On November 2, Professor Walter Block will be speaking at Yale University on immigration and open borders For further details, contacts: Angelina Xing [mailto:angelina.xing@yale.edu]; Eliza Scruton [elizabeth.scruton@yale.edu] representing the Yale Political Union. The presentation will take place starting at 7:30pm in room 102 of the Linsley-Chittenden Hall. It will also feature Yale students debating on this issue.
On November 3 Dd. Block will be speaking at Brooklyn College. The topic will be why regulation has failed America. Topics discussed in the lecture will include unionism and the minimum wage law, rent control, public housing, the drug war, and more. Contact: Professor Mitchell Langbert, mlangbert@hvc.rr.com. The talk will start at 6:00 PM in SUBO in the Gold Room.
Both events are free and open to the public.
Monday, October 26, 2015
John Taylor: Krugman's Claim is Absurd
John B. Taylor is the Mary and Robert Raymond Professor of Economics at Stanford University and creator of the Taylor Rule, which is a formula by which to manage monetary policy.
Since I do not believe a central bank should be creating any money, I don't buy into the Taylor Rule, however, he is absolutely correct in his comment that Paul Krugman has distorted his position:
Since I do not believe a central bank should be creating any money, I don't buy into the Taylor Rule, however, he is absolutely correct in his comment that Paul Krugman has distorted his position:
I see that Paul Krugman is complaining again about an op-ed that Paul Ryan and I wrote in Decmber 2010. I responded to Krugman back in February of this year when his complaints first appeared on his blog and in his New York Times column. But rather than deal with the economics of the response, he now again resorts to the same old claim that the article was promoting “monetary conspiracy theories.” This is absurd. Our op-ed said nothing about a conspiracy, it had no discussion of individuals, and it made no mention of people conspiring or even talking with each other. Our op-ed raised concerns about the ineffectiveness of quantitative easing and about the departure from rules-based policy—concerns expressed by many people then and now. Our op-ed also said that an upcoming round of “QE2 will create more economic uncertainty” and that quantitative easing operations “involved the Fed in areas of fiscal policy, such as credit allocation,” which were the proper role of Congress. Of course, we now know that QE2 was followed by QE3 about which even more questions about ineffectiveness have been raised.-RW
Hurricane Patricia, More Pacific Storms, and 4 Other Signs of El Niño
By Warren Cornwall
National Geographic
Even before Hurricane Patricia lashed into Mexico this weekend, the central Pacific Ocean had already been flogged by a record number of tropical storms. Give some credit to El Niño.
As this year’s strong El Niño raises ocean temperatures in the central and eastern Pacific, it appears to be following a classic pattern of acting both as a match that helps ignite tropical storms and as gasoline that makes them grow stronger.
El Niño is one phase in a years-long back-and-forth in Pacific Ocean temperatures and winds near the equator. Low-altitude trade winds that typically blow to the west weaken or reverse course during an El Niño.
And warm water that would usually shift toward Asia instead builds up in the eastern and central Pacific. When a tropical thunderstorm hits, the unusually warm water can set off a cascading series of events that generates and sustains the swirling vortex of a full-blown hurricane.
Changes in Pacific wind patterns tied to El Niño—particularly the weakening of winds blowing from the west high in the atmosphere—also set the stage for bigger storms by reducing wind shear, says Phil Klotzbach, a Colorado State University atmospheric scientist who studies tropical storms. Wind shear occurs when air currents at a lower altitude blow in a different direction from winds higher in the atmosphere, which can destabilize and weaken a hurricane.
Read the rest here.
National Geographic
Even before Hurricane Patricia lashed into Mexico this weekend, the central Pacific Ocean had already been flogged by a record number of tropical storms. Give some credit to El Niño.
As this year’s strong El Niño raises ocean temperatures in the central and eastern Pacific, it appears to be following a classic pattern of acting both as a match that helps ignite tropical storms and as gasoline that makes them grow stronger.
El Niño is one phase in a years-long back-and-forth in Pacific Ocean temperatures and winds near the equator. Low-altitude trade winds that typically blow to the west weaken or reverse course during an El Niño.
And warm water that would usually shift toward Asia instead builds up in the eastern and central Pacific. When a tropical thunderstorm hits, the unusually warm water can set off a cascading series of events that generates and sustains the swirling vortex of a full-blown hurricane.
Changes in Pacific wind patterns tied to El Niño—particularly the weakening of winds blowing from the west high in the atmosphere—also set the stage for bigger storms by reducing wind shear, says Phil Klotzbach, a Colorado State University atmospheric scientist who studies tropical storms. Wind shear occurs when air currents at a lower altitude blow in a different direction from winds higher in the atmosphere, which can destabilize and weaken a hurricane.
Read the rest here.
Marx Went Private Sector When It Came to His Burial Plot
Murray Sabrin: ‘Big Cancer’ and How the Pharmaceutical Industry Affects Treatment
Dr. Murray Sabrin of Ramapo College discusses the “big business” behind breast cancer. This is a brief clip from the show.
I am going to ask Murray to join me on the Robert Wenzel Show for a full interview.
-RW
I am going to ask Murray to join me on the Robert Wenzel Show for a full interview.
-RW
Rental Math in the City of Anti-Construction Crazies
Morgan Stanley analyst Vance Edelson reports that construction data shows the new apartment supply in SF is expected to increase by only 15,000 units in 2016-2017.
Right now, the forecasts point to 145,000 new jobs in the Bay Area. 145,000 new jobs versus 15,000 new units is a ratio of 9.4x.
Morgan Stanley calculated that in low home-ownership markets, like the Bay Area, a traditional ratio is four jobs for every apartment, or a 4x ratio.
In 2015, the job/supply ratio was 8.9x, according to the note.
So it's getting worse, not better.
-RW
Right now, the forecasts point to 145,000 new jobs in the Bay Area. 145,000 new jobs versus 15,000 new units is a ratio of 9.4x.
Morgan Stanley calculated that in low home-ownership markets, like the Bay Area, a traditional ratio is four jobs for every apartment, or a 4x ratio.
In 2015, the job/supply ratio was 8.9x, according to the note.
So it's getting worse, not better.
-RW
Hayek: I Never Got Caught Up in Government and It Has Done Me a Lot of Good
Awesome stuff from Hayek.
Sunday, October 25, 2015
ROUND 2: Walter Block vs. Michael Walker
It started with this: Walter E. Block vs. Michael Walker: Who Really Came Up with the Idea of the Freedom Project?
Here's Round 2:
From: Michael Walker
Sent: Saturday, October 24, 2015 5:49 PM
To: Walter Block
Cc: Fred McMahon
Subject:
Hi Walter,
If you read the biography of Milton and Rose you will find that Milton says that they worked with me to create the Index. You and Alvin Rabushka were invaluable colleagues in the development of the idea and I have always acknowledged that. But it is also true that what initiated the whole discussion was my comment on Paul Johnson’s paper on the book 1984 that disagreed with his assessment that George orwell was too pessimistic because he, Paul, had ignored the decline in economic freedom that could be seen in the size of government and other indicators. In my comment I made reference to Milton’s comment in Capitalism and Freedom re markets and freedom. It was that and the subsequent discussions at the meeting in Cambridg and conversations with Neil McLeod then the president of Liberty Fund that led to my approaching Milton and Rose to co-host with me the first meeting of the group in Napa California. Two of of the invitees were the people from Freedom House who had created an abysmal index of “Economic freedom” and the low quality of their effort made everybody at that meeting think that we could do better.
I have never tried to diminish your role in any of this Walter and have always thanked you privately and publicly for your courage in coming to Canada to join the Institute and for all the help you were in educating me, an econometrician, about the broader ideas of freedom. But I also know that the index would not have happened if I had not provided the instigation and the leadership.
Of course you worked with Jim Gwartney and indeed it was you who suggested we invite him to one of the meetings and your name does appear on the first published index. it does because I, as “your boss” assigned you to work on that project as I did on many others.. And then I spent a good deal of my time raising the money so that you could do that work. (Your name does not appear on subsequent editions because you could not work amicably with the others and they asked that you be removed.) The Freedom measuring project was only one of hundreds of measurement projects that I initiated during my time as the CEO at the Institute some of which I did directly and some I got others to do. Measurement is my shtick in the same way that the philosophy of Liberty is yours.
I don’t suppose that any of this will assuage you but thought I would give it a shot. In some ways I feel privileged to be in the company of Milton, and Professor Hayek as people you disparage.
Best regards,
Mike
-----
from: Walter Block <walterblock@business.loyno.edu>
to: Michael Walker
Robert Wenzel <rw@economicpolicyjournal.com>
cc: Fred McMahon
Economics Faculty [Loyla-New Orleans]
Dear Dr. Walker (I only use first names to address people I like, who are friends of mine, or, about whom I am at least nuetral; the "dear" I think, is merely a polite salutation):
This could deteriorate into not a "he said, she said" debate, but, rather, one of "he said, he said." The only definitive proof there could be about whose idea this was would be if either of us had tape recorded our first conversation about it. I clearly remember going into your office and suggesting this initiative, and also suggesting that the Liberty Fund would be of help to us in organizing conferences on this topic (I had worked with them before I arrived at the Fraser Institute in 1979). However, I did not tape record this conversation, and, if you did, I expect you would have long ago thrown it out. Why? Because it would have clearly established that the idea of the economic freedom index was mine.
However, there is some indirect evidence that you take credit for work, ideas, that emanated from other people. You once asked that I ghost write op eds for you. We have, oh, a dozen co authored or co-edited books, refereed journal articles, op eds; your name was stuck onto all of these even though I did 100% of the work on virtually all of them.
Here's another bit of evidence that the idea to measure economic freedom couldn't have been yours. For a long time, and, as far as I know to the present day, you really don't understand what constitutes economic freedom. I was reminded of this lacunae of yours with your mention of Alvin Rabushka. He might be able to offer evidence that you, at least at the time we both went to the Hoover Institution to talk to him about this, didn't really understand what economic freedom is all about. It was your adamant contention that "tax expenditures", "loop holes" e.g., the failure of government to collect some taxes, was really a government subsidy to individuals. I tried to explain to you that this would only be true if the governemnt was the legitimate owner of the entire GDP; then, it would be "giving" some of "its" money to people. Since of course this is fallacious, at least from the perspective of those who favor free enterprise and understand the concept of "economic freedom!", tax expenditures were NOT a subsidy from the government. We discussed this for WEEKS in Vancouver. You wouldn't, couldn't, didn't understand my clear explanations. You dragged me to San Francisco to talk about this with Alvin. The two of us ganged up on you on this point, but you still were not convinced. Pathetic.
I don't for a moment dispute that you brought Milton, Rose and David Friedman in on this initiative. I fail to see the relevance of that point. It does not at all dispute my claim that the initial idea for statistically measuring economic freedom was mine, not yours.
I do agree with you that "the index would not have happened if (you) had not provided the instigation and the leadership." The initial idea was mine, but, you, indeed, did spearhead this project, did do important administrative work in making it all happen. You were my boss then, and if you didn't want the Fraser Institute to do this, it would not have happened. I also credit you for raising money (along with Pat Boyle) not only for this project, but for keeping the entire Fraser Institute going financially in its early days. I, also, had a hand in this administrative aspect of the project. I fondly remember leading one of the Liberty Fund seminars on this matter. Milton, Rose, and David were there. They were all very outspoken. At one point I hammered down my gavel (did I really have a gavel?), and said to great applause and laughter: "One Friedman at a time" since the three of them were continually interupting each other and dominating the conversation. I also freely and fully acknowledge that measurement is your "schtick." (By the way, that is now considered a micro aggression on many university campuses, since you are herein using the culture of other people with that word.)
Just out of curiosity, could you please offer some evidence to back up your claim that I "could not work amicably with the other..." members of the economic freedom team. I haven't counted them, but I must have, oh, 150 co authors, and I am on good terms with all of them. Well, perhaps, except for Jim Gwartney. This stems from the fact that his text (co-authored with Rick Stroup) claimed that the error term in econometric regression equations indicates the degree of racial or sexual discrimination. I wrote to Jim and Rick telling them that the error term indicates no such thing, but, rather, our ignorance (you, as an econometrician, hopefully, can support me on this), and he never responded to my query, which I take amiss. But this occurred only in the last few years, not in the 1990s, when we started the economic freedom indices. Did Jim say I couldn't work "amicably" with him?
Dr. Walker, you are an intellectual bully (you don't think I wanted you as a co author, co editor, of publications you didn't work on), and a person who tries to seize credit for the work of others. Yes, higher education has got its problems, serious ones as I alluded to above. But, when I advise my students as to careers, I warn them about the dangers of working for a free market think tank like the Fraser Institute, mainly as a result of my experiences with you.
Since you publicly claim this idea of the economic freedom index was yours, I have no compunction about sharing this correspondence with others.
Best regards,
Walter
Walter E. Block, Ph.D.
Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
Joseph A. Butt, S.J. College of Business
Loyola University New Orleans
Here's Round 2:
From: Michael Walker
Sent: Saturday, October 24, 2015 5:49 PM
To: Walter Block
Cc: Fred McMahon
Subject:
Hi Walter,
If you read the biography of Milton and Rose you will find that Milton says that they worked with me to create the Index. You and Alvin Rabushka were invaluable colleagues in the development of the idea and I have always acknowledged that. But it is also true that what initiated the whole discussion was my comment on Paul Johnson’s paper on the book 1984 that disagreed with his assessment that George orwell was too pessimistic because he, Paul, had ignored the decline in economic freedom that could be seen in the size of government and other indicators. In my comment I made reference to Milton’s comment in Capitalism and Freedom re markets and freedom. It was that and the subsequent discussions at the meeting in Cambridg and conversations with Neil McLeod then the president of Liberty Fund that led to my approaching Milton and Rose to co-host with me the first meeting of the group in Napa California. Two of of the invitees were the people from Freedom House who had created an abysmal index of “Economic freedom” and the low quality of their effort made everybody at that meeting think that we could do better.
I have never tried to diminish your role in any of this Walter and have always thanked you privately and publicly for your courage in coming to Canada to join the Institute and for all the help you were in educating me, an econometrician, about the broader ideas of freedom. But I also know that the index would not have happened if I had not provided the instigation and the leadership.
Of course you worked with Jim Gwartney and indeed it was you who suggested we invite him to one of the meetings and your name does appear on the first published index. it does because I, as “your boss” assigned you to work on that project as I did on many others.. And then I spent a good deal of my time raising the money so that you could do that work. (Your name does not appear on subsequent editions because you could not work amicably with the others and they asked that you be removed.) The Freedom measuring project was only one of hundreds of measurement projects that I initiated during my time as the CEO at the Institute some of which I did directly and some I got others to do. Measurement is my shtick in the same way that the philosophy of Liberty is yours.
I don’t suppose that any of this will assuage you but thought I would give it a shot. In some ways I feel privileged to be in the company of Milton, and Professor Hayek as people you disparage.
Best regards,
Mike
-----
from: Walter Block <walterblock@business.loyno.edu>
to: Michael Walker
Robert Wenzel <rw@economicpolicyjournal.com>
cc: Fred McMahon
Economics Faculty [Loyla-New Orleans]
Dear Dr. Walker (I only use first names to address people I like, who are friends of mine, or, about whom I am at least nuetral; the "dear" I think, is merely a polite salutation):
This could deteriorate into not a "he said, she said" debate, but, rather, one of "he said, he said." The only definitive proof there could be about whose idea this was would be if either of us had tape recorded our first conversation about it. I clearly remember going into your office and suggesting this initiative, and also suggesting that the Liberty Fund would be of help to us in organizing conferences on this topic (I had worked with them before I arrived at the Fraser Institute in 1979). However, I did not tape record this conversation, and, if you did, I expect you would have long ago thrown it out. Why? Because it would have clearly established that the idea of the economic freedom index was mine.
However, there is some indirect evidence that you take credit for work, ideas, that emanated from other people. You once asked that I ghost write op eds for you. We have, oh, a dozen co authored or co-edited books, refereed journal articles, op eds; your name was stuck onto all of these even though I did 100% of the work on virtually all of them.
Here's another bit of evidence that the idea to measure economic freedom couldn't have been yours. For a long time, and, as far as I know to the present day, you really don't understand what constitutes economic freedom. I was reminded of this lacunae of yours with your mention of Alvin Rabushka. He might be able to offer evidence that you, at least at the time we both went to the Hoover Institution to talk to him about this, didn't really understand what economic freedom is all about. It was your adamant contention that "tax expenditures", "loop holes" e.g., the failure of government to collect some taxes, was really a government subsidy to individuals. I tried to explain to you that this would only be true if the governemnt was the legitimate owner of the entire GDP; then, it would be "giving" some of "its" money to people. Since of course this is fallacious, at least from the perspective of those who favor free enterprise and understand the concept of "economic freedom!", tax expenditures were NOT a subsidy from the government. We discussed this for WEEKS in Vancouver. You wouldn't, couldn't, didn't understand my clear explanations. You dragged me to San Francisco to talk about this with Alvin. The two of us ganged up on you on this point, but you still were not convinced. Pathetic.
I don't for a moment dispute that you brought Milton, Rose and David Friedman in on this initiative. I fail to see the relevance of that point. It does not at all dispute my claim that the initial idea for statistically measuring economic freedom was mine, not yours.
I do agree with you that "the index would not have happened if (you) had not provided the instigation and the leadership." The initial idea was mine, but, you, indeed, did spearhead this project, did do important administrative work in making it all happen. You were my boss then, and if you didn't want the Fraser Institute to do this, it would not have happened. I also credit you for raising money (along with Pat Boyle) not only for this project, but for keeping the entire Fraser Institute going financially in its early days. I, also, had a hand in this administrative aspect of the project. I fondly remember leading one of the Liberty Fund seminars on this matter. Milton, Rose, and David were there. They were all very outspoken. At one point I hammered down my gavel (did I really have a gavel?), and said to great applause and laughter: "One Friedman at a time" since the three of them were continually interupting each other and dominating the conversation. I also freely and fully acknowledge that measurement is your "schtick." (By the way, that is now considered a micro aggression on many university campuses, since you are herein using the culture of other people with that word.)
Just out of curiosity, could you please offer some evidence to back up your claim that I "could not work amicably with the other..." members of the economic freedom team. I haven't counted them, but I must have, oh, 150 co authors, and I am on good terms with all of them. Well, perhaps, except for Jim Gwartney. This stems from the fact that his text (co-authored with Rick Stroup) claimed that the error term in econometric regression equations indicates the degree of racial or sexual discrimination. I wrote to Jim and Rick telling them that the error term indicates no such thing, but, rather, our ignorance (you, as an econometrician, hopefully, can support me on this), and he never responded to my query, which I take amiss. But this occurred only in the last few years, not in the 1990s, when we started the economic freedom indices. Did Jim say I couldn't work "amicably" with him?
Dr. Walker, you are an intellectual bully (you don't think I wanted you as a co author, co editor, of publications you didn't work on), and a person who tries to seize credit for the work of others. Yes, higher education has got its problems, serious ones as I alluded to above. But, when I advise my students as to careers, I warn them about the dangers of working for a free market think tank like the Fraser Institute, mainly as a result of my experiences with you.
Since you publicly claim this idea of the economic freedom index was yours, I have no compunction about sharing this correspondence with others.
Best regards,
Walter
Walter E. Block, Ph.D.
Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
Joseph A. Butt, S.J. College of Business
Loyola University New Orleans
Hayek: Why Intellectuals Drift Towards Socialism
What Hayek says about intellectuals, I believe, also applies to every category from movie stars to the general public. The advantages of freedom over central planning in a complex world is a very difficult concept to grasp. It is counter-intuitive to the daily planning we do every day at the individual micro level.
-RW
-RW
The Case of the Missing Walter Block
Further exchange surrounding: Walter E. Block vs. Michael Walker: Who Really Came Up with the Idea of the Freedom Project?:
From: Felix Bronstein
Sent: Sunday, October 25, 2015 1:24 AM
To: Walter Block
Cc: Robert Wenzel
Subject: Re: Walter E. Block vs. Michael Walker: Who Really Came Up with the Idea of the Freedom Project?
Sent: Sunday, October 25, 2015 1:24 AM
To: Walter Block
Cc: Robert Wenzel
Subject: Re: Walter E. Block vs. Michael Walker: Who Really Came Up with the Idea of the Freedom Project?
FYI - a better link (with your picture missing): http://www.fraserinstitute.
Felix
---
Dear Felix:
Thanks.
Best regards,
Walter
Walter E. Block, Ph.D.
Harold E. Wirth Eminent Scholar Endowed Chair and Professor of Economics
Joseph A. Butt, S.J. College of Business
Loyola University New Orleans
Donald Trump: From a Psychological Perspective It Would Be Good If Everyone Paid Taxes
But he is against it for practical reasons.
I tell you, Hayek warned about the Trump-type in Chapter 10 of The Road to Serfdom.
-RW
I tell you, Hayek warned about the Trump-type in Chapter 10 of The Road to Serfdom.
-RW
The Myths About the Evils of Payday Loans
Economists Robert DeYoung, Ronald J. Mann, Donald P. Morgan, and Michael R. Strain cranked out the numbers and published their findings in a New York Federal Reserve report:
Payday Loan Prices: High but Justified?
The first complaint against payday lenders is their high prices: the typical brick-and-mortar payday lender charges $15 per $100 borrowed per two weeks, implying an annual interest rate of 391 percent! That’s expensive, to be sure, but is it unfair? For economists, the answer depends on whether payday credit markets are competitive: with healthy price competition, fees will be driven down to the point where they just cover costs, including loan losses and overhead.
Judging by their sheer numbers, payday lending is very competitive. Critics often fret that payday lenders outnumber Starbucks as if they—payday lenders, not Starbucks—were a plague upon the land. But shouldn’t competition among all those payday lenders drive down prices? They seem to. This study estimated that each additional payday firm per 1,000 residents in a given Zip code was associated with a $4 decline in fees (compared with a mean finance charge of about $55). In the later years of the study, the authors found that prices tended to gravitate upward toward price caps, but that seems like a problem with price caps, not competition. And of course, payday lenders also have to compete against other small dollar lenders, including overdraft credit providers (credit unions and banks) and pawnshops.
Competition seems to limit payday lenders’ profits as well as their prices. This study and this study found that risk-adjusted returns at publicly traded payday loan companies were comparable to other financial firms. An FDIC study using payday store-level data concluded “that fixed operating costs and loan loss rates do justify a large part of the high APRs charged.”
Is a 36 Percent Interest Cap in Order?
Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researcherstreat a 36 percent cap as an outright ban. In view of this, “36 percenters” may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether.
“Spiraling” Fees?
A central element of the debt trap critique against payday loans is their “spiraling” fees: “When borrowers don’t have the cash come payday, the loan gets flipped into a new loan, piling on more fees into a spiral of debt for the borrower.” It’s certainly true that payday loan fees add up if the borrower extends the loan (like any debt), but do they spiral? Suppose Jane borrows $300 for two weeks from a payday lender for a fee of $45. If she decides to roll over the loan come payday, she is supposed to pay the $45 fee, and then will owe $345 (the principal plus the fee on the second loan) at the end of the month. If she pays the loan then, she will have paid $90 in fees for a sequence of two $300 payday loans. Payday lenders do not charge refinancing/rollover fees, as with mortgages, and the interest doesn’t compound (unless of course she takes out a new loan to pay interest on the first loan). Perhaps it is just semantics, but “spiraling” suggests exponential growth, whereas fees for the typical $300 loan add up linearly over time: total fees = $45 + number of rollovers x $45.
Do Payday Lenders Target Minorities?
It’s well documented that payday lenders tend to locate in lower income, minority communities, but are lenders locating in these areas because of their racial composition or because of their financial characteristics? The evidence suggests the latter. Using Zip code-level data, this study found that racial composition of a Zip code area had little influence on payday lender locations, given financial and demographic conditions. Similarly, using individual-level data, this blog post showed that blacks and Hispanics were no more likely to use payday loans than whites who were experiencing the same financial problems (such as having missed a loan payment or having been rejected for credit elsewhere). The fact is that only people who are having financial problems and can’t borrow from mainstream lenders demand payday credit, so payday lenders locate where such people live or work.
(Note: The economists added that rollovers are a bit more problematic but in the end concluded:
Critics see these chronic rollovers as proving the need for reform, and in the end it may. A crucial first question, however, is whether the 20 percent of borrowers who roll over repeatedly are being fooled, either by lenders or by themselves, about how quickly they will repay their loan.)
Payday Loan Prices: High but Justified?
The first complaint against payday lenders is their high prices: the typical brick-and-mortar payday lender charges $15 per $100 borrowed per two weeks, implying an annual interest rate of 391 percent! That’s expensive, to be sure, but is it unfair? For economists, the answer depends on whether payday credit markets are competitive: with healthy price competition, fees will be driven down to the point where they just cover costs, including loan losses and overhead.
Judging by their sheer numbers, payday lending is very competitive. Critics often fret that payday lenders outnumber Starbucks as if they—payday lenders, not Starbucks—were a plague upon the land. But shouldn’t competition among all those payday lenders drive down prices? They seem to. This study estimated that each additional payday firm per 1,000 residents in a given Zip code was associated with a $4 decline in fees (compared with a mean finance charge of about $55). In the later years of the study, the authors found that prices tended to gravitate upward toward price caps, but that seems like a problem with price caps, not competition. And of course, payday lenders also have to compete against other small dollar lenders, including overdraft credit providers (credit unions and banks) and pawnshops.
Competition seems to limit payday lenders’ profits as well as their prices. This study and this study found that risk-adjusted returns at publicly traded payday loan companies were comparable to other financial firms. An FDIC study using payday store-level data concluded “that fixed operating costs and loan loss rates do justify a large part of the high APRs charged.”
Is a 36 Percent Interest Cap in Order?
Even though payday loan fees seem competitive, many reformers have advocated price caps. The Center for Responsible Lending (CRL), a nonprofit created by a credit union and a staunch foe of payday lending, has recommended capping annual rates at 36 percent “to spring the (debt) trap.” The CRL is technically correct, but only because a 36 percent cap eliminates payday loans altogether. If payday lenders earn normal profits when they charge $15 per $100 per two weeks, as the evidence suggests, they must surely lose money at $1.38 per $100 (equivalent to a 36 percent APR.) In fact, Pew Charitable Trusts (p. 20) notes that storefront payday lenders “are not found” in states with a 36 percent cap, and researcherstreat a 36 percent cap as an outright ban. In view of this, “36 percenters” may want to reconsider their position, unless of course their goal is to eliminate payday loans altogether.
“Spiraling” Fees?
A central element of the debt trap critique against payday loans is their “spiraling” fees: “When borrowers don’t have the cash come payday, the loan gets flipped into a new loan, piling on more fees into a spiral of debt for the borrower.” It’s certainly true that payday loan fees add up if the borrower extends the loan (like any debt), but do they spiral? Suppose Jane borrows $300 for two weeks from a payday lender for a fee of $45. If she decides to roll over the loan come payday, she is supposed to pay the $45 fee, and then will owe $345 (the principal plus the fee on the second loan) at the end of the month. If she pays the loan then, she will have paid $90 in fees for a sequence of two $300 payday loans. Payday lenders do not charge refinancing/rollover fees, as with mortgages, and the interest doesn’t compound (unless of course she takes out a new loan to pay interest on the first loan). Perhaps it is just semantics, but “spiraling” suggests exponential growth, whereas fees for the typical $300 loan add up linearly over time: total fees = $45 + number of rollovers x $45.
Do Payday Lenders Target Minorities?
It’s well documented that payday lenders tend to locate in lower income, minority communities, but are lenders locating in these areas because of their racial composition or because of their financial characteristics? The evidence suggests the latter. Using Zip code-level data, this study found that racial composition of a Zip code area had little influence on payday lender locations, given financial and demographic conditions. Similarly, using individual-level data, this blog post showed that blacks and Hispanics were no more likely to use payday loans than whites who were experiencing the same financial problems (such as having missed a loan payment or having been rejected for credit elsewhere). The fact is that only people who are having financial problems and can’t borrow from mainstream lenders demand payday credit, so payday lenders locate where such people live or work.
(Note: The economists added that rollovers are a bit more problematic but in the end concluded:
Critics see these chronic rollovers as proving the need for reform, and in the end it may. A crucial first question, however, is whether the 20 percent of borrowers who roll over repeatedly are being fooled, either by lenders or by themselves, about how quickly they will repay their loan.)
Mankiw and Summers: Keep the Cadillac Tax
Greg Mankiw and Larry. Summers, both economics professors at Harvard and first class apologists for government interventions, have written a joint essay at NYT calling for the continuation of the Obamacare Cadillac tax:
This is the kind of education going on at Harvard. Free market options aren't even discussed.
-RW
One of us, a former member of the Obama administration, remains a fan of the president. The other, not so much. But we agree on one thing: The excise tax on high-cost health care plans, the so-called Cadillac tax, is good policy. Congress should side with President Obama and resist calls to scrap it...Of course, there is no discussion at all about the evils of centrally planned health insurance. The discussion assumes centrally planned health insurance and just attempts to micro-manage and support some of the interventions of the designed central planning.
One of us worked for President Obama when the Affordable Care Act was passed. One of us worked for President George W. Bush and supported John McCain and Mitt Romney in their attempts to defeat Mr. Obama. We disagree on many things, but we agree that health policy is too important to treat as if it were nothing more than another political battlefield.
Some policies deserve bipartisan support. The Cadillac tax is one of them.
This is the kind of education going on at Harvard. Free market options aren't even discussed.
-RW
Charles Koch Does Some Fancy Footwork When Asked If Koch Industries Will Benefit From the XL Pipeline
The Charles Koch high-profile campaign continues. From an interview by Daniel Fisher of Forbes:
Q. In your book you say you support the XL pipeline even though it would cost you money. Explain.
But Fisher nails him:
A. If that pipeline is built it will reduce the cost of transporting Canadian crude to the Gulf Coast by $3 a barrel. So presumably the price of Canadian heavy oil will increase by $3 a barrel compared to foreign competition, which is what the Gulf Coast refiners are running now. So that will increase the cost of our crude oil at our Minnesota refinery by $3 a barrel. We run 250,000 barrels a day of it, so that will cost us $750,000 a day, which is a little less than $300 million a year. But we’re still in favor of it because it makes good sense.
And Charles fancy steps to talk about production versus the land owned by KOch Industries, which would skyrocket if the pipeline is installed.
Q. Ah, but you have millions of acres of heavy oil reserves in Canada yourself.
A. First of all we don’t develop oil in Canada. If we find something with reserves or have acreage that goes up in price we sell it. So we approach it more as a trading vehicle. And our total production of heavy oil in Canada is less than 100 barrels a day. Take 50 barrels a day of production and we import 250,000 barrels a day, what are the odds that that acreage is going to be producing 250,000 barrels a day? It’s ludicrous.-RW
Saturday, October 24, 2015
When Friedman Readily Admitted He Didn't Understand Hayek's 'Prices and Production'
The Milton Friedman Austrian hate series continues. From the interview with Lanny Ebenstein, as reported in Chicagonomics:
From the book blurb:
I think his [Hayek's] capital theory book is unreadable, I cannot say I've read it. [laughter] It's very unreadable...I never could understand why they were so impressed [at the London School of Economics] with the lectures that ended up as Prices and Production and I still can't.
From the book blurb:
Hayek was not only a leading champion of liberty in the 20th century. As this massive book reveals, he was also a great economist whose elaboration on monetary theory and the business cycle made him the leading foe of Keynesian theory and policy in the English-speaking world. Here are collected his most important works on these topics: re-typeset, indexed for the first time, and beautifully bound in a 536- page hardbound book for the ages. These works have been tragically out of print for many years. Together they constitute a complete presentation of Hayekian money and business cycle theory. Even more, they work together as an excellent elucidation of Austrian macroeconomic theory, which is why this book has already been adopted in some classrooms. The timing could not be better. The entire world economy is now suffering from the effects of bad monetary policy, and with results that Hayek explains in great detail. With "counter-cyclical" policy again revealed as unworkable, and while the politicians plot to make matters worse, the contents of this book has direct bearing on present and future of monetary policy. Hayek was barely out of his twenties in 1929 when he published the German versions of the first two works in this collection, Monetary Theory and the Trade Cycle and The Paradox of Saving." The latter article was a long essay that was to become the core of his celebrated book and the third work in this volume, Prices and Production, the publication of which two years later made him a world-renowned economist by the age of thirty-two...
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