Stephen Hicks, Ph.D.

Subprime mortgage crisis — history flowchart

Here is a simplified flowchart, developed for my business ethics courses, reflecting my understanding of subprime mortgages’ contribution to the crisis.

Let me emphasize that this is only about the subprime contribution of the overall crisis. Fannie Mae and Freddie Mac enabled much spillover into non-subprime mortgage sectors, government-set capital requirements and other regulations enabled the AAA ratings of mortgage-based securities that encouraged speculators, and there were plenty of imprudent and unscrupulous characters in the private sector too.

Click on the image for a larger size or here for a PDF version.

Suggestions for improvement welcome. Thanks to Christopher Vaughan for the flowchart’s visual design. [Return to the StephenHicks.org main page.]

Deregulation? The Federal Register’s size

Following up on my post entitled “When was the financial sector deregulated?”

Another crude measure of regulation or deregulation is to count the number of pages in the U.S. Federal Register. The Federal Register is the government’s daily publication of new and proposed rules. Some of the rules are trivial and some have large impact; some are proposed and some are final; some are clarifications and some are new. But cumulatively the Register’s increasing or decreasing bulk tells us something about regulatory trends.

For the last generation, here are the Federal Register’s total page counts for selected years:

1980s: 52,992 pages per year average.
1990s: 62,237 pages per year average.
2005: 73,870 pages.
2010: 81,405 pages.

(Side note: This year alone, the Register has published about 590 items related to the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

Question: Does anyone know of a Register page count by economic sector? For example, have number of pages devoted to regulating the Finance and Banking sector increased or decreased over that time?

Of course, page-measurement is a very crude indicator. It doesn’t tell us whether particular rules were good or bad, and it doesn’t tell us whether the overall effect of the rules was positive or negative. So we also have to discuss at least two other follow-up pro-regulation arguments:

1. “Magic Bullet” explanations of the financial crisis: Yes, government regulation increased overall–but if only government regulators hadn’t altered Regulation #355,017, the financial crisis would have been avoided. Or: If only the regulators had also enacted Regulation #4,854,229, the crisis wouldn’t have happened.

2. “Relative-Size Inadequacy” arguments: Yes, regulation increased, but the size of the financial sector increased at a higher rate, so under-regulation was the cause of the crisis.

And the deeper, underlying pro-regulation argument that:

3. Left to themselves, financial markets are predatory and incapable of self-regulation, so top-down government regulation is necessary.

Sources:
Clyde Wayne Crews. Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State. Cato Institute, 2002.
Clyde Wayne Crews, Jr. Ten Thousand Commandments: An Annual Snapshot of the Federal Regulatory State. Competitive Enterprise Institute, 2006.
The 2010 page count: Politifact Virginia.
Federal Register: The Daily Journal of the United States Government.

Related: My essay, “Defending Shylock: Productive Work in Financial Markets.”
What is the US economy? Introduction.

More: Do conservatives really value economic liberty?

Some do, sort of. But most of its major representatives do not. Another example is GOP hopeful Newt Gingrich.

In his 1984 book, Window of Opportunity, Gingrich attacks laissez-faire and proposes what he calls “opportunity society conservatism”:

“The opportunity society calls not for a laissez-faire society in which the economic world is a neutral jungle of purely random individual behavior, but for forceful government intervention on behalf of growth and opportunity.”

So the free market is a “jungle” and “purely random” and Gingrich favors “forceful” government intervention.

Two more examples, recalling an earlier post — of anti-free-market conservatives, each representative of a different sub-species of conservatism.

First the traditional conservatives, taking Robert Bork as representative, this from his Slouching Towards Gomorrah:

“Because both libertarians and modern liberals are oblivious to social reality, both demand radical personal autonomy in expression. That is one reason libertarians are not to be confused, as they often are, with conservatives” (p. 150). Bork goes on to argue that “Free market economists are particularly vulnerable to the libertarian virus” and to cite philosophical errors about ethics and human nature as the root problem: too often the free market economist “ignores the question of which wants it is moral to satisfy” (p. 151) and fails to recognize that “[u]nconstrained human nature will seek degeneracy often enough to create a disorderly, hedonistic, and dangerous society” (p. 153).

Second, the neo-conservatives, taking Irving Kristol, “godfather” of the neo-cons, as representative, this from his contribution to his co-edited Capitalism Today:

“The inner spiritual chaos of the times, so powerfully created by the dynamics of capitalism itself, is such as to make nihilism an easy temptation. A ‘free society’ in Hayek’s sense gives birth in massive numbers to ‘free spirits’ – emptied of moral substance” (p. 13).

Gingrich, Bork, and Kristol are among the biggest names in contemporary American conservatism and all are opposed to free-market capitalism. Can we cite equally prominent conservatives who are forcefully and consistently free-market capitalist? So what are we to make of the often-held view that connects conservatives to economic liberty? Is it merely that they are relatively less anti-free-market than their left-leaning opponents?

[Source for the Gingrich quotation: David Brooks, "The Gingrich Tragedy." The New York Times, December 8, 2011.]

When was the financial sector deregulated?

One popular meme is that the financial crisis was caused by deregulation in the banking and financial sectors. Accordingly, suggest the memists, free markets should take the blame and more government regulation is the solution.

When did this deregulation take place? One measure of the degree of regulation is how much the federal government spends to craft and enforce regulations in various sectors: consumer safety, environment, energy, homeland security, and so on. The more the government is regulating, the higher its budget should be; and the less government is regulating, the lower its budget.

Here are the federal government’s budgeted spending numbers for the Finance and Banking sector of the economy (in constant 2000 dollars) from 1960 to 2009:

1960: $190 million
1970: $356 million
1980: $725 million
1990: $1.598 billion
2000: $1.965 billion
2007: $2.065 billion
2008: $2.294 billion
2009: $2.343 billion

Another measure is the number of government personnel employed in crafting and enforcing regulations. The numbers for Finance and Banking:

1960: 2,509
1970: 5,618
1980: 9,524
1990: 15,308
2000: 13,310
2007: 11,637
2008: 12,113
2009: 12,190

Other measures of degree of regulation? Conclusions?

Source: Veronique de Rugy and Melinda Warren, “Regulatory Agency Spending Reaches New Height: An Analysis of the U.S. Budget for Fiscal Years 2008 and 2009″ [pdf].

Related: Deregulation? The Federal Register’s size.
What is the US economy? Introduction.

Thankful: wealth and life expectancy

Something to be thankful for: All those productive people who created the wealth that has enable so many of us to live longer and more fully.

I love this data map from Gapminder correlating life expectancy with wealth (click for full size):

And encouraging numbers over at Forbes (via R.M.): Avik Roy looks at cancer survival rates among the wealthiest countries and notes that the USA does well despite having three healthcare systems, not one.

My upcoming lectures at Universidad Francisco Marroquín

From November 3 to 6, I will be giving an invited series of lectures and seminars (nine hours worth of them!) at the Francisco Marroquín University in Guatemala.

My general themes will be entrepreneurship, ethics, philosophy, and political economy.

The times titles of my various talks are as follows.

Open Lecture (Thursday, November 3): “Entrepreneurs and Philosophers: Why a Philosophy of Freedom Matters.”

Luncheon Seminar (Friday, November 4): “Economics as a Value Science.”

Full-day Seminar (Saturday, November 5): “Philosophy for Economists and Economics for Philosophers.” Sub-units for the day:

1. Philosophy and the Evolution of the Mixed Economy

2. On the Best Arguments against Free-Market Capitalism
“Socialism is moral even if it isn’t practical.”
“Wealth is a social creation.”
“We live in a world of scarce resources.”
“The free market is dog-eat-dog.”
“Humans are too depraved for freedom.”
“Humans are too incompetent for freedom.”
“Value is not of the material world.”

3. Ethics and Political-Economy
Entrepreneurship and Virtue Ethics
Objective, Subjective, and Intrinsic Value
Egoism, Altruism, and Predation
The Entrepreneurial Life

4. Government in a Free Society
What government is—the what and the how
Legislating morality

5. The Case for the Free Society
Moral and Economic Arguments for Freedom
Empirical Data and Theoretical Principles
“What” and “How” Arguments
Integrating Friedman, Hayek, and Rand
The Positive and the Negative Cases for Freedom

6. Freedom and the Meaning of Life

Thanks to UFM’s Centro Henry Hazlitt for sponsoring my visit.

Fernández and Sarano to speak at Rockford College

Federico Fernández and Martin Sarano will speak on “Doing Business in Argentina: The current business climate and the ethical dilemmas it presents to entrepreneurs and corporations” to my Business and Economic Ethics class on Thursday, October 13.

Early in the twentieth century, Argentina’s economy was one of the top ten in the world, but it experienced significant decline over the past several decades. Doingbusiness.org is a useful site with information about the ease or difficulty of doing business in every country in the world. Argentina is ranked 115th overall.

Fernández and Sarano are President and Vice-President, respectively, of the Bases Foundation of Argentina, and Sarano is concurrently a student in the MBA program at the Booth School of the University of Chicago. I had the pleasure of meeting them last year at the Third International Conference on the Austrian School of Economics in the 21st Century.

Please see the flyer [pdf] for details about the talk’s time and location. Fernández and Sarano’s visit is sponsored by the Center for Ethics and Entrepreneurship.

Elizabeth Warren and the doulos

Elizabeth Warren’s recent remarks offer a striking glimpse into a prominent strain of American political thought. Warren is a Harvard law professor and U.S. Senate candidate, and she has been a White House presidential assistant. An excerpt:

“There is nobody in this country who got rich on his own. Nobody.
“You built a factory out there? Good for you. But I want to be clear: you moved your goods to market on the roads the rest of us paid for; you hired workers the rest of us paid to educate; you were safe in your factory because of police forces and fire forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory, and hire someone to protect against this, because of the work the rest of us did.
“Now look, you built a factory and it turned into something terrific, or a great idea? God bless. Keep a big hunk of it. But part of the underlying social contract is you take a hunk of that and pay forward for the next kid who comes along.”

What gives this argument rhetorical force is its appeal to a principle of economic justice: You should pay for the benefits you get from others. Don’t be a freeloader. Warren combines that principle with a list of benefits an imagined factory builder has received from others to get the implicit conclusion and policy recommendation: The factory builder has unpaid debts that justify increased taxation.

Five observations and questions:

1. On the seriousness of the economic justice claim: If we’re to conclude that the factory owner (let’s call her Jill) has unpaid debts, are we to (a) estimate how much benefit Jill the factory builder has received from others, (b) determine how much she has paid for those benefits (since presumably she paid her employees, truckers, and taxes), so that (c) we can determine whether she has paid too much, too little, or the right amount? Are we to make that serious accounting effort, or is this argument meant to generate an unspecified debt claim and a blank check for politicians and the IRS to fill in as they judge best?

2. On the transfer of debt: Warren points out that, for example, many of the factory’s employees were educated in government schools. The government has taxed its citizens and used that money to educate, say, Jack. Interestingly, Warren does not say that Jack now has a debt to society that he should pay. Instead, the debt seems to shift to Jill when she hires Jack. How does that work?

3. On disingenuous application: Warren targets her argument only against the prosperous. Yet middle and low income people also receive the same benefits as the factory builder—they use the roads, enjoy police and fire protection, use the services of those educated in public schools, and so on. Why is Warren not also hectoring middle and low income people for apparently violating the social contract?

4. On the compatibility of the economic justice principle with the rest of Warren’s political philosophy: Warren here suggests strongly that Jill the factory builder has freeloaded on unpaid benefits from the rest of society and that justice requires that she pay for what she received from others. Does Warren therefore favor abolishing the welfare state? I rather doubt it. So we end up in an odd position: Those who live on or profit from government welfare get a pass in Warren’s system, while those who build factories are considered freeloaders.

5. On the doulos and a historical echo: In Plato’s Crito (50d), Socrates argues that he has no right to escape from prison, even if he is innocent. Socrates imagines himself in conversation with the Laws of the State and has the Laws say to him, ‘”In the first place did we not bring you into existence? Your father married your mother by our aid and begat you. Say whether you have any objection to urge against those of us who regulate marriage?” None, I [Socrates] should reply. “Or against those of us who regulate the system of nurture and education of children in which you were trained? Were not the laws, who have the charge of this, right in commanding your father to train you in music and gymnastic?” Right, I should reply.’

Socrates has agreed that the State made possible his existence and upbringing. Consequently, he is in debt to the State, as the Laws go on to conclude forcefully:

“Well, then, since you were brought into the world and nurtured and educated by us, can you deny in the first place that you are our child and slave, as your fathers were before you?”

“Doulos: In ancient Greece, a slave (δοῦλος).” In the above translation of Plato’s text, doulos is translated as either child or slave. Thus we have an argument for paternalism and slavery: Socrates, his ancestors, and presumably his descendants, are creatures and chattels of the State.

Is Warren’s position that different?

Perhaps hers is not meant as a serious argument, though, and only as red meat thrown to the “Tax the rich!” political base. But what if Warren is serious?