this example of a market at work.

Thursday, November 06, 2008

Limited Government

One of the most essential features of the Constitution is that it sharply limits the power of the Federal government. It is clear from the Constitution and the contemporary writings of the Founders that a Congress with plenary powers was not intended.

Government has moved from an independent body to prevent rights from being violated toward anything a majority says it is. While the Constitution has some room for interpretation, the wild interpretations of the Commerce Clause seem a bit much. The Interstate Commerce Clause allows the federal government to regulate commerce between the several states. The justifications given for many regulations follow from the Commerce Clause. The powers of the federal government as traditionally understood to regulate interstate commerce centered around prevention of states erecting trade barriers with other states. A second interpretation says that the federal government can place regulations on interstate commerce. A railroad that travels between several states or goods that are transported across state lines could be regulated. Up until the 1930s, these interpretations were the rule.

It gets complicated when the federal government tries to regulate things that are not interstate commerce at all. With the National Labor Relations Board v. Jones & Laughlin Steel Corporation decision the power of the federal government under the commerce clause greatly increased. After several decisions in the late 1930s and early 1940s, the commerce clause could be interpreted for almost any regulation desired.

Some recent decisions of the 1990s and early 2000s give reason for hope. United States v. Lopez (1995) challenged the Gun Free Schools Act of 1990. Lopez's defense said that the federal government did not have a right to regulate firearms in school zones. Therefore, the law was unconstitutional. The Court held "A law prohibiting guns near schools is a criminal statute that does not relate to commerce or any sort of economic activity." This case was the first one since the Great Depression to limit the power of Congress under the Commerce Clause.

If you think that the Commerce Clause can be interpreted to mean all things to all people then why was it even included. If you want to have the federal government step beyond its Constitutional limitations then amend the Constitution. Otherwise, we should just shred it as another meaningless document.

Wednesday, November 05, 2008

The Truth About Regulation and the Financial Crisis

I was trying to start an argument about the financial crisis. A person I know on the far left blamed deregulation. She has next to no knowledge of financial markets, and she is simply wrong on the record of deregulation under Bush. Without evidence she assumes two things:
  1. Substantial deregulation of financial markets took place under Bush
  2. This deregulation in large part caused the current financial crisis
I recently found a prescient article from the Wall Street Journal dated November 11, 2003.

Mr. Mankiw did taxpayers a service by wading into the debate over how to monitor these companies that have become repositories of enormous financial risk. Fannie in particular has marshaled its political troops to stop a bill in Congress that would transfer its regulation to the Treasury Department from a feckless unit of HUD. Fannie prefers feckless.

Specifically, "the subsidy creates a source of systemic risk for our financial system." This is because "the subsidy has allowed" the companies "to become gigantic," with their debt more than tripling to $2.2 trillion from 1995 to 2002."

Oh, but it gets better. "But especially notable is the support for Fannie and Freddie from liberals who normally detest corporate welfare. In this case, Congressman Barney Frank criticized Mr. Mankiw because he is worried about the tiny little matter of safety and soundness rather than "concern about housing."

Link to the article

For a problem as complicated as the financial crisis, it is not likely to be the only major cause. Looking at the evidence we see evidence that regulation was actually increased on Wall Street. The deregulation that did happen in the recent past probably prevented even worse consequences. One, Sarbanes-Oxley substantially increased the regulatory burden on companies. Under SarbOx, companies must mark certain assets to market. Even performing assets have been marked down substantially by banks. Since many of these assets are illiquid and difficult to value, they are often marked to a model rather than an actual market price(since a market price does not exist). Two, a substantial deregulation, the Gramm-Leech-Bliley Financial Services Modernization Act, enacted in 1999 under Clinton probably helped prevent an even worse disaster. This act repealed substantial parts of Glass-Steagall, and it allowed commercial banks and investment banks to combine. The universal banks have fared better in the recent crisis. I have a few more comments and links on another post.


I don't expect everyone to be an expert on regulation of financial markets. I certainly am not one myself. However, I do expect someone to actually have some facts about a situation before they argue a position. Remember, "Everyone is entitled to his own opinion, but not to his own fact"

I will continue to research this issue, and keep my readers updated.

Health Care Coverage

The spectrum of health care systems

No government involvement in health care - All hospitals are privately owned and all health insurance is privately underwritten. In the most extreme case, doctors and hospitals would not be licensed by a government agency. Treatments and pharmaceuticals would be unregulated by the government. The only regulations that would apply to health care would be laws that apply to all other industries such as laws against fraud.

Regulation of practice and treatment - Doctors and hospitals must meet certain minimum standards set by a state or federal government. In the case of minimal regulation, harmful or useless pharmaceuticals and treatments are not allowed to be sold. Warning labels for some medications or treatments may be required by the government. Regulations for pharmaceuticals could range from minimal standards to extensive testing for efficacy on a certain condition.

Regulation of prices - Pharmaceuticals, treatments, or pay for doctors may be regulated by the government in order to keep prices down.

Regulations of private insurance markets - Mandates for coverage of certain conditions and perhaps requirements for deductibles. Rates or underwriting practices may be regulated by the state or federal government. In an extreme case, underwriting is basically outlawed with guaranteed insurance laws and community rating. The insurance may be mandatory, provided by employer, or freely purchased by individuals.

Government payment for medical care - In one way or another the government sets up an insurance program. These programs could range from coverage for specific groups or for an entire population.

Government provision of health care - A state agency owns and operates hospitals. With today's current system, some hospitals are government owned such as VA hospitals or county hospitals. In the British National Health Service, the government owns the hospitals and general practitioners contract with the National Health Service.

The US has a little bit of all of these systems to one degree or another.

I will post some information on other health care systems around the world shortly.

Monday, November 03, 2008

A Flawed Analogy

For those that know me well, I often venture into political conversations at bars, on the quad, and over dinner. This blog has intentionally stayed away from politics for the most part and focused on economics and finance. Typically I have addressed current financial issues and perennial economic fallacies. That said, this entry is more political in nature.

"I think when you spread the wealth around it's good for everyone." -- Barack Obama
Ok, if you're spreading the wealth around it's not good for the person having their wealth spread around. (People who pay taxes)

"I don't know what's next. By the end of the week, he'll be accusing me of being a secret communist because I shared my toys in kindergarten. I shared my peanut butter and jelly sandwich." -- Barack Obama

Nobody would accuse Obama of being a secret communist for sharing his own stuff. He wants to force you and I to "share" our stuff. Of course, it's not really sharing at all if the government locks you up if you don't share your stuff.

That is all for now.