Widget Image
Follow PPD Social Media
follow
1,000 Followers
follow
0 Followers
follow
People's Pundit Locals Community
Tuesday, March 4, 2025
SECTIONS
logo
mobile-logo
HomeStandard Blog Whole Post (Page 823)
Economy

(Photo: REUTERS)

They’re doing it again!

When the last housing bubble burst, politicians blamed “greedy banks.” They said mortgage companies lent money recklessly, making loans to people with dubious credit, for down payments as low as 3 percent.

“It will work out,” said the optimistic bankers. Regulators didn’t disagree. Everyone said, “Home prices will keep going up.” And home prices did — until they didn’t.

The bubble popped in 2007. Lots of people were hurt, and politicians took more of your tax money to bail out Fannie Mae and Freddie Mac along with reckless banks. They also gave the Federal Housing Administration a $2 billion bailout.

Then the politicians said, “We’ll fix this so it doesn’t happen again.” Congress passed Dodd-Frank and a thousand new regulations. The complex rules slowed lending, all right. It’s one reason this post-recession recovery has been abnormally slow.

But — April Fools’! — the new rules didn’t solve the problem of reckless lending, and it’s happening again.

Because our government subsidizes home purchases, recklessness is invited. Somehow, Americans buy cars, clothing, computers, etc. without government guarantees, but politicians think housing is different.

Both parties support the subsidies.

The left wants government to help struggling families, and the right thinks home ownership sends a wholesome cultural message. Both parties have cozy connections to home-builders and lenders.
At the time of the housing crash, most high-risk loans were guaranteed by the government. Those banks wouldn’t have been as reckless if they had their own money on the line.

But they knew they could grant a mortgage to most anyone and the FHA would back it or government-sponsored companies Fannie Mae and Freddie Mac would buy it. That fueled the frenzy of lending.

After the bubble popped, I assumed the political class would learn a lesson, but they haven’t. Today, even more American mortgages are guaranteed by government. More than 90 percent of new loans are backed by taxpayers. After the crash, Fannie and Freddie did raise their minimum down payment — to a measly 5 percent — but a few months ago, they lowered it again to 3 percent!

Are they crazy? A sensible congressman, Rep. Jeb Hensarling (R-TX), tried to get an answer from the administration’s new mortgage regulator, asking in a hearing, “All things being equal, is a 3 percent down riskier to the taxpayer than a 10 percent down loan?”

A pretty basic question — but one that director Mel Watt still dodged, responding, “Mr. Chairman, that is generally true. But when you pair the down payment with compensating factors … look at other considerations … you can ensure that a 3 percent loan is just as safe.”

What? That’s nonsense. This is what happens when pandering politicians get to dispense your money. Watt is among the worst. When he was a congressman, he pushed for mortgage subsidies for welfare recipients who made down payments as low as $1,000.

Edward Pinto, who studies housing risk for the American Enterprise Institute, says policies like this put us on the way to another bubble: “The government is once again … saying, let’s loosen credit, give loans to people that potentially can’t afford them, and everything will be fine because house prices will go up.”

On my show, former FHA commissioner David Stevens, who did improve lending standards a bit after the crash (before Watt and his cronies weakened them), responded that this time the government has new regulations that will prevent things falling apart: “I think in the effort, post-recession, to make sure we never go down this path again, we have created more rules than ever existed in the history of this country.”

But more rules aren’t a solution. Government’s regulators didn’t foresee the problems last time. Fannie and Freddie got a clean bill of health right up until the collapse.

The solution is less government involvement. Canada doesn’t have a Fannie, Freddie or FHA. Canada didn’t have the trauma of a housing bubble. In Canada, lenders and homeowners risk their own money.

Does that mean Canadians cannot afford homes? No! Without all that government help, Canada’s homeownership rate is higher than ours.

John Stossel is host of “Stossel” on Fox News and author of “No They Can’t! Why Government Fails, but Individuals Succeed.”John Stossel is host of “Stossel” on Fox News and author of “No They Can’t! Why Government Fails, but Individuals Succeed.”

When the last housing bubble burst, politicians

Opinion

obama-college-tuition-speech-tennessee

President Obama spoke Friday in Tennessee, which is starting its own tuition program for community college students. His proposal, modeled after Tennessee’s, is to make the schooling free. (Photo: Jabin Botsford/The New York Times)

An op-ed piece titled “Conservatives, Please Stop Trashing the Liberal Arts” appeared last week in the Wall Street Journal. But it is not conservatives who trashed the liberal arts.

Liberal professors have trashed the liberal arts, by converting so many liberal arts courses into indoctrination centers for left-wing causes and fads, instead of courses where students learn how to weigh conflicting views of the world for themselves. Now a professor of English, one of the most fad-ridden of the liberal arts today, blames conservative critics for the low esteem in which liberal arts are held.

Surely a professor of English cannot be unaware of how English departments, especially, have become hotbeds of self-indulgent, trendy fads such as trashing classic writings — using Shakespeare’s works as just another ideological playground for romping through with the current mantra of “race, class and gender.”

Surely he cannot be unaware of the many farces of the Modern Language Association that have made headlines. And when our English professor uses a phrase like “critical thinking,” he must be at least dimly aware of how often those words have been perverted to mean uncritical negativism toward traditional values and uncritical acceptance of glittering catchwords of the left, such as “diversity.”

Diversity of political ideas is not to be found on most college campuses, where the range of ideas is usually from the moderate left to the extreme left, and conservatives are rare as hen’s teeth among the faculty — especially in English departments. Academics who go ballistic about an “under-representation” of ethnic minorities in various other institutions are blissfully blind to the under-representation of conservatives among the professors they hire. On many campuses, students can go through all four years of college without ever hearing a conservative vision of the world, even from a visiting speaker.

The problem is not political, but educational. As John Stuart Mill pointed out, back in the 19th century, students must hear opposing views from people who actually believe them, not as presented by people who oppose them. In the 18th century, Edmund Burke warned against those who “teach the humours of the professor, rather than the principles of the science.”

During my years on the lecture circuit, I liked to go into college bookstores across the country and see how many of their courses assigned “The Federalist” among the books students were to buy, as compared to how many assigned “The Communist Manifesto” or other iconic writings on the left.

“The Federalist” is a classic, written by three of the men who were among those who wrote the Constitution of the United States. It is a book of profound thoughts, written in plain English, at a level aimed at the ordinary citizen.

It might even be called “The Constitution for Dummies.” There are Supreme Court Justices who could benefit from reading it.

My survey of college bookstores across the country showed “The Communist Manifesto” virtually everywhere, often required reading in multiple courses — and “The Federalist” used virtually nowhere. Most college students will get only the left’s uncritical negativism toward the American form of government, under the rubric of “critical thinking.”

The liberal arts in theory could indeed make valuable contributions to the education of the young, as our English professor claims. But the liberal arts in practice have in fact done the opposite, not just in the United States but in other countries as well.

The history of the 20th century shows soft-subject students and their professors among the biggest supporters of extremist movements, both fascist and communist — the former in central and eastern Europe before World War II and the latter in countries around the world, both before and after that war.

Those who want liberal arts to be what they were supposed to be will have to profoundly change them from what they have become. Doing that will undoubtedly provoke more denunciations of critics for “trashing” the liberal arts by criticizing those who have in fact already trashed the liberal arts in practice.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.

An op-ed piece titled "Conservatives, Please Stop

Policy

vat-tax

I warned just last week about the dangers of letting politicians impose a value-added tax. Simply stated, unless the 16th Amendment is repealed and replaced with a new provision forever barring the re-imposition of any taxes on income, a VAT inevitably would be a new source of revenue and become a money machine to finance ever-larger government.

Just look at the evidence from Europe if you’re not convinced.

That’s why the VAT is bad in reality.

Now let’s talk about why the VAT (sometimes called a “business transfer tax”) is theoretically appealing.

First and foremost, the VAT doesn’t do nearly as much damage, per dollar raised, as our current income tax. That’s because the VAT is a single-rate tax (i.e., no class warfare) with no double taxation of income that is saved and invested.

In some sense, it’s a version of the national sales tax, except the revenue is collected on the “value added” at each stage of the production process rather than in one fell swoop when consumers make their purchases.

And it’s also conceptually similar to the flat tax. Both have one rate. Both have no double taxation. And both (at least in theory) have no special preferences and loopholes. The difference between a flat tax and the VAT is that the former taxes your income (only one time) when you earn it and the latter taxes your income (only one time) when you spend it.

In other words, the bottom line is that it is good (or, to be more accurate, less bad) to have a tax system with a low rate and no double taxation. And in the strange world of public finance economists, a system with no double taxation is called a “consumption-base tax.” And the flat tax, sales tax, and VAT all fit in that category.

So why, then, if supporters of limited government prefer a consumption-base tax over the internal revenue code, is there so much hostility to a VAT?

The answer is simple. We don’t trust politicians and we’re afraid that a VAT would be an add-on tax rather than a replacement tax.

Which explains why it’s better to simply turn the existing tax code into a consumption-base tax. After all, the worst thing that could happen is that you degenerate back to the current system.

But if you go with a VAT, the downside risk is that America becomes France.

There’s a story in today’s Wall Street Journal that illustrates why consumption-base taxation is both a threat and opportunity. Here are some introductory excerpts.

U.S. lawmakers on both sides of the aisle increasingly are finding appeal in an ambitious concept for overhauling the nation’s income-tax system: a tax based on consumption, a tool long used around the world. …As the name implies, consumption-style taxes hit the money taxpayers spend, rather than income they receive. One prominent feature of consumption systems is that they generally tax savings and investment lightly or not at all. That, in turn, encourages more investment and innovation, and ultimately more growth, many economists contend.

The reporter is wrong about consumption systems, by the way. Income that is saved and invested is taxed. It’s just not taxed over and over again, which can happen with the current system.

But he’s right that there is bipartisan interest. And he correctly points out that some politicians want an add-on tax while others want to fix the current system.

The tax-writing Senate Finance Committee is giving new consideration to the consumption-tax idea with the hope that its promised boost to economic growth would ease the way to a revamp. …Some of these proposals would have consumers pay another tax in addition to existing state and local sales taxes, while others would merely reshape the current system to tilt it more toward consumption. …Enactment of a broad-based federal consumption tax would align the U.S. with a global trend.

A Democratic Senator from Maryland wants to augment the current tax code by imposing the VAT.

Mr. Cardin introduced legislation last year to create a type of consumption tax known as a value-added tax and at the same time lower business taxes and scrap income taxes completely for lower-income Americans.

While some GOP Senators want to modify the current system to get rid of most double taxation.

Republicans on the working group also are interested in the concept, including a proposal put forward recently by GOP Sens. Marco Rubio of Florida and Mike Lee of Utah. That plan would make several changes to the tax code that would move the nation closer to a consumption-based system. …Many GOP members “believe that there are economic benefits to moving away from taxation of income and toward taxation of consumption,” a Senate aide said.

And the story also notes the objections on the left to consumption-base taxation, as well as objections on the right to the VAT.

Some liberals are concerned that consumption taxes affect poor people disproportionately, while unduly benefiting the rich, unless adjustments are made. For their part, conservatives fear that some types of consumption tax—particularly value-added taxes—would make it too easy to dial up government revenue collection.

So what’s the bottom line? Is it true, as the headline of the story says, that “Proposals for a consumption tax gain traction in both parties”?

Yes, that’s correct. But that’s not the same as saying that there is much chance of bipartisan consensus.

There’s a huge gap between those who want a VAT as an add-on tax and those who want to reform the current system to get rid of double taxation.

This doesn’t mean we shouldn’t worry about the prospect of an add-on VAT. As I warned last year, there are some otherwise sensible people who are sympathetic to this pernicious levy.

Which is why I repeatedly share this video about the downside risk of a VAT.

Simply stated, unless the 16th Amendment is

Opinion

John Kerry, Mohammad Javad Zarif

U.S. Secretary of State John Kerry, second from left, meets with Iranian Foreign Minister Mohammad Javad Zarif, second from right, for a new round of nuclear negotiations Wednesday, March 4, 2015, in Montreux, Switzerland. (Photo: AP/Evan Vucci, Pool)

Recent statements from United Nations officials, that Iran is already blocking their existing efforts to keep track of what is going on in their nuclear program, should tell anyone who does not already know it that any agreement with Iran will be utterly worthless in practice. It doesn’t matter what the terms of the agreement are, if Iran can cheat.

It is amazing — indeed, staggering — that so few Americans are talking about what it would mean for the world’s biggest sponsor of international terrorism, Iran, to have nuclear bombs, and to be developing intercontinental missiles that can deliver them far beyond the Middle East.

Back during the years of the nuclear stand-off between the Soviet Union and the United States, contemplating what a nuclear war would be like was called “thinking the unthinkable.” But surely the Nazi Holocaust during World War II should tell us that what is beyond the imagination of decent people is by no means impossible for people who, as Churchill warned of Hitler before the war, had “currents of hatred so intense as to sear the souls of those who swim upon them.”

Have we not already seen that kind of hatred in the Middle East? Have we not seen it in suicide bombings there and in suicide attacks against America by people willing to sacrifice their own lives by flying planes into massive buildings, to vent their unbridled hatred?

The Soviet Union was never suicidal, so the fact that we could annihilate their cities if they attacked ours was a sufficient deterrent to a nuclear attack from them. But will that deter fanatics with an apocalyptic vision? Should we bet the lives of millions of Americans on our ability to deter nuclear war with Iran?

It is now nearly 70 years since nuclear bombs were used in war. Long periods of safety in that respect have apparently led many to feel as if the danger is not real. But the dangers are even greater now and the nuclear bombs more devastating.

Clearing the way for Iran to get nuclear bombs may — probably will — be the most catastrophic decision in human history. And it can certainly change human history, irrevocably, for the worse.
Against that grim background, it is almost incomprehensible how some people can be preoccupied with the question whether having Israeli prime minister Benjamin Netanyahu address Congress, warning against the proposed agreement, without the prior approval of President Obama, was a breach of protocol.

Against the background of the Obama administration’s negotiating what can turn out to be the most catastrophic international agreement in the nation’s history, to complain about protocol is to put questions of etiquette above questions of annihilation.

Why is Barack Obama so anxious to have an international agreement that will have no legal standing under the Constitution just two years from now, since it will be just a presidential agreement, rather than a treaty requiring the “advice and consent” of the Senate?

There are at least two reasons. One reason is that such an agreement will serve as a fig leaf to cover his failure to do anything that has any serious chance of stopping Iran from going nuclear. Such an agreement will protect Obama politically, despite however much it exposes the American people to unprecedented dangers.

The other reason is that, by going to the United Nations for its blessing on his agreement with Iran, he can get a bigger fig leaf to cover his complicity in the nuclear arming of America’s most dangerous enemy. In Obama’s vision, as a citizen of the world, there may be no reason why Iran should not have nuclear weapons when other nations have them.

Politically, President Obama could not just come right out and say such a thing. But he can get the same end result by pretending to have ended the dangers by reaching an agreement with Iran. There have long been people in the Western democracies who hail every international agreement that claims to reduce the dangers of war.

The road to World War II was strewn with arms control agreements on paper that aggressor nations ignored in practice. But those agreements lulled the democracies into a false sense of security that led them to cut back on military spending while their enemies were building up the military forces to attack them.

Thomas Sowell is a senior fellow at the Hoover Institution, Stanford University, Stanford, CA 94305. His website is www.tsowell.com.

Against the background of the Obama administration's

Economy, Video

(Photo: REUTERS)

The National Association of Realtors reported contracts to buy previously-owned homes jumped 3.1 percent in February, beating Wall Street’s 0.4 percent forecast. However, inventory remains a problem, while greater concerns mount over whether or not increased artificial risk is injecting poor mortgage contracts into a fragile market.

“Pending sales showed solid gains last month, driven by a steadily-improving labor market, mortgage rates hovering around 4 percent and the likelihood of more renters looking to hedge against increasing rents,” Lawrence Yun, NAR chief economist said. “These factors bode well for the prospect of an uptick in sales in coming months. However, the underlying obstacle – especially for first-time buyers – continues to be the depressed level of homes available for sale.”

The PHSI in the Northeast fell 2.3 percent to 81.7 in February, but is 4.1 percent above a year ago. In the Midwest the index leaped 11.6 percent to 110.4 in February, and is now 13.8 percent above February 2014.

Pending home sales in the South decreased 1.4 percent to an index of 120.2 in February, but is still 10.8 percent above last February. The index in the West climbed 6.6 percent in February to 102.1 (highest since June 2013 at 111.4) and is now 18.3 percent above a year ago.

Total existing-homes sales in 2015 are forecast to be around 5.25 million, an increase of 6.4 percent from 2014. The national median existing-home price for all of this year is expected to increase around 5.6 percent. In 2014, existing-home sales declined 2.9 percent and prices rose 5.7 percent.

“Several markets remain highly-competitive due to supply pressures, and Realtors® are reporting severe shortages of move-in ready and available properties in lower price ranges,” adds Yun. “The return of first-time buyers this year will depend on how quickly inventory shows up in the market.”

However, despite the housing lobby’s (NAR) increased optimism, other factors and changes in lending practices give experts reason for pause.

As PPD reported last week ahead of the NAR report, the composite National Mortgage Risk Index (NMRI) for Agency purchase loans, a gauge of housing market risk, hit a new series high for the 3rd straight month. The NMRI stood at 11.93 percent in the month of February, up 0.1 percentage point from the average for the prior 3 months and 0.8 percent from a year earlier.

Within the composite, the risk indices for Fannie/Freddie, the FHA, and the VA all hit series highs in February, also marking the 3rd consecutive month the subindexes have shattered their previous highs. According to analysts, the marked shift in market share from large banks to nonbanks accounts for much of the sector’s upward risk trend, as non-bank lending is substantially riskier than the large bank business it replacing due to looser lending practices in the name of redistribution.

“The migration of mortgage lending away from large banks is an important story,” said Stephen Oliner, codirector of AEI’s International Center on Housing Risk. “Lightly regulated nonbank lenders have been more than willing to make risky loans, with taxpayers ultimately on the hook if defaults mount.”

But these are risky tactics supported by the Mr. Yun and the NAR. Further, while the Pending Home Sales Index is a leading indicator for the housing sector, it is based on pending sales of existing homes representing roughly 20 percent of transactions for existing-home sales. The NMRI results are based on nearly the universe of home purchase loans with a government guarantee.

“Our data confirm the push by regulators to loosen lending standards is heavily reliant on layering of, not compensating for, risks,” said Edward Pinto, codirector of AEI’s International Center on Housing Risk. “This is true for both low downpayment and high debt-to-income lending.”

The National Association of Realtors reported U.S.

Economy

consumer-spending

A shopper organizes his cash before paying for merchandise at a Best Buy Co. store in Peoria, Illinois, U.S., on Friday, Nov. 23, 2012. (Photo: Daniel Acker/Bloomberg/Getty)

U.S. consumer spending barely rose in February, up 0.1 percent without adjusting for inflation, as household savings hit their highest level in more than two years.

After dropping 0.2 percent in January, the Commerce Department report released Monday is the latest sign that the economy slowed more than previous estimates suggested in the first quarter. Households cut back on purchases of big-ticket items, including automobiles, typical winter spending on utilities saw an increase.

Economists polled by Reuters forecast consumer spending, which accounts for more than two-thirds of U.S. economic activity, to increase 0.2 percent last month. However, when adjusted for inflation, consumer spending actually fell 0.1 percent last month, which is the weakest reading since April of last year.

The U.S. dollar (USDUSD) rose relative to currencies after the data, while prices for U.S. Treasury debt, including the 25-year (NYSEARCA:LBND), fell.

Considering consumption since in the fourth quarter, the latest round of weak consumer spending data may just force economists to further lower their first-quarter growth estimates, which currently range between an abysmal 0.9 and 1.4 percent annualized growth rate. Meanwhile, the government adjusted its data last week to show the economy grew at a 2.2 percent rate in the fourth quarter.

Income rose by just 0.4 percent in February after a similar gain in January, while savings increased to $768.6 billion. That’s the highest level since December 2012, up from $728.7 billion in January, bring the saving rate to 5.8 percent, which is also the highest since December 2012 and up from 5.5 percent in January.

Though there was a small increase in prices last month, leading some to suggest the recent disinflationary trend may have run its course, inflation remains well below the Federal Reserve’s 2 percent target.

Fed Chair Janet Yellen signaled on Friday that the U.S. central bank would likely start raising interest rates later this year, even with inflation running low. The Fed has held its key short-term interest rate near zero since December 2008.

A price index for consumer spending increased 0.2 percent in February after falling 0.4 percent in January. In the 12 months through February, the personal consumption expenditures (PCE) price index increased 0.3 percent.

Excluding food and energy, prices edged up 0.1 percent after a similar gain in January, while the so-called core PCE price index increased 1.4 percent in the 12 months through February.

U.S. consumer spending barely rose in February,

Politics

elizabeth-ashack-labor-department

The Labor Department economist Elizabeth A. Ashack, who compared Christians to Nazis in a now-deleted Tweet.

Elizabeth A. Ashack, an economist at the Labor Department, recently deleted a less-than flattering tweet comparing Christians in Indiana to Nazis. Fearing a firestorm, Ashack deleted the tweet after Right Scoop posted it on their blog shortly before PPD captured the image below.

PPD has made numerous attempts to allow Ashack and the Labor Department to respond, but those attempts have gone unanswered.

elizabeth-ashack-tweet

The #BoycottIndiana hashtag that accompanied the comment are clear references to the Religious Freedom Restoration Act signed by Indiana Gov. Mike Pence, which has left-wingers in an uproar. Opponents of the law on the Left, to include the media, have argued the law allows Christians to discriminate against gays and lesbians. However, much of the “substance” heard in the war cries the law has invoked are simply inaccurate.

“If there is a government action or a law that an individual believes impinges on their religious liberty, they have the opportunity to go to court,” Gov. Pence said Sunday in a heated interview with George Stephanopoulos. “Just as The Religious Freedom Restoration Act that Bill Clinton signed allowed them, the court would evaluate the circumstance under the standards articulated in this Act. That’s all it is.”

In fact, the language of the law is nearly identical to the 90s-era bill signed by Clinton, as well as the Illinois law supported by then-state Senator Barack Obama.

“Except as provided in subsection (b), a governmental entity may not substantially burden a person’s exercise of religion, even if the burden results from a rule of general applicability. (b) A governmental entity may substantially burden a person’s exercise of religion only if the governmental entity demonstrates that application of the burden to the person: (1) is in furtherance of a compelling governmental interest; and (2) is the least restrictive means of furthering that compelling governmental interest,” the law says.

“A person whose exercise of religion has been substantially burdened, or is likely to be substantially burdened, by a violation of this chapter may assert the violation or impending violation as a claim or defense in a judicial or administrative proceeding, regardless of whether the state or any other governmental entity is a party to the proceeding,” it adds. “If the relevant governmental entity is not a party to the proceeding, the governmental entity has an unconditional right to intervene in order to respond to the person’s invocation of this chapter.”

What is particularly concerning is that a Labor Department official is so openly supportive of an organized effort to boycott and shame businesses in any state. Whether it is ethical for any public servant to lend any support — tangible or intangible — to an intentional effort to damage a state’s economy, is a question the Labor Department has yet to answer.

According to agency records, Ashack has worked for the Labor Department since September 1998, focusing most of her efforts on research that unsurprisingly benefits the cause of organized labor. She has changed her Twitter biography by deleting any reference to the Department of Labor, but her LinkedIn profile as of this writing still proudly declared the association.

And when you see these headlines about — about Indiana, a license to discriminate in Indiana and — and — it just — I’m telling you, George, it is a red herring and I think it’s deeply troubling to millions of Americans and — and, frankly, people all across the state of Indiana who feel troubled about government overreach.

Elizabeth A. Ashack, an economist at the

News, Politics

sen-bob- menendez-iran-sanctions

FILE – In this Sept. 4, 2013, file photo, Sen. Robert Menendez, D-N.J. speaks at Capitol Hill in Washington. Key Democratic and Republican senators are crafting legislation to reinstate the full force of Iran sanctions and impose new ones if Tehran doesnât make good on its pledge to roll back its nuclear program, brushing aside the Obama administrationâs fears about upending its diplomatic momentum. Menendez and Sen. Mark Kirk, R-Ill., hope to have the bill ready for other lawmakers to consider when the Senate returns Dec. 9 from its two-week recess, according to legislative aides. (AP Photo/Susan Walsh) (A2013)

Sen. Bob Menendez, D-N.J., said at a synagogue in Franklin Lakes Sunday he has “real concerns” whether the Obama administration’s deal leaves Iran a “threshold nuclear” state.

“This bill is a good bill and I’d hoped the administration would have supported it,” Menendez said. “We are going to have to see what the agreement is and what are the mechanisms for verification. There needs to be a very robust inspection.”

Sen. Menendez has been a leading and very vocal critic of the president’s unpopular Iran policy, and was even gearing up to co-sponsor draft legislation meant to check the administration’s power to negotiate a deal. However, the Justice Department will soon file corruption charges against the powerful senator, alleging that he used his office to help a Democratic donor who is also his long-time friend.

READ ALSO – DOJ Suspiciously Resurrects Years-Old Allegations Against Sen. Bob Menendez

The timing of the federal charges against Menendez is blatantly suspicious, as the administration resurrected years-old charges they had refused to investigate in the past. Still, despite the immense political and legal pressure from the White House, he has not backed down.

Though he supported the decision to delay a vote on his own new sanctions bill (S. 615) until after the March 31 negotiating deadline, which was done with the hope to win more Democratic support, Sen. Menendez repeated Sunday that he would oppose any deal that leaves Iran as close as one year away from the bomb.

Sen. Bob Menendez, D-N.J., said at a

Policy

IMF Global Economy Chamber IMF

October 12, 2013: The IMFC meeting begins during the World Bank/IMF Annual Meetings at IMF headquarters Saturday in Washington. World finance officials prepared to wrap up three days of meetings in Washington, where fretting about the risk of an unprecedented U.S. debt default overshadowed myriad worries about a shaky global economic recovery. ( AP Photo)

There’s a “convergence” theory in economics that suggests, over time, “poor nations should catch up with rich nations.” But in the real world, that seems to be the exception rather than the rule.

There’s an interesting and informative article at the St. Louis Federal Reserve Bank which explores this question. It asks why most low-income and middle-income nations are not “converging” with countries from the developed world.

…only a few countries have been able to catch up with the high per capita income levels of the developed world and stay there. By American living standards (as representative of the developed world), most developing countries since 1960 have remained or been “trapped” at a constant low-income level relative to the U.S. This “low- or middle-income trap” phenomenon raises concern about the validity of the neoclassical growth theory, which predicts global economic convergence. Specifically, the Solow growth model suggests that income levels in poor economies will grow relatively faster than developed nations and eventually converge or catch up to these economies through capital accumulation… But, with just a few exceptions, that is not happening.

Here’s a chart showing examples of nations that are – and aren’t – converging with the United States.

The authors analyze this data.

The figure above shows the rapid and persistent relative income growth (convergence) seen in Hong Kong, Singapore, Taiwan and Ireland beginning in the late 1960s all through the early 2000s to catch up or converge to the higher level of per capita income in the U.S. …In sharp contrast, per capita income relative to the U.S. remained constant and stagnant at 10 percent to 30 percent of U.S. income in the group of Latin American countries, which remained stuck in the middle-income trap and showed no sign of convergence to higher income levels… The lack of convergence is even more striking among low-income countries. Countries such as Bangladesh, El Salvador, Mozambique and Niger are stuck in a poverty trap, where their relative per capita income is constant and stagnant at or below 5 percent of the U.S. level.

The article concludes by asking why some nations converge and others don’t.

Why do some countries remain stagnant in relative income levels while some others are able to continue growing faster than the frontier nations to achieve convergence? Is it caused by institutions, geographic locations or smart industrial policies?

I’ll offer my answer to this question, though it doesn’t require any special insight.

Simply stated, Solow’s Growth Theory is correct, but needs to be augmented. Yes, nations should converge, but that won’t happen unless they have similar economic policies.

And if relatively poor nations want to converge in the right direction, that means they should liberalize their economies by shrinking government and reducing intervention.

Take a second look at the above chart above and ask whether there’s a commonality for the jurisdictions that are converging with the United States?

Why have Hong Kong, Singapore, Taiwan, and Ireland converged, while nations such as Mexico and Brazil remained flat?

The obvious answer is that the former group of jurisdictions have pursued, at least to some extent, pro-market policies.

Heck, they all rank among the world’s top-18 nations for economic freedom.

Hong Kong and Singapore have been role models for economic liberty for several decades, so it’s no surprise that their living standards have enjoyed the most impressive increase.

But if you dig into the data, you’ll also see that Taiwan’s jump began when it boosted economic freedom beginning in the late 1970s. And Ireland’s golden years began when it increased economic freedom beginning in the late 1980s.

The moral of the story is – or at least should be – very clear. Free markets and small government are the route to convergence.

Here’s a video tutorial.

And if you want some real-world examples of how nations with good policy “de-converge” from nations with bad policy, here’s a partial list.

* Chile vs. Argentina vs. Venezuela

* Hong Kong vs. Cuba

* North Korea vs. South Korea

* Cuba vs. Chile

* Ukraine vs. Poland

* Hong Kong vs. Argentina

* Singapore vs. Jamaica

* United States vs. Hong Kong and Singapore

* Botswana vs. other African nations

Gee, it’s almost enough to make you think there’s a relationship between good long-run growth and economic freedom!

[mybooktable book=”global-tax-revolution-the-rise-of-tax-competition-and-the-battle-to-defend-it” display=”summary”]

There’s a “convergence” theory in economics that

People's Pundit Daily
You have %%pigeonMeterAvailable%% free %%pigeonCopyPage%% remaining this month. Get unlimited access and support reader-funded, independent data journalism.

Start a 14-day free trial now. Pay later!

Start Trial

Subscribe