Stimulate the Economy and Spend Nothing

Published in the January 17, 2017 Wall Street Journal.

Stimulate the Economy and Spend Nothing - WSJ

 




Operation Choke Point

[This was first published in early 2014.  I’m reposting it now so it will be easy for Wall Street Journal readers to find.]

I recently wrote about Operation Choke Point.  That’s the name of the new set of banking regulations designed to choke off bank access to illegal activities.  Except that many of the activities are perfectly legal.  Here’s a partial list of entities targeted:

Choke Point Targeted Industries

Choke Point Targeted Industries

So much for the second amendment: firearms and ammunition sales.  So much for your social life: dating services (no, I won’t include escort services).  And pharmaceutical sales?  Are they talking about the drugs I regularly get from Kaiser via USPS?  Needless to say, racist materials, telemarketing, and even pornography are broadly protected by the first amendment.

Kelsey Harkness

Kelsey Harkness

Kelsey Harkness at The Daily Signal has been all over this story.  Today she reported what may be a bit of good news:

Daily Signal Article

Daily Signal Article

The correspondence I received from the FDIC and DOJ is a great first step in ensuring that those responsible for Operation Choke Point are held accountable and that Congress and the American people receive details and answers they deserve.

The investigation will be conducted by the Justice Department (bad) and the Federal Deposit Insurance Corporation (probably good). Eric Holder’s Justice Department has been a cesspool of cronyism, discrimination, racism, and Chicago-style shakedowns. We owe thanks to  Rep. Blaine Luetkemeyer (R-MO), quoted in Ms. Harkess’s article →

But there’s more.  Consider this (from the Daily Signal article, quotation attributed to FDIC):

Responsible for regulating and auditing more than 4,500 banks, the FDIC also agreed to investigate what it calls a “serious allegation” by the congressmen that an FDIC senior official provided false testimony to Congress on the operation.

“Going forward, we will work through the committees and report the results of our work when and as it is appropriate to do so,” wrote Fred W. Gibson Jr., Principal Deputy Inspector General for the FDIC.

We can only hope.

 

 




My 2017 Economic Forecast

Opening slide

That leaves Trump with economic advisers who are 100% batshit crazy protectionists. Kudlow would have been a voice of sanity.

[Update January 22 with news about the chair of the Council of Economic Advisers]

Apparently Larry Kudlow is out. From the linked article →

The good news is that Kevin Hassett is on the short list.  He’s currently

…director of research for domestic policy for the American Enterprise Institute, is a tax expert with a Ph.D. from the University of Pennsylvania. His presence in the administration would address the concern of some economists, including former Republican and Democratic chairmen of the panel, that Trump lacked academic economists on his team. Hassett has published several articles [four listed on his cv] in the peer-reviewed American Economic Review.

This guy is the real deal, albeit with a strong focus on taxes and tax policy.  I was unable to find anything about his views on international trade, but he’s a respectable economist — the first, so far, in the current administration.  You can find out more about him via his page on the AEI website.

[Updated January 20 to add the video of my talk.]

On January 9 I had the privilege of speaking with the Hayward Rotary Club on the economic outlook for 2017.  I have a video of my presentation, but it will take me some time to get it online.  For now you can click here for a pdf version of my Powerpoint slides.  As always, feel free to leave comments, opinions, or just chime in with your forecast.

 




Check Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

Update: just as I was about to publish this article, Kelsey Harkness’s recent article flashed in front of me. Kelsey is a writer and producer at The Daily Signal. And, once again, the two of us have been thinking along the same lines. (See Operation Choke Point for another example.) Her article includes a nifty video featuring interviews with customers who use overdraft protection and payday loans.  Both are substitutes for more conventional types of credit, including credit card lending, personal loans, car loans, and mortgages.  The last two, of course, are collateralized.  Miss a few car payments and the lender can take back the car. (See the classic Repo Man (1984, Harry Dean Stanton at his best) for examples.)

Payday Loan Cost Table Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

Payday Loan Cost Table (click for larger image)

Now on to my original article.

Have you ever bounced a check? (“What’s a check?” Patience, grasshopper.) Technically your check was returned because the balance in your account did not have sufficient funds to cover the amount of the check. Such events are called NSF in the industry.

Today, of course, people use debit cards and many checks are processed via automated clearing house (ACH) systems. Nevertheless, when you use a debit card for a transaction that exceeds the balance in your account, in many cases it will be covered by overdraft protection. And, guess what? You pay for the privilege of not having the transaction declined. (Indeed, you are more likely to have a credit card transaction declined if the balance is near your credit limit.)

On December 20 the Pew Charitable Trusts released a study of overdraft protection. It would be hard to imagine more bias. The research focuses exclusively on overdraft protection fees and their impact on the poor. There was no mention of the benefits to consumers.

And there are many benefits. For one thing, both the bank and the merchant will charge you a fee for NSF. The lowest fee I’ve seen at a business is $25. But there’s also a larger cost. If enough transactions are declined your credit rating will suffer. If a very large number are declined, your bank may terminate your account. These costs are probably greater than the actual monetary costs, especially for the poor who usually don’t have very good credit.

As for the bank fees, let me use Wells Fargo Bank NA as an example. (I bank at Wells Fargo and am quite familiar with their website. I chose them because it was my lowest-cost research option.)

Wells Fargo charges $35 for overdraft protection at the most basic level. (Interestingly the fee is only $12.50 for “Teen checking” accounts.) However, this is literally a personal loan with no collateral.  There are no funds in any of your accounts to cover the transaction. The bank also charges $35 for an NSF transaction. But if you have a savings account and/or a line of credit with sufficient funds to cover the transaction, the overdraft fee is $12.50. And you can also set up overdraft protection using a credit card issued by the bank. For my accounts, the fee for overdrafts less than $50 is $12.50. For overdrafts greater than $50 the fee is $25.
(I got the credit card fees from a phone call to Wells Fargo customer service.)

The reason overdrafts not covered by savings, line of credit, and/or credit cards are so expensive is that they are essentially unsecured loans. Wells Fargo does note that if you cover the overdraft with a deposit by the end of the business day there will be no fee.

Legal geeks will want to read the official FDIC study on the mechanics of overdraft protection.

What About the Benefits?

… usually serves as a short-term source of small-dollar credit in order to meet a pressing need for funds and to prevent important payments such as utilities, rent, or other bills from being denied for insufficient funds. Moreover, those who use overdraft protection do so because it is better than available alternatives.

Do the benefits of overdraft protection outweigh the costs? A study by the Federalist Society in 2012 (Todd J. Zywicki and Nick Tuszynski, “The Economics and Regulation of Bank Overdraft Protection,” March, 2012) notes that overdraft protection, →

Other research shows that those who use overdraft protection (and payday loans) are quite aware of the cost. But the cost of, say, having the electric power to your home cut off is apparently regarded as much higher than the overdraft fees by actual consumers.

Economists still are pretty sure that, in most cases, consumers make the best decisions they can given their economic and social circumstances. The Pew study is yet another piece of research that implicitly assumes consumers are stupid and need government protection.

Check Do Consumers Really Need Protection From Excessive Overdraft Protection Fees?

This is a check. People once used these to buy goods and services.

Oh, yes.  Above is a picture of a check.  Don’t bother — neither the routing number nor the account number are valid.




Vancouver House

Vancouver BC Imposed a Fifteen Percent Tax on Foreign Home Buyers. Guess What Happened Next?

In the best rent-seeking tradition, I support this law. Demand will shift from Vancouver to the west coast – including the greater Silicon Valley area where my wife and I own two houses.

Somehow I missed this story when it hit the newswires in July. Vancouver, British Columbia, is a delightful town with breathtaking scenery, a pedestrian-friendly downtown, and attractions for all manner of tourists. Add in the Mediterranean climate and the magnetism is almost irresistible. Apparently the lure was enough for flight capital from China to push up housing prices, especially in the higher-priced segment. According to Reuters,

The new law comes weeks after the province released preliminary data showing that foreigners invested some C$1 billion ($756.7 million) in British Columbia housing from June 10 to July 14, with about 86 percent of that in Vancouver.

The cost of a typical home in the Vancouver area jumped 32 percent over one year to hit C$917,800 [$694,500] in June. Foreign buyers have taken the brunt of the blame for the runaway market, though factors like low interest rates also play a role.

The results have been all too predictable. Bloomberg reports that the demand for $1 million plus priced houses in Seattle has spiked. The tax went into effect August 3. Here’s what happened:

Demand Shifts South and East

Demand Shifts South and East (click for larger image)

Here are the details (from Bloomberg):

The Seattle metropolitan area has already seen a 50 percent jump in house prices in the past five years, thanks in part to a booming technology industry and growth in companies such as Amazon.com Inc. and Microsoft Corp. Still, the median home value is $409,900, less than in San Francisco and Los Angeles, according to Zillow Group Inc. In Vancouver, the benchmark home price is C$919,300 ($680,000), or C$1.06 million ($782,000) with the tax.

Interestingly, some of the demand is shifting to Toronto. Please, folks, look to the south. It’s pretty nice along the California coast from Bolinas to San Diego.




A Plea to My Fellow Economists

[Update November 15: read this first.  It will save you time.]

Last summer any number of foreign policy experts wrote open letters opposing Mr. Trump’s candidacy. Some declared outright that they would not work in the Trump administration even if they were asked. While this note is addressed to my colleagues in the economics profession, I hope our foreign policy counterparts will listen to my plea.

There are many competent, qualified professional economists in the U.S. Some may be invited to serve in the Trump administration. Their inclination will be to say, “No.”

Please don’t do this. Mr. Trump’s current team of economic advisers is about the worst I have ever seen. I’ve written about his chief adviser, Peter Navarro, who is no more qualified to be an economic adviser than I am to play in the National Basketball Association.

There are, however, a number of good economists who labor in obscurity. I am especially partial to those who do the number-crunching, specifically statistical analysis. I oppose economists who rely on models that are entirely endogenous and based on assumptions. (Jonathan Gruber’s “micro-simulation model” cited when he supported the ACA is one such animal.)

So, in no particular order, here’s my list:

  1. Casey B. Mulligan, U. of Chicago has done some of the best, most original number-crunching on the impact of the ACA and other Obama programs. His predictions have been more accurate than almost anyone else.
  2. Karen H. Johnson retired as Director of the Division of International Finance at the Federal Reserve Board in 2007. But you’ll need to find her first.  Since her retirement she has apparently decided to maintain her privacy.  Dr. Johnson would bring valuable experience and intelligence to any attempt to reform the Fed.  She is very smart and articulate.  Disclaimer: she was my dissertation adviser at Stanford.
  3. David Neumark, U.C. Irvine has done the best empirical work on the minimum wage and poverty available today.
  4. Bob Hall, Stanford and the Hoover Institute. Along with Chad Jones (Stanford) Bob has the kind of eclectic research portfolio that should serve him well in Washington.
  5. Don Fullerton, University of Illinois and National Bureau of Economic Research (although a spot in the EPA might be a better fit given his expertise in environmental economics).
  6. Charles I Jones, Stanford Graduate School of Business. (See Bob Hall above.)

Casey B. Mulligan

Casey B. Mulligan

Bob Hall

Bob Hall

Chad Jones

Chad Jones

David Neumark

David Neumark

Astute readers will notice the absence of any faculty from Harvard, MIT, and other famous programs east of Lake Michigan.  Frankly, these are the folks who got us into this mess.  I hasten to add that some of Prof. Mulligan’s colleagues at Chicago have made their own special contributions to the current U.S. economic malaise.

 




Tony Lima Interviewed by Dukascopy TV

Dukascopy Studio

Dukascopy Studio

Dukascopy is a Swiss financial services firm.  A few weeks ago I was interviewed by Celeste Skinner.  The video runs about eight minutes.  And I apologize for my seemingly-closed eyes.  Next time I will position my teleprompter better.




Margrethe Vestager EIREXIT

EIREXIT

Margrethe Vestager EIREXIT

Margrethe Vestager

It was a mere 69 days ago – June 23 – that Britons voted to leave the European Economic Union. Yesterday the bureaucrats in Brussels showed that they have learned nothing. Brussels, home of the EU parliament and the European Commission (aka bureaucracy), declared that Apple owed the government of Ireland $14.5 billion in unpaid taxes. Apple and the Irish government have both said they intend to appeal this ruling.

EIREXIT?

Now all we need is a name for Ireland voting to leave the EU. IREXIT? EIREXIT? Competition Commissioner Margrethe Vestager gave a press conference that pretty much consisted of mudslinging and allegations unsupported by documentation.

The EU decision is a terrific illustration of why the UK is leaving. Bureaucrats in Brussels made a fiscal policy decision that properly belonged to the government of Ireland. The last time I checked, Ireland was still an independent country. And, while Ireland is a member of the eurozone, even the European Central Bank supports fiscal federalism. In fact, that is part of the ECB charter. Apparently the aforementioned EU bureaucrats decided to do the job that is prohibited for the ECB.

The details of the EU decision are important. Under the EU treaty, governments are prohibited from giving special tax treatment to individual companies. The Commission claimed that Apple paid a tax rate of 0.005 percent in 2014. Apple CFO Luca Maestri said that the amount of the taxes owed is a “completely made up number” and there was “no special deal.” Indeed, it’s nearly impossible to believe that Apple’s effective tax rate could have been that small.  Personally, I’m inclined to believe Mr. Maestri.

How Apple Does It

Apple funnels all of its EU profits to Ireland. Under Irish tax law, profits earned in other countries are not taxed. And the other EU countries don’t tax the profits because they are being taxed by Ireland (even though the tax rate is zero). That doesn’t sound like a company-specific tax break to me.

Even the U.S. Treasury Department weighed in via an e-mail.

We believe that retroactive tax assessments by the commission are unfair, contrary to well-established legal principles, and call into question the tax rules of individual Member States. The commission’s actions could threaten to undermine foreign investment, the business climate in Europe, and the important spirit of economic partnership between the U.S. and the EU. We will continue to monitor these cases as they progress, and we will continue to work with the commission toward our shared objective of preventing the erosion of our corporate tax bases.‎

And the government of Ireland, personified by Finance Minister Michael Noonan, stated, “I disagree profoundly with the commission’s decision.” He added that the the government would quickly file an appeal before the EU courts. “This is necessary to defend the integrity of our tax system; to provide tax certainty to business; and to challenge the encroachment of EU state-aid rules into the sovereign member state competence of taxation,” he added.

Best estimates are that the appeal process could take three are four years. The market pretty much shrugged off the EU ruling. Near the close August 31 Apple was up 0.31 points.




The Power to Regulate is the Power to Destroy

Shuttered Trep Cafe The Power to Regulate is the Power to Destroy

A student walks by the closed cafe in the library of the Leeds School of Business. The Trep Café (short for entrepreneur) was a student-run small business at the University of Colorado Leeds School of Business which operated as a non-profit organization that funded student scholarships. It is now closed. (Cliff Grassmick / Staff Photographer)

Student entrepreneurs at the University of Colorado have learned an important lesson: don’t bother. A state agency has levied fines against a student-run non-profit coffee shop that put it out of business. The power to regulate is the power to destroy.

Colorado Department of Labor and Employment Claims Another Scalp

State regulators in Colorado have claimed another scalp. A student-run coffee shop at the University of Colorado has gone out of business. The reason? A whopping $224,200 fine levied by the Colorado Department of Labor and Employment. The vitally important law the coffee shop broke? Not having workers’ compensation insurance for several months in three different years. From DailyCamera.com:

The Trep Cafe, located on the second floor of the Leeds School of Business Koelbel Building, was notified in April of $224,200 in fines from the Colorado Department of Labor and Employment for not having workers’ compensation insurance for several months in 2011, 2015 and 2016.

The fine was so high because it was Trep Cafe’s second violation of workers’ compensation insurance rules. …

When they learned about the most recent violation, the cafe’s managers sprang into action and got insurance the next day. They attempted to appeal the fine over the summer but learned in an Aug. 5 letter that they still had to pay the fine.

“While the director appreciates the steps respondent is taking to ensure that it remains compliant, it is unclear why respondent did not make these changes sooner, as respondent was fined previously for failing to maintain workers’ compensation insurance,” according to the letter from the Colorado Department of Labor and Employment, which was provided to the Daily Camera by the university.

The managers’ attempts to explain that the business was managed by undergraduate students also went nowhere.

“The statute does not provide exceptions for organizations which are ‘student-operated’ or for non-profit organizations,” according to the letter. …

The cafe was founded in 2005 as a nonprofit, separate from the business school. According to the Secretary of State’s office, the nonprofit was registered at 995 Regent Drive, the address for the business school. The registered agent for Trep Cafe was always a business school employee.

The goal of the cafe was to give CU students hands-on experience running a small business. All the profits from the Trep Cafe were turned into scholarships for business students.

Caldwell said the fact that the cafe was run by students, who cycled out when they graduated, led to a lapse in communication about workers’ compensation insurance.

She said the managers running the cafe this year weren’t even CU students yet the first time Trep Cafe was fined for not having insurance.

Those students sure learned an important lesson about entrepreneurship. Don’t bother. When state bureaucrats can put you out of business for trivial matters like this, why not just stay home and study instead?

About the Title

The title of this article is, of course, an homage to Chief Justice John Marshall in his decision in McCulloch v Maryland (1819). This excerpt from Time.com says it all.

Handing down one of the basic decisions of U.S. constitutional law, the Supreme Court ruled in McCulloch v. Maryland, back in 1819, that the Constitution exempts the Federal Government from state taxation. Setting forth his renowned dictum that “the power to tax involves the power to destroy,” Chief Justice John Marshall declared that the states (and, by inference, local governments) “have no power, by taxation or otherwise, to retard, impede, burden or in any manner control the operations of the constitutional laws enacted by Congress.”

 




Venezuela Supermarket

Venezuela Update

Venezuela Supermarket

(Juan Barreto / AFP/Getty Images)

The situation in Venezuela just keeps getting worse. But at least one media outlet finally has the correct analysis of the problem. It’s not low oil prices. It’s socialism. Period.

Comradely gestures to be sure, but sugar production has rapidly declined ever since the seizures. In May, scarcities got so bad that Coca-Cola temporarily suspended production of its popular line of soft drinks, saying it couldn’t buy enough supplies of the industrial sweetener.

The source of this amazing insight is the Los Angeles Times (August 11). Reporters Chris Kraul and Mery Mogollon begin their article with an anecdote about sugar production. A mere 10 years ago Venezuela imported very little sugar. Domestic production was only slightly lower than demand. Today the country imports 80 percent of domestic consumption. Why? In 2006 former dictator-for-life Hugo Chavez nationalized many sugar refineries (10 of the 16 plants), turning their operation over to “worker cooperatives.” He also seized thousands of acres of sugar cane fields and converted them into communal properties. In other words, competent managers and engineers were replaced by Chavenista factotums. (Side note: compare this with the U.S. Office of Personnel Management situation.) The result was inevitable →

The fundamental source of the problem is price controls. Persistent shortages are always caused by some mechanism that prevents price rationing. In this case, it’s government policies.

Another Solution That Won’t Work

Current president Nicolas Maduro has now decreed that many people will be forced to work part-time on farms. Yeah, that will work. Here’s the story from CNN:

In a vaguely-worded decree, Venezuelan officials indicated that public and private sector employees could be forced to work in the country’s fields for at least 60-day periods, which may be extended “if circumstances merit.”

“Trying to tackle Venezuela’s severe food shortages by forcing people to work the fields is like trying to fix a broken leg with a band aid,” Erika Guevara Rosas, Americas’ Director at Amnesty International, said in a statement.

Maduro seems unable to understand that there are many jobs that require actual knowledge and skill. In his view, labor is completely fungible. This is, of course, completely at odds with reality.

From the same story:

Venezuela is the world’s worst economy, according to the IMF. It’s expected to shrink 10% this year and inflation is projected to rise over 700%. Beyond food shortages, hospitals are low on supplies, causing many patients to go untreated and some to die.

Price Controls With Inflation?

Ironically, despite price controls, Venezuela’s inflation rate this year will be at least 700 percent. That’s the figure the L.A. Times reports as the IMF forecast.

Venezuela Inflation

(click for larger image)

Prof. Steve Hanke (Johns Hopkins, Cato Institute) tracks troubled currencies. He compares the black market exchange rate with the official exchange rate to calculate the implied inflation rate. Incredibly, the markets are predicting that the inflation rate will be about 60 percent.[1] Personally, I think this is a black market failure.

[1] Steve H. Hanke, The Troubled Currencies Project, Cato Institute – Johns Hopkins University. Retrieved on 8/13/2016 from http://www.cato.org/research/troubled-currencies-project.