Excess returns to Congress

Some may say excess never left Congress, but I am referring to something a bit different.  “Excess returns” is the phrase used to describe an investment result which is above average for the kind of investment made.  And according to a report from Barron’s Randall W. Forsyth, a new study shows that U. S. Senators achieve an excess return of 10.7% per year in their personal investments.  For members of the House of Representatives, the excess is 6.8%.  Forsyth points out that any professional investment manager who achived this result on a consistent basis would be quite phenomenal.  He concludes that

Members of Congress used inside information gleaned from their positions of power to enrich themselves in the stock market.

He is probably right, and I would be the last to accuse Congress of honesty, but there is another possible explanation.  Maybe Congressmen are just cleverer than the rest of us, and in particular are more difficult to deceive.  Congress itself is evidence that the broad public is easily fooled.

In this regard, I recall stumbling a few months ago on a link to the personal investment statements that Congressmen and some other federal officials file. (Curious that I did not bookmark it and can’t seem to locate it right now.) I picked a Congressman who I thought might be honest, Ron Paul, and looked up his statement.  Dr. Paul seemed to have most of his money in precious metals, I don’t recall the extent to which it might have  been bullion, mining stocks, or related investments.  Of course this strategy would have done very well over the past couple of years. Paul is associated with the idea that U. S. dollars should be backed with gold.  I don’t think he considers this realistic in the near term, but of course if it ever happened the effect would be to push the price of gold higher as bullion would be accumulated to “back” the money.  But does Paul endorse gold-backed money in order to increase the value of his investments?  Or does he invest in gold  because he expects its value to increase?  I’m pretty sure it is the latter.  Of course this kind of logic would apply only to honest Congressmen, so I suppose we could consider Ron Paul to be an outlier.

According to Forsyth, the source study, by Alan J. Ziobrowski of Georgia State University, James W. Boyd of Lindenwood University, Ping Cheng of Florida Atlantic University and Brigitte J. Ziobrowski of August[a] State University appeared May 25 in the Journal “Business and Politics” and covers the years 1985-2001.

Reality and the Real World Economics Review Blog

Somehow the “mainstream” didn’t anticipate the 2008 global financial crisis until it actually happened, yet a few analysts did issue warnings.  So it seemed like a good idea for the Real World Economics Review Blog to organize a contest and award a prize to “the economist who first and most cogently warned the world of the coming Global Financial Collapse.” Yet somehow they couldn’t allow even the nomination of the guy who predicted it first and most accurately (pdf).  We are fortunate that Mason Gaffney has reviewed the record and documented what happened.

What bitcoin illustrates about fiat money

The value of bitcoin seems to have surged to over $7, from less than one dollar a couple of months ago.  This is a far faster increase than the price of gold, or silver, or other “hard” assets.

Bitcoin was invented by Satoshi Nakamoto, who must be a skilled and innovative programmer.  Anyone can generate bitcoins by setting their computer to solve specific mathematical problems.  As more bitcoins are generated, the difficulty of the problems increases.  Relatively few vendors currently accept bitcoins, but several dealers are willing to trade dollars for them.  And the reason their value has increased must be that people are willing to pay more dollars than previously.

Why pay more dollars?  One reason is that the total number of bitcoins is limited, so presumably they cannot suffer the kind of inflation that often occurs with paper currency. (Could that rule change? Yes, just as some new major deposit of gold or silver might be discovered.)  Another reason, of course, could be that people are just learning about bitcoins, and seeing the trend, expect it to continue.  Also, bitcoins give some indication of being truly anonymous, secure money.

Now, if I was a skilled programmer, I could invent my own bitcoin-ish system, and generate my own coins.  But unless someone is willing to accept my coins in exchange for something people want, they’ll have no value.  Perhaps Satoshi Nakamoto is not only skilled, but also charismatic.

Bitcoins have intrinsic value in the sense that it takes a lot of work (done by the computer) in order to generate one, much as it takes a lot of work to discover, mine and refine precious metals. But, whereas I could use precious metals to make jewelry or tableware, I can’t think of anything that anyone could do with a bitcoin, other than spend it or save it.

So it seems to me that bitcoin shows that fiat money could work quite well, provided that the proper amount of it is issued.  If bitcoin’s deflationary trend continues, it might be a good investment but would lose usefulness as actual currency.  I think the most likely outcome will be, either, a decision to produce more bitcoins (however that might be made), or the creation of other alternative currencies operating in parallel.

Interesting times.

New horizons in corporate subsidies

I thought it was a scandal when, years ago,  businesses were given subsidies– free money– in exchange for doing the community the favor of employing people.  I thought it was a bigger scandal when retailers were allowed to retain sales taxes, paid by their customers, to pay for capital equipment used in their business. I thought it was about the biggest possible scandal when Continue reading New horizons in corporate subsidies

Hong Kong’s “citizens dividend”

I have previously discussed Hong Kong’s land tenure system, under which the land is publicly owned, but improvement owners have security of tenure in exchange for paying significant land rent.  One result is that most working people don’t have to pay any sales or income taxes.  Another is that land is efficiently used.

But there are a couple of concerns:

  • Since Hong Kong doesn’t collect all the economic rent, speculation can still drive up the cost of housing as well as any activity which uses land (and they all do).
  • Wealthy mainland residents are moving to Hong Kong to take advantage of the increased liberties which HK residents get, further driving up costs for local people.

Now we read that every HK has declared a sort of citizens’ dividend, every permanent resident will get HK$6,000 (US$773, currently).  Bloomberg calls it a “handout,” but I think “share of economic rent” might be more appropriate.  Opponents of the move say it will be inflationary, and certainly it could lead to higher economic rent, with speculation driving land costs even higher. Of course, if people expected the government to collect all the economic rent, speculation would not occur. While the cost of living might still increase, giving an equal dividend to every resident would tend to flatten the income distribution, helping the poor much more than the wealthy.

 

Another way the poor and their land are separated

Andrew Kahrl‘s talk this afternoon at APA was “The Plight of Black Coastal Landowners in the Sunbelt South and Its Lessons for Post–Housing Bubble America.”

He used examples from New Hanover County (NC) and Virginia Beach (VA).  A hundred years ago, coastal land wasn’t really good for farming, and folks were aware of the danger of storms, so it tended to be cheap. Poor black farmers wanted to own their own land, and this was what they could get.  Continue reading Another way the poor and their land are separated

Who needs federal transit funding?

Not the Washington DC streetcar project, which at a cost of $1.5 billion is expected to raise land values by $5 to $7 billion.  (This is the increase in value of “existing properties.” Double it to include the value of new construction.) So collecting just 30% of the increase should be sufficient to pay the cost.

A lot of details are missing from the source article, and so far I don’t know how to get the  study which it describes.

Thanks for Alanna Hartzok for the tip.

 

Saudi housing bubbling

Suppose you are a king. And suppose you have a restless, mostly young population, high unemployment, with most people having to rent because housing and land are too expensive. Few people can get mortgages, because they involve large down payments and high interest rates. Also suppose that you have a big country, lots of land relative to population, and a huge government surplus. What to do?

You could examine why housing is so expensive, and whether there’s a way to make more land available. Maybe that’s happened in Saudi Arabia, but recent news reports give no indication.  Instead, the Saudi solution is to encourage the mortgage industry and expand credit.  Will that make housing cheaper?  Will that make it easier for an underemployed population to get decent housing? Or will it drive up the price of land and feed what seems to be an already-building bubble?  It may be that the Saudi objective is to get more of their people into debt-slavery so they’ll faithfully serve the state.  I don’t know.

What really puzzles me is how mortgage interest fits into an Islamic-dominated state.  Possibly this is like the “Islamic Finance” offered by some U S banks, where no interest as such is charged, but either the price is inflated to compensate for the fact that it will be paid gradually, or the “homeowner” is technically a renter until enough rent has been paid to cover the cost plus what, to others, would be interest.

Bloomberg says the King pledged more than $82 billion for housing, but does not say whether this comprises direct government grants, or is simply some amount of debt which homebuyers will contract.  It also says that

Saudi Arabia’s mortgage law will change the way home finance is regulated, from registering mortgages to prosecuting police officers who refuse to carry out eviction orders.

This will be interesting to watch, preferably from a distance.

More about Saudi housing and morgages: