Tuesday, October 13, 2009

Magic Numbers in Politics

Magic Numbers in Politics
Thomas Sowell
Tuesday, October 13, 2009

Back in the days of the Soviet Union, two Russian economists who had never lived in a country with a free market economy understood something about market economies that many others who have lived in such economies all their lives have never understood. Nikolai Shmelev and Vladimir Popov said: "Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others."

What does that mean? It means that a huge increase in the demand for ice cream can mean higher prices for catchers' mitts, among other things.

When more cows are needed to produce more milk to make ice cream, then fewer cows will be slaughtered and that means less cowhide available to make baseball gloves. Supply and demand mean that catchers' mitts are going to cost more.

While this may be easy enough to understand, its implications are completely lost on many people in politics and in the media. If everything is connected to everything else in a market economy, then it makes no sense to have laws and policies that declare some given goal to be a "good thing," without regard to the repercussions, which spread out in all directions, like waves that spread across a pond when you drop a rock in the water.

Our current economic meltdown results from the federal government, under both Democrats and Republicans, declaring home ownership to be a "good thing" and treating the percentage of families who own their own home as if it was some sort of magic number that had to be kept growing-- without regard to the repercussions on other things.

We are now living with those repercussions, which include the worst unemployment in decades. That is the price we are paying for increasing home ownership from 64 percent to 69 percent.

How did we get from home ownership to 15 million unemployed Americans? By ignoring the fact that there was a reason why only 64 percent of families owned their own home. More people would have liked to be home owners but did not qualify under mortgage lending standards that had been in place for decades.

Politicians to the rescue: Federal regulatory agencies leaned on banks to lend to people they were not lending to before-- or else. The "or else" included not having their business decisions approved by the regulators, which could cost them more money than making risky loans.

Mortgage lending standards were lowered, in order to raise the magic number of home ownership. But, with lower lending standards, there were-- surprise!-- more mortgage payment delinquencies, defaults and foreclosures.

This was a problem not only for banks and other lenders but also for those in the business of buying mortgages from the original lenders. These included semi-government enterprises like Fannie Mae and Freddie Mac, as well as Wall Street firms that bought mortgages, bundled them together and issued securities based on the anticipated income from those mortgages.

In other words, all these economic transactions were "interconnected," as the Russian economists would say. And when the people who owed money on their mortgages stopped paying, the whole house of cards began to fall.

Politicians may not know much-- or care much-- about economics, but they know politics and they care a lot about keeping their jobs. So a great distracting hue and cry has gone up that all this was due to the market not being regulated enough by the government. In reality, it was precisely the government regulators who forced the banks to lower their lending standards.

The other big lie is that this was a failure of economists and others to foresee that the housing boom would turn to bust and set off financial repercussions across the economy.

In reality, everybody and his brother saw it coming and said so-- including yours truly in the Wall Street Journal of May 26, 2005. As far away as London, The Economist magazine warned about the danger. So did many American publications and individuals. The problem was that politicians refused to listen. They were fixated on the magic number of home ownership and oblivious to the economic interconnections that Russian economists saw long ago and from far away.

Magic Numbers in Politics: Part II
Thomas Sowell
Wednesday, October 14, 2009

It is understandable that many people do not pay nearly as much attention to political issues as they do to practical decisions that they have to make in their own lives. For one thing, they have only one vote among millions, so their influence on what policies the government will follow is in no way comparable to the weight of their decisions in their own personal affairs.

One consequence is that politicians can get away with half-baked arguments that people would never accept in their personal lives, where they apply a lot more scrutiny.

People who would never let some high-pressure salesman rush them into signing a contract to buy a car, before they have a chance to read the contract, may see nothing wrong with a President of the United States trying to rush Congress into passing a thousand-page bill before anybody has a chance to read it all.

Numbers, as well as words, get more scrutiny in private life than in political issues. Politicians love to cite magic numbers that are supposed to tell us whether some policy is a "good thing" or not. By sheer repetition, it is claimed that bigger numbers mean better results, whether the number is the percentage of families that own their own homes or the miles per gallon that automobiles get.

Administrations of both political parties, going back as far as the 1920s, have from time to time pushed the idea that a higher percentage of people owning their own homes is a "good thing," completely ignoring such repercussions as rising foreclosure rates in the wake of extending mortgage loans to people who are unlikely to be able to keep up the payments.

One of the other magic numbers that is popular in politics is the average miles per gallon of gas that cars are supposed to get, in order to meet standards set by the government. No matter how big this number gets, it can always get bigger, so there is no logical stopping place-- which means a never-ending political crusade to increase that magic number.

The open-endedness of magic numbers is not their only problem. The more fundamental problem is that the costs entailed by a magic number are often either ignored or downplayed. More miles per gallon, for example, are usually achieved by having lighter cars-- and lighter cars mean less protection from the consequences of automobile accidents. Bluntly, it means more severe injuries and death.

Many of the same people who protest against "trading blood for oil" when it comes to military interventions in the Middle East seem not to see that higher miles per gallon can also mean trading blood for oil.

The magic number du jour is the number of Americans without health insurance. Apparently getting more people insured is another "good thing"-- which is to say, it is something whose costs are not to be weighed against the benefits, or whose costs are to be finessed aside with optimistic projections or a claim that these costs can be covered by eliminating "waste, fraud and abuse."

In real life, people weigh one thing against another. But in politics one declares one thing to be imperative, so the issue then becomes how we do it. In real life, all sorts of desirable things are not done, either because of other desirable things that would have to be sacrificed to do it or because of the dangers incurred in achieving the desired objective are worse than the problem we want to solve.

Almost never are the dangers of having uninsured people weighed against the dangers of having government bureaucrats over-ruling doctors and deciding whether money would be better spent saving the life of an elderly person or paying for an abortion for some teenager.

The crowning irony is that the problems caused by insurance companies refusing to pay for certain medications or treatment are to be solved by giving government bureaucrats that same power, along with the power to prevent patients from using their own money to pay for those same medications or treatments.

More than two centuries ago, Edmund Burke said, "Nothing is good but in proportion"-- that is, when weighed as a trade-off. But a prudent weighing of trade-offs does not produce the political melodrama of pursuing a "good thing" measured by some magic number.

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