The "Free Stuff" SOTU

OK, I didn't watch the SOTU.  First of all, every minute would feel like having my teeth drilled.  And second, I was singing in a concert last night.  (Pretty great concert.  Check out the web site of the chorus here.)  But anyway, I've read enough about it to have a good idea what was in there.

At least on the domestic policy front, here's my summary: "I stand for free stuff."  Universal child care!  Paid sick leave!  Paid maternity leave!  Government guaranty of equal pay for women!  Higher minimum wage!  Free community college!  Supposedly this is the plan to "help" the middle class.  And then at the end of the speech:  "surely we can all agree" on these goals.

Do large numbers (let alone a majority) of middle class people actually think that their lives will be improved by getting more and more compulsory free stuff from the government?  I find it hard to believe, and the rapidly increasing numbers of Republican office holders in the era of Obama would seem to validate my skepticism; but I've never seen a poll directly addressing that question.

In my view the idea that lots of free stuff can improve the situation of the middle class is just a simple fallacy.  Sure, the government can make any one person rich by handing out a check, or enough free stuff.  If the government gives you a check for a billion dollars, you are now a billionaire.  That's great for you.  And in a country with over 300 million people, everybody else just lost about $3 each -- they'll never even notice.  So handing out free stuff seems to work great when the stuff only goes to a small number of people.  But the whole thing doesn't hold together when the proposal is that everybody gets the free stuff and everybody has to pay for it, which is what Obama is proposing.  It's not complicated to understand.  Suppose that the government hands out a check for a billion dollars to everybody.  Sorry, but nobody is rich.  In the aggregate we can only consume what we produce.  What they've done instead of making everybody rich is to eliminate the ability of anyone to get ahead through hard work and effort.

Well, at least if they pass out money, you still get to pick what you buy.  When they hand out the stuff, you're stuck with what they decide is good for you.  Community college is not right for you?  Too bad, you must pay for it anyway!  (Remember, close to half the population does not attend any post-secondary education at all, and this is mostly the lower part of the income distribution.  In our tax system these people may pay less than their pro rata share of the taxes, but why again should they pay anything at all for some better off person's higher education?)  If you're in the middle class, the only thing that government's universal distribution of "free stuff" can accomplish for you is gradually to take away your ability to get ahead by hard work.  It's like attaching a ball and chain around your ankle in your race to succeed.

Mitt Romney was far from my favorite as the Republican candidate for President, but he did have a great moment on the "free stuff" issue.  In March 2012 a heckler at a campaign stop asked this question:

 “So you’re all for like, ‘yay, freedom,’ and all this stuff. And ‘yay, like pursuit of happiness.’ You know what would make me happy? Free birth control.”

And Romney replied:

"If you’re looking for free stuff you don’t have to pay for, vote for the other guy. That’s what he’s all about, okay? That’s not, that’s not what I’m about.”

On The Value Of Manhattan Real Estate

The legend is that Manhattan Island was purchased from the Indians in 1626 for $24 worth of trinkets.  The current issue of the New York State Bar Association Journal contains a fascinating article by Paul Otto (unfortunately no link available) giving some detailed history of the transaction.  Was it the best real estate deal of all time?  The story illustrates that different people, for very good reasons, may value the same thing very differently.

Otto points out that the historical letters that are the basis for our knowledge of the purchase mention the value placed by the Dutch on the traded items -- 60 guilders -- but do not mention what the items were.  Thus there is a 1626 letter from one Pieter Schagen, representative of the States General in the West India Company, reporting on the arrival in Amsterdam of a ship from the colony, and stating that the Dutch "have purchased the Island Manhattes from the Indians for the value of 60 guilders"; and a further 1630 letter from West India Company director Johannes de Laet, informing the other directors that there was an island called "Manhattes or Manhatans Island, because this nation of Indians happened to possess the same, and by them it had been sold to the Company."

But even though there is no specific historical reference to the goods traded for Manhattan, Otto points out that there were other, similar transactions at the time, for example one involving what is now Hoboken, New Jersey, and another for Staten Island.  In the case of Staten Island, one document describes the trade goods in question as follows: "Duffles, Kittles, Axes, Hoes, Wampum, Drilling Awls, Jews harps, and diverse other small wares."  Do those seem like "trinkets" to you?  Actually, it is easy to see why the Indians might place tremendous value on these things.  "Duffles" were coarse cloth, which could be used for clothing or blankets; previously the Indians had used deer skins for these purposes.  If you can imagine what it might be like to get through New York winters with nothing but deerskin to cover you, you can see how valuable simple coarse cloth might be.  And then there are axes and hoes.  Before the Europeans came, the Indians had only stone tools.  That means that they had had to build their famous "longhouses" by the backbreaking effort of chopping down trees with only stone axes.  If you have nothing else to do for, say, two weeks, try chopping down a single tree with a stone axe; and you will then understand why the Indians must have viewed metal axes as a godsend.

In fact Otto reports that the European trade goods substantially transformed Indian life, as they stopped trying to be self-sufficient in a hopelessly inefficient stone age economy, and instead devoted their efforts to producing trade goods (largely fur pelts).

Demand for duffels also indicates the Indians' growing dependency upon European goods.  As the Munsees increased the time they spent harvesting furs or producing wampum, they would have less time to produce basic necessities such as clothing, forcing them to acquire these items from the Dutch.

March forward about four centuries to the present, and the value of Manhattan real estate is about as illiquid as ever.  The New York YIMBY ("Yes In My Back Yard") website reports yesterday on the sale of a development site on the North side of Delancey Street for $7.5 million.  The site has a development potential of about 20,000 square feet, so the transaction values the building rights as about $375 per square foot -- and that's with some burden imposed by the so-called "inclusionary zoning" that requires a portion of any apartments built to be "affordable."

But meanwhile, across on the South side of Delancey Street -- where sits the SPURA urban renewal site that has so frequently been a subject of this blog -- the City sold the rights to build 1.9 million square feet for only $180 million.  That's less than $100 per square foot.  But we're getting 500 "affordable" apartments!  Yes, but the difference between $100 psf and $375 psf for 1.9 million square feet is over $500 million -- in other words, over $1 million per "affordable" apartment.  By the way, income limits for the so-called "affordable" apartments are to reach well upwards of $100,000 per year for many of the apartments.

I can understand why the Indians placed such big value on duffles and metal tools.  Why we give up $500 million for a handful of "affordable" apartments when the same people can be housed for a small fraction of the money in a cheaper place -- that I can't understand. 

Economic Insanity Roundup

Here in New York, they distribute the LA-based newspaper called Investors Business Daily, but somehow it doesn't make much of a splash.  Even compared to the Wall Street Journal, IBD does a great job of shining some light on the economic craziness all around us.  Their edition for this holiday weekend has a particularly good collection of underreported stories.

First up, IBD has been doing a great job covering Venezuela, and this weekend's edition has an editorial headed "Venezuela's Socialism Is Falling Apart."   Sample:

As socialism plays out to its logical conclusion in Venezuela, the specters of long lines, rationing, troop enforcers, bizarre edicts and desperate statements are now the order of the day.  Not only have more than a dozen Venezuelans been arrested for posting photographs of empty store shelves on social media, three governors have responded to long lines by — prohibiting them; ordering the arrest of anyone who lines up for goods before sunrise.  Troops now supervise lines because so many fistfights and looting incidents break out in these daily 12-hour ordeals for rice or toilet paper.

Anything about that in the New York Times?  Not that I can find.  A few days ago Venezuela's Catholic bishops issued a pastoral letter blaming Venezuela's desperate economic situation on the adoption of socialism as its economic system.  IBD covered that here on January 12.  IBD quotes from the letter as follows:

Venezuela's bishops Monday blamed "Marxist socialism" and "communism" by name for the horrors and chaos gripping their country, according to a story in El Universal.  The bishops said the long lines of people trying to buy food and other basic necessities and the constant rise in prices are the result of the government's decision to "impose a political-economic system of socialist, Marxist or communist," which is "totalitarian and centralist" and "undermines the freedom and rights of individuals and associations."

So what did the NYT have to say about the bishops' letter?  As far as I can determine, they haven't mentioned it yet.  Here is a list of all of their latest articles on Venezuela.  The most recent one was December 30.  It conceded that the decline in oil prices was a problem for Venezuela, but then said that the country was "in a better position to avoid a bust" than at the time of previous oil price declines.  Oh, on December 17 the Times published an op-ed by Diosdado Cabello, side-kick of Venezuelan strongman Maduro, criticizing the U.S. for imposing sanctions on Venezuela for human rights violations.  You literally cannot find out what is going on in Venezuela from reading the NYT.

Also on the editorial pages of this weekend's IBD we have "Green Energy Good For Rich, Pain For Poor," by Kathleen Hartnett-White.  In a world where new drilling technologies and "fracking" have suddenly generated a surplus of fossil fuel energy and sent oil and gas prices plunging, Europe continues to suffer human-created artificial shortages.  Hartnett-White quotes the German Association of Energy Consumers for the proposition that German electricity rates are now "two to three times higher than the U.S. average," all as part of an intentional program to appease the environmental gods by making Germans poorer.   And then this:

British officials celebrate the energy scarcity as the new normal, urging Britons to schedule laundry and work according to wind conditions and cloud cover.

Didn't centuries of human creativity and striving finally give us a world where we can now be largely independent of nature's whims to earn our living?  Yes, only to find ourselves with politicians desperate to undo it all.  Thankfully, here in the U.S., even as the EPA tries to impoverish the people, the frackers have them on the run, at least for the moment.

And then on the front page of IBD we have "Obama Mandates On Employers Now Exceed $5 Per Hour."  It seems that Obama's State of the Union address, scheduled for Tuesday, will propose yet another mandate on employers of low-income workers, this time for paid sick leave of 7 days per year.  This would come on top of the recently-imposed mandates of health insurance under Obamacare, plus increases in the minimum wage.  IBD calculates the value of the new sick leave mandate as approximately 30 cents per hour; and it calculates the total of the three mandates -- sick leave, health care, and increased minimum wage -- as coming to $5 per hour for low-wage workers.  

Might all these mandates have some impact on the employability of low-skill workers?  Well, the Bureau of Labor Statistics records an unemployment rate of 33.2% for African American teenagers in its most recent (December 2014) report.   That's up (although not by much) from 31.2% in Bush's last year of 2008, and in the interim has exceeded 40% at times.  Do you think our President might show a little concern about that?  None that I've seen -- I truly think he believes that all his mandates are completely free.  Funny, I also can't find any reporting from the New York Times on the African American teen unemployment rate for the whole time of Obama's presidency.   But something tells me it will become a big issue when a Republican President comes into office. 

How Haiti Stays Poor

Consistently one of the most-read posts on this blog is the one titled "Why Is Haiti So Poor?"  Although written about six months ago, lots of people keep finding it by searches on Google and other search engines.  Very appropriately, there is a lot of curiosity out there as to how it can be possible for this particular country to stay consistently so much poorer than all those around it.

Take the Dominican Republic for example.  It shares the same island with Haiti.  U.S. policy toward the two countries is not meaningfully different.  Haiti is not subject to any kind of special embargo like Cuba has been, and Haiti even gets some preferential trade treatment due to its extreme poverty and to the severe earthquake of 2010.  On the foreign aid front, Haiti gets a lot more per capita than the Dominican Republic.   But in the rankings put out by the World Bank, the IMF and the CIA, all three find that GDP per capita is in the range of 7 to 8 times higher in the Dominican Republic than in Haiti.   Haiti has far lower income than any of the other Caribbean island countries, and for that matter than any other country in the Western Hemisphere -- only some sub-Saharan kleptocracies rank lower.  In the CIA ranking, even North Korea ranks higher!  (The other two don't rank the Norks.)

Wasn't this all supposed to turn around with the outpouring of aid that followed the earthquake?  Leading the aid bandwagon were the Clintons, Bill and Hillary and their Clinton Foundation.  They came up with the idea of putting together an industrial park called Caracol in Haiti to attract private investors to create jobs.  On the web page of the Clinton Foundation you'll find a glowing write-up:

In collaboration with the Government of Haiti, the Inter-American Development Bank, and the U.S. State Department, the Clinton Foundation assisted with the development of the Caracol Industrial Park, which could ultimately create up 60,000 jobs and help to decentralize the Haitian economy. In October 2012, President Bill Clinton joined Secretary of State Hillary Rodham Clinton, President Martelly, Prime Minister Lamothe, and President Moreno of the Inter-American Development Bank (IDB) for the opening of Caracol Northern Industrial Park. Today, the Korean apparel manufacturer Sae-A is the anchor tenant and will create 20,000 jobs alone.         

They actually got one building built there and formally opened the place in 2012.  Here is Hillary at a photo op in connection with the opening.

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So where is this project today?  Mary Anastasia O'Grady of the Wall Street Journal traveled to Haiti and visited the site, and filed a report over the past weekend.  The answer to the question is that the project is inexplicably stalled.  Employing the 60,000 Haitians requires building some 40 simple factory buildings.  In the U.S., once you have a site, these things can be slapped together by private businesses in a few months.  In Haiti, four years after the project was announced, they have built all of three buildings.  The anchor tenant, South Korean garment manufacturer Sae-A Trading, says that it is willing to hire 20,000 people itself -- but to employ them it needs another dozen or so buildings, and so far it only has three.

So why in heavens name doesn't Sae-A just slap up the buildings and get on with things?  And now we come to the crux of the matter.  Sae-A doesn't control the building of buildings -- the Haitian government does.  Per O'Grady:

A Dec. 12 IDB [Inter-American Development Bank - a foreign aid agency] press release says the Haitian government is approved for a new $70 million grant to construct, among other things, three new production buildings by 2018 with a goal of providing space for 6,800 workers.

So we get to the issue that even O'Grady doesn't address directly, although it is strongly implied.  Why would the Haitian government insist on building the buildings itself with U.S. foreign aid money at a pace that will only get three more built in the next three years when forty are needed right now and private investors can do it right away?  And the answer of course is that the way it has been set up with the Haitian government in control of the land and the building, the $70 million must then flow through the Haitian government, where officials can skim a very nice part of it off for themselves.  And meanwhile while we all wait for that process to play out the people have no jobs and starve.

And the person who is the public front for this disastrous project is none other than frontrunner in the prospective race for Democratic nomination for President, Hillary Clinton.  It's not just that her foundation is in up to its neck and that she is the lead at the photo ops; she also got the U.S. commitment to the foreign aid when she was Secretary of State.  This project is her baby.  And she has no understanding of why this project is stalled or for that matter of what makes an economy work.  She should be screaming bloody murder about the corruption and obstructionism of the Haiti government, and instead her foundation web site brags about being in bed with them.  Her foreign aid is the very mechanism that the corrupt government of Haiti uses to enrich itself and keep the people in abject poverty.

Another Candidate For "Worst Possible Public Policy"?

Actually it's almost impossible to beat "affordable housing" in Manhattan as the worst possible public policy, but it looks like President Obama has a new contender for the title, namely his proposal announced late last week for universal "free" community college.

Do you think the idea is that a lot of low income people are currently precluded from going to community college by the prohibitive cost?  Impossible, and I can't even find any respectable commentator trying to justify the proposal on that ground.  According to the Washington Post here (reporting on Obama's proposal) the average cost of community college is about $3800 per year.  But low income students qualify for "Pell grants" of over $5000.  In other words, the low income students already get their tuition paid plus some, and the bulk of the financial benefit of this new entitlement will therefore be going not to the poor, but to those higher up the income ladder who don't "need" the money, at least as "need" is defined by the Pell grant criteria.

So what is the political calculation?  I can't think it's anything more than just transferring some money to a couple of core Obama/Democratic constituencies, namely young voters and academics, to buy their continued loyalty.   The program is highly unlikely to pass while the Republicans control Congress, but if somehow it gets enough Republican support with all Democrats and gets through, the Dems say "we got you this big handout"; and if as is likely it fails, they say "the mean Republicans kept you from getting the handouts you deserve."

But this is totally a losing game for the young people who are the main supposed beneficiaries.  Even after dramatic recent improvements, the government continues to run deficits around half a trillion dollars per year; and even some rapid economic growth is not going to keep that number from going up substantially as the baby boomers retire and start claiming Social Security and Medicare.  So the cost of this new entitlement will be borrowed.  Who is going to pay that back?  Any young person who has his act together enough to attend post-secondary education, even community college, is highly likely to come out behind when he gets stuck paying his share of the taxes down the road.  Are young people dumb enough to fall for the "free handout" line?  Well, it seems that plenty of them fell for it as to Obamacare.  As Jonathan Gruber so famously said, getting these things passed depends on the "stupidity of the American voter."  But I continue to think that the young voters are starting to catch on.

Is it even possible to come up with a respectable justification for this new handout?  Here is Richard Kahlenberg taking a stab at it in the Atlantic.  Kahlenberg admits that the poor already get grants from the government that exceed their community college tuition, so he justifies Obama's proposal on the basis that giving free community college tuition to middle class students will induce more of them to go to community college, where they will mingle with the poor, and that will cause the poor to get a better education.

While some argue that free tuition for upper- and middle-class students is a waste of resources, in fact it is in everyone’s interest to ensure that community colleges are socioeconomically integrated. We have known since Brown v. Board of Education that separate educational institutions for black and white—or for poor and rich—are rarely equal.

As with affordable housing in Manhattan, it requires believing in perpetual motion machines to think this makes any sense.  We'll transfer substantial resources to middle and upper-middle income people from a tax system that raises plenty of money from lower-middle income people, and as payoff we'll get some inchoate and unmeasurable benefits.  And I suppose if we try the "free tuition" gambit and still not many upper-middle income people choose to attend community college, then it would make sense to Kahlenberg to offer them cash grants until we buy enough of them to attend.  How about $10,000 per rich kid to go to community college?  They still won't go?  Make it $20,000!

UPDATE, January 14, 2014:  Tom Hanks, of all people, weighs in on this issue with an op-ed in today's New York Times.   It seems that Tom attended a community college in California called Chabot, and most of the article consists of his praise for the courses and education he received, as well as for the low price (it was free).  But of course all that has existed for decades without the need for $60 billion per year in federal largesse.  Only in the next-to-last paragraph does Hanks get around to trying to come up with a reason why his experience supposedly justifies support for President Obama's proposal:

I’m guessing the new Congress will squawk at the $60 billion price tag, but I hope the idea sticks, because more veterans, from Iraq and Afghanistan this time, as well as another generation of mothers, single parents and workers who have been out of the job market, need lower obstacles between now and the next chapter of their lives. High school graduates without the finances for a higher education can postpone taking on big loans and maybe luck into the class that will redefine their life’s work. Many lives will be changed.

But Tom, community college is already free to the low income, either because the states and localities make it that way, or via Pell grants.  What are the currently-existing "obstacles" you are talking about -- the struggle to fill out the Pell grant application?  And if you can't name any such obstacles, what is the possible justification for spending another $60 billion a year that will not go to the low income?  Kahlenberg at least tries to address that issue, however lamely.   Really, Tom, you should stick to acting. 

Greece Again!

It was a couple of years ago, around the end of 2012, that Greece was seemingly on the edge of default every day and finally got bailed out by its EU brethren in return for promises of "austerity."  After a round of half-hearted small spending cuts and big tax increases, plus some debt "restructuring" and loans from other EU countries, Greece proceeded to stumble on for two years and now is more or less right where it was back in 2012.

Today Greece has an election coming up (on January 25) and the guy leading in the polls is Alexis Tsipras of the left-wing populist Syriza party.  He's promising an end to the "austerity" and repudiation of some or all of the sovereign debt.  To no one's surprise, Greek sovereign debt has spiked to interest rates over 10%.  Credit default swaps are indicating a chance of default of 20% in one year and over 50% in five years.  Talk in the air is that there will either be another bailout or that Greece will exit the euro.

Well, as I said just a few days ago, a good way of looking at capitalism is that the whole idea is to force hard economic choices to be made.  Greece is caught up in vast wasteful overspending by the government and desperately needs the shock of some economic discipline to force it to stop.  The rest of Europe has also gone into seemingly permanent stagnation from overspending, although not to the level of the crisis of Greece.  Yet when I look around for some kind of sensible economic voice, all I can find are advocates for some kind of continuation of the status quo to avoid the "pain" or "suffering" or "disruption" that would come from a Greek default or exit from the euro.

Do you think the Economist is sensible?  Forget it.  In the most recent issue they are urging "caution" and yet more "monetary and fiscal stimulus."  Let's see if we can hide the problem with yet more government spending while things fester for a few more years!

That stagnation points to the deeper reason for caution. The continuing dismal economic performance of the euro zone now poses a big political risk to the single currency. In the short run, so long as creditor countries (and that means principally Germany) insist only on budgetary rectitude and reject all proposals for further monetary and fiscal stimulus, that performance seems unlikely to improve.

The Economist asserts that the Greek economy has shrunk by 20% since 2010.  All that means is that they are taking fake government numbers -- that count all government spending at 100 cents on the dollar in GDP -- at face value.  Although honest numbers do not exist, it is likely that getting rid of some of the government waste was one of the best things that could happen to the Greek economy.  Yes, it is undoubtedly hard on those who were employed at the make-work to have to re-deploy into productive enterprises; but postponing necessary adjustments only means that the adjustments will be even more disruptive and difficult when they finally come.

All kinds of people can come up with all kinds of inchoate fears to justify continuation with the unsustainable status quo.  Here is Megan McArdle at Bloomberg on January 5:

[A Greek] exit [from the euro] will be a disaster. The mechanics of a Grexit are beyond daunting. The financial system will have to be frozen in order to keep people from immediately withdrawing all their euros and attempting to find them safe harbor abroad. And what do people use for money? In the long run, Greece may be better off, but in the short term, there will be immense suffering. And the contagion may well spread beyond Greece; Ireland seems to have escaped the trap, but Italy, Portugal, and Spain all remain vulnerable.

"Immense suffering."  Really -- on what basis?

Or here is Tim Worstall in Forbes on January 4 predicting yet a different form of disaster:

Greece leaves the euro, the banks fail (likely, if not entirely certain) and then? Sure, the first 12 months will be pretty hairy but our standard solution then predicts that we would see significant and sustained growth in the Greek economy. It wouldn’t be a surprise to see several years of growth in the 5-10% of GDP sort of range.  Then what happens? Does Italy, already in the beginnings of a terminal debt spiral, then say, well, we’ll go for that internal deflation route? Or do they start polishing the lira printing presses and leave the euro? What about France that is getting close to such problems? Belgium which is already over the hill and well into this area?

There is really no alternative to some kind of major economic disruption to jolt Greece out of its mess.  The only question is, take it now or postpone it and hope it goes away.  It will not go away.  If postponed, when it comes it will be worse.  Time for a little bravery!