Sunday, August 29, 2004

Punting on growth

A split is seen between Mark Latham and predecessor Simon Crean as Labor decides how it would run the economy, reports economics correspondent David Uren

NOT since John Hewson has a political party been led by someone so smitten with economic ideas as Mark Latham. But Latham's approach is first and foremost political, in contrast to Hewson's attempt to teach a perplexed populace economics 101.

Despite his interest. Latham has deliberately cast economic policy into the background of Labor's public policy platform. He says that when he runs his community forums. tax and economics is not what people want to talk about. He has also tried to reassure those who see economic management as Labor's key weakness. and establish points of difference with the Government and appeal to some particular constituencies and prejudices.

Former Paul Keating staffer John Edwards, the local chief economist with London-based bank HSBC, says former leaders Simon Crean and Kim Beazley tended to look for clouds on the horizon with the release of every good piece of economic news. but Latham has willingly embraced the idea that the economy is doing well. Instead Latham claims as much credit as he can for Australia's strong economic performance from reforms initiated under Labor governments, while emphasising the need to improve the distribution of the fruit of progress. Labor talks not only about those who have been left behind on social welfare but also those who feel under pressure because they are working more hours and cannot get access to services they want.

Although pressing Labor's heritage as the party of economic reform, Latham has not ventured into any politically difficult ground in developing an agenda for how he would advance it. Serious economic reform, as Hewson found, is hard to press from the Opposition benches. The themes Latham has promoted all have a political edge to them.

Latham's economic spokesmen have strong credentials. Crean, now Treasury spokesman, and finance spokesman Bob McMullan have economics degrees and served as ministers in economic portfolios. while assistant treasury spokesman David Cox has an MBA and learned the ropes under Bob Hawke's formidable finance minister Peter Walsh and then as chief-of-staff to treasurer Ralph Willis. Latham has an honours degree in economics from the University of Sydney.

Although Latham and Crean talk to each other a lot. Latham and his economic spokesmen do not always appear to work closely as a team. Latham whistles a tune, which the others try to pick up and follow. Sometimes they go off in their own directions, while sometimes Latham's tune takes some surprising twists. The pledge of fiscal responsibility is an example of this. It was devised as a way of countering the relentless attack from Coalition Treasurer Peter Costello on the debts left behind by the Keating government. It also serves the internal purpose of forcing discipline on shadow ministers to match spending proposals with savings.

The pledge is that Labor will keep the budget in surplus in each of its first three years of government, and that it will reduce government spending and tax as a proportion of the economy. as measured by gross domestic product.

When articulated by Crean and McMullan, the pledge carries an important qualification. "On current forecasts, there is no reason why this should not be possible," Crean said in his budget reply speech this year. McMullan, in a speech to the Sydney Institute. said the pledge to keep the budget in surplus did not reflect a fetish with surpluses but a view that the budget should be counter-cyclical, building up surpluses during times of strong economic growth, as is forecast for the next three years.

The origin of the pledge is a commitment given by the British Labour Government, when first elected, to stick to the economic forecasts set down by the previous Conservative government. Treasury's forecasts for the Australian economy show a surplus in each of the next three years and a reduction in spending and tax as a share of GDP.

However, when Latham mentions the pledge, he includes no such qualification. He told ABC radio's AM program, "Labor's commitment is surplus budgeting for every year of the next parliament and we will do everything we can to have downward pressure on interest rates. That is our budgetary commitment, that's important for families and the future of the economy. We believe in surplus budgets and we will have that in place through the next parliamentary term

The above is the first part of an article appearing in "The Weekend Australian" newspaper of 28 August, 2004 (p. I 29) which does not appear to be otherwise online

Tuesday, August 24, 2004


Wayne Lusvardi writes: "Below is an article from the Pasadena Star News and my letter response in today's paper regarding the issue of affordable housing. Although the story is local it is interesting to see how Leftist government is often able to use Orwellian reverse language to fabricate a housing affordability crisis in an economy where "over-affordability," not non-affordability, is the real issue at hand".

City Raises Fees to Promote More Affordable Housing

Gene Maddaus
Pasadena Star-News (Pasadena, CA)
August 16, 2004

Housing developers who do not build discount-priced homes will have to pay substantially more in city fees, as the City Council acted Monday night to try to stem the tide of gentrification.

The council voted 7-1 to substantially increase the so-called "in lieu' fee for housing developers, a move that had been delayed for one year.

"This was a positive step,' said affordable housing advocate Marvin Schachter. "They have at last moved to do something.'

The new fees vary depending on the type, size and geographic location of a proposed project. Some developers will see only a modest increase, while others will see their affordable housing fees double, triple, or quintuple.

The purpose, however, is not to generate more revenue for the city's affordable housing trust fund, but rather to coax developers into building more affordable housing.

If developers make 15 percent of their projects "affordable,' or commit to build the equivalent elsewhere in the city, they are not required to pay the fee.
"The purpose of the in-lieu fee is to discourage the payment of the in-lieu fee,' Schachter said.

Under the old fee structure, developers had an economic incentive to pay the fee, which was cheaper than the cost of providing discount housing. The new fee schedule is designed to neutralize that incentive.

Councilman Chris Holden noted that with escalating rents and land values, it is becoming increasingly difficult for Pasadena's poorer residents to stay in Pasadena.
"The tide is against us,' he said.

Councilman Steve Madison initially objected to the fee increase on the grounds that it unfairly placed the social burden of providing affordable housing solely on developers.

But Madison was persuaded to vote for the resolution after Holden agreed to ask the city attorney to explore the possibility of limiting the affordable housing to Pasadena residents and city employees only.

Without such a provision, Madison said, "it's inducing people who don't live in our city to move here.'

Schachter and affordable housing activist Michelle White said later that they had no objections to a local preference.

Councilman Steve Haderlein voted against the fee increase, saying it placed "a heavy burden on a few.'

The council also voted 8-0 to modify the inclusionary housing ordinance to allow developers of for-sale housing to fulfill their affordable requirements by building rental units. Under the earlier regulatory scheme, for-sale developers were required to build for-sale affordable housing.

Developers and real estate agents liked the new provision because it allowed greater flexibility, while affordable housing activists believed it would help assuage the most severe affordable housing shortage, that of rental units.

The council also did away with a restriction that required "off- site' affordable housing to be within one-quarter mile of the primary project. When the ordinance was passed three years ago, that provision was intended to prevent dumping of affordable housing in Northwest Pasadena, and guarantee that affordable homes would be spread throughout the city.

But developers complained that the provision was too restrictive, and made it nearly impossible to build off-site housing. Under the new system, developers will be allowed to build off- site units everywhere in the city except Northwest Pasadena.
On the whole, developers and real estate activists blanched at the fee increase, but welcomed the "carrot' provisions that made it easier to fulfill the affordable housing requirements.

"I think we should be more incentive-based than punitive- based,' said Realtor John Grech. Gene Maddaus can be reached at [626] 578-6300, Ext. 4444, or by e-mail at .

Wayne Lusvardi replies:

Confiscatory concept

"City raises fees to promote more affordable housing' (Aug. 16) reports that politicians have been pressured to believe we have a housing affordability crisis. As someone who has developed affordable housing for a public housing authority, taught courses to city managers on affordable housing, and currently works as a real estate appraiser, I don't believe Pasadena has an affordable housing crisis. Let me offer some evidence:

According to DataQuick ( ) in April 1989 interest rates were 11 percent and the typical mortgage payment was $1,278 per month. The typical monthly mortgage payment in California in July 2003 was $1,284 per month. Adjusting for inflation, the "typical' mortgage payment in 1989 would be $2,216 per month today.
Housing affordability advocates claim that people are being driven out of Pasadena to places like Palmdale due to expensive downtown housing and neighborhood gentrification. But there is no affordability problem in Pasadena if it continues to be defined as the unaffordability of new, luxury housing units in the upscale downtown urban village. As a society we don't say that people are being excluded from buying expensive automobiles or other luxuries, so why do we say this with high-end housing?

Is it a hardship for people to move to Zip Code 93591 in Palmdale where in June 2004 there were 21 new home sales averaging $165,000? This equates to a payment of $843 per month, which is cut in half after deducting mortgage interest from income taxes.
People continue to find their own affordability solutions without government such as apartment sharing, living with parents, illegal housing conversions and compressing more than one family in single-family zoned homes, driving up rents and sales prices.

Thus what is needed is less "affordability,' not more. We don't have a housing bubble because we don't have an excess of housing supply. What we have is a housing market on steroids of historically low interest rates and easy-money loans. This is pumping housing demand as renters flood into the ownership market just as the supply of newly built housing is being restricted in older cities to the most expensive downtown commercial land. It took me a long time to learn that government can't create affordable housing.

Unfortunately, many prominent religious institutions in Pasadena haven't had the wisdom to see this and continue to advocate for "feel good' inclusionary housing policies that help the connected and a few people, but are immorally confiscatory of the wealth of downtown property owners.

Tuesday, August 10, 2004

FDR's policies prolonged Depression by 7 years, UCLA economists calculate

Two UCLA economists say they have figured out why the Great Depression dragged on for almost 15 years, and they blame a suspect previously thought to be beyond reproach: President Franklin D. Roosevelt.

After scrutinizing Roosevelt's record for four years, Harold L. Cole and Lee E. Ohanian conclude in a new study that New Deal policies signed into law 71 years ago thwarted economic recovery for seven long years.

"Why the Great Depression lasted so long has always been a great mystery, and because we never really knew the reason, we have always worried whether we would have another 10- to 15-year economic slump," said Ohanian, vice chair of UCLA's Department of Economics. "We found that a relapse isn't likely unless lawmakers gum up a recovery with ill-conceived stimulus policies."

In an article in the August issue of the Journal of Political Economy, Ohanian and Cole blame specific anti-competition and pro-labor measures that Roosevelt promoted and signed into law June 16, 1933.

"President Roosevelt believed that excessive competition was responsible for the Depression by reducing prices and wages, and by extension reducing employment and demand for goods and services," said Cole, also a UCLA professor of economics. "So he came up with a recovery package that would be unimaginable today, allowing businesses in every industry to collude without the threat of antitrust prosecution and workers to demand salaries about 25 percent above where they ought to have been, given market forces. The economy was poised for a beautiful recovery, but that recovery was stalled by these misguided policies."

Using data collected in 1929 by the Conference Board and the Bureau of Labor Statistics, Cole and Ohanian were able to establish average wages and prices across a range of industries just prior to the Depression. By adjusting for annual increases in productivity, they were able to use the 1929 benchmark to figure out what prices and wages would have been during every year of the Depression had Roosevelt's policies not gone into effect. They then compared those figures with actual prices and wages as reflected in the Conference Board data.

In the three years following the implementation of Roosevelt's policies, wages in 11 key industries averaged 25 percent higher than they otherwise would have done, the economists calculate. But unemployment was also 25 percent higher than it should have been, given gains in productivity.

Meanwhile, prices across 19 industries averaged 23 percent above where they should have been, given the state of the economy. With goods and services that much harder for consumers to afford, demand stalled and the gross national product floundered at 27 percent below where it otherwise might have been.

"High wages and high prices in an economic slump run contrary to everything we know about market forces in economic downturns," Ohanian said. "As we've seen in the past several years, salaries and prices fall when unemployment is high. By artificially inflating both, the New Deal policies short-circuited the market's self-correcting forces."

The policies were contained in the National Industrial Recovery Act (NIRA), which exempted industries from antitrust prosecution if they agreed to enter into collective bargaining agreements that significantly raised wages. Because protection from antitrust prosecution all but ensured higher prices for goods and services, a wide range of industries took the bait, Cole and Ohanian found. By 1934 more than 500 industries, which accounted for nearly 80 percent of private, non-agricultural employment, had entered into the collective bargaining agreements called for under NIRA.

Cole and Ohanian calculate that NIRA and its aftermath account for 60 percent of the weak recovery. Without the policies, they contend that the Depression would have ended in 1936 instead of the year when they believe the slump actually ended: 1943.

Roosevelt's role in lifting the nation out of the Great Depression has been so revered that Time magazine readers cited it in 1999 when naming him the 20th century's second-most influential figure.

"This is exciting and valuable research," said Robert E. Lucas Jr., the 1995 Nobel Laureate in economics, and the John Dewey Distinguished Service Professor of Economics at the University of Chicago. "The prevention and cure of depressions is a central mission of macroeconomics, and if we can't understand what happened in the 1930s, how can we be sure it won't happen again?"

NIRA's role in prolonging the Depression has not been more closely scrutinized because the Supreme Court declared the act unconstitutional within two years of its passage.

"Historians have assumed that the policies didn't have an impact because they were too short-lived, but the proof is in the pudding," Ohanian said. "We show that they really did artificially inflate wages and prices."

Even after being deemed unconstitutional, Roosevelt's anti-competition policies persisted — albeit under a different guise, the scholars found. Ohanian and Cole painstakingly documented the extent to which the Roosevelt administration looked the other way as industries once protected by NIRA continued to engage in price-fixing practices for four more years.

The number of antitrust cases brought by the Department of Justice fell from an average of 12.5 cases per year during the 1920s to an average of 6.5 cases per year from 1935 to 1938, the scholars found. Collusion had become so widespread that one Department of Interior official complained of receiving identical bids from a protected industry (steel) on 257 different occasions between mid-1935 and mid-1936. The bids were not only identical but also 50 percent higher than foreign steel prices. Without competition, wholesale prices remained inflated, averaging 14 percent higher than they would have been without the troublesome practices, the UCLA economists calculate.

NIRA's labor provisions, meanwhile, were strengthened in the National Relations Act, signed into law in 1935. As union membership doubled, so did labor's bargaining power, rising from 14 million strike days in 1936 to about 28 million in 1937. By 1939 wages in protected industries remained 24 percent to 33 percent above where they should have been, based on 1929 figures, Cole and Ohanian calculate. Unemployment persisted. By 1939 the U.S. unemployment rate was 17.2 percent, down somewhat from its 1933 peak of 24.9 percent but still remarkably high. By comparison, in May 2003, the unemployment rate of 6.1 percent was the highest in nine years.

Recovery came only after the Department of Justice dramatically stepped up enforcement of antitrust cases nearly four-fold and organized labor suffered a string of setbacks, the economists found.

"The fact that the Depression dragged on for years convinced generations of economists and policy-makers that capitalism could not be trusted to recover from depressions and that significant government intervention was required to achieve good outcomes," Cole said. "Ironically, our work shows that the recovery would have been very rapid had the government not intervened."


Sunday, August 01, 2004

The Islamic "Z" Men

(And the media war within the terror war)

By Wayne Lusvardi

With the unconfirmed report that Abu Musab al-Zarqawi - al Qaeda's reported field commander in Iraq - may have been captured on Friday July 30, there is the impression that al Qaeda's No. 2 man had been nabbed. See here. Maybe so, maybe no.

For the uninformed there is little distinction between al Qaeda's "Z" men - Abu al Zarqawi and Ayman al Zawahiri. To most Americans the names sound the same. Zarqawi is a warrior; Zawahiri is a strategist and right hand man to Osama bin Laden.

Since it is often said that it takes one to know one, a recent book by another "Z" man, Montasser al Zayyat, "The Road to al Qaeda: The Story of bin Laden's Right Hand Man" (Pluto Press, 2004) may be helpful in knowing our enemy. The book is a best seller in the Arab world (Note: Pluto Press is a hard Left publisher -- which makes it all the more interesting). While Zarqawi would be a real catch (I'm skeptical they have caught him), it is Zawahiri, the mastermind of 9/11 that really needs to be caught or killed if the war on terror is going to cut off the head of the snake rather than just its tail.

Author Montasser al Zayyat knew Zawahiri personally after both were rounded up and imprisoned in Egypt after the assassination of Anwar Sadat in 1981. Zayyat has since broken ranks with al Qaeda.

Zayyat's book points out that Zawahiri and other militant Islamists view the execution by Nasser in 1966 of Egyptian activist and ideologist Sayyid Qutb as a galvanizing event. Qutb's writings called for political jihad after the 1967 Arab defeat by Israel and the failure of Nasserism to build a new Arab society based on socialism. After Nasser cracked down on radical Islamists in the 1960's, there was a subsequent migration of hundreds of thousands of Egyptian professionals to the Gulf States in the 1970's and 1980's, in an under-reported "Arab Exile" that formed the basis of today's terrorism.

Like many revolutionaries who lived in France, Britain or some other modern western state only to return to their native country to foment revolution, Qutb actually lived in the U.S. for a while. It is not recognized in the mainstream media that al Qaeda's revolutionaries are more like the Jacobins, Bolsheviks, and latter-day Marxist guerrillas in the Baader-Meinhoff gang. Their insurrectionist tactics are the same: provoke retaliation by the ruling power that can be painted as brutal repression in the hope of getting the mass of the populace on your side. Proving that poverty doesn't breed revolutionaries, Zawahiri unsurprisingly comes from an aristocratic Egyptian family whose grandfather founded the Arab League. Zawahiri went to Cairo University, earning a doctor's degree in surgery. He married a female philosophy professor there. Zawahiri later went to Afghanistan during the Soviet occupation to implement a jihad without interference from the Eqyptian secret police. In Afghanistan Zawahiri met bin Laden. Zawahiri and bin Laden co-opted the Taliban. The Taliban provided a safe haven for members of the Egyptian Jihad movement. Another little known fact is that the U.S. was funding the Taliban up to right before 9/11.

And if you haven't picked up on it, recent reports, later proven false, from conservative media outlets of "nuke missiles found near Bagdad" and "Zaqawi captured" seem timed to drown out U.S. domestic news about John Kerry and the Democratic National Convention. Of course, this is no different than what the mainstream media has been doing for decades in the other direction -- as pointed out in Edith Efron's book "The News Twisters" (1971) which devastatingly documented that coverage of the 1968 U.S. Presidential campaign was massively slanted against Richard Nixon by all three U.S. network news departments. Efron convincingly proves her point in this book with some of the most damning bar graph statistics I've ever run across. And for an example of slanted Leftist media reporting of the Vietnam War read Peter Braestrup's "The Big Lie" (Yale University Press 1978) which documents the massive misreportage of the Tet Offensive as a "disaster" -- which helped change the course of the support for the Vietnam war at home. It not only pays to know your enemy, but to know the lens through which you know your enemy.