Sanchez destined for failure; american prosperity in the age of bailouts (2010)

Destined for Failure This page intentionally left blank DESTINED FOR FAILURE American Prosperity in the Age of Bailouts Nicola´s Sa´nchez, Christopher Kopp, and Francis Sanzari Copyright 2010 by Nicola´s Sa´nchez, Christopher Kopp, and Francis Sanzari All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, except for the inclusion of brief quotations in a review, without prior permission in writing from the publisher Library of Congress Cataloging-in-Publication Data Sanchez, Nicolas Destined for failure : American prosperity in the age of bailouts / Nicolas Sanchez, Christopher Kopp, Francis Sanzari p cm Includes bibliographical references and index ISBN 978–0–313–39263–4 (hard copy : alk paper) — ISBN 978–0–313–39264–1 (ebook) United States—Economic policy—2009– Government spending policy—United States Fiscal policy—United States Keynesian economics I Kopp, Christopher II Sanzari, Francis III Title HC106.84.S36 2010 330.973—dc22 2010022048 ISBN: 978–0–313–39263–4 EISBN: 978–0–313–39264–1 14 13 12 11 10 This book is also available on the World Wide Web as an eBook Visit www.abc-clio.com for details Praeger An Imprint of ABC-CLIO, LLC ABC-CLIO, LLC 130 Cremona Drive, P.O Box 1911 Santa Barbara, California 93116-1911 This book is printed on acid-free paper Manufactured in the United States of America Sa´nchez To those who taught me the most My mentor, Professor Jeffrey B Nugent My aunt, Carmencita San Miguel Page´s† My uncle, Jose´ Calle Ripoll† My teacher at Colegio Trelles, Prudencia Dı´az† † In memoriam Kopp To my parents Christopher Kopp, M.D., and Karen Kopp, and all of my family and friends who encouraged me to complete this project, especially Gerald A Buchheit Jr Sanzari To my parents and twin brother Anna, Michael, and Philip Sanzari This page intentionally left blank CONTENTS List of Illustrations ix Foreword by Nicola´s Sa´nchez xi Introduction and Theory Surviving the Media Age of Misinformation 19 Regulation: The Achilles’ Heel of the U.S Economy 35 Curing Health Care 49 Investing in Health and Education 67 American Unions: Robin Hoods or White-Collar Criminals? 85 Housing without Foundations: How Ideology Led to Crisis 101 Foreign Policy, Foreign Failure 121 Polluting the Economy with Environmental Regulation 135 10 Taxing More and Producing Less 153 11 Ensuring Disaster with Moral Hazard 169 viii CONTENTS 12 The Burden of the Keynesian Cross 185 13 Putting It All Together 201 Index 211 LIST OF ILLUSTRATIONS FIGURES 1.1 U.S Long Run Economic Growth 2.1 U.S Real Price of Natural Gas 26 2.2 U.S Real Price of Gasoline 27 2.3 U.S Adjusted Monetary Base 33 7.1 New Housing Units Started in the U.S 2000–2008 112 10.1 Laffer Curve 160 12.1 Keynesian Cross 186 TABLES 6.1 Estimated Cost Markup of Unionized Labor—2006 92 7.1 Population and Real Per Capita Income 111 9.1 Coase Theorem Example 138 This page intentionally left blank INDEX Abortion, 73–74 Absolute purchasing power parity, 30, 31 Adjustable rate mortgages (ARMs), 108–9 Afghanistan, war in, 124, 131, 206 Agency for International Development, U.S., 130 AIG (American International Group), 110, 114, 115, 178 Airlines, productivity of, 12 American Dream Downpayment Act (2003), 106 American Home Mortgage, 114 American Recovery and Reinvestment Act (2009), 115 Anderson, Terry, 141 Arctic National Wildlife Refuge (ANWR), 141–42 Asian nations, 35–36; automakers, 37 Asset values, 9, 10, 12–14, 202 Audubon Society, 142–43 Australia, health care in, 56, 57 Automobile industry, 68, 207–8; CAFE laws and, 36–38, 203, 204, 208; health care costs and, 51; labor costs in, 89–92; labor unions and, 86–93, 95, 179–80; outsourcing and, 88–89 Automobile insurance, 170–72 Babcock, Hope, 143 Balance sheet recession, 6–7, 15 Balance sheets, 6–9, 88, 89; governments and, 9–11; health of firms and, 8–9; household wealth and, 7–8 Banking industry, 113–15, 117; government bailout of, 114–15, 178; no recourse loans and, 113–14; predatory lending by, 108–9 Bank of America, government bailout of, 114, 178 Barro, Robert J., xii, 115, 191, 196 Bear Stearns, 101, 114 Bernard Baker Sanctuary, 142 Big Mac Index, 31, 32 Big Three, in auto industry See DaimlerChrysler; Ford Motor Company; General Motors 212 INDEX Biomedical research, 55 Biotechnological revolution, 50 Black market, 163, 166 Blacks, 146; mortality rate of, 72–73 BNP Paribas, 114 Board of Education of Independent School District No 92 v Earls, 43–44 Brazil, internal market in, 190 Britain, home ownership in, 106–7 See also United Kingdom Budget constraints, 11, 56 Budget deficits, Obama and, 207, 208 Buffett, Warren, 92–93 Bureaucracy, 46, 59, 139, 145, 149; taxes, 165 Bureau of Economic Analysis, 2, 123 Bureau of Labor Statistics, 2, 93 Bush, George H W., 127 Bush, George W., 3, 95; on home ownership, 106 Bush (G.W.) administration, 15, 33, 181; auto industry bailout and, 179; defense spending in, 123; financial prosperity in, 208; tax cuts and, 154; war on terror and, 124 Business cycle, recession and, 1, CAFE regulations See Corporate Average Fuel Economy (CAFE) laws California, environmental law in, 144–45 Canada, health care in, 53, 56, 57, 58 Cancer prevention, 74 Cartels, 31 Carter, Jimmy, 23, 40, 104, 195 Case-Shiller Home Price Indices, 110–11 Castonguay, Claude, 58 Charitable donations, 165 Chernobyl nuclear disaster, 38, 40, 41 China, 6, 190, 198 Chrysler See DaimlerChrysler Cisneros, Henry, 106 Citigroup, government bailout of, 178 Citizens United v Federal Election Commission (2010), 96 Civil Rights Act of 1968, 103 Civil War, costs of, 124 Climate protection, 147 Clinton, William, 56, 106 Coase, Ronald, 137 Coase theorem, 137–40 Cognitive skills, education and, 79–81 Collateralized mortgage obligations (CMOs), 104–5, 113 Collective bargaining, 85, 86, 97; auto unions and, 88, 92, 94; restrictions on, 94 See also Labor unions Communism: containment of, 126, 132; scientific materialism and, 198 Community Action Program, 95 Community Reinvestment Act (1977), 104 Compensation packages, 23–25 Competition, health care and, 49, 50, 53, 59–62 Competitive markets, 191 See also Free market Congress, U.S., 114; Community Reinvestment Act and, 104; Freddie Mac legislation and, 103; privacy legislation and, 43–55 Congressional Budget Office, xiv, 123 Congressional Research Service, 124 Consumer Price Index, 30, 90 Consumers, Keynesian economics and, 186–88 Consumption tax, 162 Containment, of communism, 126, 131, 132 Corporate Average Fuel Economy (CAFE) laws, 36–38, 203, 204, 208 Cost-benefit analysis, 144, 149; bankruptcy and, 181; health care, INDEX 52, 204; Kyoto Protocol, 148; oil drilling, 142, 143; pollution, 137; water restriction, 145; zoning laws and, 146 Cost cutting, in health care, 60 Costs, 37 See also Prices Council (public) housing, in Britain, 107 Credit default swaps, 110 Crony capitalism, 101, 145, 195, 208, 209 DaimlerChrysler, 115, 179; labor unions and, 87, 88, 90, 91–92 Debt, 33; asset price collapse and, 6; cancellation of, 130–31; collateraleralized, 104–5, 113; as liability, 7–8, 9; monetarized, 196 Default rates, 108, 113–14 Defense spending, 123–26 Dementia, 74 Demographic trends, 8, 51, 74, 103 Department of Agriculture Food Grant Programs, 130 Department of Defense, 123, 124 Department of Housing and Urban Development (HUD), 104, 106, 109 Department of Interior, 148 Department of Labor, Wage and Hour Division, 96 Department of State, 130 Depression era See Great Depression Detroit bailout See Automobile industry; specific manufacturer Developing countries, 147; trade restrictions in, 189–90, 191 Dinlersoz, Emin M., 96–97 Drawbacks, 8–9, 202 Drug industry, R&D costs in, 54–55, 58 Drugs, efficacy of, 76–77 Drug testing: placebo and, 70–72; privacy and, 44–45 213 Economic aid, 127–31 Economic analysis, greenhouse gas emissions and, 147 The Economic Consequences of the Peace (Keynes), 199 Economic growth: Community Reinvestment Act and, 104; consumption tax and, 163; education and, 76, 79, 80; greenhouse gas emissions and, 148; Right to Work laws and, 96–97; water restriction and, 144–45 Economic misinformation See Misinformation, media age and Economic regulation See Regulation Economic stimulus, 115, 196, 197 Economic theory, 1–17; endogenous growth theory, 191–92; household wealth and, 7–9; wars and inefficiencies in, 192–95 See also Keynesian economics; Recession Economist (magazine), 56 Economists, foreign aid and, 129, 132 Education, investment in, 76–82, 204; cognitive skills and, 79–81, 205; economic growth and, 76, 79, 80; machines, learning and, 77–78, 79, 81, 205; quality vs quantity in, 79 Efficiency: CAFE laws and, 36–38; and competition, in health care, 60, 61, 62; economic, 46; of free markets, 31; human resources and, 14, 24; tax system, 157; trade restrictions and, 189 Eisenstadt v Baird, 43 Elderly, health of, 74–75 Electric Power Research Institute (EPRI), 40 Ellwood, David T., 97 Emergency Economic Stabilization Act (2008), 114–15 Employee benefits, 94 214 INDEX Employer-employee relations: labor unions and, 87; privacy issues and, 42–43, 44 Employment, 16, 195; war and, 192, 193, 199 See also Labor; Unemployment Endangered Species Act, 144 Endogenous growth theory, 191–92 Energy development, in public lands, 141–44 Energy prices, 25–27, 204, 208 Entitlement programs, 51 Environmental regulation, 135–49; Coase theorem and, 137–40; farming and, 144–45; free market and, 141, 149; global warming and, 146–48; housing and, 145–46; property rights and, 135–36, 140, 148, 149; public land management and, 141–44; tragedy of the commons and, 140–41; transaction costs and, 137, 138–39 Ethanol fuel, 139–40 Europe, 190; drug industry in, 55 See also specific countries Exchange rates, 29–32; resource allocation and, 30–31 Externalities: ethanol production and, 139–40; negative, 135, 137 Fair tax, 162–63 Fannie Mae (Federal National Mortgage Association), 102, 103, 104, 109, 115, 116 Federal Deposit Insurance Corporation, 105 Federal Emergency Management Agency (FEMA), 174, 177 Federal government: foreign policy and, 121–22; Great Depression and, See also under Department; Government Federal Home Loan Bank System, 102 Federal Housing Administration (FHA), 102 Federal Reserve System, 114, 115, 154, 155, 188, 196; interest rates and, 198 Fee-for-service reimbursements, 52, 57 Feldstein, Martin, 113 Ferguson, Niall, 5, 108 Fertility, 74 Financial institutions, 3, 117, 208; government bailout of, 114–15, 178, 180, 181, 207; home ownership and, 112 See also Banking Financial instruments, 7, 14, 15, 67 Financial liabilities, 7, 8–9 See also Debt Financial markets, 114 See also Wall Street Fine, Glenn, 97 First World War, 201, 206 Fish and Wildlife Service, U.S., 144, 145 Fisher, Richard W., 51 Fishing quotas, 140–41 Flat tax, 163–66 The Flat Tax (Hall & Rabushka), 164 Flood insurance, 175–76 Food aid, 130 Ford Motor Company, 88, 91, 92 Foreign aid, 127–31; debt cancellation and, 130–31 Foreign exchange, 29–32 Foreign policy, U.S., 121–33, 201; economic cost of military force and, 122–27; economic costs of, 121; failed foreign aid and, 127–31; U.S superpower status and, 126–27, 132 Fossil fuels, 40, 137; oil drilling, 142–43; oil spill, in Gulf of Mexico, 39, 148 INDEX France: health care in, 53; nuclear energy in, 39, 40–41 Freddie Mac (Federal Home Loan Mortgage Corporation), 103–4, 109, 115, 116 Free market, 31, 205; environmentalism and, 141, 149; health care and, 49, 57 Free speech, 95–96 Friedman, Milton, 188 Fuel economy, CAFE laws and, 36–38 Gallup Poll, 85 General Motors (GM), 115, 179; CAFE laws and, 37, 38; labor union and, 87, 88, 90, 91, 92 Geophysical Research Letters, 147 Germany: health care in, 53, 56; Hitler and, 201 Gigerenzer, Gerd, 71 Ginnie Mae (Government National Mortgage Association), 103, 115, 116 Global warming, 146–48 Gokhale, Jagadeesh, 51–52 Government: balance sheet and, 9–11; efficiency of, 14; housing programs and, 102–4; money creation and, 195; security and, 10, 12, 13; subprime mortgage debacle and, 101 See also under Department; specific administration Government bailouts, xi, 178–79, 205; of financial industry, 114–15, 178, 180, 181, 207; housing crisis and, 109; recession and, Government regulation See Regulation Government revenue, 153 See also Taxation Government spending, 188; on defense, 123–26 215 Government Sponsored Enterprise (GSE), 109, 116 Government subsidies, 31, 112–13, 191, 192, 207 Great Depression, xiv, 16–17, 155, 207; housing politics in, 102; Keynesian theory of, 4, 188, 192; money supply in, 188–89, 195; recessions in, 1–2, 16 Greenhouse gas emissions, 147–48 Griswold v Connecticut (1965), 43 Gross domestic product (GDP), 74, 111, 115, 123; defense spending and, 125–26; health care costs and, 50, 51; recession and, 2, 3–4, 16; security and, 12, 13; tax code and, 158 Gross vehicle weight rating (GVWR), 36 Gulf of Mexico oil spill, 39, 148 Hall, Robert E., 164, 165 Hanushek, Eric A., 79 Health, investment in, 69–76; elderly and, 74–75; human values and, 75–76; mortality rate and, 72–73 Health care, cure for, 49–64; doctorpatient interaction, 54; drug development and, 54–55; evaluation and, 62; government-run, 53–59; intergenerational account deficit and, 50–53; obesity and, 53–54; in OECD countries, 49, 53–55, 56, 57; Patient Protection and Affordable Care Act (2010), 52, 55–56, 62–63; “pay as you go” system and, 51; price controls and, 55–56, 58; rising costs and, 50–51; single-payer system and, 49, 50, 56–57, 59; technology and, 57–58; value-based competition and, 49, 50, 53, 59–62 Health insurance, 170, 171 Herbert, Bob, xiv, 16 216 INDEX Herna´ndez-Murillo, Rube´n, 96–97 Hispanics, mortality rate of, 72–73 Home ownership, 112; in Britain, 106–7; minorities and, 102–3 See also under Housing Home Owners’ Loan Corporation (HOLC), 102 Hospital utilization rate, 54 Household wealth, 12; governments and, 9–10; human capital and, 14; liabilities and, 7–8; security of, 13 Housing: environmental law and, 145–46; investment in, 68–69; segregation and, 103 Housing Act of 1968, 103 Housing crisis, 4, 101–17, 205, 208; British example, 106–7; collateralized debt obligations and, 104–5; government housing programs and, 102–4; home ownership and, 102–3, 106–7, 112; HUD and, 104, 106, 109; ideology leading to, 110–13; mortgagebacked securities and, 103, 105, 115, 116; risk management and, 108, 110; subprime mortgages and, 101, 107–8, 109, 110, 113, 114, 116, 173 HUD See Department of Housing and Urban Development Human capital: education and, 79, 205; households and, 14; investment in, 68, 192 See also Labor market Humanitarian missions, 130, 133 Hurricane Katrina, 173–75, 176, 182, 193; New Orleans and, 174–75, 177–78, 180 Idaho, Right to Work laws in, 96–97 The Impact of Right to Work Laws on Union Organizing (Ellwood & Fine), 97 Incentive principle, 38; health care, 52, 60; tax structure and, 159–61, 165 Income tax, 154, 155–56 Infant mortality, 73 Inflation, 16, 33; as benefit to borrowers, 104–5; energy costs and, 26; information problems and, 28–29; interest rates and, 21–22, 29; printing of money and, 154; real exchange rate and, 30 Information sharing, 14, 62 See also Misinformation, media age and Infrastructure, value of, 11–13 Insurance and risk, 169–72, 206–7; automobile insurance, 170–72; flood insurance, 175–76; health insurance, 170, 171; private vs public, 176–78 Interest rates: approaching zero, 6, 7, 15; inflation and, 21–22, 29; misinformation and, 20–23; mortgage, 108–9; real vs nominal, 197–98, 203; value of time and, 19, 68, 203 Internal Revenue Service (IRS), 165; tax code and, 155, 157–59 Internet, 77 Investment, 67–72; in economics, 67–68; in health, 69–72; in housing, 68–69; in human capital, 68, 192; Keynesian Cross and, 186–87 Iraq War, 124, 132, 206 IRS See Internal Revenue Service Japan, 36, 58, 81, 190; automakers in, 88, 90–91, 92; economic recession in, 4, 5–6, 15, 198; nuclear power in, 39; United States compared to, 5, 15; welfare state in, 5; work ethic in, Jubilee 2000 campaign, 130 INDEX Keynes, John Maynard, xiii, 4, 207 Keynesian Cross, 185–87 Keynesian economics, xiii, 4, 16, 115, 185–99; challenges to, 188–92, 198–99; interest rates and, 197–98; macroeconomic policy and, 185–87, 192, 195–97; wars and inefficiencies, 192–95 Korean War, 126, 206 Kuwait, Persian Gulf War and, 125 Kuznet, Simon, 148 Kuznet curve, 148 Kyoto Protocol, 147–48 Labor market, 7, 79, 203; compensation and, 23–25; government sector, 24; privacy laws and, 204, 208; war economy and, 192–93 Labor unions, 85–97, 205; auto industry and, 86–93, 95, 179–80; labor costs and, 89–93; outsourcing and, 88–89; politicization of, 95–96, 97; “Right to Work” laws and, 96–97; teachers and, xii, 82 Laffer Curve, 160–61 Land use restrictions, 145–46 Land value, 7, Legislation See Regulation; specific laws Lehman Brothers, 101, 110, 114 Less-developed countries: 147, trade restrictions in, 189–90, 191 Letters of recommendation, 45 Liabilities, 7–9, 10; as drawbacks, 8–9, 202; drug use and, 45; financial, 52; monetary debt as, 7–8, 9; social, 45 Liberating Learning (Moe & Chub), 81 Life expectancy, 53 Linder, John, 162 217 Loans, “no-recourse”, 113–14 See also Mortgage market London Interbank Offered Rate (LIBOR), 108 Lucas, Robert E., 191 Macroeconomics, 201; investment in, 67–68; Keynesian economics and, 185–87, 192, 195–97, 198, 207 Making Home Affordable Program, 116 Media age See Misinformation, media age and Medicaid, 52, 63 Medical drugs See Drugs Medical treatment, health and, 70–72 Medicare, 51, 52, 56, 63, 153 Meltzer, Allan H., 33 Merrill Lynch, 101, 114 Military aid, 131 Military force, economic costs of, 122–27 Minorities: discrimination against, 24; home ownership and, 102–3, 106; land restrictions and, 146; mortality rate of, 72–73 Misinformation, media age and, 19–33, 202–3; quantity of money and value of other assets, 27–29; real foreign exchange and, 29–32; real interest rates and, 20–23; real price of commodities and services, 23–27 Modigliani, Franco, 188 Money, printing of, 154, 155 Money supply, xiv, 16, 33, 187; Great Depression and, 188–89, 195; price levels and, 27–28; Ricardian equivalence and, 196–97 Moral hazard, risk and, 105, 169–83; defined, 170; government bailouts and, 178–79; hurricane Katrina and, 173–75, 177–78, 180, 182; insurance, 169–72, 175–76 218 INDEX Moral values, 50 Mortality rate, 53, 72–73 Mortgage-backed securities, 103, 105, 115, 116 Mortgage Interest Relief Act at Source (Britain), 107 Mortgage market, 102, 107–9; defaults, 108, 113–14; subprime, 101, 107–8, 110, 113, 114, 116, 173 See also Housing crisis Nagin, Ray, 175 National Bureau of Economic Research, 145 National Bureau of Economic Research (NBER), 1, 2, 16 National defense See Defense spending National Environmental Act (1969), 40 National Flood Insurance Program (NFIP), 175–76 National governments See Government National Highway Traffic Safety Administration (NHTSA), 36 National Homeownership Strategy, 106 National Marine Fisheries Service, 144 National Resource Defense Council, 144 National security, 10 See also Security Natural resources, 7, 8, 13 NBER See National Bureau of Economic Research Negative externalities, 135, 137 New Deal era, 155 See also Great Depression New Orleans, hurricane Katrina and, 174–75, 177–78, 180 Newton, Isaac, 78 New Zealand, health care in, 56 NINJA (No Income No Job or Assets) loan, 108, 113, 116 Nominal price, 20 See also Price “No recourse” loans, 113–14 Norway, health care costs in, 53 Nuclear power, regulation of, 38–42, 203–4 Nuclear Regulatory Commission (NRC), 39, 40 Nutrition, health and, 70 Obama, Barack, 4; defense budget and, 123; economic stimulus package and, 115; nuclear energy and, 39 Obama administration, 33, 144, auto industry bailout and, 179–80; budget deficits and, 207, 208; health care and, 49; housing crisis and, 115–16 ObamaCare See Patient Protection and Affordable Care Act (2010) Obesity, 53–54 Oil spill, in Gulf of Mexico, 39, 148 OPEC (Organization of Petroleum Exporting Countries) cartel, 36, 209 Opportunity costs, 136 Organization for Cooperation and Development (OECD), 49, 53–55, 56, 57–58 Organized labor See Labor unions Outsourcing, unions and, 88–89 Patient-doctor interaction, 54 See also Health care Patient Protection and Affordable Care Act (2010), 52, 55–56, 62–63 Paul J Rainey Sanctuary, 142 Paulson, Henry, 114 Performance-based compensation, 53, 61 INDEX Persian Gulf War, 125, 127 Petaluma case (1995), 145 Pharmaceutical industry See Drug industry, R&D costs in Placebo, medical treatment and, 70–72 Politicians: housing crisis and, 116–17, 205; labor unions and, 85, 95–96, 97; military aid and, 131 Pollution, environmental law and, 136–37 See Environmental regulation Poor countries See Less-developed countries Population growth, 4, 5, Porter, Michael, 59–60 Posner, Richard, 45 Poverty, 69, 128–29, 133; taxes and, 162, 164 Prices: automobile, 37; controls, in health care, 55–56, 58, 59; energy sector, 25–27; housing, 110–11, 115; interest rates and, 20–21; real, misinformation and, 23–27, 32; relative vs real, 19–20; resource allocation and, 190, 191 See also Cost-benefit analysis Privacy Act of 1974, 43 Privacy issues, 42–45, 204, 206, 208 Privatization: of federal lands, 143–44; of health care, 58 Production, factors of, 8, 202 See also Capital; Labor; Land Production, labor unions and, 86 Productivity, 14, 16, 193, 208; computer revolution and, 55; financial instruments and, 15; inflation and, 29; investment and, 68; longevity and, 50; security and, 10–11, 12 Profitability and profit, 6, 9, 46 Property rights, 135–36, 140, 148, 149 219 Public goods, 12, 153 Public health policy, 70 See also under Health Public lands, management of, 141–44 Purchasing power, inflation and, 21 Quants (financial engineers), 110 Rabushka, Alvin, 164, 165 Real estate bubble, 113–14 See also Housing crisis Recessions, 1–3; balance sheet, 6–7, 15; Great Depression and, 1–2, 16; indicators for, 1; in Japan, 4, 5–6, 15, 198 Regulation, 35–47; CAFE laws, 36–38, 203; nuclear power, 38–42, 203–4; privacy issues and, 42–45 See also Environmental regulation Research and development, drug cost and, 54–55, 58 Resolution Trust Company, 105 Resource allocation: exchange rates and, 30–31; price and, 190, 191 Resource management, 136 Retail tax, 162–63, 166 See also Taxation Ricardian equivalence, 196–97 “Right to buy” legislation, 107 “Right to Work” laws, 96–97 Risk: insurance and, 169–72, 206–7; interest rate and, 22; placebo and, 71, 72; subprime loans and, 108, 110 See also Moral hazard, risk and Roe v Wade, 43 Romer, Paul M., 191 Roosevelt, Franklin D., 4, 102 Russia, communist regime in, 190 See also Soviet Union (USSR) Saudi Arabia, 125 Savings and loan crisis (1980s), 105, 173 220 Schwartz, Anna, 188 Schwarzenegger, Arnold, 144 Second World War, 125, 126, 188, 192, 206 Securities and Exchange Commission, 103 Securitization, of loans, 107, 109, 113 Security, 50, 124; local vs national, 10; social capital and, 11–13 Segregation, housing and, 103 Smetters, Kent, 51–52 Smoot-Hawley Tariff Act (1930), 189 Social capital, 11–15, 19, 32; security and, 11–13; thought experiment, 13–15; trust and, 13–14, 15 Social-insurance contributions, 155 Social liability, 45 Socially optimal quantity, 137 Social Security system, 73–77, 153, 155 Solow, Robert, 190 Soviet Union (USSR), 198; containment of, 126, 131 Special affordable loans, 109 Special interests, environmental law and, 149 Specialization, 77, 189, 190 Speculative bubble, in housing, 110–13 Stagflation, 195 Stock market crash (1929), 4, 188 Stock markets, xiii, 29, 181 Structure investment vehicles (SIVs), 114 Subprime mortgage market, 101, 107–8, 110, 113, 114, 116, 173 Subsidies, 31, 112–13, 191, 192, 207 Substitution effect, 37 INDEX Supplemental Unemployment Benefits (SUB) program, 87–88 Supreme Court decisions, 43, 44–45; on free speech, 96 Swan, Trevor, 190 Sweden, health care in, 58 Tariffs and quotas, 31, 189 Tax Advocate Service, 157 Taxation, 9, 11, 153–66, 187; deductions in, 154, 165; fair tax, 162–63; federal income tax, 154, 155–56; flat tax, 163–66; fraud and evasion, 156, 158–59; Great Depression and, 189; health care and, 52, 59; incentives and, 159–61, 165; income transfer and, 195; national defense and, 123; progressive structure of, 159–60; regulation and, 46; retail, 162–63, 166; Ricardian equivalence and, 196–97; security and, 12; subsidies and, 25; tariffs and quotas, 31, 189; tax code and, 156–59, 165; viable alternatives, 161–66, 209 Tax code, 155, 156–59 Tax cuts, 115, 160; Bush era, 154 Tax evasion, 156, 158–59 Tax Foundation, 157, 159, 161 Tax specialists, 165 Teacher-student relationship, 78, 81 See also Education Teacher unions, xii, 82 Technology, 8; defense, 125–26; endogenous growth theory and, 191–92; health care and, 57–58; industrial base and, 190; machines, learning and, 77–78, 79, 81; modern growth theory and, 198–99; overfishing and, 140 Teisberg, Elizabeth, 59–60 INDEX Terrorism, 13, 124 Thatcher, Margaret, 107 Three Mile Island nuclear incident, 38, 39 Time, value of, 19, 68, 203 See also Interest rates Toyota Motor Company, 37, 91 Trade: exchange rates and, 30–32; imbalances in, 46; restrictions on, 189–90, 191, 209 Tragedy of the commons, 140–41 Transaction costs, 137, 138–39 Transparency, privacy and, 43, 45 Treasury Department, U.S., 115, 143, 176 Trust, social capital and, 13–14, 15 Unemployment, xiv, 1, 144; auto unions and, 87–88; recession and, 2, Unions See Labor unions United Auto Workers Union (UAW), 86–93, 95, 179–80; labor costs and, 89–92, 93; unemployment benefits and, 87–88 United Kingdom, 189; health care in, 53, 56, 57–58 United Nations: humanitarian activities of, 130; Universal Declaration of Human Rights, 85 221 Value-based competition, in health care, 49, 50, 53, 59–62 Value of time, 19, 68, 203 See also Interest rates Value systems, health and, 75–76 Vietnam War, 124, 126, 127, 132, 206 Visual information, 80 Wages, 23, 195 See also Labor costs Wall Street financiers, 101, 103, 105; subprime mortgages and, 109, 110 Wall Street Journal, 57, 58 War, inefficiencies and, 192–93, 206; full employment and, 192, 193, 199 See also specific war War on terror, 13, 124 Wealth, redistribution of, 29 Weapons technology, 125 Wigley, T M L., 147 Woessmann, Ludger, 79 Worker income See Labor market World superpower, U.S as, 126–27, 132 World War II See Second World War Yatsuhiro, Nakagama, Yucca Mountain nuclear storage, 41 Zoning law, land development and, 145–46 This page intentionally left blank About the Authors ´ S SA ´ NCHEZ has a Ph.D in economics from the University of NICOLA Southern California (1972) and has taught at Texas A&M University and at the College of the Holy Cross, where he is currently Professor of Economics He has published many academic articles for top economic journals, such as The Review of Economics and Statistics, Economic Development and Cultural Change, Journal of Economic Behavior and Organization, Land Economics, The American Journal of Agricultural Economics, Weltwirtschaftliches Archiv, Cuadernos de Economı´a, and many others He has also published chapters in scholarly books and has written over 150 articles for the popular press He has been a guest lecturer at several American universities and also at universities in Mexico, Puerto Rico, and Spain He enjoys city life CHRISTOPHER KOPP is an undergraduate majoring in economics and mathematics at the College of the Holy Cross Chris is a member of the Economics Department and College Honors Programs, and his primary academic interests include the study of macroeconomics and financial markets Chris has also studied international macroeconomics at the London School of Economics and Political Science He graduated from Saint Francis High School in his hometown of Hamburg, New York, in 2007 Outside of the classroom Chris is an airplane pilot and enjoys the outdoors 224 ABOUT THE AUTHORS FRANCIS SANZARI is an undergraduate economics and political science double major at the College of the Holy Cross A member of the Economics Department and College Honors Programs, his academic interests outside of economics include the study of American public policy He graduated in 2007 from William Hall High School in his hometown of West Hartford, Connecticut He spent the summer of 2010 working in international business in Malaysia and Singapore An Eagle Scout, Francis particularly enjoys hiking, camping, and the outdoors ... increase in asset values in the country lacking trust will be less than in the country where 14 DESTINED FOR FAILURE trust prevails for the simple reason that in the former the costs of implementing... enterprises—some of which is held in the form of stocks in companies Finally, financial instruments, in the form of bonds, 401Ks, or rights over pension funds (of one type or another, including government pensions).. .Destined for Failure This page intentionally left blank DESTINED FOR FAILURE American Prosperity in the Age of Bailouts Nicola´s Sa´nchez, Christopher