Fungible Convictions

Government’s role in the economy should be to allow creative accidents to happen and ensure destructive accidents don’t.

My three local Hyatt hotels laid off every housekeeper on August 31st. Citing tough economics, Hyatt said it was financially necessary to lay off the workers and replace them with temporary employees who will be paid half as much and will be offered no benefits.

I’m a capitalist. And I understand the necessity of lowering operating costs, even when it means layoffs.

But Hyatt in this case deserves a boycott because they lied to their workers. Hyatt told its workers it would be bringing in temporary staff to help cover shifts holidays and vacations. Hyatt had its $15/hr workers train these new $8/hr workers—and when the training was done, Hyatt fired the old housekeeping staff.

So I ask my family, most of whom are business people or travel for work, to insist that their companies not patronize Hyatt. Because it’s one thing to cut costs; it’s something else—it’s sadism—to lie to their employees, fire them with no warning, and help create hundreds of uninsured, both the temps and the newly unemployed:

Williams, a single mother of a 13-year-old with asthma, stocked up on medication before her insurance runs out at the end of the month. Last week, the former Hyatt Regency Boston housekeeper also had to cancel an airline ticket she’d bought the day before she was laid off to go see her father in Barbados. She hasn’t seen him since 2005, and isn’t sure when she’ll see him again.

The chain owner of the long-lifed Out-of-Town News has decided not to renew his $5000/month lease, says the Boston Globe.

The owner, now a chain vendor, has notified Cambridge officials that it does not plan to renew its lease Jan. 31, saying the public appetite for printed news has all but vanished.

While I’m mostly the heartless sort—one who believes in the law of supply and demand at least at the local level—this will all but eliminate access to foreign newspapers and magazines in Cambridge for those who don’t have internet. But that’s kind of the point: who passes through Harvard Square every day, reads a foreign language, and doesn’t have an internet connection? Cambridge and neighboring Somerville have working-class immigrant communities, but they’re not who I’ve seen browsing the two cramped aisles at Out-of-Town News.

Don’t misunderstand, this is a big loss to Harvard Square. But demand for information, like water, has its way of finding and exploiting cracks, changing the landscape in the process.

Added: A Harvard grad friend of mine says, “How will I tell people where to meet me in Harvard Square?”

After being in Alaska the past week, I have a rudimentary but legit appreciation for how a minority of Alaskans could want to secede from the U.S. The main grievance of secessionists there is that the Lower 48 has too much control over Alaska’s resources. Well, how are they going to feel now that the banking system is being bailed out not just by the federal government but by European governments?

I hope to post a bunch of short posts over the next week about the honeymoon and generally about things in the news I’ve missed. But as a Democrat with libertarian leanings, I can really only begin to imagine what free-marketers (not to be confused at all with modern conservatives) think about this story:

After a weekend of crisis talks on both sides of the Atlantic, European nations and the United States unveiled on Monday a staggering and coordinated series of multibillion-dollar rescue packages to shore up teetering banks and guarantee credit to free up lending between them.

While the broad outlines of some of the deals represented a concerted response to plummeting stock markets and frozen credit markets, the leading European economies also embraced some individual steps, underlining the differences of approach they have sought to bury in the face of the worst financial crisis of the post-war era.

On Sunday, European leaders agreed to act at a national level from what officials called a “toolbox” of measures fitting their individual requirements.

“The time of everyone moving alone is over,” President Nicolas Sarkozy of France told a news conference in Paris.

Don’t get me wrong, this has to happen. But the number of things allowed to go wrong in the market because of a mish-mash of regulation and non-regulation (or willful ignorance) is dispiriting to anyone who thinks markets should work with no government involvement whatsoever.

There’s a lot to catch me off-guard in the last year . . .

For example, there’s the hilarity of Flight of the Concords, which I totally missed by not having HBO:

There’s cancer blah blah blah . . .

And there’s how much, it turns out, I like martinis, despite growing up around and enjoying cheap beer—both amongst my parents’ friends and especially at college, when we’d drive two hours out-of-state to get a few cases of Yuengling, still the cheapest greatest beer in America.

But, in a larger context, what’s really caught me off-guard is the idiocy of leaders who weren’t caught off-guard by the current financial crisis. In 2005, when my father and I started looking for a home loan to buy the condo Lindsay and I live in now, we knew we could game one company and immediately refinance. It was pretty easy.

Those same people are the ones now wallowing in the Freddie Mac and Fannie Mae crises, companies that owe or guarantee $5.2 trillion in mortgages.

A long-term virtue in both Lindsay’s and my family is the assumption that at some point things will go wrong. (In Catholicism this is called prudence.)

How is it that lenders could have been so imprudent? The reality is that individuals in these companies had little to lose, they didn’t enjoy the right the fail as they should have: as publicly traded companies, these people could enrich themselves, but even if the stock collapses, they have their salaries and the supposition that the government would step in at the first sign of systemic failure.

So, for example, as leaders they were encouraged to go after the boom in sub-prime mortgages. Nevermind that booms are followed by busts—but who cares when your salary is guaranteed? Moreover, who cares when your company is both publicly traded and implicitly (and now explicitly) backed up by taxpayers? As the Economist writes in this week’s lead, “the profits were privatised, but the risks were socialised.”

One could argue, as I would, that this is indicative of bad government. Good government overseers would have said, “You’re welcome to fit this niche in the mortgage market”—those marginal borrowers who may have been too risky for private companies—”so long as you keep long-term stability as your key goal.” Instead, leaders at Fannie and Freddie helped design a business model that took as its key assumption that house values would continue to rise (ignore the fact that southern California’s market is down more than 25%, and that takes it merely to 2004 levels). And why wouldn’t you take that as your key assumption if the potential reward enriched you but the potential failure wasn’t your problem?

The lesson for me is the libertarian one: governments cannot be trusted to do thorough oversight of an industry over which it doesn’t have 100% discretion, because industry will always find ways to relax that oversight, usually through successful lobbying.

The other libertarian lesson is that consumers must educate themselves. Diane McLeod is just one example of a consumer who didn’t think through her purchases and is now hundreds of thousands of dollars in debt.

I’m not someone free of debt myself. I have student loans from graduate school that my father pays, and he and I, along with Lindsay, pay the mortgage on my condo, roughly a third each. I don’t underestimate my good fortune.

Then again, I’ve always paid my credit card bill in full, every month, because I’m terrified of outstripping my means.

Anyway, beyond personal responsibility is corporate responsibility. . . .

My question for lenders is simply this, which honestly I don’t think they ever consider: What do you do when you succeed?

In other words, these adjustable rate mortgages and credit card rewards programs and derivatives—what in the world did you think would happen when they did what you’d hoped? The only way they have a return for you and your company is if people take on more debt than they can truly afford, and if millions of people are doing that, then hundreds of thousands, if not these same millions, are outstripping their means, are about to default. Meaning your company implodes dramatically or gets bailed out.

In the short term it must be great to rake in that dough. But when those schemes fail, as they inevitably must when they’re premised on lending to the financially weak, why is the public the one picking up the pieces?

While Freddie and Fannie need to be bailed out in this situation to avoid catastrophe, it’s another lesson in what should be an inalienable right to fail. In order for an economy to function at its best, companies that seek rewards should bear the brunt of its failures.

…is its ability to convince citizens to vote beyond—and sometimes against—their own self-interest.

The New York Times published an editorial today enumerating the poor defenses by the executive branch of its own economic policies.

Mr. Bush boasted about 52 consecutive months of job growth during his presidency. What matters is the magnitude of growth, not ticks on a calendar. The economic expansion under Mr. Bush — which it is safe to assume is now over — produced job growth of 4.2 percent. That is the worst performance over a business cycle since the government started keeping track in 1945.

Mr. Bush also talked approvingly of the recent unemployment rate of 4.8 percent. A low rate is good news when it indicates a robust job market. The unemployment rate ticked down last month because hundreds of thousands of people dropped out of the work force altogether. Worse, long-term unemployment, of six months or more, hit 17.5 percent. We’d expect that in the depths of a recession. It is unprecedented at the onset of one.

What struck me while reading the editorial was that access to accurate statistics has consistently convinced me to vote beyond my own self-interest. This November will be my tenth trip to the polls, and in every one, my decision has been based on issues that have little to nothing to do with my everyday life. I’m financially stable, know only two people deployed to Iraq—and in support positions at that—have excellent private health insurance, and take the bus to work. But on those issues (the economy, the war, health care, and dependence on foreign oil), I have strong opinions on what the next President should do. It must sound pedantic, but there’s no possible way for me to have those opinions, and have them based somewhat on reality, without access to good information. It’s the one thing that achieves the major (stated) goals of both contemporary liberals and contemporary conservatives: to hold those in power accountable for their promises and actions, and to let people make decisions for themselves.

That’s why I’ve considered President Johnson’s signing of the Freedom of Information Act in 1966 to be as important as his signing of the Civil Rights Act two years earlier, and why suppression of documents—whether by someone fearful of being charged with spying on their fellow citizens or by a candidate afraid of what their previously undisclosed financial ties will reveal—is inevitably harmful in a society whose power, ultimately, even if only every four or eight years, rests with voters.

For all the acclaim “Talk of the Town” and its fiction and David Denby’s reviews get, the New Yorker has no better writer, from issue to issue, than James Surowiecki and his column “The Financial Page”. His contrariness and thorough research reflect the best of the New Yorker; his necessary brevity (or perhaps that enforced by his editor) avoid the worst.

This week’s piece, “Home Economics,” is a perfect example. Taking as his topic the premise that home ownership may in fact by bad for the economy, Surowiecki fits in all these gems into a 933-word article:

[T]he boom . . . was stoked by cheap credit and lax lending standards. Buying a home used to require a sizable down payment: in 1976, the average for a first-time buyer was eighteen per cent. By contrast, a National Association of Realtors study of first-time buyers between mid-2005 and mid-2006 found that almost half put down nothing at all, and that the median down payment was just two per cent. If you earn eighty thousand a year, no one will lend you four hundred thousand dollars to buy stocks, but plenty of people were willing to lend you that money to buy a house.

Homeownership also impedes the economy’s readjustment by tying people down. From a social point of view, it’s beneficial that homeownership encourages commitment to a given town or city. But, from an economic point of view, it’s good for people to be able to leave places where there’s less work and move to places where there’s more.

[A] study of several major developed economies between 1960 and 1996, by the British economist Andrew Oswald, found a strong relationship between increases in homeownership and increases in the unemployment rate; a ten-per-cent increase in homeownership correlated with a two-per-cent increase in unemployment. (In the U.S., it may be worth noting, the states that have the highest unemployment rates—states like Alabama, Michigan, Mississippi—are also among those with the highest homeownership rates.)

All of this is beautifully brought together around the thesis that homeownership—at least in this era of creative financing—is a brutal burden when the economy goes south. No down payments, adjustable interest rates, no-doc loans, falling values: these are things you can’t slough off when it’s time to look for a job in another town or your kids need a better school district. It’s a set of points newspapers have been trying to drive home, as it were, for the last year; Surowiecki nailed it in 933 words.