Magic numbers in politics

Back in the days of the Soviet Union, two Russian economists who had never lived in a country with a free market economy understood something about market economies that many others who have lived in such economies all their lives have never understood.

Nikolai Shmelev and Vladimir Popov said: “Everything is interconnected in the world of prices, so that the smallest change in one element is passed along the chain to millions of others.”

What does that mean? It means that a huge increase in the demand for ice cream can mean higher prices for catchers’ mitts, among other things.

When more cows are needed to produce more milk to make ice cream, then fewer cows will be slaughtered and that means less cowhide available to make baseball gloves. Supply and demand mean that catchers’ mitts are going to cost more.

While this may be easy enough to understand, its implications are completely lost on many people in politics and in the media. If everything is connected to everything else in a market economy, then it makes no sense to have laws and policies that declare some given goal to be a “good thing,” without regard to the repercussions, which spread out in all directions, like waves that spread across a pond when you drop a rock in the water.

Our current economic meltdown results from the federal government, under both Democrats and Republicans, declaring home ownership to be a “good thing” and treating the percentage of families who own their own home as if it was some sort of magic number that had to be kept growing — without regard to the repercussions on other things.

We are now living with those repercussions, which include the worst unemployment in decades. That is the price we are paying for increasing home ownership from 64 percent to 69 percent.

How did we get from home ownership to 15 million unemployed Americans? By ignoring the fact that there was a reason why only 64 percent of families owned their own home. More people would have liked to be homeowners but did not qualify under mortgage lending standards that had been in place for decades.

Politicians to the rescue: Federal regulatory agencies leaned on banks to lend to people they were not lending to before — or else. The “or else” included not having their business decisions approved by the regulators, which could cost them more money than making risky loans.

Mortgage lending standards were lowered, in order to raise the magic number of home ownership. But, with lower lending standards, there were — surprise! — more mortgage payment delinquencies, defaults and foreclosures.

This was a problem not only for banks and other lenders but also for those in the business of buying mortgages from the original lenders. These included semi-government enterprises like Fannie Mae and Freddie Mac, as well as Wall Street firms that bought mortgages, bundled them together and issued securities based on the anticipated income from those mortgages.

In other words, all these economic transactions were “interconnected,” as the Russian economists would say. And when the people who owed money on their mortgages stopped paying, the whole house of cards began to fall.

Politicians may not know much — or care much — about economics, but they know politics and they care a lot about keeping their jobs. So a great distracting hue and cry has gone up that all this was due to the market not being regulated enough by the government. In reality, it was precisely the government regulators who forced the banks to lower their lending standards.

The other big lie is that this was a failure of economists and others to foresee that the housing boom would turn to bust and set off financial repercussions across the economy.

In reality, everybody and his brother saw it coming and said so — including yours truly in the Wall Street Journal of May 26, 2005. As far away as London, The Economist magazine warned about the danger. So did many American publications and individuals. The problem was that politicians refused to listen. They were fixated on the magic number of home ownership and oblivious to the economic interconnections that Russian economists saw long ago and from far away.

[Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.] COPYRIGHT 2009 CREATORS.COM

and now we are playing the numbers game yet again...

Submitted by S. Lindsey on Fri, 10/16/2009 - 3:34pm.

The Healthcare bill will be deficit neutral.. Yeah right..

Increased Taxes (Obama calls them FEES????) and Medicare cuts go into effect 2010..

Only part of the UHC bill will go into effect 2015.. 5 years of taxes and cuts, but that’s not all. Most of the UHC will not be implemented until 2017 and 2018.. Almost 10 years of taxes and Medicare cuts to pay for 2 years of coverage.. After those 10 years..? We would see the REAL cost of this plan.
Another part of the game is the "Private" insurance joke.. The Government assumes that employers will find it too expensive to maintain private healthcare coverage.. They are assuming that employers will drop coverage and just give the money to the employee which will then become taxable income. Thus providing additional revenues to the Government.. That is the only way it works..
If employers fail to do that.. guess what.. No longer Deficit neutral..

Another part of the game is the payment to Doctors who take Medicare..
The plan proposes a 25% cut over 5 years and no increased cost of services for 10 years.. Leaving Doctors holding the bag for an estimated 60% of Medicare cost..

Do you really believe that is going to happen.. What will happen Doctors will stop taking Medicare patients forcing Senior Citizens into rationed care.. and oh guess what.. early life retirement.

"A Government big enough to give you everything you want, is strong enough to take everything you have." Thomas Jefferson

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