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Archive for October 24th, 2011

A couple of months ago, after reading an excellent column in the semi-official newspaper of the Vatican, I joked that we should send Obama to Rome for an economics lesson.

I now completely retract that statement. There may be some economically astute people who write for L’Osservatore Romano, but they are offset by the economic illiterates at the Vatican’s Justice and Peace department.

Here are some excerpts from Reuters about the spectacularly misguided thinking from this division of the Catholic Church. For all intents and purposes, they want to double down on the cross-subsidization policies that have undermined markets and crippled the global economy.

The Vatican called on Monday for the establishment of a “global public authority” and a “central world bank” to rule over financial institutions that have become outdated and often ineffective in dealing fairly with crises. The document from the Vatican’s Justice and Peace department should please the “Occupy Wall Street” demonstrators and similar movements around the world who have protested against the economic downturn. “Towards Reforming the International Financial and Monetary Systems in the Context of a Global Public Authority,” was at times very specific, calling, for example, for taxation measures on financial transactions. …It condemned what it called “the idolatry of the market” as well as a “neo-liberal thinking” that it said looked exclusively at technical solutions to economic problems. “In fact, the crisis has revealed behaviours like selfishness, collective greed and hoarding of goods on a great scale,” it said, adding that world economics needed an “ethic of solidarity” among rich and poor nations. …It called for the establishment of “a supranational authority” with worldwide scope and “universal jurisdiction” to guide economic policies and decisions.

Wow. So many bad ideas in so few words.

Let’s look at the three main proposals and translate what they actually mean.

1. A “global public authority” is bureaucrat-speak for a world government. We’re already dealing with statist schemes like the OECD’s “Multilateral Convention” that will morph into an International Tax Organization. A supra-national government would be even worse since it would have power to wreck all sectors of the economy. These proposals are driven by the left’s desire for bureaucratization, harmonization, and centralization.

2. A “Central World Bank” is bureaucrat-speak for a Federal Reserve on steroids. But it would be even worse than that. In the current system, at least investors have the ability to dump dollars and euros and shift to currencies that are better managed, such as the Swiss Franc. A supra-national Fed, by contrast, will give the political elite more power to pursue bad monetary policy.

3. The notion of “taxation measures on financial transactions” is bureaucrat-speak for the Tobin Tax, which is a great scam for politicians since they would get to tax every transaction we make. If you think it is a good idea to put sand in the gears of the economy, sign up for this scheme. This idea is so bad that even the Obama Administration is opposed to it.

Last but not least, I’m flabbergasted by the report’s comments on the “idolatry of the market.”

What planet have these people been living on?

Do they blame the market for the financial crisis, when the mess was the result of the Federal Reserve, Fannie Mae, Freddie Mac, and government-created moral hazard? Do they blame the market for the sovereign-debt crisis, when the mess is the result of over-spending governments?

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Over and over again, I tell people to ignore whether politicians have a D or an R after their names. That’s because Democrats sometimes do the right thing and Republicans often do the wrong thing.

My latest example of Republicans doing the wrong thing come from Florida, where GOP politicians decided that free markets should not be allowed to function and that all taxpayers should be put at risk to subsidize hurricane insurance (primarily benefiting upper-income people).

The Wall Street Journal opined today on why this is a mistake.

…evidence continues to build that the state’s taxpayers will get walloped sooner or later. The state’s own hurricane reinsurer now admits its 12-month funding shortfall for claims is $3.2 billion. That estimate is based on the taxpayer-backed Florida Hurricane Catastrophic Fund’s cash on hand, its investment income and the amount banks estimate the fund could raise in municipal bond markets, if needed. Uh-oh. The Cat Fund was supposed to be a reinsurer of last resort but was expanded far beyond a prudent size in 2007, thanks to former Governor Charlie Crist. …Florida consumers will ultimately pay the bill. If the Cat Fund must issue bonds, it levies “assessments”—a code name for a tax—on the state’s property and casualty insurance holders to pay interest and repay principal. Only workers’ compensation and medical malpractice insurance holders are exempt—Mr. Crist’s nod to the tort bar. Lest you think $14 billion is enough, consider that Category 5 Hurricane Andrew caused $26.5 billion in damage in 1992, according to the National Hurricane Center. Wilma, which hit in 2005 as a Category 3, cost $21 billion. If the fund couldn’t pay its claims, some of the state’s insurers would likely go bust. The Cat Fund’s chief operating officer, Jack Nicholson, characterizes that problem as potentially “significant.” He is promoting legislation to reduce the fund’s size and shore up its finances. The time to do that is before the next big one hits, but Florida’s ruling Republicans continue to behave as if this is someone else’s problem.

I’ll go one step farther than Mr. Nicholson. Florida politicians shouldn’t just “shore up” the Fund. They should abolish it.

Private markets should determine the cost of insuring beach houses, resort hotels, and other properties susceptible to hurricane damage.

Yes, small subsidies don’t do as much damage as big subsidies, but you wouldn’t want a doctor to remove only 50 percent of a tumor during a cancer operation. That would be a big mistake, creating a much bigger risk that the growth would return to its original size.

The same principle exists with government interventions. Once politicians decide that it is okay to provide special favors for one group of people (usually big campaign contributors), it is very difficult to limit the size of the handouts.

But the moral of the story is that big government is a mistake – even when (or especially when) bad policy is being imposed by Republicans.

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