catallaxyfiles

The latest issue of Policy has an article by Fred Argy comparing classical liberalism and social liberalism (no link). I thought this weekends Essay on Liberty should set out the differences between classical liberals (or libertarians) and social liberalism. It is by Leonard Read and was first published in 1954.
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Stan Liebowitz was the person who very early fingered the underlying causes of the subprime crisis. John B. Taylor has shown how the loose monetary policy contributed while Liebowitz described the housing train wreck. Liebowitz is back again - writing in the WSJ - arguing that it was the relaxation of prudent ending criteria and not adjustable rate loans that is the main culprit.

The analysis indicates that, by far, the most important factor related to foreclosures is the extent to which the homeowner now has or ever had positive equity in a home. The accompanying figure shows how important negative equity or a low Loan-To-Value ratio is in explaining foreclosures (homes in foreclosure during December of 2008 generally entered foreclosure in the second half of 2008). A simple statistic can help make the point: although only 12% of homes had negative equity, they comprised 47% of all foreclosures.

Further, because it is difficult to account for second mortgages in this data, my measurement of negative equity and its impact on foreclosures is probably too low, making my estimates conservative.

Liebowitz gets to the bottom line.

Understanding the causes of the foreclosure explosion is required if we wish to avoid a replay of recent painful events. The suggestions being put forward by the administration and most media outlets — more stringent regulation of subprime lenders — would not have prevented the mortgage meltdown regardless of their merit otherwise.

Rather, stronger underwriting standards are needed — especially a requirement for relatively high down payments. If substantial down payments had been required, the housing price bubble would certainly have been smaller, if it occurred at all, and the incidence of negative equity would have been much smaller even as home prices fell. A further beneficial regulation would be a strengthening, or at least clarifying at a national level, of the recourse that mortgage lenders have if a borrower defaults. Many defaults could be mitigated if homeowners with financial resources know they can’t just walk away.

Let us remind ourselves what the Boston Fed were saying (and still are saying) about lending standards.

Down Payment and Closing Costs: Accumulating enough savings to cover the various costs associated with a mortgage loan is often a significant barrier to homeownership by lower–income applicants. Lenders may wish to allow gifts, grants, or loans from relatives, nonprofit organizations, or municipal agencies to cover part of these costs. Cash–on–hand could also be an acceptable means of payment if borrowers can document its source and demonstrate that they normally pay their bills in cash.
Credit History:Policies regarding applicants with no credit history or problemcredit history should be reviewed. Lack of credit history should not be seen as a negative factor. Certain cultures encourage people to “pay as you go” and avoid debt. Willingness to pay debt promptly can be
determined through review of utility, rent, telephone, insurance, and medical bill payments. In reviewing past credit problems, lenders should be willing to consider extenuating circumstances. For lower–income applicants in particular, unforeseen expenses can have a disproportionate effect on an otherwise positive credit record. In these instances, paying off past bad debts or establishing a regular repayment schedule with creditors may demonstrate a willingness and ability to resolve debts.

Long time columnist for The Australian and man of letters Frank Devine has passed away at the age of 77.

Homer writes, “Talking about retail trade more evidence today that Sinkers is wrong about the stimulus payments again.” Yes, the ABS put out the latest Retail Sales figures. Homer is referring to this post on retail sales where Ashton de Silva and I calculated that the stimulus packages have had a small impact on retail sales. This is in contrast to what some commentators are saying. Here is Peter Martin on todays news. Ashton and I still believe that the stimulus is having a small impact. Here is our updated figure.

We estimate the cumulative excess spending to be between $360 million and $940 million - small compared to the size of the cash splashes.
Update: Ash reminded me that the data labelled ABS-Trend is actually our replication of the ABS method. We didn’t report that data in our IPA paper, but did include it in the version sent to an academic journal. The ABS stopped reporting the Trend data after November 2008 - but we have calculated a trend using the ABS method and two other methods too.

There should be a law limiting the sale of any book to ten thousand copies. This would throw the literary market open to new talent, fresh ideas and non-commercial writing. If people were forbidden to buy a million copies of the same piece of trash, they would be forced to buy better books.

These are the words of looter Balph Eubank - a character in Ayn Rand’s Atlas Shrugged. Things in Australia are not nearly so bad, but the same principle applies.

The Productivity Commission has been investigating parrallel importing of books in to Australia. Here is the argument for a ban an parallel importation of books.

As the law currently stands, Australian publishers have a window of 30 days to bring out an Australian edition of a book once it has been released anywhere in the world. If they do so, then Australian bookshops have to sell the Australian version, and can’t import the book from overseas. This can mean that books are more expensive - and harder to get hold of - in Australia than they are elsewhere, but also allows the country’s local publishing to flourish, rather than forcing it to compete with a flood of cheaper-priced editions from overseas.

In an impassioned response to the review, which looks at the potential for reform of the law, the Booker prize-winning [Peter] Carey argued against making any changes. “As long as we have a territorial copyright our publishers have a commercial argument to support Australian literature,” he said. “They will battle for the sake of our readers and our writers, even if their owners have no personal commitment to the strange loves and needs of Australian readers, or the cultural integrity and future of the Australian nation.”

Today in the Australian Tim Wilson debunks this argument.

When the Howard government removed import restrictions on compact discs in 1998, it was accused of gutting the music industry and jeopardising the income of musicians. But industry data shows royalties increased from $81.8million in 2003 to $108m in 2007, and the number of performers receiving royalties also increased. Meanwhile, the average price of a CD album has fallen by 32per cent.

Similarly, New Zealand’s removal of parallel import restrictions on copyrighted works in the same year also points to benefits. Jobs in the publishing industry have been lost on both sides of the Tasman, but the NZ industry has not lost nearly as many.

Part of the reason for slower job losses in NZ is that, without protection, publishers focused on being internationally competitive and increased their exports. It is similar to the experience of Australian industries following the liberalisation of tariff barriers in the 1980s and 90s.

The Australian voices telling Australian stories argument is simply rent-seeking and doesn’t stand up to empirical analysis. We’ve heard these arguments before. One of my RMIT colleagues, Jonathan Boymal and I argued that the USFTA wouldn’t destroy Australian television and got some serious hate mail.

Tim Wilson also deals with a far more interesting argument.

But the most absurd claim is that easing import restrictions would water down the exclusive rights copyright confers. In a book there are two property rights: one relates to the physical book and the other to the copyright text. Import restrictions are designed to protect the former and don’t affect the latter.

Although parallel import restrictions exist for the three main branches of intellectual property - copyright, patents and trademarks - they are inconsistent and unnecessary for copyrighted works. Patents and trademarks need parallel import restrictions because the property rights afforded are not automatic. They need to be registered with a government agency country by country. But they rarely are because of the cost involved, and as a result there is no guarantee that royalty payments will be made to the right holder on an import.

Copyright, on the other hand, is automatically conferred to the right holder and it is protected in all countries that are signatories to the Berne Convention for the Protection of Literary and Artistic works. Royalties are paid to copyright holders when their works are published in those countries, based on the laws of each country. The only justification for import restrictions for copyright is to guard against counterfeit products.

Australia’s parallel import restrictions may be included in the Copyright Act, but they are not a part of IP protection. They are a trade barrier disguised as IP protection.

I don’t think it’s fair to call this claim absurd - it is very clever and sophisticated, but wrong as Tim suggests. A longer discussion of the issues can be found here.

Update: Chris Berg reminds me of some hate mail he got in response to an op-ed on the very same issue. It’s from Shane Maloney - a giant of Australian literature.

CHRIS Berg is absolutely right to demand that Australian authors be dunked in acid (The Sunday Age, 15/2). These parasitic bludgers have been getting a free ride for far too long, hiding behind arty-farty notions such as “literature” and sticking their ink-stained fingers into the pockets of “the punters of Narre Warren”.

It is thanks to self-serving emotional blackmailers such as Maurice Gleitzman and Matthew Reilly that our kids can’t read. The sooner these spongers are put out of business, the better. Australia doesn’t need its own publishers and printers. It certainly doesn’t need fancy-pants international successes like Peter Carey and Tim Winton.

Australia should go down on its knees, open wide and think of Peru, correctly identified by Berg as the go-to place for cheap books.

So what if authors don’t get royalties? Bloated fat cats like Kate Grenville should be happy to work for nothing.

And consumers with a yen for fiction can always subscribe to the IPA Review, where the right is right, cartels are invisible and an acid bath is a prescription for good health.

Since 1971 Malaysia has had in place its own New Economic Policy (not to be confused with Lenin’s policy of the same name which involved the temporary introduction of markets into the Soviet economy). While formally ending in 1990, it was simply replaced by similar successor programmes.

Informally the NEP and its successors is known as a pro-bumiputera policy or a policy of explicit racial preferences in economics and education for the majority Malay Muslim population (bumi is Malay for earth, putera is Malay for prince, with bumiputera translating into the equivalent of ’sons of the soil’). In other words, affirmative action for the majority ethnicity. It was introduced to reduce the economic and educational disparities between the Malays and the Chinese and in fact arose partly out of the racial riots of May 1969. For instance one of its targets was to have Malay businesses own 30% of the national wealth (at the time of the racial riots in 1969 this share was 1.5%).

Another element of the policy was to reserve more places in university for Malays. Of course when one group has more of a rationed good another, in this case the Chinese, will have less. Given the high value placed by the Chinese community on education, it’s no exaggeration to say that the bumiputera policy is responsible for a not insubstantial part of the migration of Malaysian Chinese to Western countries as well as increased business for Australian universities from those unable to migrate.

In a surprising development, Malaysia’s new Prime Minister Najib Tun Razak has announced a relaxation of part of this policy along with a relaxation of foreign investment restrictions:

Malaysia took a big step yesterday to liberalise its economy, relaxing a host of restrictions on foreign investment, including a controversial rule requiring businesses to be partly owned by ethnic Malays.

The Prime Minister, Najib Razak, announced that listed companies would no longer be required to allocate 30 per cent of their holdings to Malays as part of an affirmative action program for the country’s ethnic majority.

Mr Najib said the rule was neither benefiting poor Malays nor was it sustainable amid the global economic slowdown, which will force Malaysia into its first recession in a decade …

Mr Najib will have to walk a political tightrope in diluting the new economic policy, which provides a host of privileges in business, education, jobs and property ownership to the Malays who make up 60 per cent of the country’s 28 million people.

Chinese and Indian ethnic minorities have long chafed against the policy, which Mr Najib has been dismantling since taking office in April. Even many Malays have protested against it, saying it mainly benefits the elite Malays.

Mr Najib later told reporters the policy had failed to meet its target of raising the Malay share of corporate wealth to 30 per cent by 2010. It stands at 19 per cent now.

This is a surprising development because not only was the NEP the brainchild of the current PM’s father, Malaysia’s second Prime Minister Tun Abdul Razak, but the current PM used to be a bit of a Malay nationalist firebrand in the past. For instance he has made very provocative statements in the past about both the Chinese and Islam:

In the midst of UMNO’s internal crisis in 1987, a rally by UMNO Youth led by Naijb was held in Kampung Baru, Kuala Lumpur. Anti-Chinese sentiments were expressed openly during the rally with placard carrying slogans like “May 13 has begun”. In a widely documented speech Najib vowed to bathe the keris with Chinese blood. [36][37][38][39] The keris is a traditional Malay weapon that is often used as a symbol for Malay nationalism …

In keeping in line with popular strategy Najib declared on August 2007 that Malaysia has “never been secular because being secular by Western definition means separation of the Islamic principles of in the way we govern the country.”[42] Najib’s comments subsequently sparked a heated public debate which in turn, roped in other organisations – also split over opinions – to make differing statements on Malaysia’s position as an Islamic or Secular state

If the leopard has indeed changed his spots, this could be the equivalent of a Nixon visits China or Clinton ending ‘welfare as we know it’ moment.

Last year I did a sabbatical at the Institute of Public Affairs and found in their library a fantastic series of books ‘Essays on Liberty’. They had been published by the Foundation for Economic Education. The Mises Institute have republished them in pdf format (HT. Julie Novak). Even better FEE gave permission to republish the essays.

This essay by Hans Sennholz on executive compensation is very good - it was first published in 1959.
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Hayek long ago told us what the economic problem really was.

The peculiar character of the problem of a rational economic order is determined precisely by the fact that the knowledge of the circumstances of which we must make use never exists in concentrated or integrated form but solely as the dispersed bits of incomplete and frequently contradictory knowledge which all the separate individuals possess. The economic problem of society is thus not merely a problem of how to allocate “given” resources-if “given” is taken to mean given to a single mind which deliberately solves the problem set by these “data.” It is rather a problem of how to secure the best use of resources known to any of the members of society, for ends whose relative importance only these individuals know. Or, to put it briefly, it is a problem of the utilization of knowledge which is not given to anyone in its totality.

Those words were first published in 1945 and can be found in his Individualism and Economic Order.

The Rudd government has learned that lesson the hard way.

THE Rudd Government has dumped one of its key election promises, the Grocery Choice price monitoring website, after supermarkets failed to provide enough information to make the site reliable.

After a meeting today with major supermarkets, Competition Minister Craig Emerson announced that the measure - an election promise that was aimed at keeping grocery prices low - would not proceed.

“Upon close examination of the data requirements for reliable price information, I have formed the view that it is not feasible to generate that information in a timely manner, “ Dr Emerson said.

Craig Emerson has a PhD in economics, so he at least isn’t as ignorant as his colleagues and knows better.

The $13 million site, which originally launched last August, was heavily criticised for displaying information that was too general and outdated to be useful.

If more economists paid attention to the problems of socialist calculation and spoke about it more, then this sort of thing would happen less.

In the Tax Oppression post I suggested that the stimulus package was quite large and that it would adversely impact future rankings. Commenter Steve Edney raises the question of whether our stimulus package is really large compared to other economies. If not, then the ranking might be unaffected. Good point - so how large is the stimulus package in comparative terms?

Last week my good friend Tim Wilson sent me this link from the OECD. The good stuff starts on page 17. The two pictures worth thinking about are below.


So the answer is: Pretty big.