"Why America Needs a Little Less Laissez-Faire"

Barney Frank says we've gone too far down laissez-faire boulevard:

Why America needs a little less laissez-faire, by Barney Frank, Commentary, Financial Times: As we prepare for this autumn’s election, the results are in on America’s 30-year experiment with radical economic deregulation. Income inequality has risen to levels not seen since the 1920s and the collapse of the unregulated portion of the mortgage and secondary markets threatens the health of the overall economy.

These two economic failures will be major issues in the forthcoming presidential election, and, importantly, there is an emerging Democratic consensus standing in sharp contrast to the laissez faire Republican approach.

There are two central elements of this consensus. Democrats believe that government’s role as regulator is essential in maintaining confidence in the integrity and fairness of markets, and we believe that economic growth alone is not enough to reverse unacceptable levels of income inequality. In the wake of the subprime mortgage crisis, ... it clear that a mature capitalist economy is as likely to suffer from too little regulation as from too much.

With respect to income inequality... Whether because of globalisation, technology or other factors, it is clear that market forces have produced too much inequality and government has not adequately used its capacity to mitigate the impact of these forces.

Conservatives have long argued that government efforts to address these issues would damage the economy. They are, of course, the same people who predicted that there would be an economic disaster after Bill Clinton and the Democratic Congress raised marginal tax rates in 1993, and who opposed other tax increases on upper-income people. Economic growth in the ensuing years was among the strongest in the postwar era. It is now clear that growth in the private sector is consistent with a far greater variation in many aspects of public policy – including taxation and regulation – than conservatives claim. In fact, appropriate ... market regulation is necessary to promote growth, and its absence – as we have learned – can retard it.

As recently as a year ago, one often heard the argument that US financial activity would migrate offshore unless we moved to further deregulate markets. There is little evidence to support this claim. In fact, it is now clear that what has been migrating to the rest of the world are the problems associated with securities based on bad loans – often originated by unregulated institutions in the US. ...

Widespread securitisation ... has turned out to be far less than the unmitigated boon it had once appeared. The market did its job with great efficiency in exploiting the benefits of securitisation but government failed to make good on its responsibilities. The failure of regulation to keep pace with innovation left us with no replacement for the discipline provided by the lender-borrower relationship that securitisation dissolves. Increasing and largely unregulated leverage multiplies the corrosive effect of this change.

In response to the current crisis, it appears that the regulatory tide may, at long last, be turning.

In 1994 a Democratic Congress – the last before the Republican takeover marked the arrival of the deregulators – passed the homeowners equity protection act, giving the Federal Reserve the power to regulate all home mortgage loans. The avatar of deregulation, Alan Greenspan, then Fed chairman, flatly refused to use any of that authority.

In contrast, today’s Fed will soon issue rules using that authority. That represents a significant repudiation of the previous view. While the proposals made by the Democratic presidential candidates differ in detail, they are to a substantial extent consistent with the argument I have made here. Their Republican counterparts continue to advocate the hands-off approach pursued by the Bush administration. As a result, we are likely to have a healthy debate about the role of government in supporting a robust capitalist economy in the 21st century. It is important to note that this debate is not about policy details but represents fundamentally different views about the nature of our modern economy. ...

On the inequality point, we should remove inequities in outcomes, particularly those that arise due to unequal opportunity. But fixing problems after the fact is not enough, there is much more we can do to equalize economic power and to bring about more equal opportunity than we are doing now.

An unequal playing field may cause most of the goodies to roll into one corner, and redistributing the goodies to where they would have gone on a level field is unobjectionable even though those in the corner will complain when you take away their hard-earned wealth. But leveling the playing field has to be a priority as well, it's the best solution in the long-run, and this is where I would like to see more effort.

Until opportunity is equalized, at least more so than now, redistribution may be needed to compensate for the uneven playing field that we have, and there's no guarantee that the outcome will be equitable even with equal opportunity. But we can surely do more - we surely should do more - to help disadvantaged segments of our population to acquire the tools they need to be successful and compete on a more equal basis.

Comments

[hari]

BF certainly reconfirms what ails American capitalism...

Mark recognizes - in between the lines - there're fundamental political consequences to the current setup if NOT urgently corrected. The system is, may be, on life-guard depending on the extent of the impending recession, and its political fallout.

[Jay]

Well on the reverse side, what about governments trying to fix their failures with more government regulation?
It shouldn't be a surprise to any Californian that if you cap electricity prices and create burdensome regulations for new power plants, you are going to have a shortage of electricity.
So how do we solve this government failure? More government regulation! Coerce individuals to install radio controlled devices on A/C units, so the government can turn back your electricity, by preventing you from keeping your living quarters comfortable.
Oh well you could always install a solar panel in San Fran and have everyone else in the city pay for part of your electricity bill. But if the government shuts off you A/C you might be feeding the grid, instead of keeping your domain at your desired temperature.

[Lafayette]

Article: These two economic failures (income inequality and the sub-prime mess) will be major issues in the forthcoming presidential election

Barney Frank has a crystal ball? By the time November rolls around the American economy will be improving.

All people want is for lead-head to dry up and blow away to Crawford. So, another Republican CAN win the next election. Why not?

The only way to fix Income Inequality is by raising taxes? Who is proposing that? In fact, they are all falling over one another to agree that a tax cut is absolutely necessary to get the economy rolling again.

They even agree to continue the previous tax cuts (that benefited upper incomes), which were supposed to die this year.

[Gegner]

These jokers have DOUBLED the national debt! In just seven years this adminsitration has spent more than the other 42 previous administrations combined...and we have absolutely NOTHING to show for it!

Given that our current mess is the result of the last 'fiscal stimulus package' one has to seriously question the 'wisdom' of throwing more money at the already raging inferno.

Once upon a time, a hundred billion dollars was a lot of money, but this represents a fifth of what these bozoes have sunk into the 'black hole' over in the Middle East!

Again, once upon a time, war was good business...where the hell are the positive economic effects of the half a trillion dollars we've already spent?

[donna]

There was no fricking electricity shortage, Enron screwed CA.

The regulation is needed because some people are simply greedy evil bastards. And the "free market" can't control them.

[Jay]

"In just seven years this adminsitration has spent more than the other 42 previous administrations combined"

Let me intervene for Anne here.

Absolute rubbish. I'd love to see that proof. Even if you are a zombie that doesn't understand the time value of money, all you have to do is go back through Billo and George Senior.

Or do you deny the 1.5 Trillion we were spending on average each year under Billo?

[robertdfeinman]

Apparently deregulation doesn't work too well for capitalists either. It's the big financial firms that are sustaining the huge losses.

Regulations exist not only to protect the innocent, but to allow firms that want to operate ethically to do so. Without the rules the unethical players have an advantage.

Restoring some degree of regulation will improve things, but the other fault of modern capitalism is still unaddressed: the concentration of markets into an ever decreasing number of hands. It is very easy for firms to collude when there are only a handful. They don't even have to do it illegally, there are plenty of signaling mechanisms that they can use. We see this at work all the time in the cell phone and airline industries.

Oligopolies are probably preferred these days since they allow firms to do what they wish without having to worry about being the targets of public hate or government investigation.

[Jay]

RFD: "It is very easy for firms to collude when there are only a handful."

Almost, but not quite...

It is very easy for political parties to collude when there are only a handful.

[James Killus]

It shouldn't be a surprise to any Californian that if you cap electricity prices and create burdensome regulations for new power plants, you are going to have a shortage of electricity.

What actually comes as no surprise is that if you have a system where withholding supply from a highly inelastic market will result in greater profits to the suppliers, then said suppliers will, in fact, withhold supplies in order to create artificial shortages.

The California electric shortage followed what was widely touted as "deregulation." When the response to a clearly toxic dose of a medication is that more of the same medication will work better, the word "Quack" springs to mind, and not the good kind that ducks make.

Only silly gits believe that there can be such a thing as a laissez-faire market in electricity, or have I somehow stumbled into a universe where anyone can string up electric power lines on someone else's property without government backing? No, I look around and note that I'm still in the same universe where self-styled libertarian ideologues yammer the same blather that they've yammered for the past several decades.

[realpc]

"we should remove inequities in outcomes,"

Are you sure that's what you mean? You want all outcomes to be equal? If all outcomes were equal, I would definitely stay in bed tomorrow morning. The heck with driving to work in a snowstorm!

[save_the_rustbelt]

Mitt Romney has promised to return lost manufacturing jobs to Michigan....... And I will be drafted by the Steelers this year.

This is confusing, what exactly does deregulation have to do with income inequality? What regulations is he referring to?

Do we want to re-regulate airlines, so most people could not afford to fly and the pilots got huge checks for flying two days a week.

Do we want to re-regulate trucking, which inflated trucking costs and was a major cash cow for lawyers?

Anyone who read the SEC regs or SarbOx knows the financial sector is still heavily regulated.

Regulations will not make up for peeing away a large chunk of blue collar economy to low wage and slave labor countries.

[Jay]

"What actually comes as no surprise is that if you have a system where withholding supply from a highly inelastic market will result in greater profits to the suppliers"

And how do competitors and possible new entrants act as profitability rises? If you are not sure, go back and look at what homebuilders did from 2002 to 2005 as profits rose.

[anne]

Interestingly, what led directly to the electricity crisis in California was deregulation, freeing prices, and what immediately solved the problem was setting price caps. But, history is continually being rewritten by those who wish to distort history.

Deregulation left a situation where in a naturally non-competitive market consumers were without protection against price manipulation and manipulation was simple and has been thoroughly documented. All that had to happen was for electricity transmission to be limited early on a hot day under the guise of work needing to be done on facilities. Immediately prices would climb as there was an anticipation of supply tightness. The higher prices were a splendid reward to companies for always finding repair work on transmission facilities to do on hot days, and companies acted to gain the rewards. When caps on prices were instituted, the price manipulation became impossible and the supply tightness simply disappeared.

[anne]

"It shouldn't be a surprise to any Californian that if you cap electricity prices and create burdensome regulations for new power plants, you are going to have a shortage of electricity."

Not only is this comically false, but it is precisely the opposite of the truth.

[Jay]

"a naturally non-competitive market"

Yeah, if the government didn't protect the current electricity producer's monopoly through regulation, the market would have behaved a lot differently. As profits rise, it encourages investors to build their own capacity. But naive NIMBY outcry has proven quite successful at restricting new entrants through heavy handed government regulation. Don't forget every 4 years or so politicians need to buy votes one way or another to keep their job.

[anne]

Not that it matters, because in a growing economy budgets will grow with rare exceptions as in the wake of wars, but government spending since the initial budget of George Bush have been larger than the spending under Bill Clinton. The relative largeness of the budgets has been determined by military spending increases. Military spending has grown as a portion of national income, while non-military spending has declined. Tra la.

[anne]

"Yeah, if the government didn't protect the current electricity producer's monopoly through regulation, the market would have behaved a lot differently."

This is of course a lie, not a deception but a lie, since deregulation had already occurred before the so-called California energy crisis. Lie on, though.

[anne]

http://select.nytimes.com/search/restricted/article?res=FA0C10FC3D5B0C738DDDAB0994D8404482

December 10, 2000

California Screaming
By PAUL KRUGMAN

California's deregulated power industry, in which producers can sell electricity for whatever the traffic will bear, was supposed to deliver cheaper, cleaner power. But instead the state faces an electricity shortage so severe that the governor has turned off the lights on the official Christmas tree — a shortage that has proved highly profitable to power companies, and raised suspicions of market manipulation.

The experience raises questions about deregulation. And more broadly, it is a warning about the dangers of placing blind faith in markets.

True, part of California's problem is an unexpected surge in electricity demand, the byproduct of a booming economy. It's possible that the crisis would have happened even without deregulation.

But probably not. In the bad old days, monopolistic power companies were guaranteed a good profit even if their industry had excess capacity. So they built more capacity than they needed, enough to meet even unexpectedly high demand. But in the deregulated market, where prices fluctuate constantly, companies knew that if they overinvested, prices and profits would plunge. So they were reluctant to build new plants — which is why unexpectedly strong demand has led to shortages and soaring prices.

Now you could say that in the long run there is nothing wrong with that. Building extra generating capacity was costly, and the costs were passed on to consumers; while prices may fluctuate in a system with less slack, on average consumers will pay less. In fact, textbook economics suggests that it's actually a good thing that electricity prices skyrocket when supply runs short: that's what gives the power companies an incentive to invest. And so you could argue that no public intervention is warranted — indeed, that the caps that still place an upper limit on electricity prices only worsen the problem, that we should rely on market competition to solve the crisis.

But how competitive is the electricity market? What makes California's power crisis politically explosive is the suspicion that it's not just about inadequate capacity, but also about artificially inflated prices.

How might market manipulation work? Suppose that it's a hot July, with air-conditioners across the state running full blast and the power industry near the limits of its capacity. If some of that capacity suddenly went off line for whatever reason, the resulting shortage would send wholesale electricity prices sky high. So a large producer could actually increase its profits by inventing technical problems that shut down some of its generators, thereby driving up the price it gets on its remaining output.

Does this really happen? A recent National Bureau of Economic Research working paper by Severin Borenstein, James Bushnell and Frank Wolak cites evidence that exactly this kind of market manipulation took place in Britain before 1996 and in California during the summers of 1998 and 1999....

[save_the_rustbelt]

"True, part of California's problem is an unexpected surge in electricity demand, the byproduct of a booming economy. It's possible that the crisis would have happened even without deregulation."

When southern California runs out of water and half of the people have to leave this problem will fix itself :))

Seriously folks, the California experience is not indicative of what happened in most of the country, and we should be careful about using exceptions to set the rule.

[anne]

http://query.nytimes.com/gst/fullpage.html?res=9906E4DA1631F935A15751C0A9649C8B63

February 26, 2002

The Power Perplex
By PAUL KRUGMAN

Until recently, it seemed unlikely that California would ever get anything back from the energy companies that, in the view of state officials, robbed the state of billions of dollars. Then came the Enron scandal. Will revelations about Enron's political machinations, and new allegations by former Enron employees that the company manipulated California's electricity markets, change the odds?

California officials apparently think so. Yesterday they filed a suit with the Federal Energy Regulatory Commission, seeking a renegotiation of electricity contracts signed during the state's power crisis. They may hope that FERC officials -- particularly the chairman, Pat Wood, who was recommended for the post by Enron's Ken Lay -- will feel the need to demonstrate their independence by getting tough with energy companies.

The contracts in question were signed about a year ago, when wholesale electricity prices in California were more than 10 times normal levels. Last June, however, prices suddenly plunged. Now the state wants those contracts canceled.

Does the state have a case? The conventional wisdom is that California has only itself to blame for its power crisis, that the debacle was the result of ''flawed deregulation.'' This conventional wisdom has become conventional mainly because it fits so well with our era's enduring faith in markets. (And I mean faith: ''I believe in God and I believe in free markets,'' Mr. Lay once declared.)

But try asking what ''flawed deregulation'' means, and you usually get a long pause. Eventually you hear that wholesale prices were deregulated, but retail prices weren't -- which is true, but doesn't have much to do with what went wrong.

The key fact about California's crisis is that it peaked not in summer, when air-conditioners gobble electricity, but in the cooler months. Supplies should have been ample. Instead, there were severe shortages, because for some reason a third of the state's capacity stayed off line.

The power companies say that generators were shut down for maintenance after being worked hard the previous summer. But the mysterious shutdowns went on for about six months, and continued despite sky-high prices for electricity. Surely there was time and incentive enough to carry out some expedited repairs.

A more likely explanation -- widely accepted by energy economists -- is that power companies found that they could make more money by shutting down some of their plants, and hence creating shortages that sent prices into the stratosphere, than they could by actually meeting demand.

If conventional wisdom was right, the crisis should have gotten even worse last summer. Instead, electricity suddenly became abundant, and prices plunged. Frank Wolak, the Stanford professor who heads California's electricity market surveillance committee, has explained why: by June, thanks in part to energetic conservation, most of the state's power needs were being supplied under those long-term contracts. The spot market, which was so easy to manipulate, had become relatively small; so the incentive for power companies to drive up spot prices by taking generators off line had largely vanished. Lo and behold, idle capacity came back on line, and the crisis was over.

Now the truth is that California's deregulation probably was flawed, but the flaw was in trusting markets too much, not too little....

[anne]

http://www.pkarchive.org/economy/Wolak.html

May 27, 2002

Frank (Wolak) Thoughts On The California Crisis
By Paul Krugman

We're approaching the first anniversary of the sudden, unexpected end of California's energy crisis. I went way out on a limb, at least by journalistic standards, by saying that market manipulation was a key feature of that crisis. I have since been vindicated: arguments that people called leftist nonsense a year ago are now conventional wisdom.

But of course I wasn't a brilliant investigative reporter; I just knew enough to talk to the right people, and to understand what they were saying. Paul Joskow and Severin Borenstein were very helpful. But my most helpful source of all was Frank Wolak, the Stanford professor who also heads the CAISO market surveillance committee. (CAISO is the "system operator").

In a recent paper Wolak offers a very nifty model to explain what was going on. However, as they say in the journalistic trade, he buries his lede: the model is in passing, amid a dense discussion of institutions and their reform. So I thought I would lay it out here, to give you an idea of how I think about the whole thing.

Wolak's model starts with a simplified demand curve. We assume that the demand for electricity is totally inelastic at some given quantity - say 900 megawatt-hours - until the price reaches a ceiling, say $1000 per mwh. It doesn't matter for current purposes whether that's a legal ceiling or the price at which utilities simply refuse to buy.

On the supply side, we assume that there are a smallish number of generators, each with limited capacity - let's say 5 generators with a capacity of 200 mwh each. Each generator has a marginal cost of, say, $20 per mwh actually produced.

Wolak assumes that in the market, each generator submits a bid price for its capacity; then the system operator takes the bids in increasing order of price, but pays all producers the highest bid actually taken. This is a stylized version of the PX, or day-ahead, market that actually operated. He also assumes implicitly that the bids are submitted in order - that the generators go one by one, each knowing what the previous bids were. (It's possible to do this with simultaneous bids; in that case it's a mixed-strategy equilibrium, with qualitatively similar results.)

So what's the Nash equilibrium of this game, given total capacity of 1000 and demand of 900? The first four generators submit bids at $20, their marginal cost; the last generator bids $1000, the maximum. It knows that it will sell only 100 mwh, half its capacity - but far better to sell 100 units at $1000 than 200 at $20!

The really striking thing, of course, is that there is excess capacity in the system - yet the price goes sky-high. And with a little realistic friction added, you could easily imagine blackouts and brownouts as part of the picture. Let me also stress that this is a non-cooperative equilibrium - it doesn't involve collusion, let alone conspiracy, among the generators. You don't have to imagine Ken Lay and Dick Cheney sitting in a room, trading sneers, and chortling over the havoc they are wreaking (which isn't to say that this might not have happened!). All it takes is individual firms, acting in their individual self-interest.

The resemblance of this story to the actual crisis in California, with a record number of plants closed for "repair", with shortages and blackouts continuing through the low-demand winter months, is obvious. Yet the whole exercise may seem suspiciously quick. If it's so easy to have a crisis in which market manipulation produces very high prices, why doesn't it happen all the time? And why did the crisis suddenly end?

But that's the beauty of Wolak's model: the price-rigging equilibrium only happens if the numbers are right, and so it can collapse if the numbers change. In fact, Wolak offers a clear story both about why California plunged into crisis, and why it plunged back out again....

[anne]

Importantly, regulated utilities had far more incentive to add to electricity supply and capacity than deregulated. Now, ways can be carefully examined to allow for a manner of deregulation that will be both forward looking in meeting capacity needs and deliver electricity efficiently at any time for the sake of consumers. I am not arguing for regulation or deregulation, since I would not begin to know enough before significant study, but I knew quickly what was happening in California as the logic of market interference became clear.

Paul Krugman was waved away in analysis, but Krugmnan knew who to look to and the logic made him right from the beginning and made him more right as investigation proved subsequently.

I am always in favor of unregulated markets, made to work properly with regulation at least when necessary.

[Kyle]

It's unfortunate that deregulation is such a highly regarded policy position among Republicans considering the perverse affects that it continues to have on the public health. Nothing exemplifies this better than the FDA, which consistently fails to provide adequate protection against pharmaceutical drug companies and Chinese toy imports. The administration has cut the department's funding numerous times, and the review boards for new products and drugs face consistent number shortages because they're often staffed almost exclusively by industry employees who face ethics issues. A number of product inspection plants have been shut down, including three this past year alone.

Chinese imports have exponentiated over the past decade but in real money terms, the investment in the FDA to monitor and test these imports have decreased. Unfortunately, candidates refuse to level with Americans and tell them that the only way to protect the people is to spend more (aka "invest"), not cut rampant irrational government spending. That means yes, higher government income through taxes and smarter allocation of spending. I won't vote Republican this election not because I'm a Democrat, but because I'm allergic to bullshit.

[GeorgeNYC]

Bravo!

[save_the_rustbelt]

Kyle:

During the 80s AND 90s the FDA was criticized for being too restrictive especially with HIV/AIDS drugs. Now it is being criticized for not being restrictive enough. So what should we do with this?

[save_the_rustbelt]

From the land of fruits and nuts.........

California wants to control home thermostats
By Felicity Barringer
Published: January 11, 2008

SAN FRANCISCO: The conceit in the 1960s show "The Outer Limits" was that outside forces had taken control of your television set.

Next year in California, state regulators are likely to have the emergency power to control individual thermostats, sending temperatures up or down through a radio-controlled device that will be required in new or substantially modified houses and buildings to manage electricity shortages.

The proposed rules are contained in a document circulated by the California Energy Commission, which for more than three decades has set state energy efficiency standards for home appliances, like water heaters, air conditioners and refrigerators.

The changes would allow utilities to adjust customers' preset temperatures when the price of electricity is soaring. Customers could override the utilities' suggested temperatures. But in emergencies, the utilities could override customers' wishes.

Final approval is expected next month.

"You realize there are times - very rarely, once every few years - when you would be subject to a rotating outage and everything would crash including your computer and traffic lights, and you don't want to do that," said Arthur Rosenfeld, a member of the energy commission.

Reducing individual customers' electrical use - if necessary, involuntarily - could avoid that, Rosenfeld said. "If you can control rotating outages by letting everyone in the state share the pain," he said, "there's a lot less pain to go around."

While the proposals have received little attention in California, the Internet and talk radio are abuzz with indignation at the idea.

The radio-controlled thermostat is not a new technology, though it is constantly being tweaked; the latest iterations were on display this week at the Consumer Electronics Show in Las Vegas. Pacific Gas and Electric, the major utility in Northern California, already has a pilot program in Stockton that allows customers to choose to have their air-conditioning systems attached to a radio-controlled device to reduce use during periods when electricity rates are at their peak. But the idea that a government would mandate use of these devices and reserve the power to override a building owner's wishes galls some people.

"This is an outrage," one Californian said in an e-mail message to Rosenfeld. "We need to build new facilities to handle the growth in this state, not become Big Brother to the citizens of California."

[barry payne - economist]

If there was all that competition in the housing market, why did the house prices keep going up? Don't entering suppliers drive prices down and don't high prices encourage substitution among buyers? Was it a market failure? (Jay)

In California, one condition that accomodated the electric shortage was too-long lead times for approval and construction of new generation, not necessarily capped prices that presumably pressed profit below the cost of capital.

Further, had strong time-of-use and other measures been in place, they may have prevented the shortage. Controlling AC units by mandate is usually an emergency measure, otherwise offered as an option with discounts for reducing peak use.

In very short run periods, demand is usually inelastic for anything, but the nature of capital intensive electricity prevents adjustment on the supply side by definition if already tight, and absent alternatives on the demand-side, the deregulated wholesale price will shoot up with small reductions in supply.

Enron was in the catbird's seat and played it to the hilt. Otherwise, a true working market was supposed to dissipate these risks for retail users by spreading them into futures markets - never happened and may never happen according to Wolak, even when there is excess capacity.

Oil companies do the same thing with their refineries in peak use periods.

While the transmission and distribution systems remain a natural monopoly for the foreseeable future, the continued deregulation of generation has resulted in a backlash in some areas as large, not just small end-use customers rebel to broken promises that prices would fall. (See Illinois for example.)

Some cases are reminiscent of the Yeltsin era in Russia, when publicly owned generation was plundered and sold to private entities for pennies on the dollar, which turned around and sold it back for huge mark-ups way above past recovery levels under regulation.

In general, it's a mistake to allow deregulated private anything so close to something as tempting as a regulated natural monopoly that uses the former as an input without some sharp, bright lines of division combined with intensive transparency.

Reaction to climate change has resulted in further subsidies for nuclear and coal-fired generation which raises the cost of generation even more.

The message of Amory Lovins of Rocky Mountain Institute hits home more every day: If real laissez faire ever was in place to level the playing field between all energy sources, particularly conservation alternatives in the form of "negawatts", nuclear, coal and much oil wouldn't stand a chance from the competition.

Meanwhile, the electric grid was recently deemed the greatest invention of the 20th century along with the transistor. Both were developed in heavily regulated industries, not under laissez faire.

[Bruce Wilder]

barry payne: "why did the house prices keep going up?"

Here are two, partial answers:

1.) It is land, not house, prices that rose. The housing bubble was concentrated in areas of the country, where the population was expanding rapidly, or there were significant constraints on new building.

2.) Banks were encouraging an orgy of Alt-A and subprime borrowing, which funded an "false" increase in demand (false in that it was based on future promises of mortgage payments that could not be met).

[Jim]

If CA were to individually limit each home's energy consumption on hot days, there would be some hot and angry voters who might suddenly rethink their positions on conservation and new power plants. Others should suffer, not I...

[gordon]

I'll see Bruce Wilder's explanation and raise him with this; there is too much money. Seriously, there is too much money available for loans to buy assets - but not enough money available to pay wages. So the consumer price indices are artificially low, because wages are low, but asset prices are artificially inflated, because there is too much money available for their purchase. Put another way, inflation is rampant in asset markets, but has been "fenced off" (via low wages, anti-union campaigns, foreign competition, illegal immigration) from consumer prices. It's a really neat trick, and works beautifully with economists - who can't handle the idea that there could be more than one inflation rate.

[barry payne - economist]

BW Yeah, I know, it was a rhetorical question for Jay at 04:02 but you went and gave away the answer. Paine spelled out those rents some time ago.

That's why the prices went up despite the competitive entry of housebuilders and somewhat constant cost of materials and labor (not even sure about that given zoning and development regs), so price increases over and above housing component costs and economic land rent constituted the bubble itself.

STR Haven't looked at the CA rate designs but suprised at the ongoing mandatory threat of rotating brownouts and blackouts. PG&E was bragging about spending much on demand-side savings - didn't do much apparently .

Seems they should put in stiff Time-of-Use rates at a minimum if not already rather than threaten random cutoffs. A steep difference in peak versus off-peak use can be handled by most over time as they shift use in a variety of proven ways. Example is large hot water heaters that hold water heated from prior evening and has an emergency button that can be use to cut it on during peak periods.

They really need to open up the trans and dist grids to serious competition from all kinds of generation sources instead of allowing it to be gamed by the big players. Hell, there's a guy who has figured out how to put cost-effective wind turbines in the constant, highspeed slipstream several miles up tethered to a cable that sends the electricity back down and he can't even get venture capital.

Maybe a few cutoffs will get customers thinking about conservation alternatives, like some Illinois customers that woke up one day and had a 300% increase in their bill. The real barrier is most of the savings must be built up front into the original construction of dwellings and end-use equipment with higher capital costs. Everyone has a time horizon that's too short to get to the savings.

[Hank]

Has anyone compared how the banks that were lending primarily along the lines set out under the Community Reinvestment Act have held up during the meltdown?

Is it poor local people who are responsible for the problem (which would affect those banks as much as anyone else)?

OR is it the brokers and lenders who are responsible, the ones who are now looking like predatory lenders, if they got to the borrowers and sold them "loan products" ahead of the local bankers?

[Carl]

The thieves of Wall Street have finally done it, they put me and Barney Frank on the same side. I think I want to tax them back into the middle class just for that.

[skeptonomist]

Control of regulation of financial markets needs to be taken back from the Fed. They are supposed to be politically neutral, thus avoiding partisanship on the part of the President and Congress, but Greenspan was (and is) a right-wing extremist.

It is obvious why the right wing favors the importance of the Fed, but I think too many liberal and centrist economists have been influenced by the propaganda about the power of monetary policy and the supposed dexterity of the Fed chairmen.

[skeptonomist]

In answer to rusty "...what exactly does deregulation have to do with income inequality?":

Financial manipulation is where the biggest money is now and has been for some time, and is a major cause of inequality. How are the obscene profits made in big-money speculation beneficial to the economy? Little of this has to do with actual productive investment. This is where deregulation should be stopped above all. Deregulation led to the savings-and-loan debacle and apparently to the recession of 1991, and lack of regulation led to the housing bubble and bust. Controlling these things can't be left to the Alan Greenspans.

[barry payne - economist]

For some interesting insights on the subject of inequality at the ground level, go to the current WSJ blog with some lawyers sniping at each other about losing their jobs, layed off recently as a result of the credit default scandals.

Theses guys are well into the six-figure range of salary. They generally start not far below six figures in the first year of employment, just out of law school, and some start above that level.

With the threat of layoffs, suddenly the details of their largely dull, repetitive jobs centered around racking up a quota of billing hours every week comes to the fore as they engage in some rare oneupsmanship among each other, as in (paraphrase) "I'm a real attorney who actually goes to court and makes stately arguments before a judge while you're a lowly gopher who updates footnotes for a white-shoe star who does mega mergers at 1k an hour."

Think these guys earn their salary? A good professional secretary could replace some of them at half or third the pay without skipping a beat. At the higher rungs of the income ladder, credentials count for more while qualifications mean less. Many of them could just as well be on a production line churning out specialized assemblies, the essential difference being a well rounded four-year liberal education for verbal and written skills - the rest is just fluff.

[lonesome moderate]

save_the_rustbeltRegulations will not make up for peeing away a large chunk of blue collar economy to low wage and slave labor countries.

I am confused by this--perhaps you could care to elaborate? What is it that you would like to see done to preserve/recover blue collar jobs, if not some kind of regulation?

[gordon]

As far as US electricity prices are concerned, I thought that the results were in, with the Showalter reports giving the prize for lower cost to the regulated states.

[mik]

Regulations will not make up for peeing away a large chunk of blue collar economy to low wage and slave labor countries.

Yes, they will not. But most people who love more regulations don't mind American jobs going to poor, non-white countries.

After all, everyone should be equal, so the world will be a better place if Americans will be a little poorer and 3rd world countries a little richer.

[Lafayette]

JK: where withholding supply from a highly inelastic market will result in greater profits to the suppliers, then said suppliers will, in fact, withhold supplies in order to create artificial shortages

This is called, in legalistic terms, "restraint of trade".

It is also illegal. A court order could have compelled anyone found doing so to cease and desist immediately, followed by a nice multi-million dollar fine.

Enron was a good example of Savage Capitalism. But, the authorities are there to regulate such savagery. Why were they not more active? Particularly in markets where the offering is a Public Service.

When are we going to understand monopolist pricing in Public Service markets in America? (Has nobody ever played the game of Monopoly? Do so, it's still instructive.)

Or, like Microsoft, is anyone who makes a billion dollars doing something illegal going to walk away with a slap on the wrist, whilst some bank robber gets 20 years for having taken one one-hundredth the amount?

Really, the unfettered "free enterprise" bullshit has gone far enough. And, if we are not prepared to reform matters now, at the moment of a presidential election, when are we prepared to do so?

It's obvious: If the Republicans can lose the presidency and yet maintain control of either the Senate or (less likely) the House, America is in for another 5 years of Gridlock (under a Dem PotUS).

[Lafayette]

About the energy gluttons: Some new products are about to hit the markets that will show us visually how much energy (that we are using) is perhaps too much.

Cables that link appliances (TV, air conditioners, etc.) to the the mains supply will actually begin to glow red when too much energy is being consumed. No, they won't burn out at some peak wattage, but that too wouldn't be a bad idea.

By giving an electricity allocation, especially during peak hours, in terms of so many "Watt-hours per week", people would quickly understand when they have "blown a fuse" and the house goes dark. (Of course, this is what happens with "brown outs". But, brown-outs can be avoided if people are fore-warned about excessive electricity usage.)

NB: In France, just keeping a device plugged in to the mains, but "asleep", costs annually as much as all the electricity needed to power a city of 40,000 people. (France is a nation of 65 million, about one-sixth the population of the US.)

[save_the_rustbelt]

Lonesome:

What regulations would stop the globalization avalanche that has been in progress since 1993?

I'm confused by the attempt to tie regulations to income inequality - only a tenuous link that I can see.

[baileyman]

Funny in all the talk of deregulation, free markets, etc., few are the times one points out that all this happens in the context of SOME kind of rules. "Free" merely describes a preferred set of rules for somebody. Ditto "deregulation".

You guys are good. Especially Anne, whose bookmarks or random access brain I hope continue to operate the Wayback Machine for our benefit.

And Bruce Wilder, yeah man, "Boss! Da land! Da land!"

[Peter]

The idea that there is a pendulum from 'left to right' and back again is very worth of consideration- this will correct the imbalances that occur in this type of capitalist economy.

If the imbalances go too far as now, the corrections will be all the more severe- not to mention, the rising unhappiness of those loosing out economically. It happened in the 1920's and the lated 19th century (The Gilded Ages) and is likely happening now. Demographics, a low saving rate, lack of pensions and social safety nets a bi product of the Conservative Revolution' of the last 30 years make a continuation of this 'era' since 1980 unlikely.

This 'swing back to populism' or the 'left' will see reforms that should have been enacted 60 years ago like health care.

[save_the_rustbelt]

about California....

Apparently one problem is this - when the power does black or brown out both home and office thermostats are set so the AC will roar as soon as the power comes back on - causing an incredible pull on the grid a few seconds after power is reestablished.

Anyone with much sense resets themostats so this won't happen (out here either in hot or cold weather).

Beyond that apparently the grid is stretched too thin and the gummint wants to be able to impose quasi-blackouts without taking down the grid (some folks are very dependent on the grid for say, their oxygen concentrator).

[James Killus]

Dear folks,

Please notice that when Jay was challenged about the electricity market in California, he responded by pointing to homebuilding, apparently claiming that barriers to entry into the electricity production and distribution market are similar to those for real estate developers.

At least, he would be making this claim if he knew what the phrase "barriers to entry" meant. But he does not, because he is a Conservative Movement libertarian, and he believes in magic.

It's pointless arguing with nitwits. However, I suggest that you shall know laissez-faire by the company it keeps. And laissez-faire is down to prostitutes, know-nothings, and village idiots.

[Lafayette]

The Market for Special Services

The utilities have been traditionally Public Services. In Economics, it generally applies to the capacity of a commodity or a service that satisfies a special human want/need. This specificity meant that the service was generally un-privatized and managed by the state. Why?

Because utilities are necessary to everybody (which, if one looks, is the meaning of the word "utility" or usefulness. This utility is regardless of where or when, that is, urban/suburban/rural or time of day. These are specific conditions that make the market "special". How so?

Because of customer density, meaning, access to the clientele -- which, in the city, is easy but gets increasingly more difficult as clientele density diminishes with distance from the center. There are required therefor special equipment that must be amortized over a large range of circumstances.

Most companies, profit-seeking, want to amortize their sunk capital and get on to making profits. So, they will cherry pick their markets, prioritizing them from easy to difficult. This can mean that the delay from first-service delivery (in town centers) to last-service delivery in the suburbs is enormous.

Example: I know plenty of friends in America, having left the cities for the suburbs are still waiting for DSL. Compare this to other friends I have, here in France, that live completely in a rural community (less than a thousand people) but have DSL. Why? Because it was imposed upon the incumbent telecoms company (that owned the lines) that the DSL-service delay from profit-generating city centers to rural communities would be limited to two years.

Public transport is still considered a utility, particularly in town. Why? Because of the difficulty of providing access to the client of multiple providers of the transport service. Only one track in one tunnel is financially acceptable. The sunk cost would have to be recuperated by rents to multiple providers -- which is a management nightmare.

I could go on, but the point is made. Whenever a market approaches or becomes "special" it is considered best to have it regulated by an authority even if allowed to be run by a private enterprise. All depends upon the amount of autonomy that is given to the enterprise running the service.

And, to give it autonomous pricing power is one of the most senseless prerogatives that a state or national authority can surrender. It is a guaranty often, but not always, of predatory pricing.

And, btw, Public Health Services is just another example of how deregulation has led to predatory pricing of a particularly special service, an essential human need.

[Callahan]

laissez faire, laissez faire, there will be an answer laissez faire.

[Lafayette]

Cal: laissez faire, laissez faire, there will be an answer laissez faire

Libertarianism or statism?

Laissez-faire was first employed by French physiocrats who wanted no intervention of the state in market affairs. It is part and parcel of the body of philosophical work underpinning moder libertarian thought.

The French have come a long way since then. Marx had a hand in that. Europe is recovering from its opposite, too much statism.

So, Lafayette says, "Libertarianism or statism? The truth is somewhere in between". Let's look for it.