Should You Buy Bonds?

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Lacy Hunt and Van Hoisington write,

Presently the inflation picture is most favorable to bond yields. The year-over-year change in the core personal consumption expenditures deflator, an indicator to which the Fed pays close attention, stands at a record low for the entire five plus decades of the series

True.

Over the past year, the Treasury bond yield rose as the nominal growth in GDP slowed. The difference between the Treasury bond yield and the nominal GDP growth rate (Chart 4) is important in two respects. First, when the bond yield rises more rapidly than the GDP growth rate, monetary conditions are a restraint on economic growth. This condition occurred prior to all the recessions since the 1950s, as indicated in the chart. This condition also signaled the growth recessions in 1962 and 1966-67. Second, the nominal GDP growth rate represents the yield on the total economy

True.

But then I downloaded from the Fred database the 10-year Treasury rate and the level of nominal GDP. I took the three-year average of nominal GDP growth rate, and I subtracted it from the 10-year rate, to get a rough measure of the differential between the 10-year rate and the growth rate of nominal GDP. From 1963 to present, this differential averages -.18. A super-simplistic model is that the nominal interest rate should revert to this average differential. So, if nominal GDP growth is 6.25 percent and the average differential applies, the nominal interest rate should be 6.07 percent.

For the latest three years, ending in Q1 of this year, nominal GDP growth has averaged 3.85 percent. Using the super-simplistic model of the nominal rate, it should now be 3.67 percent. In fact, it is now 2.52 percent.

Hunt and Hoisington are betting that the nominal interest rate is going to fall, but when I look at the same GDP data they do, I think it ought to be higher than it is now.

Central Planning, in Practice

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The Washington Post reports,

Unknown to most, a single committee of the AMA, the chief lobbying group for physicians, meets confidentially every year to come up with values for most of the services a doctor performs.

Pointer from a reader, who requested that I comment. Actually, I had seen the article, but I thought it was too depressing/frustrating to even begin to comment.

The truly fundamental error is the belief that there is any objective way to measure cost. See my essay on subjective value. If you really want to see the fundamental nature of the error, see James Buchanan’s Cost and Choice. And, speaking of Buchanan, would he have been the least bit surprised that when the government is deciding how doctors get paid, a trade group representing doctors takes over?

Mr. C and Mr. K

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As I work on my book, I am trying to come up with a way to explain the classical economic outlook. Here is one approach. Comments welcome.

Here is an imaginary dialog between a classical economist (C) and Keynesian economist (K).

K: See that man, Uri, sitting on the bench over there? He is involuntarily unemployed.

C: How do you know that? Do you know his reservation wage? That is, do you know the lowest wage that he would accept to go to work? Do you know what his best offer has been?

K: Yes. He won’t work for less than $12 and hour, and his best offer has been $11.50

C: So he is not really unemployed. He has withdrawn from the labor force, because he can’t find a job that will pay him what he wants.

K: No, according to the Department of Labor, as long as he is looking for work, he is unemployed. Besides, in his last job, he earned $14 an hour and what he produced was worth $15 an hour. But when the economy went into a slump, the demand at his firm fell, and he was laid off. His problem is that there is a lack of effective demand.

C: I’m not sure what ‘effective demand’ means, but ok. What should Uri be doing instead of sitting on the bench?

K: He could be digging a ditch for the government.

C: But he’d rather be sitting on the bench. Why should he dig the ditch?

K: The government can pay him to dig the ditch. They can pay him $12 an hour.

C: If his ditch-digging is worth $12 an hour, that’s fine. The taxpayers should be happy to pay Uri to dig a ditch if it’s a worthwhile use of his time.

K: Actually, the ditch is not worth so much. Let’s say his ditch-digging is worth only $5 an hour. But this way, he’s working instead of sitting on a bench, and as taxpayers we benefit from the ditch.

C: No! As taxpayers, we pay $12 and hour for ditch-digging that is worth only $5 to us. That makes us worse off.

K: Would you rather pay unemployment benefits of $8 an hour and get nothing?

C: No….But if we are going to redistribute income to Uri, why not encourage him to take the offer for $11.50 and pay him just $.50 an hour as a subsidy to do that?

K: Hmmm. Not such a bad idea. But the ditch-digging puts more spending into the economy.

C: No it doesn’t. You give $12 to Uri to spend, but that $12 comes from those of us who pay taxes, and now we have $12 less to spend. It’s just a transfer.

K: But we’re not going to raise taxes. We are going to borrow the money to pay Uri to dig the ditch.

C: In that case, the borrowing is going to use up saving that otherwise would have been used to build homes or expand businesses.

K: No. Households and businesses do not want to spend any more. The savings would have sat idle. We need the government to spend those savings, because no one else will.

C: Really? You seem to think that we can have an excess of savings without driving down interest rates. I don’t see how that can happen.

K: That’s a discussion for another day.

Non-Profit Rent-Seeking

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James Piereson writes,

For much of U.S. history, nonprofits have operated as a check on government by providing private avenues to serve the public interest. Unfortunately, American charities—and more broadly, the entire nonprofit sector—have become a creature of big government…

The publication Giving USA, which tracks charitable spending, reports that the government now supplies one-third of all funds raised by not-for-profit organizations.

… According to a recent report by the Chronicle of Philanthropy, government funding of such charities grew by 77% between 2000 and 2010, while private support for such groups grew by just 47%.

I keep emphasizing that the main difference between non-profit and for-profit is that non-profits are accountable to donors and for-profits are accountable to customers. This means that the non-profit sector is going to be more elitist and more less efficient than the for-profit sector. It does not mean, as so many people think, that the non-profit sector operates from better motives or provides more social benefit.

I am not saying that a non-profit sector is a bad thing. Just remember that it is inherently paternalistic, and that is problematic.

Given my view, the trend for the non-profit sector to align with government is not surprising, but still disturbing.

UPDATE: Steven Moore also weighs in.

The Civitas Institute, a conservative think tank in North Carolina, recently published an analysis of the financial statements of the left-wing groups sponsoring these rallies, such as the Community Development Initiative and the Institute of Minority Economic Development. It found they have collected about $100 million in state grants, loans and contracts. No wonder they’re enraged over GOP lawmakers’ attempts to rein in spending.

Squeezed Up, Nine Years Later

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Mark Perry writes,

America’s “middle class” did start largely disappearing in the 1970s, but it was because they were moving up to a higher-income category, not down into a lower-income category. And that movement was so significant that between 1967 and 2009, the share of American families earning incomes above $75,000 more than doubled, from 16.3% to 39.1%.

Nine years ago,I wrote,

the middle has shrunk, from 22.3 percent of households to 15.0 percent…the two categories below the middle also have shrunk, from 52.8 percent of households to 40.9 percent. Adjusting for inflation, the percentage of households with incomes over $50,000 has climbed from 24.9 percent in 1967 to 44.1 percent in 2003.

Peter Wallison on the 30-year Mortgage

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He writes,

In my testimony, I introduced the fact that this week Wells Fargo (the largest mortgage lender in the US) was offering a 30 year fixed rate non-government mortgage for 4.5%, while the government form of the same mortgage was 15 basis points higher at 4.65%. Apparently, Wells had found a way — previously said by the Left to be impossible — to hedge a 30 year fixed rate loan.

Some remarks:

1. Government-guaranteed rates will not automatically be lower. These days, for various reasons, Freddie, Fannie, and FHA are under pressure to boost margins, which means charging high rates.

2. As a too-big-to-fail bank, Wells is in a position to compete against Freddie and Fannie. Investors can treat Wells Fargo debt as if it were government guaranteed. (I imagine Wallison would agree with me on this.) Wells’ disadvantage vis-a-vis Freddie and Fannie–if there is one–is more subtle. That is, Freddie and Fannie may have to hold less capital than Wells. But I would say that we don’t really know where the interest rate on a 30-year mortgage would settle in a world where no mortgage lender enjoys a government guarantee.

3. On the larger issue, Wallison is of course correct. There is no public-policy reason to steer the market toward a 30-year fixed-rate mortgage. As he points out, a 20-year fixed-rate mortgage would be just fine. So would a 30-year mortgage where the interest rate adjusts every five years.

Do You Concur?

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I have been participating in a discussion of Mark Weiner’s book at the legal theory web site, Concurring Opinions. On this post of mine, Gordon Sollars commented,

A federal government with considerably less power than presently exists in the U.S. is not necessarily a “weak” government, opening a society to a resurgence of clans, given the existence of state and local government structures… If the only choice is between clans or governments with a direct span of control over the lives of hundreds of millions of people, the contemporary liberal project is as doomed as the libertarian one.

Indeed, there are plenty of examples of successful small states. And there are plenty of examples of successful Federal states. Canada seems less centralized than the U.S. these days, including for health care. The provinces appear to have more independence than our states do.

There are also plenty examples of successful states that do not have hundreds of millions of people. Singapore and Sweden.

Finally, there is the example of Switzerland, which is both much smaller than the U.S. in terms of population and a more Federal system of government.

McMedicine, Coming?

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Lifted from the comments:

Well, it’s not scientifically valid, but I did have dinner last weekend with a friend who is a CEO of a 2000 person HC provider, and he would tell you that margins are being squeezed mercilessly. Overhead is enormous – 80% of his employees are NEITHER doctors NOR nurse-practitioners. Consolidation is going to come very fast, and a decade from now, there will be less than 100 healthcare providers in the United States.

Some remarks:

1. This prediction may be quite independent of whether Obamacare remains intact.

2. Higher education, too, has bloated overhead. Of course, that industry is not being squeezed mercilessly. Yet.

3. There was once an essay that began, “The traditional model of medical delivery, in which the doctor is trained, respected, and compensated as an independent craftsman, is anachronistic.”

Amar Bhide and Edmund Phelps on the Fed

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Their op-ed is a grab bag. For example,

It is doubtful, though, that quantitative easing boosted either wealth or confidence. The late University of Chicago economist Lloyd Metzler argued persuasively years ago that a central-bank purchase, in putting the price level onto a higher path, soon lowers the real value of household wealth—by roughly the amount of the purchase, in his analysis. (People swap bonds for money, then inflation occurs, until the real value of money holdings is back to where it was.)

What I think this refers to is the idea that when the government prints money, it collects seignorage, also known as the “inflation tax.” The implication is that quantitative easing amounts to nothing other than a tax increase.

Later, they write,

Households have maintained their strong propensity to consume, persuaded that their retirement incomes will be topped up with entitlements. But consumer-goods production—giant machines needing only a guard and a dog, as some wag put it—is generally not labor-intensive enough to provide high employment at normal wages. A central bank’s monetary policy, no matter how ambitious, cannot solve this structural problem.

In my PSST words, the Fed cannot create patterns of sustainable specialization and trade.

Still later, they write,

What we do need from the Fed is reform of the ways banks are regulated and supervised. Tough, on-the-ground examination of individual banks not only helps keep them solvent, such scrutiny can also prevent out-of-control money growth without suppressing productive lending. Similarly, rules that discourage banks from relying on yield-chasing hot money will limit the runs and panics the Fed has to fight.

This is a bit like my argument for principles-based regulation. The problem with letter-of-the-law regulations, like risk-based capital, is that they set the regulator up to be gamed. You invite financial wizards to come up with ways to dress up high-risk portfolios in low-risk clothing. Principles-based regulation, along with “on-the-ground examination,” means that you do not just sit back and watch helplessly while the financial wizards run circles around you.

Property Without Rights

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Nick Sibilla writes,

Airbnb rentals in Paris contributed $240 million in a year to the local economy, while Crain’s estimates they could have an economic impact worth $1 billion in New York State. Plus, the property owners can earn some income on the side. It’s a win-win-win…except for the established hotels.

For some reason, the laws against renting out your own property strike me as a more fundamental violation of property rights than other regulations.

Of course, when it comes to making me angry at government regulation, shutting down cheap bus service is also right up there.

Stories like these are what make a phrase like “Government is the name for the things we do together” ring so hollow in my ears.