Worst in Nation Hawaii Health Connector Looking for Another $28M by Andrew Walden

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Good money after bad?

Ranked last year as “worst in the nation,” with sign-up costs estimated at $56,819 per enrollee, the Hawaii Health Connector is begging Legislators for another $28 million.  The sales pitch?  A financial plan which openly states the Connector will lose money for another eight years.

The Connector is set up as a State-mandated non-profit organization with insurance company representatives on the Board of Directors.  The unique setup allows the Connector to evade Hawaii’s public records laws, but Hawaii’s lone Republican Senator Sam Slom argues the “$28 million in ‘debentures’ … are in reality General Obligation bonds.  Their issue by a private non-profit is unconstitutional….” On March 25 the House Consumer Protection and Health Committees agreed, yanking the funding mechanism from the bill and leaving the details for the House Finance Committee to work out in a hearing now set for Wednesday April 8 at 2pm in room 308. UPDATE: FIN passed SB1028 un-amended–it is headed for a referral to Conference Committee.

At the February 15 deadline, the Health Connector touted 13,356 sign-ups in the three-month enrollment period–but as many as 7,700 are Micronesian immigrants forced off Medicaid and into plans provided by the Health Exchange.  Estimated to save the State $20 million per year, the move alarms Dr. David Derauf of the Kokua Kalihi Valley clinic.  In a February 26 column in the Honolulu Star-Advertiser, Derauf points out:

“As a result of these changes, many will suffer serious consequences to their health. Some will die.

“For this particular group of lawfully present immigrants, the state under Medicaid currently pays 100 percent of the costs of the program, which ensures that low-income people have access to medically necessary care at no cost.

“By transferring them to a Connector plan, much of the state’s cost will shift to the federal government, which provides significant insurance subsidies for people near the poverty line.

“However, even with those subsidies, an individual will still have to pay up to $2,250 in copays and co-insurance in a single year — an impossible amount for someone working 40 hours a week at minimum wage and earning only $1,343 a month. At these income levels, seemingly insignificant copays can prevent people from getting the medications and treatment they need.”

Kelii Akina, President of the Grassroot Institute explains: “Before the Affordable Care Act, Hawaii had a workable public-private partnership that ensured 93% healthcare coverage for the population.  It was a model that other states were studying and planning to implement in some form without a federal mandate.  Now consumers as well as the state government are facing skyrocketing costs.”

Other populations are being suggested as forcible Obamacare converts.  A bill offering benefits to “innocent” ex-convicts includes lifetime health care “…provided that the claimant enrolls in the Hawaii health insurance exchange….”  With labor negotiations ongoing,Governor David Ige is suggesting putting the State’s 40,000 employees into the Connector.

While reaping the benefits of Micronesian misfortune, Connector officials talk up the State’s60,000 new Medicaid enrollees–signed up not by the Connector but by the State Department of Human Services.  While the Connector managed to waste $205 million on its failed enrollment software, the State DHS blew another $144 million on balky Medicaid signup systems leading to the February ouster of the State’s Medicaid Director.  Both efforts ended up relying on human enrollment workers to complete applications.

Says Slom: “I serve on the Connector Oversight Committee. When I seek fiscal answers I get double talk. The enrollment figures are bogus. The business plan is flawed. The Connector depends on endless subsidies and has lost millions of taxpayer dollars in questionable contracts. The Connector must be dis-connected now.”

Study shows seismic shift in lending away from large banks to non-banks

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Study shows seismic shift in lending away from large banks to non-banks continued in February By Stephen D. Oliner, Edward J. Pinto and Brian C. Marein.

A new study released by the AEI International Center on Housing Risk found that the seismic shift in home purchase loan originations away from large banks to non-banks continued in February.  Since November 2012, the large bank share has dropped from 61 percent to 33 percent (see the report below).  The share shift was unabated in February as the large bank share dropped 1.2 percentage points from  previous month.  The dramatic decline in the large bank lending share has been met point-for-point by an increase in the non-bank share, which has risen from 24 percent to 51 percent.  Large non-banks and other non-banks each have accounted for about half of the 27 point increase in share.

This shift is due to the fact that non-banks compared to large banks are more thinly capitalized and more lightly regulated, generally face less reputational and litigation risk, and tend to have a shorter term outlook. Additionally, their primary business is generally just mortgage banking as compared to the more diversified business lines of large banks.  Therefore they have a more limited ability to stay on the sidelines.

Key Takeaways:

  • The dramatic decline in agency market share for large banks continued unabated in February, offset by an equally dramatic increase in the non-bank share.
  • Since November 2012, the large bank share has dropped from 61% to 33%, a move of 28 points, including a 1.2 point drop in February, a dramatic decline that has been met point-for-point by a 27 point increase in the non-bank share from 24% to 51%. Large non-banks and other non-banks have participated equally in the increase, accounting for 14 points and 13 points respectively.
  • Large banks have reduced the riskiness of their agency mortgage originations over the past few years. Non-banks, in contrast, have shifted toward riskier loans as they have increased their market share.
  • Loans originated through the retail channel are less risky than loans originated through the broker and correspondent channels. This is true both for large banks and for non-banks. But retail channel loans from non-banks are substantially riskier than such loans from large banks.
  • The bottom line is that large banks attempting to regain market share would have to move well out the risk curve.

VIDEO: IRS Commissioner Admits the Tax Code Cannot Be Understood

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“The best thing [Congress] could do would be simplify the tax code,” Koskinen told the National Press Club on March 31. “I don’t know how anybody understands all the ramifications of it.”

The IRS Commissioner also quipped that, “the IRS code is longer than the Bible, with none of the good news.” Read more.

Profiles In Exceptionalism: Steve Jobs

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He “gave back” by creating by RICHARD LORENC.

This week, I’m beginning a new series that will profile exceptional individuals. The criteria for being an exceptional individual is simple: The person will have changed the way people think and behave purely through persuasion. Thus, no one who ever occupied an official post in government will qualify.

The first in this series is Steve Jobs. Jobs died in October 2011 after a long struggle with pancreatic cancer. Walter Issacson’s biography on him became available shortly after Jobs’s death and became the best-selling book of 2011, destined to become a classic in biographical work.

People obviously like Steve Jobs, but why?

Why would everyone from Larry Ellison – Jobs’s friend and the billionaire boss of Oracle – to teenaged Occupy Wall Street protestors idolize a man who, by most accounts, was not the most congenial fellow? After all, his biggest accomplishment, some say, was making computers prettier.

The answer lies in Jobs’s story.

Jobs’s life experience mirrored what comparative religions scholar Joseph Campbell called the “monomyth” The monomyth idea outlines three major choices a potential hero must undertake. He must first leave his familiar world, then claim victory over immensely powerful (often supernatural) forces, and finally return home to share the wisdom of his journey with others.

After growing up in the apricot orchards of what’s now called Silicon Valley, the teenaged Jobs left that world for India, half a world distant. There, over several months, he encountered and experimented with new ideas, including Zen Buddhism.

He later credited Zen thought in the development of his design philosophy: “The main thing I’ve learned is intuition, that the people in India are not just pure rational thinkers, that the great spiritual ones also have an intuition.”

In India, Jobs obviously did not battle physical demons, but spent his time there addressing some personal ones. He then chose to return to begin to share a unique vision of how technology could enrich people’s human relationships.

Like most successful entrepreneurs, Jobs was extremely tenacious. After forming Apple Computer with Steve Wozniak, he found it wasn’t easy to convince people that they should have a computer at home. In fact, I’ve heard that if you were to ask most people in the early 1970s whether there would ever be such a thing as a “personal computer industry,” they would laugh in disbelief.

But Jobs had a vision for how the computer could become a useful, beautiful, and extremely personal tool for every person to use to communicate with others.

His Indian sojourn wouldn’t be the last time Jobs would leave the familiar to slay dragons. He was kicked out of Apple shortly after debuting the Macintosh personal computer, emerging a few months later with a new company called NeXT. After NeXT failed to catch on, he returned to Apple as a consultant, taking the position of “iCEO” (interim CEO) until becoming the company’s permanent CEO a couple years later.

During all of this, he also set Pixar on the road to become the world’s preeminent computer animated film company.

Each of these appearances and withdrawals, like his time in India, marks a different adventure Jobs undertook. And each ended with his sharing with the world the insights he gleaned.

But it wasn’t always easy.

You can imagine (or even remember) what people might have said at various points throughout Jobs’s career:

“No one needs a computer in their home.”

“I’d shut [Apple] down and give the money back to the shareholders” (Michael Dell actually said this in 1997.)

“No one will see a film without live actors.”

“Who wants 1000 songs in their pocket?”

“The iPad is just a big iPod touch. Also, it has a stupid name.”

(That last thought hurt Jobs deeply. It had forever been his vision to create a beautiful, useable computer that the user would love to touch.)

Amidst the naysayers, Jobs created products that people never before knew they wanted. Some would even say today they “need” Apple’s computers, phones, and software.

Jobs also demonstrated another exceptional characteristic among high-profile business leaders: He was content to allow Apple’s record of employing thousands and serving millions speak for itself.

Unlike other wealthy businesspeople, Jobs never felt it was important to make a show of his philanthropic or civic works. Under his leadership, Apple didn’t match employees’ charitable contributions, and never attached its name to nonprofit efforts.

Jobs “gave back” by making.

I’m certain Jobs contributed to his chosen causes – competition in schooling, for example – privately. By choosing not to match his employees’ gifts, however, he made a subtle point that charity must be given entirely freely or it is no charity at all.

Perhaps that was another insight he gleaned in India or on another adventure.

His biggest insight, I think, relates to a long perspective on life, which he communicated beautifully:

When you grow up you tend to get told the world is the way it is and you’re life is just to live your life inside the world. Try not to bash into the walls too much. Try to have a nice family, have fun, save a little money.

That’s a very limited life. Life can be much broader once you discover one simple fact: Everything around you that you call life was made up by people that were no smarter than you and you can change it, you can influence it, you can build your own things that other people can use.

Once you learn that, you’ll never be the same again.

ABOUT RICHARD LORENC

Richard N. Lorenc is FEE’s chief operating officer.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Is Obama Trying to Make Government Too Big to Fail?

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When President Obama spoke of fundamentally transforming America, I took him at his word. I was always troubled by those comments because, although America has issues that will require creative solutions, it certainly shouldn’t be fundamentally “transformed.” Transformed into what? One transformation that President Obama is trying to institute is a legacy of dramatically bigger, more bureaucratic, and more intrusive government. This new government leviathan that he has constructed has built-in mechanisms to ensure that it is not easily dismantled.

Here is a short list of areas which have been altered and damaged and will take time and effort to repair and unwind:

1) Service-Oriented Government:

The players in the IRS targeting scandal, the EPA email scandal, the Clinton email scandal, the NSA targeting scandal, and the AP/Fox News journalist-targeting scandal, have yet to suffer any real consequences for their actions. Because of this lack of consequences a new “standard” for government has been set. That new standard states that the weaponizing of government is acceptable as long as the political fallout can be contained. A legacy that will outlast this President.

2) The Mainstreaming of Soft Bigotry and Anti-Semitism:

The Obama administration’s overt hostility to Israel in favor of tyrannical and destructive regimes, along with their callous handling of the Paris terror attacks in the Jewish deli, has assisted in mainstreaming both a soft and a hard bigotry against Jewish people and Israel. This will be difficult to unwind because many people who share the Obama administration’s views are now serving in appointed positions in the government bureaucracy and this will take time to change.

3) Presidential Abuse of Power:

The Obama administration’s abuse of prosecutorial discretion through their illegal Executive Actions on immigration, along with their unilateral, and completely unconstitutional, rewriting of Obamacare, has resulted in unprecedented presidential power at the expense of Americans who rely on our constitutional system to protect them against the abuse of power. These “new” presidential powers have reset what is “acceptable” action by the President and have put the next President in an awkward scenario where his or her first task should be to strip away the illegal authority President Obama has taken.

RELATED: Bigger Government Equals Bigger Problems for “The Little Guy”

4) Crony Capitalism:

Both Democrats and Republicans are responsible in this arena, but the Obama administration has been pushing tax code carve-outs for his “special” corporate friends in the green energy arena, and legions of others who have figured out that it is far more profitable to lobby and invest in kissing the butts of government officials than to invest in producing better products. This has ensured a steady flow of money into the campaign accounts of politicians interested in regulation, taxation and in big-government, not the free-market, picking economic winners and losers. This will persist long after the President has left office.

5) Immigration:

The Obama administration has provided, through illegal and unconstitutional measures, incentives to avoid the legal immigration process in favor of those violating the immigration laws. One of the reasons they are doing this is to ensure a steady-stream of, what they believe to be, future voters in electorally strategic areas, long past the time President Obama has departed the White House.

6) Financial Markets:

The Dodd-Frank legislation signed into law by the Obama administration has enabled the government to designate a private business as “systemically important.” The end result of this is that the company will be forced into a regulatory spider web and your tax dollars will bail them out if they fail. This is that rare piece of legislation that manages to upset both taxpayers and crony-capitalists receiving taxpayer bailouts. The legacy of this legislation is that it ensures large campaign donations to big government politicians who will help influence who is designated “systemically important” and who gets the tax payer bail outs. This will enshrine a bigger and more aggressive regulatory state if we don’t stop it soon.

7) The Internet:

The Obama administration’s relentless push for the recently passed FCC “Net Neutrality” regulations will guarantee a future of Internet taxes and heavy government regulations. The permission of FCC bureaucrats will now be needed for web activity which was previously free of government intervention. This will inevitably lead to abuses of power where Internet content is regulated and corporate money is diverted from Internet development and growth into lobbying and paying off elected officials who can “approve” what were previously free-market arrangements.

8) Land-Use Planning

The Obama administration’s push, through various environmental edicts, to move people into living in cities is an effort to coalesce people into strong, lasting Democratic voter-enclaves. City living is heavily reliant on government (transportation, water, police, fire, sanitation etc…) unlike rural living where Americans are free to be more self-reliant. This will lead to voting trends that are difficult to counteract.

RELATED: This Week in Big Government

9) Most importantly:

The Obama administration’s disingenuous and relentless pursuit of division in America based on race, socio-economics, place of birth, religion, sexual-preference, and gender, strictly for political advantage, has done lasting damage to the fabric of the country. We can no longer have legitimate policy differences without being accused of racism, sexism or some other “ism” or “phobia.” It will take years to reestablish a more dignified and respectful political dialogue in the country after President Obama leaves office.

Now, for the good news. In order to know where we need to go, we have to know where we’ve been. We can, and will fix this. You and I were put here to fight back, not to sit back and rest on the liberty given to us by The Lord but secured and paid for by the blood and sacrifice of others. It was never going to be easy but nothing truly worth having is. Our mission is clear and 2016 is right around the corner. It’s time.

EDITORS NOTE: This column originally appeared in the Conservative Review. The featured image is courtesy of CR and the AP.

When Internet Explorer Ruled the World

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The government tried to destroy Microsoft for giving away a browser by JEFFREY A. TUCKER.

Microsoft announced this month that it was finally taking Internet Explorer out behind the woodshed, officially ending its two decade reign as the king (and then later the court jester) of web browsers. The main focus of media coverage has been how IE was outcompeted by Firefox, Safari, and Chrome — not to mention mobile apps that are rapidly overtaking traditional computer programs as a share of Internet browsing. But once upon a time, Internet Explorer ruled the World Wide Web.

On the sites I’ve managed, I watched as IE went from 95% of traffic to 20%, a spectacular and well-deserved crash that took fully 20 years. Microsoft was never able to fix its interminable security problems. Each new version, from 1 to 10, seemed to fix some issues from the previous version while introducing more problems.

It wasn’t entirely Microsoft’s fault, either: as the dominant browser, it was subjected to non-stop hacking from every malware creator on earth. Even a team of a thousand developers couldn’t overcome this, and it didn’t help that Microsoft itself was crippled by its sheer size and bureaucratic management structure.

On one level, this is a classic story of creative destruction. IE was cool, once upon a time — really! — and it way better than the jalopy it displaced (Netscape Navigator), but it was unable to keep up against the nimble innovators it inspired. It had a 20-year run of it, which isn’t so bad in the software business. But history moves forward, and in the wild world of the Internet, no one can presume that market dominancemeans permanent market control.

But just you try telling that to the Department of Justice.

DoJ was the main player in a witch hunt surrounding Internet Explorer that began in 1995 and lasted until 2004, hounding Microsoft for a full decade over its allegedly “monopolistic” behavior. (FEE, of course, provided ongoing commentary the entire time.)

Even in the early years of the web, government regulators and judges presumed to know better than entrepreneurs and consumers how to structure the market. In a long series of judgements, regulations, settlements, and impositions, the antitrust regulators diverted countless millions of dollars away from product development and towards litigation, which, in the end, turned out to be over absolutely nothing.

The “browser wars” were not settled in court; they were fought, won, and lost on the desktops, phones, and tablets of hundreds of millions of users, and it was those consumers — not all-powerful monopolies or benevolent regulators — who decided IE’s fate.

The saga began when Microsoft released its browser as a preinstalled part of the Windows operating system. Government regulators declared this to be a terrible thing because it represented an exploitative vertical integration of products (which somehow harmed consumers), and stood in violation of a court order dating from 1994.

Microsoft had promised not to “abuse” its monopoly status in the operating system market by “bundling” its other products with Windows, thereby “forcing” consumers to purchase them. But then they decided to include IE with Windows, and antitrust attorneys from Washington swooped in to save consumers, stop the big corporate bully, and right all wrongs.

But there was a slight problem with this story: Microsoft was giving IE away for free! In a brilliant maneuver, Microsoft decided not to charge for the browser so that it could avoid paying sales royalties to the providers of its basecode (Spyglass, Inc.). The whole rationale of old-timey antitrust laws was that consumers were being robbed and exploited by corporate monopolies. It didn’t fit this scenario at all, but government attorneys still pursued the case, forcing the country to listen to ten years of tedious debates about whether IE was a separate “product” or just a “feature” of Windows.

And yet every antitrust case, no matter how silly on the surface, has a deeper history. In this case, the prime mover — the snake whispering in the ear of the king — was Netscape. Its Navigator was the main browser on the market in 1995, and the one most threatened by Microsoft’s innovation.

After years of depositions, hearings, trials, appeals, and endless kvetching by Netscape (while its market share whittled away to nothing), the trial ultimately ended in a judgement against Microsoft, and featured such goofy scenes as the judge deleting the shortcut to IE from the desktop, and then proclaiming that he had removed it from the computer.

It was amazing to watch: even as this titan of industry was fighting for the right to give its products away for free, other companies were sneaking up behind to offer better browsers. Even more extraordinary, new operating systems were coming along to threaten the nearly universal use of Windows — the monopoly that formed the whole basis for the government’s case about Internet Explorer!

We who opposed this harassment of Microsoft would often point out that competitors could someday displace both IE and Windows. Someday people might even use IE for nothing other than downloading one of its replacements! Our suggestions were met with incredulous guffaws and cynical snickers. It was just obvious that without some major government action to shatter Microsoft, the company’s powerful monopoly would last forever!

These were also the years in which Mozilla’s Firefox browser became the fashionable choice among the tech set. Some prefered eccentric tools like Opera, and Safari, as part of the emergent Apple operating system, was waiting in the wings, while still others were experimenting with using open-source systems like Linux for consumer use.

It was very clear to anyone in the industry at the time that Microsoft’s dominance was extremely fragile. But that’s not how the DoJ saw it. Government attorneys treated Bill Gates like he was some latter-day Rockefeller, a digital-age robber baron who deserved the harshest possible punishment for his egregious innovation that brought millions of people online.

All these years later, standing over IE’s freshly dug grave, we can see who was right. The free-market critics of the antitrust action nailed it perfectly. Linux eventually came to be rolled into Google’s new browser Chrome and became its own free-standing operating system, powered by downloadable applications, not software suites.

What’s even more extraordinary is how applications running on smartphones have begun to eat into the market for web browsers in general. Here again was a development that no one could have imagined even ten years ago.

One reason that people don’t talk about this case much anymore is that it never amounted to anything. It was eventually settled long after it didn’t matter, and nobody cared about why we were fighting. The entire case, once called World War Three, has been relegated to a strange footnote about a soon-to-be defunct piece of software.

But how many resources and how much development attention was wasted in the course of those ten years—  half of IE’s lifespan? It’s impossible to say. IE would probably have died regardless. But it’s possible that, had the government not litigated so hard all those years, millions of consumers might have been spared some of IE’s security holes, and maybe Chrome and Safari would have faced stiffer competition on their way up.

We’ll never really know. What we do know is that this antitrust action didn’t help a single consumer on the planet. It was all a gigantic diversion from the heart of the story.

But like all political stories, it had winners and losers. Consumers likely lost out from the wasted resources and chilling effects on competition. The original beneficiary of the suit, Netscape Navigator, did the world a favor and went extinct anyway. And, of course, the lawyers, bureaucrats, and grandstanding politicians all came out ahead.

But something much more substantial and important happened in these years. A revolutionary and fundamentally disruptive company, Microsoft, came to be civilized on Washington’s terms.

It opened up lobbying offices in Washington, DC, and began pumping in increasingly large amounts of money (at least $133 million since 1996) to curry favor in low places  It started a program of large-scale political contributions. It ended its practice of permissionless innovation and started playing the game.

In short, Microsoft made the decision to work its way into the political apparatus rather than face unending harassment and possible death at the hands of the regime. I can’t blame them for their choice — they had a bottomline to protect, an obligation to their shareholders — but let’s not be blind as to the real purpose of all this litigation: rent-extraction and pummelling an outsider into submission.

Competitive markets are a process of ongoing upheaval in service of the consuming public. There is nothing government can (or will) do to improve this process, but plenty it can do to blackmail innovators into a compliant posture, at least for a time.

ABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

First-Time Buyer Mortgage Share and Mortgage Risk Indexes (FBMSI and FBMRI) for February 2015

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SUMMARY:

  • First-time buyers accounted for nearly 56 percent of primary owner-occupied home purchase mortgages with a government guarantee, up slightly from the prior February.
  • The Combined FBMSI (which measures the share of first-time buyers for both government-guaranteed and private-sector mortgages) stood at an estimated 50 percent.
  • The number of primary owner-occupied purchase mortgages going to first-time buyers over the 6-month period of September 2014-February 2015 totaled an estimated 667,000, up almost 4 percent from the 643,000 mortgages over the same 6-month period in 2013-2014.
  • The Agency FBMRI stood at 15.07 percent, up 0.2 percentage point from the average over the prior three months and up 0.8 percentage point from a year earlier. The Agency FBMRI is about 6 percentage points higher than the mortgage risk index for repeat home buyers.

The First-Time Buyer Mortgage Share and Mortgage Risk Indexes (FBMSI and FBMRI) are key housing market indicators based on monthly data for nearly all government-guaranteed home purchase loans, which greatly reduces the risk of sample error. By relying on millions of loans, this approach stands in contrast to traditional first-time buyer surveys based on small samples of home buyers or real estate agents.

In February 2015, first-time buyers accounted for nearly 56 percent of primary owner-occupied home purchase mortgages with a government guarantee, according to the Agency First-Time Buyer Mortgage Share Index (FBMSI).  The February share was slightly lower than the revised share for January and slightly above the February 2014 share.  As indicated in the chart below, the first-time buyer share has displayed no trend over its 23-month history apart from seasonal variation.

image001 (2)

The chart below displays the monthly first-time home buyer percentage by agency.  As shown, the share varies widely across agencies.  FHA is at the high end with a share consistently around 80 percent, while Freddie Mac is at the low end with a share generally below 40 percent.

image002 (1)

The Combined FBMSI (which measures the share of first-time buyers for both government-guaranteed and private-sector mortgages) stood at an estimated 50 percent in February 2015.  Consistent with the agency series, the broader combined share has varied seasonally but has displayed no trend over its 23-month history (see chart below).

image003 (2)

The monthly count of agency first-time buyer mortgages (the Agency FTB Loan Count) is presented in the chart below.  The number of primary owner-occupied purchase mortgages going to first-time buyers over the 6-month period of September 2014-February 2015 totaled an estimated 667,000, up almost 4 percent from the 643,000 mortgages over the same 6-month period in 2013-2014.  This increase in the Agency FTB Loan Count outpaced the 2½ percent rise in total agency purchase loan volume over the same period.

image004 (1)

The Agency FBMSI is calculated, as noted above, from a nearly complete dataset of government-guaranteed home purchase loans, which greatly reduces the risk of sample error. The near-universe of included loans stands in contrast to the 2014 survey of home buyers and sellers conducted by the National Association of Realtors (NAR), which was based on responses constituting only 0.2 percent of all purchase loans originated during the 12-month survey period and was voluntary, with responses received from only 9 percent of those mailed the 127-question survey.[1]  Data on the importance of first-time home buyers for non-agency loans are not available to our knowledge from any source.  The Combined FBMSI is calculated from the loan-level data in the Agency FBMSI, along with assumptions for the non-agency loans that we believe to be reasonable.

The Combined FBMSI percentage of first-time buyers is much higher than that estimated by the NAR.  For the July 2013-June 2014 period covered by the NAR’s 2014 survey of home buyers and sellers, the Combined FBMSI showed an average share of 50 percent, substantially higher than the NAR’s survey of home buyers finding that first-time home buyers took out 36 percent of the mortgages used to buy a primary residence.[2]

“February’s results show that first-time buyer volume and share remain strong,” said Edward Pinto, co-director of the American Enterprise Institute’s (AEI’s) International Center on Housing Risk.

“We calculate first-time buyer shares from comprehensive data provided directly by the federal housing agencies, making our indices the most complete measures currently available,” said Stephen Oliner, co-director of AEI’s International Center on Housing Risk.

AEI’s Agency First-Time Buyer Mortgage Risk Index (FBMRI) estimates the share of first-time buyer mortgages that would default in a stress event comparable to the 2007-08 financial crisis based on the actual performance of loans originated in 2007.  The Agency FBMRI stood at 15.0710 percent in February, up 0.2 percentage point from the average over the prior three months and up 0.8 percentage point from a year earlier. As indicated in the chart below, the Agency FBMRI is about 6 percentage points higher than the mortgage risk index for repeat home buyers.

image005

The higher risk for the mortgages taken out by first-time buyers is largely due to risk layering. As shown in the table below, in February 2015, 68 percent of first-time buyer mortgages had a combined loan-to-value ratio (CLTV) of 95 percent or higher, and 96 percent had a 30-year term. Given the combination of little money down and slow amortization, these buyers will have very little home equity for a number of years unless their house appreciates substantially. In addition, about one-fifth of first-time buyers taking out mortgages had a FICO score below 660, the traditional definition of subprime mortgages, and one-quarter had total debt-to-income ratios above 43 percent, the limit set by the Qualified Mortgage rule.  The mortgages taken out by repeat buyers are less risky along two dimensions in particular: a much smaller share had a CLTV of 95 percent or higher and a smaller share had a FICO score below 660.

Characteristics of Mortgages Taken Out by First-Time and Repeat Home buyers:

February 2015
CLTV ≥ 95% 30-year Term FICO < 660 DTI > 43%
First-time Buyers 68% 96% 21% 26%
Repeat Buyers 37% 91% 10% 24%
Source.  AEI International Center on Housing Risk, www.HousingRisk.org

This risk profile for first-time buyers implies that the supply of mortgage credit to this group is not tight.  In February 2015, the median first-time buyer with an agency mortgage made a down payment of only 5 percent, or $7500 in dollar terms.  For the large subset of first-time buyers who obtained mortgages with an FHA, VA, or RHS guarantee, the median down payment in February was even smaller ― 3 percent ($4100 in dollar terms).  Moreover, the median FICO score in February for first-time buyers with agency mortgages was 705, slightly below the median of 713 for all individuals in the United States with a score.[3] For first-time buyers with FHA-insured loans, the median FICO score in February was only 673, well below the middle of the distribution for the U.S. as a whole. These data are a strong counterpoint to the NAR’s commentary that “interested first-time home buyers continue to find it challenging to obtaining [sic] financing because of weak credit and income credentials and inability to pay the required down payment.”[4]

“It is in the NAR’s financial interest to push for ever looser credit standards.  But the facts demonstrate that down payments are already low and total debt ratios are high,” said Pinto.

“The FICO data undercut the argument that first-time buyers have limited access to mortgage debt.  Many borrowers with weak credit profiles are buying homes.” said Oliner.

The FBMSI and FBMRI are objective and transparent measures of the first-time buyer share and the riskiness of first-time buyer mortgages, respectively, based on the millions of loans contained in National Mortgage Risk Index (NMRI) database developed by AEI’s International Center on Housing Risk. The FBMSI, FBMRI, and NMRI are updated monthly.  For more information about these indexes and the work of the center, please visit HousingRisk.org.

[1] The NAR conducts a separate survey of realtors (http://www.realtor.org/reports/realtors-confidence-index) that also collects information on first-time homebuyers.  Although this monthly survey is sent to more than 50,000 realtors (out of a total of 1.1 million members), the response rate is low; only 4,259 responses were received for the January 2015 survey and of these, only 1,979 realtors provided information based on the last sale they had closed in January.  Thus, the results from both NAR surveys reflect very limited information with questionable reliability.

2 A small part of this gap could reflect a difference in the definition of first-time homebuyers.  The various federal agencies use the Uniform Residential Loan Application (Form 1003), which asks the following questions: have you had an ownership interest in a property in the last three years and was it a principal residence?  Applicants who have not owned a principal residence within the last three years are considered to be first-time homebuyers by these agencies. The NAR survey asks whether the purchaser is a first-time buyer, without further instruction, which likely results in a slightly narrower definition than the one used by federal agencies.

3 The national median score is from FICO; the other FICO scores cited here are from AEI’s International Center on Housing Risk.

4 Supra. NAR realtor confidence survey, p. 12.

Food Freedom and the Science of Association

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“Food freedom” shows the importance of free association to community by WILLIAM SMITH.

“Americans of all ages, all conditions, all minds constantly unite. Not only do they have commercial and industrial associations in which all take part, but they also have a thousand other kinds: religious, moral, grave, futile, very general and very particular, immense and very small… In democratic countries the science of association is the mother science; the progress of all the others depends on the progress of that one.” — Alexis de Tocqueville, Democracy in America

Lemonade stand operators, farmer’s market foodies, and amateur bakers everywhere — or at least in Wyoming — rejoice! A recently signed law, the Wyoming Food Freedom Act, has done away with onerous regulations on local food sales by exempting certain sales from government inspection, licensing, and certification. Specifically, the change applies to sales between a producer and an “informed end consumer” (defined as a final buyer who is aware that the product has not been inspected, licensed, or certified).

Life just became easier — and tastier — for Wyoming’s residents.

The foremost benefit of legalizing small food sales is ending the cruel absurdity of policemen shutting down children’s lemonade stands and PTA bake sales. It also makes it easier to bring food to market, which benefits both producers and consumers. According to Sen. Dan Dockstader, one of the bill’s supporters, selling home-grown food became “a serious source of secondary income” for many state residents since the 2008 recession. As for consumers, this law will make it easier and cheaper to buy fresh food.

Beyond that, state regulations controlling the buying, selling, and consumption of food include some egregious affronts to human dignity. Food is not just indispensable for life — for many people it is also a means of discovering identity and purpose. Regulations that interfere with people’s ability to decide for themselves what to eat, what to grow, and how to practice their identity deserve skepticism at best.

There is still another reason to cheer for “food freedom”: it can strengthen communities. Abolishing unnecessary regulations on food allows neighbors to trade directly with one another and to develop relationships with local food growers, whether professional or amateur. Freed food can also strengthen social capital, and in places where producing your own food has been tradition since time immemorial, freed food can enable people to grow closer to their hometown culture. This is one way that markets and trade can actually enhance culture and community, as well as promoting profitable enterprises.

Though “community” is usually not a concept associated with libertarianism — you tend to find it more often in conservative and progressive thought — it is in fact essential to a free society. The food freedom movement provide an excellent opportunity for libertarians to reach out to and make common cause in defense of community with both conservatives and progressives.

Community is appealing to both the left and the right in part because it is an inherently group-oriented idea, and both conservatism and progressivism tend to be focused on collectives and collective action.

One reason conservatives appreciate community is for its role in “moral policing.” William Lind explains, “Community is a highly important conservative value because it is through community expectations and pressures that traditional morals are best upheld.” But when traditional morals are threatened by changes inside or outside the community, state action all too frequently becomes the means to “protect” community values from social evolution, as we see in bans on drugs and gay marriage.

As for progressivism, its “we’re all in this together” ethos and emphasis on collective responsibilities are often and easily used to justify harmful and coercive policies — confiscatory taxes, labor controls, restrictions on “offensive” speech, etc. — that trample on individuals’ rights.

Given that intellectual landscape, it is no mystery why libertarians are skeptical of appeals to community in political contexts. But, as Alexis de Tocqueville noted in Democracy in America, “The political associations that exist in the United States form only a detail in the midst of the immense picture that the sum of associations presents there.”

A community, in its simplest meaning, is people who share a common identity or goal and the network of associations between them. People are bound together through all the numerous voluntary and familial relationships and associations they share. Community refers both to these shared identities and social bonds, as well as to the idea that such associations matter and ought to be nurtured.

In other words, “community” can be another term for civil society. A free society, of course, will be one in which most of our associations are voluntary, either through trade or through nonmarket associations. Cultivating understanding and respect for these institutions is therefore of the utmost importance for those who seek social progress and a freer society.

De Tocqueville recognized this when he wrote, “The morality and intelligence of a democratic people would risk no fewer dangers than its business and its industry if the government came to take the place of associations everywhere.” Put differently, when states flourish, community withers.

So how can libertarians engage conservatives and progressives to demonstrate that we also value community? In the political context, the issue of food freedom brings us all to the table. Though they may reach this conclusion in different ways, conservatives, progressives, and libertarians are in agreement that freed food (and the voluntary cooperation it nurtures) is a good thing. It is up to us to demonstrate that more freedom, not more control, is the path to pluralism, decentralization, and a stronger and richer social fabric composed of vibrant associations. Exploring these shared desires will help develop trust and goodwill between members of these groups.

There is a fundamental philosophical divide that cuts across libertarianism, conservatism, and progressivism: the divide between those who believe human flourishing is best reached through centralized, coercive means, and those who believe it is best achieved through decentralized, voluntary means. In order to achieve kind of society we want, we must cultivate goodwill with those who share our vision of communities organized from the bottom up through voluntary association. Libertarians would do well to emphasize this in their interactions with like-minded conservatives and progressives.

Food and community go together like peanut butter and jelly. Libertarians, conservatives, and progressives may not typically go together as well, but with a shared appreciation for freed food and the importance of social networks, there’s promise for productive, positive collaboration. After all, breaking bread is a time-honored way to build bridges, strengthen bonds, and heal rifts.

ABOUT WILLIAM SMITH

William Smith is a Program Development Associate at FEE, crafting engaging seminars for our growing young audience

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Let the Budget Battles Begin

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The announcement of a new fiscal budget for the U.S. government always sets the stage for struggles between the spenders and those trying to put some limits on the spending. The spenders usually win because politicians—particularly progressive ones—love to tap the national treasury in order to reward their supporters.

As the Speaker of the House John Boehner said on the occasion of the March 17 announcement, “For 53 of the last 60 years, the federal government has spent more than it has taken in. It is unacceptable.” Not so unacceptable that one Congress after another has not seen fit to ignore common sense and fiscal prudence.

Capitol with DollarsThe sheer enormity of the budget tends to overwhelm and I suspect that most voters pay little attention to it and the issues it represents except to want assurances that their benefit check arrives. Rarely mentioned or largely unknown is the size of the nation’s unfunded liabilities, long term obligations in Medicare and Social Security. In 2014 they reached nearly $49 trillion with a “T”.

Our annual Gross Domestic Product, (GDP) what the U.S. takes in for goods and services is about $14 trillion. Our current national debt is $18 trillion and growing. Regarding the unfunded liabilities, Romina Boccia of The Heritage Foundation noted last year that they were “nearly three times the size of the total national debt or more than $150,000 for every person in the U.S.” He predicted that “even the most vulnerable Medicare and Social Security beneficiaries would see their benefits drastically cut after 2030.”

Here’s another way of looking at our debt. When interest rates return to normal WE are going to be paying several hundred billion in interest on our current $18 trillion debt. In short, we have to desperately start cutting spending NOW to reduce that debt. Or else!

The 2016 budget announced by House Budget Chairman Tom Price represents Republican values. As the Wall Street Journal noted, it “would cut spending by $5.5 trillion relative to the status quo over the next decade, reducing federal spending to 18.2% of the economy by 2024. The share today is 20.3% and is headed toward 22.3% in a decade on present trend.” It’s useful to keep in mind that every dollar the government collects and spends is one less dollar that the private sector can spend on starting and expanding businesses large and small.

All that money represents opportunities for waste that are mind-boggling. A recent article in CNS News reported that “Medicare and Medicaid made a combined $77.4 billion in improper payments in fiscal 2014, a 20.4 percent increase from fiscal 2013, according to data published by the Government Accountability Office and the federal paymentaccuracy.gov website.” Twelve government programs that wasted money made the Government Accountability Office list including the school lunch and public housing/rental assistance programs.

The good news about the new fiscal budget is that it openly calls for repealing ObamaCare. It also outlines deregulating Medicaid to give governors more flexibility. It is a terrific fiscal burden. The budget took note of the fact that there are too many duplicative government programs such as 92 antipoverty programs. The Congressional Budget Office estimates that consolidating such programs would increase real GDP per capita by 1.5% in 2015. Eliminating a whole bunch of them would save even more.

Jane M. Orient, M.D., the Executive Director of American Physicians and Surgeons, and a policy advisor to The Heartland Institute, warned that “there seem to be some good first steps, such as block-granting Medicaid to the states. But even Republicans aren’t admitting that their budget also involves fighting over money that we don’t have, that the Federal Reserve will create out of faith and credit.”

“Also absent,” said Dr. Orient, “is recognition of the crushing burden of regulation, especially EPA rules to destroy a huge portion of our electrical generating capacity, with heavy subsidization of costly, unreliable, environmentally destructive wind and solar projects that can’t possibly replace coal, nuclear, or natural gas. Or recognition of the destructive impact of the Department of Education. How about devolving environmental protection and education back to the states, too, along with Medicaid?”

Heartland Tax & Budget News (1)“This new House budget,” said Peter Ferrara, a Heartland Senior Fellow for Entitlement and Budget Policy, “shows the passing of the Age of Obama and the broad gulf of difference between today’s conservative Republicans and the modern, ultra-Left, extremist, neo-socialist Democrats. Reagan-life, the plan would balance the budget without tax increases, while modernizing our increasingly dangerously lagging military.”

The Wall Street Journal editorial pointed out that, “As important, failing to pass a budget would also deprive Republicans of the procedural tool known as reconciliation. This allows the GOP to pass a final budget with a simple majority in the House and Senate, and thus it will be crucial to putting larger reforms of ObamaCare or taxes on Mr. Obama’s desk. A vote against the budget is in that sense a vote for the ObamaCare status quo.”

In sum, the proposed budget represents a serious effort to enact reforms that are long overdue. These and other measures are needed to encourage economic growth, the heart’s blood of the nation.

© Alan Caruba, 2015

EDITORS NOTE: The featured image is by J. Scott Applewhite/AP Photo.

Filthy Stinking Profits: Entrepreneurs have a nose for potential by DANIEL J. SMITH, ZAC THOMPSON

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Imagine a product that leaves your home covered in soot. Worse, imagine it makes your entire neighborhood smell like rotten eggs. The stuff discovered in Lima, Ohio, did just that. “Even touching this oil,” writes historian Burton Folsom, “meant a long, soapy bath or social ostracism.”

Why even bother to pump such “skunk oil” out of the ground?

When John, an entrepreneur, brought a new “investment opportunity” to the board of his company, suggesting that it spend millions of dollars to buy and store the stinking Lima crude, they must have thought it was the dumbest idea they’d ever been asked to risk money on.

But John was confident that a technology could be found to make the rejected oil usable. Many successful entrepreneurs can sympathize with how he must have felt. They likely have been in similar situations, where no one else saw the hidden potential they did in an idea or innovation.

In fact, Sam Altman, the president of the famous Silicon Valley business accelerator, Y Combinator, revealed that to make profits, his firm specifically searches for companies in which other investors don’t see the hidden potential. “We don’t want ideas that are whatever the current fashionable thing is,” says Altman. “So by the time everyone is already starting something in some category, it’s too late.”

Altman goes on to explain that to make a profit, you have to find ideas that look like bad ideas to most people, but have the potential to actually be good ideas. That investment strategy resulted in the creation of successful companies such as Dropbox, Airbnb, and Reddit.

The most assured way to become rich in a market society is to discover a new idea that can enhance the lives of millions of consumers and be the first to invest in it. As soon as the pathbreaking entrepreneur demonstrates an idea’s potential by earning profits, other investors will quickly enter the market. The increased competition will quickly spur innovation, quality improvements, and lower prices, benefiting millions of consumers in the process. In fact, William Nordhaus estimates that, while initial innovators do earn handsome returns, consumers are overwhelmingly the primary beneficiaries of innovations; innovators receive only about 2.2 percent of the total value to society generated by their innovations.

Even computers and televisions, goods and services that, with perfect hindsight, should have been seen as obvious profit opportunities, demonstrate the skepticism that often surrounds new innovations. Ken Olsen, the founder of Digital Equipment Corporation, famously predicted in 1977 that “There is no reason anyone would want a computer in their home.” Darryl Zanuck of 20th Century Fox figured people would “soon get tired of staring at a plywood box every night” and predicted household television would never take off.

The path to enhancing the lives of millions of consumers isn’t always obvious or easy. It is often fraught with great personal risk and financial peril, and met with great skepticism.

Perhaps no one exemplifies taking the risky and difficult path to improving others’ lives more than our skunk-oil entrepreneur: the world’s first billionaire, John D. Rockefeller.

While some have heard of Rockefeller’s humble background and the hard work he devoted to building his fortune, few people know the incredible foresight he exhibited in pursuing ventures that nearly every other investor believed to be bad investments, allowing him unexpectedly to improve the lives of ordinary people.

When it came to skunk oil, Rockefeller saw an opportunity to employ resources that no one else saw a use for. He was convinced that he could purchase up the dirt-cheap crude oil and then invest in discovering a technological innovation that would make it usable. When Standard Oil’s board initially refused to finance the risky project, Rockefeller declared that he would stake some of his own personal fortune, some two to three million dollars, eventually causing the board to grant Rockefeller permission. The investment proved lucrative, as Rockefeller found a technology that would refine the oil while neutralizing the horrid smell. The discovery brought the price of kerosene down to record lows, benefiting millions of consumers (not to mention helping save the whales in the process!).

Rockefeller had a knack for seeing the hidden potential in opportunities that no one else saw. When the Mesabi iron mine was discovered in Minnesota in the late 1800s, investors avoided what they considered to be a risky venture because Mesabi’s ore was notorious for clogging drilling machines. Even iron and steel experts such as Andrew Carnegie saw the ore as worthless; he, too, chose not to invest in the mine. Only Rockefeller made the bold move of investing in the mines. As with skunk oil, he was certain that this ore could be refined and made useable with, at that time, nonexistent technology.

Rockefeller was, once again, proved right when he was later able to provide cheap and useable ore to steel manufacturers after a technology was discovered that made the ore usable. His ability to see a profit opportunity where no one else saw one substantially reduced the costs of steel manufacturing. Cities such as Pittsburgh and Birmingham exploded in economic growth as new factories were opened to utilize the new source of ore. A reduction in steel manufacturing costs allowed for the construction of new railways, bridges, the first skyscrapers in Chicago and New York, and an overall greater infrastructure. Carnegie came to regret his initial judgment and eventually bought the mine’s entire output from Rockefeller.

Not just hardworking and thrifty, Rockefeller also had a natural inclination to see profit where other investors and entrepreneurs saw nothing. Just as importantly, Rockefeller was willing to take great risks investing in projects that no one else dared to invest in. He recognized, as entrepreneurs do today, that substantial profits can only be made by discovering the hidden potential in opportunities that others did not see. Once the first pathbreaking entrepreneur realizes profits, additional investors enter the field, quickly driving down costs and dissipating profits for new investors, all to the benefit of consumers.

Entrepreneurship, when left unfettered, is a continuous process that encourages the creation of seemingly impossible products and services that enrich the lives of billions.

ABOUT DANIEL J. SMITH

Daniel J. Smith is an assistant professor of economics at the Johnson Center at Troy University.

ABOUT ZAC THOMPSON

Zac Thompson is a graduate of the economics program at Troy University.

Oil Boom and Government Glut

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The government buys 5 million barrels of oil for its stockpile by JEFFREY A. TUCKER.

It’s a sweet thing when Uncle Sam becomes a mega-buyer of your product.

While the price of oil continues to plunge to record lows, drivers are celebrating, and oil executives are sweating it out. But never fear, the government is running to the rescue — of the oil industry. The Department of Energy is planning to enter the market with a purchase of 5 million barrels. It’s necessary for national security, don’t you know.

Oil prices have fallen 55 percent in the last year. The trend defied every expectation, and it’s been wonderful for drivers, businesses, and consumers. It’s an impressive illustration of how prices reveal information about underlying resource realities.

Technology has blasted away the last decade’s wild and misguided fears of a shortage. Production is at an all-time high in response to unprecedented demand. The stunning events have been a boon to consumers, as downward pressure keeps pushing on prices at the pump.

The market is giving us oil as never before. It is not failing. It is succeeding beyond belief.

“Experts” keep saying the trend is temporary, but no one knows for sure. We could see $20 per barrel before year’s end.

The new purchase is for the Strategic Petroleum Reserve, a hoary leftover from Gerald Ford’s presidency. It pays oil companies for their products, as the DoE says, “to protect the United States from severe petroleum supply interruptions through the acquisition, storage, distribution and management of emergency petroleum.”

But far from seeing “disruption,” we are seeing more and better distribution. You can tell from its language that this is the most thrown-back program imaginable. It illustrates a complete lack of understanding of the price system, which is the signaling mechanism that reveals shortages and surpluses in the market. Prices coordinate the interests of buyers and sellers with facts about underlying scarcity. Rising prices signal facts about supply and demand, incentivizing less consumption and more production. Falling prices encourage consumers to buy more and producers to make less.

The price system actually works, unlike these lame attempts at central planning. The proposed purchase by the government constitutes only half a day’s worth of production in the United States — as if an intervention so small would make the difference between prosperity and disaster.

If it is really necessary to have a “strategic reserve” for oil, wouldn’t we also have to have the same for carrots, beef, iPads, tennis shoes, wine, or raisins? Actually, we have one of those too: a National Raisin Reserve, an equally bizarre anachronism from the Great Depression that requires raisin farmers to give as much as half their crop to the government in order to keep raisin prices high.

The full Strategic Petroleum Reserve covers less than two months of US production, which is itself only 10 percent of world production. Why not make it six months? Why not a year? And what’s a half-day, more or less? There is no rational way to decide.

Let’s imagine there really were some weird catastrophe that caused all distribution to stop. Prices would surge through the roof and inspire a gigantic increase in oil production from all over the world.

But let’s also pretend, because of some foreign policy issue, that the United States also stopped all imports, and then tapped the “Reserve.” It’s not the consuming public that would benefit. It would be the government itself, making sure that the military and all the “essential” government agencies stayed running.

In other words, this program is not about you and me, even in theory. To understand why the Reserve exists, look who benefits most directly: the oil industry itself. It’s a guaranteed market, a kind of subsidy to big business, just as food stamps are for agriculture. Perhaps this is why this proposal is being made again right now, just as prices are falling so dramatically. It’s just thinly veiled corporate welfare.

The Reserve-subsidy came about during a period when oil prices were controlled by the government, and the oil industry was facing very serious financial pressure. The Reserve helped to alleviate that pressure — a classic case of how one intervention leads to others, until all special interests are satisfied with the new equilibrium. The SPR was a fix for a “market failure” created by government-failure.

Oil prices haven’t been controlled since the late 1970s, completely removing any objective conditions for why this needs to exist at all. The only time we ever had gas lines was when we had a “czar” telling people how much they could buy and what they were allowed pay for gas, and the lines disappeared when the controls were removed.

What harm does the Strategic Petroleum Reserve do? Most of the time, it’s simply an unconscionable waste of taxpayer money. When its supplies are actually deployed, dumping oil on the market from a government-mandated reserve, it puts downward pressure on the price and reduces the incentive to step up production right when it is needed most.

The Reserve is a perfect illustration of the dangers of any government program: once one starts, it is extremely difficult to get rid of it, no matter how irrelevant the original rationale has become. Here we are 40 years later, with astounding increases in supply and the technology for refinement and distribution, but we are still paying for this economically illiterate central plan for stockpiling oil.

It needs to be completely abolished, just as Ronald Reagan suggested in 1980 (before he later changed his mind to favor its expansion). The SPR is just like the Post Office in this sense: it exists solely due to that magic combination of economic ignorance and special-interest pleading.

ABOUT JEFFREY A. TUCKER

Jeffrey Tucker is a distinguished fellow at FEE, CLO of the startup Liberty.me, and editor at Laissez Faire Books. Author of five books, he speaks at FEE summer seminars and other events. His latest book is Bit by Bit: How P2P Is Freeing the World.

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Profits Are the Only Business of Business by D.W. MACKENZIE

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Forty-three years ago today Milton Friedman published his article “The Social Responsibility of Business Is to Increase its Profits.” It is to Friedman’s credit that most of this short article rings as true today as it did on September 13, 1970. It is at the same time disappointing that this piece remains timely precisely because too few Americans have understood and accepted Friedman’s arguments against corporate executives promoting social welfare over private profit.

How do the specifics of Friedman’s article look today? Does an executive who spends profits to promote “social ends,” to fund education, or to “fix the environment” impose what amounts to a tax? Yes, Friedman is correct.

Is the imposition of such a de-facto tax undemocratic? Perhaps it is. Friedman admits that the shareholders could fire a CEO for imposing a de-facto “social responsibility tax”- so the shareholders can vote against their CEO. Legally, the CEO is an agent of the stockholder, their employee. However, proposals to spend part of corporate profits on socially responsible ends aim at overriding the interests of shareholders; it undermines the democratic element of corporations.

Do arguments for redirecting corporate policies toward social responsibility erode personal liberty, aim at conformity, and promote socialism and collectivism? Yes. Stockholders invest in a corporation for profit, for personal gain. If the CEO starts aiming at social ends at the expense of private shareholder interests, then the corporations is effectively being run as if it were owned by society. This is, in effect, socialism. As Friedman put it, the social justice doctrine “would extend the scope of the political mechanism to every human activity.” The idea of aiming at social responsibility actually means directing corporate funds toward one person’s particular opinion about the interests of “society.” Social welfare and social justice are, at very best, vague concepts. As Ludwig von Mises put it in his 1949 treatise, “under socialism one will dominates.”

Friedman also claims that taxation by the state is the legitimate mechanism for collecting funds to promote socially responsible ends. We have constitutional, legislative, and judicial mechanisms to collect and spend legal tax dollars. Is this claim true? Are legal tax mechanisms better at promoting social responsibility than the illicit use of corporate funds for these purposes? Friedman notes, quite correctly, that people who push for socially responsible corporate policies are those who have failed to convince their fellow citizens to support their personal version of social responsibility. Having failed in an attempt to use the political mechanism, they resort to trying to politicize the market mechanism. Friedman is right, but this brings us back to my assessment of Friedman’s article: Friedman has himself failed to convince his fellow citizens that his view of profit is correct.

I agree that democracy can only work if public discourse works. The best ideas will rise to the top of an open and free debate among rational, reasonable people. I agree that people who press for corporate social responsibility are usually collectivists who press for conformity and disdain opposite points of view. However, the fact that political debate involves a high degree of intransigence and emotion means that the democratic process does not function very well.

Consequently, I must disagree with Friedman’s assertion that the public sector can work effectively to promote social responsibility. The fact that so many people continue to press for social responsibility and economic justice against Friedman’s advice shows that his support of government taxation for social responsibility is unfounded. Friedman is correct in noting that the great merit of private enterprise is that it makes people responsible for all their actions, either selfish or unselfish. However, lack of personal responsibility in the public sector does not promote responsibility in thinking about how to best use tax dollars in a socially responsible manner.

The main elements of Friedman’s article are correct. The sum of these elements is highly questionable when it comes to his confidence in political mechanisms. Profits are the only business of business. Social responsibility should be the business of government, but it is time to recognize that the modern tax and regulatory state has failed in this endeavor.

ABOUT D.W. MACKENZIE

D. W. MacKenzie is an assistant professor of economics at Carroll College in Helena, Montana.

Here’s the Obama Administration’s Response to the Shale Boom: More Regulations

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In the last few years, we’ve seen innovative companies combine old and new technologies to tap into shale deposits that were once unreachable. The resulting shale energy boom has made the United States the world’s top oil and natural gas producer while creating jobs and improving the nation’s energy security.

Now that we’ve moved from an age of energy scarcity to one of abundance, the Obama administration wants to add another layer of bureaucracy on energy producers.

The Interior Department released its long-awaited proposed regulations on hydraulic fracturing on federal lands, and on page 12 is this nugget:

Operators with leases on Federal lands must comply with both the BLM’s regulations and with state operating requirements, including state permitting and notice requirements to the extent they do not conflict with BLM regulations.

Federal regulators aren’t known for being speedy, as Katie Tubb and Nicolas Loris of the Heritage Foundation explain:

The [Bureau of Land Management] estimates that it took an average of 227 days simply to complete a drill application—just one step in the approval process to harvest oil and gas resources on federal lands. This is compared to 154 days in 2005 and the average 30 days it takes state governments to do the same.

As a result, the number of acres of federal lands leased for energy development has been declining.

BLM data of onshore acres of federal land leased.

Acres leased on all federal onshore land. Data source: Bureau of Land Management.

Now, don’t think states are failing to regulate hydraulic fracturing. If Pennsylvania is any indication, it’s far from the truth. Check out my favorite scene from the documentary Fracknation:

“There are numerous permits you have to get before doing anything” on the Marcellus Shale, Range Resources’ Tony Gaudlip said.

The only thing these duplicative, redundant federal regulations will do is ensure less of our energy abundance is available for our energy-hungry economy.

EDITORS NOTE: The featured image is of a pumpjack in Los Angeles, Calif. Photo credit: Patrick T. Fallon/Bloomberg.

Zoned Out

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Why and how we should seek to restore a free market in land by NATHAN SMITH.

I once knew a man who was finishing his basement so that his daughter and son-in-law could live there. I spent a lot of hours down there with a nail gun before the city planners nixed the project. My in-laws in Modesto, California, had to move out of their house into a mobile home on their own farm, because their kids needed a place to live. The law, for some reason, allowed them to put a mobile home there if seniors would be living in it, but not to accommodate a young family.

In run-ins with zoning laws, ordinary people encounter the perversity of government firsthand in ways that should make them receptive to the message of freedom and property.

You see, modern American society does not have a free market in land. Government interference with land use causes many of society’s problems. For example, in recent decades, people have started moving out of richer states into poorer ones, as high-productivity metropolitan areas refuse to accommodate population growth, driving housing prices and rents sky-high. While expensive real estate reflects high demand, the distortions originating with urban planners have made it difficult for young people to get a start in life. Artificial limits on supply, including zoning laws, building-height restrictions, parking requirements, and rules on maximum occupancy and minimum lot size, drive prices higher.

Without restrictions like these, real estate developers could build more high-rises and townhomes. Housing supply would rise, prices and rents would fall, more affordable cities would attract more people, and metropolitan productivity would raise national GDP.

Exclusion Zones and Environmental Harm

Zoning can be a form of class warfare when rich people deploy government power to keep poor people out of their field of vision. In the early twentieth century, some officials used zoning laws to exclude racial minorities from white neighborhoods. Today, class has replaced race as a main motivator for exclusion. Even when officials claim other intentions, zoning’s effects are the same. Government interference with land use blocks people from stretching scarce dollars by sleeping more people in a room, for example, or converting single-family homes into multifamily homes. High property taxes and onerous construction codes make housing less affordable for everyone, especially the poor.

Zoning also harms the environment by forcing people out of cities, where they live less environmentally friendly lifestyles. Segregating residential, industrial, and commercial land use forces people to live farther from the places where they work and shop, causing more automobile dependency, asphalt, and urban sprawl. A free market in land would not eliminate sprawl, of course. Some people want a house and a yard. But the rise of suburbia in post-WWII America was driven not only by preferences, but significantly by zoning laws.

This Land Is Their Land

Zoning tends to have an antidensity bias, but it often frustrates lovers of the rural life, too. When I moved to central California two years ago, I took a liking to the orchards and vineyards that surround the city, and looked for places in the countryside. That should have been easy. Agriculture generates low value per acre compared to residential rents, so people like me, with city jobs but a taste for the rural life, could easily offer landowners more than the land’s agricultural opportunity cost.

Unfortunately, the Fresno County Division of Public Works and Planning has zoned most of the land here “exclusive agricultural” in order “to protect the general welfare of the agricultural community from encroachments of non-related agricultural uses which by their nature would be injurious”—how, pray tell?—“to the physical and economic well-being of the agricultural district.”

The name of this regrettable agency contains the telltale word planning. It is curious how often America fails to learn the lesson of its own victory in the Cold War: Markets are better than planning. Read a zoning ordinance and you will quickly get the strange sense of reading a Gosplan document. Why must non-agricultural operations be limited to 10 percent of a plot of land and three employees? Why are riding academies permitted (subject to director review) but arts and crafts schools prohibited? Why not leave such decisions to the market?

Externalities and Other Canards

The only legitimate economic rationale for zoning is that land use often has positive and negative local externalities. What I do with my land can affect my neighbors’ quality of life. If I fill my front yard with flowers, the whole street benefits. If I fill it with trash, I spoil my neighbors’ street views and property values. A factory next to a suburb is an eyesore. A cafe may enliven a neighborhood, but patrons compete with residents for scarce parking. In the face of local externalities, the usual theorems about market efficiency cease to hold, and zoning laws can, in principle, raise social welfare by mitigating activities with negative externalities and/or encouraging activities with positive ones. Possibly, though I doubt it, the Fresno County Division of Public Works and Planning could find some feeble argument from local externalities to justify allowing riding academies but not arts and crafts schools in “exclusive agricultural” districts.

But there’s a better way to deal with externalities, elucidated by Nobel Prize-winning economist Ronald Coase in his 1960 article “The Problem of Social Cost.”

Coase considered, as an example, the problem of a rancher whose cows sometimes stray into the neighboring farmer’s field and destroy his crops (a negative externality). Does the farmer have a claim against the rancher, or do the rancher’s cows have a right to roam where they will? Should fences be built? Should one of them halt operations? What is the efficient solution? What is the just solution? Coase claimed no insight about justice, but he showed why, if efficiency is our goal, it does not matter whose side the court takes, as long as (a) rights are defined clearly, and (b) they are tradable.

Suppose the following monetary values:

Rancher’s profit: $10,000

Farmer’s profit: $20,000

Damage to crops: $15,000

Cost of fencing: $15,000

The socially efficient solution here is for the rancher to halt operations. Fencing is too expensive. The rancher’s profits are lower than the farmer’s, and too small to offset the damage to crops.

Now, suppose a judge sides with the farmer, making the rancher liable. The rancher will shut down because his profits do not suffice to buy out the farmer or pay for the costs of fencing. But if the judge sides with the rancher, he will still shut down, because the farmer will pay him a little over $10,000 to do so. Either way, we get the efficient solution.

If, instead, the values are . . .

Rancher’s profit: $50,000

Farmer’s profit: $10,000

Damage to crops: $15,000

Cost of fencing: $15,000

. . . then the farmer will shut down, either because—if a judge rules against him in his dispute with the rancher—crop damage is causing him to lose money, or because—if a judge rules in his favor—the rancher buys him out. Whatever the efficient solution is, Coasean bargaining will find it, once the law clearly defines property rights in causing, or in being free from, externalities.

Bargaining Our Way to Pleasantville

Zoning laws should be replaced by a free market in land, with Coasean bargaining to deal with local externalities. The solution would be imperfect, due to transaction costs. But the system would get better over time, as entrepreneurial developers wanting to gentrify or commercialize neighborhoods would learn the best ways to acquire, from residents, the appropriate rights—perhaps involving complicated option contracts or Elinor Ostrom-style solutions to commons problems. And all of these alternatives would be supported by common-law approaches to dispute resolution and contract, which have been thoroughly crowded out by municipal codes.

By contrast, centrally planned systems tend to ossify over time, as they grow increasingly more starved for the market-pricing information that could provide signals about the efficient use of resources. Of course, the local knowledge of people on the ground is the foundation of community. That too is lost when town planners purport to know more.

Market flexibility is especially important now because technology wants to reorganize cities. Already, in an age of smartphones and laptops, when one hardly needs bookshelves or desks, young people with large student loans who want to live in Manhattan might find six-in-a-room lifestyles quite tolerable for a few months or years. Let the market decide. On the other hand, solar power and mobile data could open up attractive lifestyles in the foothills of the Sierras if they weren’t zoned “exclusive agricultural.” Let the market decide. Let the people decide.

In the future, cheap driverless taxis will make acres of urban parking obsolete. Even the home kitchen might become optional when driverless cars offer cheap 24/7 delivery of hot restaurant meals. Let the market decide. We need to get the old zoning boards out of the way and leave people and markets free to discover the lifestyles that best suit them in the 21st century.

ABOUT NATHAN SMITH

Nathan Smith is a professor of economics and finance at Fresno Pacific University and the author of Principles of a Free Society and Complexity, Competition, and Growth. He blogs at Open Borders: The Case (openborders.info).

EDITORS NOTE: The featured image is courtesy of FEE and Shutterstock.

Why the World Bank can’t compete with Chinese AIIB

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My translation into English of a press conference given by the top China monetary policy expert Chen Yulu appeared in December of 2014 at American Daily Herald. Mr. Chen showed that the internationalization of the RMB had nearly doubled YOY in 2013 and reported that RMB clearing centers were opening up in major European capitals and in Asian countries allied with the US. Based on such data, he predicted meteoric growth of the RMB, namely, in 3-5 years, the Chinese yuan (RMB) could be the third most widely used currency in world trade, even though at the time it was ranked only ninth. Though Mr. Chen emphasized that China did not intend to replace the dollar in world trade, it would be hard to conclude otherwise from the facts and figures he presented.

Yesterday, a report came in regarding the Asian Infrastructure Investment Bank (AIIB), a venture launched by Beijing. Germany, France and Italy had followed Britain’s lead in joining this bank. More ominously for the petrodollar, Saudi Arabia was already a founding member. The U.S. warned other countries to “think twice” about joining. We shall examine why.

Earlier that day, we learned that Australia had also joined this Chinese banking venture.

The U.S. has at least two reasons to fear that the Third World will prefer the new bank over the World Bank:

  1. The World Bank is increasingly enforcing “Western values” which boil down to social Marxism, plus climate change ideology. Thus its policies encroach on Third World national sovereignties.
  2. The World Bank is funded essentially by Keynesian debt-based economies, notably the US, whose currency is propped up by a flimsy agreement with the Saudis enjoining the latter to sell their oil only in US dollars, which are rapidly losing intrinsic value, regardless of their apparent value compared to other currencies with debt-based “value.”

I had shown here how Keynesianism and social Marxism are the result of the same sort of mind set and carry the seeds of their own failure within them.

Financial experts have warned us that a debt based economy has an expiration date. Many people ignored the warning, putting all their faith in the petrodollar agreement, which is threatened by China. Recall the Nixon was eager for free trade with China and for the petrodollar agreement with the Saudis. How ironic – and fitting, and predictable in retrospect – that both countries have now embraced each other to the detriment of the country that lent them their strength.

I had pointed out here that the petrodollar agreement with the Saudis is a veritable pact with the devil and the ulterior motive for the shedding of US and foreign blood in proxy religious wars that invariably redound to the deaths of Christians and other minorities in Muslim countries.

Some more-moderate Republicans and orthodox investors keep insisting that the dollar continues to rise and the stock market is going up and up, so not to worry.

All very true, so far. But you can’t measure the strength of a debt-based currency against that of another debt-based currency. You need to gage it against a currency backed by a real, productive economy, like China’s, the economic giant with the largest precious metal and foreign cash reserves in the world.

Lately, the RMB has been tracking the dollar in almost a flat line, showing great stability so far. And the RMB is not backed by an agreement with the Saudis to protect them from enemies real and imagined in exchange for artificially propping up the currency. But that could change.

A scan of the above referenced Reuters article on the gaggle of European countries joining the AIIB revealed the source of U.S. concerns:

Quote: Washington has questioned whether the AIIB will have high standards of governance and environmental and social safeguards. [my emphasis]

Can you guess what “social safeguards” might include?

The U.S. dominates the World Bank, and here is a glimpse of what these “social safeguards” entail:

“JIM KIM, the president of the World Bank, wants it to promote gay rights. He has declared the “fight to eliminate all institutionalized discrimination” to be an “urgent task”. He recently put on hold a $90 m loan to Uganda’s health sector after its government introduced one of Africa’s most draconian anti-gay laws. He has ordered an overhaul of the bank’s lending policies to make sure that no loan assists discrimination. At this week’s Spring Meetings in Washington, D.C., he is convening discussions with gay activists on how best to do so.”

It seems the U.S. has transformed the World Bank into a social change agent and intends to enforce its ideas of gay marriage and the like, and that is no doubt why it is not in a hurry to join the AIIB.

The World Bank partners with Millennium Challenge Corporation (MCC), which develops guidelines for social and environmental policies for the bank. In the introduction to its pamphlet “Guidelines for Environmental and Social Assessment,” MCC writes:

“Unlike biology, gender is mutable, and women’s and men’s roles, behaviors, and responsibilities change over time and are different in different societies.”

The concept that “gender is mutable” is not further explained but it encapsulates the LGBT ideology of “queer theory,” which holds that the male-female distinction is not preset by biology but rather by individual choice. This contradicts not only common sense but the teachings of every world religion. And since no justification for this is provided in the literature targeting the lendee, it constitutes a quasi-religious decree reflecting what could be called “queer theology.” In fact, in enforcing this ideology, the World Bank is encroaching on the moral teachings, including religious teachings, prevailing in the countries to which it lends.

The environmental restrictions for lending by the World Bank prohibit lending for projects that provide the kind of amenities existing throughout the First World. It will not lend for projects involving oil refineries and most smelting processes, for nuclear power facilities or for

“Construction of motorways, express roads and lines for long-distance railway traffic and of airports with a basic runway length of 2,100 meters or more; construction of a new road of four or more lanes, or realignment and/or widening of an existing road so as to provide four or more lanes, where such new road, or realigned and/or widened section of road would be 10 kilometers or more in a continuous length.”

Thus it in effect supports a worldwide caste system where only the rich countries that can afford their own financing may enjoy modern highways and modern international airports.

Assuming the AIIB’s lending rates are reasonable, then as long as the Chinese bank imposes none of the above-outlined ideologically based restrictions on its lendees, it will easily compete with our sclerotic and moribund U.S. hegemony.

After all, in business, the formula for success is filling the voids left by competitors’ offerings of goods and services.

The lack of respect for clients’ sovereignty in making free-market choices is a hidden reason for a decline in the prestige of the World Bank, and since the trend in BRICS countries like China is to trade in non-dollar currencies, this dedollarization policy can only lead to a decline in the dollar in the future.

U.S. enforced social and environmental Marxism is slowly turning financial clients away and the Chinese are providing a vital missing ingredient, namely, respect for thenational sovereignty of client countries.

The importance of sovereignty and the way it is abused by the U.S. is discussed here and here by yours truly at American Daily Herald and here and here by international law expert Bernard Chalumeau (in translation) at my own web site. Europe’s participation in the AIIB is a natural and predictable reaction to this lack of respect for it sovereignty.

So with all these strikes against the U.S.-backed World Bank and its absurd policies, and in view of the dedollarization policies of China and the BRICS, what kind of future can we reasonably expect for the dollar?

AMEinfo.com, a Middle East trade site, carries a little-noticed fact that could be a game changer:

“The Saudi minister supported China’s plan to establish the Asian bank for investment in infrastructure projects in which the kingdom agreed to become a member.“

Obviously, the Saudis are turning away from their one-time most favored trading partner and embracing the world’s largest economy, one that is perfectly capable of providing the same kind of military guarantees to the Saudis as the U.S. now provides.

Can we look forward to a “petroyuan” in the not-so-distant future?

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